Weathering Uncertain Markets

Key Principles for Lifetime Investing

Managing an investment portfolio for the long term is partly a test of willpower. Your emotions and instincts will be urging you to react to short-term news and market movements, even though your investment goals might be far away.

Discipline is vital to weathering uncertainty, but it is easier said than done. By following some simple rules you can train yourself to prepare for whatever the future throws at you. Globally we are in a period of relative calm, but 2018 might bring market and macroeconomic shocks that could test your resolve. Following the principles below will position your portfolio to weather uncertain markets.


Act on Insight, not Instinct

Markets do not necessarily react to events in a rational manner. Boom and bust cycles, together with asset bubbles and crashes, have been a feature of investing as long as markets have existed.

The reason is obvious: investors are human beings, and their decisions are often driven by emotional biases rather than careful thinking. While most investors understand the theory of “buying low, selling high”, many people don’t put it into practice and tend to fear losses more than missing out on potential gains, even if the end return would be the same.

This means your instincts might urge you to get out of the market at the bottom of a downturn, to avoid the possibility of further losses. But if you do this you run the risk of selling low and missing out on some of the best value opportunities.

Growth of $100,000 in MSCI Asia ex-Japan, 1988-2017


For illustrative purposes only. It serves as a general summary, is not exhaustive and should not be construed as investment advice. The strategy described are hypothetical and conceptual

You Can’t See the Future, But You Can Plan For It

No matter how much information you have, it is virtually impossible to predict for any length of time exactly when markets will rise or fall. This is problematic since only a few good days can account for a large part of market’s long-term total return.

So among the best ways of planning for an uncertain future is to stick to a long-term strategy and stay invested. If you miss just a few of the best days it can have a massive impact, as the following chart shows.

Hypothetical investment of US$100,000 in MSCI Asia ex-Japan Index,
1 Jan 1988 - 8 Sept 2017

Why it pays to stay invested

For illustrative purposes only. It serves as a general summary, is not exhaustive and should not be construed as investment advice. The strategy described are hypothetical and conceptual

Diversify to Manage Risk

“Don’t put all your eggs in one basket” is equally good risk management advice for grocery shopping and investing. Not every asset class will be increasing (or decreasing) in value at the same time, so investing across a wide variety of assets should help smooth returns over time.

Assets tend to move together during periods of market stress, in part owing to a common instinctual urge to sell to avoid further losses. So a crucial part of weathering market stress is ensuring you have exposure to a mix of assets, including alternatives such as commodities, real estate and non-traditional investment funds.

Annual performance of selected asset classes (in USD)

Why it pays to stay invested

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. As of 31 December 2016. Source: Bloomberg, Morningstar. U.S. stocks represented by the S&P 500 Index, developed stocks ex-U.S. by the MSCI EAFE Index, emerging market stocks by the MSCI Emerging Markets Index, U.S. bonds by the BofA/ML Current 10-Year U.S. Treasury Index, non-U.S. bonds by the Citigroup Non-USD World Government Bond Index, emerging market bonds by the JP Morgan Emerging Market Bond Index, commodities by the S&P Goldman Sachs Commodity Index. Returns in USD and include reinvestment of dividends and capital gains. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Hypothetical strategies assume 100% investment in prior year’s best/worst performer on January 1 of each year. Reference to specific asset classes in this communication is for illustrative purposes only and does not constitute an offer or invitation to invest in any of the asset classes mentioned above.

Consider the True Cost of Cash

In times of uncertainty your instinct might be to convert your investments into cash. But the longer you hold cash, the less it can actually buy when inflation is taken into account.

If you decided to hold onto $100,000 in cash in 2007, for example, by the end of 2016 it would only buy you around 73% of the same goods and services as it did when you started, despite having the same face value.

Implied purchasing power of 100,000 held in cash in specified currency in 2007 terms, 2007-2016

Why it pays to stay invested

Source: CPI data from respective government statistics agencies.
NB: Figures charted are year-end values. Figures take LCU100,000 equivalent and compound annually using year-on-year percentage changes in CPI (where value for year x = (value for x-1)/(1+CPI for x)). For illustrative purposes only. It serves as a general summary, is not exhaustive and should not be construed as investment advice. The strategy described are hypothetical and conceptual

Invest with Discipline

One way to conquer your emotions and remove the temptation to jump in and out of the market is to set aside a defined sum to invest at regular intervals, usually once a month. This allows you to budget effectively and can smooth the impact of price volatility, since you will buy more shares or fund units when prices are low and fewer when prices are high. This means returns are likely to be better compared to jumping in and out or investing lump sums on an ad-hoc basis.

The benefits of this “dollar cost averaging” technique can be seen in the following hypothetical example. An investor who commits a smaller sum each month benefits when the share price declines, making the average cost per share lower.

Illustrative strategy 1: Systematically invest $1,000 per month every month for a year regardless of share price

Why it pays to stay invested

Illustrative strategy 2: Invest $12,000 as a lump sum at the beginning of the year

Why it pays to stay invested

The information provided is for illustrative purpose only and is not meant to represent the performance of any particular investment. Systematic investing does not guarantee a profit and does not protect against loss in declining markets. Systematic investing involves continuous investing so investors should consider their ability to make periodic payments in all market environments. Investing involve risk, including the possible loss of your entire principal. All figures are represented in USD.