Fund Fever & The Remedy

Problem 1: Your portfolio is wrong for your risk profile
When times are good and markets are expected to rise, some investors can be over-aggressive, believing that they are taking little risks. It is when the market falls that they realise they do not have the stomach for that kind of risk.

Remedy > To sustain a satisfying portfolio, says Wong, it is important to review and assess the original reasons for its construction; and re-look the assumptions made. If you are panicking because the fall in your high-risk investments means that you are short of funds to pay for your basic and emergency needs, it's time to look at your invested amount, and if it is invested in the right assets? The first step in building your portfolio is to take a look at your total net worth (the difference between the total value of your assets and total value of your liabilities). This will help you to manage your money better and understand the impact of your financial decisions, and reduce the chances of your portfolio becoming redundant after your plan is put forward.

For instance, says Sam Wadia, and investment trainer and a Monetary Authority of Singapore-licensed financial consultant, if you need insurance protection, implement it first, so that your investment account is not jeopardised should an undesirable calamity, like an accident or an illness, occurs. "You need to determine the proportion of your entire net worth that you would like to put into investment products. From there, you determine specifically how much would go into unit trusts," says Gary Gan, general manager of business development & marketing, Pacific Mutual Fund Bhd.

Second, how are your funds spread out? Asset allocation is a strategy that aims to balance risk and reward through distributing investments among different asset classes. If your portfolio is wrong for your profile, you just have to adjust it, says Pretta Mehrotra, head od research with Perkasa Normandy Managers Sdn Bhd. "Go back and start at the beggining. If you can do some switching to save costs, you should."

Mike Lee, financial planner and managing director of CTLA Financial Planners Sdn Bhd, says investors who can stomach a little more risk than what their risk profile says can opt to keep some of the equity funds. "This may work out, especially if it's a good fund and will also save you some cost." Note that you can also tweak the risk by switching within a fund category. For example, it is riskier to put more funds in small-cap funds than in big-cap ones. "Although they are closely correlated in terms of asset class diversification, the extent of the fall/rise in their values is different," says Wong.

Problem 2: You have too many funds
As fund houses introduced more funds, you may have been tempted to snap them up. Any fund that seems slightly different from what you already have in your stable sounds good - after all, it;s all about diversification, right?

Remedy > There is such thing as over-diversification, says Pretta. "Over-diversification does not have benefits. Let's say you have RM10,000 and you're diversified into five funds, which means a small exposure in each. That, is some sense, is over-diversification, because nothing is going to make an impact. Rebalance and be sensible." Depending on the investment amount, the optimal diversification range is five to 10 funds, says Wadia. To select the right type of funds, you must have access to a broad enough universe that only ine fund fits your entire portfolio, opiness Gan.

Wong suggests investing in five asset classes - equity, money market, real estate investment trusts (REITs), bonds and commodities. "Try and find a characteristic in the fund that is negatively correlated to whatever funds you already have." To simplify things, Lee says: "If you want a property fund, pick a global fund that would cover everything. Then there is no need to buy China or European property funds because they are all in the same asset classes."

To cut down on the number of funds, look at those that are not performing well and/or are in the wrong sectors at the moment, says Lee. "Rebalance, switch within the same fund house or sell it and redeploy the funds into asset classes. Although this (current market) is unusual situation where most sectors look bad, there are promising ones like precious metals, where the bulk of that would come from gold mining companies."

Problem 3: Your portfolio has taken a dive
If you find that your funds are tanking, they aren't the only ones. According to the Lipper Malaysia Fund Market Insight Report last December, funds registered for sale in Malaysia incurred an average loss of 22.28% for 2008. A lot more uncertainty lies ahead. In difficult investing environments like this, what do you do?

Remedy> There are four strategies you can employ in times like these, depending on your risk appetite, says Lee. "Either sell your units, switch to money market funds, dollar cost average or continue holding till things get better again." Selling means protecting the funds from further losses, but it also means that you don't enjoy the comeback if stocks rebound. Investing more means that you could reduce the cost of your investment, but if the market continues its downturn, returns will be affected. Retaining the status quo means that you are depending on the market's whims to recover the losses you have already suffered. Which do you do?

The key to portfolio success is having a plan and taking action. First, keep in mind that the past is the past. Next, examine your personal situation, risk profile and investment horizon - can you stomach more volatility this year? If you can't and need the money this year, get out of the market. However, if you don't need the money, riding through it (the volatility market) can be a possibility, says Pretta, more so if you back what you've lost in the short term. If you have some cash to spare and think the funds you're holding are good investments but they are just victims of the market, you can opt to average down. Either ride it through for the next five years or get out."

Ideally, you would have been managing your portfolio and you would have already switched to a more conservative stance. but if you have held on to your equity funds, with the market down by more than a third in the past 12 months, selling has its risks. If the market improves, selling now means locking in losses and selling low instead of buying low. "If you did not take action at the end 2007, it might be too lateto make any adjustments," says Lee. "If you're not able to switch from equity to a more conservative fund and you find that the fundamentals of your equity fund is still good, the next best action to take would be to dollar cost, especially if you have surplus funds. To dollar-cost means that you are investing at a price (of a fund) that has dropped but believe that the fund is still good for your portfolio."

If the economic situation has changed the fundamentals of a fund, it may be timely to reasses its longer-term viability. Lee says to look at the market, clean up your portfolio, and identify the funds that do not have potential. "Switch some to money market funds temporarily. However, retain about 15% to 20% of your portfolio in equities," he says. For those who are looking to buy more funds to take advantage of the low prices, Lee recommends exchange-traded funds or tracker funds.

"If you have a choice to accumulate buy funds that are passive, don't have upfront fees and don't depend on stock-picking. These funds are looking attractive and will beneft from the first wave when the market rebounds."

Source: Personal Money magazine, February 2009