When investing in bonds, stocks, or mutual funds,
investors have the opportunity to increase their rate of return by timing the market - investing when stock markets go up and selling before they decline. A good investor can either time the market prudently, select a good investment, or employ a combination of both to increase his or her rate of return. However, any attempt to increase your rate of return by timing the market entails higher risk. Investors who actively try to time the market should realize that sometimes the unexpected does happen and they could lose money or forgo an excellent return.
Timing the market is difficult. To be successful, you have to make two investment decisions correctly: one to sell and one to buy. If you get either wrong in the short term you are out of luck. In addition, investors should realize that:
1. Stock markets go up more often than they go down.
2. When stock markets decline they tend to decline very quickly. That is, short-term losses are more severe than short-term gains.
3. The bulk of the gains posted by the stock market are posted in a very short time. In short, if you miss one or two good days in the stock market you will forgo the bulk of the gains.
Not many investors are good timers. "The Portable Pension Fiduciary," by John H. Ilkiw, noted the results of a comprehensive study of institutional investors, such as mutual fund and pension / retirement fund managers. The study concluded that the median money manager added some value by selecting investments that outperform the market. The best money managers added more than 2 percent per year due to stock selection. However the median money manager lost value by timing the market. Thus, investors should realize that marketing timing can add value but that there are better strategies that increase returns over the long term, incur less risk, and have a higher probability of success.
One of the reasons why it is so difficult to time correctly is due to the difficulty of removing emotion from your investment decision. Investors who invest on emotion tend to overreact: they invest when prices are high and sell when prices are low. Professional money managers, who can remove emotion from their investment decisions, can add value by timing their investments correctly, but the bulk of their excess rates of return are still generated through security selection and other investment strategies. Investors who want to increase their rate of return through market timing should consider a good Tactical Asset Allocation fund. These funds aim to add value by changing the investment mix between cash, bonds, and stocks following strict protocols and models, rather than emotion-based market timing.
In conclusion, there are 3 keys to have a successful unit trust / mutual fund investment.
1. Well diversified in a complete investment portfolio.
2. With a strong holding power for long term (at least 10 years)
3. Without any "investment emotion" involved.
Hi,
ReplyDeleteI would like to inquire more on the 1st point in your conclusion: well diversified in a complete investment portfolio. In your opinion, which one is better:
1) to invest (let's say RM10,000) in a mutual fund that has a a diversified portfolio (as you say, tactical asset allocation or mixed asset); or
2) to invest the same amount of RM10,000 in multiple portfolios separately (eg. some in stocks, some in bonds, money market etc)?
Hi Izaf,
DeleteIt depend on few factors, such as investor's investment objective, risk profile, time horizon and etc.
And the same time, is the RM10k the only fund that for the whole investment or the investor can come out new top up for the future, lump sum or regular..?
Another factor to consider is domestic market and global market situation.
Beside looking at unit trust fund portfolio, is the investor consider about bigger picture such as his/her personal whole asset allocation or portfolio management.
All of the above need to be factor in if we are talking about personal financial planning.
I hope my simple points meet your expectation on your questions.