As I reflect on the happenings of 2020, the one thing that troubles me most was the number of people asking me for financial advice because their investment portfolio had performed poorly.  I am especially perturbed as many of them are ordinary people with extraordinary (and avoidable) losses in the stock market.

After listening to the many sob stories from fellow investors based in Singapore, I can list four reasons for their poor market performance:

#1 Overconcentration in Singapore economy/ stocks

Many Singaporean investors have the majority of their investments in stocks listed in Singapore.  According to Bloomberg, the Singapore stock market is officially the worst performing one in Asia.

If you were to look at the chart above, in 2020, the Singapore stock market, represented by the Straits Times Index (STI), is the worst performing compared to the major stock market indices across the world. Many Singapore stocks listed in SGX simply do not perform well. 

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Over the last 6 years, de-listings have outnumbered new listings, and the market capitalisation has been shrinking. Some of our best Singapore companies such as Razer and SEA Group (Shopee) chose to list in Hong Kong or US, where the valuations sought are much higher than SGX.

With the declining quantity and quality of stocks listed on the SGX, how would Singapore investors do well in investing in stocks in SGX?

To make matters worse, very few Singaporean investors diversify their stocks investment in other markets. By putting all their eggs into one terrible basket, when Covid-19 hit the world in 2020, many Singaporean investors were badly affected.

#2 Costly love for dividends and blue chip Singapore stocks

Singaporean investors are largely risk-averse and dividend-seeking. Ideally, they would want a stock that has strong growth, high dividends and sound capital protection. Such stocks simply do not exist; you cannot have your cake and eat it. 

Growth stocks do not pay good dividends, while dividends stocks usually have limited growth potential. Given their need for certainty of investment gains, most Singaporean investors end up preferring high-dividends instruments like REITs and dividend paying blue-chip stocks.

However, every investor should know this – if a company pays high dividends, it usually means that the company gives shareholders a lot of its profits, leaving little for reinvestment, innovation and growth.

In the face of a major business disruption from competition or the external environment, the high dividend paying company would have little “dry powder” to face the challenge head-on.

The Covid-19 crisis has burst many Singapore investors’ dream for dividends. Many blue-chip stocks are bruised to “blue-black” stocks.  Many REITS are also cutting their Distribution Per Unit (DPU). 

To make matters worst, many of the “blue-chip” companies are in industries that are facing major permanent disruptions. For example: SPH’s advertising business is disrupted by Google and Facebook.

Telcos like Singtel, M1 and Starhub are disrupted by communication applications like WhatsApp, Wechat and Telegram. Banks like DBS, OCBC and UOB are facing disruptions from digital banks and the rise of Fintech.

Focusing on dividends could cause you to miss out on companies that are leading the market growth. Highly profitable US-listed companies like Amazon, Google, Facebook, Berkshire Hathaway do not issue dividends. Yet, their share prices have skyrocketed over the years. Non-dividend paying stocks could make you more money and are likely to be more resilient to competition and external shocks.

#3 Being fearful when others are fearful

Warren Buffet immortalised this quote: “Be fearful when others are greedy and be greedy when others are fearful”. Yet many Singapore investors do just the opposite.

During the market crash of March & April 2020, a huge opportunity presented itself when the US Federal Reserve announced unlimited Quantitative Easing to support the market.

I published an article Why I Believe A Big Stock Market Bull Run Is Coming, Despite The Current Covid-19 Crisis and posted a video telling everyone that a major US market bull-run was coming.

Instead, many investors passed the chance as they felt that the market would continue to fall and they didn’t want to catch a falling knife.  Of course, they all missed the investment opportunity of a lifetime – for being fearful when others are fearful.

#4 Being greedy when others are greedy

Now that the market has recovered strongly and sentiments are bullish, many people are entering (and jumping into) the market. Many are treating the stock market like a casino. 

I shudder as I hear more ordinary people (such as hawkers, national service boys, aunties and uncles) talking about the stock market in public these days. This is a strong signal of a growing stock market bubble to me.

Many Singapore investors buy stocks based on hearsay, market rumours, analyst reports, online recommendations, or some technical analysis charts. Many are dangerously dabbling into Bitcoin, Forex, Options and Futures with very little knowledge of what these instruments are and the risks they carry. 

I have seen this phenomenon again and again for more than 2 decades – Asia Financial Crisis (1997), Dot.com bust (2001), Global Financial Crisis (2008) and China Stock Market Crash (2015).  I am almost certain that this blind euphoria will end up in a terrible blood bath for many Singaporean investors.

What should investors in Singapore do?

For most Singaporean investors, I would like to reiterate this: to do well in stock market investments, you could adopt a simple 3- step strategy:

1. Set up a financial safety net with a 1M65 (or better yet, 4M65 ) CPF strategy. With a million-dollar financial safety net, you would be able to better react emotionally to market turbulences, especially buying on market crashes, instead of panicking.

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2. Diversification outside of Singapore. As a Singaporean, your property, savings, job and CPF are already based in Singapore. By over-investing in the Singapore stock market, you are dangerously putting all your eggs in one basket. Consider investments in other markets, e.g. US or Asia etc.

3. Adopt a compounding strategy, e.g. Dollar Cost Averaging (DCA) into the S&P 500 or NASDAQ 100, and holding it for a long time. The S&P 500 has grown at an average rate of 8 per cent – 10 per cent annually over the last century. Putting $1 into it would likely more than double its value in a decade and quadruple in two decades.

This article was first published in Dollars and Sense.