#149. Recovering Investment Losses

Find Out How You Can Quickly Recover Your Investment Losses, Even If You Have Lost 40%

 

Hong wrote in the comment section of article #56. When To Switch And When To Do Dollar Cost Averaging? as below:

I'm investing into PM's PSEASF. This fund has been dipping for the past 1 year. 

Looking at current financial crisis 2008/2009, shall I continue with DCA (invest monthly)?

My objective of this fund is for medium term (5 yrs). What's your opinion?

And my immediate reply was:

I sympathise with you for investing in this fund during this financial crisis. If you have bought this fund during it's launch at 25 sen per unit, as today, there is already a 40% reduction in your investment. 

In the future, it will be wise for you to set a 'stop loss' target say at 10% or 20%. If you have hit that point, you should cut your losses and switch to another funds. (Read this article for more information: http://www.unit-trust-investment.com/2008/05/91-when-to-cut-losses.html)

However, since you are now 40% below your initial investment, I reckon it is too late to cut your losses. If you choose to stay on with your investment (since you have a 5-year plan) you have other options. Read on. 

Well, the market is cyclical as I have always said. What is down now, may be up in the future.

This fund was launched at 25 sen. How low more can it go? Whereas most PM's funds are above 50 sen to 1 ringgit per unit. Optimistically, in the long run, you can wait for your investment to improve in price.

What you can do now is continue with the DCA on a monthly basis. However, look for an equity fund that has to date suffer the least losses. And look for funds that pays good dividends. Perform DCA on those funds instead of your PSEASF. Those funds will have a better track record compare to PSEASF which is a new fund. And those funds will recover faster when the market picks up again.

When the market eventually recovers, you will be thankful that you have invested during when the price is low with your DCA.

However, if you are psychologically feeling that even DCA is a wasted effort, perhaps a better thing to do is look for an investment that can reap you a better reward. Bearing in mind, that this 'investment' has to give you a return that can help you recover the total amount of your losses in PSEASF. 

Any good and safe investment that can give you a good return should be considered. At least, this will minimise the losses in PSEASF. 

Nevertheless, this losses of 40% in PSEASF is just paper loss. It is not materialised until you liquidate your funds. Give yourself the 5 years time and work things out slowly.

Warren Buffett's number One rule of investing is don't lose your money. An investment should protect and grow your wealth. However, when the investment has suffered an inevitable loss, we just need to find the quickest way to regain profit and recover the losses. This is what I have said in the Philosophy of Investment.  

Now, to expand the above points further:

1. Set a 'stop loss' target. Know when to call it quit. How much losses can you take when go into an investment? If it is 20%, then move your funds out once the investment has reached 20%. 

2. Find other ways to make your investment profitable again. Once you have decided to cut your losses, move your funds out. 

(i) You can switch it to another fund that is performing. Some funds that you can consider when the economy is going down are:

(By using the Public Mutual Fund Performance tool, select the funds and then choose the 'Date Range' as from 1/1/2008 to today's date I obtained the performance below.) 

Public Islamic Bond Fund - year to date performance of 3.70%

Public Money Market Fund - 3.00%

Public Select Bond Fund - 2.29%

You may also want to choose the beginning date as the same date you have invested in your 'losing' fund and made a comparison of how other funds have performed against your own fund.

The benefit of switching your fund to these bond funds is you do not have to pay anything (for switching from an equity fund to a bond fund). And when you switch from the bond fund back to an equity fund like PSEASF, you just need to pay a low switching fund of RM25. This saves you money compare to if you were to sell your PSEASF fund and then later buy again when the economy picks up. You will incur a sales charge again. 

(ii) Or withdraw the funds and put in Fixed Deposit. I know it is not a good idea to put your money in Fixed Deposit, but a gain of 3% in Fixed Deposit at least helps you to reduce the 40% losses. 

Bear in mind that 3% in Fixed Deposit is the same as the above Public Money Market Fund's performance. So, a better choice is to switch your fund within the Public Mutual's funds as describe in 2(i). 

3. Once you have decided to switch your losing fund to say Public Islamic Bond Fund that has a year to date performance of 3.70%, you may want to begin to do your Dollar Cost Averaging on this new winning fund instead. That way you can be sure that your new money is put in an investment that is gaining profit. 

You are heaping soil onto a hill (lama-lama jadi bukit) rather than throwing soil into a deep hole. It takes time to fill up the deep hole. But you can see your small hill becoming a larger hill. 

Remember too that the sales charge is 5.5% on equity fund (PSEASF). The sales charge in bond fund on the other hand is low. It's a mere 0.25%. When your investment is at a loss, you might want to minimize further losses in your new money injected into the investment. Paying 0.25% sales charge is much better than 5.5%. 

4. Alternatively, you may want to liquidate your investment from unit trust and invest in other type of investments. For example, I invested in gold at a price of RM86.03 per gram on 28 October 2008. Today's (18 December 2008) price per gram is RM95.54 per gram. 

That means, I have made per gram = RM95.54 minus RM86.03 = RM9.51

That is a gain of about 11% within a short period of less than two months!

For example, if your initial investment of RM10,000 in PSEASF has suffered a loss of 40%, that means you are now left with RM6,000.

You then take out this RM6,000 to invest in gold and make a handsome profit of 11%. That means you now have RM6,660. So, instead of incurring a loss of RM4,000, you are now in a much better position. You are now at a loss of RM3,340 (4000 - 660). 

However, to be able to get this kind of return, you have to 'time' the gold market. Timing is crucial in investing. Everything has a timing. While you drive a car out from a junction, you also have to time the exit so that you don't hit other oncoming cars. You have a time to eat your dinner and a time to sleep. So why not a time to buy your investment?

Timing the market certainly comes from understanding the market and your investment. It takes practice and knowledge to time the market accurately. 

5. When the market and economy improved and return to an uptrend, switch your funds back to those that are performing the best. Again switching and your timing is key to help you regain your losses and make your investment a profitable one again.