There are two main stages to owning a winning fund portfolio: 

Portfolio Construction

1. What are the 3 attributes of a winning portfolio?
2. Unit Trusts - Why are they recommended, and for whom?
3. Why is it important to have a diversified portfolio?
4. Should the investor hold cash?  How much?
5. How to determine the risk / return of the portfolio & correlation of funds – what are the information needed and how to get it, how often to access?
6. What are the keys / strategy / suitable approaches to a well-planned unit trust investment portfolio?  What is the role of speculation?
7. What actually determines the individual’s asset allocation? What are the factors that lead you to suggest the percentages?

Portfolio Management 

1. Why is it important to manage a portfolio of unit trusts (when they are already managed funds)?  
2. What’s the role of speculation in managing a unit trust portfolio?

Rebalancing: 

• What would determine if one needs to rebalance the portfolio? Is there a rule-of-thumb for this?
• How often should one value the portfolios?
• What are the things that one needs to do in rebalancing the portfolio?
• Is it auto or still manual filing? What is the process / charges of different fund mgmt houses?
• What is the best way to add fresh monies? How should fresh monies be allocated - current portfolio? 
• How does one change the asset allocation as the time horizon changes? – the medium term time frame would eventually become a short term time frame.

PORTFOLIO CONSTRUCTION

1. What are the 3 attributes of a winning portfolio?

• Liquidity for easy, quick and low cost purchase and sale of all or part of the portfolio without losing a lot to ‘bid-ask spread’
• Adequate diversification : for safety, lower volatility
• High quality / valuation for great potential returns

 2. Unit Trusts - Why are they recommended, and for whom?

• Unlimited upside potential, unlike bonds
• High transparency (information about relevant internal activities are available)
• Relatively low cost as compared to, say, hedge funds
• Safer than hedge funds and pure individual common stocks as well
• Very liquid
• Well diversified: Unit trusts spread the risks involved in investing because they invest in a variety of financial instruments, including stocks, bonds, properties, commodities, currencies and cash.
• Professionally managed: Unit trusts are managed by professional fund managers. Their job is to monitor one’s investments and make necessary investment decisions based on research ad analysis in order to generate good returns.
• Convenient / You can invest globally: Unit trusts are invested all over the world and in various business sectors. This way, one has a lot more opportunities. Think Latin America might boom? Interested in commodity stocks? Unit trusts pick out the best companies in these sectors for an investor 
• You need only a small amount of investment to start with: Initial investments usually start from $1000. An investor can also begin a Regular Savings Plan (RSP) where he sets aside a fixed amount to invest at regular intervals. With unit trusts, a small sum buys one a well-diversified portfolio.
• Buying and redeeming is simple: Most unit trusts in Singapore allow daily buying and selling of units. As long as one’s orders are received by the day’s cut-off time, one can be assured that one’s purchases or redemption will be transacted at that day’s prevailing price.
• It is relatively safe: If one has a low tolerance for risk, one can choose a fixed income unit trust that can give one stable returns. Generally, over the medium to long term, it will likely perform better than one’s fixed deposits.

Unit trusts are not for people who: 

• have large amounts of money to be able to diversify adequately and conveniently
• have great amounts of time, knowledge, skills and experience, intuition, aptitude 
• have access to high quality, in-depth information and timely sound advice to function as professional portfolio managers and asset analysts to be able to select the right investment opportunities.

3. Why is it important to have a diversified portfolio?

Pros of diversification:

• Safety in numbers: You don’t place all your eggs in one basket.
• Survivor benefit (if invested in a particular industry): Especially relevant in the financial industry of 2008, where some of the industries giants collapsed, leaving the survivors with the spoils i.e. a bigger market share.  After all, the finance industry as a whole is essential to growing economies world-wide, and where size does matter.
• Lower volatility:  Matters when you need the money i.e. need to sell
• Lower risk of total loss

Cons of Diversification:

• Loss of the huge potential profit from winners
• Over-diversification may lead to lower overall portfolio quality
• Over diversification may indicate low confidence in investment decisions
   

Final word - Benefits of Adequate Diversification

For most investors, an adequate number of parts to diversify their portfolio is ten. These parts must represent different assets which have low correlation with one another.  Low correlation means that prices and intrinsic values / economic prospects are not closely linked or in proportion to each other. 

