Sunday 5 October 2014

Different Mentality in Stock and Unit Trust Investing

I have investments in both stocks and unit trusts.  However, the investing mentality in both can be quite different. These different mentalities can both be a boon and a bane for successful investing in them.

Before I go into the details, I should mention that I generally adopt a market-timing strategy (for when to buy and sell) and value investing (for what to buy) for my stock investments. Please see Have A Plan for more details. However, for my unit trust investments, I adopt a Dollar Cost Averaging strategy with monthly investments into index and balanced funds. The differences in investment strategies explain some of the differences in the investing mentality in both types of investment.

Market Price

For stocks, as we know, they can be quite volatile. You will never know for sure whether they will go up or come down. When a stock that you own has gone up by quite a bit, you start to worry whether it might come down again. You then wonder whether you should sell it off. You have heard about letting the price runs, but you have also seen and experienced for yourself how some stocks came back down in price after a run-up. This struggle happens regularly as the stock continues its climb, and is especially strong when the price starts to correct. Sometimes, you decide to sell, only to see it resumes its climb upwards. Other times, you decide to hold, only to see it starts to descend. The jittery mentality of stock investments leads many investors to be short-term investors, influenced more by the stock price than the business fundamentals of the company. It is thus difficult for most investors to achieve multi-baggers in their portfolios, which requires long-term investing in good companies.   

In contrast, for unit trusts, when they reach new highs, you hope that they would go higher, without any worry that they might have peaked and are about to decline. Even when the prices correct, you accept that this is part and parcel of investment and are prepared to hold them through the price correction. This steadfast mentality of unit trust investments allows investors to invest for the long run, thus enabling the magic of compounding to happen. 


There is always a lot of real-time information about stocks, including company announcements, stock analyst recommendations, kopitiam talks and even rumours. Investors readily take in such information, analysing them thoroughly to estimate the impact to the stock price. The vast amount of real-time information allows investors to constantly evaluate their investments and make the necessary buy and sell decisions to improve the performance of their portfolios. 

In contrast, for unit trusts, there is generally not much real-time information, except for economic and industry news that impact both stocks and unit trusts alike. Information about the performance of unit trusts are published by fund managers on a monthly basis (factsheet) and 6-month basis (performance report). Yet, seldom anyone reads these factsheets and reports. I understand there are investors who regularly switch between unit trusts, discarding the laggards in their portfolios in exchange for the top performing funds in the performance tables. For me, I generally stick to the same unit trusts and let them run on auto-pilot, not realising that the underlying investment strategies of the unit trust could have changed, until the performance of the unit trust starts to deviate from expectations. This is the reason why I had stuck with an under-performing unit trust for 2 years, as mentioned in Experience with Lifecycle Unit Trusts


There are both good and bad traits in the investing mentality in stocks and unit trusts. If we are conscious about the bad traits of the respective investing mentality, we can avoid them and improve the performance of our investments.

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  1. I agree with you, hence if one is to invest in stocks with an aim of capital appreciation, a target should be set as a benchmark.

    1. Hi, sorry for not replying earlier. While setting a target would help investors to hold on until the target is achieved, there are stocks that fall back down in price before hitting the target. Hence, I will sometimes use a trailing stop in case the stock falls back down.