Monday, September 30, 2013

Small Update 29 Sep 2013

All right, so I'm back and I made a huge long post about asset allocation. I hope you liked it!

Anyway, here's so updates.

I've been watching videos and reading from Rob Arnott's firm's website, very interesting stuff, especially concerning asset allocation.

I've also got this link for a market guide by JPMorgan, which is also pretty interesting. I haven't had time to look through all the slides, but I like how it shows empirically that small stocks fare much much better in a post recession recovery.

Finally, I am still short the Russell 2000, though I did get blown out for some stop losses. Considering that I am not at the market top short selling down, I am actually kinda worried that the Russell 2000 makes a new ATH and blows out of stops for all my short sells now. That would really hammer away and take out my profits, also well as 10% kick in my nuts to my capital.

However, I've got a strong feeling that the government is going to shutdown tomorrow. That ought to push stocks a lot lower, as hopefully past down a strong support, which will then turn into a resistance, so that I can stop worrying about it kicking me out. Honestly, I hope for a nice slippery fall here, which snowballs into something huge.

I wouldn't say that I'm fully prepared to capitalize fully on any market moves, because I am also still at a lost of my ideal portfolio, as well as my plans moving forward. I still do think that I am in a position to catch so of the downside and turn it into a tidy profit, given that investing in today's economy is not only paltry, but risky as heck.

Asset Allocation

For some horrible reason, I can't find the article that I was reading that was talking about asset allocation. But basically, it was saying that your choice of asset allocation is much more important than the actual individual securities of each asset class. The allocation part makes up a much larger part of your returns compared to the individual security selection.

Now, that is actually a nice fresh look at things again. While everyone is always focused on picking the best securities within an asset, people just look broadly within 2 assets classes, equities and bonds.

I am definitely am a firm believer that the subtle differences within the types of asset classes really can make a large difference to the portfolio performance, especially the OW-ing and UW-ing of asset classes.

What brought me to suddenly think about this was reading this post on Investment Moats. It's actually a link from Mebane Faber about popular asset allocation strategies and historical backtesting. The link that he gave was this one, which includes a lot of data, as well as the portfolio constituents. However, if you look at the newer posts on Faber's website, he has actually included 3 more portfolios, have a look here. It is also rather recent at 24th September too.

 (from http://www.mebanefaber.com/2013/09/24/how-does-the-all-market-portfolio-perform/)

Now, of course knowledge is out there for us to read, review, understand, dissect, and ultimately to be made use of in the best possible way for ourselves.


Thursday, September 26, 2013

Big Bet

I'm convinced the US government is heading for a shutdown.

It seems lots of people are turning on the ACA and raging. Honestly, I'm cool with that.

I have just placed MASSIVE puts on the Russell 2000.

The R2000 is a lot less volatile, which helps because the S&P is being so volatile that it keeps kicking me out just before turnaround.

Anyway, stop losses are free, downside is all the way down to zero!

Be back to blogging again on the updates of everything once I return from my business trip!

Wednesday, September 25, 2013

Me rambling about the market, dividend stocks and REITs

The S&P is now back to where it was a few weeks ago, looks like they need to announce that they are not tapering again, just in case people forgot. That ought to blast stocks back through the roof, even if there isn't any new market information, just repeating the same old.

As of now, I'm just fooling around with some currencies based on technical analysis and I'm shorting the S&P quite heavily. The index is screwing around with me, kicking me out at my stop loss 4 times now, before doing a full 180 about one point after my stop loss. Seriously pissing me off. Anyway, so many things are pointing towards the US economy being crazy right now. Although it has performed well YTD, I ain't gonna stick my hands in that honeypot.

As you know, I love the concept of dividend stocks. I'm so tempting to put myself in positions which are globally diversified, but still in dividend stocks. However, after reading this article, I'm not too sure about it.

I think the best course of action for me now is really to just sit tight with whatever I have, and hope and pray for a very very nice and pretty market correction. Hopefully, it turns into panic and then a mass depression follows. I honestly rather everything just break down now, so I have many wonderful years of smooth sailing ahead of me, haha!

I think once the economy tanks, I will be very very largely be picking up high quality, dividend growing, dividend stocks. Basically, whatever that survives, ought to be investment worthy. Not only will this provide me easy access to dividend stocks, but the prospects of massive yields just makes me squeal, haha.

Next, I will also be going in quite strong in global real estate equities, which are basically REITs. For REITs, it's just the yields that really appeal to me, along with the fact I think that real estate is always a good investment, especially at deep discounts.

Read this fascinating article by JPMorgan, and maybe you'll be as sold as me. The main takeaways are that REITs actually behave like actual real estate in the long run. They are very much bond like in terms of their income generating power, since they will always generate income, regardless of the price of their stocks. However, they are also very much equity-like, being affected by the swings in market prices. Now, like I just said, that means you can actually pick up cheap "real estate" relative to its actual value. And lastly, US REITs are overbought and overvalued now. Not that surprisingly, Asia-ex Japan REITs are the cheapest, going at a 30% discount based on their research. Well, that was more than a year ago in 2012, but I think the consensus is pretty clear, global REITs are cheaper and have less volatility.

However, my big gripe here is that most REITs portfolios have a large chunk of the US in them. There's a fund from Henderson, but it has half of its weightage in Japan, and I just can't take that. I think you guys know my stance on avoiding Japan. The next closest thing to broadly capture the Asian REITs market is through Lyxor ETF FTSE EPRA/NAREIT Asia ex-Japan. Honestly? I love it! 57% in HK and 27% in Singapore! Basically, the 2 most overpopulated countries in Asia, haha! My only grip about this is that it only pays out a paltry 1.5% dividend. If the HK property bubble finally explodes, I'm definitely going in strong with this one! When the Singapore real estate sector tanks, I'll definitely be going in stronger in my position with the Phillip Real Estate Income Fund. But frankly speaking, I would really much rather own actual shares of the fund constituents. Management fee is at an acceptable 0.8%, which actually drives it really close to a lot of the more narrowly defined and smaller ETF listings here. The Lyxor ETF expense ratio is 0.65%. I think you can tell that I really like it.

However, I have a big gut feeling that if the US economy crashes, it is going to nicely drag down the Singapore and HK economy as well, effectively popping both housing bubbles here and in HK, along with sending equities prices to deep discounts. When that happens, I'll see the situation. If REITs are more badly beat up relatively to equities, I think you can be sure that I'm going straight in there. If not, I'll be heading into dividend equities based on regions, and slowly monitor the property market.

The ideal situation is for me to be able to enter similar ETF positions as my mutual fund positions, so that I can see which is actually outperforming the other. I think this can be done quite accurately with with the DBX High Yield Asian Dividends ETF compared to First State Dividend Advantage. Both of them monitor Asia ex Japan, so I should aim to get equal weightage of both, and let them rip! It's probably going to set me back $7k on the ETF, so I should aim to have 7k in the mutual fund as well. There's no ETF comparison for Global dividends though, so perhaps I will split my money across different funds that aim for equity income as well. For EM dividends, there is really only 1 choice available, haha.

Honestly, whether the property markets tanks first, or the stock markets crash, ultimately just by sitting on the sidelines and going in when the dust has settled will reward me in a much larger way than me taking action now, regardless of what I decide to do, be in invest in an actual property of my own, or into my financial investments.

Monday, September 23, 2013

MH's Personal Investment Building

Well, not that I've written a post about my investment building and its reasons, why don't I share what I have done for myself so far?

Updated as of 22/10/12

Level 1: Solid Foundation
I personally have no debt to speak of as of today. I am gracious and thankful for my parents to have provided me my whole life until I graduated from school. My only debt is to them, and I have already started giving them a portion of my monthly salary.

This situation could change if I decide to get a place and move out during the next property downturn.

Summary: 
I have no debts :)

Level 2: Easy Access Savings
I have squirreled away a very sizable amount emergency cash, while I must admit, is sitting idly in my savings account, accumulating peanuts of interest. I am getting a very lovely 0.05% on my savings account, I SHIT YOU NOT. Thanks bank.

