As an Old Year ends, a New One Begins (24 Dec 2009)

As we approach the end of the year, let’s take stock. It has been a tough year for many people, a global recession, many job layoffs, uncertainty in markets, have no doubt also caused a certain amount of anguish in many people.

Although stock markets looked as if they were on the edge of an abyss in March, the darkest time was followed by a huge rebound in the months that followed. I remember writing at the start of the year in my GM column in the Fundsupermart magazine that this year (2009) will surprise many an investor as it would turn out to be a positive one. Markets did in the end surprise on the upside, with many markets moving up 50% or more.

Despite the positive performance by markets this year, I suspect many investors remain in the red in terms of their investments which were bought at higher prices. The economic turmoil has wrecked havoc on many company’s earnings and in turn bonuses, increments, has been cut, amidst much job uncertainty. Many would heave a sigh of relief to put the year 2009 behind them.

But enough of looking back, it is more important to look forward. 2010 will usher in a new year. A new year, with new resolutions, worries, as well as new hopes. While challenges and concerns remain plenty, the economic environment is definitely on the mend. US, still a key export market, is clearly coming out of recession, its housing market showing signs of improvement. China is continuing its high rate of growth, and many Asian economies have also all swung out of recession.

Along with the recovery in the various Asian economies, companies are likely to see their earnings improve in 2010. 2009 saw earnings of many companies plunge as demand plummeted and fear made everyone cut back drastically. 2010 will see much needed confidence return to consumers, helping to drive earnings of many companies back up again. While we are still along way off from the highs of 2007, it would still be a significant improvement from the lows of 2009.

There are many concerns aplenty amidst this tide of growing positive news. But this is precisely why I am confident that there is still lots more upside to stock markets. Trading volume remains weak at this point, and there are huge amounts of money remaining in cash. From Greece going under scrutiny, to Dubai World’s troubles, from worry over hyper inflation, to worry about double dip recessions. All these concerns means that investors will not so quickly forget about fear, that greed will not set in so quickly. This means that markets will trend up steadily based on fundamentals rather than rocket up, carried by greed and over exuberance.

2010 will be a good year for investors, in particular those who are patient. I look forward to the new year in great anticipation, but tempered with prudence. We won’t see the kind of eye popping returns of 2009, and there will be volatility mixed in with times when the markets seem dead and stagnant. But ultimately, by the end of 2010, I expect that investors who persisted throughout the whole year will see decent returns. I expect Asian markets could return 20 to 30% for 2010.

So, after rebalancing your portfolios at the end of the year, look forward into the new one and take heart. 2010 will be a good year. Here’s wishing everyone a Merry Christmas and a Happy New Year!

Rebalancing My Portfolio (15 Dec 2009)

I am putting my own portfolio through a rebalancing exercise. I only do this once a year. The basic concept is to take profit for your winners, put some of the profits into your loser or laggard markets, and also, ensure that you don’t have too much into one particular area.

Looking at my portfolio. I remember that at the start of the year, I made a conscious decision to avoid US totally, more or less avoid Japan, and focus on Asia with some exposure into Europe. The strategy has paid off in 2009, as Asia led US and Japan markets by a mile. All the Asian funds have done at least over 50%, if not more, while the Japan fund is up 28%. I looked up the US equity funds on the fund selector and none of them did better than 34% over one year. The Europe funds I had though, did well, keeping pace with the Asian equity funds over one year.

However, its been one year in such an extreme position. Its time to move back to a slightly less extreme position. However, if you were to ask me, I would still say I favor Asia at this stage, though I also like Emerging markets as well. I am still rather iffy about Japan and US, but that’s the point about rebalancing, it forces you to put money even into areas you might not like. So, I came up with a new target allocation for my core allocation. Previously, the 60% I had in my core portfolio had 6% in Europe, 0.2% (negligible) in Japan, nothing in US, and 54% in Asia, including Singapore. My new target allocation would have 10% in Europe, 5% in US, 5% in Latin America, 5% in Japan, and the rest in Asia (35%)

Within my bonds portion, I wanted its total to make up 15% of my portfolio. As I made sure to add a portion of my new investments into my bond funds, and as the bond funds I choose this year had pretty eye popping returns over one year, they were actually not too far behind many of my equity funds. (Fidelity high yield bond fund was up 72% over one year, Fidelity US high yield was up 36%, and INF emerging market was up 64%). I was clearly too heavy into emerging market bonds though, so I decided on a final allocation of 4% into US high yield, 3% into Europe high yield, and 8% into Emerging Market Bond. So, I would be shifting some profits into my bond funds, and the US high yield bond fund would receive a bigger proportion since it was clearly the laggard.

Now, we come to my supplementary portfolio. This added up to 17.5%, and had seven funds in it! Three of these, the India, Russia and Indonesia fund had a return of 124%, 99%, 94% over one year. The South Korea fund and China fund were the laggards. Looking at South Korea, I found that I liked the valuations of the market, and its earnings growth for next year. Its one of my favorite markets for next year, so I decided to overweight it. Hence, I took profit on Russia, Indonesia, Asian financials, and added most of it all into South Korea. I left the precious metals fund and HGIF Chinese Equity alone as they were close to where I wanted their allocation to be.

I also left my CPF funds untouched as at this stage, I couldn’t add to them, and I was comfortable with their allocation.

My final portfolio had a target allocation that looked roughly like this:

Core Portfolio
Parvest Europe Alpha EUR	5%
FLF equity Emerging Europe	5%
LionGlobal Japan Growth	5%
Aberdeen Pacific Equity	25%
Aberdeen Asia Smaller Cos	5%
Aberdeen Singapore Equity	5%
Schroders Latin America	5%
FLF Opportunities USA	5%
Bonds Portfolio
Fidelity Europe High Yield Bond	3%
Fidelity US High Yield Bond	4%
INF RF Emerging Market Debt	8%
CPF Portfolio
AIGIF Acorns of Asia	7%
Lion Capital Balanced Singapore	1%
Supplementary Portfolio
HGIF Chinese Equity	3%
LionGlobal Korea	4.5%
HGIF India	1.5%
FLF Russia	1.5%
Aberdeen Indonesia	2%
DWS Noor Precious Metals	1.5%
Fullerton Asian Financials	3%
Total	100%

This actually looks like a lot of funds, and indeed, there is no necessity to have quite so many if you don’t wish to. A much simpler portfolio with a similar allocation would look like this:

Aberdeen Asia Pacific Equity	46%
Global Equity Fund	23%
BRIC Equity Fund	11%
Global High Yield Bond Fund	7%
Emerging Market Bond Fund	8%
LionGlobal Korea	5%

So, there you have it. Once you have established what kind of target allocation you want to have. To get to it just involves making the various switches to adjust to the new allocation. Don’t sweat the small amounts. For example, if you find you want adjust something from 5.5% to 5%, and it involves switching a very small amount, then don’t switch, it won’t make that much of a difference either way. It does not have to be a strict rebalancing either. I personally continue to have a heavy bias towards Asia, and it shows in my portfolio. But what the exercise does, is that it forces me to take some profit from Asia, Russia, India and add to some areas which have underperformed, like US, Japan, South Korea. Sometimes, these decisions, forced upon us by rebalancing, can be very surprising in their results. For instance, this year I never expected my high yield and emerging bond funds to do quite as well as they did this year, nor did I expect my Europe funds to actually keep pace with many of my Asian equity funds as well. I will update my portfolio when all the switches have been put through and updated in my holdings.

Year End is a Good Time for Rebalancing (4 Dec 2009)

We are in the month of December now, in the blink of an eye, it seems like the year has passed. The Lehman Brothers crash is now more than one year ago, and while it may not feel like it, most markets have been rising steadily for several months. I remember writing in a column in the Fundsupermart magazine at the start of 2009 that it would be a good year with positive surprises. So far, it hasn’t failed to disappoint. Many markets have shot up 50 to 70% year to date. But now that we have been through two such turbulent years, one with a massive crash, and almost through another with a big recovery, it is a good time to pause and rebalance our portfolios.

What exactly does rebalancing our portfolio mean, why bother to rebalance? The rebalancing method works as follows: Say we start an investment portfolio with $10,000. And as we have often suggested, we spread the investments so that the money is invested in stock markets all over the world. For example, we allocate 35% to US, 30% to Europe, and 35% to Asia. After 1 year, regardless of how well each region performs, we re-allocate our investments so that the percentage of money invested in each region remains the same. So, in a nutshell, rebalancing is about taking profit from your winners and adding money back into your losers on a consistent basis.

