Difficult to start investing? Start with what you know
Greta Zarembiene, Head of Investor Relations at crowdfunding platform Röntgen
A number of research studies have confirmed that investors prefer familiar destinations: real estate closer to home, stocks of more famous companies or simply markets and participants that are geographically closer. Simply put, in life we prefer what we recognise or think we know. This has risks and opportunities encoded in it. However, it is most worthwhile for those who want to know about this phenomenon but are hesitant to start investing.
There are many academic papers on the subject, but let's take as a starting point the study "Familiarity Breeds Investment", published by Gur Huberman, professor of finance and behavioural finance expert at Columbia University in the USA, back in 2000.
It shows that investors are disproportionately more likely to buy shares in companies geographically closer to home, as well as in companies they know better or have more frequent exposure to. The professor sees this as a risk: such investors' portfolios are less diversified, more profitable and sustainable opportunities are ignored, and better brand awareness can create an illusion of security.
Even you can easily find signs of such bias in your own actions. It is very likely that you keep your deposit with a bank that provides you with routine services, which in the first place is simply more convenient and looks more reliable than a new or lesser-known bank, even if it offers a higher interest rate.
As for other popular investment destinations, a number of studies in the US show that retail real estate investors prefer properties that are physically or emotionally closer to their own home, and it is likely that we would see the same in Lithuania, although there is no official data available in this country. Most of us feel we have a better understanding of the specifics of a familiar city or neighbourhood, and from a practical point of view, it is simply easier to maintain a property that is "close by".
However, even if this bias has its risks, let's look at the positive side of this phenomenon. First of all, many people do not invest at all, and Lithuanians are among the least invested people in the EU. If a person has spare capital but chooses not to invest because of a lack of confidence or skills, shares in the most well-known company or an investment property in the neighbourhood will still be statistically more profitable than doing nothing.
Following on from this idea, both novice and more experienced investors who choose "familiar" destinations can actually be or become experts in them: they can specialise in certain stocks, bonds or real estate segments and learn to see in them what others cannot. As far as beginners are concerned, any interest and deepening is always a necessary starting point for solid competences.
In our experience, even if a person is not actively investing in real estate but is interested in it, it is much easier for them to discover and try out other real estate-related instruments, such as bonds or crowdfunding. For someone who is already interested in real estate, it is simply easier to assess the prospects of a particular project, developer, market or neighbourhood and thus build up their competences and secure a solid return.
So if this bias towards investments that are close and familiar can encourage interest and investment, it is worth taking advantage of it. Data from the Bank of Lithuania and other organisations show that, in addition to cash in accounts, Lithuanians are investing mostly in deposits and investment housing, with shares, bonds, various funds, real estate crowdfunding and other private debt continuing to grow in popularity. Overall, if we are willing to look and invest, we are bound to find something closer, more familiar or simply more comfortable in many of these instruments, and simply having a broader horizon and a wider range of experiences will create much more value in the long run than passivity and indifference.
Difficult to start investing? Start with what you know
Greta Zarembiene, Head of Investor Relations at crowdfunding platform Röntgen
A number of research studies have confirmed that investors prefer familiar destinations: real estate closer to home, stocks of more famous companies or simply markets and participants that are geographically closer. Simply put, in life we prefer what we recognise or think we know. This has risks and opportunities encoded in it. However, it is most worthwhile for those who want to know about this phenomenon but are hesitant to start investing.
There are many academic papers on the subject, but let's take as a starting point the study "Familiarity Breeds Investment", published by Gur Huberman, professor of finance and behavioural finance expert at Columbia University in the USA, back in 2000.
It shows that investors are disproportionately more likely to buy shares in companies geographically closer to home, as well as in companies they know better or have more frequent exposure to. The professor sees this as a risk: such investors' portfolios are less diversified, more profitable and sustainable opportunities are ignored, and better brand awareness can create an illusion of security.
Even you can easily find signs of such bias in your own actions. It is very likely that you keep your deposit with a bank that provides you with routine services, which in the first place is simply more convenient and looks more reliable than a new or lesser-known bank, even if it offers a higher interest rate.
As for other popular investment destinations, a number of studies in the US show that retail real estate investors prefer properties that are physically or emotionally closer to their own home, and it is likely that we would see the same in Lithuania, although there is no official data available in this country. Most of us feel we have a better understanding of the specifics of a familiar city or neighbourhood, and from a practical point of view, it is simply easier to maintain a property that is "close by".
However, even if this bias has its risks, let's look at the positive side of this phenomenon. First of all, many people do not invest at all, and Lithuanians are among the least invested people in the EU. If a person has spare capital but chooses not to invest because of a lack of confidence or skills, shares in the most well-known company or an investment property in the neighbourhood will still be statistically more profitable than doing nothing.
Following on from this idea, both novice and more experienced investors who choose "familiar" destinations can actually be or become experts in them: they can specialise in certain stocks, bonds or real estate segments and learn to see in them what others cannot. As far as beginners are concerned, any interest and deepening is always a necessary starting point for solid competences.
In our experience, even if a person is not actively investing in real estate but is interested in it, it is much easier for them to discover and try out other real estate-related instruments, such as bonds or crowdfunding. For someone who is already interested in real estate, it is simply easier to assess the prospects of a particular project, developer, market or neighbourhood and thus build up their competences and secure a solid return.
So if this bias towards investments that are close and familiar can encourage interest and investment, it is worth taking advantage of it. Data from the Bank of Lithuania and other organisations show that, in addition to cash in accounts, Lithuanians are investing mostly in deposits and investment housing, with shares, bonds, various funds, real estate crowdfunding and other private debt continuing to grow in popularity. Overall, if we are willing to look and invest, we are bound to find something closer, more familiar or simply more comfortable in many of these instruments, and simply having a broader horizon and a wider range of experiences will create much more value in the long run than passivity and indifference.
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"Trečia diena" UAB, which operates the Röntgen platform, is a licensed crowdfunding platform. The platform is governed by the EU Crowdfunding Regulation and is supervised by the Bank of Lithuania in accordance with the law.