Realization and Lesson Learnt

Never will i realize that i will learn in 2 months what i expect that i will learn in my 4 years in the market.

In 2 months, the S&P500 fell 32%. Truth to be told, that is a very respectable figure, compare to what emerging market countries’ indices are facing. Numerous emerging market indices are down 60-70% from their peak last year, and a whole chunk of it happen to be in these 2 months.

My portfolio is down by half that. This can be attributed to being 50% in cash all these time. Nevertheless, it really feels shitty to see a near 20k paper loss almost every week when i browse my Quicken.

It would have been far worse had i not pared down my emerging markets unit trust and global unit trust.

Correlation goes to 1 when bear market hits

The main selling point of having an asset allocation is such that you minimize your portfolio risks and maximize your returns. by using instruments with different correlation, theoretically your overall portfolio risk should be less than individual instrument risk.

What I observed in this bear is that when stocks go down, no matter you own shipping stocks or property plays, they all increase their correlations such that u get slaughtered no matter what you invest in. I do know that there are some counters that buck the trend. Companies like SMRT, STARHUB and M1 were doing ok in this environment but generally even defensive plays like ST Engine and SPH were hit as well.

What i didn’t count on was that instruments who traditionally have negative or really low correlations will perform EXACTLY like equities. The real surprise and lesson was when commodities and precious metals equities went down with the general stock market. It was a costly mistake not to watch this as close as general equity market. I was able to reduce my unit trust equities when the shit hits the fan but completely omit to cut on precious metals thinking that traditionally gold and precious metal equities will explode to the upside in bear markets.

In a bear market, and a credit crisis such as this, funds are pulled out of equities, mostly as a flight to safety, but also as an emergency to shore up liquidity. Good stocks bad stocks, they all kanna pulled out.

Dividend Stocks defensive? Bleh!

The correlations for my dividend portion of my portfolio have largely been low with STI. REITs and Infrastructure trusts have been slaughtered. Their yields are humongous based on historical earnings and cashflow. On normal occasions this would be a value buy. But i’m not biting this time. Some of these dividend stocks could see deteriorating fundamentals and hence cashflow could be impacted, thus the yield and PE will be misleading.

The only respite is that you get to earn dividends while you wait for it to go back up. However, judging by how much it has fallen it would have been a long time.

Decision making and money management

A large part of me belongs to a buy and hold investor however, the curious and adventurous side of me relies more on TA for entry and speculative ventures. When support is being taken out, the general trend establish indicates to me that we will have a bear market for quite some time. It will be a bit stupid if i don’t do anything seeing near certainty we are going to have shit ahead. I pared down my unit trusts in global allocation yet i still leave my dividend counters and growth counters there. It is apparent that there is a problem with my money management and decision ability.

Passive investing is officially dead

I used to think that the average investor cannot timed the market and that passive investing is the key. However i learn well enough from this year that had i not be active in this my portfolio would have been in more shit then i realize. The decision to be 50% in cash is from the analysis that market might not be cheap. Because of that deduction, i kept this warchest there for quite some time. It turns out to be a good idea after all. Passive investing for me will be to be 100% in my allocation which would most likely to be 80% in equities which would subject me to more problems

Best Risk Tolerance lesson

How do you know your risk tolerance? Do you fill out a questionnaire to determined that? I think that is what most financial advisor would do to ascertain their clients’ risk tolerance.

Then again most questionnaire don’t measure up to a risk tolerance test I took some time ago from a behavioral finance book. That book highlighted that my risk tolerance ain’t high and i am moderately risk adverse only.

It looks like this latter test is a much better gauge of risk tolerance. In fact its quite accurate.

I think many people truly understand how much loss or volatility they can take in this market.

I should modify the way i manage my money as well. what i am doing may be taking more risk then i should.

I will add more in a week’s time.