We back tested the results over the last 39 years on a $10,000 portfolio using rebalancing every year compared to one that just held throughout with no change. At the end of 29 years, the rebalanced portfolio with 80% into equities and 20% into bond had $176,586 whiel the buy and hold portfolio had $114,731. Hence, the rebalanced portfolio outperformed a buy and hold portfolio while being less volatile.

“Why does this rebalancing method work?” You may ask. It does seem weird because while it looks simple in execution, it requires you to sell off some of your funds that have been giving you the highest returns to invest in funds that might be causing you to lose money.

The clearest example would have been the massive swings in markets we saw from 2007 to 2009. In 2007, stock markets were on a roll, many Asian markets were up 15 to 30%, but bonds were having a flat year. Rebalancing would have resulted in money shifted from the strongest Asian equity funds, moved into bond funds. Then, in 2008, when most equity funds were down 50%, while bond funds were holdings steady, rebalancing would have resulted in money being shifted back from bond funds into equity funds

The whole crux of why rebalancing works, and why we should rebalance, is based on this “that all markets go through its ups and downs, and no single market will be best performing market all the time”. So, the markets that look so bad now, which people are trying to avoid, may eventually have their turn to shine again, and regardless of how hot or good a market looks now, rebalancing forces us to take profit from this market because it believes that such a market will eventually fall from its top spot.

While selling your winners and buying into your losers is tough to do in practice. Another key thing to remember about rebalancing is that it does not require that you sell all of your winning markets or funds. It just requires that you take profit on it. Hence, if one or more markets you selected happen to go through a multi year bull run with very strong performances, you will still benefit from having exposure to such a market. Rebalancing only requires that you take profit occasionally (I usually look to rebalance once a year).

The other part of it, which is to add money to your losing markets is also very hard in practice to do. But again, this method is based on losing markets eventually bouncing back, and the harder they fall, the stronger the eventual rebound would be. Think back again to 2008. The Asian markets fell the hardest compared to other markets like US, Europe, or bonds as a whole. Many Asian markets were down 50% or more. However, rebalancing your portfolio would have meant that you were forced to shift monies from bond funds, US, and Japan into Asia, and your actions would have yielded a handsome return in 2009, with Asian markets rebounding much more strongly than US, Japan or bonds as a whole.

This rebalancing method does not always work so well every single year, like how it did in 2009. (A market could be a strong performer over 2 to 3 years!). However, if practiced consistently over a long period of time, it would do better than just a simple buy and hold method. The reason is because while markets might remain strong, or weak over more than one year, but over a long period of time of ten years or more, then eventually, the strong markets suffer their crashes, and the weak markets get to shine.

In conclusion, as we approach the end of the year, it is a good time to take a good look at your portfolio and rebalance it accordingly. A very simple way could be just to take some profit from your winning investments, and to shift some of that profit into new or existing investments which have underperformed this year. One big caveat though, rebalancing your portfolio works far better with unit trusts and it may work with stocks. The reason being that unit trusts tend to invest into many stocks or bonds and into a broad market. While an entire stock market is likely to go through its cycles of ups and downs, an individual stock could fall flat, never recover or even go bankrupt eventually. Hence, insisting on adding and adding to such a stock will be terrible for your investment returns.

Dubai World (30 Nov 2009)

Last Thursday, Dubai World announced that it was seeking to delay loan repayments for 6 months. This shook financial markets all over the world as investors realized that what they once thought was Quasi-sovereign debt would was implicitly guaranteed by the government might still potentially default. Though the total amount owed by Dubai World, which is a state-owned holding company, which was reportedly 59 billion USD, is relatively small, compared to the hundreds of billion that had to be poured by the US government into financial institutions to bail them out from the US financial crisis last year, it was still a sobering reminder just because the worst seems to be over, and things seem to be on a recovery, doesn’t mean something like that can’t happen.

Dubai will take a long time to dig themselves out of the financial mess they have inflicted on themselves. Whether Abu Dhabi, Dubai’s oil rich neighbor cough ups from its oil riches the amount that Dubai needs to bail Dubai World out is a moot point, the massive oversupply in its property sector will take a very long time to recover.

However, from Asia’s perspective, the panic has been rather overdone. The Hong Kong stock market crashed more than 1000 points on Friday. (Singapore was spared because markets were closed due to Hari Raya Haji). From an economic perspective, although large, 59 billion is not an amount that by itself, can bring a recovering global economy back to its knees again. Also, the main impact of this will be felt in the gulf region, as a large proportion of the funding to Dubai World was from banks in the gulf region.

One can be excused for feeling a strange sense of déjà vu to see such an announcement from Dubai happen, slightly one year after Lehman Brother’s collapse triggered the start of a financial crisis in the US that spread to the rest of the world. However, it is important to keep thing in perspective. Dubai does not have anywhere near the kind of size or importance that the US economy or the US financial sector had. Asia, and for that matter the rest of the world, does not rely on the Dubai consumer, nor is it a major export destination market for Asia.

For now, the main worry is that this might have a financial impact on the already fragile balance sheets of banks which might have participated in helping to fund Dubai World’s grand expansion plans. But as I mentioned, the major casualties are going to be banks in the gulf area. While there may be some possible projects or financing done by some of the banks and other institutions here, these are unlikely to be big nor have a material impact on the banks here.

If fear does cause markets to tumble because of this though, then it would be a good opportunity to look for bargains in the market. Investor sentiment has been shaken, but economic fundamentals remain unaffected. It is then a matter of being patient until investor sentiment recovers, and if the global economic recovery continues, then investor sentiment will definitely recover.

To end up, we are also coming to the end of the year soon. Besides looking back at how things are, and looking forward to the new year, it is a good time to rebalance your portfolio. Given the big swings in many markets this year, and the last, rebalancing will be very important.

How I am Hedging my Portfolio (11 Nov 2009)

What a difference a couple of days make. Last week, markets were looking rather flattish. Then it picked up noticeably over the last few days. Patience remains the key here. Every time markets retreat a bit, there is always the fear whether it will go further south. I tend to handle it by asking myself whether fundamentals have changed, and what might derail a recovery. If I don’t, then I may actually buy more when markets dip.

In any case, so far, I am not seeing it. Yes, investors worry about what happens when the stimulus packages end, and every so often, you hear what if we get a double dip recession. But you have the world’s leaders here in APEC essentially saying that they are still very much concerned about the health of the recovery, and so, they will be careful about any exit strategies.

Most Asia companies had much stronger balance sheets than US ones, and other than having to deal with the drop in demand, which is now gradually recovering, at least most Asian companies did not have to also deal with having to refinance debt in a debt market that was frozen the way the US debt market locked up. Now, the worst is essentially over, and Asia is rebounding in a big way. While demand from the US is likely to recover slowly, other parts of Asia including China will step in to make up for it. A report issued this week confirmed what most of us already guessed. Trade within Asia has been growing. Its not an overnight change, but as intra-Asian trade continues to grow at a faster rate than external Asian trade, then we will be in a better position to pick ourselves up and recover from the recession simply because within Asia, trade activity is still increasing rapidly. Hence my confidence that we don’t need US’s economy to roar back in a big way just for Asia to continue growing.

Of course, even on that point, things are not that bleak. US consumer confidence hit rock bottom this year. As we move into 2010, things will look better. Measured against the low base that is the year 2009, most economic indicators and company earnings are likely to look good.

Within such a recovery backdrop though, there will continue to be concerns, and in Asia, asset bubbles are a danger to watch for. The low interest rates and stimulus packages have created a lot of liquidity, and a lot of it has flowed into Asia and emerging markets. If allowed to get out of hand, when they do burst, it will be very painful.

Because of this, I continue to do some hedging by holding my precious metals fund and my Russia fund. Commodities and oil are the weak Achilles heel of Asia because we generally have to import a lot of it. If its anything that could stop Asia’s recovery, it would be if price speculation pushed up such prices beyond their fundamentals. Hence, having some exposure into these would ensure that if this unhappy situation does come to pass, at least some of my funds will be making a lot of money.

Another area I am hedging within my portfolio is my exposure to bond funds – namely emerging market bond funds and high yield bond funds. At this point, I find it difficult to justify placing much money in fixed deposits, or even investment grade type bond funds simply because these are either earning really low interest, or are likely to be sensitive to a rising interest rate environment. Emerging market bonds and high yield bond funds are much less sensitive to that.

