A lot of people begin investing by putting their money into unit trusts, stocks, or other investment products, and then wonder why the values keep going up and down. If you’re just starting out, it helps to understand how investments are managed and why their values fluctuate. Knowing this can make investing less stressful and help you make smarter, more confident decisions.
Where Your Money Goes When You Invest
When you invest, your money is used to buy or gain exposure to assets such as shares, bonds, money market instruments, property-related assets, or gold, depending on the investment product you choose. This process is generally similar across most investment types:
- Unit trusts and mutual funds: Your money is pooled and used to buy a diversified portfolio of assets such as stocks, bonds, or money market instruments.
- Stocks and ETFs: Your money is used to purchase shares in companies or baskets of assets.
- Alternative investments (gold, REITs, or digital investment platforms): Your money may be used to purchase physical assets, property, or other income-generating instruments.
Even though the underlying assets differ, the common thread is that your money is actively or passively managed to grow over time, aligned with the fund’s objective.
How Investments Are Managed
Investments are usually managed in one of two ways:
1. Active Management
In active management, professional fund or portfolio managers decide what to buy or sell, using research, market trends, and economic forecasts to guide their choices.
For example, a fund manager might:
- Buy shares in companies that show growth potential
- Reduce exposure to bonds if interest rates are expected to rise
- Rebalance a portfolio to ensure diversification across sectors or regions
Active management aims to outperform market averages but usually comes with higher fees, since it requires more research and active decision-making.
2. Passive Management
Passive management involves tracking a market index or a predefined set of assets, such as an ETF or index fund. The fund manager does not make frequent decisions; instead, the portfolio automatically mirrors the composition of the index.
Passive management tends to have lower fees and relies on the market’s overall growth over time rather than trying to beat it.
Whether an investment is actively or passively managed, it’s carefully monitored for:
- Diversification: Your money is spread across different sectors, types of assets, or regions to help reduce risk.
- Liquidity: Enough cash or easily accessible assets are kept on hand so you can withdraw money when needed.
- Risk management: The investment’s exposure is adjusted depending on market conditions and the fund’s goals.
This kind of professional oversight lets individual investors take part in complex markets without having to make every investment decision themselves.
Why Investment Values Fluctuate
Investment values naturally rise and fall, and understanding that investment values naturally rise and fall is key to long-term planning. Here are the main reasons for fluctuations:
1. Market Supply and Demand
The value of most investments is driven by supply and demand. Simply put, prices change based on how many people want to buy versus sell. For example, if a large number of investors want to buy shares in a popular Malaysian company, demand exceeds supply, pushing the share price up. Conversely, if more investors want to sell, the price may fall.
2. Economic Conditions
Changes in the broader economy can impact investment values. Key factors include inflation, interest rates, GDP growth, and employment levels.
- Interest rates: When Bank Negara Malaysia (BNM) raises interest rates, borrowing costs usually go up. This can reduce consumer spending and affect company profits, which may put pressure on stock prices. For bonds, interest rates and bond values generally move in opposite directions. When interest rates rise, the value of existing bonds may fall because newer bonds may offer higher returns.
- Inflation: Higher inflation reduces the purchasing power of money. Investments may rise or fall depending on whether they can keep pace with inflation.
- Economic growth: A growing Malaysian economy can improve company earnings, boosting stock prices and fund performance.
Investors should monitor these conditions, as they often signal broader market trends rather than individual investment failures.
3. Company and Industry Performance
For investments tied to companies (like shares or equity funds), the company’s performance matters.
- Revenue and profit: Companies that report higher profits may see their stock prices increase, while losses can lead to declines.
- Industry trends: Shifts in industries like technology, palm oil, or real estate in Malaysia can affect the value of investments tied to those sectors.
- Corporate decisions: Mergers, acquisitions, or management changes can influence investor confidence and, in turn, investment values.
Even well-managed funds can be affected if the underlying companies experience challenges or successes.
4. Global Factors
Investments are rarely isolated from the global economy. International events can ripple through markets and affect local investment values.
- Geopolitical events: Tensions between countries can affect investor confidence and trade, influencing stock and bond markets worldwide.
- Currency fluctuations: For investments that include foreign assets, changes in exchange rates can increase or decrease returns in Malaysian Ringgit (MYR).
- Global market trends: A downturn in international markets, like the US or Asia, can influence Malaysian investments, even if local companies are performing well.
5. Market Sentiment
Investor psychology plays a major role in short-term fluctuations. Sometimes prices move not because of fundamentals, but because of fear, optimism, or speculation.
- Herd behaviour: When investors follow the majority in buying or selling en masse, values can swing dramatically.
- News and media: Headlines about economic policies, market outlooks, or company announcements can trigger emotional responses.
- Short-term speculation: Traders looking for quick gains can cause temporary volatility that does not reflect long-term value.
Being aware of market sentiment can help investors avoid making impulsive decisions during temporary dips or spikes in value.
The Role of Investment Diversification
A simple way to handle the ups and downs of investing is diversification. This means spreading your money across different types of assets, industries, and even regions so that a drop in one area doesn’t hit your whole portfolio too hard.
For example, if the stock market dips, other parts of your portfolio like bonds or money market funds might stay steady, helping protect your overall investment. Diversification doesn’t remove risk completely, but it helps keep it in check and aligned with your goals.
Time Horizon and Fluctuations
Your investment time horizon also affects how you experience fluctuations:
- Short-term investments: May feel the swings more because the time to recover from losses is limited.
- Medium-term investments: Some fluctuations are expected, but careful management can reduce risk while still allowing moderate growth.
- Long-term investments: Short-term fluctuations are usually less impactful if you stay invested, as markets tend to recover over time.
Understanding this helps investors stay calm during temporary drops in value instead of making impulsive decisions.
What Malaysian Investors Should Keep in Mind
- No investment is guaranteed. All investments carry some level of risk, including the potential loss of principal.
- Fluctuations are normal. Seeing your investment rise and fall is part of the process, not necessarily a reason to panic.
- Professional management helps, but doesn’t eliminate risk. Managers can help navigate markets, diversify portfolios, and make informed decisions, but they cannot guarantee returns.
- Align your investments with your goals and time horizon. This reduces the impact of volatility on your plans.
- Stay informed. Understand the type of investments you hold, how they are managed, and the factors that affect their value.
Conclusion: Understanding Is Key to Confident Investing
Investing doesn’t have to feel confusing. When you know where your money goes, how it’s managed, and why values go up and down, it’s easier to make confident choices and avoid common mistakes.
Investments are tools for your financial goals, not quick ways to make money. Their values will naturally rise and fall. But with some planning, spreading your money wisely (diversification), and understanding your timeline and comfort with risk, you can ride out the ups and downs and stay on track toward your goals.
Disclaimer:
This article is intended for general educational purposes only and does not constitute investment, financial, tax, or legal advice. The information provided is not a recommendation to buy, sell, or hold any product or service. Readers are encouraged to conduct their own research and, where appropriate, seek independent professional advice before making any financial decision.
References to products on Versa app: Investors are encouraged to review the respective fund’s prospectus and product highlights sheet before investing. There are fees when investing in the product. Investors should be aware of other fees, including management fees and other charges that may apply. For further details on all fees and expenses, refer to the respective fund’s prospectus. Past performance is not indicative of future performance.
The Securities Commission Malaysia has not reviewed this marketing/promotional material and takes no responsibility for the contents of this marketing/promotional material and expressly disclaims all liability, however arising from this marketing/promotional material.