Part II: Retirement Portfolio in Trump’s 3rd Year — Taking Cover

In the past week, there has been a lot of pain in Wall Street with the Dow falling to levels last seen in September 2017. All gains for 2018 is completely obliterated as we move into Xmas/New Year week – falling by about 1655 points or 7% in just 5-days! This is not a jolly season for most investors. Unfortunately, this downward spiral is not limited to just the US – the ripples are felt in Europe, Japan and China. Here are some of the things you should do and things you should also avoid.

  • Resist from panicking. The last thing you want to do is to try to time the market. The market volatility is driven to a large degree by global politics and it will remain choppy in 2019 — a large part is from the Trump administration. If you panic and fire sell, you may be locking in your losses. You are likely not smart enough to time getting back in the market to catch the rebound. If you have a well balanced and diversified portfolio, you may want to let your portfolio do the work and ride out the storm — for now.
  • If your portfolio is overly concentrated on one country, currency or sector, this is a good time to talk to your financial adviser to diversify. Diversification is an age-old strategy to smooth out the volatility. Many portfolios trying to make a quick buck by over weighting high beta stocks. While you cannot predict the stock market swings caused by irrational political actors (you know who I am referring to), you can protect your portfolio from sleepless worries by simply spreading the risks.
  • Diversification is important, but so is a balanced portfolio. There are 3 parts that are key — equities, income and cash. First and foremost, you should have about 6 months in liquid cash without having to force sell any assets. Consider a portfolio that can generate sufficient income for you to draw on reliably — and it may not purely be fixed income. Some mutual funds invest in blue chips that pays reliable dividend. REITS may be a good alternative to straight bonds or fixed deposits. If you have a longer horizon of more than 10-years, 20% in stocks is not a bad strategy. But now is a good time to think high quality companies that will survive this roller-coaster. There are no guarantees – even the once rock solid General Electric is now in a lot of trouble!
  • Do not, I repeat, play with derivatives unless you are very sure of what you are doing. Derivatives takes many shapes and forms — but the ones you should absolutely avoid are contracts that can amplify your gains and losses to the extent that it can wipe out your entire portfolio. Derivatives like the “accumulator” can be very attractive when the markets moves in the direction of your bet, but can also be absolutely disastrous if the market turns the wrong way. Many have their entire portfolios wiped out — and this can easily happen in this volatile market environment!
  • Some amount of leverage is OK especially in the era of “cheap money” for say up to 10% of your portfolio — but looking at the trend, cheap money is coming to an end. If you have borrowed heavily to buy stocks, this is a good time to try to deleverage your portfolio. Rising interest rates means that your borrowing costs is going in the same direction. If you are heavily leveraged, large swings can result in margin call and forced selling — and it gets really ugly when that happens. Your broker can sell your stocks to protect their margin without your permission — and it may out of your hands which stocks they sell!
  • If there is one lesson learnt from the Asian financial crisis is that no one currency is entirely safe. Investors whose portfolio is mostly held in local currencies like Thai baht or Indonesian rupiah were badly burnt. USD is the global currency that most of the world’s transactions are denominated in and is still the gold standard. The USD should form a good part of your holdings. Singapore dollars is one of the most stable currency – often referred to as the “mutual fund of currencies” and should hold up quite well during volatile periods. The other two major currencies to balance your portfolio with is the Euros and Japanese Yen. I would stay away from the British Pound given the craziness of Brexit.
The NASDAQ is officially in bear territory, down 20% from peak. Dow and S&P not far behind. The worst December month since 1930s.

Your retirement portfolio should be designed for capital preservation first, and income generation second. If you set it in a diversified and balanced manner, you should be fine in the long run. While you may be rattled by what is going on in the global markets, irrational knee-jerk reactions can cause your portfolio real harm. For the longer term investor, time is normally a good thing. You just have to ride out the storm. And it will get real stormy during the Trump presidency.

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