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4 Common Mistakes That Unit Trust Investors Make

By Derek Gue

4 Common Mistakes That Unit Trust Investors Make

#1: Unclear Investment Objectives And/Or Poor Understanding Of The Fund’s Objectives

Begin with a crystal clear understanding of your investment goals (what will the investment gains be used for or how much loss you will take before you exit?), the required time frame, and your risk tolerance for that goal. If you are not investing for the long term and/or looking forward to retirement soon, pick something with lower risk and/or lower volatility.

Next, seek to understand the UT’s investment objectives and risks, and ensure that they are in line with your personal investment objectives. Make sure you are aware of the UT’s fees and charges. You can also read up on the fund manager’s background and track record, especially his/her funds’ performance during different market cycles, comparing them with other peer UTs managed by other fund managers of similar objectives whenever possible.

Although past performance is not indicative of future performance, it does not hurt to see the consistency of the fund manager’s track record during his/her tenure managing the UT. If the UT has a track record of over ten years, look at how it performed during periods of crisis (the post Sept 2001 terror attack, the SARS period in Mar 2003, the 2008 global financial meltdown and the 2012 Eurozone Austerity crisis, etc).

Other than studying the fund manager’s background and the UT’s record, it is important to also understand the fund house better, as it is the organisation the fund manager and their team of analysts are working for. More established fund houses have an impressive track record of generating decades upon decades of stellar performance from the systems and human experience they have built up during numerous market cycles. Do your due diligence before purchasing any UTs.

#2. Blindly Following The Crowd

Bear in mind the old Wall Street investment adage: “No trees grow to the sky”. Another reason investments sour is because some investors follow published information and chase after past top performers in the form of single country or single sector UTs that have performed very well in the past. Regardless of its past performance, no investment offers a guarantee of replicating its performance indefinitely. Since economies are cyclical in nature and go through phases, any sector/country that had already performed well in the last few quarters and years may be on the verge of becoming a laggard. Conversely, a laggard sector or country UT may be on the verge of a turnaround after restructuring its economy or after certain political changes or technological advances.

When investors buy stocks, many like to look at the Price/Earnings per share ratio (P/E) for the price other investors in the market are willing to pay for the company’s share for each dollar of earnings. A high P/E ratio indicates the stock is overpriced assuming ceteris paribus. Compare only the P/E ratio of companies within the same industry as each industry represents different growth prospects (e.g., financial companies should not be compared with utilities companies). Often, equities that were the flavors of the year or gave top returns last year will have very high P/E ratios, inviting questions as to whether the company can still generate earnings growth in line with its share price growth. Likewise for equity UTs, which are made up of a portfolio of companies belonging to different sectors in their holdings, P/E ratios cannot be used in the same way. Instead, I suggest you look at the current NAV of the UT you have shortlisted and compare against the 1 year, 3 years and all-time high and low NAV to get a good indication whether the UT’s current NAV is overpriced.

You should then be forward-looking and ask at which stage is the global economy now and where are the next growth countries/regions or sectors, and invest in them instead of those past flavours of the year. For example, if you are optimistic about single country Korean equities growth, believing that as the US economy recovers, it will likely demand more electronics and cars (Samsung and Hyundai) and you only wish to invest in SGD currency, you can use the search/filter tool to sift out UTs invested predominantly in Korean equities, e.g. Franklin Templeton Korea fund, HGIF Korean Equity and LionGlobal Korea fund. Just as you should compare P/E ratios within industries, you should compare 1-year, 3-year and all-time high NAV vs current NAV among similar UTs managed by different fund house.

‘Timing the market’ is another classic form of herd mentality investing. Many people think that by studying charts and trends or by following the investments of their friends or colleagues who attended technical analysis courses, they will be able to successfully time and beat the market. In reality, no one has either successfully timed the market ten out of ten times or predicted when exactly markets will peak and trough. Not even the legendary investor, Warren Buffett, has. He famously said that “People that think they can predict the short-term movement of the stock market, or listen to other people who talk about timing the market, they are making a big mistake”.

Therefore what is more achievable than timing the market is to diversify across different asset classes, geography and sectors, investing at regular intervals, and having regular portfolio reviews and rebalancing.

3. An Excessively Risky OR Excessively Conservative Mentality

Neither of these two opposing approaches toward investing will make you very successful over time. Excessive conservatism is displayed by people who never want to invest but save all their money in the bank. With current low interest rates, coupled with high inflation rates, the saver will find it hard to attain real growth of wealth in 20 to 30 years’ time.

Excessive risk-taking should also be discouraged, even if it is on a hot tip recommended by friends or the broker. When given a hot tip, you should remember the first rule of investing: only invest with monies that you can afford to lose. If it is a volatile investment above the usual acceptable risk tolerance and it keeps you up at night, it is considered as excessive risk. Using leverage to achieve greater gains but with risks above one’s level of comfort is another form of excessive risk taking that must be avoided. Even Buffett has said he would not sacrifice his sleep for the chance of extra profits through leverage.

Instead of becoming overly fearful or overly greedy, you must develop both financial reasoning (the science of investing), as well as be guided by intuition, risk-taking and inventiveness (the art of investing). Analyse the top 10 holdings of the UT individually, find out more about the geographical allocation of the UT, and ask yourself if you see future growth in that economy. If the investment currency of the UT is not in SGD, analyse other currencies too. For example, one could study USD/SGD or EUR/SGD historical charts for exchange rates or read currency analysts’ reports (use these as a reference and do not forget to consider if they are sensible and accurate).

4. Not Monitoring Your Investments And Not Having A Trusted Financial Advisor Rep (FAR) Work With You

Some investors neglect to review their portfolio or perform at least one annual rebalancing. If markets are turbulent, the review and rebalance should be done more frequently. Although the buy and hold strategy still has its place in the 21st century, a portion of the investor’s monies can be placed in an actively managed and constantly rebalanced account, overseen by an FAR. This account can contain the more volatile regional equities, single country and single sector UTs that require closer and constant monitoring.

Many analysts and experts have said that market cycles have become increasingly shorter with more wild swings. This is due to technological advances and super computers executing hundreds of trades in a second, which was unheard of prior to the nineties. Fund managers and big investors react to financial news in an instant. Not monitoring your investments regularly is costly and you do not want to be left holding that UT after 50% or more of other investors have sold their investments and the music had stopped.

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Time: 10am to 7pm
Venue: Suntec Convention Centre Hall 404 (Level 4)

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Derek Gue
Derek Gue
Derek Gue

The writer, Derek Gue, is a financial strategist who can be contacted at to give personalised advice on your Unit Trust portfolio. The article above is extracted from his best-selling book ‘Huat Ah! Building wealth in Singapore with Unit Trusts’, now available at all good bookstores in Singapore.