• Pooled fund investment strategies

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    JEREMY JESSLEY TAN, RFP

    JEREMY JESSLEY TAN, RFP

    “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
    —Peter Lynch

    The most popular investment tool for beginners is usually the pooled funds (mutual funds, UITFs). They are quite easy to comprehend and are less risky than stocks because of their being diversified. At the same time, they are more convenient for some, since investors won’t need to pick individual stocks. Just like in any investment instrument, people can use different strategies to maximize their returns or maybe minimize their losses. Here are some of the strategies I use from time to time with my pooled fund investments.

    Cost averaging

    This is probably the most common strategy when it comes to investing in pooled funds. The idea behind this is that investors regularly add to their pooled fund investment regardless of whether the Net Asset Value Per Share (NAVPS) is on the rise or on the decline.

    Pros: Depending on the fund chosen, this strategy still gives higher returns than what one gets from saving money in a regular time deposit account. This also lowers the risk for the investor, since the investment may be made at any point in the fund’s volatility—any loss from the investment made at a higher NAVPS may be compensated for by an investment made at a lower NAVPS. This strategy is also a good starting point for the habit of investing. This strategy is good for goals that are at least more than five years down the road.

    Cons: Since risks are lower with this strategy, the potential returns will also be lower. Any gains made from investing at a lower NAVPS are mitigated by an investment made at a higher NAVPS.

    Take advantage of the down market

    Mr. Warren Buffett, one of the most successful investors in the world once said: “ . . . Be greedy when others are fearful.” This quote probably sums up this strategy. When the market has just suffered a big fall and seems to be trending back up, put in more to your pooled fund to maximize the potential return.

    Pros: This strategy allows one to ride the market uptrend and gain potentially more in the short term. In case you are doing cost-averaging strategy, taking advantage of a down market can boost your potential returns and offset your ‘losses’ more quickly.

    Cons: Usually, people invest in pooled funds because they don’t want to worry about market volatility, so this strategy just might not work for some. This would require being updated with how the market is moving. Most of the time, investors don’t have the extra fund when an opportunity to use this strategy presents itself.

    Fund switching

    Most asset management company allows their investors to switch funds for free at least once a year. This strategy would make most sense during a downtrend and one would want to preserve gains made in the past. Another situation where this strategy can come in handy is when one would not want to incur more losses during a downtrend.

    Pros: One can move to a more conservative fund so losses can be minimized and past gains can be preserved. What’s good about this strategy is that as soon as there are signs that the market is starting to trend up anew, investors can switch back their funds and maximize potential returns. Unlike adding to one’s investment, you will just use past gains to buy shares in a riskier fund. There’s no need for extra funds for this to be done.

    Cons: Knowing when to switch funds takes a lot of research, experience and conviction. Without these it will be hard to figure out when would be a good time to switch to a more conservative fund and back.

    Pooled funds are used mostly for passive investing, but much like in any investment, there are opportunities we can take advantage of that will allow us to gain more from time to time. One strategy can already be enough to meet our investment goals, but I’ve learned over the years that a combination of these strategies may help us fast track our goals. A word of caution though, the more return we are seeking exposes us to higher risks—this we have to understand as we invest to achieve our goals.

    Jeremy Jessley Tan, RFP is a Registered Financial Planner. For questions on personal finance, email him at jeremyjessley@gmail.com. To learn more about financial planning, attend the 54th RFP program this June 2016. Inquire by e-mail to info@rfp.ph or text <name><e-mail><RFP> at 0917-9689774.

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    1 Comment

    1. Federico Lojo on

      When in June is the 54th RFP program scheduled. How do I apply for attendance.
      Thanks.

      Federico infante Lojo
      Lipa City