The year began amidst a raging bull market. Global equities have made up all the post-pandemic losses and are up 85 per cent as at May 7, 2021, since their March 2020 lows.
The global head of Wealth Management at Standard Chartered Bank, Marc Van de Walle states our data shows many investors have missed the bull run altogether or are significantly underinvested, waiting for the ‘right’ opportunity to re-enter.
Those who did stay invested through the volatility or re-entered the market in 2020 have a slightly different problem (‘Should I sell?’).
Van de Walle notes that “To tackle the last problem first (‘Should I sell?’), we believe it would be imprudent for investors who have ridden the bull market thus far to cash out. We do not expect a major bear market to develop, at least in the next year, given accelerating global growth and corporate earnings expectations and extremely loose policy settings. We expect economies and businesses to gradually return to normalcy by the end of the year as the pace of vaccination picks up worldwide.
“Based on decades of market history, it is hard to make a case for an equity bear market without an accompanying economic recession. Therefore, the risk of trying to time when to exit the market before any short-term correction and re-enter at the bottom are greater than staying invested (since the investor could lose some of the best days in the market by staying out).”
He urges investors to stay well-diversified across asset classes and sectors and rebalance their portfolios if they have strayed significantly away from their risk tolerance.
Rules Of Investing
Van de Walle explains that this example brings us to the seven key rules of saving and investing wisely, namely:
1. Prepare an investment plan based on your financial goals, risk tolerance and time horizon.
2. Set aside funds for short-term exigencies in cash
- Invest most of the remaining funds (say 80 per cent) in a core portfolio broadly diversified across asset classes, geographical regions and industry sectors.
Stay invested through market cycles, since time and the miracle of compounding returns is your friend
- Rebalance the portfolio at regular intervals (say twice a year) to bring it back to your risk tolerance
Use the remaining funds (at most 20 per cent), let’s call it ‘funny money’ for short-term trading (for those who want the thrill). Make sure this is based on sound research.
Finally, and this is the crucial part, follow the investment plan! Procrastination, as we saw above, is the greatest enemy of the investor.
In the long run, the market is always a bull. The above strategy should enable investors to overcome the downturns, mitigate biases and stay in the game. After all, we need to get on the bull before we can ride it.