Date
23 July 2017
Making big bets during a bull market can be risky because stock prices might already have become overvalued. Photo: Wallpaperfolder
Making big bets during a bull market can be risky because stock prices might already have become overvalued. Photo: Wallpaperfolder

This is the biggest investment risk — here’s why

Many investors have been asking the question what the biggest risks are.

Would it be a US rate hike or the US presidential election? Or is the global economy losing momentum the real threat?

Some worry about China’s slowdown but in my opinion, for whatever asset, paying too much is the biggest risk when it comes to investing.

For example, when the stock market is extremely bearish, buying shares is actually not that risky.

But when stocks are rising through the roof, making huge bets at such timing could bring big losses.

If you have paid too much for good quality companies in a sound industry, you can make money by patiently waiting for the next bull market.

But paying top dollar for highly cyclical companies may take years for investors just to escape from such bad positions.

To achieve good investment results, another important rule to remember is this: let the good quality stocks run while keeping the downside under control by cutting losses on bad companies.

However, this is easier said than done. Which is why exchange traded funds (ETFs) are popular.

For example, the Hang Seng Index regularly reviews its components, removing laggards and replacing them with rising stars.

Investing in ETFs based on such well-monitored indices benefit from a professional selection process as well as low transaction costs.

Finally, I would like to talk about a few trends regarding global capital flow.

For starters, funds keep flowing out of Europe into emerging market bonds.

Money is also moving out from developed market bonds, of which yields have dropped a lot already and fund managers have too much exposure, into stocks.

Meanwhile, US investors are increasingly interested in stocks of emerging markets which typically pay higher dividend and are priced at lower valuations.

This article appeared in the Hong Kong Economic Journal on Aug 26

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RA

Founder and Managing Director of Pegasus Fund Managers Ltd.

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