I have almost no expenses at all to speak of, though I have been planning what would be my forecasted future monthly expenses if I move into a place of my own. I think I can safely say that I am definitely able to buffer myself for 3 months of expenses.

If you are curious to see which bank I use, click this link. In my defense, the locations of their ATMs, as well as their status as being the go-to bank for local IPOs is enough to keep me with them for the time being. I am quite fond of their internet banking system as well, which is fast, efficient and safe.

Summary: 
I have a savings account with online banking features, with more than 3 months worth of expenses buffer, yielding 0.05%

Level 3: Cash Savings Account
Now, here's something I'm doing right. I have quite a fair bit of money sitting with me on the sidelines for now waiting for an idea and an opportunity. That money is nicely in my Phillip Cash Management Account. Now, what's so awesome about this? Well, this is my bridging account that gives me access to all the above levels, except lvl 11!

The beauty of this account is that while it gives me access to all those different assets, as long as I am undecided with my money, it will automatically park my money in a money market fund the next day. Should I ever need to use that money for any investment, I am able to transact immediately on that day itself. If I need to withdraw money, it takes less than 2 days for the money with be withdrawn.

A money market fund isn't the greatest, I am aware of that too. However, given that the local banks are offering nonsense interest rates, and that an 18 month fixed deposits yield is 0.5%, I think that this PCMA is perfect for me considering how liquid it is and the convenience it offers. With the ability to withdraw my money with no obligations within 2 days, the account projected yield is 0.48%. And of course, since this is an money market fund, the interest rate closes follows that of the banks here. When rates rises, I don't have to worry about trying to catch that yield.

Summary: The Phillip Money Market Fund which has a project yield of 0.48%

Level 4: Investment Grade Bonds
Well, it may be little known, but I have forayed into bonds just recently. You may want to read my posts here and here.

For bonds, I think I have aptly explained my stand in the first link, but let me explain my current approach and reasoning just for the sake of reinforcement. I have decided to go with bond funds as they offer low capital, fast, cheap and easy diversification. Although the prospects of a bond ladder does sound appealing, the capital outlay along with the accompanying work requires far too much work and expertise. I guess that's why I'm paying the expense ratio. For these bonds that I've chosen, their diversification is very broad based, and these funds are actively managed, meaning that managers can use their discretion to avoid any pitfalls in the near future. My current strategy for bonds is to avoid the US and Euro markets and stay on a short duration.

Summary: 
UOB United SGD Fund Class A [1.639]
Templeton Global Bond Fund A mdis SGD-H1 [13.0839]
Schroder ISF Global Corporate Bond [11.9799]

Level 5: Junk Bonds
Again, refer to the links in the above post to read more on my buying process.

I have to admit that for this bond fund, I initially did not know that it was a junk bond fund. Seeing it's credentials and past performance, I must admit that it is really impressive. It is globally diversified, while it still stays in the very safe rating of having a BB average bond ratings.

Summary: 
Templeton Global Total Return Fund A mdis SGD-H1 [12.0237]
Legg Mason WA Global High Yield Fund [1.00]

Level 6: Real Estate Investments
I think many people can attest for the fact that REITs have suddenly become a hot thing to investment in as of the recent years. Yield and property, it's a Singaporean's wet dream. Instead of buying a property to rent out, it's sort of the same thing, but with less capital outlay!

I managed to snag this when it dropped 15% from it's peak in May (see chart). Hopefully, this was a good bargain buy! I will be looking to add in global real estate, and highly likely to cherry pick and purchase individual REITs if their prices tumble even more and my securities account is up!

Summary: Phillip Singapore Real Estate Income Fd A with expected div yield of 4.92% and capital appreciation


Wrap Up
Well, so far that's not too bad, isn't it? I'm up to Level 6 of my own personal Investment Building, learning a lot along the way about each asset class that I'm investing in. I must admit that I am erring on the side of caution. Though I am up 6 levels, I have less than 25% of my capital invested. I may be cautious, but I have time of my side to make sure that I enter and time the market well, though I'm sure that once I ever step in, I will disregard timing from then on.

Money Honey's Investment Building

Now, taking a spin on one of my favourite personal financial bloggers, the DIY Income Investor, I have come up with my version of his Income Pyramid.

I'm calling it, Money Honey's Investment Building.It's an investment building because it's shaped like a building, and we are building our investments. Get the pun? Hur hur. Anyway...

Now, while the Income Pyramid is flat based, the Investment Building is a building. Your investment building may come in many shapes and sizes. I won't say if its right or wrong, everyone can choose their own favourite type of building to suit the amount of resources that they have and the type of risk and style they prefer. My preferred model also happens to be my favourite modern structure in the world, the Empire State Building in New York City.


The Empire State Building (ESB), like my ideal Investment Building has a strong, solid and relatively wide base compared to the rest of the building. The middle section is quite uniform, and when it reaches the top, it tapers off and becomes more skinny.

Now, think of the entire mass of the building as your wealth. The higher it is, the more dangerous and the more risky things get. It's pretty much like the Income Pyramid, except with a lot less emphasis on a very broad base. I think the pyramid is perfect for surviving 4000 years and counting. But a solid building like the ESB works just as well, given that we don't live more than 80 years. Plus, to top it off, you get a fantastic monument at the end of the show! So, let's head on to the levels of the Investment Building.



Level 1: Solid Foundation
The most rock solid foundation to investing is to have no net debt. This doesn't mean that you don't borrow. This means that day to day, month to month, year on year, you don't have debt increasing. It's really quite hard to live on no debt. If you have enough money to pay for a house or car in full, then this is obviously not the website for you. You don't need to invest because you already have, or you just have so much money that you don't need to.

But for us normal folks, this means having the ability to reduce debt as we go into the future. That should be your number 1 priority, cutting off your debt. To put it in an example, if your monthly housing loan costs you $800, make sure that you diligently pay off that $800. If not, that shortfall will have interest incurring on it, making your debt cost even more than it originally was supposed to be. If your debt is reducing as planned, it is easy for you to forecast and understand the capital repayments as well as the interest repayments that you still have left. It creates financial certainty.

Secondly, now interest rates for most long term loans are at historical lows. By paying off any loans in full, you are actively making the choice to sacrifice potential gains, because you would have otherwise invested that money, and earn more than your interest repayments. This is not true all the time, but at the current market conditions, they are! Look at this post by the Monevator, he sums it up quite well.

Basically in short, live within your means. Live expecting to be safely provided for by yourself until you're 70. Take note when I said "by yourself". Only hippies and lazy, dumb people expect the government or social welfare to look after and provide for them. Don't expect others to provide for you. Your own well-being, is simply your own damn problem. Isn't that the way it should be?

If you can achieve this, then let's move on to the next level.

Level 2: Easy Access Savings
I think the title explains it all. This level requires you to set aside some cash in an easily accessible place. Basically, this is emergency money. This is the money that you can withdraw at the drop of a hat to quickly fund an emergency or make extraordinary payments. Definitely NOT for anything that you can account for or see in the short term future. The funds in this level is strictly for emergencies, therefore it must be liquid, accessible and above all, sufficient.

I would strongly advise to keep this level funded with between 3-6 months of normal monthly expenditure. If you're ever in a squeeze, cutting back on your lifestyle will probably help extend this fund by a few months, depending how much you tighten your belt. For the extra cautious, or the people with very low levels of job security / income inflows, you might want to consider even up to a year in this. This is highly subjective and depends on each person on a case to case basis.

Although these funds should be quickly accessible, that doesn't mean that you have to spare interests to get it. There are many savings accounts which offer good rates as long as money remains above a certain level, or if you wire in a certain amount every month. Of course, a simple bank account will really do the trick here.

Risk: Bank insolvency risk. Many governments insure a base amount of deposits of banks that are registered in their country. In Singapore, the Deposit Insurance Scheme (DIS) set up by the Monetary Association of Singapore guarantees up to $50,000 per account in these following banks.

