Questions from a Budding Young Investor

Hi there!

I wanted to drop you a note to let you know that your articles have been invaluable to someone like me who is only now looking to invest. Really appreciate the time and effort in explaining your thought process in your pieces. I was also hoping to get your thoughts on my current investing journey. 

A little background about myself. I’m [Name redacted for privacy reasons] and am 32 years old. My wife and I maintain a joint account for expenses/savings, in addition to our personal savings. I started thinking seriously about investing our monies earlier this year as I felt that we were holding too much cash (held back in previous years because of all the doom and gloom talk). I’ve been buying into the market steadily since Feb and while the share prices have dipped slightly since, my overall portfolio is neutral if I am to take into account dividends received. Please see below a summary of my holdings.

Approximate values in SGD*:

1. Singtel: 10,000
2. Keppel corp: 15,000
3. Mapletree Commercial Trust: 10,000
4. UOB: 13,000
5. Netlink Trust: 12,000
6. Singapore Savings Bonds: 20,000
7. 50,000 in a UOB One savings account that yields about 2% interest – and am open investing this amount.

Assuming that my wife and I have set aside enough savings to tide us through at least 6 months of hardship, my questions are as follows:

1. You mentioned in one of your articles that our age is the approximate amount that our monies should be in bonds or safe asset classes. Does that view still hold in the current economic climate? My question stems from a recent article I read in which a hedge fund stated that they were holding on to 40% cash (in view of a worsening economic landscape) – which I think is a big deal for a hedge fund given that they are expected to create returns on with client’s funds.
2. I’ve been hearing a lot about making sure one has a balanced portfolio. For budding investors, do you have advice on which sectors (assuming we are focused on Singapore stocks) we should build our portfolio around?
3. The last question I have is – and maybe there’s no ‘right’ way –  how should people react in a market crash? Taking my case for example. Assuming that I have 70% of my monies in equities and 30% in bonds, and assuming that my family keep our jobs and is able to sustain ourselves, should I:
   • Hold on to the equities (think long term), and liquidate the bonds to invest in equities?
   • or, liquidate assets (cut loss – taking a hit of up to 20%) and look at buying into the market again. 
   • or, maintain status quo and continue to invest what we can spare

I look forward to hearing your thoughts!

Financial Horse Response:

Great questions! There are many parts to this question, so let’s break it down further.

1. You mentioned in one of your articles that our age is the approximate amount that our monies should be in bonds or safe asset classes. Does that view still hold in the current economic climate?

Absolutely. The rule applies regardless of the economic climate, which is the entire point of the rule: to remove emotional judgment from investing.

However, there’s an important point to note, and that is CPF. I’ve always felt that the CPF Ordinary Account can be treated as a pseudo bond for Singapore investors, because it can be easily tapped on to meet housing payments, or be used to purchase stocks in a market crash (as long as you have more than S$20,000). So this greatly reduces the amount of bonds that a Singaporean investor should hold.

My question stems from a recent article I read in which a hedge fund stated that they were holding on to 40% cash (in view of a worsening economic landscape) – which I think is a big deal for a hedge fund given that they are expected to create returns on with client’s funds.

The next part of your question, is basically whether you should go all-in on the market now with your S$50,000 in the UOB account, when the S&P500 is at record valuations, everybody is talking about a trade war, and emerging market stocks are in a bear market. And that’s a perfectly legitimate question. Trust me, I thought about buying CapitaLand Retail China Trust last week but I failed to pull the trigger cause of trade war fears.

But the problem with this question, is that literally nobody knows where the stock market will be 12 months from now. I can give you a long speech about how the yield curve inversion and posturing from Trump will lead to more emerging market pain. I can also give you a long speech about how the fundamentals of the economy are strong, and the current dip is a great buying opportunity for long term investors. In fact, you’ll probably hear variations of these 2 arguments from most pundits out there, depending on who you ask.

