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Strategies for Investing During Uncertain Times
Malaysia Perspective | 20 November 2008

With the impact of the high fuel price and other economic as well as political uncertainties that often plague stock markets globally, it is only natural for the local stock market to face similar implications. If you have been investing in the stock market, you would be wondering whether your investment strategy still applies.

What is the best thing to do when faced with such an uncertain market? Here are a few suggested strategies that you can adopt to protect your portfolio:

Strategy 1: Evaluate Existing Stock Holding
If you are still holding on to some poor fundamental stocks, you might want to consider selling them. Many people have this tendency to always believe that they should hold on to these stocks regardless of the stock market conditions. However, you need to cut losses too. Some people find it hard to sell these stocks, because they keep on referring to their original purchase price. If you keep doing this, you will end up holding on to low quality stocks for too long and live to regret it later when the stock price continues to dip even further, leading to much greater losses. As some would say, “Buy High! Sell Low!” instead of “Buy Low! Sell High!”

Strategy 2: Rebalance Your Portfolio
In a weak stock market condition, if you assume a portfolio which consists of only stocks and cash, your asset allocation should ideally be about 80% cash and 20% stocks, which is the opposite of the usual 80% stocks and 20% cash when the market is doing well. However, you can reduce stock holding if the market continues to drop further.

The reason for you to hold on to more cash is because you do not know when the market is going to hit rock bottom. Therefore, when the market is going downwards, you should hold more cash. During this period of uncertainty in the stock market, putting your money in bank deposits would still earn you interest from your cash, compared to investing in the stock market which is more than likely to leave you with negative returns.

Strategy 3: Pace Out Your Purchases
When the market has low demand, it is the best opportunity for you to build a long-term portfolio. You may want to start buying stocks and divide your purchases into several tranches. For instance, you can divide your funds into 5 tranches. Given the present weak market condition, you can start by investing your first tranche (or 20% of your total funds). If the market drops another 15%-20% from the present level, you can utilize your second tranche to average down your purchase price. Always bear in mind that, you do not know when the market is going to recover, so you should only use your final tranche when the market finds itself at the bottom and is on its road to recovery.

There are certain groups of investors who make it a habit to wait for the market to show signs of recovery before they start buying. If you are one of them, you may not get to buy at the lowest price, but at least you save yourself from many sleepless nights and having to wonder whether the market will go up or continue to plunge the next day. Once the market shows a clearer outlook, you can start to shop for those stocks with good fundamentals, but have yet to pick up on their momentum. As the market continues to recover, you can reduce your cash and increase your stock holding.

Strategy 4: Hold on to stocks that are of good quality, fundamentally strong and give good dividends
If your stock holdings are of good quality, fundamentally sound and continue to pay good dividends, you can consider holding on to the stocks. If you look at the prices of those stocks that maintain their dividend payment, you will find that the percentage drop in those stocks is relatively low as compared to the rest in the market as investors will basically hold on to their stocks regardless of the market condition. Investors who have a stake in this type of value stocks emphasize more on the dividend income that they receive and are therefore less sensitive to the price drop, as long as the dividend yield is still better than the interest rate offered by the banks. Therefore, if you are considering buying when the market is going down, these are the stocks that you could consider buying.

Invest in investor education
Whatever course of action or inaction you intend to choose ultimately lies on your ability to take risks and your knowledge of the industries and the companies. We need to prepare ourselves for this downturn. If we have prepared ourselves well and have listed out the stocks that we intend to purchase if the stocks drop in price, we would have the advantage of turning this market downtrend into an opportunity rather than a crisis.

This article was written by SIDC and Ooi Kok Hwa, a holder of a Capital Markets Services Representative’s Licence to carry on the business of investment advice under the Capital Markets and Services Act 2007. The information provided in this article is only for educational purposes and reflects the market conditions at a specified point in time, which may lapse and affect the relevance of this article. This article should not be used as a substitute for legal or other professional advice.

SECURITIES INDUSTRY DEVELOPMENT CORPORATION (SIDC), the leading capital markets education, training and information resource provider in ASEAN was incorporated in March 2007.

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