Unicorn1200_Mar16 You must have heard about the tale of the ‘Three Little Pigs’ at some point in your life. The first pig built his house out of straw, the second out of sticks, and the third out of bricks. Then along came the big bad wolf who blew the first 2 houses down easily. Fortunately, the first 2 pigs were able to seek refuge with the third, and we all know what followed next. The wolf failed to blow the brick-house down, however hard it tried.

Wait a minute.

Isn’t this supposed to be an article on investing? What’s with these childhood stories?

Stories often contain meaningful lessons, and the story about the pigs & the big bad wolf is not an exception. A precious takeaway is that the house made of bricks stood strong because of its solid structure and foundation. There is a framework in place.

Merriam-Webster defines framework as the basic structure of something: a set of ideas or facts that provide support for something.1 When this framework is robust and well thought-out, you feel safe. You are comforted by the knowledge that you are shielded from dangers that could potentially hurt you.

This applies to investing as well. Having a framework can help you weather storms. A portfolio built on a solid foundation reduces the emotional volatility and discomfort that may arise from external pressures significantly.

Warren Buffet – arguably the world’s best investor — mentioned that ‘for one to invest successfully over a lifetime, one does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework”.2 Such a framework is of paramount importance in today’s investment climate. It will keep your emotions in check and can even sift out assets of great value. The slew of negative sentiment the media pounds you with daily can be daunting. Turn on the radio, flip through the papers, switch on the television and there you have it. Your emotions are swung — wildly.

Unicorn advises you to adopt a unique investing framework that will keep you confident and grounded amidst market volatilities. It is built on a strong yet simple logic that will ensure your investment portfolio is well-positioned regardless of how the market fluctuates.

We call this framework the ‘Three Bags Strategy’. You will divide your funds into three ‘bags’, as the name suggests, and each serves a distinct and separate purpose.

Bag 1: The Contingency Fund You need to set aside cash that you can fall back on in times of unexpected and adverse circumstances. It is a reserve that should be big enough to tide you and your family through any emergencies or unforeseen events. With this bag in place, you will not need to liquidate your investments to deal with financial situations that could arise out of the blue.

For example, retrenchment exercises were common during the 2008 sub-prime crisis. If an investor did not have sufficient funds parked aside in the contingency fund, he will need to sell off his investments to meet his daily or monthly expenses as he searches for employment. It is also possible that he will be cashing out of his investments at a loss as asset prices are likely to be depressed during times of crisis.

The size of this bag varies from person to person, and you should discuss this with a professional who can help you make a sensible decision.  

Bag 2: The Invested Fund

Inflation is virtually a constant today. Simply saving in a bank to combat rising prices will not work for you in the long run anymore. This makes investing a need, not a want. What you must do is to put your hard-earned resources to work, so as to grow your wealth to meet your future needs. This is what this second bag is for. These funds should be carefully invested into valuable assets that are thoroughly researched. This will protect your funds from being eroded by inflation.

Unicorn is always on the lookout for highly-valued assets that are trading at depressed prices. These are the type of investments that value-investors like Mr. Buffett crave. Asset allocation also comes into play at this stage. It plays a critical role in delivering the results you desire.

For example, we recommended our clients to allocate as much as 30% of their portfolios into US equities in 2009. US equities prices were heavily battered following the fall-out from the sub-prime crisis a year earlier. It was not surprising to find most investors (retail or institutional) staying on the sidelines instead. It was pleasing to see our clients profiting from this advice as the S&P 500 grew by about 80% by the time we advised them to take profit at the end of 2013.3

You should also adopt the Dollar Cost Averaging (DCA) strategy for this bag as well. This is a disciplined, investment habit that will enhance your portfolio significantly. You put your investment portfolio on autopilot which will enable you to put a fixed amount of money into an investment at regular intervals, i.e. monthly. If the market drops, your pre-set amount goes further, buying you more shares than the month before. If the market goes up, your money buys you fewer shares.

This system prevents you from either investing in the market just when it seems most attractive (and is actually most dangerous) or refusing to buy more after a market crash has made investments truly cheaper (but seemingly more ‘risky’). DCA is the type of strategy that prevents your emotions from interfering with your investment framework.2

Bag 3: The Value Cost Averaging (VCA) Fund Another mantra Mr. Buffett preaches is ‘to be greedy when others are fearful, and to be fearful when others are greedy’.4 Markets fall because investors become fearful of the investment environment they are in. This leads to irrational selling which drives asset prices lower.

To a value investor like you, this is akin to a child in a candy store. The market is filled with under-valued assets which you will want to take advantage of. Without the VCA fund set aside, you will have to forego these opportunities. However, it is also common to see investors dip into their contingency fund (Bag 1) during such situations; we strongly discourage that. It is important that you revisit the purpose that that bag serves.

Gold prices had declined since its high in 20113 and we recently activated this bag for our clients to buy gold. We are confident our clients’ funds are well-positioned with this decision. Gold tends to perform well in periods of volatility & uncertainty, and we expect that to be prevalent in the near future given the current negative market sentiment.  

Working The Framework You now understand how the 3 bags complement one another. It is clear that this framework will save you the hassle and difficult task of second guessing the direction of the markets. Your immediate focus should be to work with your consultant to ensure that you have this robust foundation established before or as you embark on your investing journey with Unicorn.

Once this strategy is in place, you have the necessary building blocks that will allow you to reap rewards. You can rest assured that Unicorn is staying vigilant and forward-looking, especially during times of crises.  We promise to keep you updated regularly during rough times like today and stay close as we tread through this journey together.

Contributions by Keef Wong and Ng Yi Xian


1 –Merriam-Webster

2 –The Intelligent Investor

3 –Bloomberg

4 –Forbes

Disclaimers and Important Notice

The information herein is published by Unicorn Financial Solutions Pte Ltd. (“Unicorn”) and is for information only. This publication is intended for Unicorn and its clients or prospective clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of Unicorn. This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into, for cash or other consideration, any transaction, and should not be viewed as such. This publication is not intended to provide, and should not be relied upon for accounting, legal or tax advice or investment recommendations and is not to be taken in substitution for the exercise of judgment by the reader, who should obtain separate legal or financial advice. The information and opinions contained in this publication has been obtained from sources believed to be reliable but Unicorn does not makes any representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose. Opinions and estimates are subject to change without notice. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment. Unicorn accepts no liability whatsoever for any direct indirect or consequential losses or damages arising from or in connection with the use or reliance of this publication or its contents. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this publication, which may arise as a result of electronic transmission. Unicorn Financial Solutions Pte Ltd Reg. No.: 200501540R 

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