TheWall: How to make sound investment decisions during an economic downturn

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 29, 2020 - July 05, 2020.
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Investors are both excited and worried about investing in this time of market volatility. On the one hand, there are bargains to be picked up as asset prices have been battered down by panic and, perhaps, a need for some quick cash. On the other, times are bad and businesses are actually going under in what could turn out to be the worst economic downturn since the Great Depression in the 1930s.

Yap Ming Hui, founder and managing director of Whitman Independent Advisors Sdn Bhd, says investors tend to be overwhelmed by emotions in such times. “A lot of people get too excited and forget about the amount of cash reserves they are required to have. At the same time, many feel defeated after taking a pay cut and could easily forego some obvious investment opportunities.”

Yap, a licensed financial adviser with more than two decades in the industry, says basic financial planning and investment concepts can help people make better investment decisions. 

The first of these is setting clear financial goals and understanding the rate of return they want to achieve over the long term. 

He says investors should know how much cash they should keep in reserve. And they should ensure that they do not put all of their eggs in one basket.

“They should monitor their portfolio on a daily basis during volatile times. Asset prices move very fast in times like these and you may suffer unnecessary losses if you do not keep a close eye on your portfolio,” he adds.

Yap offers the following tips to investors who want to make the most of the present situation.


1. Set a target rate of return and do not get carried away by the excitement

As simple as it may sound, such a concept can help investors a great deal in making better investment decisions, says Yap. “Investors can very easily get excited during volatile times and lose their heads. They tend to project extra-ordinarily high returns for their investments — sometimes, aiming for a 100% return or more. They lose sight of the excessive risk they are taking.”

This is where having a target rate of return comes into play. “For instance, if you know you can achieve your long-term financial goals with a return of 8% per year, you will not be easily carried away by investments that are said to have returns of 100% or 200%. You would aim for a return of 10%, or even 20%, and that would be good enough. By doing so, you avoid exposing yourself to high risk,” he says. 

Personally, Yap has a long-term target return of 8% per annum. But he aims to have a return of 10% to 13% in a volatile market. “Some of my friends say I am aiming too low. I tell them that it is good enough for me,” he says. 


2. Make sure you have enough cash in reserve for a year

Yap advises his clients to have enough cash to sustain their lifestyle for a year before investing. This may sound conservative, but it is only appropriate when one assumes that the worst is yet to come. 

“I have clients who are factory owners. Their factories have started operating again, but orders are coming in slowly. They used to have three shifts per day. But now, their workers are only running one shift. Many businesses are expected to fail due to this crisis and more people will lose their jobs,” says Yap. 

“Yes, people say the markets are recovering. But if another Great Depression were to happen, the markets would recover only temporarily before dropping again. Such a cycle could repeat several times before things finally hit rock bottom. You cannot anticipate what news will come out next. The value of your investments could plunge if you invest recklessly.”

So, if you have enough cash to sustain your lifestyle for a year, you can deploy your additional cash into the market without experiencing any overwhelming emotions. 

Could investors make do with less cash in reserve? 

“Yes, but you would need to sell your investments at a loss if you do not have holding power,” says Yap. “It is very clear-cut to me. If you barely have enough to enter the market, the opportunities are not for you. It is more important for you to survive this period.” 


3. Sell underperforming assets to buy good-quality ones 

Investors should not hesitate to sell bad quality assets that deteriorate in value very quickly during a crisis, says Yap. “Their value can drop very quickly as investors are being more selective while some may go into a panic mode and sell everything on hand. Whatever you hold would become worse very quickly.” 

Investors should cut their losses and buy into good quality assets at low prices instead, he says. “I suggest that investors review their portfolio and sell assets that do not perform. Yes, you may have to take some losses, but you can use the  money to invest in good quality stocks or properties that are currently at low prices.

“You may not lose out in the end. You may even recoup your losses and make better returns over the long term.”

How should investors evaluate the quality of their assets? For unit trust funds, the easiest way is to compare the performance of a fund against its peers, says Yap. “Let’s say, you bought into a Malaysia large-cap equity fund in the past. You can compare its performance against other Malaysia large-cap equity funds over the past three years. You would have your answer if the fund you bought had consistently underperformed its peers.”


4. Diversify your portfolio and be wary of investment gurus 

It is very easy to lose sight of the importance of diversification after attending online investment seminars conducted by certain gurus, says Yap. “Many Malaysians listen to investment gurus before they invest. The problem is that these gurus tend to promote a specific asset class, telling investors that it is the best. Some people would invest most, if not all, of their money in that one asset class.

“This is dangerous during a global downturn. These gurus may not tell you that properties, for example, are illiquid. What if you need cash at a point in time and cannot sell your properties quickly? 

“Investors need to diversify their portfolios by holding some cash or stocks that are more liquid. Investors should know that each asset class has its strengths and weaknesses.” 

Yap gives an example of being diversified in challenging times. “I have a client who rented out three properties to different types of people — students, employees and a business owner. It is unlikely that all of them would move out at the same time during normal circumstances,” he says.

“However, such a thing happened in the past few months. The students moved out and went home as they started to attend online classes. The business owner stopped renting as his profits collapsed. The employees who took a pay cut needed to find a cheaper place to stay. 

“Imagine that you had invested all of your money in properties and were facing such a situation. You would be stuck if you needed cash.”

Yap says investors should be careful about the credibility of these investment gurus who conduct online classes. “For instance, some stock gurus claim that they can help investors achieve a return of 20% per year by teaching them value investing, an approach adopted by Warren Buffett. But let’s not forget that they are not Warren Buffett.” 


5. Buy regulated products, use regulated services 

It is only safe to buy products or use services that are regulated by the authorities, especially in challenging times when things can easily go wrong, says Yap. “Products and services regulated by the Securities Commission Malaysia and Bank Negara Malaysia are the best. At least, the authorities can take action to protect your interests when something goes wrong. 

“A lot of people look at the potential return on investment and forget about the return of investment, meaning whether their money can be returned safely to them at the end of the day.”


6. Monitor your portfolio daily

Financial planners tend to advise investors to monitor their portfolio quarterly and invest for the longer term. Such advice may not work in times of crisis, says Yap. “Your portfolio’s performance may fluctuate 50 or 100 basis points a day in general during normal times. But in times of crisis, it could be 10 times more volatile, with larger swings. 

“Unfortunately, the ‘buy and hold’ strategy does not work in the current environment. Your portfolio could be down 30% in just a short time.”

Yap emphasises that bad quality assets could see their prices fall quickly during a downturn. Investors who actively monitor their portfolio can detect such movements and cut their losses early to reinvest the cash in good quality assets. 

“Also, if you think the fundamentals of the assets you are holding have remained intact, but the prices have dropped drastically, you would want to quickly buy more,” he says.