Monday, February 11, 2008

Don't lose your head (or your shirt) in market turmoil

IN A few heart-stopping moments on Jan 22, marketing manager Henry Foo, 30, saw the value of his stock portfolio plunge from $100,000 to $82,100.

When he did an online check of his $150,000 unit trust portfolio, there was more bad news - it had dipped by about $10,000 in value.

He and many other Singapore investors have witnessed a large portion of their investment values wiped out in a matter of days.

The culprit, of course, is the United States sub-prime mortgage crisis where thousands of high-risk borrowers have defaulted on loans. This sparked global credit worries that cascaded through to equity markets.

As investors braced themselves for a battering, Asian stock markets took a beating on Jan 21, with Singapore suffering its worst one-day fall since Black Monday in October 1987, plunging by 6 per cent to 2,917.15 points.

Blue chips were not spared, with counters such as bourse operator Singapore Exchange crashing to $8.10 on Jan 22. Its price on Oct 8 was $17.20.

Fearing the worst, investors had to decide if they should hold their positions or cut their losses. Many regretted not cashing out when the market peaked in November.

Why investors panic

MOST people like to imagine they are rational and logical when it comes to serious matters such as investment - but human nature dictates otherwise.

The chief executive of ipac Wealth Management Asia, Mr Gary Harvey, says it is easy to understand how the ups and downs of the stock market create emotional responses.

"We fear that when markets go down, they will fall further and we will lose money. During a market decline, most investors sell their portfolio as they are motivated by a fear that the market will not recover," he says.

IPP Financial Advisers investment director Albert Lam says investors usually panic for one or more of the following reasons:

> A weak level of confidence in their investments as they did not do their research properly before buying them.

> Overexposure to certain investments due to inappropriate asset allocation or not diversifying adequately.

> The influences of market sentiment - such as fear and panic - instead of weighing up facts about the economy and investments.

> Forced selling kicking in when shares hit margin calls. This would be an issue for investors who borrow money to buy these shares but do not have the cash to top up their loans.

> "Shorting" of securities where investors sell shares they do not own as they believe the market will fall and they can later buy the shares at lower prices. However, if they are wrong and the market rises instead, they are forced to buy the shares at higher prices to cover their short positions.

Mr Lam says that investors should firstly ascertain whether there is a valid reason to sell quickly. "If the reason is invalid and he had previously done his research appropriately and engaged the services of a competent financial planner to draw up his asset allocation, chances of him panicking would be reduced greatly."

If the foundation for the investment decision is still intact, there is no valid reason to sell quickly - regardless of what is happening in the market.

How to stay calm

THIS tricky topic of dealing with market volatility was of vital interest to the 1,800 participants who attended an investment seminar organised by online unit trust distributor Fundsupermart recently.

Fundsupermart general manager and seminar speaker Wong Sui Jau has one important piece of advice: Remember that markets always recover.

"Markets cannot drop 5 to 10 per cent every day. Have faith that markets and economies are self-correcting, they won't go down forever," he says.

In fact, Mr Lam advises that quite often, market selldowns present buying opportunities for the calm investor. This means that if there is an investment which you believe is fundamentally good, then you have an opportunity to buy in at a lower price.

Here are some tips on staying calm regardless of market conditions:

> Diversification

Spreading your investment across many assets helps to eliminate some risk. This is because as we add more securities to a portfolio, the exposure to any particular source of risk becomes smaller.

This is why most financial experts typically recommend unit trusts as an investment tool as each fund comprises large numbers of securities across different asset classes such as bonds, property, resources and equity. Different classes get different weightages, depending on their prospects.

> Keep investing

A speaker at the Fundsupermart seminar, Aberdeen Asset Management Asia's senior investment manager of Asian equities, Ms Flavia Cheong, says she believes in the advantages of investing consistently. In fact, she plans to be "more aggressive" in her investing now that the markets are more volatile, and look for value buys.

Mr Harvey notes that the markets are difficult to predict and can move quickly. Also people generally lack a sensible framework for going into and out of the market - so fear and greed play out.

A case in point was the market selldown in the May to June period last year when the benchmark Straits Times Index (STI) slid by about 14.5 per cent, spooked by fears over interest rate hikes. However, the STI ended at 2,991 at year-end, up 12 per cent from the May to June period.

Says Mr Lam: "There were some clients who liquidated their investments totally during the correction. Very few who did so know when to re-enter the market. For clients who decided to ride out the volatility, the value of their investments would have been higher by the end of the year."

This shows that timing the market is difficult and dealing with market sentiment is tough. Usually, investors reason that prices will fall further when markets look low, which prevents them from taking up buying opportunities. Most investors will re-enter the market only when prices move back up. But by then, they could have missed the best prices.

Says Mr Lam: "Therefore, a more practical strategy is to stay invested if an investor thinks it is only a correction and not a change in trend.

"However, if he ascertains it is a change in trend from a bull to a bear market, he must review and re-strategise his portfolio to go defensive, such as having more fixed income assets."

> Maintain a long-term perspective

Research over many years has shown that equities rise over time and will outperform cash and bonds and give some protection against inflation.

By investing in and remaining invested in equities, investors can benefit from this trend, says Mr Harvey.

"To survive volatility and prosper during the inevitable recovery, a good investor should have a portfolio that has three strong elements - quality, value and diversity. And then, given a period of time, he would be able to reap better than average returns."

> Talk to your financial adviser

Speaking to your adviser during market volatility will help you avoid making potential mistakes resulting from emotions such as fear and greed.

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