Don't let the bull run away with your money

 It is hard to get rich even when the US market hits record highs

Tan Ooi Boon  Invest Editor 

The news seems unreal to even the most experienced investors.

Even as many countries suffer huge economic damage as they grapple with the outbreak of Covid-19 cases, the stock market in the United States, the country with the highest number of cases and deaths, has rallied to record highs.

A key reason for this phenomenon is the meteoric performance of technology companies.

While the pandemic is bad news for most businesses, those that provide services related to online transactions and entertainment thrive even more when people are forced to stay at and work from home.

Indeed, a substantial amount of the firepower that is boosting the stock market rally in the US comes from the so-called "Faang" stocks - Facebook, Amazon, Apple, Netflix and Google - the five tech titans that make up more than 20 per cent of the S&P 500's market cap.

As investor sentiment and stock market performances worldwide are often influenced by the US bourse, is it time for Singaporeans to act on their Fomo (fear of missing out) and jump in now?

After all, the stock market here has yet to see similar rallies although volatility is high.

Of course, the billion-dollar question hinges on whether the US rally will continue, even as more people are losing jobs and incomes worldwide.

There is no easy answer, because even high-profile experts and rich investors seem to give mixed signals on what will happen next.

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For instance, finance professor Jeremy Siegel from the Wharton School of the University of Pennsylvania recently gave a bullish market outlook that was buoyed by the race to create Covid-19 vaccines as well as the continual financial stimulus from the US government.

"Even if it takes another six months more than we hope to get an effective vaccine, when you come back with the liquidity that's provided by the Fed, that's a really powerful force," he told CNBC.

If you choose to spend money today that is meant for your future, you face a bigger risk of having to work through old age when your funds dry up. The good news is that financial planning is a long-term affair, and you do well if you squirrel away bit by bit now, even as you battle through this storm.

Considering stocks are largely driven by sentiment, he explained that the market should hold up in the coming months even as the world grapples with economic slowdown and a lingering pandemic.

On the other hand, billionaire investor Mark Mobius warns that the stock rally will not last, and this appears to be the widespread sentiment of many investors globally as they have collectively caused a modern-day gold rush that has pushed the price of the precious metal to a record high. Gold is often seen as the best investment when things are not going well.

While the jury is still out, here are some things you should still carry on doing during the pandemic.

DON'T STOP SAVING FOR YOUR FUTURE

Some people have the wrong idea that as times are bad, you can stop saving for retirement and spend the money now.

Indeed, you can see an increase in the number of younger people who have called for the relaxation of Central Provident Fund (CPF) rules so they can use the funds to tide them over.

Yes, times are hard, but do think for a moment - if a similar calamity strikes again when you are in your 60s or 70s, how are you going to get by if you do not even have the CPF as your last line of financial defence?

The whole purpose of planning for retirement is to allow you to enjoy a steady income when you are older, so that you do not have to continue working.

So if you choose to spend money today that is meant for your future, you face a bigger risk of having to work through old age when your funds dry up.

The good news is that financial planning is a long-term affair, and you do well if you squirrel away bit by bit now, even as you battle through this storm.

At the very least, you should keep an eye on your CPF balances and try to hit a decent amount of between $190,000 and $288,000 for your CPF Life by 55.

This will enable you to receive a steady monthly income of between $1,400 and $2,400 from age 65, which can help you pay for your living expenses.

Similarly, if you are invested in funds and shares, you should not be in a hurry to sell everything if these are intended as your long-term investments.

Instead, look for opportunities to make changes to your portfolio so that you can reap better returns when the market recovers.

Unless it is absolutely necessary to ease cash flow, you should also not surrender insurance policies that are meant for your retirement.

DON'T BE TEMPTED BY STORIES OF PEOPLE MAKING HUGE PROFITS

The stock market is akin to a battlefield because its very nature is that it must produce winners and losers at the same time.

If you have bought a winning stock, this means someone else has sold it prematurely.

If you sold a stock just before its value plunged, then the investor who bought it will suffer losses immediately.

If you are buying stocks by following the herd, you risk being lured to buy shares that others are eager to dump.

Be aware that it is hard to become rich in the stock market unless you are rich to begin with.

Assuming you are lucky to pick a stock whose value goes up 50 per cent, you will make only $50,000 even if you have put in $100,000.

Of course, if you put in $1 million, the return is sizeable, at $500,000.

Before this inspires you to go for broke to make a killing, ask yourself first: Can you stomach a loss of $500,000 if the stock goes the other way?

DON'T BORROW TO BUY SHARES

If you take out a loan to buy shares, you are now gambling and no longer investing.

After all, if you need a loan, it means you don't have excess cash and that you are willing to stake your family's well-being for a chance to make a quick buck.

At best, you stand to win a few months of "easy money" to splurge, but at worst, you end up in misery for years because a loan must be repaid.

The result of betting with money you do not own can be dire - a 20-year-old in the United States committed suicide recently after apparently chalking up a loss of close to $1 million on an online investing platform.

INVEST TO GROW MONEY, NOT TO BECOME RICH

Even if you know that the Apple stock has potential, it is hard to make a lot of money from it when it is already trading above US$130 a share, even after its four-to-one stock split last week.

Without the split, the stock would be worth over US$520 a share.

This is why many people like to punt on penny stocks - they can buy a lot more shares, so they stand to reap big profits when the price balloons.

But people often forget there is a reason why such stocks cost only pennies in the first place. It is because the businesses have yet to show outstanding performances or profits, and those who chase the price up are doing so on acts of faith that the companies will deliver results that justify their inflated share prices.

Very often, many investors end up being burnt when they find themselves still holding on to the shares when the party ends and the price tumbles.

So do yourself a favour and look at the most basic indicators before you buy into an unknown stock.

For instance, you should be convinced that the company is already operating a sound business that produces good profits, and that it is not dependent on future acts that may or may not happen.

Also, look at its average volume of trade before any hype that artificially inflates its demand. If its trade is low, it means that it will be hard to sell your shares even if you have made a big profit.

Finally, the very nature of investing means that you should pat yourself on the back if you succeed in making only modest gains. If you expect a lot more, it means you are no longer an investor but a gambler.