by Chee Jo-Ey
WHEN the stock market turns volatile and investors witness a huge sell off in the market, they might be spooked into taking their money out of the market and keeping it in cash.
Even though people might feel safer with having something more tangible like cash in their hands during a weak economy, investors are not encouraged to base their decisions on emotions.
iFAST Capital Sdn Bhd assistant portfolio manager Jerry Lee told FocusM, “One of the benefits of staying invested in the markets is that we eliminate the emotional factor from the investment decision making process.
“We realise that most of the time, the key factor that leads to investment mistakes is the emotions of fear and greed. Investors turn greedy when market sentiment is bullish and become fearful during a market downturn.
“However, we all know that the bull market will usually mature on optimism and a bear market will end during great pessimism. Hence, investment decisions that are being influenced by emotions will often lead to investment losses.”
Another point to highlight is that the equity market will usually rebound very sharply and very fast following a hefty selloff as what was experienced in the past weeks. Selling the equity exposure and holding cash will cause investors to miss out on the potential rebound in the global equity market.
Lee’s advice to investors is to stay invested in the market and look for markets or sectors with huge discounts and strong fundamentals. Most importantly, investors should diversify their portfolio according to their risk profile and not take unnecessary risk due to market fluctuations.
“For investors with substantial cash holdings, they can consider entering the market gradually, splitting their capital into three to four tranches and entering the market gradually when it drops every 7% to 10%. This will help investors to lower their costs of investment should the market continue to trend lower,” added Lee.
Despite the dire news headlines, local retail investors are buying into stocks they feel will weather the storm or even benefit from the coronavirus crisis, according to new data from investment platform eToro.
Walt Disney was the most popular stock on the eToro platform in March with a 196% increase in Malaysian investor buys compared with February.
While the Walt Disney stock fell by 18% in March following a significant sell-off in company shares due to the Covid-19 outbreak, Malaysian investors are taking advantage of this situation by scooping up Disney stock at a discount.
The same goes with Mastercard’s stock which jumped from 20th to 10th place with a 277% increase in March, fuelled by lower prices.
Advanced Micro Devices (AMD) remained a popular stock in March due to the pandemic’s role in promoting the video game industry, creating a surging market demand for CPU.
As AMD’s CPU tech remains ahead of competitors such as Intel, investors are very optimistic about the company’s future.
Affin Hwang AM chief marketing & distribution officer Chan Ai Mei said, “Due to market jitters, investors may be tempted to take profit and cash out from their investments. But there is always a danger in timing the market.
“Holding cash may provide safety to investors in times of market stress. But that would also mean investors would miss the chance of capturing returns when the market rebound.”
For example, since the market rout in mid-March the MSCI World Index and MSCI Asia ex-Japan have rebounded by 15.8% and 12.9% respectively as at April 22.
The benchmark gains were fuelled by stimulus optimism and tentative signs of Covid-19 infections starting to peak. Locally, the FTSE KLCI Index also rebounded by 11%.
Investors who cashed out would have missed the chance to recoup back gains or capture returns. As such, investors should avoid making drastic shifts in one’s asset allocation, whether it is ploughing into the market or cashing-out all at once.
“We advise investors to maintain a disciplined approach and stick to a regular investment plan by dollar cost averaging. Investors who stick to their long-term asset allocation would eventually reap the benefits and fare better overall,” added Chan.
To position their portfolios and navigate through volatility ahead, investors should first review their portfolios and assess if they are comfortable with the level of risk they are taking.
Ideally, investors should also rebalance their asset allocation annually to correct any portfolio drifts.
If liquidity is crucial, especially for conservative investors who have retired or are approaching retirement, it might be appropriate to reduce exposure in equities.
This might forego some future upside but is ideal to help preserve and protect capital. Within fixed income, conservative investors should also tilt their allocation towards investment-grade bonds and avoid high-yield exposure.
“For investors who sit in the middle of the risk-profile spectrum and want some equity exposure, an important question they need to ask themselves is if they can stomach the volatility for the next three to five years.
“If the answer is yes, then investors should average down and split their investment into a few tranches to ease their way into the market,” said Chan. – April 23, 2020
