Earlier this year, I wrote about how I intend to utilise my opportunity fund if the market correct or clash. While the market has been volatile this year, I have yet to have the chance to utilise the fund. It makes me re-think why is that so and should I tweak the plan?

I decided to take a quick check on how my portfolio has done on a yearly basis and this is what I have gathered. Out of the 18 years (2000 to 2017) since I have started investing, I had 6 years of negative return. Out of which,

  • 5 years saw a drop of at least 5%,
  • 3 years saw a drop of at least 10%,
  • 3 years saw a drop of at least 15%,
  • 2 years saw a drop of at least 20%,
  • 1 year saw a drop of at least 30%

Looking at the above data, it means that if I have kept to my earlier plan (where the trigger point is a 10% drop in my portfolio), my utilization rate of my opportunity fund will only be 17% (once every six years). Which also means five out of six years, the money in the opportunity fund do not get the higher return.  So this does not seem to produce the best outcome.

Crunching the Numbers

Using the average of my historical data ,

Average return of 15 years (exclude 3 years of >10% drop) = 20%
Average drop of 3 years (>10% drop) = -25%
Average return of the immediate 3 years after the >10% drop = 23%
Assuming opportunity fund is $10000

Scenario 1 Do not bother about opportunity fund

Value of opportunity fund at the end of 6 years
= $10000 x 1.2^5 x (1-0.25)
= $18746

Scenario 2 Invest the opportunity fund only when portfolio dropped by 10%. While waiting, put the money in Singapore Saving Bonds

Value of fund at the end of 6 years
= $10000 x 1.0224^5 x 1.23
= $13741

As seen from the above numbers, it does seem that being 100% invested is a much better idea. In scenario 1, the compounded annual growth rate (CAGR) for the 6 years will be 11%, while it is only 5.4% for scenario 2.

This is primarily due to the low frequency in which my portfolio went below more than 10% and surprisingly high average return of 20% in the other years.

Of course, the above calculations are simplistic and will vary depending on the input numbers. But for my case, it means I should tweak my strategy to improve the chance of better return of the opportunity fund.

Update to the plan

With this new insight, I decided to lower my threshold to activate my opportunity fund.

If my portfolio is down as compared to end of last year’s value AND  the drop is triggered by market correction/crash, then I will

• start to deploy the first 30% when portfolio is 5% down

• deploy the next 30% (60%) when portfolio is 10% down

• deploy the next 20% (80%) when portfolio is 15% down

• deploy the last 20% (100%) when portfolio is 20% down

• hold and wait for recovery when portfolio continues to drop.

Currently, my portfolio is about 5% down. I will be wait for another week for the month to end to decide if I should press the activation button.