When the market drops, you want to cry...

The market can go up and it can go down
The risks of investing in stocks and shares (equities) is that the price of your individual stock and consequently, your portfolio or basket of equities you own can go up and can go down!

Nobody questions why the stock portfolio goes up. But when the stock portfolio goes down, everybody wants to know WHY!!!

Unlike robots who have no feelings or emotions, you are a human being filled with flesh and blood. Emotions run through your heart when you perceive positive or negative news. When you see the Straits Times Index (STI) go up and your portfolio is full of index stocks, you are as happy as a lark! But when you see the STI go down dragging your portfolio from a +8% return to a -2% return, you curse and swear at high global oil prices, US sub-prime problem and Adam Cheng for his TV series being aired as all these appear to have caused your portfolio to melt in value.


I want to cry, too
The recent correction has also hit me (again!). For those of you who have been reading this blog, you will know by now that I am as expert as a chimpanze in picking stock winners. Most of my winners were due to the overall good economic growth from the low points in 2003 due to SARS up to the recent dizzying GDP 3rd quarter growth of 4.3%. The amount of liquidity and investments that Singapore has attracted in this upturn has helped many index stocks do well because their underlying business in oil and gas, financial services and property have done well these last few years. Fundamentally, the economy is still going strong.

However, I cannot time the market perfectly. Hence, when the correction hit in August 2007, I was able to mitigate some of its effect but cutting losses on losers and riding a winner. Fast forward to November 2007. Again, there has been a correction and even after factoring in my winner, my portfolio is down to the "fantastic" performance of 0.6%.

I too want to cry when I look at my portfolio because if I had put all the monies in treasury bills, I would have earned a risk-free 2% plus for the whole of 2007. But that is the fundamental risk of holding stocks and shares, the variability of the share price affects your portfolio performance. That is why for myself, I do not invest ALL my investible savings in equities. Currently, it is about 78% which is relatively high because I still believe that the Singapore economy is still robust enough up to middle of 2008 given our GDP and CPI numbers.

However, I do keep 22% in cash and cash equivalents to buffer me and to allow me sufficient cash to meet living expenses and emergencies.


Tips on making yourself cry less during market downturns
So how do you take measures to reduce the risk of the market downturns making you feel like crying when you review your personal net worth statement? Here are some of the simple principles I follow to make me cry less:

1) Invest less than 100% in equities (or major asset class)
The all-or-nothing strategy in investing is very risky, hence, I do not risk ALL my investments in one asset class. I minimally have at least 2 asset classes at any one point in time. For now, it is in savings deposits as well as foreign currency fixed deposits besides equities.

2) Have sufficient cash reserves
Some financial planners advocate have 3-6 mths of income or expenses as cash reserves for emergency living expenses. Assuming that you are working and drawing an income from your job or business, this reserves which should be in liquid form e.g. savings in bank accounts, funds supermart cashfund or even treasury bills (3 mths) or short-term fixed deposits. This provides you firstly with a relatively low risk asset class to balance the risk of your other investments and also provides liquidity in case there is some unforseen expense that needs to be met.

3) Live a simple life
You will be surprised on how simple a life you can live if you so desire. One of my heroes when I was young was the ex-Governor of Bangkok Chamlong Srimuang who lives a very ascetic life. While I am not advocating his brand of asceticism, we can learn to live with the little we have because at the end of the day, we cannot bring our life's riches to heaven.

A simple life stripped from the unceasing chase for materialism could be one way to counteract our ceaseless human desires. I realise that it is healthier too compared to the consumerist materialism we are all so accustomed to in Singapore.



Investing reflects our approach to life
At the end of the day, whether you choose to put 100% of your investible savings in one asset class, diversify it everywhere or do nothing and leave your money in POSB earning 0.25% reflects your approach to life.

No-one can make you do what you do not want to do. However, many of us who share similar financial goals of being financially free where our passive income from portfolio investments exceed our living expenses realise we have to adopt a disciplined approach to investing, to save and to take some risks by investing in asset classes providing for higher potential returns and higher risks mitigated by some holdings of risk-free assets.

In the meantime, enjoy the journey and learn to cry less when the market drops because we cannot all 100% time the market and if you have the power to hold, in the longer term, the market will tend to reward those who invest in fundamentally sound businesses that grow with the general economy.

Be well and prosper.