Diversifying investments across all asset classes is to spread risk across a range of uncorrelated asset classes.

Spread the risk: Diversifying across all asset classes allows you to benefit from each year’s best performing asset class.

Smooth your returns: Investment markets tend to operate in cycles. Broader exposure will enable strong returns from one asset class to offset performance of another.

Avoid the timing error: It is impossible to time the market. Therefore, maintaining a good mix of asset classes can ensure that one gains from the performance of each year’s best performing asset class.

 4. Should the investor hold cash?  How much?

Yes, the investor could hold cash. 1 to 2 year’s expenses as a thumb rule. For large / sophisticated investors, between 5 to 20 percent of the portfolio can be in cash to have liquidity for taking advantage of market opportunities / mispricing.

5. How to determine the risk / return of the portfolio & correlation of funds – what are the information needed and how to get it, how often to access?

One way to risk / return of a portfolio is to look at the beta and sharpe ratios of the underlying funds, and then using back testing (evaluating historic data) on how those funds performed i.e. returns over a 5 to 10 year period as part of a portfolio.  This information can be found at in fund fact sheets as well as on the Bloomberg system and websites like Fundsupermart.

One of the best ways to determine correlation of the funds i.e. how much in synchronization they move with each other - is simply to compare 10-year price charts.

The above information should be studied at the time of portfolio construction, and then about every quarter.

Remember though: Past performance is insufficient to predict future returns / risk.  It is important to understand the fundamentals of the underlying companies / sectors / economy to accurately gauge their prospects.

6. What are the keys / suitable approaches to a well-planned unit trust investment portfolio?

There’s no guarantee in investments but we can put the odds in our favour:    

Consider the Risk profile, investment time horizon, and foreseeable financial needs of the investor.  If the investor needs insurance for protection, implement it first, so that the investment account is not jeopardized when undesirable calamities like accidents or illnesses hit.  These can derail the entire retirement nest-egg.   
The investor must have ability to access (view information and invest in) a broad enough universe of funds.

Create a sound framework to make decisions (reduce role of the gut feel, emotions, and speculation)

Be Contrarian:  Be fearful when others are greedy, and buy more when people are selling!

Follow that framework:

Selection criteria / filters

• transparency
• benchmark composition
• fund top holdings v/s benchmark
• valuation of the benchmark (very important to gauge future price appreciation)
• performance against benchmark over 5 years or more
• expense ratio
• internal controls / regulatory oversight (example: CPF approved)

Core (major economies and sectors) & supplementary (emerging countries / industries) portfolio approach

Optimal diversification with 5-10 funds, depending on investment amount

Sticking with funds that invest in industries that have proven to be consistent performers.  Thematic funds are fairly new and have no track record. Hence, we would keep exposure to a minimum.  And the danger of chasing a hot sector is highly discouraged (e.g. technology bubble in 2000, today’s hot sector becomes tomorrow’s laggard).

7. What actually determines the individual’s asset allocation? What are the factors that lead you to suggest the percentages?

Factors that decide a person’s asset allocation percentages:

• Risk profile
• Current age and the number of years before one retires
• Investment time horizon (when money is needed)

The younger a person is and the more years he has before retirement, the more comfortable he should be with growth oriented (and more volatile) investments. The key to minimizing the probability that a person will lose money is to hold the unit trust investment for the longer term.

We do not advice investing in unit trusts unless a person plans to hold them for at least 5 years. The preferred time frame is a decade or longer.

Example:
Moderately aggressive investor with a 20 yr time horizon: 75%-80% equities and 25%-20% bonds. 
Balanced investor with a 10 yr time horizon: 60% equities and 40% bonds.

