Before the invention of the electric chain saw and Environmental, Social and Governance (ESG) considerations gained sustainable investing prominence, a long narrow bladed saw that cuts both ways called a Whipsaw was used for logging. Rather aptly, the Whipsaw was also dubbed the “misery whip” because a day of using a saw that cut both ways would result in muscle-aching misery, a misery which unfortunately a number of MPF members are about to experience. While not muscle-aching, the financial damage can be equally painful if the latest fund flow and investment return data is anything to go by.
The investment industry can be jargon filled. Hopeful “punters” have willed the price of meme stocks “to the moon”, fallen for “value traps”, seen relief rallies turned out to be a “dead cat bounce”, and fallen prey to the “whipsaw effect” – a not too uncommon phenomena which destroys, rather than creates, long term wealth but one with good discipline can also be easily avoided.
So, what is the “whipsaw affect”?
An investment “whipsaw affect” is when asset prices quickly change and move in the opposite direction. “Whipsaw” can occur in both rising and falling markets. Rewarding if you get it right but doubly damaging if you get it wrong. Like the long narrow bladed logging saw it was named after, it cuts both ways.
The “whipsaw affect” is often mentioned when discussing individual securities but the causes, affects and the potential destruction of wealth is applicable for all asset classes.
In Mr MPF’s experience, investors who fail to identify one’s long-term retirement and savings needs and to adhere to a disciplined investment strategy are most vulnerable to the “whipsaw affect” because rather than make investment decisions based on needs, decisions are emotion based whether that’s greed, hope and/or the fear of missing out (FOMO). In the first five months of 2024 we are seeing a “whipsaw affect” between US, and Hong Kong and China equities play out in the MPF system in a way which could set back retirement plans for many MPF members and for many years to come.
So, what has happened so far in 2024?
Last year US shares produced MPF’s best returns. According to MPF Ratings, the average MPF US equity fund returned 24.42% (as measured by MPF Ratings’ MPFR Index – Equity Fund (US)). Conversely, Hong Kong and China equities produced MPF’s most disappointing return, falling -13.37% (as measured by the MPFR Index – Equity Fund (HK and China)), a 37.79% difference in performance. Doubtless Hong Kong and China equity investors would have been equally disappointed with their loss and frustrated by the missed opportunity of having not been invested in the US equity market. On the other hand, dispassionate, disciplined investors may have seen an opportunity to buy Hong Kong and China equities at a cheaper price. What we have seen so far in 2024 is a classic “whipsaw affect”.
In what appears to be a classic case of FOMO behaviour MPF members moved a record $9.2bn into US equities in the first three months of 2024 with most of that money coming from money being switched from Hong Kong and China shares. In other words, selling Hong Kong and China shares at its low and buying US equities at its high in the hope the US market would continue to rise while speculating local shares to continue to underperform. What transpired in has been the opposite. Hong Kong and China shares were the best performing MPF asset class in April while US shares were the worst. The performance difference in one month alone was 9.96% in a classic buy high/sell low whipsaw. Do this a few times and your hard-earned retirement nest egg will be scrambled quickly.
Mr MPF regularly sees MPF members and general investors buy high and sell low. Selling low locks in losses and buying high increases investment risks. Neither are sensible investment traits. MPF members should seek independent professional investment advice to ensure developing the good investment habits of setting long term investment goals, diversification and disciplined rebalancing otherwise you find yourself whipsawed and that would be a very painful experience.
This article was written by MPF Ratings, Hong Kong’s independent provider of MPF research, views and education.
The information contained in this blog is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
