Proven investment strategies


THERE are a lot of uncertainties when it comes to investing. One moment you are making a killing at the stock market, and the next, an unexpected market downturn like what we had experienced in March 2020, may wipe out all of your life savings.

Don’t be fooled by “investors” or “gurus” who claimed they have the ability to predict the market. In a global recession, volatility is often the name of the game.

The truth of the matter is, to succeed in the investing game; what is required is a proven game plan (methodology), and great amount of discipline. Simple, yet not many investors have it in them to see it through.

The great Sage of Omaha, Warren Buffett once quoted: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

Without a framework, investors would have no reference point to make good decisions. They would simply be shooting from the hip, or worst, influenced by their emotions. Frankly speaking, being oblivious and getting ruled by one’s own emotions can be a dangerous combination especially in global recession.

Truth to be told, in the 20 years that I have been in the financial advisory industry, I have experienced not one but four economic crisis. I have seen investors panicked and sold after the dotCom crash in 2002 and others after the credit bubble crash in 2008. During those tough times, not only had our client’s wealth remained largely intact, but in fact, grown in times of crisis.

In this article, I would be sharing a recession proof investing methodology that I have practised over the years to help investors gain from a volatile market.

The only caveat I would make is that this methodology must be practiced in totality (meaning all the six strategies are interdependent and must be deployed together for the framework to work). If you are ready, let’s begin.

> 1. Set a reasonable target return

Most Malaysian investors are offence players, attracted by the potential of high returns. Most get caught with their pants down when market conditions do not augur well. At the first sign of trouble, some would bail, while some are forced to liquidate their investment and suffer losses.

Quality investments do not come by every day. They do however, become more affordable during a recession. To be able to seize opportunities during a crisis, first do a holistic financial plan to find out your personal financial freedom target. By knowing your return target, you will no longer be tempted to go for risky investments that dangerously promise 100% or 200% return.

Bottom line is, setting a reasonable target return prevents anyone from being mesmerised by super high returns and thus minimises one’s exposure to risks.

> 2. Strengthen your cash flow management

Retrenchments, salary cuts or delays in payout are inevitable outcomes of a sputtering economy. At Whitman, we are recommending that our clients set aside up to one year of lifestyle funding to act as a financial cushion against any emergencies prior to investing. For retirees who are planning to invest, three years would be ideal.

An emergency fund serves as a buffer to provide liquidity, and holding power for investors to wait for medium to long-term investments to recover. Importantly it provides a psychological barrier for investors to overcome their emotions, such as fear, and anxiety, while hunting down bargains during a crisis.

> 3 Sell underperforming investments fast

When it comes to investing, it is critical to cut losses early. The golden rule is to identify investments that are underperforming and dispose of it quickly. Most investors continue to hold on to poor performing investments with the hope of it rebounding.

But the truth of the matter is, there’s a reason why an investment is not performing as well as its peers. And during times of crisis, these underperforming investments will continue to drop further and may never even recover.

As such, when it comes to underperforming investments, practise sell low and buy low. Meaning, sell off investments that are non performing to free up and redirect your resources to buying quality investments that could be discounted during a crisis.

As such, be willing to get rid of any investment that it is no longer working for you. By doing so, you get to raise cash for cash reserve and have a new investment capital to purchase more attractive bargains.

> 4 Invest in multiple asset classes and countries

Asset classes are bonds, equities, cash and cash equivalents, real estate, commodities, REITS, and others. Not spreading your investment over different asset classes means subjecting your investment portfolio to market conditions that may or may not be favourable to certain asset classes. For example, when coronavirus shutdown economic activity around the world, certain industries took a hit.

Historically, there’s very little correlation between different asset classes. Each of the asset classes possesses different risk and return investment characteristics and therefore perform differently in any given market environment. Therefore, when one asset underperforms, in theory, the impact will be offset by those assets that perform well.

The idea is to keep a well-diversified portfolio that is spread across different asset classes, and even countries to reduce the portfolio’s sensitivity to market swings. An asset allocation statement can be used for this purpose.

A sign of economic recovery is when green shoots start appearing after a recession. The key is to ook out for these green shoots and capture them early to have the opportunity to reap higher (annualised) returns when it grows. When it comes to capturing green shoots, think of casting net, not a fishing rod that is wide enough to secure these green shoots.

> 5 Invest in quality investments

The rule of thumb in investing is to select your investments objectively, NOT conveniently. Always compare and do your research prior to investing and consider these three crucial factors:

i) Make sure the investment is regulated, as it would give you protection.

ii) Beware of the exit strategy. Consider not only the return on your investment but also the return of your investment. Should the investment fail, what happens to your money? Know the difference between return of your capital versus return on your investment.

ii) Always go for the best of breed. At the same risk level, you can get higher return from a better investment within the same category. If you choose a poor one, you may not event be able to achieve the benchmark return/average return of the investment category. If unit trust is your preferred investment vehicle, refer to the Lipper’s table in newspaper to compare the performance of unit trust before investing.

# 6 Monitor your investment performance daily

Some investors buy stock, hold it and never look at a statement again. Yet they hope to see the promised return after five to six years later. It does not work like that in reality!

In a volatile and uncertain market, a good investment can easily flip and turn bad. This is especially true for liquid investments. An example would be the Dow Jones on March 11,2020, fell by nearly 10%, from 23,553 to 21,200, one of the sixth-worst percentage drop in history.

If you do not have the time or capacity, especially during period of crisis or recession, avoid investments that are volatile in nature. You will not have the stomach for it. Shares require daily monitoring. As such if you don’t have the time to monitor, avoid shares altogether as it is too volatile and risky. Consider investing in unit trust instead. And if you are still not able to monitor your unit trust investment on a daily basis, then consider using a professional like a licensed financial adviser, to help keep an eye on your investment.

Make no mistake, the six strategies above are not intended to be yet another get richer quick guide. Do not expect results overnight. After all, even the most talented athletes did not achieve their accomplishments, like medaling at the Olympics or reaching the top of their sport overnight. Give it time. Train like an athlete, follow the methodology, stay focus and on track with your goals. The thing that separates winning and losing, is having the right mindset, in this case a proven intellectual framework of investing that is akin to having an AI hard-wire to take away all the fears and greed that may cause you to deviate from your goals.

Meanwhile, a popular childhood story about the tortoise and the hare comes to mind. If you recall, the hare was so confident about winning that it committed a mistake that eventually cost him the race. Therefore, be like the tortoise, not the hare. Consistency wins over time.

Yap Ming Hui (ymh@whitman.com.my) is busy working on a personal finance education channel, Yap’s Money Life Show. He hopes to use his professional experience to help Malaysians grow their wealth with high certainty, and avoid making mistakes that could have otherwise cost them millions of ringgit. The views expressed are the writer’s own.

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