Portfolio Update June 2010

2010 Year to date (YTD) Return Portfolio -4.61% Equity(Include Funds)  -3.84% Direct Shareholding -2.62% Dividend/Coupon/Interest received 2010 YTD $91,676 Absolute Return Since Nov 2007 Portfolio -1.96% Equity(Include Funds) 12.70% Direct shareholding 13.15%

Another month of uncertainty and zero returns. My performance have been dismal as I have basically not earned anything (after taking dividends into account) after 3 years in the market.

The purpose of tracking your returns is to see how you fare against the benchmark. In this case, if we benchmark to the indices(mine is a weighted composite of HSI, STI, ASX, DOW), I might have outperformed them relatively (like almost all fund managers who tell you they outperform the market). However, investors should go for absolute returns, not relative returns. That is we compare our returns to what you would have gotten if you had put your money into almost risk-free investments like Deposits and govt/investment grade bonds.  On that count, I've failed thus far with a portfolio return of -1.96%.

Portfolio Update January 2009

Return YTD : -12.41%

I have put some money to work in equities and corporate convertible bonds. Will be putting some more over the next 2 months (maybe 8%) buying up bonds and equities.

To Diversify or Not?

Image by Getty Images via Daylife I have been emphasizing the need to diversify your investments and not to concentrate most of it on just one single investment.

Yes, there will be investors who quote wisdom from warrent buffett or other stock gurus on the merits of concentrated investment and knowing your investment real well. That diversification is actually an excuse for ignorance.

But how many of these so called amateur investors think they are really in the class of the gurus? Unless they have proven themselves using a diversified portfolio that they have a knack for picking good companies (in which case, the overall stock portfolio would rise in value as well), they should not attempt to do concentrated investment.

Also, there have been numerous studies by private banks that a lot of entrepreneurs and CEOs have a bulk of their wealth tied to the fortunes of their companies (in the form of shares & options). As can be seen during the past few crisis, a concentrated holding (even for CEOs and chairman who knows their company and industry inside out) could not prevent the erosion of their wealth. In some cases, the company going bust (some internet companies, some banks) have allowed their employees to go from millionaires to zero-aire.

So, before you start having this fantasy that you are in the league of the investment gurus, please validate that statement first. Are you in that league yet?

For myself, I admit I'm not in the league of the gurus and to know I am not and to implement a safer risk-managed investment strategy will lead me to multiply my investment portfolio slowly but steadily.

Rise of ETFs in Singapore

I've been seeing more and more mass media articles educating consumers about the merits of passive investing using index ETFs with low expense ratio and the futility of choosing mutual funds that can outperform the indexes.

This is good as consumers would have better alternatives to most mutual funds that underperformed the market with outrageous expense ratio. When it comes to investing, the lower your expenses, the better your return in the long run.

However, ETF selection is critical as ETFs that lack liquidity will affect your bid/ask spread (for short-term trading). With the lack of liquidity, the ETF provider might shut down that particular ETF and return your money based on the last NAV for the cut-off date.

Interestingly, Providend was in the news today for creating 3 portfolios comprising of index ETFs which lowers the expense ratio to around 0.5% per annum. Providend will then charge clients 1% of AUM (Asset Under Management). So, the clients expense ratio is around 1.5% per annum. This is equivalent to a mutual fund annual expense, just that Providend have assumed the role of the fund manager. This should be as low an expense as you can get for ETF investing unless you are doing it yourself thru' your own trading platform. If you are a DIY person and you know your investments, you can buy ETFs thru Philips and save on the annual expenses.

Providend is a company I admired for their story of bringing value to their customers. I subscribed to their belief of lowering expenses for their customers and not take anything more than what you are supposed to recieve as fair compensation.



----Ranting----
A few years back, when I was selecting institutions to hold my investments, I had actually tried to arrange for a discussion with Providend. However, I was put off by the condescending tone of the "gatekeeper" and the way she tried to screen prospect on the phone. So, I did not arrange for a discussion. When I told my sister about my experience, my sister also commented that she and her husband was not too pleased with their experience with Providend as well. Maybe this is something that Providend should improve on.

UBS, Credit Suisse, DBS, Citi, Standard Chartered, UOB were all more welcoming. They do not screen their prospects on the phone. They welcome you for a discussion and from there, try to understand your financial situation and how they can help you. I guess what the gatekeeper must understsand is this... If someone dares to call your company for service, you can expect that they will probably be able to afford your service.

Don't depend on a retail banker or insurance advisor! Look For A Wealth Manager!

Have you been approached by financial advisor/planner who trigger your emotional button like if you care for your family, then you should buy a whole slew of insurance related products (whole life, investment-linked, endowment) to have a comfortable retirement. Yes, someone is retiring comfortably, and I bet the person is most probably not you.

