I didn’t update this blog for a while as I do not see much purpose in adding on to the negativity. Every day we open up the newspapers, we are hit by depressing news - what with retrenchments (DBS axes 900, NOL ships out 1000, Citigroup eliminates 52000 worldwide, etc) and pay cuts (Temasek staff and Cabinet ministers). Taken together, the “contributions” from DBS and NOL are close to surpassing the retrenchment figures for third quarter.

 Invest Only What You Can Afford To Lose

Without a doubt, Asia is slipping further into recession. Shipping industry is in a bad shape with lower commodity demand, overcapacity and tighter credit, not to mention the devastating effects of piracy. China is among the hardest hit by the drop in container traffic but Singapore is also feeling the heat as order books are being reviewed. Oil-rigs building firms are in the trough of their business cycle but I am not alarmed given the favorable fundamentals of increasing oil demand when confidence returns to global economies.

Construction sector, a solid pillar for Singapore’s economy given the weakness in manufacturing, electronics, pharmaceuticals and finance, could be in serious trouble soon. Many firms had snapped up projects in the recent construction boom using short-term credit to get things moving and if the banks start curtailing loans, there could be a massive collapse of main/sub contractors, suppliers and of course, job losses.

The axe could fall at any time and in the event of unemployment, there could be no income to feed the family or pay the essential household bills. I will say now is a good time to examine debt levels, cash reserves and work out a prudent family finance budget.

Many financial experts agree that a family or an individual should have at least 3-6 months of cash to cover living expenses and emergencies. Once these reserves are set up, you can then consider your long-range financial goals and invest what you can afford.

When you risk your hard earned money in the stock market, do not be greedy over short term profits. As Mark Twain commented: “There are only two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”

Mark Twain certainly has a wry sense of humor and I doubt he meant that we shun all investments. Risk is prevalent in any field of endeavor. In stocks, our equity could possibly be wiped out when the company goes into receivership. In bonds, prices could fall on lower credit rating and higher interest rates. With fixed deposits, we lose money to inflation.

Any investment strategy entails risk. However, the risks are magnified when investments are made with money we cannot afford to lose, especially if you are talking about money for rent, mortgages, utilities, children school fees, etc. The worry about losing money causes us to misread promising stock trends and increase our vulnerability to short-term corrections.

I understand that the temptation to go on a stock buying spree is high. Regardless of market bottom or not, at current prices, a lot of stocks are extremely attractive and if we intend to hold them out till the next bull run, chances are good that we can at least double our portfolio. It is a once-in-a-lifetime investment opportunity with the aftershocks of this crisis coming close to the 1929 Great Depression.

However, think twice before you borrow from friends, take out cash advances on credit cards, a second mortgage on your house, or even playing on margin which I seriously discourage. Margin allows you to use other people’s money to increase profits and interest rates are lower than credit cards, but without self-discipline, you can easily become a pauper overnight.

The liberal use of leverage has caused much of the market mess today. Margin allows an investor with little to no assets to buy stocks 10-20 times their net worth. With nothing but paper backing up the stock purchases, when the market goes into free fall, investors have to scramble for cash to cover their margin loans.

In fact, there is no need for an extreme situation of a stock market crash to throw your retirement plans into disarray, all it takes is a losing stock. If your stocks tumbled beyond the threshold of margin call, the brokerage will demand that you pay off the loan immediately or they will sell your stock at current prices.

Over the past year, huge paper losses have been sustained by investors in stock market, bonds, commodities, structured products, etc. but I will advocate perseverance in the face of hardships. I am adopting a dollar cost averaging method for my portfolio of blue-chips. The key to success is of course to back the right stocks and to implement it over long periods of time.

It is impossible to time the market and none of the top investors can lay claim to making the right calls all the time. Averaging down our investments reduces risk, remove emotions of trading (exuberance, greed, fear, panic), and ensure that the market do not pass us by when it goes on an uptrend.

For those who do not have the spare cash or are more concerned with the return of your money rather than the return on your money, then you have a very low risk appetite and should be placing money in fixed deposits only.