By Chee Jo-Ey
WITH coronavirus hogging the headlines for the past several weeks, it’s little wonder that people are experiencing all kinds of panic - from shopping for toilet paper to selling stocks.
The current period of heightened volatility triggered by the coronavirus outbreak is a real test of investors’ discipline.
FSMOne analyst Shawn Low says it is not advisable to react to sensational headlines. If investors follow headlines and are unduly influenced, chances are that they might be driven by sentiment instead of rationale.
Having an investment plan helps investors navigate the market better and prevent them from being swayed by short-term market noises and fearful headlines.
“Investing regularly over time through a regular savings plan allows investors to enjoy the benefits of dollar-cost averaging as it removes guesswork and emotions.
“As markets fall, investors will be purchasing more units per dollar at regular intervals while those who try to time the bottom would see their full holdings fall in value,” explains Low.
Dollar-cost averaging is an investment strategy in which an investor divides the total amount to be invested across periodic purchases of a target asset to reduce volatility on the overall purchase.
Affin Hwang Asset Management chief marketing and distribution officer Chan Ai Mei said that the vagaries of market timing make it challenging for investors trying to pick the bottom and can even significantly derail one from achieving the investment goals.
According to research by Morningstar, investors who stayed in the market for all 5,035 trading days achieved a compound annual return of 6.1%. However, that same investment would have returned only 2.4% had it missed only the 10 best days of stock returns.
This underscores the peril of market timing that could lead to significant opportunity loss. The truth is that timing the market consistently is extremely difficult, that even the savviest investor can get wrong.
Chan advises investors to have a regular investing plan and good discipline during both good and bad times. Over the long term, this would reduce the impact of volatility by spreading out your investments over periodic time intervals via the dollar cost averaging method.
This ensures that one does not buy at inflated prices as well as seize the opportunity to acquire more units at lower prices.
“There could still be more volatility ahead, but if you are prepared to sit through it, you would reap the returns when markets rebound. History has shown us that every bull cycle has ended at a higher point than the previous one.
“But investors will need to be patient and ensure that they are still comfortable with the risk they are taking in their investment portfolio,” said Chan.
If however investors cannot take further volatility, they could switch to less risky solutions such as bond funds or money market funds which can help them protect their capital from depleting when markets continue to get sold down.
However, by doing so, one must be prepared to forego any future upside potential should a rebound happen.
Hence, it’s best to ride through the volatility and at every dip start nibbling back in smaller tranches and stagger your investments over a time period into a diversified pool of funds.
According to University of Malaya senior lecturer at the department of finance and banking Dr Eric Koh, investment strategies are well thought out plans to help us achieve certain outcomes over a period of time.
“It takes into account, among others, your time horizon, constraints, risk or return considerations and unique circumstances. If the strategy is still appropriate and doable, you should stick to it and not change your direction at your whim and fancy,” said Koh.
As it is very difficult, if not impossible, to catch the bottom, it is suggested that investments should be made in small chunks at regular intervals. For example, you invest a fixed amount of your savings every month. When the stock price increases, you buy fewer units.
Conversely, you buy more units when the price dips. So, in the long run, you would have accumulated more units at a lower price. Hence, your average unit cost will be lower.
In general, if the security price momentum tends to move up over the long term, you would gain. In other words, there may be some short term apparent losses but if, in the longer run, that stock's price rises, you would gain. - May 15, 2020