Volatility Guide Nov 11

7/30/2019 Volatility Guide Nov 11

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Investing

inuncertaintimes

Principlesof successfulinvesting


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1

Investing

inuncertaintimes

Understandmarkets

The scale of the recent stock marketturmoil may have left you hesitant aboutinvesting in global stock markets. Butmarket volatility is not a newphenomenon we have experiencednumerous market crises over the last25 years. Many will remember the 1997Asian Financial Crisis, the 1999 internetbubble and the turmoil caused byterrorist attacks in 2001. Numerousinvestors are still experiencing theimpact of the 2008 credit crunch andglobal recession.

Few however will recall that after each

crisis, markets often returned to theirprevious levels within a relatively shortperiod of time.


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Understandmarkets

Currency collapses, terrorist attacks, hedge fund failures

there have been numerous crisis events that haveimpacted share markets over the past century. Marketsdo not like uncertainty and often overreact becauseinvestors tend to focus strongly on new developmentsand use them to predict the worst-case scenario for theirinvestments.

As unsettling as these dips are, long-term history hasshown that stock markets have resumed their upwardtrend after crisis events.

Markets usually overreact in a crisis1

2

Source: MSCI, Fidelity. Performance of the global stock market based on the MSCI World Gross Index (USD)from 1 January 1980 - 31 August 2011

Major crises in global stock market over the past 30 years

Market falls and long-term value

In the short-term, the stock market is a voting machine, in the long-term it is aweighing machine. Warren Buffet

Over the short-term, stock prices are influenced by market sentiment. However,in the long-run, stock prices will be supported by fundamentals i.e. growth of theeconomy, a companys competitive position, skills of the management team, etc.

1980 1985 1990 1995 2000 2005 2010

6,000

5,000

4,000

3,000

2,000

1,000

0

Aug 82: Mexicansovereign debtcrisis

Oct 87: BlackMonday

Aug 90: Gulf War

94: Mexicancurrency crisis

97 - 99: Asianfinancial crisis

Aug 98: Bailoutof LTCM

Aug 98: Russiandebt default

Sep 01: Terroristattacks in US

03: SARSoutbreak in Asia

00 - 03: Dot comcrash

07 - 09: Globalfinancial crisis


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However, history tells us that after every major crash,

there has been a period of recovery. Some recoveriesare quick while others take longer.

Case 1:Oil Crisis (1973 - 1974)

Case 2:Asian Financial Crisis (1997 - 1998)

Case 3:Dot com, 9/11 and SARS epidemic

Case 4:Global Financial Crisis (2007 - 2009)

Source: Fidelity analysis using month-end index levels of the MSCI World Gross Index (USD) except for theAsian Financial Crisis where the MSCI AC Asia ex-Japan Gross (USD) Index was used. Recovery patternsof past crises are not indicative of the expected recovery trend for current or future crises.

But markets do recover2

Amount lost % recoveredafter 12 months

Full recovery 46 months

60%

30%

0%

-30%

-60%


% recoveredafter 12 months

Full recovery 95 months (long recovery periodas other crisis events took place not long afterAsian currencies collapsed)

150%

100%

50%

0%

-50%

-100%



60%

30%

0%

-30%

-60%

Full recovery 70 monthsGlobal markets have yet to recover fromthe peaks



60%

30%

0%

-30%

-60%

Bear market= 10 months






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Investmentprinciplesexplained

Investment markets move in cycles periods of poor performance are usuallyfollowed by better years. These ups anddowns can be frequent andunpredictable, especially in stockmarkets.

Staying invested for the long-term is atune sung by many advisors.Nonetheless, this advice can be coldcomfort for investors who see the valueof their assets decline during crisisperiods.

Rather than react negatively during

volatile times, it is important to remindyourself of the key principles forsuccessful investing.

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Investing

inuncertaintimes


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Investmentprinciplesexplained Diversify across asset classes

Your portfolio should be diversified across asset classes,i.e. be concurrently invested in bonds, cash, equities andproperty. Defensive assets such as bonds and cash farebetter during periods of high market volatility, whilegrowth investments like property and stocks provideattractive returns when economic conditions are morefavourable. Taken together, a portfolio that invests in arange of quality assets should deliver attractive returnswith lower risk.

Equities and Bond valuations often move inopposite directions

Diversify your portfolio1

Cash may be king but could be a risk as well!

Holding assets in cash may not be a good optionfor long-term investing.

The purchasing power of cash is eroded over timeby inflation.

