Why You Should Be Cautious of Investments Promising MUCH MORE Than 10% (especially without context)

Recently I was confronted by a prospect who basically mocked me, saying that my benchmark of 8% was too low and he could get better returns from Stashaway.


It aggravated me a little because I generally dislike working with people who mock me or haven't really read a lot of my written material before challenging me.


You see, I actually reposted Stashaway's public 2020 returns in this article, which seems quite appropriate. SRI 36% performed at 21.9%, which was actually better than the SNP500 at 16.26%. [Jan 1, 2020 to December 31st, 2020]

From Stashaway's EOY email
SNP500 report EOY. Fees not included, making this return even lower.

While it's quite impressive that a more balanced risk portfolio like Stashaway, even at it's highest risk profile - was able to beat the SNP500 last year, I used 6- 8 different funds, each beating both significantly - and this was one of them.

80%.

I would have used a more extreme result fund, but I think people would already start questioning why the portfolio portion I'm revealing doesn't reflect that return.


READ ALSO: What People Keep Getting Wrong About Annualized Returns (and why they can't get 8%).


My own track record is available here, from 2017 onwards. Having beat the SNP500 by well over 60% for the year, it's pulled up my own track record to over 35% annualized in the last 4 years (much dragged down by 2018 and the recent tech correction in the last few months).


Some clients even outperformed me, seeing as I tend to really execute my own investments and work out the kinks in them before I let my investors take on the same kinds of risks that I'm willing to take.


A TM fund that illustrates relatively well how my client portfolios are doing now, compared to the SNP500.

So WHY would I caution against an investment that's over 10% net of fees?


Why wouldn't I project for a lot more than 10% net of fees to clients, based off my own record (and even current client records?)


2 Big Reasons To Be Cautious


It's important to discuss why I try not to suggest that one should expect much more than 10%, due to two big reasons:


REASON 1: The SNP 500 Return (before fees/taxes etc) is currently around 13.6% in the last 10 years, but it's been less than 6% in the last 20 years.


13.6% before fees

It's quite terrifying to think that the same investment that many young investors expect about 13% annualized due to recency bias - looking at the last 10 years or even shorter durations and setting their expectation accordingly.


It's NOT necessarily wrong to look at recent records - it's just more important to take them in context and adjust expectations. Like this.

6.06% (before fees)
5.2% (before fees)

The reason why this annualized return is so different is because unlike 2010 to 2020, 2000 to 2020 consists of


a) Dot Com Crash - where the SNP500 experienced a drawdown of 49%

b) Great Financial Crisis - where the SNP500 experienced a drawdown of 58%


READ ALSO: Why You Should Invest Aggressively NOW (And How You Still Can Have Peace of Mind)


Comparatively, there have been NO MAJOR Financial Crises outside of Covid in the last 12 years.


Think about it from a Financial Planning perspective: If one is going to use investments for retirement planning (even something like the very beatable SNP500), would you really be optimistic or cautiously pessimistic about investment returns?


Look at the difference investing $50,000 into the SNP500 (gross of fees) from age 30 to Age 65 at different expectations:


Compounds at (2010 - 2020 Return): $50,000 (35 years) (13.6%) = $4,337,221.51

Compounds at (2000 - 2019 Return): $50,000 (35 years) (6.06%) = $391,991.64


There's a literal (almost) $4 MILLION DOLLAR DIFFERENCE just from a potentially GROSS MISCALCULATION IN EXPECTATION.


Isn't that crazy?


REASON 2: TRENDS


Inflation is starting to rise again in the countries that recovered, such as China and the US – while a double whammy gets experienced from areas with second and third waves of Covid. Singapore seems determined to avoid such things, as we’ll soon experience from the 16th of May.


As a result, investing into fundamental stocks and bonds has become a lot less appealing.


Short Term and Long Term Trends tend to skew a perceived average.


For example, in 2021 everyone is buzzing about crypto now, like how they were in 2017. All the losers - likely in the majority - have kept very quiet, while all the winners are boasting about how intelligent they are.


By the first 3 months of 2018, they were all gone.


That same year in 2018, we had an influx of Forex and Options trading gurus. That went awfully quiet, quickly too.


I guess my point was really - that it's so easy to get excited today over trends compared to long term investing.


But even long term investing has its own long-term trend disadvantages.


In the 1980s, the energy sector was strong and stocks like Exxon Mobile were dominating the SNP500. But enter 2020, and we see a Technology trend instead while Energy has declined severely.


In the words of how Providend, and hopefully myself, provide advisory on this, its:


"Regular review of strategic asset allocation, in case of major strategic shifts that affect our fundamental investing assumption."


Long Term Trends have their own dangers - at a certain point, Technology may not be the dominant sector and its unwise to blindly assume that a concentrated investment without precautions taken would yield you a specific high result.


Closing Thoughts


Ultimately, there's been much greed in the air and it's nothing new. Every few years, there's something - after all, even the STI ETF was culture once. Now you rarely see someone on Seedly praise it like they did in 2016.

Don't look at a trend and assume it's a quick way to make money. Trends come and go. Context and Intelligence and the application of both is what will keep your money safe and growing.


But limiting yourself to investments recommended on a forum results in years of opportunity costs from interest you could have had if you hadn't simply followed the crowd.


If you'd have me, I'd love to show you how to have a reasonably high and realistic return, while not having to settle for mediocrity.



Money Maverick

Money Maverick is the alias of one Luke Ho, a licensed Financial Consultant since 2017. He is an Investment and Critical Illness Insurance Specialist.


Using expensive, high fee unit Trusts, he has outperformed the SNP500 every year from 2016. For the year 2020, Client performance was between 20% to 141% net of fees using strictly MAS-licensed investment instruments.


Money Maverick was started in 2018 to address the many Financial Misconceptions put out by non-licensed Financial Bloggers giving ‘free’ and potentially detrimental advice.


He would be happy to give you professional advice personally, or to speak to you as a writer of one of the Top 20 Investment Blogs in Singapore.

[Top 20 Financial Blogs, Singapore: Withcontent.co [2019, 2020]


CONTACT: 91769099 [whatsapp, telegram]

FACEBOOK MESSAGE: https://www.facebook.com/luke.ho.54/

TRACK RECORD: https://www.moneymaverickofficial.com/about

REVIEWS: https://www.facebook.com/themoneymaverickofficial/reviews/


If you have any such questions about the articles and how it may apply to your finances, you can feel free to drop Luke a message through any preferred medium (if you prefer privacy).


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The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with.


Here are some of Luke's resources on:


1) Investing: Why you should invest aggressively NOW (and how you still can have peace of mind)

2) Insurance: The Newest, Rising Critical Illnesses in Singapore (2019)

3) Retirement and Leverage: Leveraging a Private Annuity, Pros and Cons (ft. Jamus Lim)

4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them)

5) Job Assessment: A Case Study on How a $6k/mth GIrl makes MUCH more money than a $10k/mth Guy

6) Financial Optimization: How I Avoid the Largest 'Fees' of All