A Victim of Sunk-Cost Fallacy

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“Patience is a product of confidence and trust.”

— Peter Kaufman

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The only ally for long-term investment is time.

For an investment to grow over time, investors require patience.

And to be patient, investors need to have confidence and trust the investment will grow over the long term.

Malaysia Equity Market

In my opinion, confidence and trust in the local equity market have been questionable since the end of 2014.

For the past few years, the local economy has been poor or stagnate at best and this has translated to poor confidence among local and foreign investors investing in the local market.

As for trust, looking at how volatile and vulnerable our local politics is, I think it’s safe to say investors in general have lost trust in them. 

Looking forward, it’s hard to foresee a catalyst or an optimistic narrative that may push the local economy to grow.

KLCI – A Lost Decade

Below are the KLCI index performances for the past 25-, 10-, 5- and 1-year.

As you may have noticed, besides the 25-year, the index performance has been negative for the past 10-, 5- and 1-year.

Any investor who invested directly into the KLCI index 10 years ago would be looking at a negative return.

My Investment

Lately, I have been pondering my own investments in the local equity market¹.

I first started investing in 2015 via unit trust funds and have remained invested till now.

For compounding to work, I realized I needed to remain invested for a minimum of 10 years.

However, it has been 8 years and my total unrealized fund return to date is only around 9%.

The 9% return is better than the KLCI index negative return but after 8 years, it’s just a poor investment return.

In contrast, an investment in the local bond market since 2017 would have given me a total return close to 28-30% after 5 years.

Single Digit Return

I have been evaluating my local fund’s investment performance since 2019.

Even though the return was single digit, I refused to sell or cut my losses.

I hope that over the long term, the local equity market will pick up.

The problem is hope is never an investment strategy.

Thinking about it now, I believe I was a victim of the sunk-cost fallacy.

Sunk-Cost Fallacy

Below is one of the sunk-cost fallacy definitions found on the net.

The sunk cost fallacy is the tendency for people to continue an endeavour or course of action even when abandoning it would be more beneficial. Because we have invested our time, energy, or other resources, we feel that it would all have been for nothing if we quit.

Source: https://www.scribbr.com/fallacies/sunk-cost-fallacy/

I guess I wasn’t ready to accept failure investing in the local equity market after remaining invested for some years and wasting a lot of energy hoping the market would eventually pick up.

It feels like a loss after spending so much energy on it.

Lesson Learnt

I should be a bit more ruthless when it comes to cutting my losses and admitting the investment did not work out as expected.

Patience has its limit and long-term investment only works when the underlying market has a future growth.

Having said that, it is never easy to foresee or forecast the future growth of the economy and equity market.

Maybe for the current investment climate, investing in developed markets instead of emerging markets may bring more value for long-term investing.

Moving Forward

I’m well aware of the possibility of the local equity market picking up in the future.

Two years of solid growth may be enough to cover the previous eight years of poor performance and provide a decent 10-year return.

However, as mentioned before, I just don’t see any new catalyst to improve the local market performance.

For now, I may sit tight for another two weeks before deciding the next course of action.

Note:

1. Local equity market, mainly referring to companies with a large market capitalization.