I am currently in a bit of a dilemma now. Next year, I am moving house, and I need to set aside money for some renovation, and sigh, I think I will probably have to finally buy a car too. So, I need to set aside money for these things next year, but yet at this point in time, I really would love to put in that money into investments instead!
This is because we are in special sweet spot in the market currently. Earnings are really high, interest rates are low, and yet, because of some concerns, many markets, including Asia, are trading at cheap valuations! I have almost $370,000 invested into equity funds and only $42,505 into bond funds, but I would love to add even more to my equities. But doing so would bring my equity exposure even higher, so I must discipline (force) myself not to do this.
Also, I can’t (or at least I shouldn’t!) put so much money into investments because I need to start setting aside money for the renovation and car purchase next year. Putting them into investments, especially equity funds, is risky simply because the time horizon is very short. I could be taking out this sum of money within one year. And when you have a time horizon of just one year, lots of things can happen to temporarily delay or even derail their value.
Take for instance if we were to go back to October last year. Now, at that point in time, equities were cheap too, and earnings were also steadily moving up. In fact, I was also confident about markets exactly one year ago. But a couple of things happened, and while they did not exactly cause a market crash, they did cause a lot of volatility. We had concerns about central bank exit policies at the start of the year, China and other Asian countries since then started to clamp down on the property market, and in May, we had a European financial crisis.
Actually if valuations were lofty then, all these together would have certainly crashed the market. But instead, Asian markets retreated maybe 8 to 10%, then came charging back. This actually lends me even greater confidence that we are currently at a sweet spot in markets. If all these things plus fear of a double dip recession couldn’t bring about a market crash, it’s because fundamentally, things are improving, earnings are rising, and valuations are cheap! Hence, the downside is simply not high compared to the potential upside.
But back to topic, the problem is if an investor with only a one year or less horizon went into equities in October last year, he would be sitting on relatively small gains at best, and if he was forced to exit in May or June, he might even have been sitting on losses. Yet, the outlook for markets has never been better. I feel that all the event and concerns of this year has just only postponed the next phase of the bull run, and if anything, gave investors more time to accumulate and invest into equity markets.
But here’s where the dilemma comes. No matter how bullish I am about markets, a one year horizon is simply too short. Just as the one year since last October has proved, even when the market outlook looks good, certain events could cause a temporary fall or push back the anticipated uptrend. Being forced to sell out and then seeing the market run up after that is going to be really frustrating.
But this is money which I know I will be spending. I can’t exactly say “Let’s move into our new home, and because the market didn’t quite turn out how I expected, we aren’t going to do any renovation!” I suppose a car purchase can be postponed, since we haven’t had a car all this while, but renovation is going to be a non-negotiable expense item.
So, I need to be a lot more careful with this money which I am setting aside for my renovation and car purchase next year. Putting it into equity funds, no matter how bullish and confident I am, would appear to be the irresponsible thing to do. Certain things will cause a lot of anguish. In the unlikely (but still possible) event of a loss, being forced to sell out or top up even more money will feel very tough. But worse than that would be if I had to disappoint my family and tell them I need to postpone say renovations or a car purchase because of market conditions.
Instead, given that I already have substantial positions in the market, it’s just more prudent to set aside the money, but choose not to invest it into equity funds. I may make less (I am quite confident markets will go up and that will happen), but at least I will have the peace of mind, and when the time comes next year, the money will be there for the renovation and the car. Yes, my anticipated profits might be less, but let’s not get too greedy here. There will be other opportunities, and by then, if what I anticipate comes to pass, then I will already be sitting on hefty profits.
It’s the right and prudent thing to do … but wow, it is hard to force myself not to buy equity funds now!
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