{"id":30526,"date":"2017-07-18T10:59:05","date_gmt":"2017-07-18T02:59:05","guid":{"rendered":"https:\/\/www.imoney.my\/articles\/?p=30526"},"modified":"2018-08-24T00:04:41","modified_gmt":"2018-08-23T16:04:41","slug":"investment-guide-investor-not-spectator","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/investment-guide-investor-not-spectator","title":{"rendered":"Investment Guide: Be An Investor, Not A Spectator"},"content":{"rendered":"

Learning how to become an investor is a critical step to financial freedom. But when you\u2019re unsure of something, it\u2019s easier to watch from the sidelines.<\/p>\n

For example, variations of this phrase are uttered by people everywhere every day: \u201cI think a correction is coming, so I\u2019m staying out of the market for now.\u201d<\/p>\n

But there are (at least) two things wrong with this statement\u2026<\/p>\n

First: Yes, there definitely is a correction coming. But there\u2019s a good chance you\u2019ll be wrong about\u00a0when<\/em>\u00a0markets are going to fall (unless, like a stopped clock, you happen to be coincidentally correct). Even investing legend\u00a0Jim Rogers admits he made mistakes<\/a>\u00a0trying to time the market. And sometimes markets give you a bloody nose with a quick 5% or 10% slip, but then find their footing again. For most investors, trying to time the market is usually an expensive effort that\u2019s doomed to fail.<\/p>\n

Second: You\u2019ll lose out far more by\u00a0not<\/em>\u00a0being at least partly invested than you will with misguided, emotion-fuelled attempts to time the market. That\u2019s because stock market returns are extremely concentrated. Blink, and you\u2019ll miss an entire generation of gains. That\u2019s why \u201cI think a correction is coming, so I\u2019m staying out of the market for now\u201d are words that can carry enormous\u00a0opportunity cost<\/a>.<\/p>\n

So if you want to learn how to become an investor \u2013 and not a spectator \u2013 take note:<\/p>\n

<\/span>Here\u2019s what happens when you miss the best weeks \u2026<\/strong><\/span><\/h2>\n

We looked at the weekly performance of the FTSE Bursa Malaysia Index over the past 15 years. Then we looked at how performance over that period would change if an investor was not invested during weeks when the market performed best.<\/p>\n

Since June 2002, the FTSE Bursa Malaysia Index has had 790 trading weeks. Over that time period, it\u2019s returned 275.3% (in U.S. dollar terms, including dividends), for an average annual return of 9.1%.<\/p>\n

The table below shows what would have happened to that performance if an investor missed some of the best-performing weeks of the index. The single best five-day period for the index since June 2002 was the week ending October 9, 2015, when it rose 12.5%. If you had been invested for the other 789 weeks since June 2002, but missed that one specific week, your overall returns over the entire period would have fallen from 275.3% to 233.7%. Your average annual return over the 15-year period would have declined nearly a percentage point, to 8.3%.<\/p>\n

Bursa Malaysia Index \u2013 Missing the Best Weeks (since June 2002)<\/strong><\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t
<\/th>
Accumulated Return<\/center><\/th>
Avg. Annual Return<\/center><\/th>\n<\/tr>\n<\/thead>\n
All weeks (790 weeks)<\/td>
275.3%<\/center><\/td>
9.1%<\/center><\/td>\n<\/tr>\n
Missing the best week<\/td>
233.7%<\/center><\/td>
8.3%<\/center><\/td>\n<\/tr>\n
Missing the best 3 weeks<\/td>
189.4%<\/center><\/td>
7.3%<\/center><\/td>\n<\/tr>\n
Missing the best 5 weeks<\/td>
155.8%<\/center><\/td>
6.4%<\/center><\/td>\n<\/tr>\n
Missing the best 10 weeks<\/td>
92.0%<\/center><\/td>
4.4%<\/center><\/td>\n<\/tr>\n
Missing the best 20 weeks<\/td>
15.2%<\/center><\/td>
1.0%<\/center><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nSource: Bloomberg\t
\nwww.stansberrychurchouse.com<\/i><\/font><\/span>\n\n

 <\/p>\n

That\u2019s just the start, though. If you had missed the best-performing three weeks of the 15-year period, your total return would have fallen by 85.9 percentage points to 189.4%. Missed the best 10 weeks? You\u2019d have made only 92% during the period, for an average annual return of just 4.4%. And missed the best 20 weeks? You would have\u00a0only made an average annual return of 1<\/em>% <\/em>over the 15-year period.<\/p>\n

<\/span>The magic of compounding<\/strong><\/span><\/h2>\n

The key here is that by missing out on relatively few weeks of great performance, you don\u2019t just miss out on the returns of those great weeks. Your portfolio misses out on the magic of\u00a0compounding. (If you really want to learn how to become an investor make sure you read up on compounding interest<\/a>).<\/p>\n

The return you\u00a0didn\u2019t<\/em>\u00a0earn that super week was not available to earn you an additional return in the following weeks and years that you were investing \u2013 because you didn\u2019t make anything in that critical week.<\/p>\n

That\u2019s why the total return at the end of the period, 233.7%, would be so much less than the 275.3% return you\u2019d have made if you\u2019d been invested during the best-performing week of the index.<\/p>\n

<\/span>What can you do?<\/strong><\/span><\/h2>\n

So is the answer to stay invested all the time? No. No matter how long your time horizon, the periodic serious corrections in stock markets will \u2013 like missing out on the good weeks \u2013 destroy your performance.<\/p>\n

But you can exercise smart risk management by watching your\u00a0stop loss levels<\/a>\u00a0carefully. Yes, you might miss out on some of the best weeks. But by missing out on a bigger correction, you\u2019ll have done your returns a far bigger favour.<\/p>\n

What else can you do? You can be in the market but still have a cash cushion. As\u00a0written before<\/a>, cash is the best hedge. It\u2019s cheap and it represents potential\u2026 there\u2019s nothing worse than seeing great investment opportunities and not having the cash to invest in them. Plus, when markets drop, the purchasing power of cash rises.<\/p>\n

So don\u2019t pull out of the market altogether because you\u2019re worried that there\u00a0might<\/em>\u00a0be a correction. If you want to learn to become an investor \u2013 and not a spectator \u2013 make smart use of trailing stops\u2026 and keep some cash in the bank for rainy days.<\/p>\n

This article was first published here<\/a>.\u00a0<\/em><\/h6>\n
Image from glifinance.com<\/em><\/h6>\n","protected":false},"excerpt":{"rendered":"

Take control and stop watching from the sidelines!<\/p>\n","protected":false},"author":1,"featured_media":30529,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-30526","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment"],"acf":[],"yoast_head":"\nThis Is How You Become An Investor And Not A Spectator<\/title>\n<meta name=\"description\" content=\"When it comes to successful investing, it's best to be an investor and not just merely watching from the sidelines. 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