Business

Saturday September 12, 2009

Healthy people, healthy investing

Comment by TAY HAN CHONG


A DOCTORAL student at Georgia Tech performed a dissertation that looked at 18 different stock markets in developed countries. Over a 200 year period, 15 out of the 18 markets had negative returns in September. This trend thus became known as the September or the Halloween Effect.

I am not a subscriber to seasonality when it comes to long-term investing. Just like I did not believe in an old British saying “sell in May and go away, don’t come back till St Leger Day (mid September).”

But I guess one cannot ignore the various news reports and analyst reviews.

And the September Effect coincides with the end of summer vacation, and most traders come back to work in full force from September onwards.

And this is the period that they re-evaluate the good, bad and ugly in the markets before they take positions for the final push prior to the traditional Christmas break.

December would be when most Western traders close their books and tally their scores for the year.

It is true that September 2009 actually started with some corrections. This was largely attributed to traders, analysts and economists fearing that the rally in the past six months had moved ahead, beyond what the fundamentals suggest.

However, the first week of September closed relatively well with a late-week recovery given some position results on the US economy. Notwithstanding, the US unemployment rate increased to 9.7% which is at a 26-year high!

I personally think there will be continued volatility in the coming months and perhaps range-trading episodes as the bull and bear traders play their tug-of-war as more economic data are reported.

The market is expected to take stock and perhaps find a bit of a breather as it finds its next direction.

This would be important because it allows market players to “take stock” of the market valuations vis-à-vis the real economic prospects.

On economic prospects, there is almost a consensus now that the worst is over.

In fact, recent economic data suggests a global across-the-board “improvement” in economic prospects from the United States to the European Union to emerging Asia.

“Improvements” does not mean economic growth but rather the slowing down of the rate of contraction.

However, the US unemployment rate has increased despite fewer jobs lost.

When would we see the economies grow as opposed to easing contraction?

The United States is still the world’s largest economy, and I believe that the real growth will be predicated on a few elements:

·The US economy is driven 70% by consumer spending, and consumer spending must improve to give it the needed boost. This is particularly challenging, given that the United States is the epicentre of this crisis and that its consumers are probably amongst the hardest hit.

·Unemployment rate in the United States must stabilise and start to fall. Where there is employment, there is income to support credit as well as spending.

·Mortgage and credit card non-performing loans must also stabilise before consumer spending can be re-ignited.

·The rest of the world is able to increase their spending to offset the contraction in US consumer spending.

Therefore, the key element that I watch for in the US economy is the unemployment rate. A prolonged high unemployment can actually lead to stress in the mortgage and credit card businesses.

This can be a vicious cycle for the US consumers which may result in a W-shaped recession and subsequently, a knock-on ripple effect to the rest of the world as well.

This period of “breather” may see some market consolidation. I call it the firming of the bottom (or firming of the foundation).

A simple analogy: A strong building needs a strong foundation. You cannot rush the foundation concrete to dry faster, but with patience, once the base is well-established, the building can be progressively built.

I take such consolidation as an opportunity, while recognising the risks.

It is an opportunity because you too can take stock of the long-term prospects and strategise towards achieving your long-term goals.

Long term, in my planning horizon, is at least three years, or better still, five years or more. Weak movements in a month are generally short-term, which should not feature predominantly in a long-term strategy.

Recently, I was at a gym to officiate an event on financial health.

This was an opportunity for me to be educated by the personal trainer about my body.

He highlighted that fitness is specific to the individual. I, for one, cannot just adopt the training routine of a body-builder as it could be too tough on my body!

The same is true for Uncle Chan, who is a 62-year-old semi-retired tailor. Uncle Chan has to adopt a more relaxed, less-strenuous cardio-vascular routine that focuses more on stretching and muscle toning.

See exercising as a parallel to financial planning. Financial products such as investments, insurance or deposits, are like the equipment in a gym.

They are neutral – neither good nor bad. It is a matter of how often and how you use them that would determine if they are good or bad for your (financial) health.

Let us use weights as an example. If you use too little weight for muscle-toning, it will not be effective.

On the other hand, excessive weights may injure you! The logic is the same with financial planning. If you invest or insure with an inappropriate product, you can under- or over-provide which may not be good for you in the long term.

Therefore, before you plunge headlong into the equity or property market, be aware of your financial health and fitness, including your risk-taking capacity.

From there, it is similar to starting a physical fitness routine. Invest regularly just like you would exercise regularly.

Invest into asset classes that fit your risk profile – never “over-do” or “under-do”. Even as a self-professed risk-taker in investments, I have some low-risk conservative products to complement my risk-taking portfolio. This is called diversification.

I believe in physical fitness as I do in financial fitness. They are both difficult to start, and it is important to start as young as possible. For those who have started, it is about achieving the correct balance that suits one’s ability and capacity. Then perhaps, we will have less fear of the said “September Effect” or “Seasonal Flu Bug”!

·Tay is senior vice-president and senior head of UOB’s personal financial services division.

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