Many people believe that investing is the reserve of the wealthy. In actual fact, many investment options are accessible to a huge range of people, with different entry levels.
Some mutual funds, for example, can be opened with modest sums of money, making investments accessible to those with limited capital as well.
Online investment platforms have democratised access to financial instruments. Many online brokers offer lower fees and enable investors to start off with small sums of money.
Automatic savings and investment programmes such as stock savings plans or robo-advisors allow investors to pay in modest amounts regularly and build up a diversified portfolio over time.
June 7, 2024
5 min read
Investment and Life insurance
FWU - Expert Corner - FWU AG
In the vast world of finance, filled with numbers, graphs and complex analytics, we often come across beliefs and myths that influence many investors’ financial choices.
When they persist, these ideas can negatively impact the decisions taken by investors and financial experts.
That’s why, over the course of this article, we’ll be investigating the common myths and beliefs found throughout the financial sector, and exploring the weirdest financial facts; we aim to challenge widely-held perceptions and provide a clearer, more informed view that will prove helpful for investment decisions.
Ready to discover them? Here are the 5 most curious facts about finance, and 5 enduring financial myths you might not have heard of.
The terms “bull market” and “bear market” are inspired by animal behaviour. A growing market is called a “bull market”, while a declining market is known as a “bear market”.
The terms are a useful way for investors and analysts to describe and understand the market mood, but it’s important to remember there are no set rules for establishing when a bull or bear market starts or ends. Market cycles can be influenced by a whole series of economic, political and global factors.That’s right. Interest rates become negative when financial institutions such as central banks set the cost of money below zero; in other words, anyone depositing a sum of money with a bank might receive less than they paid in, instead of earning interest.
This might occur when central banks adopt easy monetary policies to stimulate the economy: when it’s important to encourage spending and investment, central banks may cut interest rates, and even take them below zero.
A further aim is to incentivise financial institutions to lend money rather than holding on to it, thereby encouraging spending and investment.
The practice was adopted both by the European Central Bank (ECB), which introduced negative interest rates on cash deposits in 2014 to stimulate the economy and combat low inflation, and the Swiss National Bank, which decided to set rates below zero in 2015 to discourage investors from buying too many Swiss francs, considered a safe haven in times of global uncertainty.
Negative interest rates can have complex ramifications, raising questions over the efficacy of monetary policies and their impact on savers, the banking system and the economy as a whole.Bitcoin, the most famous cryptocurrency of all, was created anonymously in 2008 by one or more individuals using the pseudonym “Satoshi Nakamoto”. It seems the main reason for anonymity was a desire to ensure the cryptocurrency remained decentralised and independent, creating a digital currency that wasn’t controlled by a central authority (such as a central bank or government) and avoiding regulatory or legal pressures linked to the launch of a new type of currency.
It’s important to understand that despite Nakamoto’s anonymity, the Bitcoin protocol is open-source; the community comprises many different developers, node operators and enthusiasts who cooperate openly to improve the currency and keep it secure.In 2010, the US stock market experienced a “flash crash” when around 9% was wiped off the value of the Dow Jones index in a matter of minutes.
The unexpected event was significant because it caused share prices to plunge drastically for no apparent reason, followed by a similarly rapid recovery.
The main cause of the Flash Crash is thought to be High-frequency trading algorithms (HFT) combined with low liquidity.
It isn’t common knowledge, but over 70% of trade on the major stock markets takes place via high-frequency trading algorithms, which can handle thousands of transactions per second.
The Flash Crash increased overall awareness of the risks involved in high-frequency trading algorithms, while the regulatory bodies introduced changes to market rules and controls to prevent similar events happening in the future.Berkshire Hathaway Inc., the corporation headed by Warren Buffett, has the most expensive stock in the world.
The price of a single Class A Berkshire Hathaway stock has hit several hundred thousands of dollars (it currently stands at around 615,000 euro). Its high price stems from the fact that the Class A stocks have not been split over the years, meaning that each one represents a significant stake in the company.
To make Berkshire Hathaway stock more accessible to investors, the company has also issued Class B stocks: as a fraction of Class A stocks, they naturally have a much lower price than their Class A counterparts.
Good to know
A free consultation with Forward You is the best way to clear up your doubts and banish all those investment myths, by choosing the solution that best suits your needs. Find your nearest consultant!
It’s a common misconception that the market always acts rationally.
In actual fact, human emotions often lead to irrational behaviours, and this plays a significant part in price movements.
Behavioural finance studies the emotions involved in trading to better understand how they influence decision-making.
Both fear and greed can trigger impulsive or irrational actions: fear may push investors to sell hastily when they are making a loss (even though it would be more sensible to wait), while greed can encourage them to take on excessive risks to turn a quick profit.
Emotions influence our perception of risk, and they may lead to “herd” behaviours, when investors follow market trends instead of making rational, analytical decisions.
There is a belief that having more data enables better decisions.
But it may be a misnomer, as too much information usually results in decision-making overload or irrational choices.
Analysing huge amounts of data can also prove complex and require considerable resources. Bigger data often throws up multiple interpretations, complicating the decision-making process and increasing the risk of taking the wrong direction.
Another common financial myth is that an investment’s past results predict its future performance.
Investments are influenced by a host of variables and can be affected by sudden changes, so this saying often proves to be incongruous.
The range of variables - including fluctuating economic fundamentals and business performance, the global economy, monetary policy, geopolitical events and other factors - is constantly evolving, making it difficult to predict how they will turn out in the future.
And as we mentioned before, investors act irrationally, influenced by emotions such as fear and excitement, and this can trigger price movements that aren’t always linked to past performance.
The common perception among investors that taking greater risks will automatically result in greater returns isn’t always true, because risk is correlated with the probability of loss.
High-risk investments are usually more affected by greater price fluctuations, which may lead to the capital investment being lost altogether.
We also need to consider that each investor has their own financial situation and objectives. The suitability of the risk therefore varies from person to person, and there is no universal formula that “greater risk = greater returns”.
To sum up, the relationship between risk and return is non-linear and depends on a series of factors. Diversification and balancing out risks and profits are fundamental to building a portfolio that will satisfy each investor’s needs.
Emotions influence our financial decisions
Analysing huge amounts of data doesn’t always help mitigate risk
Higher-risk investments do not necessarily lead to greater returns
It’s essential to diversify your portfolio based on your financial goals
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