If you really don’t want to make money on the markets . . .
How many of the seven great money-losing tips apply to you?
A bad day at the New York Stock Exchange last week. photograph: lucas jackson/reuters
Investors looking for decent returns are always being told what they should and should not do. But what about the forgotten rebels out there who want to lose money, or at the very least hurt their returns? For those neglected souls, we’ve compiled a list of some great money-losing tips.
Home or local bias is the tendency to overweight one’s portfolio with familiar domestic stocks. It’s been declining in recent decades, but remains high.
A 2008 study found Japanese stocks made up 73 per cent of Japanese investors’ portfolios, even though the country accounted for just 9 per cent of global market value.
US investors had 77 per cent of their portfolios in US companies, even though they accounted for 33 per cent of global stock market capitalisation.
Brazilians had nearly 99 per cent of their portfolios in domestic stocks, even though Brazil accounted for just 1.6 per cent of global market value.
The risks are obvious. In 2005, Mercer’s Gráinne Alexander warned that the Irish market represented just 0.3 per cent of the world index, “yet ‘balanced’ managed funds manage to allocate 25 per cent of total equity to this minnow market”.
The financial sector accounted for 44 per cent of the Irish index, she added, meaning Irish pension funds had over 8 per cent of their total assets in just four bank stocks – the same exposure funds were allocating to the entire UK market.
Although many international indices are now at all-time highs, the Iseq remains some 56 per cent off its peak, while bank investments have been almost entirely wiped out. Accordingly, masochistic investors should be extremely grateful to Irish pension managers, who did a terrific job at decimating the value of their portfolios.
Investors eager to lose money should steer clear of safe but unsexy value stocks and opt for glamorous growth stocks, preferably by paying crazy prices at a stock’s initial public offering (IPO).
Make sure to steer clear of actual data and evidence – otherwise you might discover that value stocks trounced growth stocks over the last century. Instead, rely on anecdotes and isolated examples of the occasional success story – the type that says you would have made 10 zillion quid by investing in Microsoft or Apple 25 years ago, irrespective of the fact that, for every such case, there are hundreds of growth stocks that went the way of the dodo.
Similarly, note that studies show the most respected companies, as measured by Fortune magazine’s annual list of America’s most admired companies, underperform the most despised companies. Or rather, don’t note it.