Monday, September 25

VUCA world: How to manage your investment better?


“WE are moving from a world of problems, which demands speed, analysis and elimination of uncertainty, to a world of dilemmas, which demands patience, sense making and engagement with uncertainty”

The recent sharp market drop posed a difficult question for investors; what should I do? Today’s market has got several macroeconomic factors impacting it and this comprises Covid-19, the Russia-Ukraine war, Federal Reserve’s interest rate hike, high inflation, supply chain crisis and the list goes on.

Looking back at 2022, there is no doubt that we live in a VUCA world. VUCA stands for “volatile, uncertain, complexity and ambiguous” and acts as a catch all for the challenges of a rapidly evolving investment environment.

Volatility refers to the speed and unexpected nature of change. It applies at several levels: volatility on a certain market, in a specific industry or in the world in general.

Uncertainty refers to events, in which we don’t have enough information to predict the outcome. Complexity refers to many different interconnected factors that come into play, with potential to cause chaos and confusion. Ambiguity refers to an absence of clarity. A situation may be difficult to interpret if the available information is suboptimal.

For more than two years it has been a rather testing time and a roller coaster ride for investors in general. Times are changing and what worked in the investment ecosystem 10 years ago is something irrelevant today.

However, the need to save and build wealth is constant.

Investors need to adapt themselves to market dynamics and find the optimal asset allocation strategy that will help them achieve their financial goals.

So where does this leave investors and where might they find opportunities during Volatile, Uncertain, Complex and Ambiguous moment? The biggest question on the minds of investors is what next and where and how to invest in this volatile, uncertain, complex and ambiguous (VUCA) world.

Below are some better ways to invest in VUCA world:


Allocate sufficient cash buffer

A cash buffer, also known as a cash reserve or a reserve fund, is the amount you have set aside for any unplanned expenses. This is the most important step in the VUCA world.

The amount of cash you would need to reserve depends on your income. I would suggest allocating at least one year equivalent of your income as cash buffer. Having a cash reserve would allow you to invest better in other long-term investments, without the fear of having no money during an emergency. “Prevention is better than cure”.


ETF is key

Legendary investor Warren Buffett calls investing a “simple game”. Buffett has long been a proponent of the index ETF (Exchange Traded Fund) investing as it offers a diversified approach.

Buffett suggests buying an S&P 500 index fund. “Keep buying it through thick and thin, and especially through thin”. Sometimes in life, taking and following a simple step is the challenge, we make investment complicating by not doing so.

Buffett has instructed the trustee in charge of his estate to invest 90 per cent of his money into the S&P 500, and 10 per cent in treasury bills, for his wife after he dies.

“I just think that the best thing to do is buy 90 per cent in S&P 500 index fund”.

Many of us try to predict or gauge the timing of market performance. In reality, you can never outdo the market, whether you are a fund manager or a financial product distributor. Don’t treat investment like a casino!


Eye on dollar cost averaging

When is the best time to invest? The answer to this age-old investing question is deceptively simple, when prices are low. However, trying to time the market and waiting for the best time to buy or sell an investment is extremely difficult.

Fortunately, there’s a time-tested strategy that can help you buy more when prices are lower and less when prices are higher. It’s called dollar cost averaging.

Dollar cost averaging is the practice of investing a fixed amount on a regular basis, regardless of the price. It’s a good way to develop a disciplined investing habit, be more efficient in how you invest and potentially lower your stress level as well as your costs.


Avoid lump sum investment

As the sum is invested at one go, the investor may end up buying lesser units if the market is on a decline. There is no option of buying units in between or regularly.

The only option is to invest in a new fund for which an investor may not even have funds due to single cash outflow owing to lump sum payment. So, the market timing is quite crucial while investing through lumpsum method.

Since financial product distribution is very much commission driven and sales target orientated, it’s very difficult for you to get “client interest first” advice. Every financial product distributor is looking for their personal income (sales closing) and act according to the financial institution mantra “selling is winning”. This is a structural problem in our financial services but as a consumer please be careful and understand the risk involved in lump sum investment. Lump sum carries higher risk compared to regular investment.


Grab the opportunity

The price of what you buy is important because everything is valuable at the right price. This is more so in a volatile environment, which will give us more opportunities to discover value, whether in the equity markets, bond markets, property and other investment instruments.

Now, while everyone agrees in hindsight that crisis offers outstanding value opportunities, the truth is very few people take them up. Do in-depth research and identify the intrinsic value in whatever you invest.

Finding intrinsic value needs higher financial literacy, investment experience, knowledge and skills. Reading some basic investment and personal finance book will help you identify the intrinsic value in any investment.

In a complex and uncertain world, understanding your investment goals, which are unique to you, defining them sharply, and sticking to them is vital. It is equally valuable to understand your own risk appetite, which is tested in volatile markets.

Finding the right match between your needs and the existing offerings is critical to a successful investment journey and a good independent advisor or licensed financial planner can help you build your wealth. Investment in VUCA, we can’t plan, we can prepare!


Gunaseelan Kannan, CFP, a Financial Adviser Representative by Bank Negara Malaysia and a Licensed Financial Planner by Securities Commission (CMSRL/B4198/2013), is currently pursuing his Doctorate research on entrepreneurship, financial planning and financial technology. He also lectures on accounting, finance and business fields in Asia Pacific University of Technology and Innovation (APU). He is the Winner of Malaysian Financial Planner of the Year 2020, from Financial Planning Association of Malaysia. He can be reached at [email protected].

For more than two years it has been a rather testing time and a roller coaster ride for investors in general. Times are changing and what worked in the investment ecosystem 10 years ago is something irrelevant today.