Level 3: Cash Savings Account
So, what is different between level 2 and level 3? Level 3 adds an extra layer of buffering before you have to dip into your investments.

This should be where all excess money goes in, which is after paying off level 1 debt and fully funding level 2. This is where you money should sit in if you have to hold any cash at all. Therefore, you should be looking for reasonable yield, yet flexibility to deploy your money into the higher levels when an opportunity arises.

Being the buffer in between your cash and investments, this level treads a very blur line between level 2 and level 4. However, it is very important to have a clear boundary of what cash you can touch, and what cash you cannot touch, and this is what is the most important distinction between level 2 and level 3.

Risk: Bank insolvency risk, same as level 1. Also, depending on the terms and structure of your cash savings account, you may not receive the agreed upon interest rates if you fail to deposit a certain amount monthly, or if your balance drops below a certain point. Also, if you need to withdraw money within a certain period, you may be penalized for doing so. This is not really a risk, but rather things to note that can affect your yield in this account.

As we go to higher levels, things get riskier. If you can't handle the heat, stay out of the kitchen. In investments, it would be: If you can't risk losing any money, don't make any risky investments.

Level 4: Investment Grade Bonds
It cannot be contested that bonds have much lower volatility compared to equities. Therefore, with the lower risk, you are presented with lower rewards.

Bonds are basically a loan, but from you, to a government or corporation. But I think you can think of it as a fixed deposit account, but tradeable. The other difference is that the owner of the account will get bi-annual "interest payouts", which are the bonds coupons. Basically, at the end of the term of the bond, the "borrower" will repay you back your capital, plus the last bi-annual interest payout. Simple enough, isn't it?

The main question here is, do you invest in individual bonds, or do you engage in a bond fund? Should you choose a fund that is actively managed or follows a benchmark? Should the fund be a mutual fund, or an exchange traded fund? All these questions have good merits, with their cons as well.

However, considering that we are building up our Investment Building with stability of the structure in mind, bonds here are the level that we are going for.

Risk. Interest rate risk. All bonds are subject to interest rate risk. To keep things simple, if interest rates go up from the time you bought your bonds, their value goes down. If interest rates drop, their value goes up. Default risk. Investment grade bonds have a very low chance of default, but it is certainly possible. In such a case, your capital is not guaranteed and you may suffer a substantial loss.

Level 5: Junk (High Yield) Bonds
I would like to use the prefix of Junk compared to High Yield because all too many investors get caught up chasing yield that they forget about the risks involved in investing in these sort of bonds.

Junk bonds have a higher credit spread, which means more yield compared to investment grade bonds. As always, there are risks that come with this added reward. The main risk here is the much higher chances of a default. Junk bonds have very equity-like characteristics, which makes them more volatile than investment grade bonds. The risk/rewards curve never lies. So do keep in mind that if equities tank, there is a large correlation to junk bonds as well, as these bonds are actually tied to these equities. Default rates will also increase in such periods, making them much riskier than investment grade bonds.

However, that being said, bonds are not as volatile as stocks when considering their equity-like propertoes. It must be remembered that bonds are a form of debt, regardless of their packaging. Drawdowns peaked in 2008 at 35% if you were in a bond fund.

If you are holding individual junk bonds and the company issuing these junk bonds goes insolvent, its assets will be seized and liquidated, while bond holders are next in line to collect back their money before equity holders. The recovery rate is about 40%, whereas of course equity holders would not get anything in this case. Not much reprieve I must admit, but it is better than nothing.

Risk. Interest rate risk. All bonds are subject to interest rate risk. To keep things simple, if interest rates go up from the time you bought your bonds, their value goes down. If interest rates drop, their value goes up. Default risk. Investment grade bonds have a very low chance of default, but it is certainly possible. In such a case, your capital is not guaranteed and you may suffer a substantial loss.

Level 6: Real Estate Investments
Many people will say that real estate investments are just a fad, however I beg to contest. I will mostly be talking about Real Estate Investment Trusts (REITs), as opposed to an actual physical real estate. Mainly, physical real estate should be part of your physical assets and not part of your financial stocks. However, REITs can play a part in your investment portfolio.

REITs are basically trust funds which own properties and manages them. Being property owners, they collect rent and facilitate the maintenance of these facilities. They can run across various areas of the property market. One of the key main things about REITs though, is that they are firstly asset-backed, and secondly have a payout ratio to meet. REITs own physical property, that means by owning shares of a REIT, you are in fact a partial owner of whatever properties they own. Secondly, REITs are obliged to payout part of their profits to shareholders to receive a tax benefit, which many of them do.

The property market does suffer ups and downs, just like any other market. However, it has been shown by a study in the UK that the property market does appreciate at almost the same rate as other financial assets. Personally, I believe that only 2 variables are always constantly on the rise, labour costs and property costs.

Next, these REITs all have a Net Asset Value (NAV), which is the sum of the value of all the property that it owns if it goes bankrupt. Being back by physical assets means that the value of the company isn't in goodwill, it's branding or efficiency, which are intangible. Currently in Singapore, there are many REITs that are selling below its NAV. That means as an owner, if you sell off all the property and redistribute it, you will immediately profit, without even accounting for the potential gain of income rental!

However, REITs are equities as well, and as such, they do also suffer from drawdowns, which can turn quite massive. The GFC saw REITs plummet 68%. While this can scare most people, I think the most comforting thought is that you still are a shared owner of actual property. As a shareholder of a REIT, your assets are mostly the property, which will still retain value, as opposed to a normal equity shareholder, who may not be left with much of anything at the end.

Risk: REITs have interest rates risk since their recurring dividends give them a very bond like property, so the same risks applies. REITs are also subject to the fluctuations of the equities market, which is why they can have such large drawdowns. However, REITs still can maintain a portion of their value if things go south, which is more that can be said compared to other equities.

Level 7: Globally Diversified Dividend Equity
Dividend stocks are my personal sweet spot favourite. Just like junk bonds have equity-like properties, dividend stocks have bond-like properties. Equities have a much higher up-side compared to bonds, which also equates to a much higher down-side as well. During the GFC, assets in this class tanked down 67% from it's peak. Though most people don't usually buy equities at it's peak, it is certainly a possibility and investors potentially stand to lose that much.

Compared to equities, dividend paying companies tend to be large, well-run, with reputable and favourable status in this geographical influence. They are more shareholder focused, therefore more prudent with the management and governance. These companies usually lag behind equities in the broad economy. This means that they lose less in a downturn, but also gain less in an upturn.

The main case for these equities is that they pay dividends. Dividends allow for young investors to diversify and fortify other positions and allow better allocation of funds. For older investors, it provides a stable source of income when no further investments are needed. In a sideways market, dividend stocks generate the most returns to an investor, while offering lower volatility, and still being able to participate in the upswing, albeit slightly handicapped.

The risks of dividend equities are in the first paragraph of this level. Although they behave like fixed income investments due to their dividends, they are ultimately still equities and should be treated as such. They are also subject to interest rate risks, but to a much less extent that of bonds or REITs. They are still subject to large swings in prices and whatever else that may affect the equity market.

Level 8: Globally Diversified Equity
Stocks are a tough game to play, everyone knows that. Just as much as you can make a fortune, you can just as easily lose a fortune too. The only free lunch that most pros will tell you about is the benefits of diversification. Through diversification you immediately eliminate the unsystematic risks of holding individual stocks or in narrow sectors. This can be done by buying an entire index, through ETFs or mutual funds.

To add another layer of this cake, it would be to look towards diversifying across geographical boundaries. Not every country is going through the economic cycles at the same point of time. While some countries and regions are going through a boom, others may be going through a bust. This therefore reduces the systematic risk of specific markets, because now you are diversified across many markets.

However, a good point to note is that economies are getting more interlinked and dependent on each other. During the great financial crisis on 2008, the whole world felt the effects, though some economies were much less affected by others. Economic crisis of a global scale can still affect a globally diversified equity portfolio.

