Defending yourself against the bearish hordes

Are the bears winning?
If you do not know by now, the bearish sentiment appears to be overwhelming all the bullish news about the booming Singapore economy and property market. As far back as a couple of weeks back, bullish sentiment was strong with people talking about how the Integrated Resorts, Formula One night races to be held in Singapore were going to boost tourism, the economy and propel Singapore into the "Golden Age".


Stock markets can go up and go down, so what can you do to defend yourself in this type of market?

Let's re-examine the fundamental principles of investing:

1) Invest within your means
Investments should be done with savings that is not needed for urgent expenses such as the rent, living expenses etc. Invest only what investible savings you have after putting aside three to six months of income as a buffer for unexpected emergency expenses. To invest by borrowing is a very risky strategy as you are risking capital you do not have. Use your own capital unless you are very sure of what you are doing with other people's money.

2) Diversify
The stock market can go up and it can go down. The price of the shares you bought can go up and can go down. Hence, never put 100% of your investible savings into stocks and shares unless you have backup plan, for example, rich parents to bail you out. If not, do set aside some investments into low yielding but low risk e.g. fixed deposits, high yielding savings accounts or treasury bills. Not putting all your eggs in one basket gives you a psychological boost as you know you have some protection against major market moves.

3) Understand your investments
You have bought into company ABC. Do you really understand why you are holding the shares of this company? Peter Lynch shares in his book, "One Up on Wall Street" that you should be able to articulate three reasons why you are holding the shares of any company and to do so in layman terms that even a child could understand. Hence, you may want to analyse your share portfolio to see if it can meet this test. In general, while the current bearish sentiment scares away a lot of newbie investors, experienced investors who have holding power and are diversified know it is not the end of the world. If the company you are investing is fundamentally sound, has a good business and is showing profitability and decent dividend yields even at current depressed prices, you can hold out for the dividends.

Shares of companies which have strong fundamentals will tend to outperform fixed deposits or money market. Know your investments and know yourself.

4) Understand your emotions
Fear and greed is in everyone of you. I struggle with it whenever I see the market moving. The trick is to be able to practice the principles and to know when and why you want to enter or exit the market. In hindsight, no-one can fully time the market but knowing your reasons and being rational in the sea of rationality will help you overcome decisions made under panic and stress from needing to cash out because you do not have holding power.

Be well and prosper.