It is amazing that after 29 years in the stock market, there is still something new to learn. In the recent market sell-down, I am quite surprised by the speed at which the market freezes. By this, I don't mean the drop in stock prices, but rather the rapid decline in liquidity at such an early stage of a bear market. For less actively traded stocks, the bid-ask spread can be as much as 2-3 cents, which is quite significant for stocks priced below a dollar. Not only that, the bid-ask volume is also quite small. Usually, such low liquidity is only observed near the depth of a bear market.
So far, the rapid decline in liquidity has not signficantly affected me, as I have not really started buying. But it did spring an attack on my cash reservoirs. As discussed in Behind Every Successful Bear Market Recovery is A Cash-Like Instrument, one of the key aspects of my equity-centric investment strategy is to have cash reservoirs in the form of fixed-income instruments that could be liquidated reasonably easily in bear markets to be reinvested in beaten-down stocks and REITs. Currently, these fixed-income instruments comprise OCBC 4.2% preference shares, CapitaMallAsia 3.8% bonds and, until recently, Frasers Centrepoint (FCL) 3.65% bonds. The ability to liquidate them at reasonable prices is thus crucial. Can you imagine the frustrations knowing that your target stocks are down by 50% but you cannot raise the cash to buy them?
As mentioned earlier, the rapid freezing of the stock market, including the fixed-income instruments, caught me by surprise. During the Global Financial Crisis, I had another preference share, OCBC 5.1% preference share, that declined to around $83 at its lowest point. I reasoned that the large decline was due to the crisis in the global financial sector and OCBC naturally would not be spared. In a normal bear market, I reasoned that such large declines in fixed-income instruments that pay stable dividends regularly would not be common. But the price and bid-ask volume of the likes of Genting 5.125% perpetual securities declined rapidly in the recent sell-down. Initially, I thought it was because people were selling them off to raise cash for Aspial 5.25% bonds. But after 2 continuous days of selling, I realised this could not be the only reason. To avoid the frustration mentioned above when I need the cash, I decided to act too. I sold FCL 3.65% bonds, escaping with a small profit. As for the other 2 fixed-income instruments, I decided to hold them for now. Past experience in bear markets has shown that the psychological benefits of always keeping some cash available (can be in fixed-income instruments) far outweighs the potential monetary gains from being 100% invested. So, I might not sell all of them even at the depth of the bear market.
Given the rapid fall in liquidity for fixed-income instruments, it suggests that I should not be placing so much faith in them. Thankfully, Singapore Savings Bonds (SSB) have been introduced since this month. Liquidity of SSB is less of a concern. There is no capital loss, and you can redeem as much as you want. The bigger issue is you will only get back the money at the start of the following month, so the wait is longer, but redemption could always be planned ahead of time. The other concern is the total amount of SSB is limited to $100K per person. Considering the above benefits, SSB may be a viable alternative/ complement to the fixed-income instruments. Although SSB pay lower interest than the fixed-income instruments, they at least guarantee that they could be sold whenever needed at no loss of capital.
Having said that, I would not be applying for this first tranche of SSB. Given the current market conditions, I prefer to hold more cash and look out for stock bargains. However, I will certainly revisit SSB and its more traditional sibling, Singapore Government Securities (SGS), when the stock market returns to normal.
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