The first market plunge test for POSB Invest-Saver investors | Investment Moats Skip to Content

The first market plunge test for POSB Invest-Saver investors

Stock market  volatility and market plunges can  be very uncomfortable for first time equity investors. Do remember what you have pre-committed and preserving your brain is more important than your money.

It always seem that the banks like to release products at exactly the wrong time. Whether it is guaranteed products at the time when you should be buying stocks or in the current climate releasing a Blue Chip Wealth building plan called Invest-Saver at exactly the wrong time.

I wrote about it in a comprehensive article on the merits and pitfalls of investing in Invest-Saver and also how you can use it to build wealth here. [Article]

Market corrects 10%

Since the top of 3480 reached,  the index have corrected 10%, another 10% and its an official bear market.

It is not always nice as a first time investor in equity to see your hard earned money go negative.

Already, I see irresponsible journalism telling folks this is the new financial crisis and you should move to cash.

I am in the same position

I think I had it worse. At least you guys and gals started when it was near 3250. Take a look at my average at my Stock Portfolio Tracker.

My highest was at 3460! Die!

Remember what you pre-committed to your investment plan

Often times, investors gets hard done not by the market but by themselves. 

They couldn’t manage their emotional state and that becomes the detriment of their investment returns.

The fund managers may not always get it right but coupled with an investor that does not follow the game plan, it becomes even worse. Some don’t even have that in the first place.

For the folks who do not have a game plan, I urge you guys to re-read this.

“Protecting yourself against the possibility that you might turn out to be weak-willed,” she says, may have a “subjective value” to the human brain.

So if you are considering an entry—or return—to the stock market, ask yourself if you are ready to precommit to it.

You could buy a fixed amount every month in a dollar-cost-averaging plan; sign an investing contract, witnessed by family or friends, stipulating how long you will hold your investments; name the account after a goal, such as saving for college or retirement; or craft a checklist that spells out the only conditions under which you would sell.

Jason Zweig’s article on pre-commitment hack for the brain

If you follow the game plan of passive investing, you have already pre-committed to dollar cost averaging into the Invest-Saver, understand the volatility that comes with the assets, how it will benefit you for the time horizon you invest in.

According to what I written, the thing to take care of now is getting a grip on your emotional state.

Lets see if we can hack your brain on this.

How the market can played out

When you invest in something like an STI ETF, which is a basket of Singapore blue chips, then tend to move up and down.

That is the fact of life of things traded daily.

A possible worse case scenario is a 10% drop evolves to a 50-60% one. That’s not a very pretty sight for most. To me that is a very good thing.

Essentially, my friend dollar cost average into this at the top. He is still alive, still contributing $1000 to this and living a normal life. You can read about it here.

In another way, this 10% correction can go down a bit further and then go back up just like at the start of 2012.

10% corrections are more frequent than you think. They happen like once every 22 months at least.

If you liquidate all, what happens if it ends up higher in 3-4 years time? STI 6000?

Markets are built upon turmoil

The truth is that we have  great run, but we also have a lot of problems, problems you hear in the news.

You are an investor, don’t confuse politics and making money.

All those little dips are 10% at least, with one near 20%.

The truth is that we do not know how much lower it will go

Think  you are smart enough to get back in

This is debatable. Some of you could be smarter than these hedge fund managers who spend a large part of their life training to be investors, speculators and practicing it daily.

And they missed this large bull market.  Read here.

You just got started

Some  of you will get panicky and pull money out or just end this plan. Hey, this plan was started in end July.

It is just one month.

You just got started.

You have 30 years ahead of you probably.

Your next 10 years stream of injection will be bigger than your current holdings

You would probably have 1 month dollar cost average now.

The typical bear market (if it really becomes that long drawn) will be 2-3 years.

When you DCA into an Index ETF monthly, you are injecting a stream of cash flow.

Adding up the stream of cash flow per year could amount to an amount even larger than your current invested holdings.

You get to buy assets cheap

When you pre-commit to the plan, you have a far longer horizon than investment managers who typically have to perform every single year.

That is also your advantage.

As a person building up wealth you SHOULD hope for more of these corrections.

