5 (wrong) investment myths debunked

Insights, Perspectives 2022
20.05.2022 Reading time: 4 minute(s)
Timing the market and hoarding cash: just two out of five often poorly performing investment strategies

What “safe haven” investments are left?

  

Myth 1:
Cash is safe

 

In fact, hoarding cash leads to devaluation by inflation. Your money buys a lot less.

Source: Vontobel 2022.

  

Discover why the old “safe” has become the new “false friend”

 
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    Before investing in stocks, bonds or any other asset class, people often hesitate for one simple reason: “I might lose money!”

    Yes, that’s true. Investing money can result in losing money.

    But the very same is happening today—day to day—if you’re hoarding cash to protect your assets. Even though the balance on your account statement doesn’t change, the value you get for your assets may be steadily decreasing.

  • Chart: Devaluation in detail

    During a period of monetary easing, the purchasing power of cash plummeted.

    Safe haven 1: Devaluation of cash in local currency vs. local inflation

    Comparison of inflation between countries: Devaluation of cash in the USA – Eurozone – UK – Switzerland (in local currency)


    Source: Bloomberg; cash less month-over-month inflation (CPI all items).
    Past performance is not a reliable indicator of current or future performance.

      

    Similar to cash, the former “safe haven” of sovereign bonds has lost purchasing power over the last decade.

    Safe haven 2: Devaluation of short-term sovereign bonds in local currency vs. local inflation

    Short-term government bond depreciation in comparison: USA vs. Euro zone vs. UK vs. Switzerland (in local currency based on local inflation)


    Source: Bloomberg; 1–3 years sovereign bonds, less month-over-month inflation (CPI all items).
    Past performance is not a reliable indicator of current or future performance.

      

    Investment discipline: how to improve investment strategy by leveraging discretionary mandates

    Fighting Myths & Co. with investment discipline

    In times of volatility and uncertainty, investment discipline often suffers. Our experts support you on a mandate basis so that tactics and strategies go hand in handOur managed solutions

     
 

  

  

Myth 2:
You need to wait for the right moment to enter

 

Actually, compound interest effects can tip the balance of your investment

Source: Vontobel 2022; for illustrative purposes only.

Four ways of investing 100 USD over twenty years: Investors who enter the market at once unlock better long-term compound effects compared to investors who stagger the same amount over time. Illustration based on an estimated 10% returns per annum.

  

Discover why immediate investment often pays off

 
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    Most investors have a clear vision when it comes to entering the market or re-investing their liquid positions: Waiting until markets are at a favorable low.

    But what does a favorable “low” mean in practice? The lowest price in an intra-day perspective? The bottom after a market sell-off in a region? A global crisis or a crash?

    In fact, entering the market in a cautiously staggered manner can affect your performance more than possibly “bad” timing in the beginning, e.g., entering the market at peak time.

  • Chart: Losses with staggered entry
    “Historically, the immediate investment paid off most”.
    Portrait shot of Jonathan Hinterwirth, Head Asset Allocation with Vontobel’s multi-asset investment boutique


    Jonathan Hinterwirth,
    Head Asset Allocation in Vontobel’s Multi-asset Boutique

     

    Entering the market in a cautiously staggered manner can affect your performance more than  possibly “bad” timing in the beginning, e.g., entering the market at peak time. Slide right to learn more:

    Why the immediate investment pays off: Losses from staggered investments with monthly ramp-up
    1 of 2 Losses from staggered investments with monthly ramp-up


    Source: Vontobel 2022, Bloomberg. S&P 500 Index returns from 01.02.1990 to 28.02.2022, daily total returns (including dividends), gross.

    Note: Past performance is not a reliable indicator of current or future performance.

    On average, investors lose -5.7% if they don't invest at once but follow a staggered investment plan
    2 of 2 On average, investors can lose up to –5.7% when following a staggered investment plan


    Source: Vontobel 2022, Bloomberg. S&P 500 Index returns from 01.02.1990 to 28.02.2022, daily total returns (including dividends), gross.

    Note: Past performance is not a reliable indicator of current or future performance.

      

 

  

  

Myth 3:
Timing the market is the only source of returns

 

What does history teach investors?

The average investor does not retain real wealth.