Risks: Global issues that affects many countries and economies in a similar fashion. What impacts one country negatively will likely do so to many other countries and this creates a worldwide issue where all markets are affected.

Level 9: Country / Region Diversified Equity
When you think that a certain country or region is going to experience a large boom which would be narrow defined to them, you may want to invest there. The benefit is straightforward, that particular country has some sort of advantage that will allow it to grow faster and be more prosperous compared to other countries.

So again, with risks comes rewards. The largest risk here lies within the unsystematic risk and the lack of geographical diversification. From 1929 to 1932, the US stock market tanked 90%. On top of being affected by the global economy, specific issues regarding internal affairs will also affect the progress of the economy. Think of political or social unrest, which ultimately leads to economic uncertainty. Riots, wars, natural disasters, that sort of thing.

Risks: Unsystematic risk. This risk is dependent on the market. Therefore if the entire market is being influenced by the same factors, the market would be affected similarly as most of the stocks in it. A recession or a major boom are things that can negatively and positively affect the entire market.

Level 10: Individual Securities
Investing in individual securities requires one of the highest level of knowledge and experience. There is exposure to multiple risks, like systematic risks, unsystematic risks and global risks.

There are no benefits of diversification, but that means that is no averaging factor to returns as well. For taking a large amount of risks, you are in a position to earn large returns as well.

Risks: Muppet risk, being used by the pros. There are brokers out there that trade individual stocks for a living for years and years, with insider information and teams of analysts and more resources than your annual paycheck. This is really seriously risky business, so tread carefully.

Level 11: Leveraging
The only form of leveraging that I can condone is property loans. Then again, if you bought property at a high, and the value falls, you stuck in as big of a rut if it was any other investment.

Basically, leveraging is increasing your bets with borrowed money. If you leverage factor is X2, that means you earn 20% for every 10% you would have earned. But, this of course runs the other direction as well, your losses also are magnified.

Leveraging offers many sort of products and vehicles. There are leveraged ETFs, mutual funds and CFDs for individual stocks, indices and forex.

The main issue here is about your downside risk. With leverage, your downside risk increases, by a lot. Leveraging is the only level in the entire investment building where you can lose more than what you put in. For every other level, if the investment goes sour, the amount of recovery decreases every level, as the amount of risks increases as well. That means no matter what happens, you can never OWE anyone money. You just simply lost all of yours. Leveraging does not protect you from this. You may be liable to fork out money to repay people, since you were making investments with borrowed money!

Risk: Very risky, definitely not for people who want to preserve capital. This really should only be on very well researched bets with people with very large risk appetite. Of course, this also should be the smallest percentage of your portfolio, depending on the amount of leveraged used. I personally would not recommend anyone to dabble in this, except for those who are completely fine losing their capital invested in these vehicles. Basically, if you choose to invest in these, be prepared to lose your capital. It's the same rule for gambling. Only gamble what you can afford to lose.

Conclusion
With that, I hope that I've outlined a rather simple framework that clearly states the pros and cons for most asset classes, as well as give you a nice gradual path to step your foot in and explore the world of investing without taking too much risks too quickly.

Remember, the higher you go, the more risks involved, the most you stand to lose and the more knowledge is required to remain successful. I would strongly advise people without any financial background and can't bear a large drawdown to stay away from anything above Level 5. I can assure you, by mastering and being knowledgeable in that, you are already making your money work much harder for you than it is compared to people who are not even aware about the many different pros and cons of assets in the world of investing.

[1] Junk Bonds and Dividend Stocks Drawdown
[2] REITs drawdown
[3] Equities Drawdown

DIY Income Investor's Modified Income Pyramid

I honestly love the guy, and he probably doesn't know how much his advice helps me!

Anyway, so here is his Income Pyramid.

 Now that you've seen it, let's go through it.

Level 1: Solid Foundation
I think this is the most important step of them all. Don't invest money, if you have debt to pay off. Basically, live within your means. Don't even think about investing money if you have any outstanding loans to clear.

Sure, you don't make money paying off debt, but you save money paying off debt.

Why do I say that? Well, I think it's a given that regardless of what rate of returns you are getting on your investments, your debt is accumulating interest faster. So instead of working on becoming richer, let's work on not becoming poorer, aye?

Level 2: Easy Access Savings
Of course I have to agree with him when he says that your first level of income should be easy access savings.

These savings should be in a bank account which you can withdraw and deploy easily in case of any emergency or even just to pay your monthly bills and expenses. The money here shouldn't be locked up for any reason, and should be able to provide you enough buffer to definitely make it through the month, considering expenses.

He recommends 3-6 months of expenditure, which I clearly agree and support. If you don't have this amount of buffer time, in the event that you are really strapped for cash, you would have no choice but to liquidate your holdings. I believe that given enough buffer and you know that something bad is coming up, you would have enough time to make sure that the investments divested are ones that you would have done so anyway, and not a great investments that you should still hold on to. The time gives you the opportunity to make best of a bad situation.

Level 3: Fixed Rate Savings
Fixed Rate savings is an extra layer of quick cash that you can access if you really need to break the bank. The con is of course is you may not get the full rate that you were aiming for, but at least you now have cash!

Level 4: Easy Diversification
I'm going to cut him off here and say that ETFs are great and provide cheap, fast and easy diversification, but, in the context of me in Singapore, it may not be that appropriate.

The main aim and goal here is to pick a vehicle which gives you a cost-effective way to diversify to minimize risk. Rather than just sitting out and on your money, watching inflation erode away the value of your wealth, you would want to ensure that you wealth keep up with the times, and perhaps outperform it.

Given in the Singapore context, I think that the most diversified and simplest way to invest using ETFs would be say a split your portfolio to 50% MSCI World, 10% MSCI EM and 20% Local 1-3 Bonds and 20% Local Bonds.

Level 5: Bond Ladder Ownership
Now, considering that Singapore has no capital gains tax, I contest and doubt this part of the pyramid in this usefulness in Singapore. Perhaps to take a spin on this, it would be to directly own bonds, be it government bonds or corporate bonds. In this way, you're not affected by interest rate risk as long as you hold the bonds til their maturity. This creates confidence but having a definite knowledge of your cash flows. The only issues here is that there is substantial default risk, as well a experience is required to evaluate the bonds. As well as luck and timing!

Level 6: High Yield Dividend Shares
Lastly, we have direct investment into individual shares of companies. This requires the highest level of risk, knowledge and experience to execute correctly. There is no benefit of diversification, so there is plenty of downside risk. However, if done correctly, now only can you stand to benefit from constant handsome dividends, those dividends may increase, along with the share price of the securities.

I have removed Level 7 of his pyramid because I do not entirely agree with it's positioning. I think a bond ladder in Level 5 will do. Level 7 only becomes viable if interest rates have globally gone up very high and we're heading for a downturn soon, then we can use it to lock in long term favourable interest rates.

Anyway, that's all with my long wided rambling post. I'll add my own flavour and opinions, as well as suggestions and reasonings in another upcoming!

MH10

So I've sorted through my shortlist and put in even more stringent criteria compared to the shortlisting. Here are my picks.

ExchangeBB TickerName (BB)Category
STIOCBCOversea-Chinese Banking Corp LtdFinance
ASX50WPL:AUWoodside Petroleum LtdPetrolchemical
ASXMTS:AUMetcash LtdCom Staples
HK386:HKGChina Petroleum & Chemical CorpPetrolchemical
AMXECMPA:NAEurocommercial Properties NVReal Estate
CAC40DG:FPVinci SAConstruction
MDAXHNR1:GRHannover Rueck SEFinance
SMISCMN:VXSwisscom AGTelecomm
FTSE100MRW:LNWM Morrison Supermarkets PLCCom Staples
FTSE100SBRY:LNJ Sainsbury PLCCom Staples

Basically, all these companies have the following criteria, in order of importance:
  • Minimum 1 stock per exchange
  • Maximum 2 stock per exchange
  • Dividend yield over 3%
  • Dividend growth over 5 years
  • Reasonable payout ratio, less than 70% *1 exception
  • P/E ratio is lower than exchange average
  • Earnings growth positive over 5 years *1 exception
  • Price to Book below 2 *1 exception
  • Market cap over 1B
  • Diversify over sectors if possible
Payout ratio is 92.74% for Metcash Ltd
Earnings growth over 5 years is -3.2% for Swisscom AG
Price to Book ratio is 2.0064 for Woodside Petroleum Ltd

Basically, these constraints are because of lack of choice within their own exchanges, as well as the need to diversify across sectors.

