The global pandemic has changed how we live and invest in many ways. But we need to be clear that what we are experiencing is not the first crisis, nor will it be the last in your lifetime. Life goes on. As an investor, there are lessons to learn and yet to be learned. The question now is, “How do we ride this out unscratched and even profit from it?”
Issac Newton said, “If I have seen further than others, it is by standing upon the shoulders of giants”.
We all have limited time in our lives. And our personal knowledge and experiences are often insufficient to help us ride through a crisis. But we can always learn from successful people and organizations who were tested over time. In the context of Singapore, who else has that long history and track record than our sovereign funds, GIC (Government of Singapore Investment Corporation), who is managing over US$100 billion in assets in over 40 countries worldwide now?
I shared before that I was very thankful that a short conversation with John Mauldin about “human adaptiveness” helped me ride through the toughest time during the Circuit Breaker and stock market crash last year.
As a member of the MAPIC program, I was invited to a closed-door sharing session with 30-year GIC veteran Mr Aje Saigal recently. I didn’t hesitate for a second to sign up.
Additional reading: How to build wealth through property investment: a review of MAPIC program
In case you are not familiar with Saigal, he joined GIC since its inception in 1981. He served in key positions including Chief Investment Officer and he was also on the CPF Board and chaired the CPF investment committee. After his career with GIC, Mr Saigal is now the CIO of Nuvest Capital.
Indeed, I have learned a lot from Saigal, who shared his experiences with making investment recommendations for Singapore’s sovereign wealth fund. And I totally agree with him that the same principles used by GIC can be applied to individual investments as well.
I find the insights are especially relevant today as we are going through a global pandemic crisis. So I want to dedicate this article to share what I learned so that you too can benefit.
Lesson #1: Why do we invest?
Saigal shared that GIC was set up in 1981 when global inflation was at its highest levels in the 1980s. At that time, the US inflation was 15% per year! Singapore just experienced a more than 30% inflation in the mid-1970s. The purpose was to help safeguard Singapore’s reserve to combat inflation.
Inflation is something many people cannot understand nowadays due to the prolonged deflation environment we are currently experiencing. I talked about the upcoming retirement crisis due to inflation in June last year. Unfortunately, not many people cared about the idea at that time, but it is a big topic in the market now.
Additional reading: 5 ugly truth of the upcoming retirement crisis and how to deal with it.
Inflation may not have mattered much in the recent past but it will definitely matter in the future. If you are preparing for retirement or already retired, it is going to be the biggest financial challenge that you will face. That is why you need to invest. As Saigal put it,
The difference between savings and investing is that investing helps you stay ahead of inflation.
He shared that at the time when GIC was set up, their return target was 4% above inflation for a full market cycle, which is typically 4 to 6 years.
Although this target may have changed over the years, I think that is really a good benchmark for an individual’s investment target for retirement. If your asset grew at a 3% to 4% rate during the past 10 years, you may still feel very comfortable. But it won’t be the same when inflation becomes the central government’s KPI (Key Performance Indicator) in the future.
Lesson #2: Diversification is the only free lunch
Who doesn’t want to have low risk and high return? But I seldom see people do it.
Saigal shared how GIC survived through the past crises such as in Oct 1987, the Asian Financial Crisis and the Dotcom bubble through diversification.
Diversification sounds simple, but it is not well understood. In my years of helping clients review their existing investment portfolios, I have found that people often over-exposed themselves to unnecessary risks.
Here’s a simple example. If you have $50,000 to invest, buying shares in DBS, OCBC and UOB will expose you to similar risks as buying any one of them. But somehow, people are still discussing which bank’s stock is better.
“Diversification is not about spreading the risk but neutralizing risks through less correlated investment instruments.”- Ivan Guan
In the past few years, many people have shifted their entire investment portfolio to REITs due to the good performance of this asset class. And there was even a new word called “REITiree”. When I cautioned people not to over-rely on REITs for retirement, the article was “hentam left and right” (Singlish: slapped) by the REITs enthusiasts. True enough, the global pandemic again proved that owning REITs is not a bulletproof strategy.
When the pandemic was just starting last year, I heard many people talking about how it was a golden time to load more REITs. That is why I wrote an article (April 2020) to warn investors it was too early to invest in REITs. And the chart below speaks for itself.
This is not to say that REITs are a bad investment but you should always diversify your investment portfolio. There were many investment opportunities in the past year and many stocks had a stellar return. Without diversification, your capital is stuck and you will miss out on some of the best investment opportunities in life.
Now, REIT investing is out of favour because new toys are in town: Gamestop, Tesla, Bitcoin, Dogecoin, etc. All these can be a good investment, but too much of a good thing can also be bad.
