[SINGAPORE] The US Federal Reserve’s 11 rounds of interest rate hikes – a total of more than 500 basis points between March 2022 and July 2023 to tame inflation – hurt businesses. The higher rates increased borrowing costs, thereby eroding corporate profits.
However, the Fed’s monetary tightening cheered fans of Singapore dollar fixed deposits (FDs) and Treasury bills (T-bills) as returns from these safe instruments rose.
Between September 2024 and December 2024, the Fed changed tack to address labour market weakening, with three rounds of interest rate cuts totalling 100 basis points.
As the Fed holds these lower rates steady, returns from Singapore dollar FDs and T-bills have eased. The cut-off yield of the six-month T-bill issued on Jun 10 was 2.05 per cent per annum, down from 3.76 per cent per annum for the six-month T-bill issued on Jun 11, 2024.
As the returns offered by safe instruments slide, should investors embrace more risk by switching from FDs and T-bills to equities and corporate bonds? Taking on more risk can cause a loss of capital should a company’s share price tumble or a bond issuer run into financial difficulty and have trouble repaying bondholders.
This becomes a pertinent issue when we consider that Singapore residents generally expect to live a long life. In 2024, life expectancy at birth was 81.2 years for males and 85.6 years for females.
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Rising life expectancy is worth celebrating. However, as people live longer, the need to save and invest for retirement becomes more pressing. After all, one may need more passive income to fund the longer years in retirement and cope with inflation, even if one receives an annuity for life under CPF Life.
Hence, a good financial habit is to reduce discretionary spending on fancy vacations and meals, and plough the savings into assets such as high-quality equities.
Buying lemons
Despite studying financial reports, analysing industry data, dissecting technical charts and evaluating the management team, an investor – even a seasoned one – might still buy a stock that turns out to be a lemon.
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Think of a financial shock affecting the entire equities market or social and political upheaval that rocks a country. Or a technological disruption which kills an entire industry.
Also, regulatory changes or trade tariffs might cause financial ruin for specific businesses.
Then there are corporate fraud cases which send high-flying companies crashing.
That leading business figures were ensnared in a S$1.5 billion nickel-trading scam allegedly masterminded by Ng Yu Zhi may make ordinary investors wary of venturing beyond the safe assets. Well-known venture capitalist Finian Tan, his associates, his company as well as the funds his group manages lost about US$33.3 million in the alleged scam. This was despite Dr Tan being an experienced investor who did much due diligence on Ng.
Pain of losing
Seeing hard-earned capital being eroded when an investment in a stock or bond goes wrong hurts. One might feel extremely silly that money which could have been spent to treat oneself was instead channelled into an investment gone bad. For example, I felt stupid not to have foreseen the recent carnage in the US office property market.
When an investment goes wrong, one could start doubting if one is cut out to be a stock/bond investor and react by avoiding these investment instruments.
Indeed, one’s risk aversion might escalate substantially and one may vow never again to buy equities or bonds. Worse still, brooding over financial losses can severely harm one’s mental health.
Unfortunately, major developments and trends suggest that stock and bond-market volatility could rise. The rivalry between the US and China is intense. Trade barriers are being erected while the forces of nationalism and populism are rising in many countries. If a major global crisis erupts, can countries cooperate to help manage it?
The US dollar’s pre-eminence may be eroding, and the capitalist system may require much reform.
Risks of environmental disasters are rising. Also, the growing power of artificial intelligence (AI) and other technological advances can greatly disrupt many industries.
Room for optimism
But, on the other hand, there is room for optimism on economic and business prospects.
In many countries, the young are much better educated today. Some nations have positive demographics. Meanwhile, there are many wealthy seniors in developed countries.
Many developing nations are keen to trade with others, undertaking reforms to open up their economies and strengthening the rule of law.
Advances in AI, the digital economy, medicine and space exploration, among others, could drive breakthroughs that birth entire new sectors and enable some existing businesses to discover major new growth engines.
The green economy can be lucrative for businesses that offer cost-effective solutions to increasingly environmentally conscious consumers.
In short, backed by human ingenuity, the global economy might continue growing and living standards may continue rising for many of the world’s inhabitants.
If the above scenario unfolds, investors will be rewarded for embracing risks by buying equities and corporate bonds.
An investor holding a diversified stock and bond portfolio will likely have some lemons in it. Nonetheless, other portfolio holdings could produce gains which more than compensate for the losses from the lemons.
The growing power of AI gives investors much easier access to data and help in analysing data.
Resilience is key
Still, foresight is never perfect. An investor needs, especially in a more volatile world, to learn to cope with handling losses on specific investments.
No one likes losing, be it in sports or an arts competition, or in the business or political sphere. However, learning to handle painful defeats often helps shape great champions in many fields.
Unfortunately, one cannot avoid life’s curveballs and thus needs to be resilient. Indeed, it can be harder to build resilience when growing up in a safe and stable Singapore.
Ultimately, learning how to handle losing is a prerequisite for being an investor over the long term and building sustainable success in the investment world.