Right now, I'm looking at 4.32% dividend yield off these guys, which should grow about 8.5%, along with EPS to grow about 6%. They have a P/E of 10.5, which makes them in terms of P/E, about 65% cheaper on average to their own exchanges.

Honestly, I think this looks great.

I am going to monitor prices as of today, and maybe until the end of the year? If I find that my stock screening criteria to be pretty good, perhaps I will actually invest money into it. Now, I'll just update as and when, to let you know the progress. Since I theoretically cannot buy a lot of these stocks with a small investment, due to some of them have large and lumpy share prices, I'll just give out the percentages. Let's just assume a $1M investment?

Sunday, September 22, 2013

Money Honey 10 Shortlist (MH10)

Hey guys!

So, I was going through the website that helps me find the highest yielding stocks around the world, and I came up with a criteria and spent the last 2 hours of my Sunday doing this. You can imagine the amount of pleasure I had, haha.

Anyway, here is my spreadsheet with all the stocks that I have shortlisted for me to slowly review and remove! Presenting, the MH10 Shortlist!

I've got it by Exchange, Category, Div Growth, Div Yield, Payout Ratio, EPS Growth, P/E, Price to Book, AUM and an interesting Relative P/E. Relative P/E is the P/E ratio of the stock relative to the exchange that it is listed on. I think it is a good indicator to judge if the stock is cheap compared to its home market, as opposed to an absolute number, which is P/E, which helps compare across markets.

My criteria was rather simple.

  1. Dividend Yield > 3%
  2. 5 Year Dividend Growth > 0%
  3. Payout Ratio < 100%
  4. EPS > 0% (I left some which are just slightly negative)
  5. Price to Book > 2 (I left some that are above as well)
Anyway, have a look if you want, I'll probably be trimming down the selection after I have a snack, haha.

Follow Up Plans 22 Sep 2013

I love the blogs that I read. I think that most of them are fantastic, because they aren't trying to sell me anything or push me in any direction. Rather, it is just a platform for them to share information that they receive, and show their thought process of how they dissect the noise and just take away whatever is useful.

I think they have really helped me start with investing.

Anyway, I'd like to share with you this link from The Reformed Broker, it is titled "All-In and All-Out". Basically, it tells you why you'd be silly to just sit on your money all the time, or be 100% invested all the time. I really like it, and its giving me courage to take the next steps forward.

As of now, I am currently reviewing 3 more funds for me to consider. Incidentally, they are all JPMorgan funds.

They are the Emerging Markets Dividends Fund, the Asian Pacific Income Fund and the Global Income Fund.

However, I think it's safe to say that I am not going to invest into the EM fund yet. Firstly, I don't think that now is a good time to go in. With all the turmoil and volatility, I think it's quite a risky bet. Personally, I don't think it is that cheap looking at the historical values and where things are looking to go. I'd like to wait and see if the tapering does NOT cause an outflow out of EMs. Perhaps the next time I look towards this fund is after the October Fed meeting or early next year, just to let the dust settle down.

The Global Income Fund appeals to me because it is global, it has both equity and bonds, and it has a asset allocation approach. The benchmark is 35% MSCI World, 40% Barclays US High Yield and 25% Barclays Global Credit Index. This is a pretty nice diversified and defensive blend, which I'm quite liking. Also, including dividends, the fund has so far produced an annualised return of 12%, which I have to say, is mighty fine. This is considering that it is 50% equities, 40% bonds and 10% unlisted. In the May bond sell off, the fund only lost a respectable 6% as it's maximum drawdown. I think that's quite impressive, considering that is now pretty much recovered all those loses and is still up YTD about 6.6%. Assets are broadly allocated between Global Reits (5.2%), Non US Bonds (5.4%), Preferred Equity (6.6%), Emerging Markets Equity (7.9%), Non Agency Mortgages (9.7%), High Yield (24.7) and Global Equity at (30.2). I really like the exposure into REITs, Preferred Equity, and Mortgages, though Agency backed would be much nicer. So far, based on their asset allocation, I'm quite loving it. However, on the geographical front, things aren't that peachy to me. Given that the US has a 51.6% allocation worries me a bit. The Eurozone has 17.7% and Japan has 3.5%. This actually makes the places that I have been actively trying to reduce exposure to to make up a whooping 72.8%!!! Of course, you can see it that probably only half of that is in equity, but still, I am worried about it. UK, Asia-ex Japan, Aus/NZ only make up a punny 10% of the portfolio, which is less than Emerging Markets at 14.8%. I don't know if I really like this geographical allocation. However, I do know that most of the US allocation is because of the High Yields. Bond duration is not listed, but I would really like to see something under 4, though I think under 7 is more realistic. Then again, it depends on the YTM of the fixed incomes. All these data are missing from the factsheet, so I guess I will have to dive deeper before I make a decision. Dividend yield is estimated at 5.2% a month, very snazzy, I like! *Update: This fund is actually been running since 2008, and it is rated 5 Stars by MS. 22% are investment grade bonds, while 76% are junk bonds. The duration is 3.9 years! The Unlisted assets were Emerging Market Debt and Convertible Bonds. TER is 1.45%. Here's the link to the JPMorgan website to grab stats. Looks pretty to me now!*

Next, he Asian Pacific Income Fund actually did not appeal to me as the Global Income Fund on first glance, but I have taken a double take at it, and I actually do find it rather appealing. It's benchmark is 50% MSCI Asia Pacific ex Japan and 50% JPMorgan Asia Credit Total. A simple and easy set-up, 50/50. I'd like to highlight that this fund has been going on since 2001 in the US, and it has beautifully returned roughly 8.1% annually, and it has outperformed its benchmark on the long term.  They have a nice Morningstar rating of 4 stars, which means they aren't that bad. They breakdown their equity and fixed assets slightly differently. For equities, it is 64.2% and fixed income is at 32.7%, with the rest being liquidity. So now that equity and fixed income is split, we can really see if the equities and bonds are going crazy. As of now, I really like the equity allocation, being heavily overweight in Australia, Singapore and HK. Taiwan and Korea are placed on the backburner. The only cause of concern is that the HK market is cheap, but it is so linked to property places, let's hope if there's a crash based on that, the fund managers can react quickly enough. As for the fixed income part, I think it is rather balanced except for a large overweight in China fixed income. I suppose they are assuming the RMB will appreciate in value and they will make off the currency difference? Anyway, this fund has the facts on all its bonds. It is pretty much split between investment grade and non-investment grade. The duration is 5.2 years, which provides it barely enough cover since its YTM is 5.74%. Of course, the longer the Fed waits to taper and the longer the bonds are held, duration will drop. With a 5.74% YTM and 4.83% dividend yield, the fund is looking to be paying about 5.47% based on previous dividends. Enough though it lost 11.5% in its largest drawdown so far, the fund is still down 7% from that drop. However, that being said, it is still up 2.9% YTD. *TER is 1.9%, which is very high! Anyway, here's to the JPMorgan page*

Of course, Asia is more susceptible to the money outflows, but that being said, it has not recovered like the Global Income Fund. In my head, that to me says cheap, go for it!

So, as of now, I am seriously considering to take in the Asian Pacific Income Fund as a nice, slow step forward to include equities into my portfolio, and this would by default include the Asian Pacific equities which gives high dividends.

I will be cautious before entering the Global Income Fund or the Emerging Markets Dividend Fund, though I must say that if I do decide to increase my exposure in the EMs, I think this fund would very nicely suit my style.

