Don’t Get Too Greedy Now (23 July 2010)

Markets continue to climb steadily. The STI index is close to 2970 currently. There is actually not much volume, which shows that a lot of investors remain cautious. This is actually a good sign. A steady rally that occurs as investors climb a wall of worry will last longer than one that boosts the market up for a just a short period of time, then swiftly runs out of steam.

There are lots for investors to worry about if they want to. The US economy, which has previously been recovering swiftly (to everyone’s surprise), is now slowing in its rate of recovery. Its latest ISM Manufacturing index still indicated growth, but it was not as strong as expectations. The US Federal Reserve chairman Bernanke’s latest comments on the US economy did not foster much confidence either. Furthermore, although Europe has now stabalised and the Euro has also now stopped falling, their financial problems will take some time to sort out.

But its easy to get too caught up with the bad news. One key indicator which I often go back to, is valuations, and right now, valuations for many markets remain very attractive. This shows that many companies are growing their earnings, but their stock prices have not been driven up because investors are still so cautious.

But on a personal level, I shifted $10,000 from equities (Aberdeen Pacific Equity fund) into bonds (Fidelity Asian High Yield Bond Fund). Does this mean I am turning negative on the market? A firm no to that! For me, my long term asset allocation was to strive and have 10 to 15% of my portfolio in bond funds, while the rest are in equity funds. This way, if there are falls in markets, I can shift from bond funds into equity funds while they are cheaper during these times. This year so far, I have done it twice already, the latest during the May sell off. So currently, I am considered heavily overweight into equities, even more so than my target long term allocation.

So, this shift of $10,000 into Fidelity Asian High Yield Bond fund is to move back towards my long term allocation. In truth, it is not enough, I would still remain overweight at this point. But my intention, is that as the market continues to rally, I would gradually then shift some more from my equity funds back into my bond funds. This gradual way of adjustment allows me to continue to enjoy the upside for my remaining equity funds, but I am locking in some of my profits which I made when I shifted from my bond funds into equity funds during the selloffs this year.

Volatility will always be a part of markets. If we have diversified portfolios, and we maintain discipline and not get emotionally driven towards our investing, then volatility in itself is not so scary. From the peak of the market in end March, to the April/May selloffs, when markets fell on average 10%, my portfolio fell from $379,000 to $353,000, so I lost $26,000 during that period of sell off. But I did not panic and sell any of my equity funds, and in fact shifted money from bond funds to equity funds. Now, even though markets have recovering, and still not at the previous March peak, my portfolio is already back to near the March levels.
The key thing for many investors now is to not get too greedy. If you are already into equity markets at this point, then don’t let rising markets cause you to double your equity holdings and such. By all means, enjoy the ride up, but realistically, it will be a gradual one, without the kind of eye popping returns of last year. In fact, lock in some profit occasionally as the market rises to that your allocation towards equity funds do not get too large. We must remember that although certain regions like Asia have done much better than what economists expected, there are some headwinds currently. So, keep an eye on your portfolio, try not to let it get too heavily overweight in equities as stock markets recover.

On the flip side, if you have been staying out of markets all this time, then you may want to consider putting some of that money to use because returns from keeping them in savings accounts are so low currently. While bond funds, especially the Asian high yield bond funds I personally like right now are definitely riskier than a savings account, I think its well worth the risk.

(PS: I haven’t updated my portfolio yet, because I just put in the trade today. I will update my portfolio when the transactions are completed.)