Wednesday, October 22, 2008

Why we should invest in downturn market ?

salam hye to all...

In the wake of the turbulence of stock markets in recent months, unit trust
investors may be tempted to either sell or buy. However, investors are advised to
remain calm and practise dollar cost averaging with their long-term goals in view.

When regional and global markets succumbed to panic selling in August 2007 and more
recently in January 2008, the severity and sharpness of the correction was large
enough to make unit trust investors ask themselves whether they should redeem now to
stem further losses or buy more units at currently low prices. In fact, if they
practise dollar cost averaging, they need not concern themselves with these timing
issues. Dollar cost averaging enables investors to automatically buy more units when
prices fall and fewer units when prices rise.
It is especially during times of market volatility that individual investors should
remain focused on their long-term investment goals and keep their emotions from
influencing their investment decisions. A disciplined and methodical approach to
investing is the key to long-term investment success.

Unit trust investors are advised to buy and hold their investments for the medium to
long term. The buy-and-hold principle is based on the notion that a good investment
will generate reasonably attractive returns over the medium to long term. This also
means that investors are able to distinguish between daily movements in the market
and the underlying long-term value of their investments. Professional fund managers
buy and hold for the medium to long term as they are prepared to wait patiently over
several years for their investments to reach their intrinsic or fair values. For the
unit trust investor, the 'buy-and-hold' strategy can also be applied by holding on
to a well-selected unit trust fund over a period of at least three years.

There are some investors who believe they can achieve superior returns by timing the
purchase and redemption of equity funds to profit from the stockmarket's short-term
movements. These investors are tempted to engage in timing the market especially in
an environment where equity markets are volatile. Such investors who wish to make
quick gains in the stock market by switching from one fund into another fund will
often be disappointed. Market timing strategies that are often recommended by
'investment experts' have seldom been successful. This is because stock markets are
inherently volatile and are impossible to predict with numerous factors, both
domestic and foreign, affecting daily and weekly fluctuations in stock prices.

Investors who wish to take a more active approach with their investments by timing
the market will expose themselves to many risks. In order to profit from the
market's short-term trends, the investor has to correctly predict the market's trend
and its turning points.
Without the appropriate skills to discern signals and time the entries and exits,
the market timer may not only miss opportunities, but also potentially suffer the
blow of rapid losses. Also with a higher frequency of fund switching, investors will
have to incur increased transaction costs.

Investors who are concerned about market volatility are advised to practise dollar
cost averaging as this strategy enables investors to focus on the long-term
investment goal and not worry about the prevailing level of the market. Dollar cost
averaging is simply investing a fixed amount of money in a financial asset (such as
a unit trust fund) on a regular basis (monthly, quarterly, biannual) regardless of
the market cycle. By investing a fixed amount on a regular basis, investors will buy
more units when the market is lower and fewer units when the market is higher. This
strategy will produce a lower average cost of investment than the average market
price over any given period.

In addition, investors are also advised to rebalance their portfolios regularly at
least once a year to ensure that their portfolio allocation reflects their
investment objectives and risk profile. Thus if, as a result of an uptrend in stock
prices, an investor's equity exposure has exceeded a level consistent with his risk
tolerance, he can trim a portion of the equity funds and switch into bond or money
market funds to rebalance the asset allocation accordingly. Maintaining a target
asset allocation reduces the risk that the portfolio becomes too concentrated in a
single asset class.
In conclusion, unit trust investors should always focus on achieving their medium to
long-term investment goals. The practice of dollar cost averaging and regular
portfolio rebalancing are effective tools that help investors remain focused on the
long term horizon and prevent them from over-reacting to short-term movements of the

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