The End of the World is Not Here

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It’s official - the Business Times on 11 Oct 2008 reported that Morgan Stanley notes investors get nothing.

The ‘pot of gold at the end of the rainbow’ did not materialize for investors who bought into structured deposit products.

When they were sold,  the salesman would have said: “Hey, this is a 100 year old company … nothing can go wrong … put ALL your money with us.”

I’ve a problem with the word “ALL”.  Whatever happened to the wise saying of “never put ALL eggs in one basket” which we all know?  Don’t we follow it anymore?

Diversification is key in your wealth accumulation strategy. When we buy a property it’s location, location and location.  When we invest, the mantra is diversification, diversification and diversification!!

No matter how sweet the deal or promise may be, resist the temptation to put all you’ve got into a single product, especially one that you may not fully understand.

I’m curious how people could be so trusting towards salesperson at banks.  My father’s priority banking relationship manager changed four times over a period of 18 months. How’s that for relationship building?  None of them called him when they left, let alone the new RM that took over his account.  When the new RM saw that his fixed deposit of $200k had matured, she immediately launched into selling a forex deposit to him (without even asking or understanding what other investments he had at that point in time)! And forex deposits which are highly risky are NOT for retirees!!! I’m just glad he did not lose anything.

That’s why never go to a tied agent (someone who represents one company and hence can only sell the products of that one company) …  An IFA is the only one who can give you ‘manufacturer diversification’. An IFA is in the unbiased position to source, compare and select the most cost effective solution that fits your needs.

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What we experienced recently in the global financial markets was a “one of a kind event”.  This is likened to winning a lottery twice in a week!

Read on to find out more. One-of-a-kind-event

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Stay the Course on Equities

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Click here for the Seminar Invite - 11 Oct 2008

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Here’s an article - Don’t Panic - that clearly illustrates the outcome of the attitudes of 2 investors and their portfolios:

a) A person that chooses to remain unperturbed by the market situation

versus

b) A person that responds (emotionally) and attempts at timing the market

I hope you’ll get a fresh perspective on why we’ve always advised our clients to stay level headed and not adopt a herd mentality.

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Dollar Cost Averaging refers to the discipline of investing a fixed amount of money on a regular basis.

This strategy can increase the rate of return of your investment safely and steadily.  This is the recommended way to invest, especially in uncertain times like this.

Learn more about the benefits of dollar cost averaging here.

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I think many Singapore investors may have suffered from stress, anxiety, panic attacks and maybe even sleepless nights over the last 2 months.  The bombardment of negative news from the media did not seem to stop and people tend to remember the bad news even when there is good news to rejoice about.  Many were not advised properly about their investments and they can only rely on their own judgement on what to do next.

I’m glad that we’ve done the right thing from the onset for our clients.  In fact, during this stressful time, we’ve been pretty peaceful.  There is no rainbow before the storm.  So we ride out the rough times and await the good times. Click here to read about When Doing Nothing is THE Best!

Cheers!

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Hello all,

Yesterday, we witnessed global stock markets staging a historic rally, following from the announcement of several government-sponsored bank rescue packages.

Just as the sharp falls in stock markets tend to be concentrated in short periods of time, the best gains are similarly concentrated. Because these gains often occur just before, or after, a market fall – an investor who tries to time investments is highly likely to miss the best gains.

Fidelity had analyzed the returns from the UK, US and other stock markets over the period 1993 –2008. This shows that missing just a few days’ stock market performance can significantly impact performance.

Investors have seen that global stock markets are prone to short-term fluctuations and over the last quarter these have been quite sharp.

It can be tempting during times of stock market uncertainty to delay making new investments or even consider selling existing investments and try investing again when values are lower – this strategy is known as ’market timing’.

It is often the case that ‘time in the market’, rather than ‘timing the market’ is the more effective investment strategy.

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How should Singapore investors respond to the US financial crisis

Here are some of the news-makers that have sparked the recent waves of concern among investors and the public globally:

• $1 trillion in bailouts using US tax-payer money
• AIG
• Lehman Brothers
• Merrill Lynch
• Fannie Mae and Freddie Mac
• Citigroup
• Bear Stearns
• Housing loan bubble

Q1: Why are banks in the US filing for bankruptcy?

The predicament that major US banks are facing now is due to the over lending of mortgage loans to poor credit rating consumers (sub prime) during the housing boom in the US a few years back. The sub prime loans are repackaged in the form of investment tools such as structured deposits and sold to investors.

When the economy starts to take a turn for the worse, many of the sub prime loans cannot be repaid and the domino effects spills over. Warren Buffet in his annual report of 2002 highlighted that ‘financial derivatives are financial weapons of mass destruction carrying dangers that, while now latent, are potentially lethal’.

The good news is that most Asia banks, including Singapore’s, are not sophisticated enough to dabble into such products and thus the exposure to these instruments are limited.

As your financial adviser, we have always stayed away from structured deposits as a form of investment. Hence, the bulk of your investments are predominantly invested in either unit trusts or low risk endowment funds via insurance companies (non-AIA).

