Volatility is the price you pay for the performance that you get over time. – Nick Murray
FOR beginners, pooled funds such as mutual funds and Unit Investment Trust Funds (UITFs) are often the most popular investment tools. They are relatively easy to understand and generally less risky than individual stocks due to their diversified nature.
Additionally, pooled funds are more convenient for some investors since they eliminate the need to pick individual stocks. Like any investment instrument, there are various strategies that people can use to maximize returns or minimize losses. Here are some strategies I occasionally use with my pooled fund investments.
Cost averaging. This is probably the most common strategy when it comes to investing in pooled funds. The idea behind this is that investors regularly add to their pooled fund investment regardless of whether the Net Asset Value Per Share (NAVPS) is on the rise or on the decline.
Pros: Depending on the fund chosen, this strategy still gives one higher returns compared to regularly saving money in time deposits. This also lowers the risk of the investors since they are investing at any point in the fund's volatility. Any loss from the investment made at a higher NAVPS can be compensated by an investment made at a lower NAVPS. This strategy is also a good starting point for the habit of investing. This strategy is good for goals that are at least more than five years down the road.
Cons: Since risks are lower with this strategy, the potential returns will also be lower. Any gains made from investing at a lower NAVPS are mitigated by an investment made at a higher NAVPS.
Take advantage of the down market. Mr. Warren Buffett, one of the most successful investors in the world, once said: "... Be greedy when others are fearful." This quote probably sums up this strategy. When the market has just made a big decline and seems to trend back up, put in more to your pooled fund to maximize the potential return.
Pros: This strategy allows one to ride the uptrend of the market and potentially gain more in the short term. In case you are doing a cost-averaging strategy, taking advantage during a down market can boost your potential return and offset your 'losses' quicker.
Cons: Usually, people invest in pooled funds because they don't want to worry about market volatility, so this strategy might just not work for some. This would require being updated with how the market is moving. Most of the time, investors don't have the extra funds when an opportunity to use this strategy presents itself.
Fund Switching. Most asset management company allows their investors to switch funds for free at least once a year. This strategy would make the most sense during a downtrend, and one would want to preserve gains made in the past. Another situation where this strategy can come in handy is when one would not want to incur more losses during a downtrend.
Pros: One can move to a more conservative fund so losses can be minimized and past gains can be preserved. What's good about this strategy is that as soon as there are signs that the market is starting to trend up anew, investors can switch back their funds and maximize potential returns. Unlike adding to one's investment, you will just use past gains to buy shares in a riskier fund. There's no need for extra funds for this to be done.
Cons: Knowing when to switch funds takes a lot of research, experience and conviction. Without these it will be hard to figure out when would be a good time to switch to a more conservative fund and back.
Pooled funds are used mostly for passive investing, but much like in any investment, there are opportunities we can take advantage of that will allow us to gain more from time to time. One strategy can already be enough to meet our investment goals, but I've learned over the years that a combination of these strategies may help us fast-track our goals. A word of caution, though, the more return we seek exposes us to higher risks — this we have to understand as we invest to achieve our goals.
It's also important to periodically review and adjust your strategies as market conditions and personal financial goals evolve. Regularly monitoring your investments allows you to stay aligned with your objectives and make informed decisions.
Being adaptable and willing to adjust your approach in response to new information can enhance your ability to navigate the complexities of investing and achieve sustained success. Remember, the journey to financial growth is ongoing, and continuous learning and strategy refinement are key components of a successful investment plan.
Jeremy Jessley Tan, RFP, is a registered financial planner. For questions on personal finance, email him at jeremyjessley@gmail.com. To learn more about financial planning, attend the 108th RFP program this July 2024. Inquire by email to info@rfp.ph or text at 0917-9689774.
Read The Rest at :
