Coping with volatility

Back in 2008, I came face to face with extreme fear. With the sudden bankruptcy of Lehman Brothers Inc, the world stared at the near global collapse of financial systems. I was invested then and value of investments was declining precipitously.

Fast-tracked to today, there is still uncertainty in the global economy, in particular the economic problems of the Eurozone area. In general, Investments are still volatile. Last year was challenging. As reported by NTUC Income on the performance of its Life Participating Fund, the year ended with a negative return of 0.88%. With a professional outfit as NTUC Income, it too was challenged in a volatile investment markets. What more can we say for minnows of small-time investors like us!

In truth, the extreme fear in 2008/09 was not the case in current environment. But the sickening feeling at the depth of stomach is familiar, all the same. In recent weeks, equities were up and down. Foreign currencies depreciate with bigger margins. This spells trouble for investments.

What are coping strategies for retail investors? This list is what I came up with.

1. Talk to your partner if investment lost value. Be honest and upfront about losses. This is a vent to release the pressure off you.

2. Know and be aware of potential or actual losses. Do not dwell on it persistently. Avoid reviewing and calculating losses every now and then. Let it pass. Future value of investment is something we cannot see. It may turn out in your favour.

3. Determine your investment horizon and need for cash in short or long term. If you have the holding power and not in need of cash urgently, do not react to daily movement of prices. Daily gyration is expected. Ride out the volatility. If you own stocks with final dividends to be paid out, consider taking dividend instead of selling them cum dividend.

4. Diversify your portfolio setting proportions for lower to medium to higher risk investments. Cash amount is part of this portfolio. Set aside cash amount for personal and family expenditures. Reduce the higher risk investments to a level that you can afford to lose. As far as possible, invest only with your own money and not to borrow money to invest. Property investment is not part of my deliberation.

5. Take action only after assessing your risk tolerance level. If there is a need to cut loss because of your circumstances, do it and not to go back and review your action.

Investment is not gambling. We have to decide carefully before investing. Know what you are doing before venturing into investing. Seek professional advice from your banks. These banks have relationship managers to walk you through investment strategies. If you do not understand the investment instruments, walk away from them. Investing should not cause us to lose sleeps and affect our work.

Copyright © 2012, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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