What do you do when you find your retirement fund shrink to half what they were worth 10 months ago? How do you feel when seemingly low risk investments in top institutions and companies in the world fail you? Well, you are not alone.
Who would have predicted the fall of century-old establishments like Lehman and Bear Stearns?
NOBODY, really!
This is a good lesson to myself and all else seeking better returns for their investments. Whenever anyone asks me for investment advice, I always tell them to keep a portion of their wealth in cash and safe investments albeit low returns, such as fixed deposits in established commercial banks, while they put the rest in riskier investments such as equity-based mutual funds or stocks. This is yet to be tested as we haven't come to the bottom of this crisis, according to esteemed economists around the world.
So far, we've only seen investment banks and other niche financial institutions fail - not Bank of America, Citibank or HSBC - or not yet. Banks with a large deposit bases are somewhat sheltered from this turmoil, lest there be a run on the bank stemming from market rumours such as the one which befell Bank of East Asia in Hong Kong.
Governments are going all out to guarantee their nations' bank deposits - first the USA, then Europe, followed by Hong Kong, Singapore and others in Asia. I'm sure this "jumping on the bandwagon" syndrome is an inevitable defensive move especially coming from Hong Kong and Singapore. Imagine all the high net worth individuals pulling out their deposits from one country and parking them somewhere with governmental protection. That would have been catastrophic for their banking system.
Now, about riskier investments.
My approach has always been that of putting money I don't need for now, and money I can sit out and wait for returns in riskier higher return investments. We as individuals don't go by annual balance sheets and performance figures. We can afford to sit out investments over 3 or 5 years. If our investments return 50% in 5 years, we're still doing a healthy 10% per year average return (not compounded return) which isn't bad.
Some days ago, a friend of mine who has put money into equity-based funds panicked when the markets collapsed. He sold out, and ended up losing half the capital invested. Such panicky investors is a contributory factor to the collapse of stock markets around the world. He didn't need the money now. He wasn't forced by banks or brokers for he did not pledge the investment as collateral against any borrowing. There is really no conceivable reason for him to cash out when values are shedding on rumours rather than fundamentals. Such is the free market I suppose.
My sister called me the other day and asked how I was doing, as she knew I like to sort higher returns in riskier investments. I told her YES my portfolio did shrink by about half from the beginining of the year. YES there is a paper loss. But I also told her that I did follow Warren Buffett's advice earlier on in the year to hoard cash and wait for opportunities. I'm still pretty liquid and can embark on "buy" opportunities should I see signs of the markets bottoming out.
Having been through the Asian financial crisis in the late 90s, this doesn't surprise me anymore although its severity and speed did catch me off guard a little. The crests and troughs seem to happen every 10 years - 1987 black Monday, 1997 Asian crisis and now sub-prime.
My advice to friends and family is to wait this out, if their investments are in blue chips or blue chip funds. I waited out the Asian crisis and the investments paid off - at least on paper, as of end 2008 - but I didn't cash out in time before this crisis hit. Lesson for me then is to cash out when we hit the next high - be it in 3, 5 or 8 years' time - and restructure my portfolio so I won't be caught out in a situation where I'm depending on those investments to accord me the same lifestyle I'm leading now during retirement.
I hope this will help any panicky investor thinking of biting the bullet and cutting losses, for this is not the end of trading in the free market. As long as markets are trading, what goes down must come up, and vice versa.
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