The Nasdaq Composite fell 5 per cent on 5 May 2022 ,this is the largest one day decline since June 2020. The S&P 500 plunges by almost 7 per cent in 2 days in early June 2022. Again the same widely followed index slid another 3.2% on 17 June 2022. As Federal Reserve started quantitative tightening, such volatility is likely to persist. With continued evidence of red hot inflation, we are definitely in a challenging environment for investing. What should investors do now; to flee and stay on sidelines and wait for next entry point or should one take advantage of present volatility? As much it is difficult to know when and how the stock market will recover, I like to suggest clients to ask the following questions during this bearish period to have better clarity on their action plan:
Can you remember why did you start investing, what gives you the motivation to start investing, and for many, who have actively been contributing to your portfolio? This is a pertinent question that I always post to clients, when we know the main objective of investing, it gives clarity and gives us a clear objectivity especially when one sees the gains eroded from their portfolio or for some; sitting on losses for new top-ups in recent months or past year. Talk to an experienced adviser to do a portfolio review if this is yet to be done in the past 1/2 years.
After we establish the main objective of this investment, the next question will be the holding period of this investment. I know from experience that some will tell me, “I do not need it now hence let’s leave it open-ended”. It is always good to establish the minimum holding period for this investment so that the specific instruments used can be aligned to one’s objective and time horizon. One does not want to be caught in a situation to have to liquidate when the market is plunging, so holding power is key.
We never walk away from this discussion/self-talk without asking another pertinent question; what if I lose X amount of my capital as the market continues to head south? Are you able to wait it out till the market recovers? If you have been investing on your own and had never asked yourself this, you may be in for a rude shock seeing your portfolio plunging now. Whenever I meet new referrals who want to do investing, I always ascertain their risk appetite and I will take time to discuss this with them (especially new investors), it seems like, before the start of 2022, many people hold a very positive sentiment when it comes to investing, it is a given to have gained. This is worrying to me as the market is never predictable like clockwork. One needs to establish the maximum loss they can stomach, this is an equally important question other than the desired rate of return. You need to know what is your threshold of risk. If you need someone to walk you through this in an objective manner, feel free to contact me for a discussion.
I have kept this sharing short and concise, yet there are definitely more grounds to cover if one is serious about portfolio construction for their goals. I am happy if you want to discuss this with me. Remember when one has time in the market, this will definitely reward the person who can ride out the volatility and reap the desired returns. Looking at history, the markets recovered from the 2008 financial crisis, and the dot-com crash, so we will get through whatever comes next as well. I wish you well on your investing journey.
Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
