MARKET volatility causes many investors to react differently, with many of them naturally reacting out of fear. Some people are afraid of losing out and “buy more when price is low” while some fear losing everything and “sell it off now”.
These situations are usually triggered by a lack of understanding about the market and the fundamentals of investment. When people lack understanding, they tend to act based on what they choose to believe, which may not be true.
In my opinion, the current market reacts irrationally due to two possible reasons.
- People feel that their future is uncertain before the COVID-19 vaccine is made.
- The market underestimated the lingering effect of post COVID-19 that could prolong market recovery period.
Nevertheless, if not careful, we may miss the opportunity brought during this period. By pulling out entirely from the market now, we may miss the boat when the market rebounds. If we wait until the market hits the bottom only to buy, we will only know when the lowest is after it happens.
It will be too late for us to react. If we buy too soon, we may buy at the higher price when the market continues to drop.
What we need to do now is to be careful, not fearful about the market situation. We must have a proper plan to manage risks especially when there is an opportunity. First, let us determine what we want the investment to play and decide which risk levels are suitable. Here are some useful steps to form up a plan:
- Reflect / Establish your investment objectives and time horizon.
- Assess the role you want your investment to play and decide which risk levels are suitable.
- Evaluate the excess money (bullets) available for investment but do not compromise with your cashflows.
- Spend time to understand the market and the investment tools available.
- Get the information from the right sources and not from general news or social media.
- Develop a portfolio to better manage the risk and not “put all eggs into one basket”.
We strongly recommend that you adopt the Dollar Cost Averaging approach. Taking mutual fund investment as an example, decide on a time frame for your portfolio and apportion a fixed investment amount.
Pace out the investment on a regular basis to buy the funds that are identified in the portfolio regardless how the market performs. If the market continues to go down, you will be buying the funds at lower price points. You have at least covered the downside scenario.
If the market continues to go up, you may reassess your available unused bullets and decide whether to continue to buy. This is the preferred way to protect both the upsides and downsides of the market, especially during this uncertainty period.
“Only those who will risk going too far can possibly find out how far one can go.”
Vivian Chow is a licensed financial consultant with FA Advisory Sdn Bhd.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
