A college freshman who is planning to invest in mutual fund asked me:
Why would people sell their shares for a lower price? Wouldn't a share increase its price once it has decreased? Why not just simply wait for the price to increase from the day you bought it?
Below is my reply to him. Please note that the concept not only applies to mutual fund, but also to stocks and UITF.
Here's the thing, there are investors who believe that "time" is essential in growing their wealth, while some think that "timing the market" can grow their wealth faster. For the former, it means that the investor is committed to hold on to the investment for a long time, ignoring the up and down movement of the market, believing that after several years, the share price has increased already (historically speaking, for stocks and equity funds, prices have increased, especially if invested for at least 5 years). For the latter, investors prefer to redeem their investment to save whatever profit is remaining, preserve their capital, then just subscribe again once the market has stabilized. Others choose to sell, even at a loss, hoping that prices will fall down further, then once the price rebounds, they will enter again. For those trying to "time the market", the idea is to be able to buy more shares at a lower price given the cash you have (it also gives you the opportunity to start gaining as soon as the market goes up again, unlike those who held on to their shares and waiting for the price to breakeven). Another reason why an investor will sell at a loss is because he/she desperately needs the money.
Ideally, timing the market puts you in a better position to gain more using the money you have. HOWEVER, not everyone can time the market perfectly. This leads to some investors missing the big rebound and eventually re-entering at a higher price. Some of them who have seen that prices are higher now (compared to their selling price last time) hesitate to re-enter, thinking that the price is too high already (therefore, higher risk for their money). If the market goes on a big rally again, there's a high chance that they'll be left behind and regret the decision.
I've experienced being in both positions. I tried to time the market several times, and regretted the decision in some instances. Honestly, my Sunlife MF which I got in 2006 (and still holding) is giving me better profit percentage, compared to my "timed" investments. That's why I agreed with a financial speaker when he said that "It's time, not timing, that determines your personal wealth". Right now, I'm building an elementary, high school and college fund for my 1 year old son, and I'll honestly say that I'll bet on "time" this time (i'm subscribing to two BPI Equity UITFs every month).
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