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 December 2008

YTD Returns : -10.44%

The market seems to have reach a bottom since Oct '08 as the portfolio value is not going down as fast as before.

However, hedge funds I owned have all suspended redemption till Jan/Feb '09. So, Jan/Feb '09 should set the trend for next year. If hedge fund redemption continue, I'm sure you will see more selling in the market.

This downturn have left me to re-examine my strategy. My intended allocation was to be 50% equities/alternatives and 50% in bonds. However, should I even be 50% in equities and alternatives as an asset class since I would be very comfortable receiving all the coupons from the bonds. The coupons payment would put the portfolio in the highest income bracket if it should be taxable as an individual. So, why am I in equities at all?? :-s

The Joseph Cycle - Simon Sim

Image by alemdag via Flickr A nice quote I got from "The Joseph Cycle" by Simon Sim.

The more you save, the more you will have. Saving creates wealth; wealth attracts more wealth. Thus, it is said, "Money makes money!".

Anyway, the Joseph Cycle is a good read for people who are interested in economic cycles and how it can help in stock investment. For those in a hurry, the gist of the book is in credentialing and validating the Biblical Joseph Cycle of 7 Fat years and 7 lean years. The Joseph Cycle equates to a 7 year bull and 7 year bear in the stock market. After which, Simon mentions that for most, we have only 2 opportunities within our lifetime to take advantage of these cycles. The beginning of the last bull started in 2001 and will end somewhere inside 2008. After which, there will be the 7 years bear from 2009-2015. Thus, the year 2015 will be the bottom as well as the next start of a bull and if we believe in the Joseph Cycle, we will do well to invest during the start of the bull and hold on till the end of the cycle, ignoring most crisis along the way. But he does mentioned that you can still invest even if it's a bear cycle as long as the stock is undervalued or a crisis present an opportunity.

My conclusion? Well, it means that life carries on and we still will have to stick to our usual investment philosophy of asset allocation. For stocks, buying quality companies at fair prices giving fair dividends. For mutual funds, just let it grow thru' the dividends reinvested (since the fund manager is supposed to be doing the stock picking for you).

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 Lose your pants! Look at the percentage loss not the absolute loss

Image by Renegade98 via Flickr During this hard times in the market, people feel compelled to sell out their investment.

They panicked when they see losses of $3~4k in their individual stock and maybe a loss of $30k in their portfolio.

However, you should only sell if you feel the investment has served its purpose or the price is right or the business behind the investment does not have a compelling future.

One way to mitigate the desire to sell is to look at the percentage loss instead... so the $30k loss could only be a blip in your portfolio as it is only a 3% loss. If you believe the market returns an average of 6-10% per annum, then a 3% loss is not really a cause for alarm.

My investment portfolio is currently down 2.6% and that translates to a loss in the region of $200k, but I'm holding tight.. Are you?

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?