Tuesday, November 24, 2015

To Hold or Not to Hold Stocks?


A long investment horizon is good if portfolio has ample time to grow.

A widely regarded financial adage says that holding investments for a longer time increases the likelihood that the investment will yield a positive return. Take a long-term chart of 20 years of any stock market and you typically would find positive returns at the end of the period.

However, experienced investors have come to use the term "long-term investment" in a tongue-in-cheek manner when their stock or investment starts to perform poorly by saying that it would now go into their "long-term portfolios".

So is it true that holding equities "long term" always pans out well?

In October 2007, the Singapore Straits Times Index (STI) reached a lofty 3,800 before subsequently crashing 60 per cent, thanks to what is known today as the global financial crisis.

Many market players held onto their horses and waited for the STI to recover. An investor would have had to wait until 2013 to regain his capital if he had invested at the peak six years earlier .

Japan in the 1990s presents another example. More commonly known as the "lost decade", the Japanese Nikkei Index was trading close to 39,000 at its peak in 1990. Today, the same index, which has been one of the top performers this year, is trading closer to 18,000, less than half its value more than 20 years ago.

While it is not common to find another well-documented case of a market as big as Japan having gone through such a long and painful period of underperformance, there are hundreds, if not thousands, of stocks that have undergone similar horrific fortunes in recent years.

So the question that beckons is: Do we wait for them to recover? How long can an investor wait?

Consider an investor who decides to start investing at the age of 30 and targets to start drawing down on his nest egg by the time he is retired at 65. That is a good 35 years.

The reality is that many investors buy into the markets in chunks and, while they might have started at age 30, it is often not the bulk of what they were going to eventually put into their portfolio. If you look through the age group data of investors, you will find that the average age is closer to 45.

This suggests that most investors have less "investment time" for their portfolios to flourish than the hypothesised 35-year gestation period. That is cutting it quite close to the 15-year timeline that it took the Nasdaq to recover from the tech-led crash of 2000 to 2001.

The strategy of holding investments for the long term is not wrong; investors should try to plan their portfolios such that they can take advantage of a longer investment horizon.

One of the ways to do this is to have a very disciplined approach to investing at an early age. A regular savings plan, which helps you to systematically invest over a period of time by setting aside a portion of your income or savings to put into the market, is a tried and tested way of smoothing out volatile market conditions.

There are also other investment strategies to reduce your chances of being caught in a market crash.

The first has to be the most ancient saying in the oldest investment strategy book - "Diversify: Do not put all your eggs in one basket".

If one had invested his nest egg in a varied portfolio of investments - bonds and stocks in more than one sector or country - rather than all his money in technology stocks in 2000, the value of his investments would have held up much better. Aim for investments that are negatively correlated to get the best out of diversification.

On the day that the Nasdaq peaked on March 10, 2000, Mr Warren Buffett's Berkshire Hathaway was hovering at its two-year low. Mr Buffett had no interest in investing in technology stocks and had been widely criticised for missing out on the huge rally.

The subsequent collapse in the Nasdaq saw a 78 per cent crash from peak to trough over the next two years, while Berkshire Hathaway climbed 75 per cent over the same period.

Second, be forward looking. When I was still in university, I asked my father if I could do a review of his portfolio of stocks. To my surprise, his portfolio looked nothing like those that I had studied about, but rather just a mishmash of penny stocks. Not that penny stocks are poor investments but, over the years, my father had sold off all the stocks that made money, and kept all the loss-making ones.

He was waiting for the stocks to appreciate before selling them so that he would not crystallise his losses. He had unintentionally chosen to keep the loss-making stocks and sold off the best ones.

It was a lesson for me that when we invest, we need to be forward looking.

Our decisions to buy or sell should be made based on the future outlook of the company and not whether we had lost money on the stock.

These two strategies can be used in conjunction with a long-term investment plan. This way, you build a well-diversified portfolio that has ample time to grow. At the same time, you give yourself the flexibility to rebalance investments that no longer seem viable in the long run and replace them with those that fit your investment objective. - Straits Times Singapore

•The writer is head of investment advisory, strategy and managed investments at Standard Chartered Bank Singapore.


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