Sunday, 23 April 2017

Possibly The Worst Time to Invest – 3 Years On

This is an annual blog series that I started 3 years ago to document the worries about investing at the wrong time, which would bring losses and headaches. The blog series track the performance of 2 passive portfolios invested in index funds using the portfolio rebalancing strategy. Both portfolios comprise of 70% allocation in stocks and 30% in bonds. The plain vanilla portfolio invests in global equities and global bonds while the spicy portfolio invests in US equities and Asian bonds. The first portfolio was started in Dec 2013, while the second one was funded progressively over 2015. 

In the first post in 2014, I mentioned worries about the Dow Jones Industrial Average (DJIA) nearing its all-time high (then) and US Federal Reserve planning to raise interest rates from an all-time low. In the second post in 2015, I mentioned that the same worries persisted, with DJIA touching yet new highs and interest rates moving up in anticipation of Fed's interest rate increase. Not only that, new risks emerged with oil price crashing by more than 50%, China's growth slowing down and the threat of Grexit. Yet, despite all these worries, the plain vanilla portfolio went up by 12% since its inception.

In the third post last year, I mentioned that worries about market declines actually materialised, with major declines in Aug 2015 and Jan 2016. The decline in Jan 2016 was especially severe, with stock markets around the world crashing. At mid Feb 2016, the plain vanilla portfolio was down by 0.7% since inception while the spicy portfolio lost 7.0%. Yet, by the time I wrote the annual post in Apr 2016, both portfolios had bounced back strongly. The plain vanilla portfolio was up by 8.5% while the spicy portfolio gained 0.6% since inception.

With each passing year, more and more risks materialised. Jun 2016 saw Britons voting for Brexit while Nov 2016 saw US citizens voting for Donald Trump as president. Both outcomes were unexpected and led to sharp falls in the stock markets around the world. Yet, barely days later (or hours in the case of the US presidential election), stock markets had recovered fully from their initial falls. Not only that, stock markets went on to scale new heights on optimism that President Trump's fiscal policies would spur faster growth in the US and world economies. Currently, the plain vanilla portfolio is up by 21.6% while the spicy portfolio is up by 13.7% over their respective holding periods of about 3.5 years and 1.5 years.

Personally, I still worry a lot about risks, which I wrote about in a couple of posts last year, such as What Have We Got After 8 Years of Easy Money?, Making America Great Again and Its Impact to Asia, Another Year That Ends with 7, etc. This pessimism is reflected in my active investments. Over the past 1 year, I have been taking some money off the table. Some of the risk management related divestments include Venture at $8.38, Valuetronics (partial) at $0.50, Global Logistic Properties (partial) at $1.81 and a couple of speculative shares (see Meet The Minions). Nonetheless, there are new investments, but these are in more defensive stocks such as dividend stocks, beaten-down stocks and even Gold.

In fact, I was quite tempted to tinker with the 2 passive portfolios given the strong views about the market. But I decided not to do anything about them. Had I rebalanced or withdrawn money from the 2 passive portfolios, they would not have achieved the returns mentioned above. They have built-in defence mechanisms to manage market crashes through portfolio rebalancing if the stock/ bond allocation were to deviate from the original allocation by a pre-defined amount. For these 2 portfolios, I will continue to stick to the pre-defined strategy even if the markets were to crash.

In conclusion, it is difficult to predict where the markets are heading. If you have a well-defined defence mechanism in place, just let the portfolios continue their work.

See related blog posts:


  1. Hi BI,

    Can share what is your well-defined defense mechanism ??

    1. Hi SI,

      Sorry, I was referring to portfolio rebalancing. The 2 passive portfolios will rebalance if the stock/bond allocation is off the original allocation by 7% or more.