Also, it is a way to hedge against the scenario where the global economy goes sideways. I don’t see this as likely, but what if speculators drive up commodity prices so high that rising costs cuts into the profit margins of most companies in a big way? You can only pass on so much rising costs to a consumer that is already price conscious in the current environment. Or some other unforeseen event that doesn’t quite cause another recession, but results in little to no growth over the next 2 years.

In that kind of situation, high yield bonds and emerging market bonds would be my hedge. In the high yield bond market, many companies had already managed to refinance themselves for the next few years, and as long as they can meet their current interest rate obligations, they are unlikely to go under. The surprising thing is that we haven’t quite seen the number of bankruptcies that we expected to. The biggest example, during the great depression, over 3000 banks went under in the US, but up till now, less than 150 banks have been taken over by US bank regulators this year.

Its one year already since Lehman Brothers collapsed. If we haven’t seen a big round of company failures up till now, then, in a gradually improving environment, we won’t be seeing it either. Yet, interest rate yields for high yield bonds remain significantly higher than for investment grade bonds, when the very high possibility of interest rates going up eventually over the next 2 years is going to have a much more negative impact on investment grade bonds than high yield bonds.

Many emerging market bonds also remain at higher yields compared to the developed country sovereign bonds. This despite the fact that in today’s world, it is clear who are the major creditors and who are the major debtors. There is a disconnect here that is not going to change simply because rating agencies are used to giving emerging market bonds a higher risk premium. Yet, I ask myself. Who is in greater danger of defaulting on interest payments? An emerging market country which has strong foreign reserves, is growing fast, and is exporting either lots of goods (like China) or exporting lots of commodities (like Brazil) and is a net creditor, or a country that doesn’t have much reserves, spends more than it earns (has a big deficit), and is a net debtor. I think I can fit lots of developed countries with strong investment grade type ratings into this latter category. Yet, a lot of emerging market bonds continue to give a higher yield compared to the developed countries.

So, I remain highly positive, and I am looking forward to a next phase of market uptrend over the next 6 months to one year. In the meantime though, I am taking pains to hedge by having exposure to oil (through my Russia fund), precious metals, emerging market bonds and high yield bond funds.

Why You should DIY (5 Nov 2009)

It seems weird for me to suddenly talk about DIY or “do-it-yourself” with regards to investing. After all, investors with Fundsupermart are all DIY investors. But I still believe there are many people out there who do not take charge of their own finances, and yet, it is a very important decision.

There are so many reasons I have come across for people who do not want to DIY. But one of the biggest reason is that there is a spouse, a relative (father or mother), etc who is better and that relative handles it all for them.

This is not a very good reason I feel personally. Especially if the trust is to such an extent that they have no idea what is being done to their money, just that this trusted relative manages it for them. First, about the spouse. Let me state that no matter how secure a person feels about a relationship, at the very least, one has to know what your spouse is doing with your money.

Not asking might seem like the ultimate in a trusting relationship. But its your money, surely you have a right to know what is being done to it? For all you know, it was put into some risky business venture, and its all gone, if you never asked. Just because one’s spouse in more knowledgable in investing does not make him or her the best person to handle your money. You are the one that knows best how much risk you can handle.

Also, at risk of being overly brutal, divorce cases are going up, and money is often one of the factors that break up a marriage. No matter how much in love you might feel, one should always maintain a certain amount of independence. Relying on your spouse to handle something as important as your investments is a dependence that is very dangerous. What happens if the unthinkable happens and there is a divorce, by then, trying to think back and track and get back whatever money you placed with your spouse would be a very difficult task. Yet, it could be money you have saved for years, meant for retirement, kids, etc. And to lose track of all of that because it was “handled” by your spouse would be terrible. Imagine if he or she turned around and said that it was all lost in a huge market crash, or some risky overseas venture. You would have little recourse since you were the one who willingly left everything to be managed by your spouse.

Also, even if it didn’t happen. People can die. So, if you chose not to know anything about how your investments were handled previously and if your spouse (touch wood) suddenly passed away. Now, on top of the grief of losing a loved one, you would have to grapple with investments, which at this point, you might have no inkling or idea about.

This happens to anyone you place a huge amount of trust in managing your personal money on. No it your spouse, relative, etc. Things may change. One thing that doesn’t change though, is your own knowledge and your own motivations. No matter what, you will always be looking out for yourself, when you are managing your own money, and any knowledge that you gain with regards to investing, stays with you. They don’t disappear if someone died, or if your stock broker quit or something.

So, I am talking to my wife, trying to teach her more gradually about investing, even though she is exactly such a classic example. She nods off five minutes into a conversation about investing. And I mean to teach my kids about investing when they are young. Its always better to be well informed, and such investment knowledge can only be an asset as you get older.

So, go the DIY way. Take control of your own financial destiny. Only you know yourself best.

Added $4,000 Yesterday, and US on the Mend (30 Oct 2009)

After two days of falls in Asian markets on Wednesday and Thursday, I added in more to my portfolio yesterday. While psychologically, it is scary to add in more when the market is dropping, I have found that you usually get things cheaper during those times. Today is a pretty good day for markets so far, but I didn’t know how today would turn out when I placed my trades yesterday.

Additions were as follows:

Aberdeen Singapore Equity Fund - $2000
Aberdeen Asian Smaller Companies Fund - $2000

Total: $4000

Yesterday night, US also reported its third quarter GDP results. The US economy grew at a seasonally adjusted 3.5% annualized rate in the third quarter, the first quarter it has recorded positive growth after 4 consecutive quarters of negative growth before. While the road is recovery from here is likely to be a slow one for the US, we can all at least be relieved that it looks like the US economy is turning the corner. Economists are likely to be cautious about rushing in to declare that the recession has ended. It took months before the National Bureau of Economic Research declared that the recession in the US started in December 2007, so they are going to take some time before declaring that the recession is at an end (likely months after it has clearly ended).

The key thing is that one of Asia’s biggest export market, the US, is on the mend. I believe there are big changes involved going forward. Even on the mend, the US consumer is unlikely to go back to its free spending ways any time soon. So, the void will have to be filled up by emerging market consumers, including Asian consumers, which had previously been always been more interested in saving money than spending it.

But even for the stressed out US consumer, the signs of its economy recovering will also allow some of its consumers the confidence to start spending again. After all, its far easier to give into the temptation to spend money than it is to save it. This is why I think it is possible for Asian consumers to step up even as the US consumers take a step back. Just the other day, I was actually contemplating whether I should buy a car after all. (My two kids were growing bigger now). But with COE prices having gone up so much, and ERP charges going up as well, the high cost of owning a car again put me off. But going by the way COE prices have been going up, I am sure many others gave in to the temptation of owning a set of wheels even if I didn’t. So, can the Asian consumer help to fill up the gap left behind in the retreat of the US consumer? I am quite confident the answer is a “Yes!”

Property Asset Bubble? (28 Oct 2009)

Is Asia entering a time when asset bubbles might be forming? It might seem unbelievable. After all, it was barely just over a year ago when the financial crisis in US hit and spread to the rest of the world. But look at the property prices in Singapore and you wouldn’t know we just came from a recession. Home prices have surged, as have demand. 10,000 private residential units were sold in the first seven months of 2009, and this is more than double that of the 4300 sold for the whole of last year.

Prices of HDB flats have surged as well. Prices of resale HDB flats have hit record highs in 3Q2009, with the index at 145.2 in the 3Q2009. Prices of private homes also surged, going up 15.8% in the third quarter alone.

Part of the reason was that Asia, including Singapore was in a different part of the property cycle when the US financial crisis hit last year. US had been coming off a property bull run, one fuelled by cheap home loans and made especially widespread due to the easy availability of subprime loans. So, the crash there was sharp and the US property market may take some time to recover. Yet for Asia, there wasn’t a subprime loan fueled property bubble. In contrast, Asia was still recovering gradually from the property highs of the nineties. Hence, was barely in the early stages of a property bull run before the US financial crisis hit.

Now, with governments all over the world keeping interest rates at rock bottom, the lending costs of buying property are at a low. It doesn’t help that with so much money being printed by governments to stimulate the economy, people are nervous about possible hyperinflation and in light, property would seem even more attractive because it has historically always been resilient to inflation.

