Investing in uncertain times

Principles of successful investing

Numerous investors are still experiencing the impact of the 2008 credit crunch and global recession.Investing in uncertain times Understand markets The scale of the recent stock market turmoil may have left you hesitant about investing in global stock markets. 1 . Few however will recall that after each crisis. markets often returned to their previous levels within a relatively short period of time. the 1999 internet bubble and the turmoil caused by terrorist attacks in 2001. Many will remember the 1997 Asian Financial Crisis. But market volatility is not a new phenomenon – we have experienced numerous market crises over the last 25 years.

terrorist attacks. hedge fund failures – there have been numerous crisis events that have impacted share markets over the past century. stock prices will be supported by fundamentals i.” Warren Buffet Over the short-term. However.000 4. etc.03: Dot com crash 03: SARS outbreak in Asia 1985 1990 1995 2000 2005 2010 Source: MSCI. Major crises in global stock market over the past 30 years 6. the stock market is a voting machine. growth of the economy.000 1. in the long-run.Understand markets 1 Markets usually overreact in a crisis Currency collapses. stock prices are influenced by market sentiment.000 2.e. As unsettling as these dips are. skills of the management team. 2 .000 3. a company’s competitive position.000 0 1980 Aug 98: Russian debt default Sep 01: Terrorist attacks in US 07 . Fidelity.99: Asian financial crisis 94: Mexican currency crisis 00 .31 August 2011 Market falls and long-term value “In the short-term. in the long-term it is a weighing machine. long-term history has shown that stock markets have resumed their upward trend after crisis events. Performance of the global stock market based on the MSCI World Gross Index (USD) from 1 January 1980 . Markets do not like uncertainty and often overreact because investors tend to focus strongly on new developments and use them to predict the worst-case scenario for their investments.000 5.09: Global financial crisis Aug 82: Mexican sovereign debt crisis Oct 87: Black Monday Aug 90: Gulf War Aug 98: Bailout of LTCM 97 .

Case 1: Oil Crisis (1973 . Recovery patterns of past crises are not indicative of the expected recovery trend for current or future crises. 9/11 and SARS epidemic Full recovery ≈ 70 months 60% 30% 0% -30% -60% Amount lost % recovered % recovered after 6 months after 12 months Bear market = 29 months Case 4: Global Financial Crisis (2007 . Some recoveries are quick while others take longer.2 But markets do recover However. history tells us that after every major crash. 3 .1974) Full recovery ≈ 46 months Case 2: Asian Financial Crisis (1997 .1998) Full recovery ≈ 95 months (long recovery period as other crisis events took place not long after Asian currencies collapsed) 150% 100% 50% Bear market = 13 months 60% 30% 0% -30% -60% Bear market = 10 months 0% -50% -100% Amount lost % recovered after 6 months % recovered after 12 months Amount lost % recovered % recovered after 6 months after 12 months Case 3: Dot com. there has been a period of recovery.2009) Global markets have yet to recover from the peaks 60% 30% 0% -30% -60% Amount lost % recovered % recovered after 6 months after 12 months Bear market = 15 months Source: Fidelity analysis using month-end index levels of the MSCI World Gross Index (USD) except for the Asian Financial Crisis where the MSCI AC Asia ex-Japan Gross (USD) Index was used.

this advice can be cold comfort for investors who see the value of their assets decline during crisis periods. Rather than react negatively during volatile times. These ups and downs can be frequent and unpredictable. Staying invested for the long-term is a tune sung by many advisors. it is important to remind yourself of the key principles for successful investing. 4 . Nonetheless. especially in stock markets.Investing in uncertain times Investment principles explained Investment markets move in cycles – periods of poor performance are usually followed by better years.

000 $0 0 5 2% inflation 3% inflation 5% inflation 10 15 20 25 30yrs Cash may be king but could be a risk as well! Holding assets in cash may not be a good option for long-term investing. Equities and Bond valuations often move in opposite directions 40% 20% 0% -20% -40% -60% 00 01 Cash 02 03 04 05 06 07 08 09 10 YTD Sep 11 Global Bonds Global Equities Global Property Source: Bloomberg.000 $2. cash. Effect of inflation on purchasing power $10. MSCI World Class (USD) and S&P Developed World REIT (USD) indices respectively.000 $4. be concurrently invested in bonds.000 $6. MSCI. equities and property. Defensive assets such as bonds and cash fare better during periods of high market volatility. Monetary Authority of Singapore. Performance of asset classes as measured by the 3-month SIBOR. Source: Fidelity calculations 5 . a portfolio that invests in a range of quality assets should deliver attractive returns with lower risk. Taken together.Investment principles explained 1 Diversify your portfolio Diversify across asset classes Your portfolio should be diversified across asset classes.000 $8. i. The purchasing power of cash is eroded over time by inflation. while growth investments like property and stocks provide attractive returns when economic conditions are more favourable.e. the Citigroup World Government Bond (USD).