MANAGEMENT OF A UNIT TRUST PORTFOLIO

1. Why is it important to manage a portfolio of unit trusts (when they are already managed funds)?

Reasons to manage a portfolio of professionally managed funds:

• Unit trusts should be viewed as an individual investment.
• To implement diversification, we select several funds to form the entire portfolio. 
• These individual parts, because they are disparate from one another, need to be managed.  Management of a portfolio of unit trusts include:
• what to buy i.e. comparing and selecting the right investment from thousands of other choices
• how much to buy i.e. what percentage of the portfolio should it hold
• what and how much to sell 

2. Portfolio rebalancing:

What would determine if one needs to rebalance the portfolio? Is there a rule-of-thumb for this?

Yes. There is a rule of thumb for rebalancing.

Rebalancing should be an automatic process:  It should not depend on market value, opinions, trends or sentiment as that would defeat the purpose of rebalancing. Rebalancing should be carried out every 6 months, as suggested by Benjamin Graham (author of ‘The Intelligent Investor’), teacher of Warren Buffett.

Rebalancing is key in the management of a unit trust portfolio:  It is the action of bringing a portfolio of investments that has deviated away from one’s target asset allocation back into line. Under-weighted securities can be purchased with newly saved money; alternatively, over-weighted securities can be sold to purchase under-weighted securities.

Rebalancing controls risk:  With time, a portfolio’s current asset allocation can move away from an investor’s original target asset allocation. If left un-adjusted, the portfolio could either become too risky, or too conservative. The goal of rebalancing is to move the current asset allocation back in line to the originally planned asset allocation.

The dangers of imbalanced portfolios

1. Favoring the winners over ‘less-optimal’ performing funds

Since it is impossible to keep allocations in line with exact targets for any significant period of time, it makes sense that some investments would rise to the top. Furthermore, since the imbalances tend to favor the investments that have done the best over time, it is appealing to let one’s winners ride and hope that they will continue to outperform, letting one benefit more because of one’s overweighted position.

2. Risk tolerance goes unchecked 

The downside of not keeping one’s portfolio in balance, however, is that one new portfolio may no longer reflect one tolerance for risk. In the above example, a 60/40 asset allocation between stocks and bonds would generally be considered to be moderately risky, but a 74/26 allocation is quite a bit more aggressive. While one should generally expect to earn a higher return from the 74/26 allocation, the risk of suffering a substantial loss in portfolio value is also correspondingly higher.

3. Potential losses greater than expected

Given that historical returns have favored stocks over bonds over significant periods of time, leaving one’s portfolio imbalanced is almost certain to leave one with a higher percentage of stocks than one originally intended. The sharpness of any subsequent losses that occur can leave one surprised and annoyed that one did not take steps to fix the problem when one had the chance.

How often should one value the portfolios?
Every 6 months.

What are the things that one need to do in rebalancing the portfolio?  
Sell those that have gone/stayed up and buy those that are still down.

Is it auto or still manual filing? What is the process / charges of different fund mgmt houses?

Rebalancing is an automated process. This is possible only with certain investment platforms where the tedious process of calculating units to be sold and bought is automated.

If the account is a ‘wrap’ account, there is an annual fee usually based on a percentage of the portfolio, but no subsequent charges for switching funds even across fund houses as long as they are represented on the platform.

3. What is the best way to add fresh monies? 

One of the best ways is to implement Dollar Cost Averaging - the simple, powerful but underutilized strategy.  

Dollar cost averaging (DCA) is the discipline of investing the same amount of money at regular intervals. As a long term strategy, dollar cost averaging can help you ride on the benefits of compounding interest to potentially build a sizeable sum.

No one can really time the market. Investors are tempted to buy when market conditions are favourable – when the prices are strong.  Similarly, when the prices fall, nervous investors sell in an attempt to cut their losses. Deciding when to enter and invest is one of the most difficult and stressful decision a person can make.

With DCA, one can safely avoid ‘fear’ and ‘greed’ and hence, is removed from timing the market.