Going for the hedged month distributions allows and forces me to at least eyeball and review my investments every month. Though, I would not like to rebalance, except for every quarter. Anyway, I think I have decided to lay off the EM div and GI fund until I see a much bigger market correction... I don't know, but that's how I feel now.

International Dividends! Money Honey 10

Have you heard of the "Dogs of the DOW" strategy?

It involves buying the top 5/10 (the strategy varies) highest dividend yielders on the DJIA from the bottom 10 stocks with the lowest P/E ratios.

So, after stumbling upon this interesting strategy, I went to do some research on it. Most importantly, I wanted to see if the same rationale would work in other markets, not just the DJIA.

After some stumbling around and googling, I came across this fantastic research paper. It's the real life application and backtesting of this strategy, but with the SX5E. That's the Euro STOXX 50. I just learnt it myself too, don't worry haha.

Apparently, this has been replicated in the UK, Canada, Chile and Norway, though only Canada does seem to be substantial, while the rest does not prove this theory.

I am honestly intrigued by this strategy. Following some of the blogs on my blog roll and reading books, I can honestly say that I am quite sold that stable dividend returning stocks are generally better. There are lots of reasons why I think this, but I'll maybe write about it another time.

Well anyway, how can I put this strategy into context as a Singaporean investor? I think as you might know, I detest the US stock exchange. I think they are crazy, and I doubt I would actively want to invest there unless its at the bottom of a crash. Anyway, their witholding tax makes this dividend strategy a very unpleasant choice as well.

I mentioned the Standard Chartered online equities trading platform before. Well, here's the link anyway. Just check out the markets that they allow access to. (I've removed the US listed since they don't appeal to me). The mains perks of this is No minimum commission, No custodian fees and Low brokerage fees of just 0.25%. Damnit, I could build my own portfolio if I was free enough, haha.

Market Stock Exchange
Australia Australia Stock Exchange (ASX)
Japan Tokyo Stock Exchange (TSE)
Singapore Singapore Stock Exchange (SGX)
Hong Kong Hong Kong Stock Exchange (SEHK)
France NYSE EN Paris (PAR)
Switzerland SIX Swiss Exchange (SWX)
SIX Swiss Exchange (VTX)
Germany Deutsche Boerse (XETRA)
UK London Stock Exchange (LSE SETS)
Netherlands NYSE EN Amsterdam (AMS)


Anyway, that's a whole lot of markets that I'll have access to! Honestly, what excites me is the possibility to instead of being restricted to just a few stocks in 1 exchange, I am now able to trawl through all these exchanges and look for them!

I think that what I'd do is to go to this website (a lovely Dutch website, no less) and hunt down and make a shortlist of stocks across these exchanges.

Surely just 5 is not good enough. I'm thinking along the lines of 10 maybe? 1 stock each from ASX, SGX, SEHK, PAR, SWX, XETRA, LSE and AMS, along with the next 2 best contenders. How does that sound? Haha! Honestly, you know I love diversification, I'd do 20! But 10 is a manageable lot I think. I think the best screen would be based on:

1) Dividend yield (targetting only 4% and above)
2) Dividend growth (annual growth)
3) Payout ratio (less than 100%, probably between 40-80%)
4) Non-financials
5) Low P/E ratio (below 10)
6) Low Price to Book ratio (below 1.5)
7) Large market cap
8) Constant dividend flows
*Perhaps instead of arbituary P/E ratios, I will look at P/E ratios relative to it's on exchange average.

My plan is that based on the criteria that I have set above, I will make a shortlist of 2 stocks from every exchange that meets the above criteria, and then monitor them for a month until T-day. Held stocks will then sold and the top 10 list of the new stocks will be bought.

As of now, I am looking to begin some backtesting (if I figure out if its even possible) and perhaps even fund this strategy after the stock market crash! From the study, this strategy was the worse in a falling market.

Additionally, before the T-date, I may review the current holdings. If they still seem rather reasonable in terms of a NORMAL stock valuation, I may then just decide to hold on it and keep it!

I think having a rule of when to realize profits is a fantastic rule that the DIY Income Investor advocates. If I recall, he will take profits if he has already made 5 years worth of expected returns from the product. I think that is a fantastic idea, and I might copy to do the same. Now the question poses, how do I calculate the expected returns of a specific product? Heck, I'll just link his post and quote him.

Here's the decision process (for what it's worth):
  • the increase in capital value is higher than my 'trigger' of five times current annual income (in other words, five years' income is 'in the bag'.
  • the yield has fallen to around 4.5%: not bad but not particularly good either
  • I can't see anything much that has changed, so this probably means that I'm missing something
  • for once, I don't have much cash available at the moment in case an interesting opportunity pops up
  • and, finally, that price curve looks like it's going down again.

I think he has great criterias for deciding when to "harvest". Anyway, I was so excited about this strategy, just thought I'd pen it down before I forget about it.

To summarize:
  1. Identify 2 of the best dividend stocks from the 8 various exchanges
  2. Ensure that they meet the criteria set out above
  3. Create a shortlist of the 16 stocks and monitor them for a month while understanding their business
  4. On T-day, pick the 10 best contenders and fund each of them in equal weights
  5. Name it the Money Honey Select 10 (MH10 for short)
  6. "Harvest" if criteria is met
  7. "Sell" any individual stock that posts a -20% from date of purchase
  8. Repurchase if the stock bounces back up to the sell price
  9. Don't meddle with the stocks unless there is a crisis looming
  10. Decide which stocks to continue to keep outside of this portfolio as a longer term investment 
  11. Wash, rinse, repeat
I mean, they are all blue-chips in their own countries. You would buy blue chips in your own countries, so why not others? Haha!

Saturday, September 21, 2013

Blog Revamp

Heya guys, noticed anything new? I like it how I'm pretending that there are actual people reading this blog when I know I'm just talking to myself, haha!

Anyway, the blog revamp is for myself, so don't worry, not doing any crazy stuff.

I've put some quick links on my sidebar so I can access my own protected Google Drive spreadsheets. It's going to save me time and clicks!

Also, there's a nice little blog roll that I personally click through every day, sometimes a few times a day. I must say, I am in love in reading Zero Hedge. I think it's just fate that the author is writing under the name of Tyler Durden. Read with caution, the posts and comments make you want to sell off all your investments and store physical gold under your bed.

I do realize that my blog so far is just a big big screen of text. I'm currently (actually I'm not) in the works of organizing my own spreadsheets, so maybe I can do a monthly update of my investments and key stats that I look at myself.

Also, I'll be looking towards slowly adding in reputable market outlooks as links on the sidebar as well. I am definitely working towards a framework of helping me gauge market conditions and help me with my asset allocations based on the prevailing market conditions.

So that's all folks, I hope to make this my cosy little homepage! And maybe convince 1 or 2 of you to drop in every once in a while for a read.

Thursday, September 19, 2013

Update for 19 Sep 2013


Wow, the last's night FOMC announcement was crazy. I totally called it though, and I had open positions for AUD/USD long and USD/JPY short. It's a shame that I closed out early and only locked in $500 of profits. It's a bigger shame (and a stupid rookie mistake) that I started to chase the run up on the AUD/USD without waiting for a good entry position. A $400 dollar mistake that I WILL NOT make again.

At the moment, I'm up $800 using 10% of my investable money in my Las Vegas account. A very decent return so far this month. If I can keep it up, I can actually avoid being in the market and still make a nice 6% at the year of the year.

Even with the general positive outlook of the market, I still remain very skeptical. I think I read too much news on ZH and I'm a pessimist. I need to keep reminding myself NOT to step into the equities market until the US blows out. Statistically, it has to happen soon. I have time on my side, I can wait for it.

With the yields dropping and forecasted to stay low in the at least the forthcoming weeks, I have finally decided to go into some short duration bonds. Here's their info:

Templeton Global Total Return Fund A (mdis) SGD - H1
TER: 1.4%
Sales Charge: 0.75%
Duration: 2.35
YTM: 5.18

Templeton Global Bond Fund A (mdis) SGD - H1
TER: 1.4%
Sales Charge: 0.75%
Duration: 1.53
YTM: 3.96

UOB United SGD Fund CL A
TER: 0.6%
Sales Charge: 0%
Duration: 1.7
YTM: 3.5

So their weighted average duration is 1.86 years and their YTM is 4.21%, which I don't think is that shabby considering that they are short term bond funds.

