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Lessons to be learned from a crisis

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
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In the world of financial markets where money can be made and lost around the clock, the marketplace can be indeed a battle ground for many investors. Investments regardless of market conditions have both their advantages and disadvantages, depending on a myriad of variables such as economic and political conditions.

It is normal to observe that in a bull market when prices of stocks are rising, people will generally be investing actively as they believe prices will keep rising while in a bear market when everything seems to turn negative, they will be reluctant. Most investors do not know what to do and in most cases, they have no idea at all except react in a panic. It is certainly a heartbreaking experience to suddenly discover that all the money made in the markets just six months ago has been burnt in just a matter of seconds.

Hitting the jackpot

Being in the right place at the right time may make you profits but how many times do you actually hit the jackpot? Trading in financial markets is certainly no easy task. Amazingly, some investors do manage to make a fortune over a relatively short time.

The question is do these people actually possess real trading abilities that help them achieve spectacular returns overnight or did they just happen to hit the bullseye? Very often investors who make a killing on a few bets are likely to lose out even more in the long run without a disciplined approach.

Successful trading needs discipline

In a volatile investment environment, discipline and skill is required in order to make consistent returns. Real trading requires more than simply reading all the books and articles on investing. Good judgment is a key aspect of investing. You do not rush out to sell a stock with strong fundamentals and long term growth prospects just because it has hit a temporary low spell.

A smart investor would consider buying even more shares - at bargain prices. You also do not rush in and buy share when its price has already hit its all time high - you should be thinking about unloading it. The test of smart investing is knowing when to buy and sell.

How to minimise losses

There are a few ways to protect your investments and maybe even enhance your returns.

  • Asset allocation - diversify risks
  • Investing regularly - the beauty of dollar cost averaging
  • Reinvesting - the power of compounding

Asset allocation

Asset allocation plays a fundamental role in any investment plan. Sounds fancy? Not really as the concept is simple - spread your investments amongst different investment options. Spreading out your investment options helps you to manage market risks. For those who were heavily into only equities, recent market events shows clearly the need to diversify and spread your investments.

Having a diversified investment plan helps you to develop a disciplined approach to investing. Firstly you have to determine your risk profile. Remember the risk/return equation. The higher your risk tolerance, the higher your potential reward over the long term. Consider all the risk elements that are potential "enemies of your wealth" - market risks, interest rate risk, inflation and taxes, political risks to name a few.

Take a look at your financial goals - what are you investing for, how much can you invest, how long can you invest for. Once you have these objectives mapped out, you can at least effectively manage your risk even though you have no control over fluctuating markets, inflation and very often your emotions. Yes, your emotions constitue investors risk - How many times have you bought stocks because all your friends are buying. You bought just so you won't miss out and even though you know buying was based on rumours and not on fundamentals? How often have you put off selling a losing stock because its too painful for you, inspite of the fact that you know its good for you. The recent "collapse" of the global markets due to panic selling is one good example.

When you have determined your risk profile and investment objective, plan your asset allocation to match your profile. Invest a portion in fixed interest securities, equities or equity funds and property or property stocks. Take into consideration your time horizon. The longer your investment time horizon, the less you need to worry about short term fluctuations. Invest a greater proportion in more conservative vehicles if your investments are short term or if you are of the older generation.

Adjust your asset allocation from time to time as your risk tolerance and investment objectives change with time.