Everyone fears their investment portfolio taking a huge beating during the next financial crisis or market crash. You should not lose sleep over this notion as markets will continue to do what they’ve always been doing – fluctuating.
Some years, markets will fluctuate more wildly and some years less. Some years, they will fluctuate in a general downward direction and some years in a general upward direction. But most importantly, no one can predict with consistent accuracy when the next crash will hit.
So How Do We Defend Against A Financial Crisis No One Can See Coming?
Throughout history, there have been many instances of market crashes. Of course, most fresh in many of our minds is the Global Financial Crisis or Credit Crunch in 2007. Further back, many of us may have read of the dot-com bubble in 2001, the 1997 Asian Financial Crisis in 1997 or even the Great Depression of 1929.
We need to realise that it is a case of when the next one will hit rather than if there is a next one. Once we realise this, we would understand that we need to take active measures that will insulate our investment portfolios regardless of when a financial crisis or market crash occurs.
Here are some things you should do to ensure your portfolio survives cyclical market downturns and remains geared towards long-term sustainability.
#1 Build A “Permanent Portfolio”
The concept of a permanent portfolio was coined by popular investment analyst Harry Browne as early as the 1970s. He argued that by allocating 25% of your portfolio to stocks, 25% to bonds, 25% to gold and 25% to cash, investors would be protected “no matter what the future brings”.
The four assets are able to deliver returns within the major economic cycles including periods of economic prosperity (stocks and bonds); deflation (bonds); high inflation (gold); and economic tightening (cash).
Subsequently, other popular investors have conceptualised their own versions of what a lifetime portfolio could look like. The premise always remained the same: spread your wealth between the main asset classes to lower your risk exposure and achieve a decent return no matter the market condition. Some have presented cases for utilising a 60-40 split between stocks and bonds while others have argued that the split should be more reactionary to economic cycles.
There are endless variations supported by financial gurus for your asset allocation strategy. What this really tells us is that we need to find an optimum asset allocation model for ourselves. Of course, we can use what the experts have suggested and tweak it to suit our needs and protect our investment portfolio from the next market crash.
#2 Diversify Your Investments
Now that we’ve decided on an asset allocation strategy, we need to think about how to invest within each class of assets. We can’t just agree with the theory of investing certain portions of our wealth into stocks, bonds and gold, and leave it at that. We have to actually make the investments in the real world.
With stocks, there are over 700 listed companies in Singapore, and consider the possibilities if you invest your money in overseas companies listed on foreign stock exchanges. One good place to start is exchange traded funds (ETFs) that’s invested into different types of listed companies.
The Nikko AM Singapore STI ETF and SPDR STI ETF invests in the top 30 stocks listed in Singapore or the Lion-Phillip S-REIT ETF, that’s recently listed on 30 October 2017, invests in real estate investment trusts (REITs) in Singapore. You could also consider investing into foreign country ETFs – SPDR S&P 500 ETF that’s invested in the biggest companies listed in the US or the IS MS India that’s invested in Indian equities.
This applies to bonds as well – you can invest in bonds sold OTC (Over The Counter), listed on exchanges or even on P2P (peer-to-peer) platforms. Another option is to park your money in the Singapore Savings Bonds (SSB).
You can pick and choose your bond investments on popular platforms such as [email protected] or speak to a trusted bank representative find out which bonds are available, the kinds of coupons they’re paying, the duration of the bond and other important information. If you like, you can even invest in retail bonds that are listed on the SGX.
For cash, will you keep your cash reserves in Singapore dollars, US dollars or Chinese Yuan? Which would suit you best or which would give you the best returns? You also have to consider savings accounts that deliver the best interest on your money.
It is far simpler for gold – just try to avoid “investing” in jewellery. You could invest in gold ETFs or even physical gold, just that keeping it at home may give you a lot more stress in life and storing it at the bank may cost you money.
#3 Invest In Defensive Companies
This strategy relates more for your stocks and bonds investments. For your cash holdings, financial crises make it a good time to invest in quality assets at lower valuations. For gold, it’s also fairly straightforward – it’s value would likely rise as people rush into safe haven assets in times of uncertainty.
Investing into the stocks and bonds of defensive companies may insulate your portfolio during a financial downturn.
Defensive companies are usually large corporations with a long operational track record as this means they’ve successfully manoeuvred past crises in the past and have a good chance of doing so again. They also typically run businesses that have inelastic demand, which means regardless of the economic condition, people have to continue utilising their products and services.
Some examples may include SingTel – it’s been operational for a long time, the Singapore government has a large stake in it and people still use their mobile phones during an economic crisis – or Sheng Siong – people still have to buy food, drinks, toiletries and other household products for daily consumption during a financial crisis.
There are numerous other examples, and simplistic way to look at it is to compare which companies were less affected during the financial crises in the past. Of course, as a caveat, these companies still exist because they’ve survived the past crises, any big companies that didn’t survive would not be listed anymore.
#4 Review and Rebalance
This is another important strategy that investors tend to neglect. You should review and rebalance your portfolio on a regular basis whether the economy is doing well or not.
When you review your portfolio after a certain period of time, you would notice that the proportions of your wealth divided into the asset classes would have changed from your desired levels. This is because the price of stocks, bonds and gold rises and falls.
You need to ensure that you rebalance your portfolio by selling some assets that have performed well (and seen price improvements) and buy more assets that have performed poorly (and see price declines). This ensures your wealth is always divided according to your permanent portfolio requirements.
Of course, what stocks and bonds you buy or sell does not depend on how well they’ve performed. You should continue your strategy of finding suitable companies that are defensive in nature.
At this juncture, you could also review how well your individual investments have done, and decide to rebalance by buying or selling certain stocks and bonds you think has fundamentally changed since you bought it.
Many professionals suggest doing this on a yearly basis, however, others argue that this may be too long for investors to keep a balanced portfolio.
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Bonds and Fixed Income
Bonds and Fixed Income