A Trump Presidency: Stay True to This Old Adage

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American voters have chosen to bring big change to the White House. But resist doing the same with your long-term investments, they will be fine.

Many investors worldwide began to sell late Tuesday (November 8th U.S. time) as Donald Trump looked set to win the presidency. Stock markets tanked from Asia to Europe, and a similarly steep drop seemed likely when U.S. markets opened.

On the contrary, stocks proved resilient Wednesday morning (November 9th U.S. time), benefiting those who sat on their hands instead of selling immediately.

Elections can mean big, fast short-term swings for stocks and other investments. And emotions tend to run high in times like this, so it’s understandable if you find it hard to stay calm and leave your portfolio alone.

But we have to remember, history has shown that volatility after surprise events always die down. There is no logic or reason to why markets go down after somebody is elected as president. Most of this is due to speculative or irrational investing.

Long-term investments are meant to be held for many years to your retirement and longer. Big swings in the interim are normal and should be expected. Volatility is the price that investors pay in exchange for the higher returns that stocks have historically provided over bonds and other investments.

So rather than changing around your portfolio, focus on your career, hobbies and family, and avoid being overwhelmed with information. This is just one of the many events that will ride out itself.

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.

Money Advice that Don’t Grow Old

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Many recommendations I’ve made are as applicable today as they will be in future, and they bear repeating. Here are some of the best financial moves for you to consider:

1. Understanding and managing your thoughts, feelings, and beliefs about money is as important as understanding how money works. Our brains are programmed to make poor financial decisions. Exploring your money history and learning to identify your unconscious beliefs about money can change your financial behaviours forever. It is important to gain control of your finances and become comfortable using money as the valuable tool it is.

2. Building an emergency reserve to cover living expenses for three to months if you lose your job or experience a business slump is a necessity. If you are retired, having one to three years of cash available to cover living expenses can help you avoid taking money out of investments when their value has declined.

3. Retirement will happen, sooner than you think. Start early — as in the day after university graduation — and be consistent in investing at least 20 percent of your paycheck.

4. Learn to appreciate the word “budget”. Creating a way to track and manage income and expenses is an essential skill to thrive financially. Numerous free or inexpensive tools, like Mint.com and Expensify, can help.

5. Run from consumer debt. Personally, I use credit cards for almost every purchase for convenience and cash back rewards. However, it’s of vital importance to pay the card off every month, without fail.

6. A house is a home, not an investment. Don’t buy more home than you can afford, and don’t buy without a down payment.

7. No asset goes up forever. Price declines, even crashes, are part and parcel of investing. It’s essential to understand that the value of your portfolio will fluctuate. Be prepared to ride out downturns. Selling in a down market is a big mistake that will cost you dearly.

8. The fundamental strategy for managing market ups and downs is asset class diversification. This doesn’t mean having money in different banks, with different brokers, or with different fund managers. It’s about having a good balance of mutual/exchange-traded funds that invest in SG and International stocks, SG and International government bonds, real estate investment trusts, commodities and junk bonds.

9. There are no free investments. Pay attention to the fees associated with any investment, as well as how the advisor recommending any investment is compensated.

10. Pay yourself first. The most successful savers and investors I know simply take all their fixed expenses, taxes, and retirement plan contributions off their income earned, then spend the rest. This means learning to live on 30% to 50% of how much you earn. Certainly, it isn’t easy, but one of the most valuable money habits to cultivate is to save something for the future, instead of spending everything that comes in.

You may have likely heard of these pieces of advice before. There’s a reason for that: it works, and never goes out of style.

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.”

4 Simple Ways to Invest for The Long Term

Most people do not want investing to take up too much of their time and effort. This is due to us having many other things in life to focus on, such as our careers, families, housing etc. And so, trading, timing the market and stock picking is not suitable for 90% of retail investors.

So how can you grow your money without taking up too much time and effort? Here are 4 simple ways to do so and if you stick to this, there will be a high chance for you to retire comfortably after 20 to 30 years.

1) Start Early & Stay Invested

Inexperienced investors looking to grow their money without active monitoring can first look to compound interest to pursue gains over time. The key ingredients here are starting early, and staying invested. By doing so, you will have more time to grow your money. The table below shows how even saving and investing a small amount every month when you are young benefits you, simply because of the power of compound interest.

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2) Diversify Your Portfolio Among Various Assets and Geographical Regions

Market timing and stock picking are not suitable strategies when you want to invest passively. What you can do is to construct a well-diversified portfolio.

Diversification involves another important concept – Asset Allocation. This means mixing you portfolio among various asset classes to spread your risk. The most common asset classes for retail investors are: equities, bonds and cash. A lack of diversity means less liquidity in times of need.

A simple two-asset portfolio, comprising bonds and equities, helps to enhance returns and reduce risk. The proportion of a person’s investment portfolio to be allocated in bonds should be equal to the person’s age (or age minus 10 if he/she is more risk tolerant).

The reason behind this formula is because as we age, we are closer to retirement and should safeguard out nest egg by having less exposure to risky assets such as equities. For young people who mostly have higher risk tolerance, they can allocate more of their investments in equities which can potentially yield higher returns. I have written a separate article on why we should invest in equities if we have a long investment horizon to prepare for retirement.

Besides the classes of assets, having a basket of stocks spread across different geographical regions can reduce your long-term portfolio risk.

Interestingly, we should note that much research have shown that more than 90% of investment returns are determined by asset allocation. Only 10% is influenced by stock picking and market timing. The pie chart below illustrates the recommended asset allocation for a person with a moderately aggressive risk profile.

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3) Invest Regularly – Effect of Dollar Cost Averaging

Every stock investor may fall into the trap of emotional or irrational investing. This stems from our 2 strongest emotional forces – fear and greed, which leads to failure to grow our money.

1. Fear – When the price of our stock holdings fall, a common response stemming from fear is to sell our shares and cut our losses. Subsequently, when the stock price rises, we may be afraid to invest in the stock again. If the stock price continues to rise, we may enter the market too late to see any substantial return.

2. Greed – When we see the price of a stock going up, greed drives us to invest our money in it, with irrational optimism that the price will continue to rise. Quite often, the stock price drops instead.

Emotional/irrational investing often yields little returns for retail investors. Instead of speculating on a stock price, we should do quite the exact opposite – We should set aside a fixed amount of money to invest regularly, regardless of how the stock market is performing. The graph below illustrates what happens if we invest a fixed sum of money on a monthly basis for a certain stock, X:

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This enables us to take advantage of Dollar Cost Averaging, a passive mechanism which helps you to buy less of an investment when the price rises, and more when the price falls. This lowers your overall purchase price for investments in the long term.

4) Review and Rebalance Your Portfolio

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Given the dynamic global economy, investors should review their investment portfolio regularly and change the mix of assets, a process called rebalancing. Rebalancing safeguards your portfolio from being exposed to undesirable risks and maintains your original desired asset allocation. This would ensure you are on track to meeting your financial goals.