Five questions after a tough year of investing

Investing globally in a passive manner can also complement your active management of a portfolio of local stocks 

THIS year will be remembered as an anxiety-inducing year for investors. Seeing negative returns on their portfolios, after having endured Covid-19 and the subsequent uncertainty of the reopening, was unbearable for some. Naturally, there are doubts in peoples’ minds about whether it is worth investing in these times. Here are five common questions that were received by StashAway country manager Wong Wai Ken throughout this year. 

Wong Wai Ken

How did we get here? 

After a largely positive past two years, both equity and bond markets fell this year to the tune of -17% for the S&P 500 and -20% for international bond markets. It is worth pointing out how rare it is for both stocks and bonds to decline in tandem: The last time this happened was during World War 1, in 1917. The unique combination of the world’s emergence from lockdown, the Ukraine War, and too much cheap money in the system thanks to quantitative easing, caused inflation to spike globally. 

In an attempt to slam the brakes on inflation, the US Federal Reserve (Fed) hiked rates by 75 basis points, four consecutive times, only to send markets through the proverbial windshield. 

Having enjoyed close to zero interest rates since 2020, stocks took a beating as the risk-free rate rose, causing valuations to come down. Bonds were not spared as rising interest rates caused bond prices to fall. This confused many low-risk investors who assumed their investments in bond funds would be safe. Additionally, it did not help that other major asset classes like gold, Asian equities, tech and crypto lost ground. 

What do I do now that most of my portfolio is negative?

Being in the red is undeniably an uncomfortable position. However, a healthy way of dealing with it is to review your portfolio. Take a step back to think about your medium- to long-term goals. Kids’ education, your retirement, or a deposit on a new house may be goals that are five to 10 years away. A long-term view is not just assuring at the moment, but has proven itself time and time again to be the key success factor in investing. 

Data from Goldman Sachs Asset Management on previous S&P 500 bear markets also point to positive average returns in the following one year (27%), three years (45%), five years (93%) and 10 years (238%) after the market bottom. 

Investing consistently, or dollar cost averaging, through good and bad times is another way to help you stick to your investment plan without having to spend countless hours stock picking or worrying about when you enter the market. A simulation of dollar cost averaging into the S&P 500 monthly from January 2002 until October 2022 results in a positive performance of 155%. 

Even in the unfortunate scenario where an investor invests monthly in the same period, but somehow manages to skip the five best months, that investor’s portfolio still returns 68%. This once again proves that time in the market beats timing the market. 

If you need the cash urgently, consider selling positions in your investment portfolio that you no longer have faith in for the long term. Be brutally honest with yourself about what you would like to cut losses in or keep. Perhaps you are still holding on to a very speculative stock or crypto token that is now deeply underwater. Selling off positions like these would trim your portfolio down to holdings that are focused on achieving your financial goals, rather than punts that you had hoped would pay off. 

Is now the right time to consider investing outside Malaysia?

While it is normal to have some home bias, Malaysian investors must realise that much of their net worth is already invested locally. For those with Employees Provident Fund (EPF) savings and Amanah Saham Bhd (ASB) investments, EPF and Permodalan Nasional Bhd (PNB) both have 63% and 84% invested locally. Not to mention your property investments and cash are already in ringgit by default. 

Since 2010, the FTSE Bursa Malaysia (FBM KLCI) has only returned 20.9%, while the S&P 500 has returned a whopping 274.5%. The ringgit has also not fared well against major currencies.

The US dollar (47%), Singapore dollar (31%), British pound (11%) and euro (18%) have all strengthened against the ringgit over a 10-year period. 

For those of us who spend holidays abroad and intend to send our kids over- seas to study, the ringgit’s value is eroding over time, while our increase in wages has not kept up. Reasons to invest globally as a Malaysian have never been clearer. Investing globally in a passive manner can also complement your active management of a portfolio of local stocks. 

Investing globally doesn’t need to be complicated or expensive. One way to get global exposure is to build a portfolio of ETFs that tracks major stock markets (S&P 500, Nasdaq or Asian equities) and global bond markets (US and International Treasuries). 

Cash is king–or is it? 

Ray Dalio’s last act before stepping back from his chief investment officer duties at Bridge- water Associates was to reverse his initial claim that “cash is trash”. In the current volatile markets and with rising interest rates, cash is king, — especially if you’d kept some US dollars in reserve. 

While finding the fixed deposit (FD) with the highest rates is one way to maximise the return on your cash, do consider these other suggestions. If you need liquidity within 12 months, money market funds are a great all-weather product to park your cash in. Money market fund returns are close to — and in some cases higher than — those of FDs.

For those with EPF savings, the federal statutory body has 63% invested locally (pic: TMR)

And even better, money market funds are more liquid than FDs — while FDs have a lock-in period, you can withdraw your cash from a money market fund anytime and be entitled to the returns for the investment period.

Also, consider segregating your cash between cash for savings and cash for investments. If you’ve heard of the term “dry powder”, you’d know that it simply means cash has been reserved for an investment opportunity. If you have some dry powder left over from your bonus, you can deploy it into the market over a few weeks or months. Or even deploy an above-average amount when markets overreact and fall sharply so that you get to scoop up assets at discounted prices.

To be clear, I’m not advocating investors try and catch a falling knife on a single stock. Instead, invest opportunistically into a diversified portfolio with a long-term horizon.

If you also intend to pare down your debt in this period of rising interest rates, there’s good reason to do so. If your mortgage rates are above 4%-4.5% and are higher than the FD rates or money market fund returns, consider paying down your mortgage. After all, a dollar saved is a dollar earned. 

What does 2023 have in store? 

As we approach the end of 2022, we are seeing certain risks abate. Inflation expectations and core inflation have slowed, which gives the Fed reason to reduce its pace of rate hikes. But all eyes will remain on how high the central bank raises rates, and for how long. A weaker US economy will cool prices, but the Fed faces a fragile balance between fighting inflation and staving off a deep recession. Inflation risks will give way to recession risks, which points to continued uncertainty. 

Geopolitical risks remain, but at a less elevated level than when the Ukraine war began. Russian troops retreating from key battlegrounds point to a respite in energy and wheat prices, which could bring down global inflation. The US is trying to stabilise its relationship with China, with the recent meeting at the Group of 20 summit helping to de-escalate tensions. China on the other hand has domestic issues to contend with, including a beleaguered property sector and increasing opposition to its continued Covid lockdowns. 

While risks and uncertainty are likely to persist through 2023, it is wise to continue investing regularly to be in a position for the start of the next bull run. As inflation peaks and we get closer to the end of the rate hike cycle, bonds may start to recover from their historic rout. Ensuring you have diversified market exposure, at an appropriate risk level, helps you have peace of mind even if markets are volatile in the short term. — TMR

  • 22This article first appeared in The Malaysian Reserve weekly print edition