Asian stocks are at 10-month lows amid fears that tensions will keep escalating on the Korean peninsula and possibly of bringing the stocks sliding to 2008 crisis?
A Korean war is not the only downside risk to markets and before that, fears were festering that Europe's debt crisis could spread, and that China's real estate bubble could pop horribly and cause problems around the globe. Another scare came when the Dow Jones Industrial Average plunged almost 1,000 points in less than 30 minutes earlier this month, for reasons yet to be fully explained although it was quickly to blame on computer glitch or human error in keying the trade figure with additional zero 000s’.
The ups, as well as the downs, are also getting sharper - with the Dow often rising or falling 200 points or more in a single day.
For long-term investors, it should not be reacting to the short-term volatility and be derailed from their long-term plans. In times like these - while there can be an appropriate shift of risky assets to less risky assets - totally exiting from risky assets may not be the most advisable strategy.
If one is uncomfortable putting in a lump sum of money, regular investing is a disciplined approach and more palatable if you are uncertain about the market.
Question is whether this level of volatility is keeping you up at night if your main concern is limiting your losses and saving what cash you have, then you may want to put a lower percentage of your money into stocks and stock funds.
You can put all your money in bank deposits just because they are very secure, but that is not wise as your purchasing power will be reduced by inflation - which exceeds bank deposit rates by a fair margin ! !
Some says that a sensible combination of products with varying risk levels can provide good returns.
Bonds
Assume you buy a bond that has a face value of $10,000, a coupon - the annual interest payment - of 6 per cent, and a maturity term of five years.
You would earn a total of $600 (6 per cent of $10,000) in interest a year for the next five years. When the bond reaches maturity after five years, you would get your $10,000 back.
Consider buying Asian bonds. Asian bonds are a very attractive asset class to invest in.It is worth mentioning that while bonds are generally safe bets, they are not risk-free either.
The bond issuer could default on its debt payments.
Investing directly in bonds does not come cheap. The average bond is usually sold in blocks of $50,000 to $1 million at a time and if chosen properly can be cost efficient.
Money market funds
Money market funds invest in high-quality short-term instruments and debt securities. The latter are loans sold by firms and governments to borrow money.
These funds are a good alternative for investors who are looking for a stable, low-risk instrument with potentially higher returns - ranging between 1 per cent and 2 per cent - than banks' savings deposits.
Not all money market funds are the same. Do your homework and read the fund's prospectus and annual reports. Check to see what kinds of debt instruments the fund invests in.
Multi-asset funds
The rationale for investing in such funds is straightforward.No single asset class can be guaranteed to top the performance charts each year, so it makes sense to have exposure to a broad mix of investments, such as stocks, bonds and property. Multi-asset funds are riskier than fixed deposits, but they are usually less risky than a stock-only portfolio.
It has the ability and flexibility to invest in not just traditional asset classes like equities, bonds and cash, but also alternative asset classes like commodities and property. The fund also tactically moves into asset classes that are most appropriate for the prevailing market cycle.
Gold
Many people invest in gold as a hedge against stock market declines, burgeoning national debt, currency failure, war and social unrest. In fact, there are a number of studies which show that gold prices generally move in the opposite direction from stock prices: Gold soars when stocks tank.
Gold protects wealth as a safe haven in troubled and uncertain times. This appeal remains compelling for modern investors. United Overseas Bank sells physical gold that can be bought from, and sold back to, the bank at its daily buy-sell market rate.
Gold savings accounts
UOB and Citibank customers can open a gold saving account, allowing them to invest directly in the metal without actually owning the physical item.UOB customers can buy and sell gold at prevailing market rates. The minimum transaction and maintenance requirement for its gold savings account is 5g of 999.9 fine gold.
Based on indicative pricing rates on its website, this would cost $278.55. Transactions are done in units of 1g, at a minimum of 5g per transaction. Holdings in the account are not subject to GST and can be exchanged for cash.
An administrative fee is charged: either 0.12g of gold per month or 0.25 per cent of the highest balance per month, whichever is higher. Fees are subject to GST, which will also be deducted from a user's account in grams of gold.
At Citibank, users have to set up an account with a minimum requirement of 30 ounces of gold bought at market rates.Taking the example of a US$1,258 an ounce price, this would amount to US$37,740.
Trades are done in blocks of 30 ounces. No administration fees are charged.
Gold certificates
Gold certificates, offered only by UOB, are more popular among buyers and allow for ownership of physical gold without any physical movement of the metal. This means it is free of GST.
Issued in multiples of 1 kilobar, or kilocert, one certificate can account for at most 30 kilobars of 999.9 fine gold. An annual administrative charge of $30 per kilobar and a certificate fee of $5 per certificate are levied.
Certificates can be traded at UOB according to daily prices.
Last Friday, 18June'10, a single unit gold certificate sold at $55,843. The bank would buy it back at $55,743 - a 0.17 per cent difference. Customers can also exchange their certificates for gold kilobars with two days' notice. The bars would be subject to GST.
Fixed deposits
If the top priority is to have cash at hand, then fixed deposits are the usual place to park your money.They let you save a fixed amount of money for a fixed period at a fixed interest rate.DBS is offering 0.7 per cent a year for a 24-month term deposit.
