Earlier this week, we had the opportunity to meet some of our readers in an Introduction To ETF Investing talk jointly organised with Maybank Kim Eng and Nikko AM. During the event, we had some time to take on questions from participants.
One of the question asked that struck us was about “what investors should do if they think a recession is coming.” Should they continue to invest, stop investing, or even start selling some of their stocks?
Given the muted outlook that is currently upon us, we believe this is a question on many people’s minds. It’s a good question to ask as well. Should we stop investing or even sell stocks if we think the economy is not going to fare well in the near future? Should we only resume investing when we are more optimistic?
What Are Your Investment Objectives?
When you start asking yourself this question, it’s good to reflect back on what your investment objectives are.
For many of us, our investment objective would be to build up our portfolio over time. We want to see our investment generate returns for us over time. If the market were to provide a return of 5% per annum over the next 20 years, we want to be able to earn that return.
We like to think most people are practical. We know that outperforming (or beating) the market return is a task that even fund managers struggle to do. We are not trying to achieve that.
When people cite historical returns such as how the STI gave a return of 6% per annum over the past 10 years, it’s worth remembering that this return includes both good and bad years. Unless your intention is to beat the market, rather than to earn the market return, there is no reason why you should deliberately sell all your stocks, even if you think a recession may be coming.
Why Do People End Up Buying High And Selling Low?
You see, some people, though they claim they are passive investors, like to behave like they are hedge fund managers when markets start becoming volatile. They see the market swinging from highs to lows and after a while, they think they can spot the trend.
Instead of sticking to the strategy that has already served them well for years, they try to be clever and do market timing to buy and sell stocks during this period.
For example, they might deliberately avoid investing when times are bad, and when stock prices are lower. They return to the market when times are better, and when stock prices tend to be higher. In other words, they buy high and possibly sell low.
What About Selling When Prices Are High?
Selling when prices are high sounds logical on paper.
Yet, this contradicts what our underlying investment objectives were in the very first place. We want to invest in these companies because we want to participate with them in their growth over the long run. This long run equates into the next 10, 15 or even 20 years, not just till the next recession.
Don’t Forget Dividends Yield
Compared to other markets in the region, Singapore blue-chip companies tend to give their investors pretty attractive dividends. That means returns to investors shouldn’t just be seen through stock prices, but also based on dividend payout as well.
For example, an uninformed investor could take a look at the stock price of Singtel on 1 Jan 2013, which was $3.50, and compare it to its stock price on 1 Jan 2016, which was $3.51. He could quickly conclude that investors would have made no returns from Singtel unless they sold it when the price went up. He would be wrong.
An investor who bought Singtel on 1 Jan 2013 would have earned $510 worth of dividends by 1 Jan 2016, or about 4.9% per annum, just by holding the stock.
Your Investment Horizon Plays A Part Too
Despite all we have written, there is unfortunately still no “right” answer to the question about whether your should deliberately sell stocks if you think a recession is coming, or stop investing.
Your investment horizon plays a part too. If you are already 55, and about to retire in a few years time, then it wouldn’t really be sensible to continue ploughing in thousands of dollars in the stock market if you are already skeptical about how the investments would played out.
There are many other possible factors that could determine the way we invest. Ultimately, the most important thing we should remember are what our investment objectives are, and to deploy and stick to a consistent strategy to accomplish our objectives.
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