Investing is a game

Investing is a game.

Rules of PanzerGrenadier's Thumb
It is a game that has its own rules. Some of these rules are written and you can read them in investment books or books on personal finance. Some of these rules are unwritten and you only learn them through personal experience of seeing your portfolio go up and down depending on the market situation affecting the type of investment assets that you are holding.

To win in the game of investment in growing your savings into a size that generates sufficient income for you to live on without having to work means you have to master the written and unwritten rules of investment.

What are these rules?

Rule 1: Invest only what you can afford to lose
This rule rings true especially when you see your portfolio melting down faster than Hagen Daz on a hot sunny day! If you have borrowed money to invest, you will be subject to margin calls, to top up your accounts and so on. This restricts the amount of flexibility you have in holding on and not selling your investment at the worst timing! The ability to hold on to an investment for the long term is arguably one of the most powerful tools you can employ to protect yourself from being burnt during sharp market downturns like the recent bear market that has hit global stock markets due to US sub-prime fears affecting the US economy.

When you are not leveraged and have the ability to hold, you also become less susceptible to fear and you can ride out periods of market volatility.

Rule 2: Never put your eggs in the same basket ('Diversify')
If you had 100% of your investible savings in stocks in the Singapore Exchange since 1 Jan 2008 until today, you would not have been spared from potential paper losses of your shares because stocks plunged so much that if you had bought any counter including blue chip shares, you would still have faced possible unrealised capital losses.

Markets can go up and down and markets for different asset classes do not go up and down in tandem. Therefore, to avoid losing massively in this game of investment, you should consider an asset allocation ratio between different asset classes. I personally have a certain percentage of my investible savings in cash and cash equivalents (fixed deposits, treasury bills) in addition to my equity (share) portfolio. This helps my portfolio mitigate some of the risks of the recent market turbulence but even I am not spared in this regard.

Rule 3: Sometimes to get ahead, you can do nothing
Doing nothing goes against the grain of traders. The market goes up and it goes down and there's money to be made both ways. In the case of the equity market, it is difficult for retail investors to make money in bear markets as the number of strategies that you can take are less. This is partly due to short-selling restrictions imposed by the Singapore Exchange as well as limits on the amount you can sell. In addition, use of put warrants also require a certain degree of sophistication and the word is that market-makers for some warrants price their products to their advantage as compared to the retail investor.

Hence, during periods of short-term volatility in the equity markets, my own strategy was to cut loss on those that I could afford to beef up my cash portion of my portfolio and then wait out the rest which are below my purchase cost. As most of my equity holdings are in blue-chip companies, I can adopt a hold and collect dividend strategy with a view of even bequeathing such equity stakes to my future generation! :-)

I literally turned off my share trading platform and stopped monitoring individual stocks as they were "underwater". As I have sufficient cash reserves and basically do not depend on my investment for day-to-day living, I could take a break from the market and take a longer term view on my investments.

Rule 4: Investing is not life and death so take it easy!
While we can be serious about our approach to our investments, it is useful to put all this into perspective. If you have your health, your family and your career or business, then see investing as a game. It is a serious game as it affects when you can be financially free and choose NOT TO WORK or RUN YOUR BUSINESS. But it is NEVER ABOUT LIFE AND DEATH.

So guard your health, happiness and family first and wealth will come after that.

As ever, be well and prosper!