There's a saying that goes like this: there are generally four types of funds in the market that are easy to make money from: funds others buy; funds you've just sold; funds you tried out by investing only 10 dollars; funds you've added to your favorites but never bought...
Why does this happen? Why do others profit from funds while you don’t?
The reasons for making profits are often similar, but those who fail to profit each have their own mistakes. In this article, we will dissect the common mistakes made when buying funds from all angles and perspectives.
Common Mistake: Going all-in
Some people might think that if buying a fund is all about choosing a fund manager, and the timing of the fund isn't that important in the long run, then why not just find a fund manager you trust, choose a good fund, and then go all-in?
The mistake in doing this is that you're putting all your eggs in one basket. The risk is too great. Even great funds that heavily invest in one or two hot industries and ride the momentum will naturally see their performance soar. But once the market style rotates, the fund’s pullback will also be significant.
In addition, if you go all-in at the bottom of a bear market, that's the happiest. You can get a fairly substantial return. But even if Warren Buffett himself were to come, he couldn't tell you where the lowest point of the future bear market will be. So, when we buy funds, we don't know whether we are at the foot, waist, or peak of the mountain. Therefore, the safer approach is not to go all-in.
Proper Action: Base Position + Regular Investment
If the position is too low, it's hard to achieve significant returns when market opportunities come; and if the position is too high, it may be difficult to withstand drastic market fluctuations. So, how should we allocate funds when establishing positions?
Actually, for most newcomers, entering the market with a base position + regular investment approach is a good choice. Generally, the proportion of a one-time buy-in varies depending on the individuals, usually between 30% and 50%. If you lean towards being conservative, you can choose 30%, while if you are more aggressive and confident about the future market, you can adjust the base position to 40% or even 50%.
After the base position is established, we can start the regular investment operation.
You should know that the advantage of adding regular investments on top of the base position is that when the market rises, both the base position and the regular investment can yield good returns; and when the market falls, regular investments can reduce risk, lower the average holding cost, and accumulate cheap chips.
Common Mistake: Fear of Pullbacks and Missing Opportunities
In contrast to those who bravely go all-in, there are investors who fear wolves in front and tigers behind. They worry about pullbacks after getting on board and fear missing out when not invested. They are always hesitant, resulting in many missed good investment opportunities. In fact, keeping pace in a volatile market is quite challenging. Instead of guessing short-term ups and downs, it's better to master good investment techniques.
Proper Action: Constant Market Value Positioning Method
What is the constant market value positioning method? As the name suggests, it's a method that allows the fund in our hands to maintain a constant market value growth at a certain time interval. For example, if the fund A held by Zhang San increases by 10,000 dollars each month, it belongs to the constant market value positioning method. The constant market value positioning method is a kind of irregular investment method.
How to operate it specifically?
First, divide the money you plan to use to buy funds evenly. For example, Zhang San has 100,000 dollars, so he divides the 100,000 dollars into 10 parts, each part being 10,000 dollars.
Second, determine the investment rhythm. Generally, it's invested monthly, with the previously divided 10,000 dollars as the base. In the first month of purchase, you don't have to think about anything, just invest 10,000 dollars;
When preparing for the second month's investment, Zhang San finds that the 10,000 dollars he invested in the first month has dropped to 9,000 dollars. To achieve the target market value of 20,000 dollars (12,000 dollars) in two months, the amount invested in the second period is 11,000 dollars;
When it comes to the third month, he finds that the funds invested in the previous two months have risen to 24,000 dollars. To achieve the target market value of 30,000 dollars (13,000 dollars) in three months, he invests 6,000 dollars this time;
When preparing for the fourth month's investment, he findsthat the funds invested in the previous three months have fallen to 25,000 dollars. To achieve the target market value of 40,000 dollars (15,000 dollars) in four months, he invests 15,000 dollars this time;
..And so on. The process repeats itself on a monthly basis.
Through this method, when the market value of fund investments increases, less is invested to avoid chasing high; when the market value of fund investments decreases, more is invested to buy low. If the market continues to fall, the market value positioning method can be suspended or stopped, and then resumed after the market stabilizes.
Common Mistake: Panic Selling at Low Points, Halting Regular Investments at Low Points
According to China fund data, during the significant stock market declines in 2008, Q3 2015, and Q1 2016, investors redeemed shares of equity and balanced funds, and the number of fund redemptions reached a peak during market bottoms due to panic selling. Even investors who usually stick to regular investments may become desperate during challenging market conditions and halt their investments.
Correct Approach: Continuously Maintain Regular Investments at Low Points
Buying at low points can effectively lower the average cost of holdings and reduce overall risk. Regular investments, compared to lump-sum investments, help diversify risk. Therefore, it is not necessary to overly focus on the starting point of regular investments. The longer the market experiences volatility, the more opportunities to acquire cheaper shares, resulting in a more evenly distributed cost per unit of regular investments.
The 80/20 Rule also applies in the capital market, where 80% of the returns in fund investments may come from 20% of the time. Market fluctuations are normal, and it is crucial to adopt a scientific mindset and investment techniques. Adjustments downward are common during an upward spiral, and the same applies to regular investments.
Further Reading: How To Apply The 50/30/20 Rule To Your Budget And Savings
During market corrections, do not give up on regular investments due to the absence of visible returns or negative returns. Otherwise, when the bull market truly returns, we might regret missing out on the rebound opportunities.
Common Mistake: Frequent Buying and Selling, Increased Costs
It is widely known that certain fees are incurred when subscribing to or redeeming equity and balanced funds. If multiple transactions are made, it will increase the cost of fund ownership. For example, if a fund is bought and sold once a month, assuming the total fee rate for each transaction is 0.5%, the fee cost for one year would be close to 6%. If the total fee rate for one transaction is considered as 1%, the fee cost for one year would exceed 10%! Even with fee discounts, if there are numerous transactions, the additional trading costs can accumulate significantly.
Correct Approach: Develop a Reasonable Long-Term Investment Strategy and Flexibly Adjust According to Market Conditions
Reading without practicing is futile; true understanding comes from personal experience. As mentioned earlier, many investors are aware of the benefits of long-term investments, and they have also encountered fund managers with excellent long-term performance. However, they fail to hold onto their investments.
A set of data shows that the probability of profitability for funds held for 1-3 years is over 76%, while the probability of profitability for holdings of less than 3 months is only 46%. Moreover, as the holding period extends, the probability of achieving high returns increases. Therefore, for ordinary individuals aiming to become long-term investors, it is necessary to set limits on frequent trading behavior.
However, to maximize investment returns, it is not about leaving investments untouched but rather developing a reasonable long-term investment strategy and adjusting the portfolio based on subsequent market conditions. For example, reducing positions when the market is overvalued or in a bubble and increasing positions when market valuations return to reasonable levels.
Regardless, after purchasing funds, be cautious about falling into the trap of long-term investment and adjust the fund portfolio based on market conditions. It is advisable to moderately adjust fund strategies on a quarterly basis for medium-term considerations and on a monthly basis for short-term considerations.
There is no one-size-fits-all strategy; adjustments should be made promptly based on the market while respecting its dynamics. Invest with a long-term perspective and secure gains under appropriate circumstances.
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