In view of the volatile stock market conditions, should contributors/ investors consider switching funds? Jon Ti talks about the need to first understand and assess one’s own risk tolerance and investment philosophy before selecting an investment strategy in an interview on retirement in Malaysia with Lim Siew May from Focus Malaysia.
The article above is published in Focus Malaysia and is a copyright of ©HCK Media Sdn. Bhd.
The transcript below was prepared for this interview.
1. Should investors/ Private Retirement Scheme (PRS) contributors consider switching funds? (For instance, changing from growth fund to moderate fund, from moderate fund to conservative fund) If so, what are the pitfalls they should watch out for?
Volatile market conditions are not confined to equity positions, in fact bond markets have also been volatile in recent times. As markets have a degree of uncertainty, I believe the consideration to switch funds within the PRS landscape should be approached from a portfolio management perspective. This is because PRS funds will form only part of the contributor’s total retirement fund.
Investors/ Contributors first need to understand their own risk tolerance, suitability assessment and investment philosophy. Thereafter, they can either customize their portfolio or follow a portfolio model which best fits their retirement funding needs and readjust as the needs change. Portfolio models are recommended asset allocations to suit the contributor’s investment needs, and are commonly categorized into conservative, moderate or aggressive models. This will give contributors a guide to make disciplined investment decisions over the long run. With this in mind, switching should occur if a contributor’s retirement portfolio allocation requires re-balancing or if they decide to change their portfolio model. An example of a review to change one’s portfolio may be based on age and a shortening time horizon toward retirement; such as a decision to move from an aggressive portfolio to a moderate one.
Potential pitfalls in this case would be if contributors have not decided on what investment strategy or portfolio model they wish to adopt. Without a clear structure or strategy, they may subject themselves to enter on market highs and exit on market lows. A portfolio approach will help in making disciplined investment decisions. Another pitfall would be complacency in re-balancing, without at least an annual review, contributors may be over exposed in their risk or have insufficient exposure in their asset class.
2. What are the good reasons for one to stay invested in PRS’ funds now?
The decision to invest through PRS reflects a commitment to build one’s retirement funds as there is a penalty to withdraw before the retirement age. Thus, by default, the contributor would typically opt to remain invested until they are eligible to withdraw the funds for their retirement. Therefore, one of the most important factors would be the individual contributor’s remaining time horizon towards the period they wish to start liquidating the funds for usage. Generally, if time horizon is shortening, the contributor should consider reducing their higher risk exposures and accumulate more assets which are consistent in income distribution.
3. How would you advise clients to choose the right PRS fund?
There are some factors to consider when choosing PRS funds, one of it is transaction costs. Many PRS providers offer low to no sales charge for investing into their funds or low annual management fees. This can be a significant advantage for investor returns which are net of costs. Secondly, each fund will differ in their asset allocations, funds should be selected in reference with the clients total retirement portfolio. Thirdly, each fund will differ in geographical exposure, diversification into foreign markets is worth considering if clients do not want to invest all their assets in Malaysia. Lastly, clients should also consider the risk rating for their intended fund and if they are comfortable. If viewed from a portfolio perspective, they should consider the fund’s risk rating and its impact to the overall retirement portfolio.
