Picking Up The Pieces

Since 24 February 2020 till now, both the S&P500 and the Straits Times Index (STI) had fell at least 25%. If you had looked them up graphically online from finance sites such as Yahoo Finance, Bloomberg, etc., it resembled a steep, almost vertical cliff face. The COVID-19 outbreak continued unabated across most parts of the world, causing panic, as well as a huge unprecedented and unplanned global social experiment in terms of lockdowns, social distancing and telecommuting. This sudden disruption and behavioural shift had caused several sectors and industries to an almost standstill, especially airline, tourism, hospitality, logistics, physical retail, etc. As we know the entire financial market and economy is made up of different sectors and industries which are interdependent on one another, a stop in a few will likely result in an overall slowdown, and with this the looming threat of a huge recession.

Portfolio wise, test subject Bob’s Bedokian Portfolio was down about 20% year-to-date (YTD) and our own Bedokian Portfolio was down by around 17% YTD. Viewing our (not Bob’s, as he would see it again sometime in end-June 2020) portfolio as a pie chart, not only had it grown smaller in size but also the respective asset class slices went out of their threshold percentages, thus as an active investor I would need to bring the portfolio back to its initial balance. Instead of what a majority of other market participants did as in selling their stake wholesale, we activated the surpluses on top of our emergency fund limits to pool into the cash component of the portfolio and began to “nibble” the ETFs and individual counters of the asset classes that were beaten down.

This was a time when I had used my “10-30 Rule”¹ to determine the entry signal; I had so far carried out two series of purchases (particularly equities and REITs) for both the STI (2800 and 2500 levels) and S&P500 (2500 and 2300 levels). As I had injected funds into the portfolio, the cash portion had grown to about 8%, so the 10-30 would be based on this rather than the 5% example I gave in my eBook. Select counters that, based on your own analysis, would likely to emerge once this COVID-19 situation passed, and/or whose prices were battered down due to the general fear and for no obvious reason but were still fundamentally sound. If you are still unsure on which one(s) to get, then it would be better to go for index or asset class ETFs.

So how would the economy and the markets recover from this? My guesstimate would be a V-shaped recovery, if most of the following happenings occur (in no particular order): declining rate of infections and no/smaller second wave appearing; a standard treatment or vaccine is developed; easing of loan repayment schedules and lessening the credit crunch; assumed large amount of pent-up demand for sectors and industries that are currently unavailable or halted.

Stay calm, stay safe and stay invested.

1 – The Bedokian Portfolio, p119-120

If...

If you had just started investing, the huge fall of the Straits Times Index (STI) earlier on Monday may have spooked you. Surely, a 6% drop of the STI within a day was a horrible feeling, especially so for those who did not go through such sudden huge declines and/or got used to the boom times in recent years.

If you had disregarded your emotions and adhered to your investment principles and strategies, then whatever happened on Monday would be like a walk in the park for you. Knowing what to do next, whether in a bull or bear market, is a good sign of control and rationality.

If you had identified opportunities even when the sky was falling around you, this meant that you were able to see a silver lining amongst the doom and gloom. Prices of equities may be near your calculated valuations, so it is probably time to load them up on the cheap; not all in, though, maybe some nibbles.

If you had a diversified portfolio made up of different asset classes (e.g. The Bedokian Portfolio), your capital would be less affected than those which were in just one asset class (in this case, equities). The different correlation between the asset classes act as counterbalance to one another in different market and economic conditions, hence your losses would be mitigated.

If you are a passive investor, do not be mindful of such happenings. Instead, you should just rebalance your portfolio during your designated date and carry on with your everyday life. 

Stay calm, stay rational and stay invested.