In any investment instrument, knowledge is important to make sure we are not investing blindly and thus minimizing our risk. According to ‘Personal Investing’, in general there are 4 main factors which impact our investment return; Asset allocation, market timing, individual stock selection and cost. You will be surprise that 93.6% of average total portfolio returns were attributable to asset allocation.
Asset Allocation
Very often people ask about when to invest? Is that the right time to invest? But they forget that if they have not backed up themselves with a 3-6 months emregency fund, there is no any right time for them. Simply because no body will know the intermittent market movement in near term. Adversely, according to asset allocation, for a moderate investor who are looking for long term investment of above 10 years, reasonably they can expect higher return with more aggresive investing portflio, say 60% into high risk investment while cushioning by 20% medium risk and 20% low risk investment. Relatively, for a moderate investor who are looking for medium term investment of 5 years, they would have to expect lower return with 20% in high risk investment, follow by 20% in medium risk while cushioning by 60% in low risk investment. Very obvious, the stock market investment, which is all the way high risk is not suitable to every investor. Fixe Deposit could be an important instrument for stock investor to design their investment portfolio that suit their investing temparament. Alternatively, by having various fund to cover low, medium and high risk investment, unit trust is more attractive for various types of investors.
Dollar Cost Averaging
In any market trend, whether it is trending up or down, dollar cost averaging principle will always help to reduce our investing cost and thus minimizing the investment risk. A study from Schwab, a financial research company, has come out an interesting finding on the research to S&P 500 for the past 20 years from 1987 - 2006. What surprise me is; a poor investor investing 2K every year in the worst timing of the year enjoy double return than an investor who left his money in Treasury bills. That is not all, an investor who is investing consistently every year without timing the market has never rank last among the 5 investing styles in all the 62 rolling 20 years datapoints. Conclusion from this research is; consider dollar cost averaging and try to avoid timing the market that rarely succeed. Furthermore, dollar cost averaging helps you to force yourself to do saving through consistant investing.
Portfolio Rebalancing
A smart investor will always rebalance their investment portfolio according to the change of their commitment, age, investment temparament and of course the dynamic market movement. An important quote from Warren Buffet; be greedy when others are fearful, be fearful when others are greedy. While most of the people realise the importance of ‘buy low, sell high’, however, it is extremely difficult to do that in extreme market situation both in oversold or overbought market. Personally i have experience this common reaction from my investors throughtout this economy crisis. Very often, the emotional control could take up the bigger attribution than knowledge. Through investment in unit trust, say equity fund, which is the high risk investment to invest at least 60% in stocks, fund manager will take the control to rebalance the portfolio with their knowledge and experience.
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