Indeed, the three things likely to be resilient to inflation are commodities, property, and stocks. Stocks because companies sell goods and services, so if there is high inflation, they can raise prices as well! For commodities, well, even if inflation is rampant, people need to eat, companies need their raw materials to build their goods. Hence, commodities are resilient to inflation. Finally, for property, everyone needs and wants a roof over their heads. So, good property will always have value which appreciates even as things get more expensive.

However, are we experiencing an asset bubble already? My answer would be “Not yet.” This is crucial. We may be at the early stages of an asset bubble forming, and if no action is taken, there will be a huge bubble, which when it bursts, is going to be very painful, just like all bubbles are painful when they burst (anyone still remember the technology bubble in 1999?). But if Asian governments, including Singapore’s can take early enough action to make sure it doesn’t spin out of control, then we may yet avoid experiencing an asset bubble.

This doesn’t mean property prices shouldn’t rise. Over the long term, all prices generally go up. Governments agree that low to moderate inflation is fine, its high inflation they don’t want. But in a bubble situation, prices do not reflect fundamentals or demand at all. Everyone is just jumping in because they want to make a quick buck and everyone thinks they can get out in time before the party ends.

Asia’s stronger economic growth and general land scarcity means that property will always be in demand. But there is a reasonable price to pay for anything, and during bubbles, prices are pushed up well beyond reasonable levels. We are not in an asset bubble yet. But the ingredients are all there. Low interest rates, ample supply of money in the system, a recovering economy, increased demand, limited supply. Whether we end up like US will depend a lot on how our government can manage the current surge in property prices. In the meantime, if you already have property, let it ride the current surge. But if you don’t, then don’t chase after the property market. The higher property prices surge in the short term, the greater the danger of a bubble forming. And if government steps in now to rein in the excess as a pre-emptive measure, that would also put some brakes on the surging property market. So either way, there is no necessity to chase after the property market.

Just Put in Another $5000, it’s a Good Time to Invest (21 Oct 2009)

I just invested $5,000 more today. It was placed in the following funds.

ING RF Emerging Markets Debt HC EUR - $1,500
FLF Equity Europe Emerging EUR - $1,500
Legg Mason SEA Special Situations - $2,000

Firstly, the current market situation is that stock markets have obviously risen, but many investors are caught on the sidelines, or sold out too early. Many are very wary of going in at current prices, and wondering if it will come down. There are no obvious signs that the market is going either direction in the short term, hence all the uncertainty.

What I do know is that I am far more patient then the market, which tends to have a very limited short term outlook. Things are now slowly and surely getting better around the world. It just won’t be defined by any one single event where you wake up and suddenly, it seems like the recession is “over” and we are in boom times. If the market looks expensive now just because it has risen 50% over the last 6 months, you could fast forward 1 year and you might again in hindsight say it was still cheap now. But because no one has a confirmed crystal ball, hence there remains so much uncertainty. But for a unit trust investor like me, where I am not so concerned about the short term fluctuations, I would still “dare” to buy now.

In addition, valuations are not demanding. Forward 2010 valuations for most Asian markets are below 15 times PE, which is very reasonable, and that’s for US and Europe as well. The year 2009 is a very low base for many companies, since most were still doing badly in the first and second quarter. So, next year’s numbers are almost certainly going to look better compared to this year’s numbers.

As always, a portion of the money was invested into bond funds. The minimum subsequent investment for the ING Emerging Market Bond fund is higher than $1,000, hence I put in $1500.

The investment into Europe was because I have too much exposure into Asia, so even though I continue to like it, if I don’t add to other regions outside of Asia occasionally, soon I will be even more heavily tilted towards Asia. Its hard to practice what you preach yourself, so, yes, despite all the diversification benefits and strategies that I always talk about, I am sometimes guilty of not following strictly to them myself either. Hence from my portfolio, one can see that I am obviously overweight Asia in a big way, and probably more than is healthy.

The addition into Legg Mason SEA Special Situations fund reflects again my bullishness for Asia. I find the fund a good counterpart to the Aberdeen Pacific Equity fund, which is more value driven. This fund is more aggressive (its performance is more volatile), but it can really move up when the market runs. And from my perspective, we are in a rising tide. So, it’s a matter of time.

One day within the next few months, for no particular reason, the market will move upwards decisively over a period of time. This is because as people leave the year 2009 behind and start to focus on 2010, they will start to feel more optimistic, and many will realise that things are actually looking much more positive. Analysts will be revising earnings for 2010 upwards into the new year, and suddenly, without any particular event, the market will move upwards further.

It doesn’t seem like it now, but that is precisely why we should invest now. Investing when the whole world including your next door neighbor is screaming buy is not the way to go. But investing when most people are uncertain, are still waiting, that is how I plan to make money.

All that Glitters is not always Gold (16 Oct 2009)

Gold prices are now at 1050 USD per ounce. Ten years ago, in 1999, they were 288 USD per ounce. That’s a rise of 264% which works out to an annualized increase of 13.8% per year. This is far better than what the US stock market did. So, should we all be rushing into gold now? To be honest, I am cautious.

I am far more positive on equities than I am on gold. But firstly, here’s why gold is going through the roof. People are moving into gold right now because the US dollar is falling, and there is a fair amount of worry that it will crash. And the reasoning is that in a huge crash for the USD, then the only good of store of value would be gold. It also helps that a group of investors believe that there will be hyperinflation, and in that scenario, paper money will also see its value shrink while gold will not.

Now, here’s the reason why I am cautious, if you look at this history of actual gold prices, it is not an asset class for the faint hearted.

I ran some numbers. On a calendar year basis, over the last 88 years up till the year 2008, Gold had 44 positive years, 11 years of 0% returns, and another 33 years of negative returns. In percentage terms, this means that 50% of the years were positive, 12.5% of the years were absolutely flat, and 37.5% of the years were negative. It should also be noteworthy that including this year, gold has been on a 9 year bull run. The last time gold had a bull run similar to its current one, was in the seventies. Gold went from 35 USD per ounce in 1970 to 589 USD per ounce by 1980 (It hit a high of around 850 USD at its peak on 21 January 1980). After that, it fell all the way back down to ranges at 280 USD over the next 20 years before it started on its current bull run again.

The thing is, the asset class can go absolutely nowhere for 20 years! And this is not an isolated trend. From 1935 to 1967, gold price went absolutely nowhere! That is 32 years! I am all for long term investing, but 32 years of an investment going absolutely nowhere would be terrible even by long term investing standards.

When gold surges, it can charge up substantially over a few years, and after that, it could be a multi decade wait in the doldrums for its next bull run. This makes it extremely scary to hold as a main investment strategy. This is one of the main reasons why I hold a precious metals fund instead of just gold, and even my precious metals fund, which is up 33% since I bought it, is barely 1.6% of my total portfolio. It is more to hedge to a certain extent against hyperinflation and USD crashing rather than a main strategy.

The key thing is, I believe a recovery is in the works, and with that, company earnings will improve as the global economy gets back on its feet. Hence, I am bullish equities. However, what is gold? It is mainly a store of value. Its practical uses as jewelry is definitely not the reason why it should be surging to over 1000 USD per ounce. If people didn’t believe in gold as a store of value, its price would plummet. So, unlike companies, which are striving to improve their productivities, and have the leeway to adjust prices, go into new business, etc, gold is just gold. Its not even essential like oil, or rice, or bread. People can choose not to use gold as a store of value, and they won’t be any worse off, unlike how if people didn’t want to use oil, then everyone would have to stop driving, and all the machinery in the world would stop.

So, while I acknowledge that gold has had a tremendous run so far, I am cautious on it. I actually have a precious metals fund that would continue to go up if gold price continues to move up, but I am not betting the farm on this. The history of this asset class over the last 88 years makes it a scary one to hold. So, I would only have it in my portfolio as a form of hedging. If you want to make big bets on this yellow metal, then be prepared to be very nimble, because when the party ends on this, it could be a very long time, and I am talking about decades here before the next gold bull run revisits again! So, if you happen to be the last one holding on to gold assets when this gold bull run ends, its going to be very painful.

How much things actually cost - Part 2

This is the continuation on my previous posting of how much things actually cost. In short, we can calculate how things actually cost by considering their cost over the time in which we would effectively use them instead of just their upfront number. For example, a pair of movie tickets plus a popcorn combo for two costs $30 on a weekend. So, if we take a 2 hour movie, that works out to $15 per hour. That cup of coffee? (Its water, so let’s assume it gets digested in 2 hour). A Starbucks coffee would cost $3.5 an hour, while your kopitiam coffee would only cost $0.75 an hour. A restaurant meal costing $30 would work out to $5 per hour assuming you took 6 hours to digest the food.

