PARABLE OF THE BOILED FROG AND ASSET ALLOCATION IN AN UNCERTAIN WORLD
August was a pretty brutal month for many investors. Most of the leading stock indices were down 10-15% for the year to date; the only exception was gold with a 30% decline.
The Stock Exchange of Thailand index did not do too badly with a negative return of only 8% considering all the bad news about the Erawan Shrine bomb and the constitutional reform botch-up, which cost the taxpayers billions of baht in wasted salaries of the militaryappointed lawmakers and meant an indefinite delay for a general election.
To add salt to the wound, the US Federal Reserve announced that it intends to raise short-term interest rates by September or December at the latest, marking the end of the cheap money gravy train. Then, on top of that, we had a meltdown in the Chinese markets while the European Union big wigs continued to kick the can down the road about Grexit.
In the absence of a solution to the European debt crisis and a return to full democracy in Thailand, I struggle to be optimistic, and it would not be a stretch to see more volatility in the stock market for the rest of this year.
So what should investors do? I normally tell my clients to try turning volatility to their advantage.
Equity market corrections occur fairly often; it is rare to go a full year without one or more. Painful as it is to experience them, market corrections are part of investing in stocks. Historically, pullbacks of 5% or more happen on average 3.5 times a year, while pullbacks of 10% or more happen about once a year. As long as your portfolio is well diversified, you should remain invested for the long term and be very disciplined in using dollar cost averaging.
This is all very well, but lately something else has been keeping me awake at night and it’s not my wife’s snoring; it’s the parable of the boiled frog.
As the parable goes, the frog is placed in the pan, which contains room temperature water. The frog is content to sit there, especially if it has been out of water for a long time. It has no compelling reason to move.
When the water is warmed ever so gradually, the frog slowly adjusts to the warming water and, in the absence of any sudden change in temperature, it eventually dozes off and is boiled to death.
Like the frog, people in general don’t notice the small incremental changes in their environments, at home or in society. They become insensitive because they have adapted; they have done what their ancestors did to survive — adapt or perish. In adapting, they have learned to ignore creeping degradations in the quality of their lives.
They have become desensitised to situations that would have caused previous generations to leap from the pan.
Over the past year, I have been trying really hard to adapt to a society where you can go to jail for 18 years for expressing your right to freedom of speech and have your passport revoked for no good reason.
On the economic front, the baht is at a nine-year low and yet exports are still anaemic. After once being the engine of growth for Asia, Thailand is now the sick man of Asia. I can only hope that this is not the new normal for Thailand in the 21st century.
Thankfully, people and frogs are different: frogs don’t think, they react. Frogs don’t make choices, they respond by instinct.
People think and can make choices. They can awaken from their complacency and choose different outcomes for themselves. They can respond to critical choices when they become aware of them.
I truly believe the time has come for investors to leap from the pan by diversifying offshore. Do not keep all your eggs in one Thai basket.