Hi, I’m Mark. I’ve been investing RM 1,000 a month into two unit trust funds for almost 9 years. Both funds are recommended by my unit trust consultant who is a close buddy of mine from secondary school.
Lately, I’ve checked my unit trust accounts and found that they are worth a total of RM 77,500. I am disappointed as I had already invested a little more than RM 100,000 into these funds.
I’ve discussed this matter with my buddy, the unit trust consultant. He reckoned that I should remain committed with my investments into the two funds as they are meant to be ‘long-term investments’ to fund my living expenses after I have retired in the future. He also commented that I would definitely ‘lose money’ if I decide to dispose my funds today at a loss.
As I’m writing this, I’m still at a loss to what I should do with my funds. Thus, my question is: ‘Should I continue to invest RM 1,000 a month into these two funds or should I dispose them and reinvest my proceeds into ‘somewhere else’?
First, it must have ‘sucked’ to suffer losses after years of ‘diligent’ investing into a vehicle that you ‘trusted’ to be a solution to your money problems in years to come. It is natural to feel disappointed and have the ‘desire’ to start the ‘blame game’ for your investment losses.
So, should Mark blame his buddy for recommending him funds that caused him to lose his money?
I believe, the answer is ‘nope’ and pointing fingers at his consultant is definitely not helpful to recover the losses from his unit trust funds. If you happen to be a ‘Mark’ today, let us not cry over spilt milk. Instead, let us try to learn something from this experience so that you will emerge wiser in the subject of investing.
Here, I’ll share 3 quick pointers that are very helpful to understand how you got yourself into unit trust and more importantly, how to turnaround today’s losses into future profits from your next investments by becoming a better investor.
Point #1: Cash Flows & Capital Gains
Consultant: ‘It’s not enough to rely on FDs and EPFs to fund your retirement.’
You (Customer): ‘What do you reckon?’
Consultant: ‘How about ABC Fund which ‘makes’ an average of 8% per year’.
Today, it is common for one to compare returns offered by unit trusts with FDs and EPF. Often, many sincere ‘investors’ are convinced to put their money into unit trust funds as they are informed that their returns are ‘superior’ than how much returns are being offered by both FDs and EPF today.
In my opinion, the view of ‘comparing unit trusts with FDs and EPFs’ is one that is greatly flawed. This is because we need to recognise the differences between investing for cash flows and investing for capital gains. Let me explain:
Let us say, you decided to take up a FD promotion of 4.2% a year by placing RM 10,000 into it, you are ‘more or less’ guaranteed RM 420 in returns after 1 year. The RM 420 in interest received is a form of ‘cash flow’.
Whereas, when your consultant reckoned: ‘Bro, ABC Fund ‘makes’ around 8% a year, on average, for the last 3 or 5 years.’ Perhaps, you should ask: ‘What does it mean? Was it ABC Fund paying out RM 8 in income (cash) from every RM 100 invested into the fund? Or, was it an appreciation of unit price of ABC Fund by a rate of 8% per annum?’. If the answer is latter, then, the 8% return is basically a return in the form of ‘capital gains’ but not cash flow.
Here, let us start by asking ourselves Question #1. When you first agreed to buy units of unit trust funds, were you expecting:
– A Cash Payout of 8% per annum from your unit trust funds?
– A Capital Gains of 8% per annum from your unit trust funds?
Whatever your answer may be, let us just keep that in mind and move on:
#2: So, How Does it Make Money for You?
Here is my Question #2 for you: ‘Would you care to explain how does your unit trust funds make money?’.
Let me explain. For instance, if I invest in properties, I would expect to make my money from rental collections and price appreciation as a result of rising cost of building properties (land, raw materials, labour, related professional fees … etc) and rising affordability levels among locals in the neighbourhood.
Or, if I invest in a stock, let’s say Maybank as an example, it basically means that I have become a shareholder (although a very insignificant one ….) of Maybank. I would expect it to make money from its lending activities (interests earned by providing mortgages, car loans, credit cards, personal loans … etc) to its pool of borrowers.
So, what about your unit trust funds? How do they make money for you? What assets do they own which bring regular income (cash flows) to your funds? Are you able to explain how these funds make money for you to a 10-year old kid?
If you do not know, do not feel bad about it. This is because most people do not know either. Many adopt an attitude of investing where it involves parking your money into ‘something’ and hope that they would grow into a much larger sum of money in the future. Most people do not want to learn how that ‘something’ actually work or have the ability to make money for you.
Thus, many ‘invest’ and forget about it until when they need their money.
