Basics of investing
The war in Ukraine, higher interest rate environments and the failure of regional banks in the US has shaken the confidence of retail investors towards their investment portfolios. Alternative investment asset classes like Cryptocurrency have also proven to be volatile with the failure of FTX. Hence, it is timely for us to revisit the timeless principles of investing which have served seasoned or beginner investors alike.
1. Time in the market rather than timing the market.
The adage that ‘time in the market’ has been historically proven to be true by a multitude of studies and research. The stock market has seen its fair share of economic crises such as the Great Depression, Global Financial Crisis in 2008 and most recently the COVID pandemic. However, the stock market has continuously surprised us by hitting new highs. While the stock market may prove to be turbulent, staying invested over the long term would allow the markets the opportunity to recover.
A study by the Bank of America has shown that missing 10 of the best days over a period from 2010 to 2020 would have caused a –33% decline. Conversely, if an investor remain invested, he or she will see an 18% return.
2. Determine your risk appetite
When constructing your investment portfolio, it is paramount that you consider the amount of risk you are willing to tolerate to achieve your desired levels of investment returns. The level of risk you are willing to undertake determines the type of asset class in your portfolio. For instance, a risk adverse investor would prefer to have most of their funds in fixed income assets such as bonds.
Furthermore, your time horizons also contribute to how much risk you might be willing to take. The riskier an investment is, the greater the price fluctuations. Hence, if you are saving for your HDB downpayment or wedding, you are better off investing in Singapore Savings Bonds. This is because a longer time horizon allows investors more time to recover their losses.
3. The only constant is change
The stock markets have seen their fair share of bull and bear markets. ‘This too shall pass’ is a phrase we should all hold dear. Regardless of where we are in the market cycle of bull or bear, we must be cognizant that they are often temporary. We should always remember we should not make a permanent decision based on temporary emotions.
Written by:
Enstein Loh, Chartered Financial Consultant
Financial Services Consultant