Home  My Blog Show All Blog Asian Financial Crisis Anniversary
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Asian Financial Crisis Anniversary |
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Written by Wilfred Ling
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Saturday, 30 June 2007 |
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I have seen a number of clients who were hesitant to invest. It is kind of strange that they were looking for an adviser to help them to invest yet they wanted to look for an opportune time to invest with me. I find it rather weird because the only reason why they are looking for an adviser is to remove that burden of timing the market. Yet, they still want to DIY with an adviser?
Nevertheless, in retrospective everyone of them who waited incur a huge opportunity cost. The market shot up. I told them not to time the market, but they didn’t heed my advice. Thus they loss thousands if not tens of thousands of dollars of opportunity cost. To me that’s real cost because they had the benefit of someone advising them yet they chose to reject that advice. Hence the opportunity cost was incurred through a deliberate decision making. But people who try to find a “good” entry into the market really need a professional adviser to help them because this kind of behavior demonstrates a total lack of understanding of investment. Consider the worst case of investing lump sum during the Asian Financial Crisis at the end of July 1997. What was the return if a person had invested lump sum in a globally diversified portfolio? The return would be 7.09% per annum based on MSCI World Net in Singapore dollar from 31 July 1997 to 31 May 2007! Amazing? That crisis was no big deal. Why then did people destroy themselves permanently during that time? First reason was the use of leverage through margin trading, secondly their portfolio was highly concentrated and poorly diversified. Thirdly they didn’t have the holding power nor patience to wait. But the return was fantastic considering the lump sum was injected right at the peak of the market! However, these days people are leveraging, poorly diversified. And those who are more cautious are timing the market when they would do well by having a diversified portfolio. Very often people refer the “market” as merely equity. But these days there are so many types of asset classes like fixed income, currency and even commodities. A bear run in one doesn’t mean it is bear run in all.
What would I do if a person wants to invest a lump sum but express reservation about the risk of investing at the peak? Firstly, I have a standard powerpoint slide which I’ll educate the investor. Secondly I will consider his overall portfolio. If he is going to invest 10% of his net asset, obviously this small amount can take large risk. But if he is going to invest 90% of his net asset, then he might not be able to take too much risk. Thirdly, if his investment experience is little or none at all, I’ll suggest a “slow and steady” approach like starting overweight in money market first. Fourth, to manage the emotion aspect of the client, I’ll do dollar cost averaging although my research shows that this does not produce superior performance compared with lump sum. Nevertheless, this will make the client more at ease. |
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