Let’s touch on something close to people’s hearts here – housing. This is iffy because you can sell your house again subsequently, so many people do not see it as necessarily a cost. But for someone who is renting. Say you spend $3,000 per month renting a place. At most you would spend only 12 hours a day at your house. Rest of the time, you would be outside. So, on a per hour basis, it would cost (3000 divided by 12x30) = $8 per hour. This of course, doesn’t include things like your PUB bill, and cost of furniture and stuff.

Take a couch. Say you spent $3000 to buy a really expensive, nice sofa set. Give it 5 years usage, and assume you are a real TV buff, so you spend 3 hours watching TV every day (wow!). So, that sofa cost you 3000 divided by (3x365x5) = $0.55 per hour. Hey, its not that bad if you are a TV buff. Of course, if you are the type that buys a $3000 sofa set, but hardly use it at all because you watch TV in your bed. So, it gets used maybe 1 hour a week? Then your sofa set actually costs you 3000 divided by (1x56x5) = $10.71 per hour. That’s much more expensive now. Note that this is why I am willing to spend money buying an expensive nice bed, because we use the bed a lot. Even if it’s a $3,000 bed. If it lasts for 5 years, and we sleep on it an average of 8 hours a day, then its per hour usage is $3000 divided by (5x365x10) = $0.16, which is cheap! So, buy a good bed!

The same principle can be applied to electronic equipment like computers, handphones and TVs. So, if you spend 1 hour per day watching TV, then a $3000 TV set that lasts for 3 years would work out to 3000 divided by (365x3) = $2.74 per hour. If you spend 2 hours or even 3 hours a day paying computer games after work, then even if you spend $6000 on a top of the line computer that lasts for just 2 years, it would be only 6000 divided by (3x365x2) = 2.74 per hour only.

How about things like assessories? Again, it all depends on how often you use them. A diamond ring may cost a lot, but if the girl is so happy she wears it every day to work or play for the next 5 years (before she switches to another). Then, even if it costs $10,000, it would only work out to 10,000 divided by (300x10x5) = $0.66 per hour. Yes, you saw that right. It costs less than a cup of starbucks coffee. Of course, this is provided she wears it that often. If you are the hapless guy who sent even $10,000 on a diamond ring, and you gal only wore it a few times and then, kept it in her safe deposit box, then it would work out to say 10000 divided by (10x10) = $100 per hour! Now, that would be horrendously expensive. Of course, being a guy who actually did buy an engagement ring for my wife, I would advise that all guys do that regardless of how often they wear that ring after that. Because marriage is for life, and you wouldn’t want your wife to be mad at you for not buying her an engagement ring (even if she doesn’t wear it often).

Another common assesory, the watch, is actually pretty cheap too because we wear it so often. If you spend $5,000 buying an expensive branded watch, but you were willing to wear just that one watch for the next 10 years, to work and to play, again it would be cheap on a per hour basis, just $0.33 per hour. Of course, if you are going to end up wearing it just once each week for just 1 year before it starts to collect dust in the cupboard, then it would cost 5000 divided by 56x10 = $8.90 per hour. The worst would be if you wore it once, didn’t like the look, and never wear it again! Then, it would cost an astonishing $500 per hour! Of course, you could also buy a $100 watch and wear it for 5 years, and that would only cost $0.0054 per hour! In a similar vein, buying a $100 for a friend whom you know never ever wear watches, is a waste of money even if its $100.

How much do trips cost? Again, they can be calculated using this method. My honeymoon vacation was to Maldives, and cost nearly $10,000 for just six days or so. So, it cost $10000 divided by (6x24) = $69.44 per hour. This is obviously very expensive, which is why people can’t exactly afford to do nothing but travel all the time on holidays. Cheap trips though can be both fun, and very reasonable on the pocket. A $500 weekend trip to somewhere near, would only work out to 500 divided 3x24 = $6.94 per hour.

Ultimately, though this is just another way of looking at the cost of things, and doesn’t factor in the intangible benefit or enjoyment from things. I must emphasize that I am not encouraging people to do nothing but to scrimp and not spend any more at all. Life is going to be very tedious and boring if its all about saving and you don’t get to enjoy yourself at all. However, as with all things, things can be enjoyed in moderation. Is your enjoyment from sitting on a $3000 sofa set that much more than sitting on a $800 one? Only you can decide on that. Things that get a lot of usage are actually very cheap. So, that watch or assessory might actually work out to be really cheap if you wear it all the time. Take my wedding ring for example. It cost under $300 and is probably the cheapest assessory I ever bought on a per hour basis. This is because I have worn mine since I put it on and have never taken it off since, even in my sleep. So, as of now, I have worn it for 5 years and 7 months, or 2035 hours. So, it works out to just $0.147 per hour and its getting cheaper by the minute! On the other hand, I have realized that buying diamond rings for my wife is an extremely expensive affair because she hardly ever wears them. But diamond earrings are alright because she wears them all the time!

How Much Things Actually Cost - Part 1 (5 Oct 2009)

Back from my vacation! It cost a lot, but was fun and a good chance to get away from everything and just relax. But now that I am back, I would touch on something which is common to everyone everyday.

When ever we buy something, we often just look at the price. If this shirt cost $30, then that is all there is to it. But there is actually a slightly different way to look at this which I have thought about before. So, today, I will explore that way. Please note of course that this is a purely monetary method of looking at the cost of an item, and does not factor in how much personal satisfaction you get from using it, which can’t really be counted by money.

This method is to take the cost, add any repair maintenance that will ever be incurred, and divide the total figure by the number of hours you are actually going to use this item. For items like food, we can put a more arbitrary 6 hours to it, since its likely that it would all be fully digested by then.

So, let’s take that $30 shirt again. If I estimate that I am going to wear it to work once every two weeks for the next 2 years before I get tired of it (or expand such that I can’t wear it anymore!). And I normally wear it for ten hours on the days I do wear it to work. Then it would work out to 30 divided by (28x2x10) hours or $0.053 per hour of use. Obviously, this is very little. It also means that if I go for a slightly more expensive $50 shirt, it would still work out to a relatively small amount of $0.089 per hour.

However, if it’s a $50 casual shirt which I bought, which I ended up wearing just once, and I never wear it again after that. Then, this shirt would have cost far more. Assuming I wear it for even a full $10 on that day. Then it would work out to $5 per hour. Notice how much more expensive this now becomes compared to even a $50 working shirt. So, if you are the type that loves to buy new clothes, and end up wearing them just once, or worse, never at all! Its definitely not a very good deal.

Let’s look at something more complicated, like a car. There are all sorts of makes but let’s not take something too expensive. So, a 1.5 litre sedan.

Downpayment - $18,000, assuming use full 10 years, so $1,800 per year.
Monthly car loan installment payment -  $560 per month or 6720 per year.
Insurance - $1400 per year
Carpark – $65 per month, or $780 per year
Parking – $30 per month or $360 per year
Petrol – $300 per month or $3600 per year
Road tax – $700 per year
Maintenance – $250 per servicing, so $750 per year
Miscellaneous – $500 (accessories, car wash, replace parts).
Total – $16,110 per year.

Assuming you spend 1.5 hours on the road every day driving to work, etc. Then each year, you would spend 547.5 hours using your car. So, the cost per hour of a 1.5 litre car is ($16,110 divided by 547.5) = $29.42 per hour. Definitely not cheap. In comparision, most MRT trips won’t cost you over $2 per hour. And we are talking about a relatively cheap 1.5 litre car. Cars which are 1.8 litres and above are all much more expensive wither its maintenance, road tax, petrol, monthly payments. So, its all adds up.

We need to balance this with the amount we earn per hour as well. So, take your monthly pay, divide it by the number of hours you work per month. Let’s assume we work 8 hours a day, 20 days a month. (yes, some of us work longer, but let’s start with this). This works out to 160 hours per month. Here’s a table showing how much you earn per hour based on different salaries per month,

Monthly Salary	Amount earned per hour
$2000	$12.50 per hour
$4000	$25 per hour
$6000	$$37.5 per hour
$10000	$65.50 per hour
$15000	$93.75 per hour

So, now that we have this, you can look back and assess how expensive are the things you are spending money on relative to your earning power. If something costs $1 to $5, its probably either very frequently used, or its cheap. If it costs $10 an hour, its still affordable, but don’t buy or use too much of these things. And if something costs $30 or $70 an hour, then you either use these only once in a long while (like an expensive trip), or you better think long and hard before buying it (like an expensive luxury sedan). And as can be seen, cars are expensive!

