In recent months, the investment climate has been volatile and we have seen swings of almost 3% on a single day. If you are an investor, you would probably be feeling the jitters and be wary of what’s going to happen next.
In this issue, we will be sharing with you the investment outlook for the year ahead and tips on how to tide over this volatile period.
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ARE WE ENTERING A BEAR MARKET?
After a frenzied start to the year with rapid selloffs in various major economies, the market has begun to stabilise after Feb. But fears about slowing global growth and a slowing China continue to abound. The National People’s Congress approved lowering the GDP target and China’s leadership emphasized that 2016 will be a difficult year for growth.
Japan announced negative interest rate in January. The European Central Bank (ECB) not only took its main policy rates lower, but also expanded bond purchases and extended cheap financing to banks. Against a backdrop of challenging economic conditions,
Amid mixed economic signals, the United States is seeing some encouraging numbers from labour demand, consumer spending and inflation, which the Federal Reserve (Fed) could take as positive signals for policy normalization.
We are currently in a situation where central banks are running out of options and global growth is in limbo. The current relative market calm could be transient.
WHAT CAN WE DO AS AN INVESTOR?
We are aware that investments will bring about potentially higher returns than normal deposits. However, in such a market, how do we ensure our investments are not adversely affected?
There are 2 investment strategies, which, if employed correctly, will definitely help in managing our risk.
1. Dollar Cost Averaging
This is the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the unit price. More units are purchased when prices are low, and fewer units are bought when prices are high (i.e. collect more when it’s on “sale”).
By using this strategy, we will be able to ensure that our cost of investment is always lower than the average market price.
The best way to make use of this strategy is to invest in a regular premium investment plan that allows you to invest a fixed amount regularly, regardless of the prevailing price of the units.
2. Fund Rebalancing
Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state.
Rebalancing imposes a level of discipline in terms of selling a portion of your winners and putting that money back into asset classes that have underperformed. In a bear market, this is evident by selling your fixed income securities and buying into underperforming equities.
Regular portfolio rebalancing helps to reduce downside investment risk and ensures that your investments are allocated in line with your financial plan.
If you have an AIA Investment-linked plan, you will be glad to know that we are able to automatically rebalance your portfolio without any charges.
CONCLUSION
Regardless of the market conditions, it is important to stay invested and not make investment decisions based on fear or greed. By using investment strategies as mentioned above, you should be able to face the storm and come out of it in an even better financial position.