Investing tip 1
It is better to remain focused and stay invested during volatile times.During volatile times, it is important to remember to stay focused and stick to your long-term investment strategy. An investor who panics and sells his investments when markets are down is likely to incur losses. In addition, he may also miss out on potential gains when markets recover. Historically, markets have rebounded and eventually returned to or even surpassed previous levels. By investing over the long term, you can ride out the volatility.
Investing tip 2
The three Rs: Revisit goals, review portfolio and rebalance your investments.Over time, our financial goals and needs may change. For example, you may want to set aside funds to cater to growing expenses when new members are added to the family. Your financial objectives will have to be reviewed to meet this need.
The components in your investment portfolio may also need to be readjusted to generate higher potential returns. You may do this by taking on more risks.Even if your financial objectives or risk profile remain the same, market movements may tilt the weightage of each investment in the portfolio, exposing the overall portfolio to more risks than intended.
A rebalancing of the portfolio is required to bring it back to its original risk-return parameters. Generally, you should review and rebalance your investment portfolio every eight to 12 months.
Spread out your risks, diversify.Diversification is important as most investors are not able to predict the performance or returns of one particular asset class. Equities, bonds, different geographic regions, sectors or even various investment styles react differently to market events and cycles. Hence, investing in multiple asset classes and types will help to buffer the impact of any non-performing investment in a portfolio. Diversifying your portfolio can also help you weather the ups and downs of the market cycle.
Investing tip 4
Invest in a balanced portfolio to better manage risks and returns. A balanced portfolio is designed to achieve higher returns than debt securities or cash, but at a lower risk than a pure equities portfolio.
A fund offering a balanced approach should include both equity and fixed-income components, which can help to provide cushioning when either one of the asset classes is down. Equities and bonds usually show low correlation to each other and behave in an opposite manner under the same market conditions. Hence, when equity prices are down, bond prices usually rise, and vice versa.
Market corrections can mean opportunities; use dollar cost averaging to smoothen price swings.
Market swings and volatility are part of stock market movements. They present opportunities for investors to buy on dips or enter into dollar-cost averaging (DCA).
With DCA, a set amount of money is invested at regular intervals over a long period of time. It can lower an investor's cost of investment and reduce the risk of investing at a peak.
For example, when prices are high, the set amount can buy fewer investment units or shares. Likewise, when prices are low, more units or shares can be bought with the same amount. It helps to smoothen the ups and downs in market volatility.
Most importantly, bear in mind one golden rule: The chain is as strong as its weakest link. Regardless of the size of your investments, be vigilant and disciplined when it comes to preserving, investing and growing your wealth.
The worst of the financial crisis may be over, but the global economy is not totally out of the woods yet. Lingering problems still exist, especially in the developed countries. However, opportunities exist even in the worst of times.
Governments outside the euro zone are also at risk of drawing flawed conclusions, especially on exchange rates and fiscal policy. China seems to think that the euro’s decline makes it less urgent to allow the yuan to appreciate. The opposite is true. With its biggest export market in a funk, China needs to accelerate the rebalancing of its economy towards domestic consumption, with the help of a stronger currency.
For much of the rich world, however, the most important consequences of Europe’s mess will be fiscal. Governments must steer between imposing premature austerity (in a bid to avoid becoming Greece) and allowing their public finances to deteriorate for too long. In some countries with big deficits, the fear of a bond-market rout is forcing rapid action. Britain’s new government spelled out useful initial spending cuts this week. But the emergency budget promised for June 22nd will be trickier: it needs to show resolve on the deficit without sending the country back into recession.
In America, paradoxically, the Greek crisis has, if anything, removed the pressure for deficit reduction, by reducing bond yields. America’s structural budget deficit will soon be bigger than that of any other OECD member, and the country badly needs a plan to deal with it. But for now, lower bond yields and a stronger dollar are the route through which American spending will rise to counter European austerity. Thanks to its population growth and the dollar’s role as a global currency, America has more fiscal room than any other big-deficit country. It has been right to use it.
The world is nervous for good reason. Although the fundamentals are reasonably good, the judgment of politicians is often unreasonably bad. Right now that is what poses the biggest risk to the world economy.
Governments outside the euro zone are also at risk of drawing flawed conclusions, especially on exchange rates and fiscal policy. China seems to think that the euro’s decline makes it less urgent to allow the yuan to appreciate. The opposite is true. With its biggest export market in a funk, China needs to accelerate the rebalancing of its economy towards domestic consumption, with the help of a stronger currency.
In America, paradoxically, the Greek crisis has, if anything, removed the pressure for deficit reduction, by reducing bond yields. America’s structural budget deficit will soon be bigger than that of any other OECD member, and the country badly needs a plan to deal with it. But for now, lower bond yields and a stronger dollar are the route through which American spending will rise to counter European austerity. Thanks to its population growth and the dollar’s role as a global currency, America has more fiscal room than any other big-deficit country. It has been right to use it.
The world is nervous for good reason. Although the fundamentals are reasonably good, the judgment of politicians is often unreasonably bad. Right now that is what poses the biggest risk to the world economy.
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