I will touch on more daily examples like food, entertainment, and a favorite topic currently for many – property in my next blog update.

Going on a trip, added 6k before I leave (16 Sep 2009)

Next Wave Started, Looking at Laggards (11 Sep 2009)

It looks like the next wave up has started. Things were quiet up till yesterday when the STI index breached 2700 intraday. Concerns about the China market is subsiding as economic data from China continues to impress. The latest August data topped analyst’s forecasts. News that lending by Chinese banks rebounded in August (up 34.1% YoY) and that money supply rebounded gave much reassurance to fears that China’s banks would rein back lending.

China’s industrial output also grew 12.3% Yoy, the fastest rate of growth yet in the last 12 months, showing that it was well on track to its official target forecast  growth of 8% for the economy for the year of 2009. Asia is well on track to recovery, and while there are lots of detractors and people who refuse to believe that Asia can recover so fast. They fail to look at history.

Asia has always bounced back and recovered quickly from slumps.  And the bigger the slump, the stronger the eventual recovery. For 2008, we are talking about one of the biggest slumps in history, something that will be written in history books. A mega slump of massive proportions. Such global massive slumps where literally all markets fall by 40% to 50% are once in a lifetime occurrence. While the drop is very painful, the rebound is usually equally spectacular. The rise in stock markets over the last 6 months was not a freak event, and the trend will continue. It is backed by economic data that is starting to show that gradually, the developed countries are picking themselves up from their feet, and Asia economies are leading the way out of this recession.

I am in no hurry to sell. This rising trend based on the full global economic recovery has not been played out. Lately, I have been monitoring laggards as well. Europe for example, as the region is paying catch up. Many European funds have shown up on the top performing funds list over the last one month. I already hold Parvest Europe Alpha and FLF Eq Europe Emerging both of which have also surged recently. I will be monitoring Europe markets for bargains. I also have to admit I probably have too much in Asia at this point, and while it has certainly rewarded me over the last 6 months as Asian markets have outperformed most other markets quite conclusively. But from a diversification point of view, at some stage, I will need to rebalance away from Asia even though I remain very bullish on it. As always, it’s extremely difficult to follow what you tell others, and striving to remain diversified is probably the hardest task for many an investor, especially those with a high level of conviction in their views like me.

Gold has also surged, pushing the DWS Noor Precious metals fund higher. For me though, this fund, which I hold, and the FLF equity Russia fund which is an oil play are hedges against rising inflation. I would be perfectly happy though if gold, oil prices do not surge and these two funds which I hold creep along over the next two years. Because that would mean that inflation is kept under control, and if it happens, Asia’s economies will benefit the most from this and continue to surge forward. There is a reason why these two funds are less than 10% of my total portfolio.
Asia is showing great resilience in the face of this time’s recession and I am confident that we will experience a V- shaped recovery coming out of it. The coming 6 to 12 months are going to be very exciting ones.

Switched a Fund, Reluctantly (7 Sep 2009)

I just switched from one Asia ex Japan fund to another today. I would normally always advise against doing this. Chasing fund performance, especially within the same sector is not a thing one should usually do. Fund managers each have their own styles, and you should usually give them some time to really confirm that they are underperforming before you decide to switch.

In my case, it wasn’t a case of underperformance either. I was quite happy with the performance of DWS Asia Small/mid cap fund. It had returned me close to 40% since I bought it.

The problem was that the fund house itself wants to close the fund. Those of you who have the email should have received the email from us by now. They just had an EGM to close the fund, it didn’t pass. Now they are going to propose another one. Now, I actually like small caps right now. I think blue chips have gone up to a certain extent, and it’s many of the small caps that are lagging.

While the risks are higher for small caps, that is precisely why getting exposure to them via a small cap fund makes sense. Even if one or two fails, it would hardly impact the fund, and in the meantime, if the other small caps in the fund moves up strongly, it would more than make up for the few that fail.

But in this case, the fund house seems determined to close this fund. And if I were the fund manager, it would certainly come as an unwelcome distraction. How well can you concentrate on running a fund if it could potentially get closed within the next 3 months? As an investor, the uncertainty is also not a good thing. So, I decided to switch out of this fund. But because I still like Asian small caps, I had to do what I normally would not advise people to do. I switched from one Asia fund to another Asian fund, and their objectives are similar. Both are small cap focused.

The new fund I have switched to is Aberdeen Asia Smaller Companies. While it is not easy to run a small cap fund. I am confident that Aberdeen has the expertise to do it. I did not want to switch to a more typical Asian ex Japan fund because I already had those. I wanted specifically one that was focused on small caps.

Based on the overall performance that the fund has shown over the past few years, I chose Aberdeen Asia Smaller Companies. The fund has the best 3 year track record amongst the funds in this category. And it had also fell the least during the tough times in 2008. While it has underperformed in the initial run up compared to the other funds in this category, it was because the fund manager did not want to chase up the frothier sticks with no fundamentals. And I share a similar view in that in the medium term, the stocks with the stronger fundamentals will shine through.

Sometimes, Its The Money You Didn’t Spend That Counts (1 Sep 2009)

I bet most people bemoan not having enough money. Few people are ever in a position in which they claim that they have more than enough money and wouldn’t want more. That’s why so many of us want to invest. And indeed, investing will help to grow your wealth. Money that is invested is money which is working for you 24 hours a day, 7 days a week.

In contrast, debts, whether from credit cards, car loans, renovations loans are all draining money from you constantly. Before you even start investing, clear your short terms debts first. And sometimes, the best way is to not even incur them in the first place, so very often, it’s the money that you didn’t spend that will form the base capital for your investments.

We live in a materialistic society and it is almost impossible to keep away from spending. The key is moderation, and to be aware of your expenses so that you don’t spend more than what you can afford. In today’s world, where credit cards are readily available, and where there are many purchases which allow for installment repayments, awareness of how much you are spending is very important.

Furniture, and electronic items which allow 12 months or even 24 months repayment periods should not be seen in terms of their monthly cost. In the end, the total cost is what you will eventually pay, even if you get to pay that over 12 months instead of straight away. If a person couldn’t save up that money to pay it off right away to begin with, he may not be able to adjust his spending downwards in the subsequent 12 months for it either.

A car is one of the biggest-ticket items that you can spend your money on. So, be very careful when you are thinking of buying a car. It’s not just the upfront cash you may have to fork out, or even the monthly car installment payments, which are substantial. There is also petrol, parking fees, maintenance, road tax, ERP, car insurance, to name the most common costs. All these could easily add up to a few hundred dollars as well depending on the type of car you purchase. Personally, I believe I have managed to save a substantial amount of money simply because I did not buy a car the minute I started working. I still take the MRT to work and back every day.

Especially at the initial stage of building up your wealth, saving is very important. So, be aware of the big ticket items. Be it an extravagant wedding, expensive furniture, electronics, a car, sometimes, it’s the money you didn’t spend that will be key.

Bank Savings Account Rates have dropped to 0.16%! (26 Aug 2009)

Had a really busy weekend, was down at the InvestFair booth on both Saturday and Sunday and I got to speak with some of you. But let’s talk about savings account rates.

Did you know that the average bank savings deposit rates in Singapore are now just 0.16% in July? I generally don’t keep much money in my savings account, but it was only when I pulled out the historical data from the MAS website did I realise that they had fallen by so much. At the start of 2003, average bank savings rate stood at 0.44%. While that’s not very high either, but to fall to 0.16%! So, that means that keeping $10,000 in the average bank savings account for an entire year would net just … $16.

The rates are so low we might as well treat it as essentially zero. When I pulled the data on fixed deposits from the MAS website, the results were not much better. Average 12 month bank fixed deposit rates stood at merely 0.53% in July! At the start of 2003, it stood at 1.3%. Savings accounts are more liquid than fixed deposits. The interest rate may change daily, is calculated daily, and you can put in and take money out all the time with no penalties. For 12 month fixed deposits, there is an inherent understanding that you have to keep it there for 12 months. If you withdraw your deposit before it matures, there will be penalties like lost interest which you would not earn. That’s why fixed deposit rates have to be higher than savings account rates. But at just 0.53%? Even the cash fund, whose daily yield you seen on our banner every day shows a yield of 0.482% as at 25 Aug 09. That is only slightly lower than 0.53% and it gives daily liquidity! This means that you can put in and take out money without penalty every day.