Effect of inflation onpurchasing power

$10,000

$8,000

$6,000

$4,000

$2,000

$0

0 5 10 15 20 25 30yrs

2% inflation3% inflation5% inflation

Source: Fidelity calculations

40%

20%

0%

-20%

-40%

-60%

00 01 02 03 04 05 06 07 08 09 10 YTDSep11

Cash Global Bonds Global Equities Global Property

Source: Bloomberg, MSCI, Monetary Authority of Singapore. Performanceof asset classes as measured by the 3-month SIBOR, the Citigroup WorldGovernment Bond (USD), MSCI World Class (USD) and S&P DevelopedWorld REIT (USD) indices respectively.


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A well-diversified stock portfolio smooths out returns

over time

During a market crisis, dramatic falls on global stockmarkets dominate the headlines and lead readers toassume that every stock has collapsed in value. However,this may not be the case. Certain sectors of the marketoften perform better than others at different points inthe economic cycle. A well-diversified stock portfoliohelps to further smooth returns over time.

Defensive companies Cyclical companies

Earnings from cyclical companiesare more sensitive to economic

conditions.During a crisis, cyclical stocks areless sought after as companyearnings are expected to fall,leading to lower stock prices.

Stock prices tend to respond rapidlyto market developments, makingthem more volatile than defensivestocks.

During recovery periods, cyclicalcompanies typically outperform thedefensive ones.

This is not to say that all defensive stocks will outperformduring downturns; sometimes a traditionally defensivesector may not be favoured due to a range of otherfactors such as changing industry trends, government

policies and competition from other companies. Giventhat sector return profiles vary according to a broad rangeof factors, it is best to diversify your investments acrossall sectors.

Diversify your portfolio1

Companies less affected byeconomic cycles and are likely tohave stable (or low) growth

profiles.Some investors tend to favourdefensive stocks during downturnsas these companies can maintaingrowth and are likely to continuepaying dividends to shareholders.

However, when the economyrecovers, defensive stocks lag theircyclical peers.

ConsumerStaple

HealthCare

TelServices Utility Info Tech Finance Energy

Industrial MaterialConsumer

Discre-tionary


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26%Health Care

-7%Material

-5%Cons Stp

48%Info Tech

25%Energy

26%Energy

32%Utility

31%Material

-23%Health Care

58%Material

23%Cons Dis

0%Health Care

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

5

4%Energy

-14%Health Care

-19%Utility

36%Finance

15%Finance

9%Finance

19%Cons Dis

16%Cons Stp

-39%Energy

24%Industrial

10%Energy

-9%Info Tech

6

-3%Industrial

-17%Industrial

-19%Health Care

24%Utility

15%Tel Srv

8%Health Care

18%Cons Stp

14%Info Tech

-43%Cons Dis

23%Energy

10%Info Tech

-12%Cons Dis

7

-15%Material

-18%Finance

-23%Cons Dis

23%Energy

14%Cons Dis

4%Info Tech

17%Industrial

14%Industrial

-44%Industrial

19%Cons Stp

5%Tel Srv

-15%Energy

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

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

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Investment principles explained

Probability of negative returns decreases over time

As we have seen, markets move in cycles. Over short-termperiods, markets can be volatile and these movements resultin a wide range of positive or negative returns. But the longeryou stay invested, the greater the probability that yourinvestment will yield a positive return. As shown below,staying invested in the stock market for periods of 12 yearsor more since 1970 has resulted in no negative returns*.

Range of annualised global equities returns

Annual sector returns market leadership varies from year to year

Source: MSCI, Fidelity. Market sectors are defined according to MSCI global industry sector classificationswith returns calculated at price levels in USD. Past performance is not indicative of future performance.

Invest for the long-term2

Rank

* Source: MSCI, Fidelity. Rolling annualised returns over respective periods from 1 January 1970 to 30 September2011 using the MSCI World Gross Index (USD). Past performance is not indicative of future performance.

2001

2000

2003

2002

2005

2004

2007

2006

2008

2010

2009

YTD30/09/11

Chance of negative returns

No. of neg.annual returns

SampleSize

ChanceStayinginvestedfor:

30 years

20 years

12 years

5 years

1 year

0

0

0

95

106

142

262

358

442

490

0%

0%

0%

21%

22%

-50% 0% 50% 100%

30 years

20 years

12 years

5 years

1 year


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In the long-run, discipline breeds success

Understandably, it can be difficult to invest with confidencewhile markets are volatile. However, you should not letshort-term market movements alter your investmentdiscipline. On the contrary, keeping calm and adoptinga consistent and disciplined investment approach couldhelp you ride out volatility and offer the opportunity tobuy quality assets at more attractive prices than theywere trading at when markets were higher. The tablebelow illustrates how this works in your favour.

