Investment, Investment Strategy • 2022-05-24
Many of you are aware of the importance of investing and may have dabbled in Exchange-Traded Funds (ETFs) and unit trusts.
But do you struggle to keep up with the latest trends in the market?
Wondering why you are not getting enough returns?
Some of you may find that you are often late to the game or hopped on the wrong trend and ended up making losses.
Especially if you are doing it on the side, it may take a toll on yourself (and your money) as you have to constantly balance between your full-time job, your family commitments and managing your investments.
Dalbar's Quantitative Analysis of Investor Behaviour proved that the average retail investor only earns 2.5% of annualised returns over a 20-year period, which may not even beat inflation.
After so much hard work, why is it that many retail investors are still losing money?
We dissected investors’ behaviour while looking at market trends, and here are the 3 main reasons we found.
At The Money Folks, we help our clients invest and build multiple income streams that potentially enable them to retire with more than $1 million. Reach out to us for a financial assessment call (by application approval only).
Disclaimer: This post represents our personal views and opinions and is neither associated with any organisation nor reflect the position of any organisation. This content is also only for informative purposes and should not be construed as financial advice. Past performance does not necessarily equate to future performance. Please seek advice from a Financial Adviser Representative before making any investment decisions.
The scenarios in this article are for illustration purposes only. Investments have investment risk. Past performance is not necessarily indicative of the future performance of an investment. This advertisement has not been reviewed by the Monetary Authority of Singapore. Please seek advice from a Financial Adviser Representative before making any investment decisions.
In investing, there’s a saying that goes – the trend is your friend.
But is this always the case?
If one follows the wrong crowd, they might actually lose money from their investments.
“You should invest in X fund, they are doing so good right now.”
“I gained nearly 50% from this fund, you should too!”
If word is already on the street that a particular stock or financial instrument is gaining fantastic profits — it’s probably too late.
Here’s a representation of a typical asset’s price trend:
Source: Stages in a Bubble by transportgeography.org
Smart money is money invested by people with expert knowledge of the market. They understand the economic stages that may influence an asset’s performance. These are your Warren Buffetts, Charlie Mungers, Bill Ackmans and many more. Some people refer to them as Super Investors.
Typically, when the investment decision of the smart money group holds weight and the asset is assessed to be able to potentially profit well, institutional investors will follow suit to invest. These are usually your financial institutions such as investment banks, sovereign wealth fund managers, trust fund managers and so on. They will usually observe where the smart money goes first, before moving the market with their investment decisions.
When the momentum is picked up by institutional investors, this will then push the asset price to rise further.
Notice that when the public starts to hop onto the bandwagon, it is reaching a peak?
The asset is probably overvalued by then as retail investors are dumping cash and the price may then start to drop or crash.
The biggest disadvantage as a DIY investor is many often don’t have an eagle-eye view of the market and what’s exactly going on in the world, except for those who are full-time investors, who are always on the ball on current news and market trends.
If you watched ‘The Wolf of Wall Street’, the “pump-and-dump” scheme was practised by the main character, Jordan Belford (played by Leonardo DiCaprio). The firm he worked for schemed to inflate the price of stocks via misleading or greatly exaggerated headlines. He was able to make a fortune when the market reacted to these statements.
This may be reflected in real-life situations. Although the effect might be short-term, you might lose a significant amount of money from following the news without further research.
Some DIY investors tend to get caught up with news headlines and trading trends without doing their due diligence to understand why the price of an asset is skyrocketing. Buying an overvalued asset can lead to potential losses.
And if you are a headline victim, how long will your investments take to recoup the losses?
These price trends may be influenced by economic sector rotations, market development, or even geopolitical issues. When you make a decision without understanding the bigger picture, it can be very dangerous, especially if you are investing for retirement.
All of us want to invest smartly – buying the asset at the smart money stage or institutional investors stage, while having the foresight to sell it off before the valuation peaks and crashes.
The two key things that would help a DIY investor to be on the right side of the market are:
These require in-depth knowledge of the market, solid experience in managing investments and agility in taking the right action quickly.
Another factor often overlooked amongst DIY investors is the need for risk management. Some people might be aware of this, but they might underestimate the risks that come with their investments.
Risks are the uncertainties that come with your investments. The possibility that you might lose money is always there and it may be caused by anything related to your investment decisions, economic changes, geopolitics, business nature and many others.
Most of you might already know the importance of diversification — that you can’t put all your eggs in one basket. But if your diversification strategy is not done effectively, you can potentially still lose money.
Risk management helps you to optimise your returns as well.
Some might think that investing in an Exchange Traded Fund (ETF) is already considered as diversification. That’s a step towards managing risks but it is actually far from enough.
This is because ETFs may be concentrated in a particular geography, industry or both. For instance, the Vanguard Information Technology ETF is generally focused on the Technology sector in the U.S.
This means that if you only invested in this fund, you might be losing out on opportunities elsewhere such as the Asian market.
So in the event that the market does not favour this sector and geography, you may not be reaping the profits you are looking for.
A well-diversified portfolio also takes into account the economic stages and industrial sectors that are sensitive to these stages. Take a look at the chart below:
You can see that particular industries fare better than others during certain economic periods. For instance, the Consumer Discretionary sector fares best in the early economic stage but the energy sector does not. The opposite happens during the late economic stage.
Is your portfolio diversified enough so that it’s recession resilient and optimised regardless of the economic cycle? Is regular rebalancing done during changes in the economic cycle to optimise your gains and minimise your losses?