DCA ensures that your money purchases more units when prices are low and fewer when prices are high.

Long term benefits of Dollar Cost Averaging

• Cultivates investment discipline in one
• Minimizes risks associated with huge sum investments
• Eases one into the market (help relieve one’s concerns about uncertain markets)
• Helps one equalize gains and losses
• Ensures an overall lower unit price and more units through the years

Even more so, DCA is an ideal way to invest in the current market condition.

4. How does one change the asset allocation as the time horizon changes? – the medium term time frame would eventually become a short term time frame.

As a rule of thumb, with decreasing time horizon, the portfolio must have lower exposure of volatile investments - even those with high potential returns.  Volatile investments include common stock, and fund investing in them.  The portfolio must have greater proportions of ’safe & steady’ investments such as investment grade bonds, and low-cost funds investing in these bonds.

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Executive Money
Published January 14, 2009

Nomura sees 25% rise in global stocks

(NEW YORK) Global stocks will gain 25 per cent this year as government measures revive the economy and investors move from cash into equities, according to Nomura Holdings Inc. ‘The scale of the planned stimulus ought to be large enough to short-circuit the feedback between asset markets and the real economy,’ global equity strategist Ian Scott wrote in a note to clients dated Jan 9.

Investors should be ‘overweight’ in financial stocks and so-called cyclical industries, which are more sensitive to economic swings, Mr Scott wrote. He recommended an ‘overweight’ position in emerging-market stocks, saying they will lead gains worldwide.

Earnings will decline 21 per cent globally this year and investors face ‘dilution’ as more capital raising takes place to shore up companies’ balance sheets, according to the note. The Standard & Poor’s 500 Index will rise to 1,110 by the end of the year, a gain of 24 per cent from the Jan 9 close, Mr Scott said.

The recovery from last year’s record drop for the MSCI World Index will be led by cyclical and financial sectors and clients should position themselves ‘underweight’ in so-called defensive industries, according to Nomura. The latter are companies that tend to be less sensitive to an economic decline. ‘If, as we suspect, the market recovery continues, then the underperformance of the defensives ought to be the main feature,’ Mr Scott wrote in the note.

SCI World slumped 42 per cent last year as US$1 trillion of losses at financial firms pushed the US, Europe and Japan into the first simultaneous recessions since World War II. Analysts estimate earnings in 2009 will slip 1.2 per cent in Europe’s Dow Jones Stoxx 600 Index, while profits in the S&P 500 may fall 2.1 percent, Bloomberg data show.

Citigroup Inc strategists forecast corporate earnings are about a quarter through an estimated 50 per cent tumble from their peak, according to its 2009 global outlook report dated Jan 7. Profits will drop sharply, reflecting the ‘collapse’ in demand from the fourth quarter of last year, they said.

In emerging markets, stocks will surge 35 per cent this year as the result of stimulus measures overshadows the slowdown in goods sold outside China, according to Nomura. ‘We have retained an upbeat outlook on China’s economic growth of 8 per cent during 2009 as monetary easing and fiscal pump priming ought to offset the effects of an export slowdown,’ Nomura’s chief Asia and emerging markets strategist Sean Darby wrote in a separate note dated Jan 3. China’s economy will expand 7.5 percent this year, the slowest pace in almost two decades, the World Bank predicted.

Jonathan Garner, head of Morgan Stanley’s emerging-markets strategy team, predicted the MSCI gauge will rally to 810, while Andrew Garthwaite, Credit Suisse Group AG’s global equity strategist, expects a rise to 630.

Clients should be ‘underweight’ in Japanese shares, while remaining ‘overweight’ in Asian equities, Nomura’s Mr Scott said. He maintained a ‘neutral’ stance on European stocks. — Bloomberg

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My dear readers,

Some light is finally shining from amongst the dark clouds!

Business Times reported positive news about the direction of Asian stocks.  Low valuations make attractive buys. But as always, do exercise caution with your investments.  We still want to have adequate diversification in our portfolios.

