5 steps to a healthy portfolio
Most of us have regular medical check-ups so that any health issues can be identified at an early stage and get addressed properly. Our investment portfolios require similar care.
POSTED ON 06 May 2019
Such an environment can cause investors to behave in ways that are spurred by different motivations but boil down to timing the market - a practice that seasoned investors should know rarely pays off.
The obvious form of market timing occurs when investors fancy their chances at buying in at troughs and cashing out at peaks. The investor's confidence may even be boosted by following a market timing strategy such as the "Golden Cross" - buying when a market's 50-day moving average crosses above its 200-day moving average and selling when it crosses below.
Following such a strategy between January 1997 and December 2016 would have resulted in 10 trades and delivered an annualised total return of 6.8 per cent, which sounds impressive until we realise that a simple buy- and-hold of just one trade would have returned 7.6 per cent.
Even market timing systems of far greater complexity are susceptible to being out of the market at times of particular strength, which can hurt a portfolio's performance substantially over time.
Some investors may believe that the market is about to plummet and hold on to cash so that they can buy into the market when prices are much lower. The bigger the fall, the greater the bargain.
There are two hitches to such a plan. First, no one can predict a market tumble with clear certainty. Second, most investors invariably seize up with fear and end up hoarding cash for protracted periods following major events of market distress.
Some of the strongest positive returns have occurred in the aftermath of stress periods and investors unwittingly miss out on significant profits, particularly in the first year following a market dive.
Many investors have learnt the hard way that, by the time it looks like the dust has settled and it is safe to start investing again, the real money has already been made.
Investors may also cling on to cash when they are afraid of a sharp loss in their investments' value should the market plunge shortly after they enter the market. Such a sentiment is understandable, but investors should bear in mind that markets do recover and a portfolio's value will rebound so long as one does not lock in losses by selling in a panic.
How long does it take to break even? Let us assume a global, multi-asset investment was made one month before eight of the least-favourable market periods since 1973, including the dot.com bust and the global financial crisis.
It would have taken an average of three years for the investment to regain its original value, a relatively short period if an investor takes the long-term view (as one always should when investing).
Ultimately, the most effective way of growing one's wealth is to get invested and stay invested with a global, diversified portfolio, which can weather the tough times relatively well so that the investor is still in the market and can reap the rewards when the recovery starts.
Sophisticated digital tools that are available today can assist investors in achieving this objective. Citi's Total Wealth Advisor can simulate the performance of different portfolios under adverse conditions, so investors can easily understand the robustness of their portfolios through a visual and interactive presentation. For instance, we can illustrate how three different portfolios fared during the global financial crisis a decade ago.
Portfolio A is almost entirely made up of fixed income and consists of a mix of global investment-grade bonds and emerging-market bonds. It has a cumulative gain of 7.7 per cent between July 2008 and February 2009 followed by a 6.3 per cent rise between March 2009 and April 2010 - a steady but tepid return when compared with the other portfolios.
Portfolio B has about 40 per cent in fixed income and about 55 per cent in equities spread across the US, Europe, Japan and emerging markets. It slides 21.8 per cent between July 2008 and February 2009 but recovers strongly with a cumulative return of 33.9 per cent between March 2009 and April 2010.
Portfolio C, comprising 85 per cent equities with no fixed-income assets, nosedives 33.4 per cent between July 2008 and February 2009. Although it rallies spectacularly with a cumulative return of 47 per cent between March 2009 and April 2010, not many investors have the stomach for the one-third loss in value that they must endure in the preceding period.
Overall, portfolio B offers the best balance between pulling through the crisis and riding the subsequent recovery. Financial institutions with a global network will have the expertise to help investors assemble a well-diversified portfolio in terms of asset classes and geography, while periodically rebalancing to markets that are more affordable.
In essence, attempting to time the market is an expensive game that will likely burn a hole in your pocket. The wise, prudent investor keeps his or her core portfolio fully invested over time.
The writer is head of wealth management and segments, Citibank Singapore.
This article was published in The Sunday Times on March 31, 2019.
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