Today's Straits Times reported that Temasek sold its Barclay shares during the December/ 2008/ January 2009 period. This period is right at the bottom of the financial storm. I am sure Temasek is going to face the firing squad again. It is not my intention to criticise them but there are precious lessons we can learn as private investors:
* As Temasek has a huge army of smart analysts and resources, its terrible market timing trades show that "normal" human like us will be worst off if we attempt to time the market. It will be arrogance and proud to say that we can do better than Temasek. It is better to admit humility. Since we will do much worst than the army of smart analysts, we have to avoid what Temasek practices.
* Temasek has to make major decisions such as timing the market because its monies are active managed. Each stocks are selected because it thinks that the stock is undervalued while stocks are sold because it thinks it is overvalued. Close monitoring of these stocks are required because the worst case lost is 100%. Barclay was thought to be nationalised. If so, the stock price would be close to zero. Think AIG and GM and you will get the picture. Thus, Temasek has to make tough calls such as cutting lost to avoid the possiblity of making 100% lost. This is the hazard of active managing. Anyone who invests in stocks individually automatically must active manage the holdings since the worst case lost is easily 100%. You can find all your holdings to be 100% in red if not monitored closely. Lesson? Avoid active management style. Try to avoid active managed unit trust if this is possible. Avoid holding stocks investment since this mandatory require active management.
* It is not possible for a diversified portfolio of index funds to be incur 100% lost. If the portfolio is diversified, a 100% lost imply we are at the end of the world. If this is really the case, it will not be important where your assets would be since you cannot bring anything to paradise. Thus, investing in a portfolio of index funds is always recommended.
* Not all index funds are "safe." If your portfolio of index funds all invest in emerging countries, you could suffer heavy losses and sleepless nights when that happens. During the financial crisis, Malaysia imposed capital control in Sept 1998. As a result, its Malaysia stocks could not be traded by foreigners. ETF such as the iShares Malaysia ETF sufferred significantly as the underlying becomes illquid. The NAV and ETF share price fall apart significantly. You wouldn't want this to happen to you.
The folowing isn't about Temasek but about me: During the financial storm in Oct/Nov 2008, some clients ordered me to cut lost either through liquidating the entire portfolio or switch to money market. One scolded me for being financial adviser "with no skill." I was extremely hurt by such a comment. In retrospect, I am vindicated that buy and hold is the best principle. The market has rallied significantly and those who "cut lost" during the financial storm were like Temasek's foolish mistake. Fortunately most of my clients trusted me and held on to their assets. From this experience, I learnt that the client-financial adviser relationship is only as good as the "weakest link" in terms of financial education. That is to say that if me as financial adviser lacks financial education, the relationship isn't going to succeed. If the client lacks financial education, the relationship will also fail.
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