You invest your hard-earned cash into a fund to help grow your retirement portfolio, but in a mere 2 days, the fund you've invested in loses 66%.
This happened to investors in the Third Circle MET Target Return Fund in December.
What's more, Asset Managers who invested in this fund also lost a fair chunk of their portfolio.
That's why today I want to share the three red flags you must always look out for when investing in a fund. Plus I'm going to explain what the number rule is you must follow BEFORE you invest in any fund.
These three red flags could save you from losing a large chunk of your portfolio if you invest in the wrong fund
The Third Circle MET Target return fund was hit by extreme volatility
May 2013, the fund dropped 19.92%.
December 2014, the fund dropped 15.57%.
August 2015, the fund shed 21.21%.
As an investor, you shouldn’t accept these significant drawdowns. The best way to combat this volatility is to set a stop-loss and stick to it – usually 25%. This way, you would’ve sold off the fund without experiencing a big loss.
Red flag #2:
This fund stated that it aims to offer stable positive returns
, mainly in the form of capital growth. But looking at its returns, it’s clear it hasn’t offered considerably ‘stable’ returns. This is another red flag, you could’ve picked up on.
The best thing to do is scrutinise the fund initial fact sheet – detailing its historical, current and expected returns. Then compare this to the fund’s quarterly update to see if the fund achieved its expected returns. If not, you should cut your losses and sell your investment.
If you did this with the Third Circle Fund, you would’ve saved your investment from falling again.
Red flag #3:
The fund also clearly stated that its investment strategy is moderately risky
, but again, with the fund experiencing that kind of volatility, it tells another story. The fund looks like a very risky investment AND expensive.
To find this information out, all you need to do is look at the fund’s fact sheet and note:
The total expense ratio (TER), which is the amount you pay towards management fees. If it’s higher than 3% (as was the case with Third Circle Fund), then stay away!
Risk rating – The Third Circle Fund claimed to offer “stable” returns, but it had 4 massive drops. Always make sure the fund sticks by its investment strategy with its risk levels.
Benchmark – make sure that the fund you’ve invested achieves similar returns to its benchmark.
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If you spotted these three red flags, you could’ve pulled your money out of the Third Circle MET Target Return Fund leading up to its crash.
Before I finish, I want to raise one important rule you must follow before you invest in a fund.
Number #1 rule: Failure to understand risk management could lose you a fortune in the wrong unit trust fund
You shouldn’t even start investing without understanding risk management.
And failure to use the proper risk management tools can be the difference between losing a little money, than a lot.
Selling at your stop loss level prevents a small loss from becoming a much bigger one
. Your goal should be to avoid the worst of a market crash by having a strategy that forces you to exit at a certain level. Having, and sticking with, a stop loss is one of the most effective ways to protect your capital in a volatile market.
Another risk management tool is portfolio rebalancing, which involves realigning the weightings of your investments based on their level of risk. For more information on types of portfolio rebalancing, click here
Until next time,
Always remember “knowledge brings you wealth.”
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