Getting Nearer to be a Second Liner Investor

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This title might have caught your curiosity. You might be wondering why second liner, why not first? …  Is there a third liner investor? Let me explain what those liners mean.

We have all agreed upon the fact that investing through mutual fund is safer than investing through stock.  But we also have to agree that this is double edged. Mutual fund investment is safer, however it is also true that the profit rate is much lower. We can’t possibly deny this fact that low risk low reward.

Low Risk Low Return

Stock investment can have the possibility of double or even triple your capital in just a few years for the veterans.  But for mutual fund investor, no matter how expert you are, you can’t have the possibility of doubling or tripling your capital in few years’ time. This is what I called the differences in the potential growth of your investment as different investment liners. Stock investors are the first liners, while those mutual fund houses are the second liners.  They are second liner because the capital size they are overseeing is normally gigantic which is hard to increase in size drastically. In order to protect losses, they employ a widely or even overly diversified strategy. This overly diversified strategy keeps their investment safe but at the same time, lower their return drastically. If they are able to garner a yearly return of 30-40% profit will be highly exceptional. Most probably they can occasionally hit with such high return but not on yearly basis for a consistent number of years.

For retail unit trust investors, we have heard some professional advice to diversify our mutual fund investment. This is also to lower down our investment risk. If we follow such approach, our return of investment will be kept lowering down further, possibly around 10-12 % during bull market run up alone. An excellent example will be the demo account put up at fundsupermart.com.my website. If you were to make an assessment, you will find out the annualized return of the most profitable portfolio is 12.4%. If we keep doing this for longer term going through both bull and bear market, the return will be lowered down further, possibly just slightly above Fixed deposit rate. This is what I call the “Third Liner investors”. This is perhaps the most common reason why mutual trust investment is seen as uninspiring to most investors.

As most of us are not only retail investors, but also having small capital, it does not seem to bring us any way promising if we choose to use the third liner investor’s approach in mutual fund investment.  Therefore, we have to think of a way to get away from those barely minimum return of investment as being third liner investors. This would mean to increase of return of investment, it is also to increase the risk we are going to take. But for sure, no matter how high the risk is, it will certainly not that kind of risk as if in direct stock investing.

Minimized Diversification

First of all, the first tactic is to minimize portfolio diversification. Choose only those funds which would have the most possibility of high yield. Warren Buffet used to say that the reason investors diversified too much is because we are not certain of what we are doing. He said, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” Knowing which fund would give the highest yield by the end of the year would never be an easy task. However, it is not an unworthy task to learn neither.

It is possible to aim for 20-25% yearly return when we do mutual fund investment if we learn how to do it right. I remember when I first came into this investment game, I was able to garner a profit of about 34% annual return for one of my portfolios for 3 years. One of its largest contributors at that time was the starring dear fund called Hwang Asia Quantum Fund (now becomes Affin Hwang Select Asia (Ex-Japan) Quantum Fund). At that time, it was performing at an annual profit return of 40-45%.  I had also done with a few switching to other funds opportunistically. However, at that time, I knew nothing about risk management, it was in fact an innocent achievement. It was invested fully at one fund at a time and switched totally into another high performing fund all together. Thinking of it, I was so brave, but did not know what a risk I was involving. But as of now, I will never do it again! 😀

Recently, I had also developed a demo portfolio for my student to watch. But it was a much smaller capital account. This portfolio was installed with proper risk management. And it was also able to gain an annual rate of return of 24% at one period of time. But this achievement was not reaching a year’s time yet. (I must clarify that I don’t have all these high achievement for all my 17 portfolios, some merely 15-17% or lesser only at this moment. I still have much more to learn.) The bottom line is, increasing our profit rate of return is possible if we continue to learn the art and its skill.

Maximizing Switching Strategy

Secondly, if we were to increase our return of investment with mutual fund, moving away from being a third liner investors, we cannot tolerate our fund staying still or plateau for a long period of time like 3 months or more, worst still to allow it to keep losing for that length of time. Because 3-4 months is a long period if we were to calculate our return annually. It will drag down the total return rate by the end of the year.  If we were able to spot any opportunity arising, we should do switching instead of waiting for the “hope.”

There might be a possibility that our funds might have jumped into a “pirate ship” and died at the spot. 😀  This is what I mentioned about high reward with higher risk. And again Warren Buffet did mention before. He said “Risk comes from not knowing what you are doing.” If we have learned to trade with our skills, risk is no longer real risk if we have mastered it.

Therefore, we can continue to learn to sharpen our senses about hot markets, good funds, economic activities, factors moving the market etc. And one day we will be able to move away from being a mere third liner investors. While we can never be the second liner investors because we are tarring behind them, we can at least getting nearer to second liner. If we can achieve an annual return of 20-25%, we are much better than many fund managers too. This target can be our hope and aspiration, don’t you think so?

 

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