COVID-19 & Your Investment Portfolio

The past couple of weeks have been the most insane period many investors have ever witnessed. The media has done a great job reporting it, there’s a lot of information out there. A lot of us are concerned and we should be concerned.

However, at times like these, we need to examine the facts. The fact is that COVID-19 is an event. It’s not structural, it’s not fundamental. And because it’s an event, we have to look back in history and we know how events like recessions eventually turn out. It’s not an “L” chart – markets don’t get knocked down and stay stagnant. But rather, it is a “U” or a “V”.

What you need, is to be very vigilant about your risk budget – making sure that you’re taking appropriate level of risk always make sense, especially in times of heightened volatility and the volatility we see now is probably going to continue. I believe we may possibly be down as much as 50% from the highs, similar to the financial crisis of 2007-08.

At this point you may question – why don’t I just get out and then get back in? Well, two reasons:

  1. First of all, you can be wrong. (I’ve learnt this the hard way at the beginning of my career.)
  2. Secondly, you would really have a hard time getting back in and the market does whatever it needs to do to prove people wrong.

Stock market volatility is akin to a roller coaster ride, it is dangerous for investors to unstrap themselves suddenly during the ride. Instead, during this period, it is advisable for investors to stay strapped in (invested) and average down the costs of investments in order to benefit when markets go up again.

To this day, I see people who got out in 2009 and never got back in – they missed a complete 10-year bull market. Warren Buffett has said, “The stock market is a device for transferring money from the impatient to the patient.”

And why will the markets go up again?

Historically whenever a recession happens, all of us – billions of human beings worldwide – always put in the collective effort needed to bring up our global economy again. 

In fact, governments are now doing all they can to ride us through this storm. The Federal Reserve has cut interest rates down to 0 – 0.25% to support America’s biggest corporations in meeting liquidity needs. The Bank of England has announced a similar plan. The International Monetary Fund has also pledged to mobilize its USD1 trillion lending capacity to help nations counter the outbreak.

So, don’t get caught up in the short-term emotion and the noise. Take care of yourself. Take care your family. And if you have an investment portfolio with me, rest assured that I’m paying attention to your portfolio during this period. If it needs to be re-balanced (when your equity-to-bond ratio shifts 20% or more), I will contact you promptly for a discussion.

The 7 Deadly Sins of Investing

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There are a few investing errors that many people make — mistakes that are detrimental to their overall investment strategies. Here are the Deadly Sins of Investing that you should avoid…

  1. Not taking your goals into account

Make sure that the investments in your account and their risk levels reflect what you are trying to accomplish. If retirement is 20 years away, and you have your money sitting in cash or bonds, you may not reach your goals. Conversely, if you plan to buy a house in six months, and you have that money invested in the stock market, you might lose your money and not be able to recover the loss in time to buy a home.

  1. Basing your investment strategy on someone else’s risk tolerance

You wouldn’t buy shoes based on someone else’s shoe size, would you? So why would you copy your friend’s portfolio holdings without taking into account your own goals and risk tolerance?

  1. Making too many short-term moves with your long-term money

While buying and selling stock can be fun, it should be done with money that is not intended for your long-term goals. If you are really set on short-term buying and selling, open an account that is just for “play money” and leave the rest of your “serious money” in well diversified, long-term investments.

  1. Having too much money in one investment

If your income depends on your salary from a company, make sure your investments don’t also depend too heavily on the same company. A good rule of thumb is to have no more than 20% of your investments in any one company’s stock — and ideally closer to 10% or less.

  1. Not knowing what you’re actually invested in

You don’t need to know the exact stocks in the index or mutual fund that you have, but you should have a general idea of what is in your portfolio. If you use a financial advisor to manage assets, and you have no idea what they’re doing with your money, ask him or her to break it down for you in simple terms or, graphs and charts.

  1. Basing investment decisions on the news

You can’t predict what’s going to happen in the market based on what you read in the news. It can’t tell you that the stock market is really going to tank tomorrow, and that you should sell everything and go to cash. Research shows that having a well-diversified portfolio that you leave alone is a better strategy than trying to time the market.

  1. Not saving enough

This is crucial. If you aren’t saving enough, it is going to be really hard to get to where you need to be.

For example, say you make $60,000 a year. If you save 10%, or $500 a month, for the next 30 years, with an average 9% return, you’d have around $900,000 to work with come retirement. If you saved 15% and made the same return for the same time period, you’d end up with around $1.34 million. That’s a big difference!

So make a plan to bump up your savings. You don’t have to go from saving 5% of your income to 15% instantly. You can set up automatic increases of 1% every 6 months until you get there.

What Is A “Deductible” or “Excess”?

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A deductible or excess is something you have on your policy when you have either, Hospital & Surgical coverage or Motor coverage. And its a dollar amount – it could be $500, $1000 or $3,000.

Quite simply put, the deductible is what you are responsible for, before the insurance company pays out anything on your behalf to fix your vehicle or seek medical treatment.

The lower your deductible, the higher your premium is going to be. Conversely, the higher the deductible you have, the lower your premium is going to be. 

Reason is this – you, the driver or the patient, are taking on more risk with a higher deductible. When you have a lower deductible, you are putting more risk on the insurance company. As a result, your premiums are effected in this way.

Why We Shouldn’t be Bothered with Fear-Mongers

bad-economic-headlinesThere is much fearmongering in the different media which we are exposed to everyday. Take a look at the money section of any website, newspaper or magazine and you will find stories warning you about the Chinese economy, the Federal Reserve’s interest rate policies, the impact of the U.S. presidential election, global oil markets and market volatility.

But none of these stories—while interesting to read and think about—is worthy of spending too much of your brainpower.

Why? Because these big global factors are beyond your control and will be resolved without the slightest help from you.

You cannot control how the S&P 500 will perform or whether the European region will restart pumping profits. History has shown us that there are times when the U.S. markets outperform foreign markets and when the opposite is true. This is also true when it comes to growth stocks, value stocks, small and large companies. There is no way to successfully or consistently predict what will happen next.

So why do we bother?

Psychologists call it the “illusion of control“. Our intellectual minds tell us we can figure it out, even when—trust me—we can’t!

Putting your precious time into what you CAN control is really the only sensible way to go.

Here are six actions where focusing your energies in will reap you rewards:

  1. Develop rational goals built on your values. Let’s face it, without a real plan, you have decided to drift and hope for the best.
  1. Consider possible life transitions and how they might impact your actions. Transitions rarely give notice, so considering the impact of possibilities allows you to put solutions in place.
  1. Build agreement with other stakeholders (your spouse, a partner) on strategies to reach your goals. With all parties working toward the same goals, you’re more likely to be working for each other and get things accomplished.
  1. Invest time and resources to work with professionals who can help move your goals forward. Whether it’s creating a retirement plan or a proper risk management plan, you’ll benefit from working with experienced experts.
  1. Know your financial numbers and assign priorities for savings, accumulation and spending. Consider a rating system from 1 to 5, where you assign a point system to where your paycheck and resources go.
  1. Understand more about the “whys” of your life. Our beliefs don’t just arrive in our thinking like a magician’s trick. On the contrary, your money beliefs—your mindset—come from your money history over the course of your life. And it’s that mindset that determines what you consider the norm. Taking the time to understand whether your beliefs support your values is always time well spent.

These actions are very specific to you—you make the choices, decisions and actions that will support the outcomes you desire.

Devoting time to the economic issues of China or whether equity markets will rise or fall is beyond your ability to control and will only divert your attention from what really impacts your life.

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.