Dear Smart Investor,
We believe that everyone can learn how to invest smartly.
But here’s the thing: reading a book or attending an investment course can give you the basics.
Theory can only take you so far.
You can’t learn investing by reading alone, just like you can’t learn how to ride a bicycle by reading a manual. Investing, like cycling, has to be experienced to be understood.
And we go beyond educating our members by supporting them when they have questions along the way.
That’s important for this particularly challenging investing climate.
In the spirit of education and sharing, we would like to present to you a sample of pertinent questions that our members have asked and our answers to each one.
We hope that the answers below will be useful for you.
The questions below have been edited for clarity and context.
“There is a lot of talk about a recession next year. Do you share the same sentiments? If yes, should we hold cash in case there are opportunities later?”
All signs point to a recession.
But we don’t know when, and for how long.
Here’s the thing:
- If a recession does hit and makes stocks cheaper, it will open up opportunities to accumulate shares at great valuations, something we like doing.
- The Smart Dividend Portfolio (our flagship Singapore dividend service) has sufficient cash and will continue to invest in great companies at good valuations, all the while keeping an eye on the underlying business.
- We do not intend to hold more cash in the portfolio just because we anticipate a crash or recession.
Bear in mind that upturns usually happen before the good news arrives.
Take March 2020, when Singapore’s Straits Times Index (SGX: ^STI) dropped by over 30% in a matter of weeks.
Then, just as quickly as it fell, the index recovered while we were still in the circuit breaker in May and June 2020. And when Pfizer’s (NYSE: PFE) vaccine efficacy was announced in November 2020, the STI shot up again.
Yet, in reality, Singapore only received its first vaccine shipment just before Christmas.
This sequence of events tells us that timing your entry into the stock market is futile.
“Should we have an exit strategy plan in place? In hindsight, we should have sold shares when they reached their peak.”
We can understand where you are coming from.
Looking back, you can’t escape the feeling that you should have sold at the peak.
In reality, it’s hard to sell at the absolute top. Our fear is that you will not find satisfaction in the stock market if you keep looking back and wishing that you sold at the peak.
Let’s also consider a counter example.
Shares of DBS Group (SGX: D05) surged by almost 24% in November 2020, when the possibility of a vaccine arose. Starting from around S$20 per share at the end of October, the stock raced past the S$25 mark within a month.
With a handsome gain within a month, you may be tempted to sell.
Of course, with hindsight, and shares trading close to S$34.50 today, it would have been the wrong decision to make.
Here’s the kicker.
If you are seeking income, selling the stock would mean that you have lost out on the dividends that DBS Group paid out throughout 2021, and 2022 to date.
Replacing this income would be another uphill task — finding a dividend payer as consistent as Singapore’s largest bank.
Bottom line: we will sell when the investment thesis is broken. But not due to random stock price movements alone.
“Is the world, particularly the US in a recession already? How long does a recession in the developed world typically last?”
Recessions are usually known after they happened because they are measured by two consecutive declines in Gross Domestic Product (GDP).
Technically, the US GDP had declined for two quarters in a row in the first half of 2021.
But, its unemployment rate remains low at 3.7%. Whether this qualifies as a recession or not, will differ depending on which US political party you ask.
For investors, the bigger question is how do recessions affect stock markets.
Data from Ben Carlson provides useful context:
If we consider every recession from 1946 to 2020, the average stock market decline was 33%.
Historically, these large decreases happened over an average of 367 days.
Here’s the thing: averages can be deceiving. The range of possibilities was anywhere from 33 days in 2020 to 929 days between 2000 and 2002.
The huge spread is telling.
We shouldn’t attempt to time the market based on these averages alone.
A recession technically should last at least six months. Yet, stock markets can recover way ahead of time — 2020, as we discussed above, being the prime example.
Get Smart: Learn and earn
Every downturn is different.
On one hand, there are investing principles we hold strongly, and have been tested over time.
On the other hand, we keep our minds open to the results of the businesses we own as they all tell us the real story on the ground, compared to general headlines that we read in the newspapers.
No one should claim that they know everything there is to know about investing.
That’s why we believe that everyone, including ourselves, is always learning to become better investors, to face new, unknown challenges, and to get past these difficult moments.
Whatever happens, we will all be smarter, together, when the economic upturn returns.
If you’re nervous, confused, or worried about buying your first stock, then our latest beginner’s guide to investing can help. It’s easy to read yet packed with valuable insights. Download it for free today, and buy your first stock in the next few hours. Click here to get started.
Disclaimer: Chin Hui Leong does not own any of the companies mentioned.