when the economy recovers. Stock prices tend to respond rapidly to market developments. Defensive companies Consumer Staple Health Care Tel Services Utility Cyclical companies Info Tech Finance Energy Material Consumer Discre. cyclical stocks are less sought after as company earnings are expected to fall. 6 . However. A well-diversified stock portfolio helps to further smooth returns over time. government policies and competition from other companies.1 Diversify your portfolio A well-diversified stock portfolio smooths out returns over time During a market crisis. During a crisis. This is not to say that all defensive stocks will outperform during downturns. this may not be the case.Industrial tionary Companies less affected by economic cycles and are likely to have stable (or low) growth profiles. defensive stocks lag their cyclical peers. making them more volatile than defensive stocks. Earnings from cyclical companies are more sensitive to economic conditions. Some investors tend to favour defensive stocks during downturns as these companies can maintain growth and are likely to continue paying dividends to shareholders. During recovery periods. it is best to diversify your investments across all sectors. However. dramatic falls on global stock markets dominate the headlines and lead readers to assume that every stock has collapsed in value. Given that sector return profiles vary according to a broad range of factors. cyclical companies typically outperform the defensive ones. leading to lower stock prices. sometimes a traditionally defensive sector may not be favoured due to a range of other factors such as changing industry trends. Certain sectors of the market often perform better than others at different points in the economic cycle.

markets move in cycles. Over short-term periods. Past performance is not indicative of future performance. Past performance is not indicative of future performance. But the longer you stay invested. As shown below. staying invested in the stock market for periods of 12 years or more since 1970 has resulted in no negative returns*. of neg. Fidelity. 7 . Market sectors are defined according to MSCI global industry sector classifications with returns calculated at price levels in USD. the greater the probability that your investment will yield a positive return. Fidelity. markets can be volatile and these movements result in a wide range of positive or negative returns. Range of annualised global equities returns Staying invested for: 30 years 20 years 12 years 5 years 1 year -50% 0% 50% 100% 30 years 20 years 12 years 5 years 1 year Chance of negative returns No. Sample Chance annual returns Size 0 0 0 95 106 142 262 358 442 490 0% 0% 0% 21% 22% * Source: MSCI. Rolling annualised returns over respective periods from 1 January 1970 to 30 September 2011 using the MSCI World Gross Index (USD). 2 Invest for the long-term Probability of negative returns decreases over time As we have seen.Investment principles explained Annual sector returns – market leadership varies from year to year 1 26% Health Care -7% 2001 Material -5% 2002 Cons Stp 48% 2003 Info Tech 25% 2004 Energy 26% 2005 Energy 32% 2006 Utility 31% 2007 Material -23% 2008 Health Care 58% 2009 Material 23% 2010 Cons Dis 0% YTD 30/09/11 Health Care Rank 2000 2 20% Utility -9% Energy -6% Material 42% Material 24% Utility 17% Material 28% Tel Srv 27% Energy -25% Cons Stp 51% Info Tech 21% Industrial -1% Cons Stp 3 9% Cons Stp -10% Cons Stp -8% Energy 36% Industrial 18% Industrial 10% Industrial 26% Material 18% Utility -31% Utility 37% Cons Dis 19% Material --7% Tel Srv 4 8% Finance -11% Cons Dis -18% Finance 36% Cons Dis 16% Material 10% Utility 21% Finance 18% Tel Srv -36% Tel Srv 28% Finance 10% Cons Stp -7% Utility 6 5 7 4% -15% -3% Energy Material Industrial -14% -18% -17% Health Care Industrial Finance -19% -23% -19% Utility Health Care Cons Dis 36% 23% 24% Finance Energy Utility 15% 14% 15% Finance Cons Dis Tel Srv 9% 4% 8% Finance Health Care Info Tech 19% 17% 18% Cons Dis Industrial Cons Stp 16% 14% 14% Cons Stp Industrial Info Tech -39% -44% -43% Energy Industrial Cons Dis 24% 19% 23% Industrial Cons Stp Energy 10% 5% 10% Energy Tel Srv Info Tech -9% -15% -12% Info Tech Energy Cons Dis 8 -24% Cons Dis -24% Utility -24% Industrial 23% Tel Srv 10% Cons Stp 4% Cons Stp 16% Energy 2% Health Care -44% Info Tech 16% Health Care 2% Finance -18% Industrial 9 -42% Tel Srv -26% Tel Srv -30% Tel Srv 18% Health Care 5% Health Care 0% Con Dis 9% Health Care -5% Cons Dis -51% Material 9% Tel Srv 0% Health Care -23% Finance 10 -42% Info Tech -30% Info Tech -39% Info Tech 15% Cons Stp 2% Info Tech -12% Tel Srv 9% Info Tech -11% Finance -56% Finance 2% Utility -5% Utility -25% Material Source: MSCI.

