If anyone told you he or she knew exactly what is going to happen in the stock market over the next few days, months or even years, do yourself a favour and stay away from that person.
That was one piece of advice from Rusmin Ang’s talk that stuck out the most for me at InvestX Congress 2017, a quasi-annual event The Fifth Person held on 19 August this year.
Rusmin is the Co-Founder of The Fifth Person, a team of individuals who believe in the importance of providing no fluff content and research to retail investors and helping them make more informed decisions.
He dedicated almost the entire past decade of his life to understanding investing in the stock market, figuring out various ways to optimise his portfolio as a retail investor.
If it’s one important lesson he learned, it’s that no one can ever, EVER predict how the market is going to be next month, next week or even the next few hours, let alone the next year.
That said, no one will know when the stock market will crash. So if someone is so certain the stock market will crash tomorrow, next week, or next month, either that person is a prophet or he’s lying to you.
To Rusmin, instead of timing the market, there are several investing ideas we can learn and apply to minimise risks and optimise our portfolio. The three main ideas he touched on were:
- Avoid cyclical sectors unless you know them well
- Review and balance portfolio regularly
- Use the Volatility Index as a gauge of market sentiment
1. Avoid cyclical sectors unless you know them well
In the stock market, there are certain sectors that are cyclical in nature. Prices of stocks in cyclical sectors or exposed to business cycles follow a rise and fall pattern after some time and are extremely volatile.
As such, it’s inevitable that these sectors don’t do as well as their counterparts over the long term.
Examples of cyclical sectors are the shipping, oil and gas, raw materials, and almost every other consumer dependent or supply-and-demand reliant sectors.
Rusmin shared a personal story about investing in shipping companies, a sector he knew very little about but was interested to learn more.
The CEO of the shipping company took on a lot of debt during uncertain and volatile times, which in Rusmin’s opinion, one of the biggest killers for the industry players.
At that point of time, if Rusmin cashed out on his position, he would have made a sizeable profit. Unfortunately, he held on and about half of his initial investment instead.
What’s worse, he allocated about a fifth of his portfolio in that shipping stock. That brings us to his next point.
2. Review and balance portfolio regularly
As retail investors, the biggest thing we can hope for is a peace of mind, as advocated all the time by local financial blogger, AK.
If we’re constantly worried about our portfolio to the extent we lose sleep at night, it’s a signal that we’re taking on more risk than we can tolerate. In those cases, we need to review and balance our portfolio as soon as we can.
In Rusmin’s case, his mistake was investing too much of his money in a stock that was very risky.
Remember, no one knows for sure how the market will be like in the future. Even the best fund managers, economists and stock analysts might be wrong. Heck, even Warren Buffett got some of his investments terribly wrong.
We can’t control the market, Rusmin said, so we have to diversify our portfolio. But don’t stop there, review and balance it regularly.
The bare minimum is to look at the stocks in our portfolio, ensure their fundamentals, net-cash positions and debt among other easily available data are still fair to their stock price.
That begets the question: How often should we review our portfolio?
3. Use Volatility Index as a gauge of market sentiment
There is no hard and fast rule how often you should review your portfolio but one good indicator that Rusmin started using recently is the Volatility Index (VIX).
Looking at the chart above, we will realise volatility spikes when crises happen. It’s self-explanatory but the important thing to note is opportunities arise when volatility spikes since crises are the best times to make a killing.
Remember Warren Buffett’s quote, “Be fearful when others are greedy and greedy when others are fearful”.
When volatility spikes, even if our portfolio is not losing money, we have to start assessing the situation. And the quickest way to know when volatility hits the market is to look at the VIX.
Certain stocks are more susceptible to downside when crises occur while others are resilient. Ideally, we want to reduce our exposure to risk, or always protect our downside, as Rusmin advised.
Also, it might be opportune to look for discounted stocks that are still very strong fundamentally, with solid balance sheets and net-cash positions.
No one can predict or time the market, not even the most successful investors in the world. But if we do protect our downside and diversify our portfolios, we just need to be right slightly more than half the time to profit.
If you’re interested to learn more from Rusmin, he’ll be speaking at our upcoming event on 16 September 2017 (Saturday), on “How To Maximise Dividends & Build Multiple Streams Of Passive Income”.
Grab your tickets now by going to www.sharesconv.com to find out more about the other speakers and their topics. See you there!