Sanjoy Sen - On Wealth Management - April 2009


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Sanjoy Sen - On Wealth Management - April 2009

  1. 1. Taking stock - make it happen for you,dont let it just happen to youMr Sanjoy Sen, Citibanks Country Business Manager, UAE, suggests some ways ofhandling the ongoing market volatility.~ ross the world, the past year has presented investorswith 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 marketsexperience a severe decline, emerging on the back of a multi-year bull run - the natural reaction for most is to capitulateand 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 isthe worst way of managing your financial future. Capitula-tion often leads to one embarking on a journey where onetends to "buy high" and "sell low". In part, fear-led behav-iour could also be fuelled by noise generated in the mediaand other financial channels which may be excessive.Those who can avoid making these mistakes should findthemselves well-positioned to ride through a rocky marketcycle and emerge stronger for an eventual recovery.Time in the marketYouhave heard the age-old adage: "It is about time in themarket and not about timing the market". While seem-inglycliched, it is, however,timeless wisdom in a periodof market upheaval such as this.To illustrate this, the annualised return of the S&P500from 1980to 2007 was 14.4%,net of dividends. However,if you remove the 60 biggest "up days" over that 27-yearperiod, 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-tomedium-term investorswould certainlybenefit from keep-ingtheirgoalsand objectivescloseto theirhearts and mindsand reacting with a rational approach. Knee-jerkreactionscan very often be harmful to most investment strategies- eventhe mostconservative.Investorscan also take a leaf from the history books bylooking back at how the market has performed over thepast. The bad news is that over the last 78years, we havewitnessed a bear market on averagealmost every5.5years,each lasting an average of 18months. There have been 14bear markets since the crash of 1929through to 2007,ac-cordingto S&P.Thegood news,however,is that the averagebear market cuts approximately38%from stock prices,andthemarketshavealwaysrebounded- evenif theytookalong time to do so, as was the case in 1938-42.The right strategiesThough investors cannot eradicate the risks associatedwith investing, they can certainly mitigate and April 2009them by making rational choices and putting the rightstrategies in place..Develop a financial plan: This is one of the mostoptimal ways of ensuring your investments track toyour long-term goals. Working with a trusted advisor,you should put a plan of action in terms of what yourrealistic aspirations and desires are and how you canappropriately manage your portfolio to deliver optimalreturns. At Citibank, our Citigoldrelationship managersdo this with their clients every day..Diversify: Diversification,across asset classes, issuers,geographyand sectors,ensures a portfolio can weathermarket volatility,mitigate risks and provide a necessarybuffer. Mutual funds are examples of diversified invest-ments, spread across securities rather than single-stockpicking or speculation. Different securities exhibit dif-ferent behaviour and any portfolio would gain fromhaving exposure to different asset classes to ensurebenefiting from the risk/return characteristics specificto that investment..Dollar cost averaging: This is another time-testedstrategy successful investors have adopted. Rather thaninvest directly into the market in a lump sum, it isrecommended that investors adopt a disciplined ap-proach to invest at pre-determined, periodic intervals,thereby taking advantage of multiple points of entryinto 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 intothe market when they are "on sale"or trading relatively75
  2. 2. much cheaper than previously..Insurance: We often tend to ignore a core part of ourwealth planning strategy- protection. As we build ourinvestment portfolio for future needs and goals, wehave to ensure we take a holistic approach. Adoptingan insurance-based strategy can alleviate some of theuncertainties life may throw at us. It is alwaysimportantto be prepared for the "ifs" in life,and retail clientshavenumerous tools availableto ensure their core investmentportfolio is complemented with a suitable insuranceplan..Remain invested and be patient: The natural tenden-cy is for investors iseither to "flee"and make emotionaldecisions about their portfolio or "freeze" and makeno decisions at all in reaction to severe market fluctua-tions. Avoidingeither temptation is not easy,and ofteninvestorseither seekto move to the sidelinesor continueon blindly without reviewing their situation, waitingfor the next recovery.However,it is difficult to predictwhen the market is truly at the bottom or when it isrecovering.Moving to the sidelines could easily lead torealising actual losses,when it was not really necessaryto bailout of the market. Those who freeze may missthe 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 amarket environment. Indeed, it is vital that each andeveryone of us ensures we have cash available for short-term needs. Cash in itself is an asset class, and needsto be preserved. However,cash also has the ability toerode in an environment where rates earned are lowerthan the rate of inflation. Hence,long-term cash shouldbe invested optimally and suitably..Work with a financial advisor: There are numer-ous do-it-yourselfstrategies that investors can adopt incurrent markets, though none of them can replace anexperienced and trusted personal service, based on adetailed assessment of your personal risk and financialprofile.Financial advisors can certainly assist in helpingyou manage risks as well as provide important supportneeded during market uncertainty. Such support wouldinclude access to global research and insight, ongoingmonitoring ofyour portfoliowith regularupdates as wellas a plan to manage volatility and weather the kind ofstorm we see today.Making informed and rational choices is crucial atany time, but particularly in times of market stress. AtCitibank; we urge our clients to work with us to be activeparticipants in making markets work for them rather thanjust letting markets happen to them. Weencourage you todo the same with your financial advisor and ensure yourlong-term plan remains intact and that the strategies youhave in place are the right ones for today in securing yourfinancial futuremJThis articie is for general information purposes only and is not intendedas a recommendation or an offer or solicitation for the purchase orsale of any security or currency. It does not take into account theobjectives, financial situation or needs of any particular investor. Anyperson considering an investment should seek independent advice on thesuitability or otherwise of a particular investment.