Sunday, May 15, 2022

The Coming Crisis

With volatility and a host of bad news coming in on all fronts, the whole vibe of the markets kind of felt depressing. Day by day, your investment portfolio value is dwindling (unless you are vested in the Straits Times Index, which is showing a slight positive year-to-date), and you wonder would the markets recover soon or probably plunging into further depths.


While we cannot really tell the future, from guesstimating of the current macroeconomic and geo-political situations, it is painting a not-so-rosy picture. Rising interest rates, which are not good for a bullish market, are combating the effects of quick-rising inflation, which is also no good for the economy, and we are feeling the collateral of this. Accelerating the inflation drive is the global supply chain crunch and the rising prices of certain commodities such as wheat and oil due to the Russia-Ukraine conflict. These in turn could lead to higher inflation, which leads to more possible future spikes in interest rates to counter it, making the economy more sluggish. Such intricacies and the delicate relationships within the markets and economy are at work, and we cannot control them.


It is especially tricky that there is this ongoing inflation-interest rate conflict, to which there are investment strategies for both. High inflation? Get equities, commodities and REITs. High interest rates? Get cash. Problem is, who will prevail eventually, at least in the short term? Also, a typical investment playbook strategy states that if markets are going down, bonds would be the natural go-to. But again, interest rates and inflation are not friendly to them, so there goes it.


If you felt it is like stuck between a rock and a hard place, it is. 


So how do we tackle this situation? Here are some general tips to ponder:


#1: Diversification


This is an obvious no-brainer advice coming from me, but diversification (in my humblest of opinion) is the only free lunch available in the world of investing. It allows you to have multiple exposures to the various asset classes, regions/countries, sectors/industries, and companies. All these are to reduce the market risks, so that even though your gains may be lesser than a concentrated portfolio, but the potential losses would be lesser.


#2: Looking For Strong “Swimmers”


A bear or correction market wave would bring a lot of securities down with it, even the strong “swimmers”. Eventually these swimmers, given their strong “physique” (a.k.a. fundamentals) would rise again to the surface and see the light of day. The easier part would be to pick the strong ones while they are still down, so that when it is time for them to rise, they will pick you up along.


#3: Keep Calm And Carry On


It pains to see one’s portfolio value dropping but fleeing the market by panic selling is not the correct way. Unlike trading, an investment time horizon is usually very long (in my opinion, at least 10 years), and such kinks are the norm rather than the exception. If you had invested for the past decade, you would have experienced the Eurozone crisis of 2012, the Chinese stock market crash of 2015 and the COVID-19 downturn of 2020. Though the markets and the economy would be down, the subsequent rebound would typically be stronger than ever.


I could sense that there might be some incoming remarks to say that this coming crisis would be different. To quote Sir John Templeton, a renowned investor and fund manager:


“The four most expensive words in the English language are ‘This time it’s different’.”


To further my stand, I would use this famous meme of James Franco from the movie The Interview:


Stay safe, stay calm, stay invested.

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