Why Eight Out of 10 Investors Go Wrong

We sometimes take our magnificent Marina Bay for granted.

Many of us will, at some time or other, walk past, ride past or drive past the columns of skyscrapers that tower over the Bay. But we forget just how marvellous the buildings really are.

However, no one can fail to be impressed, when the architecture is brought to life every evening by a laser show that lights up the entire 38-acre site.

What a mistake

Although the show has been around for nearly five years, it was only a few weeks ago that I made the effort to go down to witness it for myself. Needless to say, I ate my fill at makansutra before the show. I love my food.

The laser display had always been on my list of things to do. But it was also something that I had managed to put off for another day. What a mistake.

The light show reminded me of how some of the more mundane things in life can be quite exciting.

For example, buildings, which are nothing more than a fabrication of bricks, mortar, glass and metal, can spring to life with just a gentle sprinkling of light and music.

Investing can be a bit like that too.

Boring, boring companies

We sometimes look at the many shares in the stock market and think that they are merely a collection of boring old companies.

But we forget that at the heart of many of those companies are cash-generating machines. Some of that cash can even end up in our pockets… as dividends.

For some people, that might seem like a tedious way to invest. But for those who can appreciate the power of reinvesting dividends, it can be the “laser show” that provides the spark of life in our portfolios.

Nothing new

Recently, the Government highlighted the woeful returns that some investors have earned through the Central Provident Fund Investment Scheme (CPFIS).

It said that over the past 10 years, more than eight out of 10 people who invested through the CPFIS would have been better off just leaving their money in the Ordinary Account. That would have earned them a guaranteed return of 2.5% each year.

Nearly half who made use of the CPFIS made losses over the same period.

The reasons for the underperformance are not new. It is something that has plagued many investors for decades. It is a combination of high fees and a misguided view that we can time the market.

The government is right. Fees hurt. Overconfidence kills.

Fees erode returns

However, the disappointing performance by many is an indictment, not of the scheme, but of the mistaken way that many people invest.

To blame the scheme is tantamount to blaming the car for road traffic accidents, when it is generally the driver that is at fault. Not the car.

Fees in their various guises inevitably eat into our returns. That is an indisputable fact.

So avoid incurring unnecessary charges at all cost, whether they are switching fees, high annual management fees, up-front fees or unnecessary trading commissions.

When we buy a stock, we should make sure that we intend to hold it forever. Warren Buffett once said: “Don’t own a stock for 10 minutes, if you don’t plan to own it for 10 years.

Boring is good

Over the last decade, around three-quarters of the companies in the Straits Times Index have delivered a total return that has beaten the 2.5% guaranteed return on the Ordinary Account.

Jardine Matheson (SGX: J36) has returned 15% a year for ten years; ComfortDelGro (SGX: C52) has more than doubled in value in a decade, while Thai Beverage (SGX: Y92) has returned more than 17%.

If you had picked any of the “boring” stocks – and held them for 10 years – then you could have easily beaten the guaranteed return of 2.5%.

If you had bought a basket of those shares you should also have come out on top. Unfortunately, many people didn’t.

So bear this in mind the next time you invest: The long-term returns from investing in good companies is so overwhelmingly in our favour that it would be a shame to put our trust in a lottery ticket, rather than an opportunity to get rich slowly.

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock -- Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.