Invest regularly3

March

April

May

June

July

Total

Weighted average purchase price

Amountinvested (S$)

Unit price(S$)

Unitspurchased

Cumulativevalue of

investment (S$)

1,000

1,000

1,000

1,000

1,000

5,000

1.25

1.20

1.15

1.20

1.25

800

833

870

833

800

4,136

1,000

1,960

2,878

4,003

5,170

5,170

S$1.21

An individual invests S$1,000 into a fund every month.

The market dipped in April and May but the investorcontinued to follow a regular investment plan.

When markets recovered in July, the investors regularinvestment plan has resulted in the purchase of 4,136units, valued at S$5,170. By comparison, investingS$5,000 in March would have seen the value of thisinvestment unchanged.

Dollar cost averaging how does it work?


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Its about time in, not timing the market

It is impossible to predict when the best and worst returnswill occur. The chart below shows that if you withdrawyour investments during a market downturn, you couldmiss out the best days in the stock market and leave yourassets in negative territory.

Missing out days with the best investment returns

Understanding your appetite for risk

For individual investors, risk is often associated with the possibility of losing money.Your appetite for investment risk is influenced by your time frame and goals. If youare saving for a deposit for a home, you are less likely to tolerate wild marketswings. However, if you are investing for your retirement, say 30 years away, youwould be less affected by short-term market movements.

There is risk that investments could fall in value but over the long-term, they shouldgrow steadily. If you want to achieve significant levels of growth, you need totolerate some investment risk.

Of course, the probability of missing out all of the bestdays over your investment horizon (say 10 years) is low.Nonetheless, this example shows that selling yourinvestments to avoid losses increases the chance of younot catching the best days.

Fully invested Missing best10 days

Missing best30 days

Missing best60 days

15%

10%

5%

0%

-5%

-10%

-15%

Annualised

Returns

Source: MSCI, Fidelity analysis. Daily returns based on the MSCI AC Asiaex-Japan Index from 31 August 2001 to 31 August 2011.


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Dividends make a difference to your investmentBuy stocks forincome

Investors havetraditionally looked tobonds for income.

However, investors

should also considerhigh dividend stocks asa strategy for incomeand long-term growth.

The most powerfulforce in the universeis compound interest.

- Albert Einstein

Dividends compounded over time add up to better

returns

When things are going well and the stock market is risingstrongly, the extra returns from dividends may be consideredas little more than a token gesture. However, in weakermarkets, these extra returns become a valuable part oftotal returns, especially over time as reinvested dividendsare compounded.

For example, S$1,000 invested in the Singapore stock

market over the last 10 years would have grown to S$1,921by September 2011. But if dividends received had beenreinvested, it would be worth S$2,655 almost twice asmuch. Dividends can also be more reliable than bothcorporate earnings and stock price appreciation duringa bear market because many companies usually striveto maintain their dividends even if their profits aretemporarily falling.

Consider the value of dividends4

S$4,000

3,000

2,000

1,000

-01 02 03 04 05 06 07 08 09 10

Source: MSCI, Fidelity. Assumes growth of $1,000 invested on 30September 2001 in the MSCI Singapore Gross (SGD) and MSCI SingaporePrice (SGD) indices respectively to 30 September 2011. Percentagefigures represent annualised returns for the same investment period.Past performance is not indicative of future performance.

Growth assuming dividends reinvestedCapital appreciation only

10.3%

6.8%


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Wide range of returns in top and bottom stocks


Professional managers have the time, knowledge

and experience to develop a thoroughunderstanding of every stock

Within a stock market, individual companies can performvery differently from each other (refer to graph). An activeprofessional fund manager will have the resources toresearch and choose companies that will perform wellin the long-term, whatever the short-term performance ofthe market.

Rely on a professional manager5

300%

250%

200%

150%

100%

50%

0%

-50%

-100%

Ran

ge

ofreturns

YTD30/09/11

2010 2009 2008 2007 2006

Source: Bloomberg based on the performance of the 30 stocks in theFTSE STI Index calculated a (gross) total return basis.

Worst performing stock Top performing stock


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Investthroughprofessionally-

managedproducts

Professionally-managed investment funds in Singaporeare usually referred to as mutual funds. A fund comprisesa collective pool of money from many individuals withthe money invested by a fund manager in a range ofassets. In Singapore, these funds have to be registeredwith the Monetary Authority of Singapore.

Mutual funds are suitable options for most investors evenin volatile times because they provide:

Instant diversification

Your money in a fund is spread over many different

investments, and even if one declines in value, the overallimpact is likely to be minimal.

Liquidity

A mutual fund gives you the flexibility to convert some ofyour units to cash without having to sell your entireinvestment.

