Protecting your investments against the storms

Our journey towards financial freedom will be fraught with storms and showers that threaten to challenge each step that we take towards our goal.

Preserving capital amidst the financial storms
Investments is about growing your money at a reasonable rate of return for the risk you take. I am still reading "The Intelligent Investor" by Benjamin Graham and am struck but his thoughts on the level of risk that one should take. By Graham's reckoning, the amount of risk we take should be commensurate to the amount of time and effort that we can put into monitoring, selecting and managing your investments.

Many of us (and I include myself) are unsophisticated investors and need to be careful about market timing. No other time does this ring true that our recent stock markets in the Singapore Exchange (SGX) and the NY Stock Exchange (NYSE). Recession fears as well as fear of contagion by the sub-prime write-downs on some of the largest US banks on Wall Street have affected the US economy and the investor is starting to get very nervy about the stock market. This has seen my portfolio move towards the red in terms of unrealised losses and I have had to take some unpopular measures of cutting losses and preserving capital.

If you have holding power, i.e. can hold on to your investments for next 10-20 years without liquidating them, you will have a high chance of riding out these recent storms unscathed. However, if you need some cash for unexpected big ticket item, then our SGX may not yield much as many of the blue chips even are languishing in anticipation of a US recession despite Singapore Inc's engine still churning strongly.

Where do we find safe havens?
The closest thing to safety for me is treasury bills and Maybank iSavvy savings. Treasury bills are now yielding pretty low returns of around 1.7%+. Time deposits are not that much higher for lock-in tenures of easily 6 mths and above and for large denominations of $25,000 and above. Maybank's iSavvy still gives a return of 1.68% on balances exceeding $5,000 and is still decent considering the liquidity it offers.

I have pared down my asset allocation in equity to 70% plus from an earlier 90% plus. I have eaten realised losses on two speculative punts that went sour. Enough punting for 2008! It's time to relook at fundamentals by being focussed at quality stocks without trying to beat the market. 2007 was good to me as the market was generally bullish for the 1st 2.5 quarters. The latter part of the calendar year was more volatile.

What now, brown cow?
Given my propensity to punt on the counters that give me a negative return, i.e. make me lose money, I will use this opportunity to stop punting and focus on finishing "The Intelligent Investor" by Benjamin Graham. One of the lessons I learnt during this period is that the market is there for us. So long as I continue to live within my means, save and invest (safely now in treasury bills and iSavvy), my journey towards financial freedom still goes on albeit at a slightly slower pace. :-)

Part of winning the game of financial freedom is to preserve capital and to be patient. Invest safely and remember that it's not wrong to be defensive and let your money grow at 1.8% in treasury bills while reviewing your investment strategy.

Be well and prosper!