It means you get to buy a basket of stocks on the cheap.

If you fear missing out on good gains, wouldn’t your gains be even better if its cheaper?

If you have 30 years to go, and you know Singapore will progress through growth and inflation to a much higher level in 30 years time, would you want to get in cheaper or when it is more expensive.

If you have invested 20k, a 70% correction will see you left with $6000. But in the next 3 years of the bear, if you are investing $500 per month, you would be allocating $18000 into it, and at a  substantially cheaper price.

A 70% correction on the index at 3250 will mean it falling to 975 (yikes). If majority of your money can be bought at that price, you will only need the index to go  to 2000 for you to double your money. The gains offsets the losses  and they average out.

Single stock may go belly up, its harder for an index

A single company like SPH may go bankrupt, and that is the risk when you invest in an individual blue chip.

Blue chips like Chartered Semi Conductor and NOL have shown that even if they are Temasek linked, they can bleed for a long time and profusely.

When SPH becomes a going concern, another better quality company takes its place on the index.

Would an index go belly up? Possible but its rather difficult.

You seen the worse in Greece where the index went down 90%, but there are still value left.

The STI index can follow suite, but that would mean that your companies like UOB, DBS, OCBC, Singtel goes to near 10% of current  value.

You think to yourself, if the situation is so dire, would the alternative,  which is leaving your money in bank deposits in those banks be any safer?

Summary

I hope I give you guys a fair account of how bad it could get but also the opportunity to stay the course and not fall into common psychological issues that plague investors.

If after this, you are still not comfortable, then I guess its better to leave your money in the bank.

Lets revisit this sometime later.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

For my best articles on investing, growing money check out the resources section.

Some good REIT education
← Previous
The competition versus Genting Singapore
Next →

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Pok Chow

Tuesday 27th of August 2013

It's good to have a short term correction. Everything was expensive. There was nothing cheap to buy. That's unhealthy for the market moving forward. Having said that, I still don't find it cheap yet.

Kyith

Tuesday 27th of August 2013

i think its cheap enough index wise. we are still far off from a 3800. do note that the banks have basically gone no where for years.

J

Tuesday 27th of August 2013

I think people need to decide whether it is for long term or short term, the holding period had to be careful thought through. If focusing on short term, there are better investments opportunity out there. If for long term, the chance of STI ETF to default is super low with not bad returns.

But do take note that if SGX got approval for small quantity purchase, you can construct the same ETF without management fees and etc.

Kyith

Tuesday 27th of August 2013

Right on all counts J. You seem a well learnt investor

icyparadise

Monday 26th of August 2013

Hey Kyith, I'm thinking of doing dollar cost averaging using the standard chartered trading and buying into STI ETF. However, putting the rest of the money into odd lots... wouldn't odd lots be illiquid? Isn't it not advisable to buy odd lots?

Kyith

Tuesday 27th of August 2013

hi icyparadise, what do you mean by odd lots? are you talking about the SPDR STI ETF or Nikko one?

Daryl

Sunday 25th of August 2013

Hi kyith, what's your take on the long term commission rates of the POSB Invest-saver?

Kyith

Sunday 25th of August 2013

i don't like it. 1%. you can do well with Standard Chartered Trading if you have a min 400 per month to invest.

my15hourworkweek.com

Sunday 25th of August 2013

Hi, Great article there! You are right that the mainstream media often offers knee-jerk advice after the market corrects. Just took a look at the Sunday Times and suddenly, it's all about "you can lose money in the market", "time to cash out" stuff. And if the POSB Invest-Saver investor starts to panic, he should really re-evaluate his purchase. One should really be in it for the long haul. For a person just starting out, he should really look at this situation as an opportunity to increase his monthly allocation and take advantage. Like what you said, the index really can't go to zero.

Kyith

Sunday 25th of August 2013

haha, i nearly flipped when my friend emailed me the article. if its another 2011, the career of that journalist is going to take some beating.

i think for a month old scheme anything that moves down is a really good thing.

hey i doubt any of them will suffer as much psychologically as me!

This site uses Akismet to reduce spam. Learn how your comment data is processed.