Sunday, June 22, 2008

You need double effort to gain back any investment lost

I wrote about withdrawing EPF money for investment purpose recently. That was due to a friend of mine who is agent to a unit trust company has approached me to do so. Is now a good time to take out your EPF savings and invest in unit trust? I don't think so.

As you can see that over the past few months, there are many uncertainties in the share market that have affected the investors sentiment. The oil price as well as many commodities prices are sky rocking, inflation is accelerated, people spending with more caucious, even the local political environment has become pretty unstable since the last election. As a result, we can clearly see that the unit trust funds are sinking, especially those with high proportion in the share market.

Although I agree that investing in unit trust funds might have a better chance of getting better return than EPF in the long run, but it is definitely not a wise choice to invest on something that is still in the sinking momentum. We have to wait for a better time to switch our hard earned money from EPF to unit trust. Even in the worst scenario, EPF will still pay us a 2.5% dividend, but how much probability do you think that your unit trust will perform better than EPF return by the time they declares for the next dividend? I see more chance of losing money in unit trust funds now than making any money in the short term.

And yes, you can opt for a unit trust fund which invests in the bond and money market. But unfortunately, I don't foresee the return in those unit trust to be better than EPF dividend payout, at least not in their past few years record.

We have to remember the fact that, for any lost we incurred in investment activity, we need double the effort to gain it back. For example, if you purchase a unit trust for RM1.00, and its value drops to RM0.50, that is a 50% lost. You will require the unit trust to gain back 100% from RM0.50 to RM1.00 in order to "break even" your initial investment. That might take you a lot of time, probably a few years to drop from RM1.00 to RM0.50 and regain back to RM1.00 again, and yet you are still not making any money. If you leave your money with the EPF fund, you might probably have earned more than 10% already for the same period of time.

I will seriously think about withdrawing my EPF savings for investment, when I feel that the right timing has come. Now is definitely not the right timing, although it is a right timing to invest directly in share market by picking those high DY, zero debt, good profit growth and low PE companies. You will notice that they have low PE probably because there is no or very limited unit trust fund has invested into them yet. I believe they are already in the radar screen of the fund managers. When the market sentiment become better, the fund managers will buy and push up their stock price, raise the PE to above 10. And when the fund managers start to regain the courage and confident to invest agressively again, that could be the right time we put our money in their trust.

Unit trust agents always like to mention a practice called "dollar cost averaging". In my opinion as an experienced investor in the share market, the "dollar cost averaging" can only be used if you are optimistic that the price has been bottomed up, and there is more tendency for it to rise rather than continue on sinking. If you don't feel that the sinking effect will stop soon, you should not dump in more money with "dollar cost averaging". In fact, you should seriously consider "cut lost" instead. This is because you need double the effort to gain back any investment lost you made. Be smart, when dealing with investment.


Anonymous said... Reply To This Comment


I'm a newbie here who would like to improve my investment skills. your comments on the dollar costs averaging sounds interesting.

My question here is, how do we know whether the price is at/near bottom if we opt to use the above said dollar costs averaging tactic?

Therefore is it safe for me to say - If one couldnt reliably estimate a bottom, one shouldnt even try of applying the cost averaging? perhaps, even stock investing. Since double effort is needed when losses is incurred and one is unable to tell the bottom.


Voyager8 said... Reply To This Comment

Hi sharn,

Actually I've written two articles on that day, and the 2nd article did mentioned about your concern.

Please read on to...

How to know the bull's top and bear's bottom

Anonymous said... Reply To This Comment

Thanks mate!
Just finished reading while checking further on your blog.

Good piece of sharing here! Thanks very much.


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