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Ride Out The Volatility By Taking The Long View
Perspective | 24 September 2010
By: Xavier Lim
Articles (51) Profile

Given the prevailing uncertainties, it is not surprising at all if the Straits Times Index (STI) were to retest its 25 May-10 low of 2,650. This writer believes that the local equity bellwether will be trending sideways for the next couple of months before it finds a new direction.

So, which direction will Mr. Market be going? Some experts remain bullish on the stock market; others expect stock prices to continue drifting downwards until the traditional year-end rally comes along.

As the bears and bulls were battling so ferociously over the past few months, some of my peers suggested that to manage through this rough patch, we should hold cash, bonds and gold. Yes, they are not wrong but over the years, stocks have produced better returns than any other class of assets. More importantly, if you pick the right stock, you may gain a marvellous return.

Positioning To Grow
As the broad markets are still in see-sawing mode, investors may want to invest in high yielding dividend stocks. For those who can afford to take some risks, buying small cap stocks in anticipation of the recovery would be a viable option.

But whatever investing strategy is adopted, you should reorganise your portfolio by trimming riskier stocks and finding shelter in stable companies that offer reasonable dividend yield. With the dividend payout, there is some form of return even if your shares move sideways or downwards.

That does mean that this writer is pessimistic. In fact, if companies are able to continue to grow their revenue and, earnings continue to appear strong, there is no reason why the stock prices will not bounce back to record highs or even surpass them. Furthermore, with strict risk controls in place, we should position ourselves on the long side of the market. However, the recovery process will likely take several months or one year.

Yes, it is not easy for companies to rely solely on organic growth in this current environment. Fortunately, there are alternatives. In order to achieve revenue growth, a company could either raise prices of its products and services or engage in merger and acquisition. The latter seems to be the most logical step to revenue growth going forward. However, economic stability must exist to allow companies to spend the cash on their balance sheets, or at least companies must feel a sense of economic stability. For example, Wilmar International has been making various acquisitions these past few months, which referenced that the company is optimistic about the economy and is ready for inorganic revenue growth.

Knowing When To Sell
Markets can be very volatile as what we have experienced during this recent global financial crisis. Having fallen over 50% from its peak, the STI has subsequently recovered more than 50% from its low. Many experts have difficulty timing their market entry, while others said they have acquired some wonderful skills that enable them to pick shares at their lows, which is quite unbelievable. Anyway, that is not important. What is important here is that stock markets do recover from their lows, and continue on to reach new highs as economies improve. This means that investors who take the long-term view are able to benefit from the market, even without investing close to the lows. The interesting thing is even if you had invested at the absolute peak just before the 1997 Asian Financial Crisis, that investment would be worth many times its initial amount. Two good examples would be OCBC and Singapore Airlines.

This writer is not suggesting to buy and hold. Rather, investors should take the long-term view, be patient and stay attuned to the valuations of a stock. Do not jump in and out of the stock market. Stay on top of your investment plan and look at the valuations of the stock, with an objective to sell these positions when the valuations are overstretched. Always remember, Mr. Market will rewards us if we have the mindset of both risk control and the intent of selling when the stock is overvalued.

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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