Invest Only What You Can Afford To Lose

I didn’t update this blog for a while as I do not see much purpose in adding on to the negativity. Every day we open up the newspapers, we are hit by depressing news – what with retrenchments (DBS axes 900, NOL ships out 1000, Citigroup eliminates 52000 worldwide, etc) and pay cuts (Temasek staff and Cabinet ministers). Taken together, the “contributions” from DBS and NOL are close to surpassing the retrenchment figures for third quarter.

Without a doubt, Asia is slipping further into recession. Shipping industry is in a bad shape with lower commodity demand, overcapacity and tighter credit, not to mention the devastating effects of piracy. China is among the hardest hit by the drop in container traffic but Singapore is also feeling the heat as order books are being reviewed. Oil-rigs building firms are in the trough of their business cycle but I am not alarmed given the favorable fundamentals of increasing oil demand when confidence returns to global economies.

Construction sector, a solid pillar for Singapore’s economy given the weakness in manufacturing, electronics, pharmaceuticals and finance, could be in serious trouble soon. Many firms had snapped up projects in the recent construction boom using short-term credit to get things moving and if the banks start curtailing loans, there could be a massive collapse of main/sub contractors, suppliers and of course, job losses.

The axe could fall at any time and in the event of unemployment, there could be no income to feed the family or pay the essential household bills. I will say now is a good time to examine debt levels, cash reserves and work out a prudent family finance budget.

Many financial experts agree that a family or an individual should have at least 3-6 months of cash to cover living expenses and emergencies. Once these reserves are set up, you can then consider your long-range financial goals and invest what you can afford.

When you risk your hard earned money in the stock market, do not be greedy over short term profits. As Mark Twain commented: “There are only two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”

Mark Twain certainly has a wry sense of humor and I doubt he meant that we shun all investments. Risk is prevalent in any field of endeavor. In stocks, our equity could possibly be wiped out when the company goes into receivership. In bonds, prices could fall on lower credit rating and higher interest rates. With fixed deposits, we lose money to inflation.

Any investment strategy entails risk. However, the risks are magnified when investments are made with money we cannot afford to lose, especially if you are talking about money for rent, mortgages, utilities, children school fees, etc. The worry about losing money causes us to misread promising stock trends and increase our vulnerability to short-term corrections.

I understand that the temptation to go on a stock buying spree is high. Regardless of market bottom or not, at current prices, a lot of stocks are extremely attractive and if we intend to hold them out till the next bull run, chances are good that we can at least double our portfolio. It is a once-in-a-lifetime investment opportunity with the aftershocks of this crisis coming close to the 1929 Great Depression.

However, think twice before you borrow from friends, take out cash advances on credit cards, a second mortgage on your house, or even playing on margin which I seriously discourage. Margin allows you to use other people’s money to increase profits and interest rates are lower than credit cards, but without self-discipline, you can easily become a pauper overnight.

The liberal use of leverage has caused much of the market mess today. Margin allows an investor with little to no assets to buy stocks 10-20 times their net worth. With nothing but paper backing up the stock purchases, when the market goes into free fall, investors have to scramble for cash to cover their margin loans.

In fact, there is no need for an extreme situation of a stock market crash to throw your retirement plans into disarray, all it takes is a losing stock. If your stocks tumbled beyond the threshold of margin call, the brokerage will demand that you pay off the loan immediately or they will sell your stock at current prices.

Over the past year, huge paper losses have been sustained by investors in stock market, bonds, commodities, structured products, etc. (you may even have fared better in a casino) but I will advocate perseverance in the face of hardships. I am adopting a dollar cost averaging method for my portfolio of blue-chips. The key to success is of course to back the right stocks and to implement it over long periods of time.

It is impossible to time the market and none of the top investors can lay claim to making the right calls all the time. Averaging down our investments reduces risk, remove emotions of trading (exuberance, greed, fear, panic), and ensure that the market do not pass us by when it goes on an uptrend.

For those who do not have the spare cash or are more concerned with the return of your money rather than the return on your money, then you have a very low risk appetite and should be placing money in fixed deposits only.

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6 Comments

Filed under Business, Economy, Entertainment, Properties, Stocks

6 Responses to Invest Only What You Can Afford To Lose

  1. Thanks for posting the article, was certainly a great read!

  2. Thanks for the great advice.

    Another tips is that if you cannot afford to hold company for 10 years, don’t even think of holding it for 10 minutes.

    I like the idea of dollar cost averaging (DCA) , however, if you are not investing in a fundamentally strong company, what is the point of buying it and holding it? For example if I have DCA on DBS for the last 5 years, I would have eroded almost 30% of my investment since the average cost is around $15. But if I have DCA SPH, It is still in the black at the moment… so choosing a business to buy for the long term is also an important factor to go inline with DCA.

    Ren

    Singapore Recessions last blog post..Singapore Recession Job Loss Tracker

  3. So much negativity around me. I just returned from a trip and am really depressed to hear of terrorists attacks, murder, protests, deaths…etc. :(

    Look forward to winning the Subaru car next year though. haha…

    eastcoastlifes last blog post..Secretly… training…. – WW

  4. @ Singapore Recession -

    Holding a stock for 10 years is an appropriate time frame if you want to reap long term benefits. However, many people don’t even have the patience to hold for 3-5 years and turnover their portfolio on monthly or even weekly basis.

    I am glad to know you are in favor of DCA too. In your example, I will say it is too early to condemn DBS. Over the long term, it may still be a winner, so holding on to it may not be such a bad idea. Its reputation is tarnished now but if its policies for selling investment products are refined, DBS can regain the trust and even resume its leadership position.

    As for SPH, It is a defensive stock, good for down times but not one to rally strongly during bull runs. Anyway, I don’t favor one over the other as preferences vary among investors.

    jeflins last blog post..Invest Only What You Can Afford To Lose

  5. @ EastCoastLife -

    I am sure the negativity will not defeat you. The terrorist attacks which claimed so many innocent lives left me greatly disturbed too. So does the Bangkok political stalemate.

    By the way, good luck on the Subaru Challenge next year. :)

    jeflins last blog post..Invest Only What You Can Afford To Lose

  6. Hi Jeff :)

    What an informative and absolutely timely blog you are working on. I’m sure you are helping many…I know you are helping us.

    Peace, Love, Understanding and Respect,
    Marilyn