(more…)

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This is an interesting read -

Laszlo Birinyi, the man who accurately predicted 2008’s financial crisis, said that the S&P 500 index hit a bear market bottom end Nov’08 and that now is the best time to buy the largest US cap stocks.

LASZLO Birinyi, the investor who accurately predicted this year’s rout in financial shares, said the Standard & Poor’s 500 Index reached a bear market bottom two weeks ago and recommended buying the largest US stocks.

Mr Birinyi, who spent a decade on the trading desk at Salomon Brothers Inc and is known for pioneering money-flow analysis, said financial stocks will rise over time and shareholders were ‘too quick to dismiss them all as tainted’.

Mr Birinyi’s October 2007 warning that a recovery in banks would be snuffed out presaged a 59 per cent plunge in the S&P 500 Financials Index. The measure fell 36 per cent since he advised selling the stocks in August following a three-week rally.

‘I’m very comfortable saying the market has made the bottom,’ Mr Birinyi, president of Birinyi Associates Inc in Westport, Connecticut, said in an interview with Bloomberg Television. ‘It’s time to get out of the bunker mentality. You want to be looking at stocks, you want to be considering the market, and you want to get out of this funk that too many investors have been in for the last three or four months.’

The S&P 500 fell 52 per cent from an October 2007 record to an 11-year low of 752.44 on Nov 20. Financial shares lost three quarters of their value, dragged down by almost US$1 trillion in losses and writedowns that froze credit and pushed the US, Europe and Japan into recessions.

Mr Birinyi, whose money-flow analysis compares the dollar amounts moving into or out of a stock or index to establish whether it is being more aggressively bought or sold, cautioned against betting on a sharp market recovery.

“It’s time to get out of the bunker mentality.  You want to be looking at stocks …… and you want to get out of this funk that too many nvstor have been in the last three or four months.”

‘A bull market is forming, it’s just not going to be any outsized gains over the next three to six months,’ he said. ‘The market is going to do better, but it won’t be up, up and away. With all the concerns and issues around the world, I’d be hesitant about being very, very aggressive.’

Mr Birinyi said he bought shares of General Electric Co because the company has pledged to keep its dividend. Mr Birinyi also said Dow Chemical Co’s payout makes the company attractive and Apple Inc. is ‘good for a trade’ because it fell too far.

‘The wind is at the back of the large caps,’ Mr Birinyi said.

Stocks rose around the world on Monday, sending the Dow Jones Industrial Average to a one-month high, as President-elect Barack Obama pledged to boost the economy with the biggest public-works spending package since the 1950s. The S&P 500 on Monday added 33.63, or 3.8 per cent, to 909.70. The benchmark for American equity extended its gain since Nov 20 to 21 per cent. GE rose 5.8 per cent to US$18.88 on Monday, Apple increased 6.1 per cent to US$99.72 and Dow Chemical climbed 7.2 per cent to US$20.37.

All 10 industry groups in the S&P 500 have risen at least 9.2 per cent since the benchmark’s low last month. Financial stocks led the rally, climbing 46 per cent collectively, followed by consumer discretionary and telephone companies.

Monday’s gains put a technical end to the 13-month bear market that began after the S&P 500 reached a record close of 1,565.15. An advance of more than 20 per cent from a low is the standard definition of a bull market.

Mr Obama said on Dec 6 he will boost investment in roads, bridges and public buildings to create or preserve 2.5 million jobs after companies cut payrolls at the fastest rate in 34 years.

‘There’s an awareness now that this is across the board,’ Mr Birinyi said. ‘You have bleeding all over and a Band-aid here and a Band-aid there is not going to form a solution. You’ve got to really take some dramatic action, and I think that’s what investors are responding to today.’

