3 important things to remember as we test market lows

“Forecasts usually tell us more of the forecaster than of the future.” — Warren Buffett

I HAD a tough time Googling older articles from the beginning of the year on predictions by top global banks on where US stocks, represented by the S&P 500 index, would end this year.

After clicking past a few pages of search results, I finally managed to find an article published in The New York Times at the end of January when markets were down by 5.3 per cent. Then, many experts called for a rebound of a positive 15 per cent by the end of 2022, or about 40 per cent higher than where we are right now. Here are 3 things to note.

Forecasts are just forecasts, and are dangerous to watch closely

Today, looking at more recent forecasts, there are no longer references to those predictions from just nine months ago, as if they never happened. Economists and forecasters now stand by a new set of numbers with new soundbites that extrapolate into headlines all over the world. 

There will always be a lot of chatter by “experts” trying to predict where markets will bottom, and whether we are headed for a recession. It should be okay to say, “I don’t know”.

We do, however, need to remember some fundamentals through all this noise. Markets are forward-looking and prices are adjusted based on the combined perception of market participants — that is, every investor — of the future.

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The way markets tend to behave going into and during a recession proves this exact point.

Even if we are headed for a recession, this does not at all mean that stocks are bad.

Markets fluctuate but relative risk-return prevails over time

A lot of people have been asking us if it makes sense to switch their holdings to Singapore Savings Bonds (SSBs) or fixed deposits paying interest rates that are sharply higher than prior years.

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To answer this question, you have to remember some fundamentals about the relationship between different types of securities.

Cash gets eaten alive by inflation. SSBs are very safe government bonds — but they do not hedge against surging inflation today. Bonds from corporates and more risky governments are more risky than SSBs, and so must have a higher yield to compensate their holders for taking more risk.

Stocks are riskier than bonds because if a company goes bankrupt, bondholders will be paid back first. If you take more risk, you need more time to get compensated with higher returns.

This year, global stocks are down about 20 per cent and global bonds are down about 12 per cent. If appropriate for your goals, this is an opportunity for investors with a longer runway to invest, average down, dollar-cost average, and stomach the volatility to benefit from higher expected returns with a lower starting point. 

The four Rs: responsible, rational, resilient, reasonable

“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett

Have a plan that is evidence-based and does not require you to time the market or make forecasts. Be responsible in understanding your future needs and goals for the money you invest. Every dollar you invest should have a purpose to help you live better in the future.

Invest in rational and resilient portfolios. Depending on how far into the future your goal is and your risk tolerance, decide on strategic passive asset allocations that address each of your goals. Invest in rational and resilient portfolios that are diversified and low-cost, with no trailer fees or sales charges eating your investment returns.

As a general rule:

• If you have less than 2 years to your goal, invest in a low-risk cash management portfolio, now earning over 2 per cent
• If you have 2 to 5 years, invest in a portfolio of 40 per cent global stocks, 60 per cent global bonds
• If you have 5 to 10 years, invest in a portfolio of 80 per cent global stocks, 20 per cent global bonds
• If you have over 10 years, invest in a portfolio of 100 per cent global stocks, and potentially an allocation to private equity, hedge funds, and other alternatives

Be reasonable about your risk and return expectations. This is not speculation or gambling; this is investing. Each of your life goals requires you to calibrate your risk appetite to stocks and bonds, and at times, alternatives.

It is very difficult, but do not let frustration and emotion dictate your portfolio decisions. Flying to perceived safety now will hurt your ability to hang on to your purchasing power, and that’s the biggest risk of all.

The writer is CEO of Endowus.com, a fee-only digital wealth platform for all your wealth - cash savings, CPF & SRS.