Name: 3 Investing Lies That Are Costing You Money
Uploaded: 2025-02-07T03:15:50.000Z
Duration: 16 min 10 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

You are being lied to, and it could be costing you a lot of money.

Some of these are lies that you're being told by other people, by institutions that are profiting off your continued belief.

But the worst ones are the lies that you're telling yourself.

And the hardest thing is that part of you wants them to be true.

No matter who you are, if you are investing, you will be grappling with these right now, and you probably don't even realise.

So in this video, I'm going to shine a light on these lies to try and help you avoid making mistakes that could be costing you serious amounts of money.

In almost everything that we do in life, the more effort you put in, the better the results you get.

Whether that's studying for an exam, playing golf, or raising children, the more effort that you put in, the more time that you spend honing your skills, the better the results that you're likely to get, which is why this first lie is so easy to believe.

And there are several trillion dollar industries that are profiting off this belief.

If you ask the average person what they think it takes to be a successful stock market investor, they will probably tell you that they think you need to spend a huge amount of time and effort in analysing companies, funds, reading for the financial press, and trying to interpret economic events.

A lie that the trillion dollar asset management industry wants you to believe.

They want you to believe that it's really complicated and that to be successful, you need a lot of experience, time, and analytical resources.

And if you don't have those things, you could lose a lot of money.

They want you to believe this, not only because it means that then you're more likely to hand over all of your investments to them to manage, but even if you do choose to manage your own investments, if you believe that you have to be active to be successful, you're more likely to trade and buy into the products that they have to sell.

The financial press and content creators are in on this too, because they want you to believe that there is value in their content, that you can and should be making tactical changes to your investments based on the events that they report on and what they have to say.

And not only does this lie prevent so many people from getting into investing in the first place, because they think it's so complicated, but for those that do invest, this mantra of you needing to be active to get good results leads to a lot of mistakes.

The truth is that investing in the stock market is probably one of the only disciplines where the less you do, the better your results.

I know it's hard to believe because it's so counterintuitive but for 99.9% of people, 99.9% of the time, this is true.

You do not need to do a lot of research or invest a lot of time to get great results.

In fact, you should think of your investment portfolio like it's a bar of soap.

The more you touch it, the less of it you have.

Now, before you click away thinking that this is just another active versus passive debate, sit back down because this goes way deeper.

Every year, Morningstar produces a report called Mind the Gap that analyses investment funds to understand how good investors are at making decisions.

When looking at the US market between 2012 and 2022, the average fund returned 7.7% per year but the aggregate return that investors in those funds received was just 6%.

How can investors get lower returns than the funds that they invest in?

Surely if you invest into a fund and just hold it, then you'll get exactly the same return as the fund, right?

Here's an example that Morningstar provides.

This red line here shows the performance of the J.P. Morgan Pacific Technology Fund.

If you had invested in this fund in June 2018 and then held it for five years until June 2023, you would have received a return of about 8%, exactly the same as the fund.

The blue bars show us the inflows and outflows of this fund.

Between 2018 and 2020, you can see how money was flowing out of the fund when the fund wasn't performing that well.

But in 2020, during the pandemic, technology valuations went through the roof and this fund notched up an 82% return for that year.

And we can see how after this performance showed up, hundreds of millions of dollars started flowing into the fund, which is just a classic example of investors being active, trying to be smart, but just ending up chasing performance, which as you can see, turned out to be a big mistake as the fund fell by 55% through to October 2022.

Meaning that although this fund achieved a positive return over the period, because the majority of investors' assets went in after the good performance had already shown up, on aggregate, they're now sitting at a big loss.

The phenomenon that investors tend to make poor timing decisions that then result in them underperforming the funds that they invest in is well-documented, with other studies finding similar results across both active and passive funds.

To put into perspective just how damaging this is, if you invested 100,000 pounds and achieved a 7.7% return for 30 years, you'd have 928,000 pounds at the end.

