The war in Ukraine, rising interest rates, and the failure of regional banks in the U.S. have shaken retail investors’ confidence in their portfolios. Alternative asset classes like cryptocurrency have also proven volatile, especially following the collapse of FTX. In light of these developments, it is timely to revisit the timeless principles of investing that have served both seasoned and beginner investors well.
Time in the Market vs. Timing the Market
The adage “time in the market” has been consistently validated by numerous studies and historical data. The stock market has weathered major economic crises such as the Great Depression, the Global Financial Crisis in 2008, and most recently, the COVID-19 pandemic. Yet, it has continued to reach new highs over time.
While market volatility is inevitable, staying invested for the long term allows your portfolio the opportunity to recover and grow. A study by Bank of America showed that missing just 10 of the best-performing days between 2010 and 2020 would have resulted in a 33% lower return. Conversely, remaining invested throughout the period would have yielded an 18% gain.
Determine Your Risk Appetite
When building your investment portfolio, it is essential to assess how much risk you are willing to tolerate in pursuit of your desired returns. Your risk appetite directly influences the types of asset classes you should include. For example, a risk-averse investor may prefer allocating most of their funds to fixed-income assets such as bonds.
Your investment time horizon also plays a critical role in determining your risk tolerance. Riskier investments tend to experience greater price fluctuations. Therefore, if you’re saving for short-term goals like an HDB downpayment or a wedding, you may be better off investing in lower-risk instruments such as Singapore Savings Bonds. A longer time horizon gives investors more room to recover from potential losses.
The Only Constant Is Change
Markets naturally cycle through bull and bear phases. The phrase “this too shall pass” is one we should all keep in mind. Regardless of where we are in the market cycle, it’s important to remember that these phases are temporary. Avoid making permanent decisions based on temporary emotions. Staying grounded and focused on long-term goals is key to successful investing.
Written By:
Enstein Loh
Financial Services Consultant