Timing The Market

Timer Photo by Marcelo Leal on Unsplash

The Coronavirus pandemic has created a unique situation in the global economy. Fear of recession is clearly reflected in the sharp drops in the yields of bonds and treasuries and surges in gold prices. Money is moving from riskier asset classes like stocks into these asset classes instead.

In Malaysia, the Bank Negara Overnight Policy Rate (OPR) is now at 2.5%, which is the lowest rate in 10 years. In the US, the yields of the treasuries for certain tenures have halved since February, in addition to the fact the that yield curve (the comparison of treasury yields with different maturing tenures) has inverted again.

The S&P 500 has dropped 10% from its peak in February 2020. However it’s nothing compared to the gains over the recent years.

This lead us to the question….

Is This The Right Time To Enter The Stock Market?

The answer to this question depends on your answer to another question: have you taken care of your asset allocations of higher priorities?

My Asset Allocation Strategy: the higher you go, the higher the risks will be if you are not careful

If you have sufficient emergency savings, contributing regularly to your retirement funds and have no cashflow problems paying your home mortgage, then yes, it’s time to take more risks and go for a vanilla diversified index fund if you have not ever done that.

If you are investing in an index fund and want to take more risks, then you could even research individual companies that you are familiar with, check its valuation, and then purchase its stocks. There are blue chip companies in Malaysia with attractive valuations. The key points are: 1) make sure you are familiar the company – the easiest is to look at the brands and things that you are consuming constantly, 2) learn some financial accounting to be able to read the financial statements and 3) learn how to judge if the company is being fairly valued.

The Price That You Pay Is Psychologically Important

The common wisdom that you may hear is that you shouldn’t time the market. Just close your eyes and invest periodically like a computer program.

The irony of this matter though is that this advice is most natural to follow when you already are a seasoned investor that have gone through the ups and downs. Seasoned investors are able to regulate their emotions when the market (whether stocks, gold, properties or businesses) goes through a rough cycle.

If you are just starting to move up the asset allocation layers and going into more risky asset classes, you may be devastated psychologically if you have overpaid for your first investment and forced take a loss when its value drops. However the bigger tragedy will be if you didn’t learn anything from this mistake and choose to avoid investing all together.

My advice for the new investors is to enter a sound and quality investment during a time of distress. During a recession or market crash, everything, good and bad, gets beaten down. But, the chances of an upside will be better than a downside. It is always better to pay a cheaper price for a quality investment during a downtime than a higher price when the market improves. The lower price that you pay will be your psychological defense should the price of your investment decline again in the future.

Here is an example based on the S&P 500. At the end of 2018, I wrote about the 20% crash during Christmas. I didn’t think that the Fed interest rate hike then amounted to an unprecedented event that deserved such a crash in the stock prices. I then suggested that one should start nibbling at an ETF, averaging down the purchase price if it continued to go down. That would have been a good time for someone to purchase ETFs if he or she has never invested in stocks before.

The current coronavirus panic has caused the S&P 500 to fall again. However, the fall this time is just 10% compared to the 20% then. In addition, the prices of many US companies have become expensive compared to 2018. Entering at this price point will give less ‘headroom’ or buffer for upsides. And, in my opinion, the upside is not yet enough to provide someone who has never invested in shares with the sufficient psychological defense should the prices continue to drop.

On the other hand, a Malaysian is now looking at an unprecedented situation that has not happened for almost a decade. Here are a few facts:

  • The KLCI is at a multi year low (1,483 as of Friday 6 March) due to the various political and macro economic issues. The last time it’s at this level was 9 years ago in 2011.
  • With the persistent rate cuts by Bank Negara, bank stocks are sold down, although the dividends that they pay out have not changed significantly. The average dividend yield of the bank stocks in KLCI top 30 companies is now 4.9%. Maybank, the largest bank, has a dividend yield of 7.5% while Public Bank, the most cost efficient bank with the best asset quality, has a dividend yield of 4.1%.
  • As of the middle of 2019 property prices have increased at its slowest pace (just 0.4% from the year before, which is the slowest since 2001?). Salaries are steadily increasing to catch up with the property prices.

All the bad news added together have presented a depressing outlook for Malaysians with many things at multi-year lows. However, unless Malaysia becomes a pariah state, it is reasonable to think that the upside is pretty good.

For someone who is starting out to invest in riskier asset classes, the investment opportunities in Malaysia look appealing:

  • For those looking at index funds, take advantage of ETFs indexing the KLCI to capitalise on the eventual reversal of its downtrend.
  • For those looking at stocks, look at familiar blue chips that have strong financial track records and selling at fair valuation
  • For those who prefer properties, look for properties that can generate positive cashflows from rental.

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