Q2: The value of my unit trust investments has fallen along with the market turmoil. What should I do now?

The US is the leading world economy in terms of market capitalization. Any collapse in their financial institutions will inevitably have a triggering impact on the rest of the world, even though direct exposure may not be there.

The good news is your unit trust investment portfolio is well diversified into different regions and asset classes. We have selected your funds based on valuations and sound investment principles that are used by successful investors like Warren Buffet and Peter Lynch.

From the very beginning (3 to 4 years back), we have been bearish about the US economy. Therefore, your portfolio has no or very little exposure to the US.

Q3: Will my unit trust holdings ‘disappear’ along with the collapse of major US banks?

We first need to understand the structure of a unit trust - I draw your attention to some extracts from the national financial education program “Moneysense” website on “Making Sense of Unit Trusts”.

http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf

On Page 2

You will learn that one of the merits of unit trust is that it invests in a wide range of assets and this means that your risk exposure to any single company collapsing is not likely to wipe out your investments. If however, you are holding on to individual stocks or have direct investments (not unit trust) with a bank that went down, your risk exposure will be much higher and can be adversely impacted.

It is also interesting to note that during bad times when some firms collapse, surviving companies that ride through the crisis will have a bigger market share moving forward. Hence, a diversified fund will cushion your fall during bad times and allow you to benefit from the potential higher profitability of surviving firms when the crisis is over. These will be companies with good balance sheets, strong management and successful businesses.

On Page 15

You will see one of the most important features of the underlying structure of a unit trust - the fact that it is called a unit trust means that investors’ money are held in a trust where an independent party called the trustee is appointed as custodian of the fund’s assets. The trustee ensures that the appointed fund managers are managing the funds according to guidelines laid out in the trust deed to minimize the risk of mismanagement by the fund managers.

As an investor, you can be rest assured that your investments are held in trusts and the funds are separated from the fund managers’ assets (which can be taken away by creditors).

http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf

Q4: How does the Monetary Authority of Singapore ensure that unit trusts here are in safe hands?

Referring to Page 16 of “Making Sense of Unit Trusts”, you will realize that the bulk of the funds you are investing in are approved by MAS (although that does not mean that returns are assured). You can see on Page 17 that MAS sets out rules and regulations that, among other things, require fund managers to adhere to to ensure that the investments they manage are sufficiently liquid and diversified. MAS thus forms another pair of eyes in addition to the trustees of the funds.

http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf

Q5: What will happen to my investment if the unit trust is terminated?

On Page 22 of “Making Sense of Unit Trusts”, you will see that should a fund manager ceases operations or when the fund size has become so small that it is not economically viable to continue managing the fund, the fund manager must provide you with information on how to get a refund on your investments or otherwise make arrangements for you to transfer your investments to another fund. The fund manager must give you notice of the termination no later than one month before the fund is terminated.

Q6: I have AIG unit trusts .  What is their fate?

A statement issued on the 17th September 2008 by AIG Global Investment Corporation (Singapore) Ltd to their distributors, signed by one of their Directors, Mr. Cheong Poh Kin, states:

“We (AIG) would like to assure you that the assets of AIG International Funds – Acorns of Asia Balanced Fund and Singapore Bond Fund, which are managed by AIG Global Investment Corporation (Singapore) Limited, are held separately on trust by the trustee, Citicorp Trustee (Singapore) Limited, for the benefit of the Funds’ unit holders.  The Funds’ assets are segregated from the assets of the fund manager in accordance with the Singapore Securities and Futures Act and therefore will not be directly impacted by the financial position of American International Group, Inc.”

Q7: Should I withdraw/sell my investments now? What would happen if I do?

Understandably, in uncertain time like this, investors will focus on risk and it is not unusual for people to view their investments as more ‘risky’ as they fluctuate in value. However, if any investors are tempted to try to time their investments – maybe selling holdings to avoid further falls – a risk that they are ignoring is the risk of missing out on market rises, which often come after the falls.

Timing the market is futile. It is best to be patient and ride through the short-term volatility.

Since December 1992, the MSCI Europe index would have seen €1,000 grow to €5,152. If an investor tried to time the index’s ups and downs but had missed the best tem days over that period, their investment would only be worth €2,393. Miss the best 20 days and the value of the investment today is €1,351.

Value of €1,000 Invested in MSCI Europe Index over the Last 15 years
Stay invested - €5,152
Missed the best 10 days - €2,393
Missed the best 20 days - €1,351

Annual Performance of the MSCI Europe Index over the Last 5 years
2003 - 20.3%
2004 - 12.7%
2005 - 25.5%
2006 - 19.6%
2007 - 6.5%

Source: Fidelity International, total returns 31/12/92 to 31/12/07

This is important in today’s market conditions because the best days often immediately follow the worst. This current volatility is part of the normal cycle of the world’s markets.  So don’t panic!!

To further illustrate the possible effects of short term panic, click here for the Story of Mr Calm and Mr Panic.