But you need to know that no matter how confident the guy saying it is, he actually doesn’t know the answer to this question. Nobody knows. So you need to recognise that the decision whether to invest has to be made by you. But because you already have an emergency fund and SSBs, your downside is greatly limited. If you invest the full S$50,000 and the market tanks, you’re only sitting on a paper loss, and if you’re buying blue chips like DBS and Singtel, they’ll eventually recover to their original price.

For me? I decided not to buy CRCT in the end, because I already have a healthy allocation to stocks. I decided to let the trade wars play out a bit more, and buy in over the next few months. But that was my decision, and if CRCT goes up 10% in the interim, that’s something I’ll have to live with.

2. I’ve been hearing a lot about making sure one has a balanced portfolio. For budding investors, do you have advice on which sectors (assuming we are focused on Singapore stocks) we should build our portfolio around?

To answer you, I’m going to tell you the story of Kanye West. And the story goes like this. In the Christmas of 2017, Kanye West bought Kim Kardashian a Christmas present. Kim Kardashian, being Kim Kardashian, took a photo of the gift and uploaded it onto instagram. It turns out Kanye, being the romantic that he is, bought her a box full of stock certificates, to the tune of US$300,000. And the stocks that he picked? Amazon, Adidas, Apple, Disney and Netflix. The year to date return of these 5 stocks? 43%.

So basically, Kanye West, picking 5 stocks that he really liked, destroyed the S&P500, the Nasdaq Index, and just about every other hedge fund out there.

The moral of the story? If you are a budding investor, don’t fight someone else at someone else’s game. Pick an industry that you are familiar with and interested in, and start from there. If you are an engineer, start with engineering stocks. If you are a banker, start with bank stocks. If you are Kanye West, start with consumer stocks.

3. The last question I have is – and maybe there’s no ‘right’ way –  how should people react in a market crash? Taking my case for example. Assuming that I have 70% of my monies in equities and 30% in bonds, and assuming that my family keep our jobs and is able to sustain ourselves, should I:

• Hold on to the equities (think long term), and liquidate the bonds to invest in equities?
• or, liquidate assets (cut loss – taking a hit of up to 20%) and look at buying into the market again. 
• or, maintain status quo and continue to invest what we can spare

That’s an easy question. If you have your job, you’re able to feed yourself, and you don’t need to liquidate any investments in the foreseeable future, sell all your bonds and buy equities.

However, there are two important caveats to this rule.

Firstly, you absolutely need to have an emergency fund in place. If this is truly a market crash, your emergency fund should be able to comfortably cover 12 months of expenses, before you think about selling bonds to buy stocks. You don’t want to face a liquidity crisis and have to sell stocks.

Secondly, when you say market crash, it has to be a big one. I’m talking about a minimum 30% fall in the S&P500 or the STI Index. If it’s a small crash (<10%), you may potentially be liquidating bonds at the wrong time, and switching into equities right before a massive crash, which defeats the entire purpose of having bonds in the first place. In fact, I’d even go as far to say that it should be something like a 40 – 50% crash before you start selling bonds. But of course, it all depends on your risk appetite.

Closing Thoughts

I also wanted to have a quick word on your portfolio. You’re actually quite well diversified, with positions in Singtel, Keppel, MCT, UOB and Netlink Trust. However, you’re quite overweight Singapore, which is both a good and a bad, as long as you know what you’re doing. Personally I like to add a bit of US exposure for further diversification, but I get that not everyone is comfortable with the forex risk.

To be honest, you’re also overweight cash and bonds, but I’m sure you’re already well aware of this point. Unfortunately, it really has to be your decision whether you want to invest now or wait a bit, because there are pros and cons with both courses of action, and nobody knows what the future holds.

Cheers!

Financial Horse has a set of 7 Commandments for Successful Investing, that I ask myself before making every investment, and that I will never break regardless of the situation. Enter your email below to receive a copy in your inbox!

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