STAYING THE COURSE IN THE FACE OF VOLATILITY

Article by Areca Capital Sdn Bhd | 2nd December 2023

Ever get the feeling of déjà vu? Looking back, we’ve been seeing a usual scene play out in financial markets over the past 4 or 5 years. It has usually been a tale of two halves – the Jekyll or Hyde phases of the market. Which personality ultimately turns up in the first half (or second half) is usually unpredictable.

Looking ahead, the unpredictably and volatility will be something we have to learn to live with. The post-pandemic recovery, the damaging after-effects of supply chain issues, global economic slowdown, geopolitical tensions were only some, to name a few. The question is how this translates to our investments and how do we deal with its repercussions:  

• Making sure the Plan jives with our objective

We can’t stress enough the importance of having a portfolio of investments. For most of us, these would comprise of investments like Fixed Income/Bonds, Equity, Fixed Deposits and even Properties. How are these allocated depends on the usual factors – Financial objective, appetite for risk and pursuant to any liquidity needs.

Mismatch occurs if 45-year-old Helen, aiming to live off her nest egg for another 40 years puts a majority of her ‘investments’ in Fixed Deposit and Cash, or if 30-year-old Sam buying his first property next year, decides to put his down-payment money in Equity.

With her 40-year investment horizon in mind, a more appropriate investment allocation for Helen could be a 50-50 weight in Fixed Income and Equity.

• Diversify….reasonably

What would make up the underlying components of the 50-50 basket for Helen? Given that she may not be well versed with financial markets, Helen could go about adding several Unit Trust Funds to her portfolio to have some form of diversification. Generally, each Fund would be holding somewhere between 30-40 stocks or bonds for ample diversification. Therefore, a reasonable number of Funds for a portfolio of between RM1 million to RM3 million could be 5 to 6.

So no, Helen does not need to invest into 20 – 30 Unit Trust Funds! Owning too many similar Equity funds would not diversify away the risk of Equity investment. This is over-diversification or diworsification!

The reason for diversification is ideally, that the asset classes move in opposite direction of each other i.e., when one falls, the other rises. However, given how investments have moved in unison lately, even that may be a tall order. What is for sure however, is that well-diversified portfolios would withstand market sell-offs better. These are usually ones with appropriate allocation to Fixed Income and Equity instruments.

The main consideration to diversify is not to maximise returns, but rather, to achieve a more reasonable risk-adjusted return.

What happens when volatility or market sell-offs happen?

It is admittedly painful whenever our portfolio (and our money) takes a hit. Nevertheless, here’s when having a plan and knowing the “Why” that we invest in the first place is important.

Take a step back and review the actual objective of our investment. Taking Helen for example, if she is ultimately investing for the next 40 years, any temporary fluctuations, for example over a period of 4 days, 4 weeks or even 4 months in equity prices should not matter much to Helen. She has time in the market. What is crucial here is that Helen has a well-constructed plan in the beginning – and she sticks with it.

Many of us know this, but the question is, do we follow through on our plan? Or most of us end up switching out or over-reacting at the first sign of ‘trouble’? Alternatively, what can we do?

• Filter or turn off the noise

These days, information can be made available at literally the touch of a button. Technology offers the dissemination of information, a level playing field; as it transcends borders and regions. In our view, it is by and large, a double-edged sword. There can be too much information, even for a professional investor to digest, what more for the individual investor.

If you are reading some financial news headlines, take a step back, look at the subject in question from a different perspective before coming up with your own reasoning. Moreover, the world has never been short of news, but bad news sells.

• Re-balance your portfolio

For Helen’s initial 50-50 portfolio, if her current allocation has diverged significantly, she can consider re-balancing back the portfolio to its original weight. For example, over time, her Equity funds’ growth may have outpaced the growth in Bond Funds, turning her portfolio to a 60-40 mix. It may be prudent for Helen to switch some of the Equity portion into Fixed Income portion to re-align it back to the initial 50-50 allocation.

Conversely, following a market sell-off, the reverse would be true; due to the fall in prices, Equity’s overall allocation could fall to 40-60. Helen can now switch some of her Fixed Income allocation to buy Equity at a relatively cheaper price.

Being a disciplined strategy, re-balancing removes the emotional aspects from your investment making decision. The selling and buying decisions are typically triggered by pre-determined factors, for example, time-based (every quarterly, annually etc) or target-based (if the equity portion crosses a certain percentage of portfolio).

• Deploying Cash – in tranches

In fact, taking the glass as half-full, times of turbulence or volatility could be opportunities to add to your existing portfolio when prices are low.  

Here’s another harsh truth – holding out your investments in search for the best entry point may turn out to be futile. There is no perfect moment to invest: no crystal balls to foretell any market rallies or to catch the market bottom. Even the professionals get it wrong in timing the market.

If you are too concerned about investing in one lump sum, try a staggered approach. Identify the amount of unutilised or excess cash you can spare, and you can deploy it through 2 – 3 tranches. 

• Cost Averaging

For some, even 2 – 3 staggered investments may be too concentrated. Try adopting a Cost Averaging strategy. It involves a fixed amount of money being deployed into the Target Fund at regular pre-set intervals. If the target is to ultimately deploy RM100,000 over a period of 10 months, you’ll be looking at investing RM10,000 every month, consistently – regardless of prices and market conditions.

Whether it is through 2-3 tranches or Cost Averaging approach, these methods remove much of the market timing risk and replaces it with a more disciplined alternative.

Conclusion – Persevere through, stay the course

Despite all the negativity and bearish market sentiment around, we have to remain level-headed. Moreover, we can’t extrapolate what is happening today, and project it to the future.

If your long-term goals are intact, stay the course. Don’t rip out your investment portfolio just because of the peculiar temperaments of the market.

Maintain the Asset Allocation of your portfolio and avoid making any drastic moves unless they are warranted, rebalance periodically and make small tactical adjustments when necessary. Let time or even the professionals do the heavy lifting in growing your money for you, and most importantly, don’t let noise distract you from your ultimate objective.

Areca Capital is a niche Malaysian Private Wealth Manager. We are a firm believer in the advisory-based approach towards investing.

We help our clients, who range from individuals to corporates, family and private trusts, foundations and other institution to achieve consistent risk-adjusted returns over the long term.

For any enquiries, you may contact us at 03-79563111 or by email: invest@arecacapital.com

Disclaimer: The article is produced based on material and information compiled from reliable sources at the time of writing and it is for general information only. The article is not an offer, recommendation or advice to transact in any investment products, including the stocks or funds mentioned within. The contents of this document should not be considered to be legal, tax, investment or other advice, and any investor or prospective investor considering the purchase or disposal of any securities or the Fund should consult with your consultant or advisers as to all legal, tax, regulatory, financial and related matters concerning an investment in or a disposal of such securities or Fund and as to their suitability for such investor or prospective investor. This article does not consider any investor’s particular objectives, financial situation or needs. As such, Areca shall not be liable for any misuse of this document, other than the purposes stated herein.