Road towards Financial Stability

When it comes to investing, investors have the tendency to make mistakes with their emotional biases. The rule of high risk, high return means those who want to ‘get big fast’ returns are willing to take the high degree of risk in highly volatile investments such as options, futures, hedge funds, high-yield bonds, leveraged ETFs, penny stocks or cryptocurrencies.

Their aggressive investment styles are akin to gambling or short-term speculation activities.

Fear and greed are the emotions that drive the stock market up and down. Hence, the Fear and Greed Index is used to gauge the market sentiment, along with other analytical tools, as part of the investment decision-making process.

Nowadays, technology is the engine for financial investment. For example, high-frequency trading (HFT) is a method that uses complex algorithms to execute a large number of investment transactions in fractions of a second. HFT is capable of keeping track of market movements and identifying arbitrage opportunities.

The question is how retail investors can still make money by using their primitive investment strategy.

Time and again has shown that even investment professionals are unable to beat the stock market regardless of bull or bear markets.

The Standard & Poors (SPIVA) 2020 indexing study revealed that 82% of fund managers fell short of their S&P 500 benchmark over the past 10 years, and 87% failed over 15 years.

As a result, almost 50% of global equity funds and 50% of all fixed-income (bond) funds were merged or liquidated.

To make matters worse, it is reported that globally, an estimated USD1.02 trillion was lost to scams within just a year. Perhaps emotion coupled with poor investment knowledge and low fintech skills are the reasons people are losing money to scammers.

Nevertheless, the Prospect Theory, which won the Nobel Prize in economics sciences, explained that investors are generally loss-averse and prefer small guaranteed outcomes over larger risky outcomes.

For instance, investors are more likely to invest in a fund with a return of 5% rather than a fund with 50% chance to gain 10%.

Even though the rate of return is the same for both options, chances are investors will invest in a fund that shows the certainty of gains vis-à-vis higher gains with a probable loss.

Investing in low-risk investments is a good option for those who want to minimize the risk of losing their money. Low-risk investments are generally considered to be safe and very liquid i.e., can be easily converted into cash.

In Malaysia, some examples of low-risk investments include fixed-priced unit trust funds such as Amanah Saham Bumiputera (ASB), Amanah Saham Malaysia (ASM) and Amanah Hartanah Bumiputera (AHB).

These unit trust funds have zero price volatility, as the prices are fixed at RM1 per unit of investment. Similar to savings accounts, the funds are also highly liquid, which allows investors to redeem their units within a short period of time.

The 10-year performance (2011-2022) of ASB, ASM, and AHB recorded higher returns than fixed deposits. Considering the same level of risk and liquidity, smart investors are gaining higher returns if they invest in fixed-price unit trusts as compared to savings accounts.

Another option for low-risk investments are capital guaranteed and capital protected funds. It is important to note that both capital guaranteed and capital protected funds are not the same as fixed-priced funds.

The principal for a capital guaranteed fund is shielded from any losses. The risk of losses by underlying assets are fully absorbed by the fund management companies. Therefore investors will get back their principal at maturity.

For a capital protected fund, the principal is invested in assets like bonds which are expected to provide the principal at maturity based on the “best effort principle.” Unlike capital guaranteed funds, there is uncertainty that investors of capital protected funds may not get back their principal in full due to the risk associated with the performance of underlying assets (e.g. bonds) that affect the value of the investment principal.

In contrast to fixed funds, investors can also invest in variable funds as part of their low investment portfolio. The key to determine whether the variable priced funds are considered low, medium or high investment lies in the asset classes. In general, the risk level of an investment portfolio increases from cash to bonds, stocks, properties, and commodities.

One may ask, what’s the best to invest? Well, the choice of investments depends on several factors such as one’s financial objectives, net worth, risk tolerance, skills, and investment horizon. The Malay proverb, “ukur baju di badan sendiri” means individuals or investors need to choose what type of investment suits them best.

Investors need to learn or consult investment experts for bespoke investment or financial solutions instead of blindly following the investment strategy of others, no matter how good it is.

During an uncertain economic environment, low-risk investments help to secure against losses. Patient pays. The path of volatility is not the road to financial stability.

The journey towards financial freedom demands a wisely crafted investment portfolio.

True investors aim for sustainable returns, not short-term gains the way traders or speculators do.