Why you should invest during volatile market timesBY RAINBOW PAN
Not too many people enjoy seeing volatile investment markets. It seems to set a mood of doom and gloom. As red numbers continue to be displayed on investment market information screens or headlined in the media, some people just get downright depressed. But it is not necessarily all doom and gloom.
One of the absolutes of share market investing is that, over the long term, share markets goes up and down. Investing in share markets and not expecting volatility is like going water skiing and not expecting to get wet! Therefore, should forewarned mean forearmed? Not necessarily, human emotion is a fickle beast and you might be surprised at how big a part it plays in share market performance. Some of us will always adopt the “herd” mentality and when we see or hear people selling investments, we do the same regardless of the investment fundamentals. This is human nature, but falling markets can also provide subtle but effective opportunities.
Sam is in the accumulation stage of his working life. Whether it is his pension contributions or another regular ongoing investment program, falling or volatile share markets can be a great advantage to him.
In a managed or mutual fund investment, Sam’s contributions purchase units in the fund, much like purchasing direct shares. If the unit price of the fund drops due to falling markets this will directly affect the value of Sam’s investment. But the important thing to remember is that he hasn’t sold any units in his investment and the negative return actually does not affect the number of units he owns. So whilst the value of his investment may have dropped, he has not realised any losses by withdrawing or cashing out!
Investors with long term strategies will always be advised to ignore short term volatility. Market volatility should be expected and it stands to reason that the more aggressive the investment the more volatility is to be expected. However, referencing to Sam’s case, sticking to the long-term approach will certainly see you through at volatile market times.
Sam has the ability to invest surplus income to his investment. As a regular investor, Sam is now in a position to benefit from this market volatility. Assuming that markets will eventually turn around and start to increase, Sam’s investment has benefited from the drop in value by increasing the amount of units he owns through regular contribution. Should markets continue to drop and Sam continue to contribute, this additional purchasing power could have a significant “trampoline” effect. That is, when investment earnings start to return and fund price starts to rise, Sam’s investment will increase significantly or “bounce” due to the additional amount of units from his regular contribution.
Sounds like a good idea you say? Every month when your contribution or your employer’s contribution is added to your pension investment it is then applied to your own particular fund’s investments and purchases units in those investments.
Whenever your pension investment is suffering a drop in value due to falling share markets or fixed interest rate markets, that is in turn causing a drop in your fund’s unit price, you are taking advantage of discounted units. As long as you have a long term investment timeframe and can afford to leave your money in these funds during turbulent times, you too are benefiting from falling investment markets and like Sam, will potentially reap the rewards as a result!
Rainbow Pan, CEO and a SFC licensed Representative, ipac Hong Kong