Now, let me explain my rationale to you (and also to myself) about why I am deciding to go into these now, and why these particular funds.

Firstly, bonds. Bonds have been doing badly this year because rates have been taking a hike. With the Fed announcement, we saw yields plummet, and I think it's quite likely for for 10 year rates to be bumped down to sub 2.5 yields and stay there until the next scare (mid 2014?).

Bonds have a maximum drawdown with I am more comfortable with. For the above bonds, their historical max drawdowns are 11.3 / 11.3 / 3.4. Those aren't too bad drawdowns, considering that bonds don't usually drawdown, plus I don't foresee any near term situations that are going to case a significant drawdown. Anyway, to be safe, for both the Templeton funds, they are already 6% drawn down, which means realistically they can only draw down another 5% max, and that is a very suitable considering that I'm going for 4.57% yield from them each. It's about 1:1 risk reward, but with much more probability of upside, haha.

Bond funds VS. Bond ETFs. Though I like active management, I have come to the conclusion that bond funds are more suitable and better in the long run. Funds are not subject to short selling or speculation, short term funds are have more long-term oriented investors who will not cause a mad outflow (I hope I would be the one causing this problem, if I was running), prevented in low mark-to-market devaluations to finance redeemers. Active funds allows for better diversification, purposely sidestepping possible grey areas and focusing on what they know, rather than having blanket uncertainty. Of course, bond funds also have smaller initial capital outlay, which is of course a wonderful thing for beginner investors like me.

Now, why these particular 3 funds?

Firsty, all 3 funds are in the low duration category of less than 3 years. Although the TR fund has a slightly higher duration, I think the fact that it has a higher YTM gives that risk / reward.

All these funds are well geographically diversified. I personally do not like the USD and the EUR, so even though that this is a SGD hedged fund, I would like to limit my exposure to those areas. As such, an equal weight in these 3 funds allows me to only have just 5% exposure to the USD! For the EUR exposure, I have not delved deep into the financial statements, but it is definitely under 20%. I wouldn't be surprised that it would be under 10%, or even lower! I will try to provide an update about this.

Being actively managed, these 3 funds have quite loose restrictions, and I am quite a fan of tactical allocation. If you know a storm is looming somewhere, you can yank your stuff out and look somewhere else for opportunities.

The freedom to move around and look for the best returns according to the climate makes me believe that these 3 funds will be well suited for the weird ass environment that we have playing out in front of us.

Lastly, they all have a low sales charge, and 2 of them have monthly distributions. In line with my long term goals on passively earning income and being able to use value averaging to maximize investments in the long run!

Personally, I would love to get into the high yield bond market. However, my main gripe is that the duration compared to YTM are not very attractive to me, with all of them not being able to survive more than a 1.5% interest rate hike, which of course, happened this year when rates spiked 86%. They are also a lot less geographically diverse, with lots of them concentrated in the US. Those that are more spread out also have less yield, which really hurts their ability to shield them for interest rates.

Tomorrow or the day after I'll be updating the full details of my bond purchases once they are updated in my POEMs account. Heh, the idea of passive income gets me happy!

Thursday, September 12, 2013

My Current Plan 12 Sep 2013

Given that the market is looking crazy to me, I am really at a lost of what to invest my money in. I'll just spell out my plans in words out here, so when I read it, I'll know if I'm crazy or not.

DBS
This is my main TX account. All monies that come and go, goes through here. This is also the only entry and exit point of external sources. It is my current account, as well as the account that my salary (hur hur) gets dumped into.

DBS Vickers
This is really just going to be for IPOs, haha. Thanks for helping me open my CDP account DBS!

Phillip
Now, I really love the excess cash management that they have going on in Phillips. This is going to be of course, my main unit trust account. Funds here go on sale at 0.75%, with some on promotions at lower charges, some even with no charges! I can see that in the near future, almost all my money will be here, either cash idling and earning in the MMF, or working in funds.

Most likely my first few purchases are going to be into short term bond funds. I am currently in the midst of analyzing the bond fund that I've shortlisted. The list is really quite short, but I want to make sure that I totally understand my investments.

CMC Markets
Viva Las Vegas! Okay, truth be told, this is really like my antsy, gambling account. I really won't be too crazy or aggressive with my money here, but it's just something for me to do so that I can keep myself from meddling (too much) with my portfolio that I'd eventually build. My portfolio will have allocations for asset classes across various market scenarios, along with indicators to ensure that I am not being too itchy or rash, or even complacent in my portfolio rebalancing. I would like to think of it as being tactical, but operating within a clear framework with definite boundaries. This CFD account is really just for me to make money on the sidelines.

Unless the market is crashing, or some crazy shit is happening, I pledge to ensure that this account never exceeds more than 10% of my investable money. I actually would like to see myself ensure that I'm not gambling with anything more than 5%, with clear rules as to when I have to stop, when I will top up the account, cooling off period, when will I transfer out money, what are situations that call for the increase to 10%, what kind of crazy emergency situations will call for me to plow in even more moolah to take advantage of situations. I'm slowly think this through later.

SCB
Now, I never knew until just the other day that SCB has access to so many overseas stock exchanges! Honestly, this makes the appeal of ETFs a lot more attractive now, however it also does mean that I am open to also invest into individual stocks on these exchanges as well! However, as mentioned before, I'm avoiding the US markets at all costs. What appeals to me are ETFs denominated or hedged in CHF, as well as big big name dividend stocks that might go on discount when the markets there are doing badly!

-----------------------------------------------------------------------------------------------------------------

Currently, I'm only actively investing (gambling) with CMC at the moment. I've already made an impressive 140% return on my capital from when I started, so I'm feeling mighty gutsy sometimes, but I always try to make sure I'm not doing anything stupid. Stop losses for free! I'm waiting for the Fed announcement before I make my bond moves, because I hope that the announcement either a) spikes interest rates globally or b) crashes the stock market. If the stock market really does go up from the announcement, it just means that Humpty Dumpty is going to have an even greater fall the next time!

In situation a), I'll just wait for the dust to settle and the outlook for the future becomes more clear. But as long as I think I've got a clear grasp and understanding of interest rates of the future to come, I am quite sure that I will be investing a fair bit into some of my shorlisted bond funds.

In situation b), I'll be transferring rapidly all my spare cash that I have in my DBS interim account into my CMC account, and shorting hallelujah! By my count, every 100 points the S&P drops, I'm in a position to make $30k! That's a 6% drop. That's not even a correction, which is 10%. If the bear market really ensues and leads to massive panic (which I am sure it will), we might be looking at a drop of 20% within mere days, and an even more intense drop compared to the last crisis (maybe 60% :O)

Honestly, if that pans out, I'll be able to put a down payment on a luxury condo. I won't be able to afford the monthly installments yet though, so I'd have to wait until the ripple effects of the crashed US housing market and their stock markets hits us here in Singapore. Honestly, bursting their bubble could nicely lead us to burst the bubble that we have now and finally bring about a small bit of income distribution here on our little island.

Is it bad that I'm hoping for a global recession so that I can make money on the short, then pick up bargains on it's way back to recovery?

My ETF Gripes

Don't get me wrong, I love all the pros about ETFs. Passive investing statistically is proven to beat most managers over the long run. I don't doubt that assertion, and I would be rather content with getting the returns of the index. I don't have the urge to outperfom, because that is where all the risks are located at as well. Following the advice of Graham, I am really rather satisfied to just get average returns.

So, with all the proponents of ETFs out there, I'd thought I'd share why in my case, it is better for me not to go with ETFs.

