*Disclaimer: The plan below is suitable and comfortable for myself. Some parts might suit you too. I am not a financial advisor or guru. Please evaluate your own financial situation and act accordingly.
Step 1: Prepare an Armageddon Fund
Prepare yourself. Save up an Armageddon Fund. This is the sum of money that you can use for investment when the markets crash (>30% drop). Do not confuse this money with the Emergency Fund. The money in the Emergency Fund should only be used in the event of unforeseen emergencies (retrenchment, surgery, accidents etc.) Personally, I have 3 months worth of salary as my emergency fund.
I have an Investment-Linked Policy (ILP) maturing in July 2014. This product is a joint effort between UOB and NTUC Income. So, this lump sum of $50k will turbo-boost my Armageddon Fund. UOB and NTUC Income are unlikely to collapse anytime soon, so I am confident of getting my money back in 2 years time. ^^
Besides having the power to buy cheap stocks/ average down during a market crash, the Armageddon Fund can also give you confidence and peace of mind. You will not panic as much when everybody around you are screaming "Sell! Sell! Sell!". With a calm mind, you can make better decisions.
Step 2: Invest in Quality Dividend Stocks
"What? Invest in dividend stocks? But the prices of dividend stocks will also drop during a market crash!"
Since the prices of all stocks will drop during a market crash, why not have stocks that pay dividends? Firstly, the dividends will help to cushion the temporary price drop. The market is not going to crash forever. Secondly, dividends can also help to support the stock price once the yield becomes attractive. Lastly, market crashes do not happen every year. It usually happens in intervals of 8 to 10 years. Within these intervals, the amount of dividends you accumulated will be significant enough to compensate for the price drop.
You may ask "But what if the company cuts dividends or worse, stop dividends completely?"
Simple. Choose those solid bluechips that will not cut or stop dividends during a crisis. Let's take Singtel as an example.
Dividend History of Singtel:
2008 (sub-prime crisis) - $0.125 per share
2009 (market bottom + H1N1 epidemic) - $0.125 per share
2010 (market recovery) - $0.142 per share
2011 (Japanese Earthquake + Euro debt crisis + Arab Spring + US credit downgrade) - $0.158 per share + special dividend $0.10 per share = $0.258 per share
2012 - $0.158 per share
it is not always that things will be the same. the worse enemy is thinking what you have is knowledge when there is something you have not factor in.
If the market continues to be bearish for 10 long years, and companies will need to cut dividend to survive, it will be dark long night..
Many retail investors like to think that SH is a defensive counter in SGX; but SH's CEO thinks otherwise, property is better and more defensive for many years to come
Are Telco companies required to pay dividends?
Some companies have dividend payout policy but still no guarantee.
Was it Buffet who said "buy when blood is in the streets"? If Mr. DW has the courage to do that if a huge drop in share prices happen, he will probably make a fortune! Investing is very emotional thing though, and key is to think logically and control those emotions.
Another idea could be when stocks are expensive, start invest some cash fund instead into government bond which will be relatively cheap by then and with higher yield, perhaps in ratio of 80 %stocks, 20% bonds. When the stocks price start falling in value, government bond price will shoot up, and bonds can then be sold off to buy more cheap stocks when time comes.
I believe putting most capital into stocks and some as cash is not diversified enough - unless one has eye and heart for value investing like Warren Buffet. A way to invest without putting all eggs into one asset will be to learn and diversify at least a bit into bond and perhaps hard commodity like gold for greater purchasing power protection. Research shows a diversified portfolio with yearly rebalancing is less volatile, and its long run return actually matches that of the pure stock portfolio.
You mentioned fact because causeway way point will complete renovations year end... So wat are some good news sources for regular reading of such news? I'm trying to get started on vesting in sgx
great job DW. YOu are all set to form a family. you are financially stable. But remember do not be a miser.
Just joking. thanks for your sharing!
Hi DW, like your blog, can we exchange links :-)
Any thoughts on the new FE Trust?
i like the part (Japanese Earthquake + Euro debt crisis + Arab Spring + US credit downgrade) the best.. LOL...
Yeah i kinda agree with you on investing with stocks that provide attractive yields.
I advise my dad to hop on REITs during the crashes and he is sitting on a hefty capital gain and double-digit dividend yield annually!
Just want to check, back in 2011 you bought F&N shares based on its fundamentals.
Care to do an update on that now?
Very interested to know what you think.
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