Brexit: What Should I Do with My Portfolio?

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Since the UK voted to leave the European Union on 23 June, global markets and currencies have reacted negatively to the uncertainty, with a significant falls across all major equity markets. The British pound fell to a three-decade low against the US dollar – its biggest one-day fall on record. Markets are likely to remain volatile until it becomes clear what Brexit will mean for the UK and the rest of the EU.

What does all this mean for your portfolio? Clearly, no one knows for sure. But no matter how markets react in the next few months, you should follow this advice: Don’t let fear of the unknown – or your emotions  make your investing decisions for you.

Why we let emotions drive our investments. We tend to be controlled by our emotions regardless of circumstances. We become overly excited and ready to invest at the worst possible times. And when it comes to deciding how to invest, we often rely on poor advice, a hunch or worse – speculation we heard on the news or the radio. On the other hand, we sometimes let our fears and emotions keep us out of the game altogether.

How to take the emotion out of your investment strategy. Whether you’re worried about how global events might affect your portfolio or just fearful in general, the best investment strategy is one built for the long term. In other words, once you map out a lifelong investing strategy with your financial advisor, you should have confidence in that strategy regardless of the blips you’ll endure along the way.

While it can be fun to “play” the markets, investors should refrain from playing or risking too much on a handful of bets. It is much more prudent to keep your investments boring by broadly diversifying across big and small companies, domestic and foreign companies, and between stocks and bonds.

If your portfolio is properly diversified, stay cool and await developments.

At the end of the day, investing is a game of consistency – one where the investors who take the longest approach usually win. And when it comes to emotional investing – whether out of fear or confidence – the only way to win is not to play.

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3 Obvious Ways to Build Wealth

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You don’t have to be a rocket scientist to build wealth. The wealthy understand that while being smart can certainly help you earn money, that doesn’t necessarily mean you’ll build wealth with your earnings.

Likewise, being famous doesn’t necessarily mean you’ll be able to build wealth. Sure, it can help, but there are countless stories of those who earn a ton of money only to watch it disappear seemingly overnight.

So, what are the secrets to building wealth? And, once you build wealth, how do you keep it? The truth is that the “secrets” to building wealth really aren’t secrets at all.

They are simply common sense behaviors that, when practiced with purpose and over a long period of time, are likely to result in a pool full of cash. Let’s take a look at some of these behaviors.

1. Say “no” to debt.

Saying “no” to debt is truly a behavior at the heart of so many wealthy individuals. Why? It has something to do with interest rates.

Student loans, credit cards, personal loans, car loans, and many other types of debt all have interest rates. Some of these rates are higher than others, but one thing is guaranteed: you will pay a lot more money than necessary if you make minimum payments on a loan, and the interest rates will slowly drain any wealth you do have.

Unfortunately, that’s where many people get stuck. They are so used to debt, they think it’s normal and shrug it off as a way of life. Sure, it might be a way of life for some people, but it doesn’t have to be a way of life for you.

The way to get out of debt is to focus your energy on saying “no” to more debt. Make money fast, you might choose to attack your debt even faster than you might initially think possible.

2. Practice discipline and invest for the long-term.

It can be all too easy to get caught up in the hype of this stock or that stock. The media continually reports this or that “new hot stock.” Don’t fall for the trap. It is always better to diversify your investments and not get carried away by the allure of quick wealth.

The number one behavior that inevitably leads to more wealth is staying disciplined. Emotions are very real and very dangerous, and it’s hard to be objective about your money, especially when people around us are talking about doom and gloom as it relates to the economy. Most of your money is invested for the long-term – do not make short-term decisions about your long-term money.

The best way to get market-like returns is not to meddle with your investment mix. If you do, the probability of achieving your financial goals will most likely go down. Predicting where the stock market is headed and making decisions off the prediction is a fool’s game. It requires a crystal ball – and no one has a crystal ball. Stay disciplined.

