Devising Strategies in Difficult Times
In the history of stock market boom and bust, there has never been a situation where there is a similar occurrence compared to today's sub prime mess. In fact, this is an extremely difficult environment to invest. Equities and properties are hit hard by the poor global market sentiments. Bonds are not performing as a result of the discrediting of investment grade bonds and the government inability to lower interest rates for the fear of stroking inflation. Cash is losing money at 6% per annum because of raging inflation of 7% and artificial low interest rates of less than 1%. The only asset class that is delivering positive performance, commodities, is potentially in a bubble state with a possibility of it correcting 20-50% in a short period of time. Under such situation, what will be a good strategy to position the portfolio with minimal volatility and explosive returns when the market recovers.
The strategy that I will suggest to hedge using a combination of commodities, emerging market equities and cash. There is currently a inverse relationship between commodities and equities. The stock market is pounded by the relentless rise in oil prices. Whenever oil prices fall, the market rebounds strongly. However, we must also be cautious about the potential correction if we move our entire portfolio to commodities. So the trick is to balance out the proportion of these 2 asset class to even out the volatility until the picture becomes clearer.
The Problem with CPF Investment
Investors with CPF investments will have a trickier time. That is the result of the severe restrictions on the type of funds available to investors. The big problem is that the funds that are performing are not included in the CPF investment scheme! Out of all the CPF-OA approved funds available in the market. Only 5 funds returned positive returns during the last six months.
By now, I will have instilled a sense of fear in you why is that there is a need to invest your CPF monies when the interest from the OA account seems to be quite attractive all of sudden. The good news is that that equity funds still outperforms the CPF-OA interest in the long run.
This is the 10 years annualized return of the highest and lowest returns global funds distributed in Singapore. In the last ten years, we have seen 3 deep recession: The asian currency crisis, the dot com crash and the present sub prime and oil crisis from 1998 to 2008. Well, there is certainly no complaints on the kind of returns that investors will get if they stay invested throughout the period. And yes, these funds can still beat the CPF returns over time.
So What Now?
Investing in trenches still make significant sense during this period. The trenches should be invested into assets that are hit the worst: Namely asian equities and properties. Be warned that investors will see short term losses even with trench investing and dollar cost averaging. Investors probably will encounter 4 to 5 stock market crashes in their life time and money is made during crisis. This is probably one of the rare chances we are seeing to grab assets at discounted price. Treasure it instead of fearing it.
In the history of stock market boom and bust, there has never been a situation where there is a similar occurrence compared to today's sub prime mess. In fact, this is an extremely difficult environment to invest. Equities and properties are hit hard by the poor global market sentiments. Bonds are not performing as a result of the discrediting of investment grade bonds and the government inability to lower interest rates for the fear of stroking inflation. Cash is losing money at 6% per annum because of raging inflation of 7% and artificial low interest rates of less than 1%. The only asset class that is delivering positive performance, commodities, is potentially in a bubble state with a possibility of it correcting 20-50% in a short period of time. Under such situation, what will be a good strategy to position the portfolio with minimal volatility and explosive returns when the market recovers.
The strategy that I will suggest to hedge using a combination of commodities, emerging market equities and cash. There is currently a inverse relationship between commodities and equities. The stock market is pounded by the relentless rise in oil prices. Whenever oil prices fall, the market rebounds strongly. However, we must also be cautious about the potential correction if we move our entire portfolio to commodities. So the trick is to balance out the proportion of these 2 asset class to even out the volatility until the picture becomes clearer.
The Problem with CPF Investment
Investors with CPF investments will have a trickier time. That is the result of the severe restrictions on the type of funds available to investors. The big problem is that the funds that are performing are not included in the CPF investment scheme! Out of all the CPF-OA approved funds available in the market. Only 5 funds returned positive returns during the last six months.
Data from IFAST. 3rd July 2008
By now, I will have instilled a sense of fear in you why is that there is a need to invest your CPF monies when the interest from the OA account seems to be quite attractive all of sudden. The good news is that that equity funds still outperforms the CPF-OA interest in the long run.
This is the 10 years annualized return of the highest and lowest returns global funds distributed in Singapore. In the last ten years, we have seen 3 deep recession: The asian currency crisis, the dot com crash and the present sub prime and oil crisis from 1998 to 2008. Well, there is certainly no complaints on the kind of returns that investors will get if they stay invested throughout the period. And yes, these funds can still beat the CPF returns over time.So What Now?
Investing in trenches still make significant sense during this period. The trenches should be invested into assets that are hit the worst: Namely asian equities and properties. Be warned that investors will see short term losses even with trench investing and dollar cost averaging. Investors probably will encounter 4 to 5 stock market crashes in their life time and money is made during crisis. This is probably one of the rare chances we are seeing to grab assets at discounted price. Treasure it instead of fearing it.
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