The market continues to move south since last November. My portfolio has dropped by 10% year to date and if compared to the all time high last November, it has plummeted by a whopping 23%!
In terms of absolute value, more than a year of expenses is gone and is comparable to 2020 Q1 drop when the pandemic hit. As much as I do not like the recent correction, this drop provides a useful lesson, especially when I am preparing myself for a life without regular pay check.
Of course, the ideal situation is to sell at last year’s November high and buy back now but this is hindsight. More importantly, based on past experience I don’t have the skillset to time the market. As such, the following are what I would need to do.
1. Be ready to hold Investment for at least 3 years
Having a regular pay check helps to mitigate such volatility as I can continue to go on with my daily life without worrying about the volatility. However, the day when this is no longer available I must ensure that I do not need to sell the shares for cash flow.
Given a bear market can last as long as 2 years and providing a buffer of a year for market to recover, I should have available cash and equivalent that can last me for at least 3 years.
2. Only invest 50% to 55% of net worth in stocks
No matter how I am mentally prepared for market downturn, experiencing it in real time is never easy. For this recent correction, my current net worth has dropped by 10% within a month. However, assuming my portfolio stays at -10% by end of the year, my net worth after including CPF (excluding sum set aside for FRS) and other cash inflow, will probably remain flat. And that is a lot more palatable.
Current allocation shows that about 62% are invested in stocks and unit trusts. This should drop to around 50% in the future.
3. Invest in companies with strong balance sheets and/or cash flow
This should always be one of the criteria when investing in companies but it becomes even more important during down turn as weaker companies are going to be sold down more. The worst thing that can happen is the company needs to fold, resulting in 100% loss in capital.
Looking through my myriad of counters that I have, I am glad that most have strong balance sheet or good positive free cash flow. These companies should survive the down turn and become stronger, resulting in a stronger rebound in their share price when the storm passes.