Besides market factors, the type of financial instruments you invest in also plays a role in your portfolio performance, as you don’t want your retirement funds to be at the mercy of one asset class.
Optimising one’s portfolio performance requires diversification with strategy. This is where proper asset allocation comes into play. It requires periodical rebalancing that will not just protect your portfolio from losses but also take advantage of opportunities in the market. Hence, it optimises the returns despite any market conditions.
All of these need to be done to ensure that your portfolio remains on track to reach your financial goals.
Risk management is preparing for the unknown volatility and changes in the market.
And it is even riskier to not know what you don’t know — as this may potentially result in more losses (and worse, not knowing how it happened).
In the first quarter of 2022, KraneShares CSI China Internet ETF (KWEB) — which consists of tech-related stocks in China — experienced a serious price crash due to the looming fear that China’s tech stocks may potentially be delisted from the U.S. markets.
Many have dumped this ETF as they feared it might result in more losses than what they could accept.
However, in mid-March, the Chinese government publicly assured investors that support to the financial assets will be extended. In addition to that, the Chinese and U.S. regulators are working towards a cooperation deal plan.
These assurances were enough to send the KWEB stocks to rally — which resulted in a 40% jump!
So what should one do in this situation? Should you buy the dip or cut your losses?
It is best not to jump on a trend without doing your due diligence on a particular asset and assessing if it is aligned with your goals and risk appetite.
This is where investing in a systematic way can help ground you emotionally when deciding your next investment move.
Often, we can only understand how crazy the market volatility is when it is our money at stake, but we might be easily swayed by our fears and emotions.
So rather than investing based on fear or exciting trends, reflect on fundamental factors that influence the asset, such as government support, geopolitical relations, economic growth and many more.
If you lose money after making an emotionally driven decision, this might lead to frustration and loss of faith in investing because of the money lost.
But if you have a systemic approach to your investment and a well-prepared weather-proof strategy on how to adjust your portfolio depending on the economic cycle, you will know how to react to any market changes.
It will help you navigate through the chaos of it all.
As the famous saying goes, “Experience Is The Best Teacher”.
If you learn from your investment mistakes and make the effort to improve your investment decisions, it is safe to say that the longer you are in the market, the better you will become.
You may realise that the financial market is forever changing but your experience will help you make sounder investment decisions.
You will get better at determining which strategies fare best during a certain situation.
You will know which asset allocation is the best in order to optimise returns while managing risks at the same time.
The only drawback here is, how much time and effort are you willing to put in to learn? Many of you have other priorities – your family and career. You want to spend time on things that matter most to you.
So if time is a luxury you don’t have, consider working with a professional to manage your investment portfolio.
A Financial Adviser Representative (FAR) will be able to assist you to achieve your financial goals without having to learn investment strategies on your own – which takes years to hone.
At The Money Folks, we help our clients invest and build multiple income streams that potentially enable them to retire with more than $1 million. This is done using our recession-resilient investment framework.
Experience in investing needs to come hand-in-hand with consistent effort to understand the market and craft investment strategies to protect yourself from losing money.
Be prepared for market volatility by doing your own research and analysis on each investment instrument you intend to invest in. Besides that, keeping yourself updated with current market developments is crucial.
From here, take the time to craft an investment strategy that potentially gives you your desired returns without taking more risks than you can tolerate. From identifying market trends at the right time to asset allocation to diversifying your portfolio — you need to have a strategy in place.
A good FAR deeply understands how the market works, has the right expertise, and is able to do the above for you, so you can focus on your career and family. So if you need help, you can reach out to us here.
Monitor and rebalance your portfolio according to its performance.
Be mindful that your emotions are not driving the decisions.
But remember, rebalancing is not a mandatory thing to execute every quarter or 6 months – as long as your portfolio is on track to reach your financial goals and your risks are still aligned with your risk appetite, it’s fine. You just need to review it regularly.
Doing this requires an excellent understanding of asset classes and their performance within a certain economic period.
Just like taking care of a plant, you need to know in which environment a certain plant grows best. Some grow best in maximum sunlight, while some need to minimise sunlight exposure to bear fruit. Even their water intake varies. The same goes for financial instruments and the environment they thrive in.
If you don’t know when is the right time and how does one review and rebalance your portfolio effectively towards their goal, consult a FAR to help you grow your wealth.
This way, you can be assured that your portfolio is always on track despite any market conditions.
Are you struggling to juggle your full-time job, family commitments and managing investments?
If this is the case, you may want to consider getting a professional to take the investment management stress off your plate, so you can focus on your work and family.
Here at The Money Folks, we are a team of financial advisor representatives and some of us are Certified Financial Planners (CFP®️). We have helped more than 400 professionals grow their wealth through several passive income streams. We are trained and equipped with nearly 10 years of experience in the financial industry, and we have the expertise to optimise your investment to maximise returns while minimising risks for you.
Some of us are recognised as the top 5% of financial advisor representatives worldwide, and our clients are on track to potentially achieve their retirement goals 10-15 years earlier than planned.
Leave the weight of investment management to us — everything will be taken care of for you.
At The Money Folks, we help our clients invest and build multiple income streams - potentially enabling them to achieve early financial independence. This is done using our recession-resilient investment framework.
The information in this article is meant for general information purposes only and does not constitute financial advice. Please consult your Financial Adviser Representative before making any investment decisions. Investments have risks. Past performance is not necessarily indicative of the future or likely performance of an investment.
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