Have you ever walked into a bank with the personal banker selling you products (8% coupon payout- no risk! capital protected) that are on promotion with gifts? Did they even bother to find out what investments you have, your risk profile, time horizon? Have you asked them whether they are personally invested in these type of products or are they just following the sales script and promoting all the goodness of the products? Have you ever asked them do they need to meet a sales quota?

Ok, I may be generalizing here, but you get the idea.

When I first started looking for wealth management solutions, I turn to the private banks as they have always been the first choice for people to entrust their money with. From there, I begun to see the difference in the way they do wealth management. It is a process that is both systematic and holistic. I'm not saying that private wealth management is the holy grail but at least there is a system in place that will make it easier for you to build your wealth upon.

Wealth management is a long-life commitment and it is crucial that you find the right wealth management firm or partner for your wealth journey.


The figure was taken from a ML/CapGem Wealth Report and I found it quite reflective of the spectrum of wealth management service available.

As you can see at the rightmost spectrum, there is no wealth management solution presented and the advisory service is typically product-driven solution and transactional. I would classify most of the personal bankers and insurance agents in this group as they typically sells products and try to convince you that the product meets your needs. If you show interest in the products, they will give you a risk-profile form and ask you to fill in or vice versa. They will then give you the product. They are typically remunerated based on commission from the products or they have sales quota to meet, thus, they have to sell something to someone every day.

At the left end of the spectrum, you see the wealth management service is more advice-oriented and client-driven. It is commonly fee-based approach where you will pay a certain percentage (usually not more than 1%) for assets under management (AUM). But the bank will still earn any product sales charges and trailer fees it is entitled to and usually, it is a maximum of 2% and no more. Because they are already incentivize by the fee-based approach, they will be more interested in retaining your AUM and giving you good advice for your money, unlike the product-driven approach where commission is how the sale staff earns. The solution will be more holistic with the proper asset allocation and it will be based on your objective, timeframe and risk profile.

To get on the left most spectrum, you have two options:-
1) the private bank as they can spend more time with a client since the amount invested or managed is substantial enough to warrant more attention.
2) an independent wealth management firm (like the one I'm working for right now) who can offer similar wealth management solution to people who demand more from their wealth manager.

Starting Your Journey

Investing is serious business. So run it like a company, no matter how small the size of your fund.

Assumed the role of the CEO of your company, define your vision, plan your strategy and execute the plan. Hopefully, you will steer your company from a mom-and-pop shop to a SME and finally to a listed company.

As a CEO, you need to find your funding by selling your vision and plan to your prospective shareholders. So, who are your shareholders? Your family is a good start. Now, what should be in the plan?

1) Shareholders and Exit Strategy
Draft out an agreement to indicate the share of the fund allocated to each member and the redemption strategy. The easiest and most direct is by the amount of money contributed into the company and withdrawal will need to be a majority consensus. This reduces conflict as the shareholders are taking a risk putting money into your company and should be rewarded for it on a pro-rated basis.

2) Fund's Vision and objective
Share with your shareholders the wealth management plan. Your vision might be to have every shareholder become a millionaire with a final fund size of $XX million. Your strategy might be to adopt Modern Portfolio Theory approach with an investment time horizon of X years with a targetted return on investment of X% and a withdrawal strategy of 4% annually. Tell them the likely investment portfolio composition as well to draw out any concerns. Address the risk tolerance of each shareholder and moderate to an acceptable risk level so you can refine your portfolio.

3) Communication Strategy
Define how you will want to communicate the company's performance to your shareholders. Would it be monthly, quarterly or yearly? What should be included in the report. For a start, a half-yearly report is good as you will not be rushed into making financial investment just to show some results.

4) Staffing
Your company needs key personnel to run and most probably, you will need the CFO (Chief Financial Officer), CIO (Chief Investment Officer). Usually, it will be you acting in all the 3 roles or you could have outsource the CIO to someone else (Eg, financial advisor, banker). The CIO usually gives you advice and update on new investment opportunities. The CEO will need to work with the shareholders to decide whether to accept the investment opportunity. The CFO will need to effect the funds for the investment. Initially, decision making might include you making presentation to your shareholders to tell them the rationale for recommending an investment. This will force you to be accountable to your shareholders and indirectly, you will put more due diligence into checking out advice from your CIO.

The advantages of running your investment portfolio this way are:-
- More investment options will be available as you have more fund at your disposal. You might have read that Hedge Fund reduce the total violatility of your portfolio and it requires at least $30,000 for entry. If you have only $50,000, just investing in a hedge fund will skew your portfolio towards the hedge fund and leave little for your other investments. This will affect your total investment returns as your hedge fund occupies a large percentage of your fund. Or you could buy bonds to earn a stable income which is better than the deposit rates you get from local banks. Even an investment property is not out of the question, though it's advisable to setup a company if you are investing on behalf of your family. This is what I am doing for property investment.