But if you only achieved a return of 6%, you'd end up with 580,000 pounds.

This is how much the mentality of trying to be smart, trying to be active, is costing the average investor.

There's more that we can learn from this Morningstar report.

Across all funds, investors underperformed the funds that they invest in by 1.68% per year.

But there are some stark differences between categories of fund.

The widest gap was in sector equity, where investors underperformed by a whopping 4.38% per year, whereas the lowest gap was for allocation funds at 0.46%, which makes a lot of sense.

Allocation funds are designed to provide an entire diversified investment portfolio within a single fund, by investing in a combination of stocks, bonds, and other asset classes, often from all across the world.

So people that buy these funds are generally looking for something that they don't need to play around with.

People that have a set it and forget it mentality and are less likely to react to market events.

Sector equity funds, however, are used by people who want to make bets on specific sectors of the stock market outperforming.

This could be a fund focused on technology, pharmaceuticals, clean energy, cannabis, AI, or any other exotic category that the asset management industry thinks that they can sell.

These funds are designed for and marketed to people that think that being active is a good thing.

Correlation is not causation, but this is certainly suggesting that the more you touch your portfolio, the lesser that you end up with.

James, I'm ahead of the game because I already invest in index funds.

But then when I look at their portfolio, they have 12 different index funds and they're clearly making big bets on certain areas outperforming others.

And then when I look at their transaction history,

I can see that they keep chopping and changing between them.

People often end up being very active, but with passive funds.

We're not saying that all active management is bad all of the time, but for 99% of people, the less you touch your investments, the better the results that you're likely to get.

Of course, you need to make sure that you're invested in the right thing in the first place, something that you can stick with.

But this could be as simple as a single globally diversified fund.

Then all we need to do is set up a direct debit so that you're investing on autopilot and you're never tempted to hold back money.

And then ignore the news and get on with the rest of your life.

Then the only time that you need to get active, the only time that you ever need to sell is if you need to change the risk of your portfolio, which might not be for five, 10, or even 15 years, or when you want to spend the money at retirement.

If you do this, if you truly buy into the mantra that less is more, it's likely that you're gonna end up way ahead of the vast majority of other investors.

So let's say that you've seen the light, you've looked at your current portfolio, at the random collection of funds and stocks that you've accumulated over the years, and in a moment of honesty, you realise that there is no real strategy behind any of it.

And you've decided that you want to simplify.

But when it actually comes to pushing the button and selling our existing holdings, we find it very difficult to do, especially if those holdings are at a loss.

And the bigger the loss, the harder it is to sell.

Perhaps you know what I'm talking about because you're sitting on one of these positions right now.

Or if you don't, put yourselves in the shoes of someone that invested at this point.

How would you feel about selling this when it's down 50%?

It just doesn't feel right selling something that's down that much.

And you'll keep telling yourself that you should wait for it to come back, at least until you get even.

What's interesting is that you can see a similar pattern of behaviour with people playing roulette in the casino.

At the start of the night, when they have all their chips, they bet very conservatively, trying as hard as they can not to lose money.

But by the end of the night, if they're down big, they end up making very high-risk bets in an attempt to win back their money.

In these situations, we lie to ourselves that this is rational behaviour, that we need to stick to our guns and win back our money.

But it's not rational, whether it's in the casino or with investing.

Our emotional monkey brains are lying to us.

And the hardest thing is that we want it to be true.

As Philip Fisher, a famous American investor and author once said, more money has probably been lost by investors holding onto a stock they really didn't want until they can at least come out even than from any other single reason.

There's a trick that I like to use with clients to help them cut through their emotions and to think rationally.

If you're currently holding onto a stock or a fund that is down big,

If you're lucky enough not to be in this position, again, imagine that you bought into this fund right at its peak.

Let's say you invested 20,000 pounds and it's now worth 10.

How would you feel about selling that position?

Well, imagine if you woke up tomorrow and you found that that holding had been replaced by 10,000 pounds of cash.