The 5 most common investing myths busted
When it comes to investing, separating fact from fiction can be difficult. There is an endless supply of information, advice and trading tips which can cloud your judgement and fuel common investing myths.
In an unpredictable market and lower-for-longer rates environment, it’s imperative to make informed decisions about your investment portfolio.
To help with this, we’ve debunked five of the most common investing myths.
1. Aussie equities offer guaranteed income
While the Australian sharemarket is one of the best markets for income focused investors, payouts in the domestic market are not growing significantly. In fact, many of Australia’s blue-chip dividend stocks have made dividend cuts, including the big banks, Telstra and Woodside Petroleum. Income from the Australian sharemarket is not a guarantee!
This trend is further reiterated by the latest Janus Henderson Global Dividend Index, which shows two fifths of Australian companies in their index cut their payouts in the August reporting season.
With many Australian investors heavily reliant on domestic dividends for income, the cuts should be a timely reminder of the importance of diversifying across regions and sectors. Of the Australian sharemarket’s dividend payouts, the financial and mining sectors comprise well over 50 per cent.
By investing globally, Australian investors can diversify and gain exposure to a much broader range of income opportunities.
2. Professionals always beat the market
The sharemarket can be notoriously difficult, even for the professionals. In the 10 years to mid-2019, the SPIVA scorecard showed that more than 83 per cent of domestic equity funds underperformed their benchmark. This was consistent across other markets, including Japan, Europe, and the US.
With this in mind, the popularity of passive investing and the enormous volumes of inflows into ETFs makes sense. When considering what investment is right for you, two of the most important factors to consider are performance and fees. And remember, there isn’t a fund manager’s fee attached to a share portfolio that you construct yourself.
3. Market volatility always requires action
It can be tempting to react to market volatility and regularly reposition your portfolio in response to every macro (or micro) economic event.
However, it’s important to note the biggest impact on your overall portfolio return is your asset allocation. In years gone, it was commonly observed that 80 per cent of portfolio performance was based on this strategic asset allocation. While the research has dated somewhat, the philosophy still rings true. According to recent research by Vanguard, the influence of strategic asset allocation could influence performance by up to 89.3 per cent.
By ensuring you have the right balance of asset classes, you can put your portfolio in the best position to ride out market volatility and ever-changing macroeconomic factors to achieve your goals.
Portfolio construction shouldn’t be a ‘set and forget’ process. Your portfolio should be reviewed at least annually, or as your investment goals and risk appetite changes.
Remember it’s time in the market, not timing the market that is key. Reviewing your portfolio in the context of your investment goals, and deciding not to make changes, is still a decision.
4. Investing internationally is too risky
Investing offshore is often deemed extremely risky, particularly given each market has unique characteristics which can be complex and timely to consistently monitor. This risk can be amplified (and become extremely costly) when selecting individual stocks.
However, investing offshore as a whole should not be categorised as too risky. Buying into an index can be a simple and cost-effective way to gain exposure to hundreds of leading global companies in a risk-reduced way.
It is important to factor currency into any offshore investing activity. Currency fluctuations can have a huge impact on your portfolio returns, so be sure to consider if a hedged or unhedged ETF is best for your individual circumstances. Many investors utilise a combination of both hedged and unhedged investments to reduce the impact of currency movements in their portfolio.
5. Your choice of broker has no impact on your portfolio
While not often recognised, your choice of broker can influence the return of your portfolio, far beyond the cost of the brokerage. The real benefit comes from the specialist research, tools and insights your broker provides to help you make timely and informed investment decisions.
If you’re keen to try someone new, Bell Direct is offering 5 free trades for the next month.
Find out more on Bell Direct’s 5 free trade offer here.
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Tim Sparks is responsible for supporting the Australian investing and advising community in building better investment portfolios using ASX listed securities.