3. Stay frugal.

It’s human nature for any increase in income to be immediately swallowed by lifestyle improvements, a phenomenon known as ‘lifestyle creep’. Avoid lifestyle creep and build guaranteed increases into your savings plan by changing the way you think about annual raises. The next time you are presented with a raise, challenge yourself to save half of the increase, and ‘creep’ with the other half. This strategy will allow you to pay yourself first, enjoy the fruits of your labor, and build wealth over time.

It’s better to stay frugal, build wealth, and have a firm financial position rather than squander your money on things that you really don’t need – especially over the long-term.

The Truth About Diversification

Most investment advisors including myself, believe that building and maintaining a diversified portfolio is the most prudent way to help clients invest their money.

Not only do numerous studies of asset class returns back this up, but no matter how smart and experienced the advisor is, it’s near impossible to predict with consistency which asset class (e.g. stocks, bonds and cash) will outperform in any given time frame.

Studies on long-term investing have shown that more than 90% of the variations in a portfolio’s return can be attributed to the asset allocation decision.

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That isn’t to say that it doesn’t take skill and expertise to build a diversified portfolio – it does – there are many metrics that come into play such as growth prospects, valuation metrics, and global economic trends.

The truth about diversification is that a truly diversified portfolio will not provide the return of the best performing asset class over a given time period, nor will it match the return of the worst performing asset class. The return will be somewhere in between. Which is exactly the point – the highs are less high but the lows are less low making it more likely that an investor will not panic and change strategy at exactly the wrong time. This applies to both professional and individual investors.

The truth about diversification is that it isn’t a strategy designed to predict which asset class will outperform each year, but rather to gain from the outperformance in some asset classes while avoiding the lows in others and in the end producing solid average returns. Liken it to the Tortoise and the Hare story…as the Tortoise said: “slow and steady wins the race.”

How is “Safe” Actually Dangerous? And Vice Versa…

Some people may feel that investing in equity markets is dangerous. This is true when you do it for the short term and focus on a single country market. However, if you have a globally diversified portfolio and are able to invest for the long term, you will be able to enhance your returns with a low level of risk.

Here’s a simple question – Do you think the world’s economy will be larger 20 years from now than it is today? More likely than not, the answer is yes. The world’s population will be larger in 20 years, which will lead to more people using/wanting goods and services provided by companies. With an increase in overall demand, companies will be producing more and generating more profits. With greater profits, stock prices and stock markets will rise. The MSCI World stock market index shown below reflects how our economy grows with time.

Credit: Wikipedia
Credit: Wikipedia

Population growth is not the only driver. Human beings are also always demanding a better standard of living. For example in Singapore, we “upgrade” from a HDB flat to a condominium; we drive a small car and “upgrade” to a larger one. As markets like China, Thailand and even Vietnam open up and grow economically, their people will have higher incomes. They will start with demanding basic consumer goods and as their incomes grow, they will want to buy more and better products.

You may ask – If I put all my money in Thailand today, can I expect a definite profit in 20 years’ time? That is harder to predict although there are many good reasons to believe that Thailand will continue to grow. Many countries have faced extended periods of decline before (e.g. Japan in the 1990s). This is why you need to have a well-diversified portfolio across different regions and countries around the globe.

Our annual inflation rates in Singapore for the past 3 years have been fluctuating from 1.5% to 5.4%. This is precisely why it is risky to leave your money in “safer” instruments such as fixed deposits (often yields below 2% annually), because it might be worth less than the amount you would have to pay for your daily needs over time.

Everyone should know the difference between gambling and investing. A trip to casino can be fun but approach stock market in the same way and you will find yourself in trouble. Like a turbulent flight, volatility is uncomfortable and it is easy for anyone to bail out at the first wobble. However, if you are currently in your 20s or 30s, youth is the single huge advantage for you to ride out the ups and downs in the long term. Successful investing requires one to embrace volatility, not fear it.

But if you keep your money in fixed deposits or other “safe” instruments, you do not know if the returns will keep pace with inflation over the long term and that will be a real danger.