If you read that many rich people or institutions are willing to put 1% to 5% into bitcoin, you need to have a clear head that they are there for diversification due to Bitcoin’s low correlation with other assets, not speculation.
Additional reading: Is Bitcoin a good long term investment?
I really like the way Saigal put it,
Diversification is the only free lunch.
This is true because you need hard work and luck to choose the right investment. But, when you diversify, your risk-reward ratio immediately goes up.
A good example of this concept is ETFs (Exchange Traded Funds). People often misunderstand that the popularity of ETFs among institutions is due to their passive nature. You may not realize that institutions have enough resources to buy the underlying stocks or bonds themselves.
The real reason institutions embrace ETFs is because they use them as a tactical play to increase their short term risk-reward ratio.
Additional reading: ETF Investing: 3 myths busted.
For example, if you want to have a short term exposure to China’s tech stocks, you can choose to buy Alibaba or Tencent, or you can use the Hang Seng Tech ETF which has similar returns but less volatilities. If you are bullish on Chinese domestic stocks but do not have the facility to purchase China A-shares, you can use an ETF as well without doing research on each of the underlying companies.
Lesson #3: You need to have an economic outlook
There are many people out there telling you that investing is as easy as buying blue-chip companies and don’t look at them any more.
“You should invest for the long term, but you don’t need to be married to your investment.” – Ivan Guan
Saigal gave a very good example. The US experienced “The Great Inflation” from 1965 to 1982. But the US Fed chairman Paul Volker changed the world. With his aggressive policies, he brought inflation to its knees in the 1980s by aggressively raising the interest rate.
If you were in the wrong boat at that time, your whole investment portfolio and retirement would have been in jeopardy.
The good news is that you don’t need to have a PhD in economics to figure out what to do. The correct economic outlook is to understand what central banks want to do and the impact of their policies.
For example, when Covid just started, the US government released unlimited quantitative easing to support the market. Yes, many companies collapsed and the economy suffered. You don’t have to be bullish on the stock market, but if you are going against the central bank and shorting the market, you could have suffered dearly.
Saigal reminded us that central banks are run by powerful people. It is better to be on the same side instead of going against them.
Lesson #4: It is better to be roughly right than to be exactly wrong
Saigal shared that in earlier 1987, he was attached to a US investment manager to learn their investment model.
The investment manager felt the market was too overvalued and started reducing risks. In hindsight, it was a perfect call. Of course, as the market continued going up, some of his clients were not happy. He said a very big client withdrew their entire portfolio and shifted the money to another manager who was willing to go for full equities just before the Oct 1987 crash. Of course, now we know the market had a meltdown at that time, but it was not an easy decision to stay defensive.
This story resonates with me because every time the stock market is in its euphoria stage (often before a big correction), I will get questioned left and right by my clients about why I am taking chips off the table.
As an investment professional, when I caution my clients to avoid hypes and be prudent when the world is going crazy, I am putting my career on the line. Because there are some investors who will choose to leave for a “better performance” right before any bubble. But as Saigal said, that is “what we are paid to do” – to safeguard our clients’ long term interest.
There is no need to pick the exact top and bottom, it is better to be roughly right than to be exactly wrong.
The market may continue to rally after you sell, or it may continue dropping after you buy. But it doesn’t matter. As long as you get the big direction correct, you will achieve consistent risk-adjusted returns.
Saigal shared that “dynamic asset allocation” is the way GIC looked at investment. Dynamic asset allocation doesn’t mean that you are trading your investment holdings on a daily basis, but rather you are actively looking for different sources of extra returns and managing your portfolio risks.
Even if we are wrong, it is part and parcel of investing. Whatever we assume is based on the information today. If next week, things change, we must be willing to change.
Let me summarize…
The crisis that we are facing is not the first, nor will it be the last. That is why we need to have an investment compass to guide us so we can stay on course.
Before you start investing, you need to be clear about your investment objectives. Investing for retirement is always the area of my focus and an average 4% return above the inflation rate during a whole market cycle is a good benchmark. For example, if inflation over a given cycle is 2%, and your portfolio returns 6% on average, then you are on track to reach your investment goals.
To achieve this, you need to have a basic macro view of the economy. You need to make a call answering: “Which stage of the economy are we in? Are we in Recovery, Overheat, Stagflation or Reflation?”
The first thing you need to do is to diversify your portfolio because it is the only free lunch. You also need to monitor and adjust your portfolio dynamically when the circumstances change. Don’t worry if you are wrong, it is better to be roughly right than to be exactly wrong.
I hope this article gives you a new perspective on investing and helps you go deeper into some of the investment concepts. If you find it useful, share it or join my mailing list below or Telegram channel for more.