Scary funds? Only if you don't have a plan

We covered Black Monday in detail here.  Markets crumbled quite spectacularly on 24th August.  However, if you can stomach it this creates a buying opportunity.  As we have said here some funds that fall sharply also tend to bounce just as sharply.  This doesn’t always happen but the long term case for some of those fallers is still intact.  Let’s take a look…

Table 1 shows the bottom performers in the month of August up until Black Monday.  This is the entire retail unit trust fund universe but we have excluded funds that are less than £50m in size.  

All the funds are Chinese, Asian or emerging market funds.  The reasons for this have been covered before (see our Black Monday coverage here).  But since that point 90% of those funds scary funds are up over 10%.  While this doesn’t wipe out the loss in August it’s a useful reminder that sharp movements can occur in both directions.  

How to avoid a scare

Investors holding one of the funds on the way down have been taken for a rough ride.  It’s worth remembering two things about investing:

• You only realize losses when you sell.  A volatile fund can move up and down a lot but you only lock-in losses when you sell.
• Many investors don’t understand their technical and emotional weaknesses.  This may be uncomfortable but it’s nevertheless true.  
• Many investors end up holding funds that are unsuitable for their circumstances.  They may buy because of tempting advertising or be dazzled by a fund manager.  If or when their investment falls they panic and sell.

If you aren’t easily scared...

...have a look through the funds in Table 1 below.  Remember what Sir John Templeton said about investing: the best time to buy is when others are selling.

ACTION FOR INVESTORS

• Have a rationale behind each investment decision
• Make sure you are in funds that match your risk tolerance
• Know why you bought this fund, to the exlusion of others...
• ...and define when you might sell
• Remember the slogan: preparation prevents poor performance

FURTHER READING

• How not to invest: obsessing over the detail
• One thing you must do
• Contrarian investing is tough to do

Table 1: Worst performing funds 1 Aug-24 Aug