Published: 2008/10/17
NEWS on rising oil prices, rising cost of living, subprime lending, a weaker US dollar and even the local political scene is understandably making many investors anxious. In these situations, investors often succumb to their fears, disrupt their portfolios, and question their long-term financial plans. These trying times, however, can mould investors to become better informed and more disciplined.
Volatility, or wide, rapid swings in equity prices, is an inherent part of investing. It takes courage, discipline and foresight to remain invested in the market, especially when the urge to avoid financial pain is strong. Investors may be prone to sell in a volatile market because they think they can wait until the market settles lower and go back in when the market starts to recover. This strategy seems to make common sense.
The problem is when investors sell, they can increase their chances of missing the major market movements that signal the start of a longer recovery. Many of these major upside moves can happen quickly, often in just a few days. To avoid missing these key days, investors should consider staying invested and not panic-sell.
Let's look at our analysis of what would happen if an investor missed out on 50 of the best trading days on Bursa Malaysia, as measured by the Kuala Lumpur Composite Index (KLCI). How would that have affected his or her gains over the last 15 years?
The results are enlightening:
* Missing even five of the best trading days results in negative returns of 17.39 per cent.
* Miss the 10 best trading days and the loss almost triples to 49.13 per cent.
* Miss the 30 best trading days and the loss soars to 83.07 per cent. This represents just 30 days out of approximately 3807 trading days in total, or merely 0.79 per cent of the total trading days
* However, an investor who remained invested throughout the last 15 years enjoyed returns of 82.25 per cent.
An investor might then wonder: "But what if I'm able to avoid the worst days? That would surely help me get potentially better returns."
So now, our analysis turns to what would happen if an investor managed to avoid the worst trading days of the KLCI. How would that have affected the potential returns over the last 15 years?
The results are equally fascinating:
* Remaining invested through- out the last 15 years gives returns of 82.25 per cent.
* Avoiding just the five worst trading days results in positive returns of 260.15 per cent.
* Avoid the 10 worst trading days and the gain jumps to 413.62 per cent.
* Avoid the 50 worst trading days and the returns are a phenomenal 3266.59 per cent.
However, it is important to note that 50 out of about 3,807 trading days represent only 1.3 per cent. Would an investor have the foresight, expertise and skill to identify the 50 worst performing days over the last 15 years, ahead of time?
Let's recap the lessons from these scenarios and results:
Missing the Best Trading Days
* Missing just the five best trading days over the last 15 years results in a cumulative negative return of 17.39 per cent.
* Missing the 50 best trading days over the last 15 years results in a cumulative negative return of 92.50 per cent.
Avoiding the Worst Trading Days
* Avoiding the 50 worst trading days over the last 15 years results in cumulative returns of 3266.59 per cent. The probability of this happening is one out of 10179, an unimaginable number.
* Not avoiding the worst trading days in the last 15 years will still yield cumulative returns of 82.25 per cent.
Historical results have shown that timing the market, in the hopes of avoiding negative returns over the long-term, doesn't make much sense for the average investor. The downside in not remaining invested over the last 15 years - even for only the best five days - is a lot higher (-17.39 per cent) than staying invested through all the worst trading days over the last 15 years (82.25 per cent).
This illustrates why it is vital for investors to remain invested in equity funds as part of their long-term portfolio asset allocation and why they should not try to time the market.
Staying invested during difficult times, however, requires investors to confront their emotions during volatile periods and control the urge to sell or reduce their equity holdings.
Datuk Noripah Kamso is the chief executive of CIMB-Principal Asset Management Bhd.
INVEST SEKARANG DENGAN MENGISI FORM DI SINI.
Tiada ulasan:
Catat Ulasan