I read with interest the article by Straits Times' Senior Correspondent, Mr. Goh Eng Yeow, on how to make the most out of the bear market now. Specifically, he urged readers to suspend the usual 'buy-and-hold' strategy, and instead adopt a more opportunistic approach to benefit from the wild price swing. On a practical note, investors should buy into blue-chip stocks when they are badly bruised and sell them off when the rebound comes.
I agree with his view, knowing that 'market timing' is one of the elements that will earn you 'alpha', which is the excess return over benchmark. The other elements being asset allocation and stock-picking skill. While you can earn excess returns through asset allocation by investing in ETF or unit trust as a portfolio, and read lot of research reports to minimise the error of picking the wrong stocks, it does require skills, experience and lots of courage to buy when the market is selling.
The way I see to mitigate risk and even make money now is through the use of options/derivatives (futures, CFDs), whether it’s a covered call to generate income or a protective put insuring a holding or pair trade. Investors should be aware that it’s no longer sufficient to hold just a balanced portfolio of 60% equities/40% bonds in this dynamic marketplace.
The reality is that clients should be empowered to do their own investing and not depend solely on their wealth managers. They should determine their risk tolerance and then choose the vehicles that fit that tolerance. Most of us have in the past been resigned to pay a manager to do just this but with the rise of these products -- derivatives, ETFs, powerful platforms and education etc. – everyone is empowered to manage and execute the plan that they have developed.
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