Perennial Loss Fund: Stay or Sell?

The investment landscape, particularly when it comes to equity funds, has shifted dramatically in recent years, leaving many investors grappling with the aftermath of disappointing returnsThe world of equity investments, once synonymous with growth and long-term prosperity, has become a source of frustration and disillusionment for manyThe data speaks for itself: since January 2021, out of 507 standard stock funds, only 37 achieved positive returns, equating to just 7.3%. The overwhelming majority of these funds posted substantial losses, with average returns hovering around -31.96% and median returns falling to a disheartening -35.37%. This trend is not isolated to stock funds alone—hybrid and flexible allocation funds also fared poorly, with positive return rates barely surpassing 3% and 20%, respectivelyThese figures serve as a stark reminder of the risks inherent in equity funds and have led many to question their place in a well-rounded investment strategy.

The psychological impact on investors cannot be overstatedThe constant fluctuation and volatility of the equity market have left many feeling vulnerableIn a bid to mitigate their losses, countless investors have been quick to flee from underperforming funds, often at the first sign of recoveryThis has exacerbated market declines, creating a self-fulfilling cycle of instabilityInvestors who once believed that equity funds were a cornerstone of any diversified portfolio are now grappling with the harsh reality that these investments may not be as safe as they once seemed.

In the current climate, the rush for short-term gains has eclipsed the traditional emphasis on long-term growthFund managers, under increasing pressure to meet performance benchmarks, have concentrated their portfolios in sectors that are trending at the moment—such as alcohol, renewable energy, pharmaceuticals, and semiconductors—leaving little room for risk management or diversificationThis focus on sectors that offer the potential for immediate returns has left many funds vulnerable when these industries inevitably face headwinds

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With managers reluctant to divest from underperforming assets for fear of realizing significant losses, the situation is compounded furtherAs a result, equity funds are increasingly becoming a double-edged sword for investors, offering both the potential for high returns and the risk of significant loss.

This bleak scenario prompts a critical question: Is it still wise to allocate funds into equity investments? The reality is, many fund companies have shifted their focus to short-term performance metrics, pushing them to make decisions that prioritize immediate results rather than long-term stabilityThe impact of this shift is profound, leaving portfolios skewed toward sectors that may offer little growth in the long runFor investors, the risk becomes apparent: when the market turns south, their funds may be exposed to greater losses than they had anticipatedAs the cycle of losses continues, it becomes increasingly difficult for investors to place their trust in equity funds.

Despite the disheartening outlook for equity investments in the short term, it is important to recognize the enduring value of diversification in any investment strategyThe diversification principle, which emphasizes spreading investments across various asset classes to mitigate risk, remains a key strategy for safeguarding a portfolioThis is particularly relevant for investors who are navigating a period of poor returns in equity marketsFor example, consider an individual with 1 million yuan in savingsIf this person had placed their savings in a traditional savings account five years ago, they would have earned an interest rate of 4.18%, yielding an annual income of 41,800 yuanHowever, in the present day, interest rates have dropped to 2.4%, and the same savings would only generate 24,000 yuan per year—a decrease of over 40%. To maintain the same level of income, the individual would need to increase their principal to 1.74 million yuanIn light of this reality, investors may find that taking on some level of risk through equity funds is necessary to achieve reasonable returns in the current environment.

This shift toward riskier assets has been evident in the growing popularity of bonds in recent years, driven largely by a drop in interest rates

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As bond prices have risen in response to declining rates, many investors have been drawn to bonds as a safer alternative to equitiesHowever, this trend carries its own set of risksThe reliance on bond price appreciation is unsustainable in the long term, and if bond prices cease to rise, the returns on these instruments will inevitably fall as wellThis presents a challenge for investors who have shifted their portfolios toward bonds in search of safer returns, as they may face diminishing returns in the future.

With fixed-income products, such as government bonds and bank investments, offering lower yields, the need for a recalibration of investment strategies is more urgent than everTo maintain reasonable returns, many investors are increasingly looking to reallocate a portion of their portfolios toward equity fundsThis decision, while fraught with challenges, is supported by the dataWhile equity funds have experienced significant struggles in recent months, their performance tends to stabilize over longer periodsOver the past decade, standard equity and hybrid funds have produced median returns of 104.9%, 82.78%, and 75.71%, translating to annualized returns of 7.44%, 6.22%, and 5.8%, respectivelyIn contrast, projections for fixed-income investments suggest an annualized return of just 2.5% over the next decadeAs a result, equity funds are once again attracting interest, with many investors expecting annual returns in the range of 6% to 7%.

For those aiming to meet a 4% annualized return target, a balanced approach may be the most prudent strategyFor instance, an investor could allocate 43% of their portfolio to equity funds and the remaining 57% to fixed-income products, or alternatively, invest 34% in equities and 66% in fixed incomeThis approach allows investors to benefit from the growth potential of equities while still maintaining a degree of safety through fixed-income assetsThe goal is to strike a balance that allows for growth while mitigating risk, a strategy that may prove particularly valuable as the market conditions shift.

Looking ahead, the current economic landscape presents a unique opportunity for long-term investors