Equities investors have been advised to embrace the seven key rules of saving and investing wisely.
The Global Head, Wealth Management at Standard Chartered Bank Limited, Marc Van de Walle, gave the advice in a report titled: ’Riding the bull wisely.’
According to him, investors should prepare an investment plan based on their financial goals, risk tolerance and time horizon and set aside funds for short-term exigencies in cash.
“Invest most of the remaining funds(say 80 per cent) in a core portfolio broadly diversified across asset classes, geographical regions and industry sectors. This will help limit the downside from unexpected events (because they will happen over our lifetime!).
“Stay invested through market cycles, since time and the miracle of compounding returns is your friend. Rebalance the portfolio at regular intervals (say twice a year) to bring it back to your risk tolerance,” he said.
Walle, explained that investors should use the remaining funds (at most 20 per cent), for short-term trading (for those who want the thrill).
“Make sure this is based on sound research and not the latest fad, and done with a cool head – not be too greedy at the top and panicky at the bottom (using stop-losses would help remove personal biases and limit downside risks for this part of the portfolio) and finally, follow the investment plan,” he said.
According to him, for some investors, putting all funds to work immediately could be psychologically challenging.
“For this group, setting up a pre-determined regular investment plan would remove any personal biases. This so- called dollar-cost averaging strategy would help the investor to automatically benefit from any market upside, while allowing the investor buy cheaper if the market pulls back along the away. This strategy could include pre-determined rules to accelerate purchases in the event of larger-than-expected market draw downs,” he added.
Walle noted that based on decades of market history, it is hard to make a case for an equity bear market without an accompanying economic recession.
“Therefore, the risk of trying to time when to exit the market before any short-term correction and re-enter at the bottom are greater than staying invested (since the investor could lose some of the best days in the market by staying out),” he said.
He said that for those who have stayed out of the market before or after the pandemic, the challenge of when to get back in is seemingly much harder, noting that often, their hesitation stems from a desire to perfectly time their re-entry. In our experience as wealth managers, this is the single most common investment mistake.