If that is you, you are not really investing or being an investor. In fact, what you did was speculating or gambling as you were betting for ‘something’ to go up in value like ‘magic’. The act of buying into ‘something’ without knowing what it is is very risky. Instead, let me share a golden nugget on investing:
‘True Investors are ones that would learn, find out, and know what exactly they are getting into first before investing their money. It applies to any type of asset classes – stocks, properties, commodities, bonds, … etc.’
Hence, instead of putting the blame on your unit trust funds, more accurately, I think it could be fair to say that you were the ‘risky investor’ who had taken the risk of buying into your unit trust funds without fully understand them, agreed?
Point #3: Is Unit Trust a Long-Term Investment?
Consultant: ‘You can’t compare the returns of FDs and EPF with unit trust funds on a short-term basis. This is because unit trusts are long-term investments?’
Here is Question #3: ‘Are unit trust funds really long-term investments?’
To answer the question above, let us define what a long-term investment is. For example, a property can be a good long-term investment if you intend to rent it and keep it for the long-term. So, its definition consists of two things:
– The Income Generating Ability to Make Money Regularly.
– The Duration of Holding Onto an Investment.
Here is what you could be ‘envisioning’ when you buy units of a unit trust fund. First, you exchanged money with units of your preferred fund and thus, making you one of the fund’s unitholder. The fund received your money and would use it to buy shares (if the fund is an equity fund). As an unitholder, you hoped that these shares are held for the long-term for income and capital gains, right?
In reality, that may not be the case. It depends on how your funds are being set up and managed by your fund managers. Some funds may hold onto the shares for the long-term while some funds do not. The ‘trick’ lies in knowing the fund’s portfolio turnover ratio (PTR). Let me explain:
Low PTR Fund:
If a fund has 10 stocks and retains all of the 10 stocks in its portfolio after a year of investing without buying or selling any stocks in the stock market, hence, the fund has a PTR of zero. It does not mean that the fund itself is good or bad. For instance, if the 10 stocks owned by the fund are good, then, the fund is good. If the 10 stocks owned by the fund are bad, then, the fund is bad.
A key advantage for a low PTR fund is – You have a chance to assess, whether or not, the assets owned by the fund are good or bad as its fund managers do not change the fund’s composition of assets regularly. In short, this means that you have a better chance of understanding what you are buying into before buying.
High PTR Fund:
However, if a fund has 10 stocks and its fund managers are actively buying and selling stocks, after a year, the same fund now holds 20 stocks which are totally different from the initial 10 stocks originally held a year ago, then, the fund is a high PTR fund.
How then is it possible for high PTR funds to be long-term investments if these funds keep on buying, selling and trading stocks for short-term gains? In fact, it is common for many to sincerely believe that they are ‘investing’ for retirement when their fund managers are trading stocks for trading gains.
So, did you ‘invest’ your money into a PTR Fund? Perhaps, you should ask your consultant for its latest brochure. If your consultant happens to be one who do not know what PTR is, I reckoned that it is about time for you to ‘fire’ your own consultant. Kidding! But personally, I have a hunch that most consultants today do not know what PTR stands for and how it impacts your ‘investments’.
Conclusion: So, what should I do? Buy More, Keep, or Dispose?
Let me ask: ‘If you are Mark and felt disappointed of your investments into unit trust funds, would you continue to invest more?’
Perhaps, you may ask: ‘If I’m Mark, what should I invest into after I disposed my unit trust funds at a loss for RM 77,500 today? Is it better to buy some stocks or get into real estate?’
My answer: ‘I don’t know, if you’re Mark, what should you be investing into. My question to you is – ‘Are you a good stock investor?’ If you are, then, you should invest in stocks. But, if you are not, please stay away from it. The same goes for properties. If you are not into real estate, please also stay away from it.
The next question I have is – ‘Are you interested to learn about investing?’ If you are interested, then, it is good to spend some time to read investment books or attend seminars and workshops conducted by true investors. But, if you are not interested to learn about investing, then, it is best for you to put your money in FD accounts or to pay off your consumer debt (bad debt) or to have it ‘invested’ back into your business if you are running one …..should you decide to dispose your unit trust funds.
All in all, I’ll leave you with a handful of tips to become a better investor:
- There is a huge difference between cash flows and capital gains. Do not confound the two.
- Investors would find out about an investment in great detail first before investing their money into it.
- Investors can explain how their investments are capable of generating a regular stream of income (cash flows) into their bank accounts.
- Investing involves a lot of studying, researching, and learning. If you are not interested in them, please do not ‘invest’ your hard-earned money.
- Being a good investor is more important than asking ‘where should I be investing my money?’
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