Myths are persistent. Beware of these five mistakes when investing.
Investing is fraught with myths. This has the effect of either putting people off investing money or emboldening some to put far too much faith in investing. We debunk five widespread myths and give you the facts.
Myth 1: Holding cash is better than investing it
There's a long-held belief that stashing money under the mattress is safer than investing in the financial markets. But this does not take inflation in account. The cost of living becomes more expensive, eroding the value of cash as the years go by. And when the interest on your savings account is calculated in, returns barely beat inflation.
Not so with investing: Even if there are temporary losses, returns are usually positive over the long term. So, if you want to protect your assets and your standard of living, investing your money would be a better bet than hiding it under the mattress.
Yield of cash in the last 20 years is lower than inflation
Yield of different asset classes between 2002 and 2022 with an initial investment of CHF 100,000.
Source: Bloomberg/Credit Suisse AG. US stocks (SPX), Swiss stocks (SMIC), European stocks (SXXR), inflation (SZCPII), CHF cash (SF0001M). Last data point: January 31, 2022
Myth 2: I know exactly when I need to invest my money
Investors prefer to maximize their returns. To achieve this they resort to a seemingly simple solution: invest when alluring profits beckon and sell when losses loom. At least that's the theory. In practice, it's not so easy. Rarely do stock markets behave as expected. No one can actually predict the good and the bad days.
But if an investor gets their tactics wrong and misses the best trading days, it can make all the difference. Yield will shrink significantly. Rather than buying and selling over and over again, it would be better for most investors to remain invested throughout. You'll have to take the bad days on the nose to be sure, but you will be certain to reap the reward of the good days as well.
The best stock exchange days have a disproportionate influence on the overall yield
Source: Credit Suisse AG
Myth 3: Investing is not worth it in the long run
Negative events such as the 2008 financial crisis are permanently etched in people's memories. This creates the impression that financial markets have more bad years than good ones. In fact, the exact opposite is true: Looking at the Swiss Market Index over investment periods of eight years each, there was only one period with negative returns between 1995 and 2022. If the investment period is increased to 12 years, there were only periods with positive performance.
Investors are therefore well advised not to take heed of only the loud negative headlines. More attention should instead be given to the quieter but positive years. Overall, they more than make up for the bad years.
Histogram showing the eight-year performance of the SMIC Index between 1995 and 2022
Source: Bloomberg
Last data point: January 31, 2022
Myth 4: When investing money I behave rationally
Emotions tend to run high when investing. Few investors remain rational when it comes to their own assets. When prices point upwards, speculations about making further profits abound. When the going gets tough, however, some investors panic and sell their investments in a flash because prices have fallen and further losses are expected.
Such emotional decisions are devastating. Because they are guided by emotions instead of facts, investors always lag behind market events. They invest when it's too late and sell when losses have already been incurred. At the same time, they miss out on the recovery that rationally follows any stock market crash.
Investing money is rarely done rationally
Source: Credit Suisse AG
Myth 5: I can invest money better than others
Maximum returns. That's what every investor wants. But many of them overestimate what they can achieve. They take on a higher or lower level of risk than recommended and believe they can outperform the market. This kind of thinking seldom delivers success. Lower returns or even losses are usually the reality instead.
Experience shows that when it comes to investing the best policy is to invest in line with your risk-return profile. Experienced financial experts and a systematic investment process make it possible to optimize returns with the appropriate level of risk. But those who deviate from the return-risk balance generally see poorer results.
of Credit Suisse clients would have, looking back on the last 36 months, achieved a better risk-return result with a discretionary mandate from Credit Suisse than with their portfolio.
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