Spring cleaning your investments the right way

The original version of this article first appeared in The Business Times.

With Lunar New Year falling in January, many households plan to spring clean their homes pretty early in 2023, especially as families gather to celebrate after more than two years of Covid-related social distancing.

It is also a good time to think about spring cleaning our investments. In the process, investors often turn to market commentators to get a sense of where the markets may land. But when it comes to stock predictions this year — or any year, for that matter — one word sums them up: worthless.

That’s according to The New York Times’ (NYT) market columnist Jeff Sommer. He points out that between 2000 and 2020, the median Wall Street S&P 500 forecast has been off by an average of nearly 13 percentage points annually.

With the market tumult in 2022 brought on by the fastest rate hikes in 40 years, the market predictions for 2022 were also off by a mile. Bloomberg data showed that as of November 2021, the S&P 500 median forecast was 4,825 for 2023. The S&P 500 closed at end-December last year much lower than forecast at 3,839.50.

Forecasting is akin to crystal-ball gazing, especially when we consider the major events that were missed by market commentators. By its own admission, The Financial Times was woefully wrong that Russian President Vladimir Putin would see reason and leave Ukraine alone. With the Fed finally calling time-out on raging inflation that hit a 40-year high, equities and fixed income markets capitulated on aggressive rate hikes — with bonds losing their diversification ballast for the first time in 45 years in 2022. No one really saw this coming.

NYT columnist Paul Krugman was wrong about inflation, too. In July, the economist wrote how structural factors that include early retirements, reduced immigration, and the lack of child care, have brought down the US economy’s productive capacity.

A world shaped by a global pandemic (again missed from forecasts) is also bound to operate differently from before. “The whole experience has been a lesson in humility,” he wrote.

So, what should investors do?

Dollar-cost averaging, or DCA, is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. It’s a good way to develop a disciplined investing habit, be more efficient in how you invest, and potentially lower your stress level and costs.

Many investors carry recession fears and concerns about market volatility into the new year. But this is a timely opportunity to DCA rather than stay on the sidelines and not invest at all. That’s especially because we know investing over the long term gives us the greatest odds of success.

Life-stage investing

You should also broaden your financial assessment to longer-term goals as you commit to investing regularly. Our financial needs, priorities, and goals tend to change as we progress through different phases of our lives. Life-stage investing therefore involves tailoring your investment strategy to each stage of your life.

We can broadly divide our lives into four stages. At Stage 1, we’re in our early career phase. In our 20s and early 30s, most of us do not have much financial capital, as we have only just started drawing a salary from work. This makes it the perfect time to think about long-term investments. You can better harness the power of compound interest at this stage of your life. You can also tolerate riskier investments that, over long periods of time, are most likely to generate higher returns after riding through the ups and downs of the market.

Have separate investment portfolios for your short-term and long-term goals. The difference lies in the risk profile and investment horizon, which guide the asset allocation. If you aim to make a downpayment for your first home in the near future, that portfolio should have a higher weighting in safer assets such as bonds and money market funds. For longer-term goals like retirement, the portfolio could have a 70 to 90 per cent allocation into equities, depending on your risk tolerance.

At Stage 2, we’re at our mid-career point. We usually reach our peak earnings years in our 40s and 50s, with more substantial capital, and likely more complex financial needs and goals than before.

Mid-career investors, as the “sandwich generation”, often juggle the competing financial demands of their children and ageing parents. These may include the costs of the children’s higher education and parents’ healthcare, on top of their own retirement savings.

Ensuring you and your dependants have adequate insurance coverage is one of the important considerations at this life stage. It is also prudent to build an emergency fund for scenarios such as job loss and major illnesses. Be cautious, too, that you do not let “lifestyle creep” eat into your savings.

Your portfolio at this stage should still include higher-risk assets with the potential for greater returns, because you still have several more decades to draw on your portfolio. You may also wish to start taking on more low-risk investments when you’re in your 50s. This may involve reducing the proportion of stocks in the portfolio while slightly bumping up the allocation to high-quality bonds and medium-to-low risk funds, for example.

At Stages 3 and 4, you can prepare for retirement.

Take a closer look at the viability of your portfolio and your retirement plan, including the decumulation strategy. Recalibrate them if necessary. Possible options include topping up your CPF account, channelling more of your income to savings, or delaying retirement for a few more years.

Shifting allocations towards lower-risk assets, such as short-term and intermediate-term high-quality bond funds, can safeguard your portfolio’s value even if it may not earn you robust returns. Then, spend wisely and withdraw at a rate that allows you to enjoy your golden years and also ensures the longevity of your portfolio.

So, spring clean your investments in 2023. For peace of mind in the new year, commit to strengthening your finances to meet your investing goals through the decades.

Explore the Endowus Fin.Lit Academy to pick up personal finance and investment tips. To get started with Endowus, click here.

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