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Tuesday, October 30, 2018

How to Deal with the Market’s Ups and Downs

The most commonly asked question on investing - Is it a good time to invest? I would argue that anytime is the best time – not because I can answer correctly to the question but precisely because I can’t… and neither does anyone else. 

Study after study has shown that the vast majority of professional investment managers can’t successfully time or beat the market and the few that do happen to outperform aren’t able to consistently to do so.

So what does this mean for you as an investor? Trying to time the market is probably a waste of time that will likely backfire. The irony is that investing is so complex that your best bet is to keep it simple by following these three steps:

1) Invest according to your risk tolerance.

Risk tolerance comes in two forms. The first is how much risk you can afford to take, which is largely a function of when you might need the money. Anything you might need in the next 1-3 years (savings for emergencies, a vacation/holidays in the next year) should be kept safe in cash. Beyond that, the longer your time frame, the more aggressively you can invest in the market, which are extremely volatile in the short run but are less likely to lose money the longer you hold them (assuming you’re well diversified).

The second is your personal comfort level with risk. How do you feel if your portfolio turns red? After all, if you can’t sleep well at night when your portfolio falls in value, you may be tempted to cash out and miss the recovery. The more conservative you are, the less you may want to have in stock market and vice versa.

2) Reduce your costs.

Regardless of which investment you choose, you’ll want to look for ways to reduce your taxes, fees, and transaction costs. To reduce taxes, make sure you’re utilizing Private Retirement Scheme (PRS) with tax relief up to RM3,000 and even Skim Simpanan Pendidikan Nasional (SSPN) with tax relief up to RM6,000 for those with kids. 

As for unit trust or mutual fund costs, a Morningstar study found that low costs was the “most proven predictor of future fund returns” when comparing similar funds. Regardless of the types of unit trust fund, you’ll want to pay attention to the fund’s sales charge and switching cost. The former is what the fund charges you every upfront investment (some can goes as high as 6.5%!) and the second is how much it costs when switching between funds. You can generally minimize both by investing using Wrap Account (as low as 2% sales charge and free switching!).

The same holds true when choosing an advisor as their advisory fee will come on top of any fund fees you’re paying. Most unit trust agent collect a commission from selling high-fee funds or charge a percentage of the assets they manage for you. Both can be expensive and present conflicts of interest. Instead, look for unbiased advisors that charge a flat annual, monthly, or hourly fee as this can be both cheaper and less biased.

3) Stick to your plan.

Once you’ve created a suitable to yourself and low cost portfolio, the most important thing you can do is to stick with it. You may be tempted to jump onto the next hot investment fad (dot com stocks in the 90s, and then real estate, and more recently cryptocurrency), chase top performing funds or strategies, or bail out during the next bad news or market downturn, but any of these actions can badly affect your portfolio returns

If you can’t help yourself, put aside some “play money” you can afford to lose by speculating and consider hiring a financial advisor to talk you out of a bad decision with the rest of your money.  Financial advisor can help you to stick with your portfolio when the going get rough. (Vanguard estimates that this “behavioral coaching” can boost your returns by 1.5%.)

This last step may be as simple as the others, but it’s not easy. The hardest part of investment management isn’t when or what to invest. In fact, it’s not about managing investments at all. It’s about managing ourselves!

Henry Tan, CFP®, Shariah RFP, is a Licensed Financial Advisor at #YourFinanceDoctor. For speaking opportunities on personal finance issues, please email

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