COVID-19: What’s an investor to do?

When instability occurs in the market, one may be tempted to perform drastic actions on the investment portfolio, such as withdrawing investment to their fixed deposit. An exemplary situation is when an adviser invested RM100,000 of an individual’s money and the value is reduced to RM60,000. There may be various reactions towards this RM40,000 loss, be it selling all or some of the investments, buying more of the investments, or not performing any actions at all. Considering the volatile market condition, implementing a systematic investment plan such as Dollar-Cost Averaging would assist one in meeting long-term financial goals.

DCA strategy implements the regular and periodic purchasing of investment. DCA gains popularity among financial advisers and individual investors after the Great Depression throughout the mid-1960s. Furthermore, it encourages the investment of the same amount of money rather than the same number of shares each period. As a result, investors can purchase more shares at a low price compared to high-priced shares. 

DCA is a particularly valuable method to reduce the behavioural bias, which is capable of reducing psychological pain associated with financial when the market price falls. This explanation was supported by Kahneman and Tversky’s (1982) statement on the positive correlation between regret and level of responsibility, where DCA is capable of decreasing the level of regret about bad outcomes and enabling investment in a riskier asset. Besides managing investor’s emotion, the DCA approach employed in the regular investment plan assists the investors in minimising risks, especially those in a volatile market. Regardless of the types of investment instrument used, such as stock market, unit trust, or exchange-traded fund, DCA is found to be the most superior approach to be implemented in a volatile market.

The anxiety over the decrease in investment value by more than 30% is inevitable. In fact, during the times when the market faces extreme volatility, some investors choose to rely on their instinct to make investment decisions. While there may be a few extraordinary individuals who could succeed in this decision making, most individuals would commit mistakes. Essentially, the risk is a natural component of investment.