20 1. you should not let short-term market movements alter your investment discipline.000 1. However.170.000 in March would have seen the value of this investment unchanged. keeping calm and adopting a consistent and disciplined investment approach could help you ride out volatility and offer the opportunity to buy quality assets at more attractive prices than they were trading at when markets were higher.170 S$1.21 Weighted average purchase price 8 .20 1.000 1.25 Units purchased 800 833 870 833 800 4.25 1.15 1.000 1.170 5.000 5. The market dipped in April and May but the investor continued to follow a regular investment plan. By comparison. the investor’s regular investment plan has resulted in the purchase of 4. Dollar cost averaging – how does it work? An individual invests S$1.000 1.878 4.000 into a fund every month. Amount Unit price invested (S$) (S$) March April May June July Total 1. On the contrary.136 units. investing S$5. The table below illustrates how this works in your favour.960 2. discipline breeds success Understandably. valued at S$5. it can be difficult to invest with confidence while markets are volatile.000 1.000 1.136 Cumulative value of investment (S$) 1.3 Invest regularly In the long-run.003 5. When markets recovered in July.

Of course. the probability of missing out all of the best days over your investment horizon (say 10 years) is low. you would be less affected by short-term market movements. If you are saving for a deposit for a home. you are less likely to tolerate wild market swings. If you want to achieve significant levels of growth. they should grow steadily. Missing out days with the best investment returns 15% Annualised Returns 10% 5% 0% -5% -10% -15% Fully invested Missing best 10 days Missing best 30 days Missing best 60 days Source: MSCI. risk is often associated with the possibility of losing money. Nonetheless. 9 . not timing the market It is impossible to predict when the best and worst returns will occur. The chart below shows that if you withdraw your investments during a market downturn. There is risk that investments could fall in value but over the long-term. Daily returns based on the MSCI AC Asia ex-Japan Index from 31 August 2001 to 31 August 2011. Understanding your appetite for risk For individual investors. if you are investing for your retirement.Investment principles explained It’s about time in. However. Your appetite for investment risk is influenced by your time frame and goals. you could miss out the best days in the stock market and leave your assets in negative territory. this example shows that selling your investments to avoid losses increases the chance of you not catching the best days. Fidelity analysis. you need to tolerate some investment risk. say 30 years away.

But if dividends received had been reinvested. S$1.Albert Einstein Consider the value of dividends Dividends compounded over time add up to better returns When things are going well and the stock market is rising strongly. Buy stocks for income Investors have traditionally looked to bonds for income.000 3.000 1. Percentage figures represent annualised returns for the same investment period. Past performance is not indicative of future performance.8% 02 03 04 05 06 07 08 09 10 Growth assuming dividends reinvested Capital appreciation only Source: MSCI.000 2. especially over time as reinvested dividends are compounded. it would be worth S$2.921 by September 2011. Fidelity. these extra returns become a valuable part of total returns. Assumes growth of $1.4 “The most powerful force in the universe is compound interest.000 invested in the Singapore stock market over the last 10 years would have grown to S$1.000 01 10.3% 6.655 – almost twice as much. investors should also consider high dividend stocks as a strategy for income and long-term growth. 10 . Dividends can also be more reliable than both corporate earnings and stock price appreciation during a bear market because many companies usually strive to maintain their dividends even if their profits are temporarily falling. the extra returns from dividends may be considered as little more than a token gesture. Dividends make a difference to your investment S$4.“ . in weaker markets. However. However. For example.000 invested on 30 September 2001 in the MSCI Singapore Gross (SGD) and MSCI Singapore Price (SGD) indices respectively to 30 September 2011.

individual companies can perform very differently from each other (refer to graph). 11 . knowledge and experience to develop a thorough understanding of every stock Within a stock market. An active professional fund manager will have the resources to research and choose companies that will perform well in the long-term.Investment principles explained 5 Rely on a professional manager Professional managers have the time. Wide range of returns in top and bottom stocks 300% 250% Range of returns 200% 150% 100% 50% 0% -50% -100% YTD 30/09/11 2010 2009 2008 2007 2006 Worst performing stock Top performing stock Source: Bloomberg based on the performance of the 30 stocks in the FTSE STI Index calculated a (gross) total return basis. whatever the short-term performance of the market.

