Steeling yourself for slumps

The Sunday Times polled financial experts on the lessons - some painful - that investors would have drawn from last year's financial crisis.

Cash buffers

Consumers should ensure they have adequate cash buffers at all times. This is even more important amid market downturns, so they are not forced to unwind their investment portfolios at the worst time to fund living expenses or short-term goals.

It is good practice to have enough cash on hand to cover all short-term - that is, within three years - goals such as buying a car or going on holidays, said Ms Yash Mishra, head of private client advisory services at ipac financial planning Singapore.

Those retrenched in late 2008 or early last year at the height of the crisis would have been in a better position if they had savings to tide them over the sudden loss in income, said Mr Albert Lam, investment director at IPP Financial Advisers.

Diversify

In the last quarter of 2008, prices of stocks, commodities and corporate bonds headed south due to the economic downturn. Still, investors holding some cash or money market equivalents and global bond funds with government bonds exposure would have endured the fallout better.

'Government bonds were the only ones that stood relatively safe during the awful fourth quarter of 2008 and into early last year,' said Mr Lam.

Diversification means having exposure across asset classes, markets and fund managers. 'Diversification does not mean having five equity funds. It means your portfolio should contain other asset classes as well. For example, bonds and property securities, among others,' said Ms Mishra.

In the same vein, Ms Anne Tay, OCBC Bank's vice-president of group wealth management, advised investors to avoid relying on a single investment income - dividend income, for instance. So when firms fail to declare dividends, your income stream will not be badly affected.

Mr Patrick Lim, associate director at financial advisory firm PromiseLand Independent, noted a lesson learnt by some investors who had parked a big chunk of their savings in illiquid investments - those where little buying and selling occurs.

They might have been forced to sell at a significant loss because of the lack of liquidity in these investments.

Stay invested

All investments move in a cycle, so if you don't stay invested, you are likely to lose out in the recovery. Mr Ben Fok, chief executive of Grandtag Financial Consultancy, observed that those who opted to cash out and then stayed out of the market are likely to be worse off than if they had stayed invested.

Mr Lim highlighted that the benchmark Straits Times Index achieved returns of nearly 65 per cent last year, reversing from the loss of 49 per cent in 2008.

To time the markets, you need to have a sharp eye for both the fundamentals and technical workings of the markets, skills that most retail investors do not possess.

And of course, you need nerves of steel, at times.

Source: Straits Times, 17 Jan 2010.