Rational investment strategies to win in a tumultuous market

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

WE ARE in a correction. Global stocks in mid-May were down over 17 per cent since the start of the year, and global bonds are down 15 per cent from their peak in early 2021. 

At Endowus, we get a lot of questions on where the markets will go from here. Yet, history and evidence have shown us that trying to make such predictions in the short term is a futile effort. Rather than anxiously trying to keep up with flashy headlines and speculations, we look to time-tested strategies in a downturn that you can act on now to reorient your money for your future. 

Sell that stock and buy the market

AIG from the mid-1980s to mid-2000s was a darling of the financial services industry. Its stock went up over 20 times, while the stock market went up 5 times. But during the global financial crisis of 2007 to 2009, AIG stock went down 97 per cent, while the S&P 500 dropped by over half. 

From their peaks before the crisis, AIG stock is still down over 95 per cent, meaning an additional 20 times return will be needed to recover to pre-GFC levels. Meanwhile, the S&P 500 has doubled from its pre-GFC highs, quadrupling from its low.

Conversations with friends often revolve around winners, and when we talk about stocks that are underwater, it's common to hear things like, “I have to hold that one for the long-run now”, or “I will sell that when it gets back to my cost”.

Unfortunately, such views are ones of hope and not evidence-based. The markets are cold-hearted in this regard.

While in a downturn, it is time to really assess what to let go of, and to buy the market instead so you do not miss the upswing that your specific stocks may miss. Not facing the reality can lead to the loss of time and missing out on the recovery.

You can, of course, invest in a core multi-asset portfolio that is globally diversified and low cost. If you have a view on a specific theme like China or technology, you can also sell your single-name China or tech stocks and buy a thematic fund portfolio of China equities or technology exposure to complete your core-satellite strategy. 

In investing, there is risk you get compensated for in the form of returns. Then there is risk that is just going to give you random outcomes. The former is investing and the latter is speculation, so you have to be disciplined and diversified to win consistently over time.

Buy throughout the dip

Probably the most common questions I have been asked over the last 5 months are these: “Is now the time to buy?”; “when should I buy the dip?”; “how much further down is the market going to go?”

It is really hard to time the market and catch the trough. If you have cash on the sidelines, here’s an option: because we are clearly in a correction, try to buy throughout the dip, rather than trying to catch the bottom of the dip.

For example, if you have $100,000 to deploy, you can divide that sum up into four pieces and invest $25,000 every month over the next 4 months. No one knows where the markets will go in the next 4 months — we do know that there will still be a lot of uncertainty around the 3Rs of rates, Russia, and recession. But once there is more certainty, you are usually too late and the market will have moved faster than you can sneeze. 

Markets crashed by over 30 per cent in a month during the Covid-19 crash of early 2020. No one knew where the bottom would be. It was really hard to invest in this time of crisis and many investors stood on the sidelines. In the 6 months that followed markets rose by over 40 per cent to above pre-Covid highs, beyond the belief of what anyone thought was possible. 

If we are in a correction and you have money on the sidelines, think about a reasonable deployment plan that makes sense so you don’t miss out on the belly of the trough, and the upswing that follows.

Avoid trading and tactical shifts

Don’t change your core wealth plans unless something has fundamentally changed in your life. 

Too often we hear about people chasing returns and moving their money around from one sector to another. Most recently, we have seen people moving aggressively into commodities because they have done well recently and are expected to do well in a high inflation environment and a prolonged war. 

We have to remember that the markets are a pricing machine and the prices of everything continuously change based on the future perception that people have, with trillions of dollars changing hands every day as people buy and sell stocks, bonds, commodities and currencies. Overconfidence also makes you think that you can beat the market. It encourages more active trading, resulting in poorer returns, and under diversifying.

Stay invested, because even the worst investor can win

Let's look at arguably the best investor in the world. 20.1 per cent is the long-term annualised return of Warren Buffett, which led to a mind-blowing overall gain from 1964 to 2021 of 3,641,613 per cent. 

Then we have the annual returns of the S&P 500 for 2021, 2020, and 2019 at 29 per cent, 16 per cent and 27 per cent respectively. These included the fastest recorded market crash in history of over 30 per cent during the onset of Covid-19.

This market feels especially troubling after the strong performance we have recently experienced, and this recency bias coupled with sensational headlines has caused us to feel that the stock market is acting in an abnormal way. But the markets are really just fluctuating the way it always does, dealing with crisis after crisis, and the million reasons to get out now or jump in immediately. 

Now let's talk about the worst investor in the world, who only invested just before the stock market crashed by 20 per cent or more, which it has done five times since the early 1970s. This investor would have experienced inflation in the teens, wars, terrorist attacks, financial and currency crises, commodity shortages, the birth of the Internet, the dotcom crash, presidential impeachments, ideological battles, the wildest fashion fads, and so much more. 

This worst investor, despite horrible market timing, stayed invested and remained diversified through this compounding life journey, to achieve an astounding return of 1,445 per cent. You don’t need to be Buffett to do well.

Rest easy with 3Rs: Stay rational, reasonable, reliable

Every investor goes through ups and downs. The markets will continue to be driven by fear, anxiety, panic, denial, hope, optimism, thrill, euphoria, arrogance and more. The latest lesson behind meme stocks, SPAC and crypto bubble, only reinforces market truisms.

What you really need for wealth success is confidence in an evidence-based approach. Data shows that investors who stay invested at a risk level suitable for their goals — while being disciplined in staying diversified, strategic and passive in asset allocation, and at a low cost — stand a much better chance of success than those who try to speculate and time their exposure to markets, geographies, and sectors. 

A rational, reasonable, and reliable approach will help you find peace of mind amid turbulent times, and win much more than short-term bragging rights.

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Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund. 

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