- A consolidated portfolio with a significant fund size will mean your trusted CIO (financial advisor/banker) will develop a more significant relationship with you. In business, a company will do its best to service its best customers as it is afraid of losing significant revenue. Likewise, if you have a significant fund size, your CIO will be more interested in developing a relationship with you instead of a one-off transaction. They will more likely be trying their best to retain your assets under their management. Thus, they will not be so stupid to give you lemons that will make you move your assets out of their care.

- You will enjoy bargaining power in fees. Mutual funds have investment amount brackets and you can negotiate for it. Your time deposits in banks have amount ranges with tier interest, you can enjoy higher rates.

- Constant communication of the progress will enable all shareholders to meet frequently to own the investment decisions. It might also foster better family relationships since there's frequent get-togethers with your family.

- Maybe your siblings/parents are not as knowledgeable as you and they might have bought investments that are not suitable for them? Helping your parents plan for their retirement? Helping yourself build a better future?

Rule 3 - What and when to buy

Image via WikipediaWhen you want to begin to invest, you must first be honest with yourself and do a risk profile test. Usually, the risk profiling will be a series of questions to illicit your degree of risk aversion, investment timeframe(horizon) and goals. However, that is only a generic question and is meant to get you started in a generic big picture portfolio allocation. For example, if you are a conservative investor with an intention to take out your investment in 10 years time to for your retirement, then a big picture portfolio allocation might be a 50% bond, 50% equities asset allocation.

From there, you need to further refine your investment outcome for your individual investments within the asset classes of bonds and equities.

This is akin to what you would do every year with your supervisor. He/She will sit down with you and ask you to set your goals which must be :-

• Specific - Identify why you need this investment and what you intend to get out of this investment. Is it a theme you believe in? Or is this meant to be a core investment in your portfolio? Is it for capital preservation or is it for capital appreciation?
  
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• Measurable - You need to have a benchmark to measure the performance of your investment. If not, you will never know whether your investment is performing as claimed. For example, if you are invested in an unit trust/mutual fund that is targeted at US Market and the fund is proclaiming a 20% annualised return. You need to get an appropriate index like the S&P500 index and compared against it. If S&P500 returns 10% Year to date(YTD) and your investment is returning only 7% after fees, you might want to re-evaluate your investment decision.
  
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• Attainable & Realistic - If you expect a very high return on your investment but your risk profile and investment horizon indicates otherwise, you might want to reconsider whether it is really realistic to demand that type of return. Set realistic & attainable goals for your investment and you will not be forced to make speculative bets to achieve your desired returns. You will be more motivated when you achieve your target and you then set new stretch targets.
  
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• Timely - Or rather the time horizon (timeframe). Your timeframe will influence your investment strategy. A short 1 year timeframe might meant your value liquidity for a forseeable future needs one year from now. Or the investment might be meant as a theme you believe will do well for this one year.
  

Once you know what you want, you will find it easier to identify investments that fit your criteria.

Now that you've found what investment to buy, how do you determine whether you should buy it and when you should buy it?

For all investments, this is a must do for me. I consider the macro outlook, risk reward ratio and then consider 4 scenarios for every investment. The four scenarios are 1) Up a lot, 2) Up a little, 3) Down a little and 4) Down a lot. Usually, I will consider it worthwhile to buy if it's not scenario 4 and the risk reward ratio is adequate for the risk I am taking. Kenneth Fisher's The Only Three Questions That Count is a good read.

For equities, I will further used fundamental analysis to determine whether an investment is of good value. I will go through the checklist in this book called "The New Buffettology" which tries to explain how Warren Buffet rationalise his investment decision.

When to buy? I will usually use simple technical analysis for this. I believe in Trend and you can't fight the trend. If it's a down trend, don't catch a falling knive. How do you determine that? Well, when the price is above the 200 day Exponential Moving Average (EMA), it usually signals an uptrend. There will be others who employed more indicators like RSI and what have you, but I have found 200 day EMA enough for my use.

Ok, I am done with explaining the 3 rules I employed when I do investment. With these 3 rules, I have been enjoying my travel on the highway with minimal bumps throughout the journey.

Rule 2 - Take Profit, Cut Loss, Money Management

Image via WikipediaWhile a buy and hold strategy for equities is advocated by many financial advisors or even gurus, they are using timeframe of investment as a basis for making that argument. Usually, the time frame they are talking about is 15 years onwards as historical returns have shown in the long run, equities do outperform bonds and other asset classes and it averages around 7-10%. If you are interested in long run averages in stock and why stock is a good investment, you can read Stocks for the Long Run by Jeremy Siegel

However, in the short-run, you better have some idea of money management and when to take profit and cut loss. In other words, a bit of active management is required on your part.

