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Investing In Unit Trust- 5 Pitfalls to Avoid

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A friend told me that she had a financial planner asking her to invest all of her savings into unit trust or ILPs in end December before Christmas. She decided to hold on and not invest first and when the market fell at the start of this year, she was not unduely affected. The worst thing for a newbie investor is when he or she is given bad or biased advice and becomes so badly burnt that they swear off investing totally.

So before you invest your hard earned money, what should you be aware of and not do?

1. Trust everything the financial advisor says. It is pretty sad that the person who should be giving unbiased information is often times, ill-advised and biased. Why biased? Because the commission structure of a financial advisor can be solely commission based or heavily commission based. This means the more the advisor can persuade you to buy, the more he or she makes. Furthermore, some financial institutions give higher commissions for their own in-house products which these advisors will of course push aggressively. This could be detrimental to you at the time- witness the debacle of pushing retirees who go to the banks at year 1999-2000 to use 100% of their retirement money to buy technol0gy stock. So find an independent advisor who does not push their own bank's product and who makes an effort to tailor a portfolio suitable for you after conducting an exhaustive financial needs study of you. An advisor that tells you not to buy or to get an insurance policy from someone else before buying anything is one to keep and refer friends and relatives to.

2. Chase past performers. There is a misconception by most newbie investors that there are investment companies out there who are so infalliable that they keep making huge investment gains. The reality is that investment companies often do no better than their benchmark and often do worse in fact. So yesterday star performer may not be tomorrow's star. So what should you do? Choose the worst performer? My advice would be to look for an average performer in a laggard market. An example would be Taiwan index funds or Taiwan mutual funds. They are poised for an upward trend after a new President is elected after March. China looks oversold still and could be dangerous after the Olympic Games when the euphoria dies off.

3. Invest everything. The advisor will want to get everything from you including your spare change. What you should do is to invest the minimum to buy into the funds and slowly build up your portfolio over time, preferably over a few months or a year. This means that you will not buy at the rock bottom, and more importantly it will mean that you do not buy right near the peak of a market when it is falling. For a newbie investor, it will be advisable to stick to dollar cost averaging where you buy a fixed amount at regular intervals. This will smooth out the market fluctuations and make your investment a long run affair that does not turn sour. Also keep at least 3 months of your salary in the bank for emergencies and invest the rest slowly. Slow and steady win the race.

4. Panic. There are investors who panic when the market falls and sell off everything they have. There are two schools of thought here, one says that when the market falls 15%, you should sell and forget about the loss but invest the money later. The other says that you should ride it out and stay invested so that you will participate in the bull phase of the market and not miss it. I believe in both and subscribe to both, it is nice to be aware that your investment in particular unit trusts have fallen by 15%. Often times, this is not possible and when you discover that, it is too late and it has already fallen by more than that. Some people will panic and sell it off and swear never to come into investing again and put money in the bank, which is the worse decision you can make. I think that for the core part of your portfolio, you should be so confident in them that even though the market does down and the value of the portfolio goes down, you know that it will come back up and so you stay invested. The ones that you let go off are the more risky investment that you make and when it drops by 15%, it makes sense to cut loss and wait for other opportunities.

5. Concentrate on one unit trust. If you advisor tells you to invest all of your $10k in one unit trust or your returns will be eroded. Find another advisor. The portfolio theory in investment is the biggest breakthrough in investment theory. Usually, with lower risk, your returns should be lower. But some professors found out that when you invest using a portfolio of unit trusts or stocks, and diversify into different areas, your risk is reduced but with little or no change in your returns, in some cases, your returns could be even higher. This paradox has made investment portfolio is sexist phrase in investment and you should participate in this. If you invest in say transportation stocks, you should invest in oil stocks too because when the prices of oil drops the profit for transportation stocks like airlines will go up while the prices of the oil stocks will go down, and this works for the reverse situation when the prices of oil goes up. This means the investors reduces risks while returns are maintain because in whichever situation, you will benefit as long as companies stay solvent and profitable, abeit less profitable.

You can read "A Random Walk Down Wall Street" by Burton G. Malkiel or "The Informed Investor" by Frank Armstrong to get a clearer picture of portfolio investment.

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The information contained in this blog is prepared from data believed to be correct and reliable at the time of publication of this report. The authors do not make any guarantee or representation as to the adequacy, accuracy, completeness, reliability of the information contained herein. Neither the authors or any affiliates or related persons shall be liable for any consequences (direct or indirect losses, loss of profits and damages) of any
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Shares and financial instruments illustrated in this blog can go down sharply or in certain instruments suffer total loss on the initial investments. Investors are advised to make their own judgment on the information provided and consult their own financial advisors or consultants as to the suitability of the products illustrated to their particular financial needs and objectives before acting on any information contained herein in this blog.