7 Strategic Reasons Why Switching is Mandatory in Unit Trust Investment


Almost all Professional advice for unit trust investing is to keep invested to a fund and keep it there as long as 3 to 5 or up to 10 years. As we read those unit trust prospectuses, they often offer investor with long term investment perspective for similar length of time. If we would have listened to those advice for that length of time invested with our hard earned money, do you know what would have happened?

Frankly, it is not surprising to hear often complaints from unit trust investors saying that they are losing money even though they have followed professional advice to invest so long as several years.

I have a very different opinion on this “professional” approach of unit trust investment. I would suggest strongly for the following 7 strategic reasons why we shouldn’t blindly follow “long term” investment approach, but do switching instead.

1. Invest in the Market not the Fund

We as investors have to remember that when we do investment, we are investing not in a fund but rather in a market. All fund targets certain specific market segment or economic activities in order to garner profit home.  However, all economic activities have their own marketing cycle of uphill and downhill.

Crude Oil Historical Price
All economic activities have their own economic cycles

For example, crude oil has its best economic cycle for the uptrend at between 2001 and 2008. But it has its worst downturn at around 2014 and 2017. If anyone who has invested for “long term” from 2001 to 2017 would have seen almost all their previous profit gathered at 2008 evaporated at 2017.

The length of the cycle depends on the nature of the business undertaking.  Most challenging part is this; no one really knows how long each type of economic cycle will take. Then, switching is a useful skill in unit trust investment in the event when we make an error in projecting a certain economic activity cycle.

2. Capital Protection is the First Priority for Every Investor

Mathematically if we lose 50% of our capital in any investment, it will take 100% increase in profit to recover back.  In unit trust performances, there is rarely any instance, if not none, where unit trust can have a 100% annual profit. If any unit trust investment can have a 45% annual return would be exceptionally good. Even with this, the same fund may not be able to maintain this high performance for the subsequent year.

As a result, any loses in unit trust investment beyond 25% is almost impossible, if not totally impossible, to recover in the same fund technically speaking.  This is a very important reason to avoid any of our fund investment to lose profit beyond a certain point or level. It would be good to switch away your fund if it falls below 5-10% profit.  This has always been my practice all this while in unit trust investment.  It has kept me afloat above any detrimental level.

3. Consistent High Return on Yearly Basis is very Rare in any Unit Trust Fund

Due to various reasons, keeping high return on yearly basis is not an easy task for unit trust fund houses.  If we have been in this business long enough, you would have discovered that Morningstar keeps on updating or changing their star rating with the same fund.  A five star rated fund few years back when you invested your money, has turned out to be down to 3 stars this year. A recommended fund last year by Fundsupermart is no longer on the list of their recommended fund this year.

As small capital retail investors, we need to enhance a better return in order to help us retire comfortably with certain level of financial security. This is one of the strategic reasons why switching is mandatory in unit trust investment with the economic cycles in view as mentioned above. Though professional may argue that switching of fund may not be an easy task neither. While this is true, however, on the other hand, without switching is a guarantee of lower annual return for sure.  Unless we have already earned a large capital with our careers,  that lower annual return might still make senses. However, a lot of us having small capital to start with current investment, an average annual return of 10% or less might not get us going any where.

At least, good switching skill is something we can learn and acquire along the way if we are given ample opportunity in a life time. Why do we need to stick to a particular fund for long without awakening that we might not achieve our retirement plan as expectedly and excitedly?

Opposite Direction
Switching between funds at appropriate time and season               can enhance higher profit return.

A perfect example of switching can enhance a better profit return would be switching between gold and equity investment. If anyone invested into gold fund between 1972 to 1980,  switched over to equity fund from 1980 to 2000 and switched back to gold fund from 2000 to 2010, he would have maximized his investment return. There are many such instances in unit trust investment where you can find those opportunities where you can inter switch at the right season and timing. If we were to pay attention to study these economic activities, it is not difficult to spot those opportunities coming in.

4. Investment Involves Risk.

High reward comes with high risk. Risk management must be included in our portfolio management skill.  Even though how hard we made our market analysis, fund study, future projection, experienced gained in the past, we could never avoid the risk of making error in investment judgment.  After we executed our investment plan, things might turn out unexpectedly, because no one can foretell the future prospect accurately.  Switching then becomes very handy to tackle unexpected issues.

There are also times,  Mr Market may turn against us temporary whenever there is negative events unfolding in the global environment. It is at this juncture; switching skill comes handily to help us taking advantage over adversaries and turn it over to our advantage, benefit and profit.  Instead of riding high and low with the market adventure, we can apply strategic switching such as portfolio balancing, profit lock up, or buy at market dip, to take advantage of market volatility.

5. Directional Trend Changes for Fund Performance are often Gradual

Because of the nature of vast diversification every fund is using, daily price changes are comparatively smaller than stock.  Consequently, directional changes whether it is going uphill (bullish) or downhill (bearish) for a particular fund, the changes also come gradually. This is double sword. There are two implications;

Since, the change is gradual; it takes a long time to turn downhill. It would also take a long time to turn upward as well. A 10% drop of any fund would take a number of weeks to happen. It is also true that it will take a number of weeks or even longer to rise to the same level again.

Secondly, since it is gradual, there would be ample opportunity for us to decide how to tackle the situation skillfully and tactically. Whenever a fund turns downward below a certain permissible level, we have to decide immediately whether to top up or quit/exit the fund.  This is where switching skill is required.

If we don’t do anything, the same fund might eventually recover too sometimes. If it ever does, it would have taken a long period of time. Please remember that time is as precious as money can count for investor.  Our investment loss might have recovered, but if we have lost our precious time and opportunity, the price is rather too heavy to count.  If we have done strategic switching, we might not only see lost recovery but greater profit with the same period of time spent.

6. “Hope” is a Taboo Word for Investment

Whenever a fund started to sink, most investors would stay in a well wishing “hope” condition that one day it will recover. Some hard working investors might start making investigations, studies, analysis to discover the reason behind why the titanic is sinking. Due to the lack of transparency of fund operation, it is probably futile to study reasons behind non-performing funds. Even if study would have been conducted, the findings could have been complicated too.  If we have the same amount of study time deploy for a fund, it is probably advisable to do stock investment rather than mutual fund investment.

In other words, whenever a fund is sinking, probably the best dealing would be switching strategy, rather than stay, study and “hope” for the better days.

7. Free Selection of all Funds Available

As retail investors, we are free to choose among all available fund in the market according to economic seasons and times.  We are not paid fund managers who receive monthly salary even if their investments are losing value.  Fund manager would love to have our money invested with them for as long as they prescript.  We have to know that we do not have the obligation to make them happy, including your sale agents.  Your professional sale agent might not even aware if you have switched your fund elsewhere.  There is no reason to be loyal to their “professional” advice to keep invested in a specific fund for longer than it needs to be.

It is also our free will to exercise wisdom to protect our hard earned profit. We should decide when to protect our profit by locking it up through switching.  It is also our freedom to switch to another fund when we see a better future prospect is arising in that horizon.

The good news is most fund switching is free. Some fund houses come with certain condition for free switching. Some do not have any condition at all. You may switch your fund even within a few days after you have entered a fund erroneously.  Therefore, before you invest your money, please double check with their fund switching policy.

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