There is really a very significant penalty right now for being safe. Because fixed deposits and savings accounts are “safe”, investors keep large sums of money in them. However, given the extremely low interest rates right now, they are simply not being adequately rewarded for keeping money with the banks and being safe. Banks, in the aftermath of the US subprime financial crisis, became very conservative with their lending, you read about how many people couldn’t buy cars because the banks would not grant them a car loan. Similarly, housing loan were reduced to just 70% of the total loan for some cases because banks did not want to take as much loan exposure.

At the same time, investors fearful of the market crash pulled a lot of money out of stock markets, investments, and kept them all in cash since last year September. Many are still in cash even till this day. As a result, the banks are flush with cash and do not need your deposits. This is shown most clearly by the low interest rates being given to depositors. If the banks really wanted your money, they would be willing to give you a higher rate, but they don’t! They have so much cash they can’t loan out of it all out anyway. So they hardly need more.

As investors, we need to recognize that our money can be put to better use. Even if we still want to keep them in low risk, safer investments, there are certainly alternatives which can give better than the 0.16% from savings accounts. As mentioned previously, the cash fund gives 0.48% right now, with similar liquidity. There are low risk funds like DBS Enhanced Income which would give a higher yield than that. The next step up in yield would be Singapore bond funds. SGS bonds also can be considered. There is no law that insists that you have to hold a 15 year SGS bond to maturity. Although I would caution that holding a very long maturity bond carries the risk that if interest rate moves up, the value of the SGS bond will drop. Fundsupermart has a list of the SGS bonds and their current yield to maturity on the website.

What does this also mean for equities? Historically, when interest rates are at such low levels, assets like property and equities benefit. Equities (stock) can trade at higher than normal valuations simply because the alternative of holding cash or being in fixed income gives such lousy returns. Similarly, because interest rates are low, property loans are also giving low rates, and again since the return from being in cash is so negligible, there is greater interest in putting the money into property instead. This effect is compounded if the market starts to trend upwards, confidence comes back to the market, and more and more people start to shift money from cash into investments like stocks, unit trusts and property.

So, please review the money you have in fixed deposits and savings accounts and check on the rates you are receiving for them. Banks love to roll over fixed deposits automatically when they mature and at their current levels which are very low. Even if you still want to keep them in safe investments, there are alternatives out there which are also very low risk, yet gives a better return than what savings accounts is giving.

Just Added to my Portfolio, and about China (19 Aug 2009)

Just invested another $10,000 distributed into the following 3 funds.

a) Legg Mason SEA Special Situations - $4,000
b) Aberdeen Pacific Equity - $4,500
c) ING RF Emerging Market Debt HC - $1,500

The China A share markets (Shenzhen and Shanghai index) has been going through a slump. They were down around 20% from their highs this year as of Wednesday 19 August 2009. It speaks volumes about China’s importance now that most Asian markets also followed China and fell on Wednesday.

I think its more sentiment driven rather than fundamentals. The China A share market itself has been going through a bull phase that started since October last year. In comparison, most Asian markets only started to rally and recover in March 2009 this year. There is an important difference between the China A share market and the Chinese economy. The Chinese economy is improving, without a doubt, just as the rest of the world is also starting to pick itself up from a recession. And the ability of China’s economy to continue to grow would have a significant impact on the rest of Asia especially since US’s recovery is likely to be relatively slow.

The Chinese stock market on the other hand, is a mainly closed market which only mainland Chinese can participate in. In this current 20% slump, some investors in China may get their fingers burnt, but much of it would be largely contained within China’s boundaries.

This is why the rest of Asia, though going through a certain correction now, is not going into a market crash the way the China A share market is going through right now. For me, personally, I believe the trend for Asian markets over the next 1 to 2 years will be up and we are far from the top of the market yet. So, any corrections within the market would be a good time to buy in on the cheap. Hence, I have just put in $10,000 more into my portfolio.

The stronger the fear in the market, the keener I get to buy more. And over the last few days, the fear has become significantly stronger. Will this be the exact bottom during this particular correction? I wouldn’t know, nor am I really aiming for that. I just think that it has fallen enough such that I want to add more.

P.S. As always, stay diversified even as you invest. Even as I add to my holdings, I am putting a small percentage into a bond fund.

Don’t Market Time the Short Term (18 Aug 2009)

The market volatility since last week should be fair warning to all investors. Don’t try and market time short term and expect to come away very successful. Since last week, here are some things you could focus on which would have all given you very short term calls. The Federal Reserve was having their FOMC meeting, good news expected (no interest rate hikes). An expected National Day rally. But on Monday, after the National Day Speech, instead, because the China market crashed almost 6% on Monday and Asian markets reeled, the Singapore market was down over 80 points. After that, some investors thinking this was the end of the rally would have ran for the hills. Yet, on Tuesday, despite going through a roller coaster ride during the day, most Asian markets ended positive with the STI index up 21.74 points.

This all goes to show that daily fluctuations are so notoriously difficult to pin point its almost futile to try. I know there are certain chartists and day traders who literally try and trade intra day even. These people must have a really hard time relaxing as their emotions go up and down every day based on how markets are performing.

Let’s take a look at some numbers from the year 2007 for example.

Out of 250 trading days in 2007, a hundred and thirty five of them were positive trading days. So, based on a daily basis, there was only a 54% chance of getting a positive trading day in 2007. This is almost like flipping a coin and calling heads or tails. And this was in a year where the index was up 16.6% by year end! This shows the futility of trying to time the market in the super short term. You might as well flip a coin where the odds are concerned.

All investors want to get in at the extreme bottom of the market and get out at the very top. In practice though, its very difficult to get it exactly right. Broad trends might be foreseeable within reason, but short term daily trends are so hard to predict that its almost like reading tea leaves. Was there any fundamental reason why the Singapore STI index had to crash over 80 points on Monday? Not really. Latest Non-oil domestic numbers for July in Singapore was good. NODX rose 6.1% month on month and had been steadily improving the last few months. Was it all because the China A share market crashed?

Yet, we need to be clear as well. The China economy is actually improving, not declining, as the local China share market seems to suggest. Its 2nd quarter GDP increased to almost 8%. The key difference for China is that because that market had run up a lot already, valuations wise, it may have prompted the correction it is currently facing. The Shenzhen index is currently trading at 30X PE for the year 2009, while the Shanghai index is currently trading at 23.4X PE for the year 2009. These are high compared to the rest of Asia though they are average compared to the 5 year historical average of these two markets. The China A share market is a closed one, so it has always traditionally traded at a high valuation.

Nevertheless, profit taking can be expected and corrections are healthy. The last thing I want, would be for everyone to agree that the only direction that markets can go is up. That would actually be more dangerous than the current state of uncertainty where every single day fall is met by calls that it is time to run for the hills. There will be a time when most of the recovery has been priced in, and when this rally has run its course, but I personally think we are not there yet. So, I will be looking to add a bit more to my holdings as well in the next one to two weeks.

In the meantime, take heart. The global economy is gradually picking itself up. But the entire process will take time and volatility can be expected in the meantime. I think daily volatility is such that it is not worth the added stress and uncertainty of trying to market time in the short term.

On the Federal Reserve (13 Aug 2009)

The Federal Reserve just concluded its FOMC meeting and said that data “suggest that economic activity is leveling out”. So, they are feeling more positive as well and confident that the worst is over for the US economy. The Fed’s comments led to a wall street rally that has extended to Asian markets today. And even though the Shanghai and Shenzhen stock markets continue to be weak, the rest of Asia has taken their cue from the US instead.

This is expected as US is still going to remain the main export market for Asia for some time to come. Other good news from the Fed includes that they said they would keep interest rates “exceptionally low” for an “extended period”. This means that while they think the worst is over, they are in no hurry to rush to raise interest rates yet and risk the economy tumbling back into recession again. This is good because the US is likely to experience a slow recovery so, it will need all the help it can get.

They also said they would stop their bond buying by October. While all this didn’t bode well for US treasuries and US government bonds in general, it’s a net positive for equity markets as well. The reason being that this bond buying exercise was done to shore up confidence at a time when credit markets were frozen. Now that confidence has largely come back at least to an extent where credit markets were working again, then there was no need to keep on buying back more bonds anymore. So, the fact that they do not see the need to continue to take more such extreme measures also mean that financial and credit markets have stabalised and are back to normal now.

