MONEY & YOU BY YAP MING HUI
EDDY, a client of mine for the past two years, was a successful property investor in Kuala Lumpur, who had made more than enough money to live comfortably. His children had benefited from a private education and were now studying overseas. He and his wife were looking forward to enjoying their retirement. Everything in his life seemed to be going well.
Recently, Eddy and I met for our regular review meeting. I could see that he was very unhappy. When I asked him to explain what was wrong, Eddy said that part of his frustration was directed at an advice a unit trust agent had given him. Apparently, a year ago, Eddy was approached by a unit trust agent and he had agreed to invest an initial sum of RM100,000 into unit trusts.
Unfortunately for Eddy, the market had become very volatile. Eddy’s investment suffered. To make matters worse, Eddy heard the Federal Reserve would be tapering quantitative easing, a move that would create more uncertainties in investment market. Alarmed, Eddy consulted with his unit trust agent. He was asked to hold, since his investments in unit trusts were for the long term. He was advised against selling, as the market was bound to recover in the long run, enabling Eddy to make his money. Despite the reassurance, Eddy was perplexed. He worried that the units might never regain their worth. He had come across people who’d spent RM100,000 investing in unit trust to have it reduced by half of its original value after four years.
After understanding Eddy’s predicament, I asked him what he thought was the right thing to do.
“Well, since it’s a bearish market, I thought the wisest thing to do was to sell now, when the units are worth something. Then, when things become worse and the market is scrapping the barrel, we can start buying units at a low price. This way, I can maximise the profits.”
My ensuing silence unnerved Eddy. When he said: “Mr Yap, I am right to be annoyed, yes? You are my independent financial advisor, wouldn’t you have done the same as I?”
I took a deep breath. “Actually Eddy, no, I wouldn’t have.”
Eddy was stunned. “But …” he struggled to find the words. In the end, all he could utter was: “Why?”
“Well, the first thing is this, Eddy. How can you be sure that just because the market is volatile, everything will collapse? I can’t. I don’t have a crystal ball to tell you what’s going to happen in the future. It may get worse. It may get better. No one knows.”
I paused for a moment to let Eddy absorb what I was saying. Then I cautioned: “What both of you are doing is the opposite of each other. Your agent is advising you to do nothing at all. On the other hand, you are saying: ‘Sell everything now to cut your losses.’ I feel that neither option is viable as they are too extreme and you might get it all wrong.”
Eddy looked at me, his scepticism evident in his tone. “Since you’re the expert, what would you do in my situation?”
“In a volatile market, I would take profit whenever an investment makes more than 8% profit, and then park it in something safe like money market for the time being. If the investment continues to make profit, I will continue to take the profit.
“However, just like the law of gravity, whatever goes up must come down. When the investment drops to a certain level, I will use this ‘parked’ profit to buy back more units. After repeating this for two or three rounds, my investment return is definitely better than not doing anything at all. It is also a much easier method to follow than trying to guess when the market is at its lowest and highest point. If your guess is wrong, you will make even less money.”
If you, like Eddy, is faced with a similar dilemma, consider the following:
1. Adopt a balanced view when making investment decisions.
2. Perfect market timing does not exist. In the real world, profit maximisation that revolves around buying at the lowest price and selling at the highest is not practical. Even a legend like Warren Buffet can’t get it right all the time.
3. Take profit and park it somewhere safe. When the investment drops to a certain level, use the “parked” profit to buy at a discount. This profit optimisation approach is more practical, and easier to apply.
Throughout his years in practice as an independent financial advisor, Yap Ming Hui, best-selling author of Set Yourself Free, has convinced many of his clients to adopt a more balanced view and cautious approach when managing their investments. In the end, he’s seen how they’ve become much calmer and steadier as they forge ahead on the path to becoming financially free.