[Viewpoint]The myth of profitability

Exactly 10 years ago, in 1998, investing in financial fund products was fashionable among Koreans. The patriotic catchphrase “Buy Korea” lifted our pride as the financial crisis crushed our self-esteem. The size of the fund products expanded from 100 trillion won ($105.8 billion) in January 1998 to 262 trillion won in a year and half. The funds were so flush with money that they recklessly raised the prices of all the stocks.
The fund boom was boosted by the dot-com craze. Just because a dot-com company was involved, the stock of a wallpaper maker soared to its daily upper limit for 10 consecutive days. Even investment securities specialists competed to attract investors by offering funds that invested in dot-com securities.
However, the game did not last long. The Kospi sat at 1,059 on Jan. 4, 2000, but fell to 500 by the end of that year. The Kosdaq collapsed from 2,820 to 525. Needless to say, the funds that invested in dot-com stocks performed disastrously.
Last year, the funds boom returned to the Korean stock market. The funds grew by $63 trillion in one year, an all-time record that even exceeded the growth in 1998. The total size is now more than $300 trillion. More than 70 trillion won has been newly invested in securities funds. The money invested in the bond-based funds shifted to securities-based products.
Of course, the latest funds boom is different from the Buy Korea craze of a decade ago. Today, about 40 percent of the equity-based funds are regular savings products. If you buy a regular savings product, a certain amount gets invested every month, like a savings installment. Your portfolio might not suddenly grow when the stock index soars, but even if the stock market falls, you don’t lose as much.
When the Kospi fell below 1,600 last month, the money stayed in those funds because it was tied to regular savings products. Individual investors are not so swayed so much by the hype.
However, concerns still remain. The asset management companies that manage these funds are so obsessed with yield that they have heightened their expectations of investors. Last year, the average yield of the equity-based funds was 40 percent. It exceeded the increase of the Kospi by 25 percent. The 40 percent yield is only an average, and some marked a return of higher than 60 percent, more than twice the Kospi’s rate of increase.
The joy of making big money is undeniably sweet, but in the long term, high yields are not always something to be proud of.
If an investment fund earns twice as much as the market, it means it is too focused on stocks that are soaring instead of diversifying. It might enjoy an outstanding yield when the stocks rise, but when the market falls, there is a greater risk of collapse.
The prospect of big money paralyzes investors’ reason and logic. Instead of diversifying risk, investors are tempted to aim for one big break. There are already signs that investors are seeking a big return.
Last year, most of the money was invested on funds in June, October and November, when the Kospi jumped 2,000 points. More than 13 trillion won poured into the market, and 80 percent of that went into equity-based products.
The asset management companies are fanning the trend as they eagerly pocket transaction fees.
The Chinese and Indian funds that made a profit of about 60 percent last year are not performing well. Those institutions are now offering products that invest on individual countries such as Kazakhstan, Malaysia and Indonesia. Currently, 34 percent of the overseas equity-based funds fall into this category. There are even products that invest in Middle Eastern and African nations.
However, it is very dangerous to invest all your money in a country with a small stock market and not many listed companies.
When the market is so small, you might enjoy great profits if the market performs well. However, when the market is sluggish, you might lose all your investments. Because of that risk, internationally renowned institutions such as Fidelity, Merrill Lynch and American Funds hardly sell individual country-based funds.
The myth of profitability always ends with tragedy. The myth defies the principle of long-term investing and diversification. If you still dream of becoming rich overnight, you’d better wake up now.
This year, the market will teach people a hard lesson about the dangers of reckless investing.

*The writer is deputy business news editor of the JoongAng Ilbo.

by Jung Kyung-min