Common pitfalls of investors--mistakes investors tend to make
● 陈美凤 By Goh Mui Hong
Stock prices have fallen considerably during the current
economic malaise. Although there is the risk that stock
markets may not have bottomed, the current low stock prices
offer an opportunity for retail investors to gradually
invest in selected blue chip stocks that may have previously
been out of reach.
In the event that you decide to invest, here is a list of
pitfalls you should avoid:
Inadequate Asset Allocation-- Asset allocation is the
process of dividing your pool of money among different asset
classes, e.g. between income investments such as fixed
deposits and bond funds, and growth investments which will
include riskier investments such as stocks or physical
property. The former is considered the safer option,
however bond funds are riskier than fixed deposits although
they may offer a higher return in the long run. Growth
investments are more volatile and have been very popular in
Singapore because they offer the potential for higher
returns.
The mistake most investors make is to put most of their
money in one form of investment, say stocks or properties.
As a result, when the property and stock markets decline,
these investors are in an extremely vulnerable position. It
is always prudent to keep aside at least enough cash to
provide a cushion of about 6 months' monthly income as a
safeguard against sharp declines in the stock and property
markets or in the event that you need cash urgently.
Lack of Diversification--Having decided that you want to
put aside some money in an investment portfolio comprising
say equities, you should always aim to diversify the stocks
within your portfolio so as to minimise your risk exposure
to any one stock. Not only should you diversify between
stocks, you should also diversify between different industry
sectors, and if resources permit, within different
geographical regions. This would reduce your risk exposure
should any one company or sector or region suddenly
experience a sharp decline.
If you are a first-time investor, you may not have much
funds at your disposal. The purchase of one stock alone
could utilise the bulk of your investible savings. One way
to diversify is to invest in unit trusts which usually cost
about $1 per unit when launched. These unit trusts are
investment portfolios managed by a professional fund
manager. As the fund manager pools the funds from many
investors, he can invest in a diversified portfolio that
offers lower risk. Unit trusts may also enable investors to
diversify across regions, e.g. a European fund paired with
an Asia Pacific Fund, or between assets, e.g. investing
under an umbrella fund in an equity fund, a bond fund and a
money market fund.
Market timing--Some investors try to "time" the market,
i.e. waiting for the market peak to sell and bottom to buy.
Such strategies are difficult to implement even for the
professional fund managers. You may also incur higher
transaction costs as a result of such a strategy.
Investments should be made with a long-term view. The ups
and downs in the market can be made to work in your favour.
If you think a stock is good, you can pick it up in small
amounts so that you average out the cost of the investment
over time. For example, buying 1 lot of stock each month
over a 4-month period at say $0.70, $0.80 and $0.90 and
$1.00 would result in an average cost of $0.85.
Letting Go--If you have made a bad investment decision, do
consider selling the stock even if it results in a loss.
The mistake some investors make is in trying to average down
their losses by buying the stock again at a lower price
without analysing the cause of the decline. The price of
the stock may have fallen due to the deterioration of the
company"s financial position, poor business prospects, or
potential law suits. If the stock is not good, you are
essentially throwing good money after bad.
Herd Instinct--Some investors buy shares when they see
hectic buying in the market by other investors, i.e. chasing
the price of the stock up. Huge price fluctuations can
occur and fade very quickly leaving naive investors stranded
and holding on to stocks purchased at high prices.
Inadequate Research --Before you invest in anything, you
should familiarise yourself with the instruments and their
risks. Such information can be obtained from newspapers,
financial magazines or even on the Internet. For example,
in the case of stocks you may wish to ask yourself the
following questions: Does the company have a good
management? What type of business is the company in? Does
the business have growth potential? Does the company have a
good profit track record? What are its prospects? How
volatile is the company's stock price? If the price of the
stock is volatile, will you be able to tolerate the risk if
the price of the stock rise or decline sharply?
(The writer is the Chief Executive Officer of OUB Asset
Management Ltd. This fortnightly series on unit
trust investing is supported by The Investment
Management Association of Singapore and the Stock
Exchange of Singapore.)
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