How to invest in equities during volatile market

In the past two weeks, we saw the S&P 500 index dropped from 1263 to 1158 that's a 8.3% drop. Historically, a bear market is determined if an index drops more than 20% within two months, and we had witnessed a 17.3% drop in the S&P 500 index from July to August this year. However, the index recovered 16.9% once again within the September and October period, this volatility is a real roller coaster ride for most investor.

With such volatility, it is no surprise that investors holding certain individual stocks may have suffered significant losses and some of it may not have seen the light of the day since then, even during the sudden surge in October. One example would be MF global, the investment service firm declared bankruptcy mainly due to it's wide exposure to European sovereign bonds which causes major shortfall in customer's investment accounts. This unsystematic risk, known to be mitigated by diversification, can be detrimental to investors if they put all their eggs into one basket for etc. MF Global shares.

Thus, diversification may be the best bet. However, as individual investors, it would be hard to determine the best way to invest their money as most people wouldn't have the time to look into companies balance sheet, keep track of corporate actions and also the skill sets to determine which is a good buy and what is not. Most investors also lack the ability if not, capacity to invest in many equities at once mainly due to high brokerage cost and also the lack of exposure to other markets.

The solution is to invest in mutual funds, in Singapore we call it Unit trust. Unit trust is a form of collective investment constituted under a trust deed. Fund managers has a specified investment objective to determine the management aims and limitation. This is made possible as fund managers pooled together many investors money and allocates the funds into different markets and assets classes. Fund managers are usually well trained, qualified and have a group of individuals assisting him in making his investment decisions. These people are investment analyst, fund administrators and fund accountants and are legally enforced to be working for the benefits of the customers. Unit trusts in Singapore can be purchased through all the local and foreign banks (Citibank, Maybank, Standard Chartered etc.). Recently, retailers are able to buy it from sites like fundsupermart and dollardex at a lower cost but subjected to an additional platform fee.

While having the idea of professionals managing your money is considered one of its perks. Buying a unit trust comes at a cost as it's not available to be purchased in the stock market unlike traditional stocks and shares. Usually, there is a front end sales charge usually up to 5% of total amount and also yearly management fees ranging from 0.5 - 2%. Investors must be aware of these when they buy and usually if they buy in big amount, they are able to bargain for a lower sales charge. One of the most attractive aspect of Unit trust is the probability of fund managers achieving Alpha due to it's active investing methods. This happens when fund managers are able to beat the performance of an index that the fund are being compared against. An example can be using s&p 500 index as a benchmark and the funds being allocated to different companies or similar companies within the index at different weight-ages. However, during the Global Financial Crisis, it is realised that as little as 40% of fund managers are capable of doing so.

The idea of investing in Unit trust is to diversify your money into different asset classes to avoid mishap and unsystematic risk with the expertise of a fund manager. Investors are advised to have a medium term investment horizon or a target profit before investing.