3 Actions To Take When Unit Trust Investment Turns Negative

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Your unit trust investment turns negative – what must you do? | Most investors panic when they realize that their unit trust investment is in the negative. “Why at loss? What’s the problem? What went wrong?” It is hard to answer these questions because these are not accurate question. The more accurate question is: “What should I do now?”

FBMKLCI Index BSKL 15 March 2020 - unit trust investment turns negative
Malaysia stock market is not recovering in the near future due to Covid-19 pandemic, crude oil crisis and political upheaval. The last time it reached this low was in 2009, more than 10 years ago.

Why Your Investment is in The Negative

Before the actions needed to be taken to maximize your investment returns are decided, some facts on what is really happening when your investment is in the red must be understood first:

1. Your investment is new

Every cent you invested in unit trust fund will be charged service charge. The highest service charge for unit trust fund in Malaysia is 5.5%. This means that an investment worth RM1,000 will be deducted RM55, thus leaving the amount invested RM945.

2. Fund price has dropped

Fund price drops because of low market condition, generally. Unit trust fund value is calculated based on unit price, thus investment will turn negative because all your money was turned into units when you bought into the fund.

For example, if you buy a fund at unit price RM0.38:

RM1000 / RM0.38 = 2631.58 unit

Say, today, the fund is at RM0.32 per unit, the fund value becomes:

2631.58 x RM0.32 = RM842.11

Your fund value decreased, thus the negative value. This loss is called ‘paper loss’ as long as you don’t sell your investment. As you stay invested, your unit amount will remain at 2631.58 units and your RM will continue to be invested by your unit trust fund managers. It will continue to move in parallel with the fund unit price.

Selling your investment at negative means you realize the ‘paper loss’. Selling your fund at this moment is the worst decision ever!

Three Actions You Can Take In This Moment

1. Top up your investment

When market drops, fund is in negative and unit price is cheap. Many people view this as “fund at loss” only. However, smart investors see “cheap fund price”. Bad market condition is actually the best opportunity to buy funds at low price.

DIfference between investors who topup their investment versus investors who remain passively invested.
The difference between an investor who did not take any action and another who topped up his investment after low market rebounds

Both investors invested RM10,000 when unit price was RM0.25 making their total units 40,000 units. When market drops, their fund price drops until RM0.15 leab=ving them with 40% loss. Imagine your RM10,000 invested became RM6000!

Both investors are smart. They remain invested even though market is bad. Panic investors that sell their investment during this moment are the saddest and the worst affected.

Blue investor did not take any action during this price drop, remains at the same amount after market was healthy.

Meanwhile, red investor topped up RM4000 into his existing amount because he understand the concept ‘averaging down’. He grabbed this chance to buy more units at low price. With RM4000. at unit price RM0.15, he got 26,666 units. His total investment now then was RM14,000, including the initial RM10,000 invested. After market rebounded, with 66,666 units, his investment value is RM16,666!

Blue investor remains where he started. Red investor made profit.

What is averaging down?

Averaging down is buying units during price drops to lower your investment’s average cost per unit. Let’s go back to red investor to understand this concept.

At RM0.25 per unit, he invested RM10,000, he gets 40,000 units.

RM10,000 / RM0.25 = 40,000 unit.

At low price RM0.15 per unit, he invested RM4000 more to get 26,666 unit.

RM4000 / RM0.15 = 26,666 unit.

(Observe that buying at low price gets you more units compared to high price, just like buying things on sale)

Average cost per unit

= (40,000 unit x RM0.25) + (26,000 unit x RM0.15)
40,000 + 26,000 unit

= RM0.21

By adding to the investment when unit price was RM0.15, red investor dropped his ‘average cost per unit’ from the initial RM0.25 to RM0.21. If he keeps doing ‘average down’ and further lower and lower his ‘average cost per unit’, this fund will be protected from market drop in the future. This is the main goal of ‘averaging down’.

2. Portfolio rebalancing

A good investment portfolio is balanced based on investor’s age, needs and goals. Ideally, a 30-year-old investor, for example, has an investment portfolio consisting of 70% equity and 30% bond / sukuk. Equity fund is more aggressive and riskier than bond / sukuk fund, thus more affected by market movement. Bond / sukuk fund is more resilient in market downturn.

Investment portfolio re-balancing diagram
Example of an investment of a 30-year-old, the after-effect of economic downturn and fund switching done to re-balance his portfolio back to the set ratio.

Example above shows a portfolio of 70% equity and 30% bond / sukuk. After economic downturn, the portfolio was affected, making the equity 40% and bond / sukuk 60%. Therefore, this investor makes ‘switching’ from bond / sukuk fund into equity fud so that he maintains his 70:30 ratio.

The effect of portfolio re-balancing after market turns healthy

After market rebounded, equity funds return to normal price, but the whole equity funds would grow because of the fund injection during ‘switching’. This is how investors can take opportunity to re-balance portfolio during market downturn.

3. Continue making regular investment

The most relax investors regardless of market situation are those who invest regularly. Among unit trust investors, they are those who invest every 3 months via Members Investment Scheme or deducting monthly from their savings account into their investment funds.

During economic downturn, their investment funds will automatically average down. When dividend is paid out, they will also average down. When market is good, they continue investing towards their long term financial goals. They just have to review their investment portfolio every one or two years and make changes when necessary.

Relaxingly, the can win the money game.

Take action!

It is okay when your unit trust investment turns negative. It is an opportunity to make more money. Market will not be better in the near future. Don’t make panic decisions as investor. Be a smart investor. Contact your consultant to understand what is going on in the current market situation. Improvise, adapt, overcome.

Find out how you can invest in unit trust Malaysia

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