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The past five years saw a bull market run where investors enjoyed good returns. Events in the past year, however, have changed the market’s course and we are now faced with a volatile investment landscape. Call it greed or simply the result of being accustomed to good returns, many investors have been slow to react to the change in market dynamics and are only now starting to ask, “should I sell or not?”
A year ago, if I asked clients what return they would like to see on their investment, the reply would often be 50 per cent (based on emerging market returns of the previous three years). Today, those very same clients would be happy with eight or nine per cent.
While it is hard to generalise business executive investors, it is fair to say that they are the potential future high net worth investors. Their main objective is certainly to make good returns, but they don’t invest short-term. Most of these clients look at time-frames averaging around 15 years. Therefore, it becomes much easier for them to make sensible, long-term investment decisions.
Retail banks still play a role in their day-to-day transactions, but as executive investors have much higher expectations of the service they should receive, they have also relied on the expertise of private wealth managers to get customised, private and attentive service. The current investment climate should not be a concern for executive investors if they have set their objectives correctly together with their private wealth managers. MANAGING WEALTH IN A VOLATILE MARKETSetting up or saving an existing investment portfolio during an economic downturn starts with a solid business plan. Just as an entrepreneur should not start a business venture without one, you as an investor should at least have a mission statement on why you want to invest in the first place.
What will be your benchmark? How do you want your money to perform in real terms and what are your investment time frames? By establishing fi rm objectives, you will be able to review the performance of your investments and make informed and unemotional decisions accordingly.
An analysis of your investment portfolio is next. Break up your portfolio into groups: fixed interest, equity, property, cash, commodities, alternatives or collectibles (art, wine, antiques). The goal is to have a balanced mix of asset classes. Every investor places different risk profiles and emphasis on different assets: some prefer equities while others would opt for property. Once your portfolio is segmented, look at each asset class and determine the time frame and the level of risk and volatility you are prepared to accept in each sector. This is a constant balancing act as these asset classes either out-perform or under-perform each other on a regular basis. Get this right and you might even be able to consider yourself as a full-fledged fund manager.
A good private wealth manager should be able to help you at this point. He can manage this asset distribution and align it according to your financial objectives. In my opinion, this is what differentiates a great private wealth manager to brokers and bankers who will find you the best product in a particular sector but won’t necessarily align it to your overall portfolio.
Once you have analysed and realigned your portfolio, it is time set your benchmark. Typically, we would use an index such as the MSCI world index, or something above base rate – usually around five per cent. These days, inflation is used as the benchmark, which is around seven or eight per cent in Singapore currently, depending on how you calculate it. You can then implement a stop loss and stop gain point – for example, if I make 20 per cent on a stock or a fund in a year, I will sell 50 per cent of it. Likewise, a 20 per cent drop means a sell or additional buy in to bring down average cost prices.
These basic investment techniques are solid and proven principles to incorporate into your investment portfolio. Cost averaging into a market is a tried and tested method when we have high volatility. Th is works well with savings plans but can also be used with capital by putting in buy orders on a weekly or monthly basis. You can also cost average down your buying price by purchasing more shares in depressed markets. It makes life a little more complicated, but you will be managing your portfolio in line with your expectations. BE MINDFUL OF COSTSThe structure and domicile of your investments are two important factors. You must ensure that your investments are structured to be tax efficient and also cost effective. If you are going to incur large costs in your portfolio management, then you will be eating away at valuable profit. There is a huge difference between a 0.5 per cent annual custodian fee and one per cent over a 10 year period – on a million dollars it makes a difference of $87,000 with a gross seven per cent growth rate. There are many ways to access investments now and it pays to shop around and take some independent advice. Private banks, insurance companies, platforms and fund houses all offer vehicles to purchase assets.
Beware of transaction charges – financial advisers, wealth managers and private bankers need to eat as well. Investment institutions usually make money by buying and selling assets. If you have a large equity fund and your adviser recommends selling and investing into a fixed interest fund, for example, you might incur anywhere from one per cent to five per cent fees. Make sure you negotiate discounts or at least obtain financial justification for the charges. There are structures available where you do not incur these fees, but beware! Without any financial incentive for your adviser to look after you, the service level you will receive is likely to be very poor. It is perhaps worth considering paying higher fees, but make sure you receive very active management of your monies, which will in turn lead to performance that is related to your objectives in the long-term.
It is best to have an investment horizon of not less than three years. Don’t look at a finite goal, but instead create a serious and sensible business plan for lifetime investment.
In my view, now is the time to take some basic re-alignment steps. Critically, and subjectively look at what you have – move away from complex analysis and draw one pie chart – “this is what I am worth and it is split as follows”. If any one sector is massively larger than the others ask yourself if it is what you intended. Set an objective (percentage wise) to have in each sector. If you are at an early stage of your investment career then you can afford a little more volatility and risk. If you are or about to start using your capital to provide income, then you must bring down the volatility and increase the liquidity on a portion of the portfolio. Spend time with your adviser or on your own, and create that business plan. Th en stick to it. It is nothing revolutionary or radical – just good old-fashioned sensible planning. With implementation, discipline and foresight, you can make sure you are on the road to a successful financial future. Until you go off track the next time, that is. Mark Paine is a managing partner at Meyado Private Wealth Management Singapore with 15 years’ experience in the financial advisory sector. He has worked with private clients in Europe, North America, Middle East and Asia. He heads up the Singapore office and is looking to grow the regional office in the city.
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