1. Taking stock - make it happen for you,
don't let it just happen to you
Mr Sanjoy Sen, Citibank's Country Business Manager, UAE, suggests some ways of
handling the ongoing market volatility.
~ ross the world, the past year has presented investors
with many challenges, particularly in recent months.
ven experienced investors have been "caught out"
by the unprecedented upheaval and are carrying losses.
While we all hope for stabilisation in the months ahead,
we are also asking ourselves, "What should I do now?"
During periods of excessivevolatility- or when markets
experience a severe decline, emerging on the back of a multi-
year bull run - the natural reaction for most is to capitulate
and either make irrational decisions, or no decision at all.
It is part of the classic "fight, flight or freeze" mentality.
While reactions such as these are understandable, allow-
ing emotions to determine responses to market changes is
the worst way of managing your financial future. Capitula-
tion often leads to one embarking on a journey where one
tends to "buy high" and "sell low". In part, fear-led behav-
iour could also be fuelled by noise generated in the media
and other financial channels which may be excessive.
Those who can avoid making these mistakes should find
themselves well-positioned to ride through a rocky market
cycle and emerge stronger for an eventual recovery.
Time in the market
Youhave heard the age-old adage: "It is about time in the
market and not about timing the market". While seem-
inglycliched, it is, however,timeless wisdom in a period
of market upheaval such as this.
To illustrate this, the annualised return of the S&P500
from 1980to 2007 was 14.4%,net of dividends. However,
if you remove the 60 biggest "up days" over that 27-year
period, the annualised return falls to just 3.6%.
It is important not to be trading in and out of markets,
unless one is well-versedwith managing risk and under-
stands the impact of such an aggressivestrategy.Long-to
medium-term investorswould certainlybenefit from keep-
ingtheirgoalsand objectivescloseto theirhearts and minds
and reacting with a rational approach. Knee-jerkreactions
can very often be harmful to most investment strategies
- eventhe mostconservative.
Investorscan also take a leaf from the history books by
looking back at how the market has performed over the
past. The bad news is that over the last 78years, we have
witnessed a bear market on averagealmost every5.5years,
each lasting an average of 18months. There have been 14
bear markets since the crash of 1929through to 2007,ac-
cordingto S&P.Thegood news,however,is that the average
bear market cuts approximately38%from stock prices,and
themarketshavealwaysrebounded- evenif theytooka
long time to do so, as was the case in 1938-42.
The right strategies
Though investors cannot eradicate the risks associated
with investing, they can certainly mitigate and manage
www.meinsurancereview.com April 2009
them by making rational choices and putting the right
strategies in place.
.Develop a financial plan: This is one of the most
optimal ways of ensuring your investments track to
your long-term goals. Working with a trusted advisor,
you should put a plan of action in terms of what your
realistic aspirations and desires are and how you can
appropriately manage your portfolio to deliver optimal
returns. At Citibank, our Citigoldrelationship managers
do this with their clients every day.
.Diversify: Diversification,across asset classes, issuers,
geographyand sectors,ensures a portfolio can weather
market volatility,mitigate risks and provide a necessary
buffer. Mutual funds are examples of diversified invest-
ments, spread across securities rather than single-stock
picking or speculation. Different securities exhibit dif-
ferent behaviour and any portfolio would gain from
having exposure to different asset classes to ensure
benefiting from the risk/return characteristics specific
to that investment.
.Dollar cost averaging: This is another time-tested
strategy successful investors have adopted. Rather than
invest directly into the market in a lump sum, it is
recommended that investors adopt a disciplined ap-
proach to invest at pre-determined, periodic intervals,
thereby taking advantage of multiple points of entry
into the market. This helps reduce the risk of depend-
ing on market timing or following the market trend.
Dollar cost averaging also allows investors to buy into
the market when they are "on sale"or trading relatively
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2. much cheaper than previously.
.Insurance: We often tend to ignore a core part of our
wealth planning strategy- protection. As we build our
investment portfolio for future needs and goals, we
have to ensure we take a holistic approach. Adopting
an insurance-based strategy can alleviate some of the
uncertainties life may throw at us. It is alwaysimportant
to be prepared for the "ifs" in life,and retail clientshave
numerous tools availableto ensure their core investment
portfolio is complemented with a suitable insurance
plan.
.Remain invested and be patient: The natural tenden-
cy is for investors iseither to "flee"and make emotional
decisions about their portfolio or "freeze" and make
no decisions at all in reaction to severe market fluctua-
tions. Avoidingeither temptation is not easy,and often
investorseither seekto move to the sidelinesor continue
on blindly without reviewing their situation, waiting
for the next recovery.However,it is difficult to predict
when the market is truly at the bottom or when it is
recovering.Moving to the sidelines could easily lead to
realising actual losses,when it was not really necessary
to bailout of the market. Those who freeze may miss
the opportunities inherent in making informed choices.
.Keep liquidity, but only as much as you require:
Investors could well feel that "cash is king" in such a
market environment. Indeed, it is vital that each and
everyone of us ensures we have cash available for short-
term needs. Cash in itself is an asset class, and needs
to be preserved. However,cash also has the ability to
erode in an environment where rates earned are lower
than the rate of inflation. Hence,long-term cash should
be invested optimally and suitably.
.Work with a financial advisor: There are numer-
ous do-it-yourselfstrategies that investors can adopt in
current markets, though none of them can replace an
experienced and trusted personal service, based on a
detailed assessment of your personal risk and financial
profile.Financial advisors can certainly assist in helping
you manage risks as well as provide important support
needed during market uncertainty. Such support would
include access to global research and insight, ongoing
monitoring ofyour portfoliowith regularupdates as well
as a plan to manage volatility and weather the kind of
storm we see today.
Making informed and rational choices is crucial at
any time, but particularly in times of market stress. At
Citibank; we urge our clients to work with us to be active
participants in making markets work for them rather than
just letting markets happen to them. Weencourage you to
do the same with your financial advisor and ensure your
long-term plan remains intact and that the strategies you
have in place are the right ones for today in securing your
financial futuremJ
This articie is for general information purposes only and is not intended
as a recommendation or an offer or solicitation for the purchase or
sale of any security or currency. It does not take into account the
objectives, financial situation or needs of any particular investor. Any
person considering an investment should seek independent advice on the
suitability or otherwise of a particular investment.