But don’t put too much focus on just the Fed’s comments though. Ultimately, it may only result in a short term rise in markets only. For markets to continue to rally, earnings, and economic growth need to come back. Because these take time, we are likely to continue to see a fair amount of market volatility in the next few weeks and months as the bulls and the bears play tug of war.

I am confident the bulls will win out in the end, because time is on our side. But investors need to be patient and not get sidetracked too easily. There will be days or even weeks when markets go into corrections. At this point in time, such periods are still good entry points rather than cause for alarm. The reported earnings for companies this earnings season are in general surprising many analysts on the upside. And many of these companies will continue to surprise over the next 6 to 12 months.

We often underestimate the ability of people to bounce back from adversity. Just because a person is out of a job doesn’t mean they will roll over and just die. They retrain themselves and find a new job. Life goes on. I believe in this human spirit to never give up. This, together with governments having learnt the lessons of the 1st great depression will ensure that we not only come out of the current recession, but that we forge ahead to new heights as well.

Still Early Days for Current Bull Run (11 Aug 2009)

There is currently a tug of war between China and US. The China Shenzhen and Shanghai stock markets fell last week, and these led the Asian markets to follow. There was a certain amount of profit taking as well since many Asian markets had run up quite a bit in the previous 3 weeks. This as despite the fact that in the US, data is getting more positive. Job losses were less than expected, and most analysts are coming out to say that the worst is over for the US.

So, which market will investors choose to take their cue from in the coming weeks? My answer would be that the US market would still be the more important one to look at in the end. While China is certainly on the up and coming, the China A share market is ultimately still a closed one. Only local investors can trade on that market. The US market on the other had, has fund managers and investors all over the world participating in it, and at this point in time, US is still the larger and more important export market to Asia than China.

US GDP numbers that have just come out show that it contracted only 1% in the second quarter. This was better than expected and shows clearly that the US economy is turning the corner. The US economy is likely to turn positive in the 3rd quarter. Company earnings have also been better than expectations in general. In the US, More than two thirds of the US companies have announced 2Q earnings, and 75% of them have beaten consensus estimates.

There will certainly be profit taking along the way and markets will remain volatile. But the current trend where both economic numbers continue to get more positive, and earnings of companies surprise on the upside will continue over the next  to 12 months. And that should be what we should be focusing on at this time. (Singapore actual 2Q GDP just came out and it proved to be even better than previous estimates. 2nd quarter GDP was up 20.7%).

I can’t forecast when we will have a negative week, or when some profit taking will set in, nor will I try to. Because my investment style has never been to look at the shorter term fluctuations of markets. To me, at this point in time, the full recovery story has not been played out yet or factored in. And that would give us further upside to Asian markets yet. This means that if there are corrections at this point, I would add to them if I had additional monies to do so. (I am almost fully invested already at this point).

For me, it is too son to consider things like taking profit, or getting out of markets because I feel that the upward trend of markets has not ended. This bull run will continue, though it will not move up in a straight line. Two years later, when we look back at this period, I believe we will realise that August was still early stages of the bull run yet.

Happy Birthday Singapore! (6th Aug 2009)

Posting this in advance because its happening over the upcoming weekend. It is Singapore’s 44th Birthday and the nation has come a long way. I am un-ashamed to say that I am proud of what we have achieved, and how this small island in the middle of South East Asia continues to thrive.

I was born in KK hospital (as were most babies of my time), grow up here, found a job here, found the love of my life (my wife) here, and am now a proud father of two kids. So, all of my life, I have called no other country home. And while there has always been that odd compliant here and there, I can honestly say that even now, I would prefer to be in no other place.

I have come across others which have wanted to emigrate overseas, or had such complaints it seems like they hate being here. But to me, I have always felt that to these people, its because the grass is always greener on the other side.

From a financial perspective (since this is ultimately an investment blog!), Singapore is actually a very good place to grow your wealth. Taxes here are very low and it is possible to save. (In fact, Singaporeans are one of the world’s biggest savers). Furthermore, there is no capital gains tax with regards to gains from investments from stocks or unit trusts. Even property gains are tax free, unless you are deemed a trader.

The good government, hardworking population and our unique geographical position has also meant that Singapore has thrived as an economy, hence giving lots of job opportunities to the people and enriching the properties of its owners over the decades. Hence, although we are not the US, nor some other large resource rich country that has great social welfare benefits given to its citizens, we nevertheless still thrive and have a standard of living that most countries would envy.

Happiness is often relative though. Although many Singaporeans are relatively well off, there is always a tendency to compare. And once we compared, there will always be someone who is more successful, earns more money, drives a bigger car, or lives in a bigger house.

I try not to compare and focus on what I do have, which is health, friends, and family. I am sure there was lots of people who are richer, just as there are some who are poorer, but I do not care. I pursue wealth not because I want to be the richest person around, but because I want the kind of freedom it would allow me to enjoy. And in the meantime, I try not to forget about the things which are most important – like kinship and friends.

So, while I do not want to be poor simply because I don’t want to have to be stuck forever working just to get by. I have no wish to be a slave of money. And I am just thankful that the country Singapore, where I was born in, has given me the environment and opportunities where I can pursue my dreams and be happy. With the two integrated resorts coming up, the transforming or our reservoirs and rivers, more parks, and the more developments in Marina Bay and others, Singapore will be an even more beautiful nice place to live in the years to come. So, once in a while, stop and smell the roses. You might be amazed at this country we live in which I call home. Happy Birthday Singapore!

Keep Your Eyes on the Target! (31st Jul 2009)

It is tempting to keep checking your view holdings every day. I bet some investors are checking it a few times every day even though prices only get updated once a day. However, please don’t fall into the trap of focusing too much on the daily fluctuations once you start to do that.

The temptation is definitely there. Goodness knows, I am also happy to see my total holdings keep on increasing in value every other day. But it bears repeating that markets do not keep on going up in one straight line. There will definitely come a day or three when markets are in profit taking mode and you will see your holdings come down.

If you were following them up voraciously and living up every increase each day, when you come to days when there are profit taking, you will suffer an emotional let down just as the current bull run is feeding your emotions into a high.

Luckily unit trust prices get updated only once a day. The stock traders are currently having heart attacks as the market whipsaws dramatically even during the day. Wednesday, the 29th was a great example of this. China markets took a tumble as investors were concerned that the banks were going to pull back on lending as they were approaching their lending targets. The China market was down 7% at one point, and the STI index was down over 50 points at one point at midday.

The people that sprang out to scream “sell!” or “the crash is here!” were many. Many took profit, or even if not making money, exited the market. By the end of the day though, the market had calmed down and the STI index was down only 20 points for the day. People who were following the market so closely, including the day traders would have gone through an exhausting rollercoaster ride that day.

This extends to day to day fluctuations as well. We are currently in the midst of a strong bull market, so emotions will run high. It is extremely gratifying to see your holdings keep on charging up. Just remember again not to get too caught up in the moment. I am keeping my eyes firmly on a two to three year horizon, and not how the STI performs today. This is why we call for the STI index to hit 3600 by end 2011, but you will not hear us say where it will be at the end of this year.

Most analysts get short term market forecasts wrong anyway. They are always too conservative at the bottom and too aggressive at the top. Four months ago, when the STI index was scarping the bottom at 1455, I bet few if any analysts would have dared to come out and say that within 4 months, it would rise over 1100 points to close above 2500 points. Such an analyst would have been laughed at and ridiculed. But such is the way that market moves.

But back again to my point, so while the current bull market is extremely satisfying, please don’t let your emotions get away from you. One way is to try not to look at your holdings too closely every day.  (I said try, it won’t be easy right now I know!). If you were already well positioned, as I have been talking about doing for months, and which I showed over my 2 months worth of blog entries, then there isn’t  be massive changes to your portfolio now.

So, take a deep breath, don’t let the high get away from you. Keep cool and remember that our overall objective is to see the market much higher, but that’s over a two to three year horizon and not one week. We will get to STI 3600, I even think we will eventually pass it, but it won’t happen next week, and we aren’t going to reach there without corrections, sell downs and the market zig zagging along the way. Best analogy is for those of you that have shot at something before (with an M16 for those of us who have been through the army, with an air rifle or a toy gun for the rest).

Its “keep your eyes on the target!”