Unit Trust Investment - Psychological perspective (Part 1) RE-PUBLISHED

The chart above briefly provides the unit trust account holders to understand the multiple stages he or she will go through during a stable market condition. I believe that if one has put him/herself differently with the non-investors clearly and comprehensively, a more definite goal will be achieved without much obstruction from the irrational mind. If you are an investor and 100% of all your fund is in the Fixed Deposit (FD) account, you need not to further read this article. Your mind will 'rest' thinking of almost save risk free savings will generate a definite pre-determined interest at the end of your saving's maturity tenure.

However, for those unit trust investors, who are categorised as people who are better risk takers in relative to those of FD investors, please read on!! I hope my writings will shed some light in the way you invest!

Let's start with understanding the chart above.

The Y axis represents the Return % of the unit trust investment, against number of years active, which is represented by the X axis. As you can observe, the curve gradually moves surpassing the X axis and stops at the Point C. I have stoped the curve at this point for a reason i will explain later but in reality the curve has the potential to move upwards, unlike the return% in a FD which is fixed throughtout the holding period.

The beginning of the curve from Point A to Point B is what i describe as THE INITIAL STAGE.

Point AB curve - The Initial Stage

Due to the up front service charges that the Unit Trust Management Company (UTMC) deducts from your invesment principal, ideally the initial return will be at negative- as represented by the Point A on the chart. Like it or not, due to the risk inherent in the investment, the fund's performance is exposed to the volatility, as a result the capital growth will not be a smooth one upwards. At times, you will also experience a downward movement of the chart line. This, you do not find in a Fixed Income scheme, because the performance is not tied to the volatility of market. Having said that, it is vital to maintain sufficient number of funds in your portfolio and these funds shall possess the ability to react diferently to its benchmark index. In other words, it must have a negative and positive correlation coeeficient funds. This helps to maintain a stable return during varios market condition. Given a stable portfolio the anticipation for the return is greater and expectation for a capital enhancement is possible in a stable market. And because of you possessing different funds, and some funds may possible declare distribution either at interim or at the end of financial year. This distribution will further, upon reinvestment increases the units in your portfolio, thus increases your chances of higher return upon redemption. For the distribution to take effect you should hold your investment for more than 1(one) year at least, or on the average 3 years or above. Afterall, unit trust investment is always meant for a medium to long term investors. There is no hard and fast rule to determine how long will the total return of your portfolo will be in the negative regime (as denotes by the AB curve), however a rule of thumb indicates it might take 1(one) year in a bull market, and 1 to 2 years in a bear market. However, this may vary depending of many other factors, i.e the type of funds you hold and cost per unit of your holding units.

So, you see, at this AB point, you should constantly remind yourself to be wise by not getting into being emotional and worry about losing your investment. You need to adapt to this when investing in this scheme by understanding the behaviour of growth trend of the fund at this stage. In other words, you are said to have higher risk tolerance than of those who keep money in a Fixed Income scheme. Basicaly, in a Fixed Income, you dont have to worry about the AB curve and your will to adjust to the new risk tolerance because in a Fixed income, the curve points ABC is a flat line running horizontally at a given interest rate above zero %.

The next trend line BC is what i like to describe as the Profiteering stage and i shall write on it in the next Part 2 blog post.