Turmoil in Perspective
Just a few weeks ago, there were concerns that equity market indices were defying gravity despite the outbreak of the virus. Investors were clamouring to get on board the gravy train and were looking for suitable entry levels. The ongoing sell down has flipped the narrative. Instead of piling risk assets at current levels, investors are running for the exits, believing the end is near.
Yet, looking back at the past ten years, the COVID-19 virus outbreak is just the latest in a long line of risk events that has rocked the markets. Indeed, in just five years, we’ve lived through the US-China trade war, Brexit uncertainty, US-Iran conflict and many more. The inconvenient fact is there will ALWAYS be uncertainty around us. It is a function of life. It is how we deal with uncertainty that will be crucial in determining our overall success. This is what differentiates a successful investor from an average one.
We should approach the current market situation with this perspective in mind. Remember, it is just another risk event that we need to get through. It may sound familiar to many, but it is precisely because it works that it has been often repeated.
1. What are you trying to achieve with investing?
The answer to this should not just be to make money. Having this question etched at the back of your mind is crucial in shaping your response to such risks in the market.
If my main objective is to grow my wealth to fund a comfortable retirement life, this should immediately set the context by which I view my investments. If I have a 20-year time horizon until retirement, the current market blip would present the perfect entry opportunity for an investor looking to accumulate shares of a business he or she believes will continue to do well for the foreseeable future.
In contrast, the current market noise will not be viewed so favourably by a day trader with maxed out leverage looking to book his or her profits by the end of the month.
There you have it – the same market situation, but two very different perspectives. So, it is important to understand your investment objectives and to keep repeating it to yourself.
2. Time as an ally
The greatest ally of a typical retail investor is time. If you start investing regularly and as early as possible, the odds of your success will be that much higher versus someone who comes in later, even with a larger investment amount.
For example, the earlier you start crediting money into your CPF account which pays a basic interest of 2.5% per annum, the more you stand to benefit from the interest that is compounded annually.
Compare an individual who contributes $10,000 to his or her CPF account yearly from the age of 25, with another who starts a decade later but contributes $15,000. By the age of 65, both individuals would have accumulated about $700,000. While there is some convergence in terms of the final amount, the second individual would have to save $5000 more each year just to reach $700,000, essentially sacrificing future consumption for current gratification.
Indeed, the CPF account has become fertile ground for “hacking,” in which Singaporeans find different ways to maximise their retirement savings using CPF’s almost risk-free rate of return. Some purport that you could potentially become a millionaire just by contributing to your CPF account. These widely popular “hacks” are a clear reflection of how time and a decent growth rate will do wonders to grow your retirement kitty. The lesson is simple: Start early and save regularly.
A key hindrance to retirement bliss is the very human need for immediate gratification. We typically want to see and hear the monies coming in. We over-leverage and get all worked up when the profit and loss statement start showing red. Basing our investment decisions on greed does not work well when it comes to building up our retirement portfolio.
If you are an investment sage like Warren Buffet, concentrating all your investment bets may work out. Unfortunately, many of us are not and will not be as prolific. In this case, it may be better for us to diversify our holdings.
The benefit of diversification is simple. The whole idea behind this strategy is to spread the risk - should one asset fall in value, the value of another may rise, hence offsetting some of the losses. Hence, the traditional equity-bond split was built on the premise that should your equity holdings fall in value because of the market turmoil, your bond holdings should inversely rise in value as bonds are typically in high demand during such risk-off episodes. It’s true that investors may not be able to fully participate in the entire equity market upside if half of their holdings are in equities and the other half are in bonds. But that is the trade-off you make to reduce the overall risk of your portfolio in case equities take a turn for the worst.
As an example, if you have $100 to invest every month, you may consider investing in a multi asset fund. A multi-asset fund is usually made up of different asset classes like equities, bond, commodities and so on with the express purpose of providing income distribution or capital gains. It offers ready access to a diversified portfolio on the cheap, without the need to construct one from scratch, which might be prohibitively costly both in terms of finances and effort.
Diversification will be especially useful during episodes of market turmoil, as you will have more mental acuity compared to your overleveraged friend who happens to have parked all his bets on a single asset class. You will be able to react better and often with less regret.
Using the Great Financial Crisis as an example, the over-leveraged and heavily indebted investors are typically the first to suffer, as they would have to respond to the crisis head-on, rather than work around it.
I believe these 3 considerations are useful starting points for any investor. While there is no guarantee of success, they provide investors the space to think through their objectives and make better decisions, rather than to react to situations hastily.
Finally, even as we get flooded with bad news about the virus situation, there has never been a time in human history when information has been so readily available and accessible. Sure, it can get pretty depressing to read about death statistics through the internet, but the same medium can also be used to find out more about your investments, to review them regularly and to think about where the next opportunity might arise.