Source: Inflation based on US Consumer Price Index (CPI); average investor represented by Dalbar’s average asset allocation investor return, which utilizes the net of average mutual fund sales, redemptions and exchanges each month (“Investing & Emotions”, BlackRock Investment Insight 2016).

  

Don’t be afraid—bulls have endurance, bears don’t

Source: Vontobel 2022.

In the bear market, it’s the perspective that matters

Despite investor’s natural bias to vividly remember bear days, only a small number of trading periods were actually bearish in the past. Chart compares the number of bear market days versus the number of bull market days per occurrence, summed up as average of years.

  

Time in the market is the long-term investor’s business

A look at the total returns in global equities between 1999 and 2022, demonstrates where the “fear of missing out” (FOMO) comes from—and that staying invested can be your antidote.

Source: Bloomberg, based on the index MSCI ACWI from 01.01.1999 to 28.02.2022, daily total returns (including dividends), gross.

Note: Past performance is not a reliable indicator of current or future performance.

  

Discover why a longer time horizon lowers investment risk

 
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    Buy when valuation is low—sell when shares are at their peak. For generations, this campfire story has hardly changed.

    Unfortunately, a peak is hardly visible when you’re on it but comes into view only after the descent has begun. The same is true at a potential bottom when trying to time the first days of a rebound. As hard as they can be to time, those days are the few days that make all the difference.

    How to unlock this potential and, at the same time, make sure not to miss out on the best days?

  • Chart: S&P 500 historical returns since 1928

    When looking at maximum intra-year drawdowns since the infamous 1928 crash, we learn that drawdowns are usually recovered, at least partially, by the end of the year.

    Why it’s not worth being overly afraid of drawdowns in detail:

    S&P 500 yearly returns and drawdowns from 1928 to 2022, based on daily total returns (including dividends), gross


    Source: S&P 500 historical returns from 1928 to 2022, daily total returns (including dividends), gross.

    Note: Past performance is not a reliable indicator of current or future performance.

      

    Investment discipline: how to improve investment strategy by leveraging discretionary mandates

    Fighting Myths & Co. with investment discipline

    In times of volatility and uncertainty, investment discipline often suffers. Our experts support you on a mandate basis so that tactics and strategies go hand in handOur managed solutions

     
 

  

  

Myth 4:
Portfolio diversification is good for safety, not for returns

 

Performance of a balanced portfolio since 1900

A balanced portfolio is positive in 97% of cases in any 5-year period over 122 years.

Looking at the big picture:

Source: Vontobel 2022, Bloomberg, Global Financial Data; income from the S&P 500 Index and US Government Bonds from 1900 to 2022, annual total returns (including dividends), gross. Note: Historical data doesn’t guarantee the same course of events in the future. Not applicable to all regions and/or investment styles.

A balanced portfolio can be exemplified by 45% equities and 55% government bonds. A holding period of five years and more is the kind of long-term perspective investors favor.

Now let’s do the math: 97% of the time, a balanced portfolio spanning five years or more in any given timeframe ends up in positive territory.

  

Discover why a long-term balanced investment strategy is a solid foundation

 
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    To the ears of speculative investors, diversification sounds rather defensive, but professionals know: Diversification can be a free lunch and may unlock alpha sources of return.

    How?

    A balanced portfolio combines returns of equities and the stability of bonds with higher returns.

  • Chart: Historical returns by asset class
    “Investors often need to take risks to achieve their investment goals, but individual asset classes do not perform every year”.
    Portrait shot of Jonathan Hinterwirth, Head Asset Allocation with Vontobel’s multi-asset investment boutique


    Jonathan Hinterwirth,
    Head Asset Allocation in Vontobel’s Multi-asset Boutique

     

    As a long-term investor, taking risks in a smart way can increase your investment success. In a multi-asset environment, you need to take risks in higher yielding asset classes but they do not deliver year to year—which is why diversification is a practical tool at hand.

