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Thursday, 26 February 2009

The 'buy and hold' strategy

Goh Eng Yeow on the wisdom of having your money professionally managed.

LIFE goes on as usual for fund managers even though the sky seems to be crashing down around them, as assets of all classes plunge in value.

Last night, they gathered at a posh hotel to celebrate the achievements of their peers and dished out awards to the outstanding performers.

But as my colleague, Gabriel Chen, pointed out in his article this morning, about $1.5 billion has walked out of Singapore unit trusts in the fourth quarter alone.

Indeed, these investors who have made their exit, might have been the smart ones. Stock prices have fallen further since the start of the year and there does not seem to be an end to the stock market carnage in sight.

For the "experts", it has been a trying time, even though some have put on a brave front, waxing lyrical about the need to stay invested.

But investors, who parked their money in unit trusts have discovered that they are doing as badly, if not worse, than those who choose to have fun making investments with their own money.

The super-rich, who get the dubious privilege of parking their money with hedge funds which supposedly have the inside track to even greater wealth, fare even worse. In some cases, they have lost the family silver, after placing their money with fraudsters like Bernie Madoff.

The cynical view is that it is impossible to beat fund managers at their own game. After all, they will continue to enjoy earning their keep, so long as investors are willing to park their nest-eggs with them.

But such cynicism aside, it is pertinent to ask why so few fund managers were able to forecast the current financial crisis and take steps to protect their investors’ interests, even though they were supposed to be spending much of their time looking at the market.

Indeed, many investors are now asking themselves if it is sensible for them to stick to the "Buy and Hold" strategy advocated by fund managers. Over the years, the mantra has been to behave like a sensible long-term investor - rather than a day-trader – because stocks outperform bonds and other assets if they are held long enough.

But as economist John Maynard Keynes once observed: In the long-term we will all be dead.

Anyone who followed the buy and hold advice given out by the fund managers will feel deceived.

Wall Street has fallen to an 11 year-low, wiping out any gains made in the past decade, while stock prices here have fallen to 2003 Sars crisis lows.

Since the global credit crisis erupted over a year ago, fund managers haven’t adjusted their portfolios from stock holdings to cash fast enough. Some of them have been buried by the avalanche of plunging stock prices.

For many investors, the best strategy is to hold on tight to your cash right now, after the vast destruction of wealth last year.

The biggest tragedy is to have to try to slowly accumulate your nesteggs once again, just when a huge financial storm is in full swing.

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