Mr Birinyi started his research and money management firm in 1989. — Bloomberg

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Dear friends,

Wishing you all a Healthy, Successful and Peaceful New Year! Hope you are keeping well and have started the year on a high note

I’m looking forward to a year of personal growth and fulfilling the things that I’ve set out to accomplish.  The end result is not all that important. It is the journey of reaching our goals that will teach us valuable lessons and give us wisdom for the future.

Instead of dwelling in the ‘gloom’ (well, it’s forecasted the global economic recovery will take anywhere between 12-18 months), and whining & complaining away (which I call a dis-ease), we should take a quiet, reflective moment and give thanks to the many blessings in our lives.  It is so easy to focus on the things we do not have and forget all about what we have been blessed with.  One of my goals this year is to get involved in helping a children charity.  Helping the less fortunate gives perspective on life.  We need perspective.  That will help us to understand things/situation in a more positive light and allow us to make wiser decisions and stay calm.

The same goes for your investments.

The financial crisis caused by the greed of the big institutions is a Very, Very rare event.  There will continue to be volatility in the markets.  But that does not mean ignoring the market altogether.  I believe that it is time to take calculated risks as equities tend to react ahead of an improvement in the economy.  This event has indeed created some of the best buying opportunities of the century for investors.

Having said that, please proceed with caution when entering the market (if you’re a stock investor).  Remember - invest only money that you can afford to lose and also the stock market has no human emotions (unlike you and me). Investing is not a ‘play play’ game as the consequences can be disastrous if not managed properly.  To protect yourself from the downside risk, look to invest in under-valued stocks or stocks that are selling below net asset value. Look also at sectors with stable earnings.

To reiterate, here are the golden rules of investing that will help you stay on the path of wise investing.

Golden Rules of Investing:

1. Diversification - across asset classes, countries, industries

2. Liquidity

3. Valuation

4. Dollar Cost Averaging

5. Rebalancing; monitoring and review

6. Cost

7. Upside potential

8. Long term time horizon

9. Peace of mind - sleeping well!

10. Income - current, future, predictability, stability

11. Downside protection - fencing/safety net

12. A well thought out retirement strategy to secure your golden years

With that, Carpe Diem! (latin for Seize the day!)

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It has been a while since I last posted a message.

Not sure if you care about the outcome of the US presidential elections but I’m happy that Obama won! He made history and proved that the impossible can be possible.  Without wasting time, he has quickly put in place a team of top administrators and experts to assist him in charting the challenging path ahead.

A week before the US election on 4 November,  we experienced some record breaking market rallies. The STI gains rose to 18% in 4 days last week after Fed rate cut.  The Dow Jones Industrial Average leapt 193.95 points (2.16 per cent) to 9,184.91 in opening trades and the Nasdaq surged 38.05 points (2.30 per cent) to 1,695.26 last Thursday. The broad-market Standard & Poor’s 500 index advanced 21.97 points (2.36 per cent) to 952.06.  China, Hong Kong and Taiwan also lowered rates as part of efforts to avert a financial system meltdown and Japan’s central bank has also followed suit.

History has shown that markets typically start recovering about 6 months before you hear about the good news in the media. Though bad news will continue to capture headlines, do not let this blind you to the fact that markets could recover faster than you think. The market is irrational right now. But rational thought will return and markets will stabilize and life will go on.

I’ve enclosed a slide here (see below) from Franklin Templeton Investments. It shows you the opportunity cost of those who are staying ’sidelines’ because of fear.

I’ve also shown a snapshot of an article - This is the Time to Buy on Dips - from Business Times Weekend 1-2 Nov’08.  I draw your attention to the top right chart which reads ‘Swift Recovery from Asian Crisis’ . Notice the similarity of the downtrend during the Asian Financial Crisis and the current crisis? There is a possibility that the current crisis will bottom out soon.

If you know of family members and friends who are confused or hesitant about investing, please pass our contact numbers to them. We’ll show them how to get started and would be happy to educate and guide them on the path to wise investing.

There is light at the end of the tunnel! Hang in there…

The Opportunity Cost of Staying Sidelines

This is the Time to Buy on Dips

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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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Stay the Course on Equities

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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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