    Annual returns of key asset classes (in %, USD)

     Commodities    Global real estate    Global equities    Hedge funds    Cash    Corporate bonds    Global sovereigns    Gold

      Best 2nd 3rd 4th 5th 6th 7th 8th
    2021  33.1 29.5 18.5 3.7 0.1 –0.8 –1.6 –4.3
    2020 24.6 16.3 8.3 6.8 5.0 3.5 0.5 –4.3
    2019 28.6 23.9 18.4 12.5 8.6 8.4 7.2 2.2
    2018 2.8 2.0 –0.9 –1.0 –5.6 –6.7 –9.3 –9.4
    2017 24.0 15.6 12.7 6.0 5.7 4.2 2.2 1.1
    2016 13.1 8.1 7.9 6.2 3.8 3.8 2.5 0.6
    2015 1.4 1.0 0.3 –0.2 –2.4 –3.6 –12.1 –23.1
    2014 15.0 8.0 7.6 4.2 0.1 0.1 0.6 –14.8
    2013 22.8 6.7 3.5 0.2 0.1 0.0 –8.5 –27.3
    2012 29.7 16.1 10.9 8.3 4.5 3.5 0.2 –1.3
    2011 8.9 5.4 4.8 0.2 –6.4 –7.3 –8.9 –9.4
    2010 29.2 21.5 18.7 12.7 7.2 5.2 3.6 0.3
    2009 34.6 33.8 25.0 22.5 16.6 3.4 1.4 0.3
    2008 8.9 4.3 3.0 –5.1 –23.3 –30.4 –42.2 –47.6
    2007 31.9 24.5 11.7 5.7 5.4 4.2 3.2 –4.9
    2006 40.9 23.2 21.0 14.9 9.3 5.2 3.6 3.4
    2005 35.9 17.8 16.2 10.8 4.8 3.5 3.3 2.7
    2004 37.0 25.3 15.2 5.5 4.8 4.6 2.7 1.4
    2003 37.6 34.0 26.9 19.9 13.4 6.5 2.1 1.2
    2002 26.7 25.6 8.2 8.2 4.7 1.8 –7.9 –19.3
    2001 8.7 8.7 6.5 4.1 0.7 –12.0 –12.1 –16.2

     

     

     Commodities    Global real estate    Global equities    Hedge funds    Cash    Corporate bonds    Global sovereigns    Gold


    Source: Vontobel 2022. Indexes used to track asset classes: Cash (USD) SBWMUD1U, Global Sovereigns (USD) LGAGTRUH, Global Corporate Bonds Investment Grade (USD) LGCPTRUH, Equities AC (USD) NDUEACWF, Gold (USD) GOLDLNPM, Commodities (USD) BCOMF3T, Global Real Estate (USD) MXWO0RE, Hedge Funds (USD) HFRXGL.

    Note: Past performance is not a reliable indicator of current or future performance. Performance data does not take into account any commissions and costs charged when shares of the fund are issued and redeemed, if applicable. The return of the fund may go down as well as up due to changes in rates of exchange between currencies.

      

    Investment discipline: how to improve investment strategy by leveraging discretionary mandates

    Fighting Myths & Co. with investment discipline

    In times of volatility and uncertainty, investment discipline often suffers. Our experts support you on a mandate basis so that tactics and strategies go hand in handOur managed solutions

     
 

  

  

 

Myth 5:
Passive is always the best way to go

 

Returns of an actively managed fund vs. an index

Source: Bloomberg, net returns of the Vontobel Fund mtx Sustainable Emerging Markets Leaders A (VGREMEI LX Equity) versus the MSCI Emerging Markets index (MXEF) from 16.07.2011, when the fund was launched, to 31.12.2021.

Note: Not all actively managed funds succeed in beating a comparable, index-based passive product. According to Morningstar’s European Active/Passive Barometer 2021, active funds’ success rates over the ten years through June 2021, were less than 25% in nearly two-thirds of the categories surveyed. Past performance is not a reliable indicator of current or future performance. Performance data does not take into account any commissions and costs charged when shares of the fund are issued and redeemed, if applicable. The return of the fund may go down as well as up due to changes in rates of exchange between currencies

 

  

Discover why investing can benefit from active management

Some people advise you “grow with the flow” of global markets by opting for passive ETF structures. However, index-based, passive investing cannot unlock alpha returns, nor react at all times in periods of shifting markets.

Active managers such as Vontobel aim to increase net returns while keeping drawdowns similar, or lower, compared to index-based products.

 

  

High five for discretionary mandates: With managed solutions, experts take care of the tactical asset allocation

Fighting Myths & Co. with investment discipline

In times of volatility and uncertainty, investment discipline often suffers. Our experts support you on a mandate basis so that tactics and strategies go hand in hand. With multi-asset solutions that make investing as easy as saving.

Our managed solutions

 

  

 

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