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It is easy to be right in the markets when the only way is up

Lim Hui Jie
Lim Hui Jie5/19/2022 09:43 PM GMT+08  • 7 min read
It is easy to be right in the markets when the only way is up
While many of us may have gotten into the markets in 2020 and 2021, its important to note that the gains that we have seen may be due more to the economic environment, and less of our skill. (Photo: Bloomberg)
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One question I always get from my friends of the same age group when they find out I am a financial jour­nalist is: “So, what stocks can I buy? Should I invest my money in this stock? Should I put my money in crypto?”

However, financial journalists are not clair­voyants. We do not have some crystal ball tell­ing us what the markets will look like tomor­row or even the next minute.

Therefore, my reply is always the same: “If I knew what the markets would be, I’d be re­tired at the age of 30 and travelling the world first-class.”

In all seriousness, many young people like me have gotten into investing over the last two years, which is a good thing, especially for a financial publication like The Edge Singapore.

As many financial websites, advisers and professionals have said, people should start in­vesting when they are young because they can take the risk. They are gainfully employed, time is needed to grow investments which make use of the power of compounding, and they have relatively fewer responsibilities and hopefully lower debt levels.

While there are many investment products and services out there in the market, we will focus on stock markets and equities here.

See also: SGX total securities market down by 25.3% y-o-y to $22.1 bil in February

According to Franklin Templeton’s 2021 Next Gen Investor Survey, 80% of young adults sur­veyed aged 18–35 are investors and 88% say they are thinking of investing in a financial product this year.

That is a wise decision because the pan­demic has beaten down stocks to price levels not seen since the 2008 Global Financial Crisis.

According to brokerage Tiger Brokers, most of its growth in 2021 came from younger inves­tors, especially millennials (typically defined as those aged 25– 40) who turned to investing after being cooped up at home during the pandemic.

See also: Markets at risk of more upheaval as banking uncertainty persists

The brokerage, in an interview with The Edge Singapore last November, says the drop in the stock markets in March 2020 had the un­expected result of attracting a new wave of in­vestment interest from those taking advantage of lower prices.

But as the saying goes, when you are at the bottom, the only way is up. Many of us, my­self included, made our first investment at the height of the pandemic. As the pandemic grad­ually eased and economies recovered, so did stock markets.

From a low of 2237.4 on March 23, 2020, the S&P500 index has grown 82.8% to 4,088.85 as at May 17. Even the Straits Times Index (STI) has from a low of 2,208.42 points on March 23, 2020, to 3,201.89 points as at May 17, rep­resenting a gain of 44.9%.

What this means is that many of us who in­vested in 2020 and 2021 are in the money and it is easy to be fooled into thinking we — like the Oracle of Omaha, Warren Buffett — have mastered the art of stock investing.

Hitting bottom during the pandemic

Take me for example. I bought my first invest­ment product, the SPDR Straits Times Index ETF in January 2020 at $3. At that time, I felt it was a relatively attractive price, consider­ing it usually traded at $3.10–$3.30 before the pandemic struck. However, over the next three months, I saw the stock nosedive to as low as $2.20 as Covid-19 hit country after country.

But the intervening months saw the index go on a largely upward trend, which means that should I have bought more at any time, all I needed to do was to wait a few months to make a profit — which seemed foolproof.

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Throughout 2020, the stock that increased my confidence immensely was Singapore Ex­change (SGX). I bought SGX shares at $8.40, sold them off at $9.20, then bought back into the counter at $9 and sold them off again at $10, all in the space of a few months.

Fresh off this newfound confidence, ETFs seemed to be the best investment tool for some­one new to the game. It was reasonably diver­sified, did not require me to track the perfor­mance of a specific stock, and I had faith in the long-term growth of the Singapore economy.

But a rude awakening came in the form of the Lion-Global Hang Seng Tech ETF. Believ­ing that the world would need more and more tech, I sunk a substantial sum into the ETF when it was launched in December 2020 at about $1.34 per unit.

After an initial spike, the ETF’s price started to sink, sliding rapidly throughout 2021 as Chi­na cracked down on the sector. Nevertheless, I continued to believe technological applications would still be in great demand because of the pandemic and the “new normal”.

Eventually, I realised that the substantial funds I was sinking into the ETF could have earned more had I put it into some other blue-chip stock or a REIT. In March 2022, I bit the bullet and sold my holdings at a 42% loss.

Was it painful? Of course, but it made me realise that despite a worldwide pandemic that affected every aspect of our lives, other structur­al factors like government regulation, can have an outsized impact on a stock. It also showed how much I did not know about the markets despite working in the sector.

More complicated than we think

In 2020 and 2021, a couple of factors underpinned stock market performance, chief of which was the Covid-19 pandemic. No factor could move markets more than the pandemic.

If you had bought the STI ETF at its bottom of $2.16, you could have sold it at the peak of $3.45 for a 59% gain. And if you had picked up the stock in April 2020 at $2.50, which was what the ETF was trading for much of 2020, and sold it a year later at $3.10, you would have had made a 24% profit.

Another important factor at work was the “QE infinity” monetary policy of the US Feder­al Reserve that helped support the markets and enabled companies to rebound much faster.

When the cost of borrowing is low, people spend more on goods and services. Companies can also finance their loans cheaply, allowing resources to be channelled into recruitment and expansion, which, in turn, creates jobs and raises income.

However, as the pandemic eased, the fun­damentals of economics and markets that new investors may have overlooked took hold again. This year got off to a turbulent start due to rate hikes by the Fed and the Russia-Ukraine war. Back to the STI ETF again, if you had bought the stock for $3.13 at the start of 2022, you would only have seen 4.1% growth at the May 17 selling price of $3.26.

By the way, you may be wondering why your holdings in tech companies that performed so well during the pandemic slumped when the Fed raised interest rates.

Inflation could be the answer. Some of these fast-growing tech companies that prospered during the pandemic relied on debt for growth, which would become more expensive to ser­vice as interest rates rise. Higher interest rates also mean assets like investment-grade bonds and fixed deposits are preferred by investors as they present a safer and nearly risk-free op­tion for investors.

Even cryptocurrencies, which is an asset class supposedly isolated from the traditional fiat mar­kets, were also hit as investors realised that it would be safer to invest in less risky instruments like bonds that track the rise of interest rates.

Long story short, the reality is that investing in the markets, especially for young investors, is a daunting feat and while many young inves­tors out there have done their due diligence, an equal number probably have not.

This serves as a cautionary tale to those who have gotten their investment feet wet, to know that the gains that you have experienced are not “normal”, in the sense that unless a new pandemic with the same global impact strikes again, you are probably not scooping up stocks at dirt-cheap prices and simply waiting for the reopening before selling them off. Now, if you will excuse me, I hear some whisperings of how hindsight is 20/20, pun not intended.

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