Regular investment options Most mutual funds allow you to invest relatively small sums as part of a regular savings plan. these funds have to be registered with the Monetary Authority of Singapore. This helps you to avoid investing all of your assets when markets are expensive and smooths out your returns over time. Liquidity A mutual fund gives you the flexibility to convert some of your units to cash without having to sell your entire investment. 12 . This means that you do not have to save for a long period before you begin to invest. is better left to the experts. the overall impact is likely to be minimal. and even if one declines in value.Invest through professionallymanaged products Benefits in investing in mutual funds Professionally-managed investment funds in Singapore are usually referred to as mutual funds. Mutual funds are suitable options for most investors even in volatile times because they provide: Instant diversification Your money in a fund is spread over many different investments. Professionally-managed Professionals monitor your investments daily and assess how issues can impact valuations. This job requires a great deal of skill and time and perhaps. In Singapore. A fund comprises a collective pool of money from many individuals with the money invested by a fund manager in a range of assets.

you gain access to investments that can be very difficult to access on an individual basis. 13 . invest regularly because it is impossible to time your investments perfectly with the highs and lows of the market. Lastly. dividends received by the fund manager is reinvested back into the fund on your behalf) of the mutual fund to benefit from the compounding effect of dividends. Identify these factors and start investing early because the impact of compounding is remarkable in growing your assets.e. Your saving and investment goals. Investing and you Investment decisions need to be made within a broad and well-considered context.Benefit from compounding of dividends You could invest in an accumulation share class (i. time horizons and appetite for risk are at the heart of these decisions. This is easier than reinvesting the dividends you receive from stocks. Access to investments not available to individual investors As your money is pooled with other investors.

000 staff in 24 countries and manages or administers client assets of US$257. the company has over 5. continental Europe. property and asset allocation funds. as of 30 September 2011 14 . the Middle East and Asia Pacific. All company related data is from FIL Limited.4 billion. Established in 1969. providing investment products and services to individuals and institutions in the UK. Fidelity Worldwide Investment is an independent asset management company which is privately owned. The company’s fund managers receive research from one of the largest proprietary research teams.Fidelity Worldwide Investment A leading global fund manager Fidelity Worldwide Investment is a global leader in asset management. Experience in managing uncertainties Fidelity has managed money for more than 40 years and has steered investors through various crises. It has over 7 million customer holdings and manages more than 740 equity. Fidelity’s research-driven investment process has proven successful in delivering strong returns to investors over the long term. fixed income. based in 12 countries around the world.

We also talk to the company’s suppliers. We analyse a company beyond the details on paper. How do we manage our research process? Good research requires extensive resources. In Europe. Our regular interactions with senior management allow us to assess the quality of leadership and their long-term strategy. the research team has 27 meetings with analysed companies a day and this equates to 5. this is why major institutions through to individuals have trusted us to manage over US$200 billion spread across almost 740 funds. Our broad reach and state-of-the-art global research platform means our team completes research on 90% of the world’s largest listed companies every 90 days. gives us a platform to assess the risks involved and helps us make successful investment decisions.000 meetings each year. Fidelity has access to decision makers because of our reputation and strong presence in the market place. All company related data is from FIL Limited. securities in 13 different countries are analysed from seven different offices and two support locations across six time zones. Our intensive research process sets us apart from our competitors. as of 30 September 2011 15 . In Asia. sectors and stocks can be overvalued or undervalued at any point in time. We visit their offices and factories to learn about the intricacies of their operations. Why rely on research? We believe that markets are semi-efficient.Our research process Our research-driven process means that we study everything there is to know about a company before investing our clients’ money. Research helps us uncover opportunities. meaning that markets. Fidelity has built a world-class team of analysts and portfolio managers which is one of the world’s largest. distributors and customers to build a three-dimensional view of the company’s growth potential.

: 199006300E) is the legal representative of Fidelity Worldwide Investment in Singapore. Past performance and any forecasts on the economy. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. This document is prepared for information only and does not have any regard to the specific investment objectives. and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited. stock market. All views expressed in this document cannot be construed as an offer or recommendation. Reg. bond market or the economic trends of the markets are not necessarily indicative of the future performance. FIL Investment Management (Singapore) Limited (Co. Prices can go up and down. No. Fidelity Worldwide Investment. Fidelity.This document is prepared by Fidelity Worldwide Investment. SG11/399 16 . financial situation and the particular needs of any specific person who may receive this document.

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