For the whole portfolio, an approach called rebalancing is necessary. Rebalancing means selling your outperforming asset class and buying your underperforming asset class. The rebalancing frequency often suggested is semi-annully or yearly as anything more frequent might not give you any added returns. This requires you to examine your portfolio asset allocation and "rebalance" your asset classes percentage back to the desired allocation percentage. This will shift your portfolio back to your desired risk-return characteristic.

Rebalancing, if done correctly, will force you to 'Sell High(sell outperforming asset), Buy Low(buy underperforming asset)'. It's a discipline enforced on you to take profit.

For individual invesments within the asset classes, you need to adopt a disciple of taking profit and cutting losses. This is because no one can get a 100% accuracy on his/her investment views. You might have done serious mental work on which investment might be the next performer but what if you are wrong? Are you going to stick to your investment and usually, you become emotionally attached to your invesmtent. Or when your high flying investment takes a 20% drop, do you think it's time to re-evaluate your decision on the investment?

A way to achieve an emotionless investing approach to taking your profit and cutting your loss is to adopt a trailing stop loss strategy. This requires a fair bit of active monitoring on your part. Whenever you buy into an investment (especially stocks), do a mental trailing stop loss strategy of 20%. This requires you to ensure that your investment never drops more than 20% off its highest traded price. I use 20% as it is within my comfort level and I do not get stop out so frequently. You will have to find a percentage you feel comfortable with, though anything below 10% is most likely detrimental to your strategy as you can see the annualized volatility for stocks is around 15%.

Yes, the investment might rally after the 20% drop, but what if you are wrong? The investment might languish in that trading range for a long time. There are so much investment opportunities out there, don't let a bad investment decision tied you up.

If you bought into an investment and your investment soared 50%, you still need to do a mental trailling stop loss. Should the investment drops 20%, you take your profit! This ensures you have a 30% profit in hand for other investment opportunities and not wait for the investment to drop further and reduce your profit.

Lastly, for whatever investment you made, you need to adopt a proper money management technique. Run your investment portfolio like you are a fund manager! Adopt proper position sizing by allocating no more than 5%(maximum) of your total investment value into any investment. This way, you can ensure that a 20% loss on any of your investment will translate only to an insignificant 1% loss in your total investment value.

You might argue that this also means that a 20% gain in any of your investment will translate to only 1% gain in your total investment value. Look at the BIG PICTURE! If you were a good investor and allocate 5% to every investment, you will have 20 investments in your portfolio. If you achieve a 20% gain in all of your investments within a 1 year period, your total gain for your portfolio will be 20%! Congratulations! You are on the same level as Warren Buffet who averages 23% on compounded annual growth. Just kidding, you have to achieve that at least 10 years in a row for any one to believe you are in the same league as Warren Buffett.

So remember, do not over-allocate and let one bad investment decision deciminate all your gains accumulated by other investment. In the long-run, you will be better off!

Yes, you won't get rich fast, but you won't be a pauper either.

The Number 1 Rule in Investing!

Image via Wikipedia

You have heard stories of traders or punters made good by investing all their money into 1 stock and newspaper stories proclaiming how a trader can turn $1,000 into $100,000 in 1 month or even having 1000% return on investment.

For a beginner to investment, they might be convinced that the only way to get rich is to have concentrated bets. However, that is also the quickest way to the poor house if the bet goes wrong.

For myself, there are 3 rules of investing I stick to.

Rule 1 - Diversification thru' an Asset Allocation Approach
Some of you may disagreed and quote numerous gurus that made it good thru concentrated bets. It's a case of "Put all your eggs in One Basket and Watching it very carefully" versus "Don't put all your eggs in One Basket".

However, you need to know that they are not called gurus for nothing. Some people have the innate ability to see trends and hidden gems. Some people used discipline and smart intellectual ability to find the gems. If you are one of them, I am happy for you! :)

For the rest of us, we can take comfort in using the proven asset allocation principles in our investment portfolio. Yes, investing is not only about shares. Asset allocation is derived from the Nobel Winning "Modern Portfolio Theory" where rational investors diversified their investments into different non-correlated asset classes to achieve an optimal risk return reward ratio. You can read more about MPT in wikipedia.

Thru' a well designed portfolio, investment professionals (including Yale endowment CIO, David Swensen) have found that around 90% of your returns are achieved thru' good asset allocations. The rest of the 10% can be attributed to market timing and stock picking. So, if you are someone who believes in the 80/20 Pareto's Law, you should focus 80% of your energy on doing the simple asset allocation that matters the most!


I'll give you Rule 2 and 3 in the next blog. Time for dinner now.