Sunday 15 March 2015

Possibly The Worst Time to Invest – A Year On

About a year ago, I blogged about setting up a passive portfolio comprising of 70% stocks and 30% bonds and discussed whether it could the worst time to invest, considering that the Dow Jones Industrial Average (DJIA) was near an all-time high and the Federal Reserves was planning to raise interest rates from an all-time low. You can read more about it at Possibly The Worst Time to Invest. After a year has passed, how has the portfolio performed?

The portfolio was started in Dec 2013 with a lump sum investment. Since then, an additional investment amounting to around 13% of the intial investment was made in Mar 2014. Dividends received from the bonds were also reinvested back into the bonds. Other than that, the portfolio was left untouched and the market conditions did not trigger any rebalancing. After 14 months of investing, the portfolio has grown by around 12%, which is quite a respectable amount. Thus, if you have a good game plan and a good defence in place, do not let the current market conditions stop you from investing, because nobody can predict accurately when it is a bad time to invest.

You might counter that compared to a year ago, today's conditions are a worse time to invest than last year, with DJIA touching yet new highs and interest rates already starting to move up. But without using hindsight, would you agree with me that this time last year, the risk of a market correction is equally real? In fact, the stock market did encounter some turbulence in Oct last year. Not only that, oil prices crashed by more than 50% in the space of less than 6 months, currencies of oil-exporting countries depreciated, China's growth slowed down and Greece was at risk of exiting the Euro zone. All these are real occurrences, but they did not bring down the stock market, except for a brief period in Oct and for oil-related stocks. In essence, there are always worrisome events that can stop you from investing, but if you do that, you would also miss out on any gains in the stock market during the period you are out of it.

Some of you might be increasing your war chest in preparation of the coming bear market. Shoring up your defences is always a good thing, but too much of a good thing can become a bad thing. Even if a bear market is really coming, does it mean that an investor with 100% war chest will definitely do better than another investor with only 50% war chest? Much will depend on how these 2 investors deploy their war chests, how long and how low they think the market would go, and what stocks they buy. The key issue is, besides having a war chest, do you also have a good game plan to go with it? Besides, you know that inflation will erode the value of your cash if you keep too much of it. One thing I found out after 15 years of investing is that you can actually lose more money to inflation over a long period of time than to a single bear market. See Inflation - The Silent Killer for more info.

For new investors, you might think that the worst thing that can happen to your investments is to have a severe bear market shortly after you started investing. This is actually recoverable. I started investing my Supplementary Retirement Scheme (SRS) account in Nov 2007. Shortly after that, the Global Financial Crisis began and my index fund fell by more than 55% in price. Yet, when the fund recovered to its original price in Oct 2014, it provided an annualised return of 7.0%. You can read more about it in Review of My SRS Investments. The key strategy to this recovery is the use of Dollar Cost Averaging to invest in this index fund.

Actually, having a bear market just after you started investing is not the end of the world. The worst thing that can happen to an investor is to have a severe bear market just before retirement, not just after investing. To a young person who has just started working and investing, the amount of money invested is small. Not only that, he has 30 years of incoming cashflows from his job to fund his investments. But to a person who is just about to retire, he probably has a lot more money invested. To make things worse, he has 20 years of outgoing cashflows from his investments to fund his retirement. The longer you prevent falling down, the more painful your fall is.  

Like Life, investing is not about preventing falls. It is more important to learn how to fall down with minimum hurt and pick yourself up. The first time you fall down, it is going to be very painful, it might even bleed or leave a scar. But if you learn how to pick yourself up after a fall, then no amount of falls will bring you down. Each time the market brings you down, you will pick yourself up and become stronger. Some of the more experienced investors will tell you that one of their proudest things about investing is to survive and thrive in many bear markets! So, do you have a good game plan to thrive in the next bear market?

P.S. I am currently in the busy phase of my project, so I won't be able to respond to your comments. Hope to seek your understanding on this.

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  1. How do we know how bad the inflation is affecting us e.g. our household expenses but exclude residential home?

    Any solid view with facts other than those coming from financial planners?

    1. Even if we can figure that out, it doesn't translate into which stock to invest in? It's still about which business can make money and has an honest management team.

    2. Hi Uncle CreateWealth8888,

      Inflation is all around us. You can feel the reality of inflation from the price of food in food courts and groceries in supermarkets. Even stamps have increased in price over the years!

    3. Hi Lizardo,

      Yes, it is important to pick the right stocks. If we pick the wrong stocks, money will go down the drain.

  2. When we are unsure which way to go. Staying neutral or 50-50 may be better option.

  3. Hi CW,

    Great post. I agree with the idea of continuing investing over long run because we will not know when is crisis coming.

    Maybe in times of record high, we probably need to be more selective. A company that has a better chance or past track records of tiding over the crisis?

    Or allocate less percentage of monthly income into investment?

    If unsure, maybe time to take a holiday break before having a clearer mind to make wiser decisions!

    1. Hi Rolf,

      Sorry for the late reply as I'm currently busy with my project.

      Yes, that is good advice.