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Sharing Effective Investment Strategies
Education | 24 December 2009
By: Xavier Lim
Articles (51) Profile

In today’s rapidly-changing economic climate, a company needs to develop a business strategy that can adapt to changes effectively. Companies, both big and small need to understand that a small company may not always be the one, which will end up being ‘eaten’ by a big company. It is a slow company that is most likely to be ‘beaten’ by a fast company. A fast company is one that anticipates what might happen or what it might be able to make happen, and is fast to bring its products and ideas to the marketplace. Therefore, companies should understand how to develop and use foresight and anticipation to envisage possible future scenarios in preparing for change and managing it well.

The same reasons apply to investment. A well-planned investment strategy is essential before making any investment decisions. With many uncertainties yet to be resolved, the investment climate remains challenging. Taking action now may feel counter-intuitive, therefore, it is advisable for investors to develop an investment strategy to handle the volatile market conditions. Here are some suggested strategies that may help you invest with more confidence in 2010.

1. Diversification
No matter what the financial experts say of investing, the best investment advice continues to be maintaining diversity in your investment portfolio. This is because you do not want to put all your eggs in one basket. Unfortunately, many people fail to understand that true diversification comes from holding stocks, bonds, mutual funds, cash and currencies, and not stocks and stocks alone.

Those who believe that diversifying their portfolio equates choosing stocks in various sectors rather than focusing on one, suffered many sleepless nights when the stock market crashed in late 2007 to early 2009 due to the financial crisis. Many people learned valuable lessons during this time frame.

Nobody dare to say that we will never again experience a significant stock market crash. If this were to happen again, your entire retirement hopes, dreams, and funds invested in the stock market would be in deep and shark infested waters.

2. Keep It Simple
The key point is to understand what you invest. Investors may want to figure out their own financial goals and develop an investment strategy that requires little analytical research and time. For example, investing in stocks such as United Overseas Bank, Venture Corp and Keppel Corp (please refer to page 7-11 for more information on these 3 companies) will reduce your worry of these companies going bankrupt when the economy is in a bad shape as these 3 companies are leaders in their field. Investors should also invest in simple products with transparent structures that help to provide assurance, such as the Singapore Government bonds, REITs and international funds.

3. Asset Allocation
“No pain, no gain”, all investments involve some degree of risk. By investing in more than one asset category, investors reduce the risk of losing too much money and their portfolio’s overall investment returns will have a smoother ride. Besides holding stocks, bonds and cash, investors may want to consider allocating some of their investable assets into foreign currencies, leaving this money in a bank’s foreign deposit account.

Investors need to determine his/her financial goal and risk tolerance in order to establish an appropriate asset allocation model. Investors will be able to handle volatile market conditions with an established appropriate asset allocation model that will smooth his/her ride in investment. The model should also allow investors to limit their losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.

4. Rebalancing Of Portfolio
Periodic rebalancing of asset allocation is a good way of market timing. For example, if an investor’s 60/40 stock/bond allocation has morphed into a 70/30 split, then that investor should sell stocks and add bonds to bring the portfolio back on track.

Data has shown that investors who aligned his/her portfolio back to the target range once a year between 2003 and 2007, was less exposed to the market crash in 2008. What’s more, if an investor trimmed the bond portion at the beginning of this year, he/she will have captured more of the rebound in stocks.

5. Be Sensible
The recent recession has taught us that we need to be more attuned to the valuations of a stock. Runaway real estate and stocks at high prices made everyone think that ‘this time it is different’ – until it was not. Everyone think they are an expert when the market is bullish, in fact, one should be staying on top of his/her investment plan and look at the valuations of the stock using the financial ratios (those who want to find out more can visit our website to read the archived “Education” articles). Put it simply, be proactive, not reactive. Investor should find an asset allocation model that works, stick to it, and be prepared to hold more cash if you think stocks are overvalued. This writer urges investors not to jump in and out of the stock market.

This writer feels that having a cash reserve would reduce some worries of investors, allowing investors to use averaging down technique to lower their average cost in a stock that has dropped in price and ride out the storm. One of my peers complained to me that averaging down technique does not work and it is only a ‘game’ for the rich. Yes, he is right that you need some cash reserves to practise averaging down, but you do not need a huge cash reserve if you understand and has developed your investment strategy well.

Global stock markets have been soaring since 09 Mar-09 on the back of efforts by the governments over the world to stabilise the financial system and push for economic growth. However, it remains uncertain whether the current rally will be sustainable in 2010.

Therefore, this writer suggests that investors should not only diversify their portfolio among different class of assets, but also choose stocks in various sectors to reduce risks. Investors may want to refer to page 7-11 to consider some stock picks in 2010. Remember that investing in what you are comfortable with is one way to balance your risk and return.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.

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