wealtharticles-how_to_weather_the_financial

How to Weather the Financial Storms?

In a market this uncertain and volatile, what's an investor to do?

The first step is to stay calm and avoid rash decisions that could worsen an already deteriorating situation. In particular terminating an insurance policy prematurely may cause higher losses than holding on. It is better to get full details first.

Similarly, pulling out money early from a still-viable fixed-term unit trust can also result in unnecessary losses.

Secondly, assess what you have and decide what changes you want to make. Many who invested in shares, unit trusts or other investments have lost money in recent months.

Rather than bemoaning your losses and selling based on the past, take a fresh start at the current level and evaluate if the investment is likely to rise from a low, or sell to cut losses before they drop further.
Investors in markets that offer a "stop-loss" feature - whereby shares are automatically sold if they fall below a fixed level - may consider setting up a stop-loss in case share prices drop much more.

Then, it is time to determine what to do with your cash. Factors include whether you are a conservative or higher risk investor, the time horizon for investing and how much cash you have available. Retirees would be more likely to keep their funds in lower-risk investments, even with lower returns than say a worker in his/her 20s. A millionaire could take more risks with $10,000 than someone with life savings of the same amount.

A sound strategy for now seems to be to keep at least part of your funds in cash. With interest on savings at 0.25% or lower and 2-year fixed deposits paying just 1% when inflation is over 6%, putting money in a bank may not seem very attractive.

Money market funds do not offer anything better, with NTUC Income's flexi-cash returns dropping from nearly 3% a year ago to just 1.11% recently. Even at these rates, though, holding onto cash at a low return can be better than investing and losing it. As Calamander Capital managing director Roman Scott put it, "when you have markets de-leveraging you don't want to ride on a runaway train".

Gold prices nearly soared 1% in one day and while gold seem enticing, its huge volatility all year long and nearly 40% of demand being based on investor demand rather than supply and demand fundamentals, makes it look less attractive and there could well be more wild swings ahead.

Over time, you will probably want to get back into investments with higher returns than cash.

Trying to time the market and buy at a low is hardly realistic, as even professional investors are very uncertain as towhether the market will rise or fall and whether share prices are at a bottom.

One strategy is to use dollar cost averaging, where you put a fixed amount or percentage of your funds into a predetermined set of investments at regular intervals regardless of their price.

An investor with $10,000 to $20,000 could put $2,500 into unit trusts or selected shares every quarter over the next 2 years, for example.

While dollar cost averaging may not maximise returns, it reduces risk by allowing investors to buy investments at a lower average price and with less overall volatility.

One option would be to buy unit trusts at lower risk shares. With declines in prices, share prices would seem like a good value.

Analysts may point to indicators ranging from technical signals and market concensus on particular sectors to most money managers being negative as indicators for timing share purchases. there's no magic formula, and a dsicipline approach to buy unit trust or shares in well-run companies that are at low valuations, at regular intervals, could be preferable for long-term investors.

An alternative suggested by Mr Scott is to invest almost exclusively in real assets such as real estate, indicating in a recent report that S-Reits have become "attractive defensive vehicles offering stable cash flows and high yields, and dollar cost averaging into S-Reits could be a viable strategy."

In these uncertain times, a prudent, well-considered and conservative approach seems best.

By Richard Hartung. a former banker with multinational companies who now provides consulting services to financial institutions around the Asia-Pacific.