How to Minimise the Risk in Stock Market Investing

Equity investing is one of the potentially rewarding investment and at the same time a high risk type of investment. But, is there a way to lessen the risk? 

Well, I think there is, it is called "Money Cost Averaging". It is an investing strategy where you invest fixed amount of sum at a regular interval over a long period of time. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares at the time of a purchase. When the markets are up, you buy fewer shares due to the higher cost per share. When the markets are down, the situation is reversed and you purchase a greater number of shares. It's a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you don't have to invest the time and effort to monitor market movements and strategically time your investments. Having said that, this strategy then works well with mutual fund investing. This is because in mutual fund the fixed sum is simply divided with the cost per share to get the number of share bought, whilst when you are directly investing in equity, there is a minimum lot to buy depending on the cost per share. Of course, you can choose to buy or sell through odd lot but, you might find it difficult to buy or sell as few only trade in it. Using this strategy in direct equity investing will result to often have remainder on the fixed amount invested. Thus, the core concept of the strategy to which it will invest with a fixed amount at a regular interval is hardly meet. Keep in mind though that, unless the mutual fund NAVPS you invested in is increasing fast enough to compensate the investment fees involve, it might take a while before you appreciate the result. 

Below is the illustration of how money cost averaging supposed to works to lessen the risk given the 3 scenario in equity market. (Click to Enlarge)

Click the Image to Enlarge

Click the Image to Enlarge

First, when the market or the NAVPS is suppose to be in bullish trend. With this scenario, you probably wish you have invested huge amount early on so as to gain more but, keep in mind that equity market is not always in bullish trend. The gain may be reduce but then so as the risk in this scenario.

Second, when the market is suppose to be moving sideway. As seen in the illustration, even though it's moving sideway, still the result yield to be favourable.

Third, when the market is suppose to be in bearish sentiment with up trend bias. As you can see, with this scenario the result still yield to be positive.

In all the scenario, the result may seem like always favourable but this strategy requires discipline to stick to it over a long period of time. It may seem easy but when emotional thinking kicks in like say for instance when you speculate that the market is going to be bullish, you are probably tempted to invest more than the planned fixed amount to be invested at a regular basis, and when at bearish trend, fear will probably kicks in and will reduce or not fund the investment yet. So, to avoid this, keep in mind the core idea of this strategy and, most importantly study the fund you are planning to invest in, understand its feature and know the fees involve. The illustration shows only the sales load but there is another visible fee which is the exit fee, that's if you plan to withdraw your investment within the allotted holding period. 

Investing in Mutual fund in Philippines comes with a cost, Click: (Understanding Mutual Fund Fees), know how much will it affect your gain because, I'm sure for the first few months you will not appreciate your investment result as it will be dragged down by the visible fees involve, unless of course the fund you invested in grow fast enough to compensate the investment fees. You'll realise this if you monitor your investment closely factoring the fees involve and inflation. This probably is another reason why it is most advisable to invest long term in mutual fund following this strategy diligently.

Advantages of Getting One Type of Mutual Fund in Philippines

Below are some of what I think the advantages of getting just one type good mutual fund.

1. My investment capital will not be diluted, meaning, if the NAVPS of the mutual fund I subscribe increases, my gain will be much more higher but of course the risk is that, if the NAVPS goes down the more also is my loss. That's why I study first the funds I intend to invest in so that, I can confidently choose what type of mutual fund will fit my goal and risk appetite.

2. I don't need to "mamangka sa dalawa o tatlong ilog" which means in this case if I were to endorse mutual fund, I will have to endorse only one, the one that I invested in. So that, those who might be interested and subscribe also will likely not dilute their capital investment. Though it may sound bias nevertheless, the fund that I invested in speaks for itself in terms of performance and feature. With this logic, I and those who were encourage to invest will help increase the asset of the fund, in return will also increase the value of the NAVPS therefore, likely, the value of my share will also increase. Remember the NAVPS formula ((Asset-Liabilities)÷Outstanding Share).

3. Based on how I understand mutual fund, if I get more than one but the same type of mutual fund, I am not diversifying actually. Like say for instance, If I subscribe equity funds at company "A" and equity fund also at company "B" and the same with company "C". If the equity market goes down, likely, all of the mutual funds I subscribe in will also go down since they all invest in equity. Another is that, aside I guess from their investment strategy and fund managers, one of the reason perhaps why the same type of mutual fund is better than the other one is simply because that mutual fund has built in a good reputation and is more popular. Thus, more are interested to invest therefore increasing the asset value more compare to the other mutual fund resulting to increase in NAVPS and, finally increase also on the share value.

4. If I invest in more than one MF and since, I'm working abroad and don't have the bank account on the mutual funds I subscribe in, I will have to spend extra more on the remittance fee so as to add fund separately as, every mutual fund has different account number. I find it not very convenient at all.

By the way I invest in PDYF Click the link:  Why I Choose to invest PhilEquity Dividend Yield Fund. And, since I opened the account, to date the sales load has already been more than compensated.

Quotes by Warren Buffett On:

Earning: “Never depend on single income. Make investment to create a second source.”

Success: “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”

Spending: “If you buy things you do not need, soon you will have to sell things you need.”

Saving: “Do not save what is left after spending, but spend what is left after saving.”

Risk: “Never test the depth of river with both the feet.”Investment: “Do not put all your eggs in one basket.”

Expectation: “Honesty is very expensive gift. Do not expect it from cheap people.”

Humanity: “If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 percent.”