Lee Khee Chuan
THE popular manner unit trust funds are promoted by fund sales promoters are based on fund past performance.
And that is also the common way investor gets the impression and decides which fund is good to invest in.
Why? Because this feeds exactly into the investor’s psychology of wanting to see the good double-digit performance. So it is easy for investors to get excited emotionally.
“Dear sir, this ABC Select fund had 92.53 per cent return over the past 5 years. It has also won industry fund awards for 3 years & 5 years category”
Sound exciting isn’t it? With the adrenalin rush, the investor’s brain would have a flash of imagination that if he invests an initial lump sum, he would be able to double up his money in the next 5 years period!
This is an actual fund and its performance for 5 years (2009-2013) with total return of 92.33 per cent and in 2013, the sales agents popularly promoted it.
The 5-year total return was as at June 28, 2013. I remember details because it was promoted during a unit trust sales booth set up in a shopping mall in Kuching in September 2013.
Now, when I check the performance of this equity fund this week, it posts 17.77 per cent for the subsequent five years from Aug 1, 2013 to July 30, 2018.
Now you know why there is always a fine print at the bottom of a unit trust fund factsheet that says, “Past performance of the fund is not indicative of future fund performance” My point is that past performance is not a reliable indicator of a fund’s subsequent performance, especially for equity funds, meaning funds that invest primarily in stock market.
Volatile market
Furthermore, the market is almost always volatile. Last year, the popular word you read about the market was “goldilocks” when the stock market appeared rising in a smooth manner until February 2018.
Suddenly there was a correction – meaning the market dropped 10 per cent or more – in the US market and other stock markets experienced a kneejerk reaction.
Now, no fund managers are using that adjective anymore. The fact is, there are always internal and external factors that affect a stock market.
These multiple factors exert influence on the market at the same time and thus it is always difficult to predict the short-term direction of the market. Trump’s tantrum will make things worse and one can expect it as a consistent factor as long as he is in power.
Value Averaging
Thus, it smarter to employ value averaging (VA) as your investing method when it comes to unit trust investing. This method is ideal especially in a volatile market environment. When the fund price comes down, VA will help you to average down the fund’s price nicely when the market (thus the fund price) swings up and down.
The table below shows an actual quarterly report on value averaging for a client. As the market (hence the fund price) comes down (see ‘Unit Price’ column), more fund was switched to buy it (see ‘Switch amount’ column). This is the effect of using value-averaging formula, which dictates that more fund is switched to buy more fund units when the fund price drops.
Thus as you can see, the average cost per unit drops substantially from RM 0.9279 (December 21, 2017) to RM0.8045 (June 20, 2018) in “Average Cost” column on the extreme right. If you invested in a lump sum buying at RM0.9279 per unit and the price has now dropped to RM0.7149.
Try imagining your emotional response with a 23 per cent drop in your investment value in six months. Of course your emotional response depends on your psychological tolerance of risk in investing. In panic mode, some investors may decide to sell the fund and suffer investment loss.
In VA method, when the market is in up cycle again, there will be profit to be made and the investor will be recommended to take profit when the investment reaches its pre-set profit target.
In conclusion, when an investor uses value-averaging method, the averaging can reduce the investing risk. Furthermore, by introducing a stable parking fund into the investing strategy, which has low correlation with the volatile equity fund, it can reduce the risk of the whole portfolio.
For further enquiries, contact Lee Khee Chuan ChFC,CFP,CLU,FLMI,B.A.(S’pore), a Bank Negara and Securities Commission-licensed financial adviser representative (CMSRL/B1602/2011) and director, advisory and practice management of Standard Financial Adviser Sdn Bhd at 011-1060 1380 (Whatspp) or [email protected].