Continue … Updated with additional content on 14 October:

Q8: Will the markets continue to dip further?  What are the chances of them recovering?

These are very good questions.

Firstly, markets go up and markets come down. I assure you that market dips are normal! We do not have to fear volatility. In fact, it is volatility that allows us to make good returns in the long term.

We do not know if markets will continue to dip. No single person can predict that.  But we know that when there is a crisis and policy makers, central banks and stakeholders step in to curb the situation, the system will recover but it may not be immediate.  It is because of human intervention that, historically, growth cycles are always longer than the dips.

Click here for MSCI Indices table

From the MSCI table above, it is evident that markets do rebound fairly quickly after a fall and often by a huge margin.  If you are ‘once bitten twice shy’ and had withdrawn from the market and are waiting for the best time to enter, your attempt at timing the market could cost you your chance to participate in the market rally.

Emotions have no part in investing. Only a sound strategy and logic will enable us to benefit from the market.

To date, the MSCI Indices have declined by:

MSCI World -31%
MSCI Asia ex Japan -46%
MSCI Emerging markets -36%
MSCI America -25%
MSCI Europe -36%

We’re hopeful that markets do recover.  Be In the market when it does!

Another main index to highlight is the Dow Jones Industrial Average (DJIA). This is a good overall indicator of the global economy. It has weathered through the Great Depression, Iran/Iraq war, Asian financial crisis, internet bubble burst, 9/11, tsunami and the most recent sub-prime catastrophe.

You will notice that the trend of the index, despite all the setbacks in the market, has been progressing in an upward fashion.

Great News - The DJIA rallied on Monday, 13 October! It set a new record one-day gain of 936 points, far stripping its previous day gain of 499.19!!!

So, you see, timing the market is futile.

Q9: Is this a good time to invest?

Absolutely! The fundamentals and long-term economic prospects of many industries, companies and investment securities are very sound.  What’s more, their prices have been unreasonably battered by the market sentiment and manic panic. This makes for excellent buying opportunities with immense profit potential for investors with vision and the power to hold.

Q10: How do we benefit from the market dip?

Since you cannot predict the market, but you know that the market will recover some time and that all the governments are working to contain the problem, the sure way to benefit from this is to invest in an instrument that cannot go default due to its Trust structure.

The best time to buy is NOW (because markets are on sale)!! And the highly recommended way, when the market has dropped significantly without clear directions, to invest is to implement Dollar Cost Averaging.

Dollar cost averaging is the discipline of setting aside a fixed amount of money regularly to invest.

Benefits of Dollar Cost Averaging:

* Smoothens out the volatility in your portfolio
You automatically buy more units when the price is low and lesser units when the price is high.

* It eliminates the temptation to time the market

* It helps you to think rationally and leave the emotions out of investing

If you procrastinate, you potentially lose a lot more - when market recovers, you lose out 100%; and if you think it doesn’t or won’t recover, then you’ll forever be waiting and end up losing 100% anyway.

So, what are you waiting for?

Q11: There is so much bad news in the press.  Where is the good news?

The human brain is an interesting mechanism that is engineered in such a way that when the world is normal, it is oblivious to almost anything and everything, big or small, that is happening around us.

Then when there are some dark clouds gathering, this interesting mechanism can suddenly develop the ability to speed read newspapers and spot even the smallest article on bad news but yet having amazing capacity to still continue to ignore the good ones - no matter how big the print is!

We are born to react more to bad things than to good ones.  If you are aware of that, learn to correct this common phenomenon and you will lead a more rewarding and happier life.

Anyway, just in case you are dwelling like the rest of the world on the negativity in the market, here is some good news of the day:

Great News!
Till Wednesday, 8 Oct 2008, we saw more panic selling in the market driving all major markets down even further.  As quoted by Tom Forester, fund manager of a US focus fund that is UP 7.4% year till date - “when you see panic selling, it’s usually a pretty decent time to buy” - Forester’s fund bought A LOT on the 6th of Oct, the day when US market went crazy due to panic selling.

Other Great News!
In a rare coordinated move, central banks around the world slashed interest rates. The US Fed, Bank of England, European Central Bank, China Central Bank, Hongkong Monetary Authority, Central bank of Canada, Central bank of Sweden, Central bank of Switzerland all cut rates. This dramatic coordinated interest rate cuts by leading central banks won high marks from businesses.

2 reasons to cheer about - It is getting cheaper to do business and the world is united as one again to solve a world problem.

Latest Great News! (14 October 2008)

1.  The Dow Jones Industrial Average (DJIA) rallied yesterday (13 Oct)!
What a come back - it set a new record one-day gain of 936 points, far stripping its previous one day record of 499.19!!!  For investors who have hung in there, this is the kind of rally that you will benefit from.

2. The S&P advanced 11.58%, the BIGGEST percentage gain in 7 decades. The last occurrence was on 15 March 1933, around the time of the Great Depression.

3. The Singapore STI increased 6.57%, the BIGGEST gain since 1999!

4. Hong Kong surged 10.24% ; a new record!

5. Asian market rebounded welcoming the positive news.

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