Firstly, the ETF universe in Singapore is rather small and limited. The ETFs that we have listed on SGX is a pretty common face. Countries and regions, some bonds here and there. Since we are in Asia, the ETFs pretty much just sits still, unless it tracks something regionally. There is a lack of diversity and choices, and this really impedes construction. I think one of the main types of ETFs lacking are distributing ETFs. Almost all of them are capitalizing. Not that it's bad, but I think it would be nice if people had a choice between having their dividends reinvested, or being able to accumulate and plow them into other idea.

Secondly, currency risk. I mentioned this earlier in my last post. Honestly, tons of currencies are losing out to the SGD dollar. Maybe it's our fault that it is strong, but the case still stands. Many of the main currencies out there, USD, EUR, GBP, JPY, AUD have really gotten a beating. Over the long run, the currency loss would be so large, it would really defeat the purpose of investing overseas, unless there was really a lack of yield. I have recently been researching into overseas exchanges, and the LSE and DB (Frankfurt) has really caught my eye with their range of ETFs listed. However, like I also mentioned in the previous post, I have really lost faith in their currency to survive in the long run. Both areas seem to me like the only way out of their debt is hyperinflation. So then, what seems like a good bet? My research has shown that they are they Norwegian NKR, the Chilean Peso and the New Zealand NZD. Sadly to say, they don't really have suitable investable stock exchanges, so I went and looked further. I'm glad to report that I have found the Swiss CHF to seem to be on reasonable standing! So, currently as of now, I am anticipating opening up an account with SCB to be able to trade in CHF on the Swiss SIX! However, I will really wait and see. This would definitely be an avenue to explore, especially if I am unable to truly find a mix of assets to suit my portfolio needs in Singapore.

Thirdly, liquidity risk. The SGX is actually pretty good in terms of the bid-ask spread that market makers are providing. It really is quite competitive, especially the ETFs by DB. Their bid-ask spread gets as low as 0.2% and averages about 0.6% I think! That is really great. Comparing to DB or SIX, the spread is really quite competitive. However, there is a problem that I need more elaboration on. The MM offer a bid / ask price, accompanied of course with the volume at which they are willing to sell / buy. The volume for some of the ETFs are quite large, which is great, especially if I'm considering shifting from 1 asset to another asset. However, for some of the ETFs, the volume is barely enough for 1 person to make an optimum trade, or sometimes not even enough for an optimized full trade! Honestly, I really don't know how it works, perhaps the MM will see the shortfall in the volume and fill the offer, but perhaps they won't, and the latter is what scares me. I would really feel much safer if they had larger volumes to boot, but I also understand why they don't.

Lastly, the capital outlay. For ETFs to be optimally purchased, the bid-ask spread has to be low as well as the trading commission. For some of the ETFs like Lyxor, the bid-ask spread is in the region of 1.4%? Along with the commission, which if the optimal number is bought, will add in at least 0.28%, upwards to 0.6% if on the DB and not on LSE or SGX. So with the cheapest shares coming in at a 0.5% haircut off purchases over SGD9k, I find it really hard to stick that much money into 1 particular asset. And mind you, this can go up to as high as probably 1.5% on some of the more illiquid ETFs as the MMs charge more.

The capital outlay seriously prevents investors from makes more accurate and fine-tuned purchases to construct their portfolio, and more importantly, rebalancing! SGX announced that they want to drop the lots for shares. Honestly, that doesn't do anything, unless its accompanied by a drop in commission charges.

Of course compared to funds, you can get anything between 0% sales charge to 0.75% on POEMs. The initial starting capital for most funds is just a meager $1000. However, natural to funds, they have higher TER because they are actively managed. However, there are a spattering of funds with tiny expenses, even smaller than ETFs on SGX. Of course, most of them are more expensive, with some almost double the TER. The largest that I've actually considered is sporting a TER of 2.05%. That's a real drag on returns, unless they really are superbly, consistent benchmark outperformers, I'm really not going to seriously consider anything over the (personally perceived) average of 1.8%, which is already in the high range.

 Well, anywhere, there you go. To sum up, I hope you've enjoyed this disgusting wall of text, my essay on why ETFs is just not feasible for the starting out investor. That is unless you're fine with the:

1) limited options (put your secondary school permutations and combinations to good use!

2) currency risks

3) liquidity risks (okay, maybe this isn't really an issue, but I do think it could be better)

4) huge outlay of capital, or paying large commission charges (it's either one or the other!)

With that said, I am not going to abandon how I would use ETFs as an investment vehicle. Like I said, I really like the idea of passive index investing. Perhaps when my available investment capital grows much larger, and I already have in place a pretty rudimentary portfolio, that I can look towards ETFs as a serious permanent mainstay in my portfolio.

But now when capital in limited and the markets are crazy, I think I'd stick to funds for now.

Strategy Update 12 Sep 2013

Hey there peeps,

After lots of thinking and lots of reading, combined with lots of time wasted surfing the internet, I have to say that honestly I'm pretty confused by a lot of things. I'm just gonna vomit everything that is on my mind out here right now. It's not gonna be pretty or coherent, but it's all I got.

Firstly, reading ZH and a few other alternative news is making me feel awfully bearish. Whenever I read market outlooks posted by banks or funds, I see a lot of them being very optimistic about certain areas, rather than overall pessimistic about everything.

My personal feeling on the looks of everything is as follows:
The US is "growing" based on Fed QE, it isn't really improving or progressing. Socially, they are in a rut, there's a huge income gap, and large disincentives to work. Politically, they are divided. The Democrats and Republicans are fighting out silly things and only looking out for #1. I think their debt issue is a huge one that has to be logically figured out soon. Idk about you guys, but I see that the US has 2 major problems. First, they economy is running on lies and it's on the verge of a meltdown, which is gonna bring down everyone else. Secondly, their debt issue becomes a global issue, because it destablises a ton of currencies.

Personally, I've totally avoided the US markets based on the fact that they have a silly dividend withholding policy, plus over the last 10 years, their currency has pretty much lost 30% against the SGD. Hypothetically, if I had invested in the US over the last 10 years, whatever gains I had would take a 30% haircut. Not to mention the capital as well. A lot of currencies are looking that way. I'll elaborate more later.

Europe seems to be in a perpetual sideway motion. The stronger countries seem to be digging themselves out, while the weaker ones are just holding them down by the ankles. Their currency problem is pretty much the same problem as the US, just a bit better. I don't foresee large growth from them, just a rather sluggish general upward trend, then is linked very thinly to the US as well. I think if 1 tanks, both tanks.

Emerging Markets honestly looks great to me. Lots of people have said that they are attractive at the prices that they are at now, but a lot of proof has also gone to show that the reason for their massive growth has been the inflows from other countries towards their development. QE tapering has hit the EM's hard, and I'm really just waiting for the dust to settle down before I decide to dip my toes in.

Well, that's all said and done about geography, so now what? Where do we go from here?

After lots of research and reading, I've concluded that as attractive as passive investing looks to me, I really don't have the capital to diversify adequately. Without a large capital, I am unable to purchase ETFs at an optimal price, plus, I am unable to breakdown my allocations more and micromanage my portfolio. An ETF portfolio construction of just 3 ETFs (World, EM and Bonds) would take up between 18-27k! Plus, it would be equally weighted, and extremely hard to rebalance. I am honestly not too excited about that prospect of being so lumpy. On the other hand, funds have a relatively much lower start up rate, and it is much more manageable and easy to rebalance, with more accuracy as well.

As an ideal portfolio for the future, my portfolio would consist of:
1) Actively managed bond funds
2) Equity distinctively split between US, Europe, Asia ex Japan and EMs
3) Global dividend stocks
4) Global real estate between US, UK, Eurozone, Asia ex Japan and EMs

I am rather fond of the portfolio strategy of Core and Satellites, however, I would like to create a matrix tables which I can easily follow. It would have different scenarios like interest rates, inflation, asset bubbles, recessions and stuff like that. If I can readily have scenario planning like that, I would feel much more prepared and safer knowing that regardless of whatever market situation I'm facing, I would be able to stay largely invested and still make returns.