This article was written by Loo Cheng Chuan.
The stock market crash of March 2020 and the subsequent spectacular bull run is one of the most unprecedented stock market phenomena in history. Today, the Nasdaq 100 and S&P 500 are repeatedly breaking records on an almost daily basis.
Indeed, it has been gratifying to see my portfolio profiting handsomely in the current bull run. Unlike previous market crashes in 2008, 2012 and 2015, I have been very vocal about my very optimistic stock market analysis in my articles, on the 1M65 Singapore Telegram channel and YouTube videos throughout this COVID-19 crisis.
Despite my vocal sharing, many have missed the opportunity to profit from this fast and furious bull run. “Why did I miss out on this bull run?” or “Am I too late?” are common laments.
Rest assured, there will certainly be another chance.
While a future stock market crash is certain, it is less certain whether you will profit from it or miss out again, unless you fundamentally have an overhaul in their investment strategy. I would like to share my personal investment experience profiting from the recent stock market crash to help you prepare for the next opportunity.
#1 Adopt A Compounding Investment Strategy That Will Stand The Test Of Time
Most investors would attempt to time the market by picking stocks at rock bottom prices and selling them at the highest prices possible. Unfortunately, this strategy is very prone to fear and greed.
As seen in this recent COVID-19 crash, most investors sold out or stayed out of the stock market in March 2020, believing that the stock market would crash further. When the stock market started rallying after 20th March, many believed that it would crash again and stayed out, despite my repeated calls that a powerful bull run is coming.
If you had followed an investment strategy that has proven to compound across time, e.g. investing in the S&P 500, or equivalent funds, you wouldn’t need to catch the bottom of the stock market as the index will eventually compound its way back up over time. Even if you had invested in the S&P 500 at the peak right before each major crash over the last 30 years, you would still sit on huge stock market gains that had compounded at 7-9% annually.
Holding a compounding portfolio will help you resist selling out during market crashes, and develop the confidence in the post-fall rebound.
#2 Separate Your Cash Reserves Into Two Piles
For your first cash pile, dollar cost averaging into the S&P 500 or equivalent global fund would be a timeless and proven investment strategy. Good investors who set aside a significant portion of their savings to be regularly invested through DCA, regardless of the stock market conditions, have gained healthy returns over a long time horizon.
For your second pile, your “dry powder”, divide it into 5 to 10 “bullets” and start firing them into the S&P500 when it is down by 20% to 25% from the peak, during a major crash. Phase out your buying and buy regularly on the decline as well as on the rise.
During the recent COVID-19 crash, I usually invested once every one or two weeks. As most people would find it scary to buy during the crash, I found it very useful to have the company of like-minded seasoned investors (e.g. like those in DollarsAndSense Business Community or our 1M65 discussion group) during these periods.
#3 Build A Financial Safety Net With Your CPF
Many Singaporeans viewed my 1M65/4M65 CPF strategy as a way to retire rich. While that is true, a strong multi-million-dollar CPF retirement fund also serves as a powerful financial safety net in your investment portfolio.
“Be greedy when others are fearful”. This is a mantra popularized by Warren Buffet that few could execute in reality.
During stock market crashes, it is comforting to know that your CPF is safely and securely compounding at a high-interest rate. This will calm your investment fears and enable you to utilise your “dry powder” during major stock market crashes like the recent COVID-19 crash.
#4 Minimise your investment in Singapore stocks or the STI
Most Singapore investors love to buy Singapore shares, largely out of familiarity and because they mistakenly believe that Singapore blue chips and REITs are immune to market crashes. These investors suffered a rude shock from the recent COVID-19 market crash. These are my reasons why we should minimise our investment in Singapore stocks:
– Unlike the the S&P 500 or Nasdaq companies, our SGX stocks (including STI component stocks), are largely localised in Singapore, with some exposure to the region. They are very susceptible to global economic shocks, as seen in 1997 Asian Financial Crisis, 2008 Global Financial Crisis and now 2020 COVID-19 Pandemic. Compared to the S&P500 or the Nasdaq, there are very few good high tech or global MNCs in our SGX or STI index that could defy the gravity of the Covid-19 market crash.
– Stocks listed on the SGX, especially the STI, crash fast and rebound slowly, compared to US indices (I have previously written about this extensively here and here). The SGX stocks have completely missed out of the current US stock market bull run. Remember that the STI has never recovered from the 2008 market crash, let alone the recent COVID-19 crash.
– If your job, home, savings, CPF, are all based in Singapore, isn’t it financially prudent to diversify your investment away from Singapore?
#5 Avoid Stock Picking And Buy Diversified Indices Like The S&P 500
Very few investors, even fund managers, can pick stocks and beat the S&P 500 consistently. No matter how many times I tell this to everyone, many investors would ignore this advice and try to stock-pick, especially Singaporean investors. Even the US market bull run is largely driven by a handful of tech stocks, which requires guts, luck and the sharpest of minds to pick out from the universe of stocks.
Wouldn’t it be safer and simpler to adopt a compounding strategy like indexing the S&P 500 when you know that it will eventually recover and compound at a good growth rate?
Be Prepared For The Next Opportunity
You may have missed out capitalising on the recent stock market crash and the current US market bull run. However, do not worry, there will certainly be another. In fact, I think there might be one in the near future. Watch out for my next article on it.
Learn from this COVID-19 market crash experience. Adopt a solid investment strategy and be better prepared when the next stock market opportunity arises.
Loo Cheng Chuan, is the Founder of the 1M65 Movement. He developed the 1M65 ($1 Million By 65 Years Old) CPF investment strategy that is helping many Singaporean couples to become millionaires at retirement. He was one of the few non-civil servants to be awarded the Public Sector Transformation award in 2018 for his 1M65 efforts. He runs a 1M65 Telegram Chat Group where he regularly coaches passionate 1M65 enthusiasts on good personal finance virtues.