Are you following the herd? FSC director outlines investment pitfalls to avoid
Published: Sunday | April 26, 2009
Rohan Barnett
Jamaicans tend to get caught up in the herd mentality, a weakness when it comes to investing, according to executive director of the Financial Services Commission (FSC), Rohan Barnett.
There is a tendency or to buy in to the philisophy that 'everyone is doing it so it must be good', said Barnett, who was addressing an investment forum in Kingston at the time.
But calling on the FSC's mantra 'Think and check before you invest', the regulator proposed several strategies to avoid fraudulent schemes and other investor traps.
"Be mindful that periods of great returns are invariably followed by a decline. Just as well, if returns are too good to be true, they probably are," the former Citigroup executive warned.
"Investors are ultimately responsible for their investment choices." So to avoid becoming a victim of a charismatic con man and Ponzi scheme operator, follow this checklist:
Law of investment
One law of investment to note, the FSC director said, was that high returns always come with high risk.
"There seems to be a high affinity towards high risk, whether it is driven by greed or not," he said of the local landscape.
"It is better initially, to build wealth with low risk and with traditional investment instruments, and then to go on to more risky instruments while limiting your exposure."
Re-emphasising the need to avoid the herd mentality, the FSC director told investors at the First Global forum to beware of market sentiment and avoid being caught up in other people's enthusiasm.
"Market sentiment can lead to herd mentality, which describes how people are influenced by their peers to adopt certain behaviours, follow trends, and/or purchase items," said Barnett.
"You must firmly believe there's no safe stock, no sure-thing investment and that risk is always present. At the time same, you need the facts and intuition to make a decision."
Scepticism
Jamaican investors, he states, must be sceptical of financial engineering or hard-to-understand products.
"Never make any investment or purchase you don't fully understand. Products that rely heavily on financial engineering are the root of the present financial crisis."
Individuals, he said, should also never underestimate the importance of diversification.
"From year to year, there's no telling which asset classes will be the best performers - a strong argument for portfolio diversification. It aims to maximise return by investing in different areas that would each react differently to the same event."
Finally, Barnett advised, invest for the long term. He said, "The untamed daily and weekly fluctuations in markets highlight the difficulty for most investors in timing short-term moves and remind us that the best approach is to focus on a long-term strategy.
avia.ustanny@gleanerjm.com
