There is a common protection mechanism used by many when confronted with an investment which promises high returns: “If it is too good to be true, it probably is”.
In fact, it is so popular that there are even variations of it:
However to be a financial savvy investor, we cannot let our defense mechanism take over everytime as we may lose out on investments that are actually… Good!
As an example, there are two similiar investments, one distributed through agents and hence charged high fees of 5.5%, and another distributed thru online channels charging only 3% fees. Well obviously the lower fees are better investments right?
Unfortunately, for lay investors, the defense mechanism will kick in and actually refuses the lower fee option. How can this be?
Normally, without professional advice that the two investments are actually apple-to-apple similiar, our mind will put up a wall of reasons as to why the lower fee option is different and hence have a catch.
Actually, there’s no catch. The problem is that we automatically apply the phrase “Too Good to be True” so often that it actually becomes an unquestionable truth. The countermeasure to this problem is of course analyse the fundamentals of any proposed investment thoroughly before deciding that it is good or bad.
It also helps to be exposed to all available investments in the market and be updated with all new financial instruments constantly.
Before any gung-ho investors congratulate themselves on their own overcoming the “Too Good to be True” problem and brag about trying out every other investments, let me balance this discussion by introducing the “High Risk High Reward” myth.
Again, many variations on this phrase:
“Low Risk Low Reward”
“No Risk No Reward” etc. etc.
In fact very few people will object to the above picture as they are very familiar with the term “balancing risk vs rewards”. Gamblers commonly use this phrase to justify their behaviour.
However as studies after studies have proven, we are really really bad at statistics.
For example, Genneva Gold, on those days gave out 2% interest per month for 24% return per annum, “Too Good to be True” and “High Risk High Rewards”, right?
Unfortunately no, the high risk high rewards was backed by a flawed assumption and really bad accounting, which is that Gold price will rise forever. With possibility of zero return, the result is… zero.
Again the countermeasure? Analyse the fundamentals of any proposed investment thoroughly.
Do not let our biases rule us, question everything and have an open mind to find out more.