Last updated: 07:10 / Wednesday, 21 May 2014
MFS Investor Sentiment Insight

Buying Something You Don't Understand

People are not great at assessing relative risk. Most of us know people who are afraid to fly but have no issue with driving long distances. While both have risks, it is generally understood that driving is far more dangerous than flying.

Investing is no different. You can't avoid risks, but you should at least know what risks you're taking.

According to one of the recent surveys by MFS Investing Sentiment Insights,  many investors have very interesting ideas about the risks of passive investing.

 

The first finding that jumped out was that 64% of investors thought an index fund was safer than the market. This is a pretty clear example of someone not knowing what they're buying or how it is designed.

The second finding was even more scarier. When asked why they purchased passive investments, 48% said a major factor in the purchase was "minimal risk." Imagine how an investor who purchased an equity index fund because of minimal risks will react during the next downturn?

There is a role for both active and passive investments in a portfolio. However, it rarely ends well when we buy something we don’t understand.

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