Professionally-managed

Professionals monitor your investments daily and assesshow issues can impact valuations. This job requires agreat deal of skill and time and perhaps, is better left tothe experts.

Regular investment options

Most mutual funds allow you to invest relatively smallsums as part of a regular savings plan. This helps youto avoid investing all of your assets when markets are

expensive and smooths out your returns over time. Thismeans that you do not have to save for a long periodbefore you begin to invest.

Benefits in investing in mutual funds


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Benefit from compounding of dividends

You could invest in an accumulation share class (i.e.dividends received by the fund manager is reinvestedback into the fund on your behalf) of the mutual fund

to benefit from the compounding effect of dividends.This is easier than reinvesting the dividends you receivefrom stocks.

Access to investments not available to individualinvestors

As your money is pooled with other investors, you gainaccess to investments that can be very difficult to accesson an individual basis.

Investing and you

Investment decisions need to be made within abroad and well-considered context. Your saving andinvestment goals, time horizons and appetite for riskare at the heart of these decisions.

Identify these factors and start investing early becausethe impact of compounding is remarkable in growingyour assets.

Lastly, invest regularly because it is impossible totime your investments perfectly with the highs andlows of the market.


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A leading global fund manager

Fidelity Worldwide Investment is a global leader in assetmanagement, providing investment products and servicesto individuals and institutions in the UK, continental Europe,

the Middle East and Asia Pacific.

Established in 1969, the company has over 5,000 staff in24 countries and manages or administers client assetsof US$257.4 billion. It has over 7 million customer holdingsand manages more than 740 equity, fixed income, propertyand asset allocation funds. The companys fund managersreceive research from one of the largest proprietaryresearch teams, based in 12 countries around the world.

Fidelity Worldwide Investment is an independent assetmanagement company which is privately owned.

Experience in managing uncertainties

Fidelity has managed money for more than 40 years andhas steered investors through various crises. Fidelitysresearch-driven investment process has proven successfulin delivering strong returns to investors over the long term.

FidelityWorldwideInvestment

All company related data is from FIL Limited, as of 30 September 2011


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Our research processOur research-driven process means that we study everythingthere is to know about a company before investing ourclients money. We analyse a company beyond the detailson paper. We visit their offices and factories to learnabout the intricacies of their operations. We also talk tothe companys suppliers, distributors and customers tobuild a three-dimensional view of the companys growthpotential. Our regular interactions with senior management

allow us to assess the quality of leadership and theirlong-term strategy. Fidelity has access to decision makersbecause of our reputation and strong presence in themarket place.

Why rely on research?

We believe that markets are semi-efficient, meaning thatmarkets, sectors and stocks can be overvalued orundervalued at any point in time. Research helps us uncover

opportunities, gives us a platform to assess the risks involvedand helps us make successful investment decisions.

How do we manage our research process?

Good research requires extensive resources. Fidelity hasbuilt a world-class team of analysts and portfolio managerswhich is one of the worlds largest. Our broad reach andstate-of-the-art global research platform means our teamcompletes research on 90% of the worlds largest listed

companies every 90 days. In Asia, securities in 13 differentcountries are analysed from seven different offices andtwo support locations across six time zones. In Europe,the research team has 27 meetings with analysedcompanies a day and this equates to 5,000 meetingseach year.

Our intensive research process sets us apart from ourcompetitors, this is why major institutions through toindividuals have trusted us to manage over US$200 billionspread across almost 740 funds.

All company related data is from FIL Limited, as of 30 September 2011


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This document is prepared by Fidelity Worldwide Investment. All views expressedin this document cannot be construed as an offer or recommendation. Reference

to specific securities (if any) is included for the purpose of illustration only andshould not be construed as a recommendation to buy or sell the same. Pastperformance and any forecasts on the economy, stock market, bond market orthe economic trends of the markets are not necessarily indicative of the futureperformance. Prices can go up and down. This document is prepared for informationonly and does not have any regard to the specific investment objectives, financialsituation and the particular needs of any specific person who may receive thisdocument. FIL Investment Management (Singapore) Limited (Co. Reg. No.:199006300E) is the legal representative of Fidelity Worldwide Investment inSingapore. Fidelity, Fidelity Worldwide Investment, and the Fidelity WorldwideInvestment logo and F symbol are trademarks of FIL Limited. SG11/399


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FIL Investment Management (Singapore) Limited1 Raffles Place#14-00 One Raffles Place

Singapore 048616Tel: (65) 6511 2200Fax: (65) 6536 1960

Co. Reg. No. 199006300E www.fidelity.com.sg

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