Don’t Get Too Greedy Now (23 July 2010)

Markets continue to climb steadily. The STI index is close to 2970 currently. There is actually not much volume, which shows that a lot of investors remain cautious. This is actually a good sign. A steady rally that occurs as investors climb a wall of worry will last longer than one that boosts the market up for a just a short period of time, then swiftly runs out of steam.

There are lots for investors to worry about if they want to. The US economy, which has previously been recovering swiftly (to everyone’s surprise), is now slowing in its rate of recovery. Its latest ISM Manufacturing index still indicated growth, but it was not as strong as expectations. The US Federal Reserve chairman Bernanke’s latest comments on the US economy did not foster much confidence either. Furthermore, although Europe has now stabalised and the Euro has also now stopped falling, their financial problems will take some time to sort out.

But its easy to get too caught up with the bad news. One key indicator which I often go back to, is valuations, and right now, valuations for many markets remain very attractive. This shows that many companies are growing their earnings, but their stock prices have not been driven up because investors are still so cautious.

But on a personal level, I shifted $10,000 from equities (Aberdeen Pacific Equity fund) into bonds (Fidelity Asian High Yield Bond Fund). Does this mean I am turning negative on the market? A firm no to that! For me, my long term asset allocation was to strive and have 10 to 15% of my portfolio in bond funds, while the rest are in equity funds. This way, if there are falls in markets, I can shift from bond funds into equity funds while they are cheaper during these times. This year so far, I have done it twice already, the latest during the May sell off. So currently, I am considered heavily overweight into equities, even more so than my target long term allocation.

So, this shift of $10,000 into Fidelity Asian High Yield Bond fund is to move back towards my long term allocation. In truth, it is not enough, I would still remain overweight at this point. But my intention, is that as the market continues to rally, I would gradually then shift some more from my equity funds back into my bond funds. This gradual way of adjustment allows me to continue to enjoy the upside for my remaining equity funds, but I am locking in some of my profits which I made when I shifted from my bond funds into equity funds during the selloffs this year.

Volatility will always be a part of markets. If we have diversified portfolios, and we maintain discipline and not get emotionally driven towards our investing, then volatility in itself is not so scary. From the peak of the market in end March, to the April/May selloffs, when markets fell on average 10%, my portfolio fell from $379,000 to $353,000, so I lost $26,000 during that period of sell off. But I did not panic and sell any of my equity funds, and in fact shifted money from bond funds to equity funds. Now, even though markets have recovering, and still not at the previous March peak, my portfolio is already back to near the March levels.
The key thing for many investors now is to not get too greedy. If you are already into equity markets at this point, then don’t let rising markets cause you to double your equity holdings and such. By all means, enjoy the ride up, but realistically, it will be a gradual one, without the kind of eye popping returns of last year. In fact, lock in some profit occasionally as the market rises to that your allocation towards equity funds do not get too large. We must remember that although certain regions like Asia have done much better than what economists expected, there are some headwinds currently. So, keep an eye on your portfolio, try not to let it get too heavily overweight in equities as stock markets recover.

On the flip side, if you have been staying out of markets all this time, then you may want to consider putting some of that money to use because returns from keeping them in savings accounts are so low currently. While bond funds, especially the Asian high yield bond funds I personally like right now are definitely riskier than a savings account, I think its well worth the risk.

(PS: I haven’t updated my portfolio yet, because I just put in the trade today. I will update my portfolio when the transactions are completed.)

The Quiet Rally (7 July 2010)

Slowly but surely, stock markets are resuming their climb. I was saying that markets have stabalised and people coming back after the world cup would be surprised. We are seeing it happen now. Despite all the worries and talk about the western world slowing down, Asia’s economies continue to forge ahead, and Asian markets continue to climb steadily.

The Singapore stock market as represented by the STI index is back to within shouting distance of 2900 points. Other than the China market which has been more disappointing, most other Asian markets have shown surprising resilience and these last 2 months. Just two weeks ago, it felt like things were still pretty bad. But if we look at our funds nows, we would be struck with the strong resilience of markets. On top of that, if you had been holding a good fund, which was holding good stocks throughout these two weeks, then any losses would have been very minimal.

As an example, my main core Asian equity funds were Aberdeen Pacific Equity and Aberdeen Asian Smaller Companies. This year has been so volatile yet, since the start of the year, Aberdeen Pacific Equity is up a marginal 0.26% (based on prices as at 5 July). Aberdeen Asian Smaller Companies, which is actually a higher risk fund given it focuses more on small caps, is up 8.96% for the year.

Its been the Europe and US equity funds I held which have dragged things down. But even with them, the entire portfolio is down just 2.84% over the last 6 months, and things will improving by the day, and I would argue that Europe especially would definitely be throwing up some bargains at this point in time. I am not going to sell any of my European unit trusts, as I believe they are holding on to quality European companies which will rebound and rise after Europe settles down.

The bond funds I have held have also helped to add stability to my portfolio. The high yield bond funds are giving 6 to 8% yield on an annualized basis. The Fidelity Asian High Yield Bond Fund (USD) had the following recent 3 dividend payouts.

3 May – 0.45% yield
1 June – 0.61% yield
1 July – 0.60% yield

Where else would I be able to get 0.6% each month! In a savings account, even if I put in over $100,000, I would be lucky to get 0.6% per year rather than per month. I would happily bear the higher risk that these high yield bond funds incur for the huge difference in yield. Asian companies are doing well currently, business in Asia is booming and getting funding is not too difficult at all. Look at China, even in a year where their stock market is one of the worst performing in the region, they are having a massive IPO to raise over 30 billion SGD from the market from one single Agricultural Bank of China offering.

I acknowledge the inherent higher risk that high yield bond funds come with compared to say Singapore bond fund, but at this point in time, given Asia’s outlook, I don’t see any big recession in the offing for Asian economies. Many of the Asian governments have actively taken steps to curb inflation, to curb bank lending (in China’s case), and to keep a lid of asset bubbles forming. They are doing the right things to keep things from getting out of hand. Even China allowing its currency the Yuan to rise, is giving some outlet to the huge flow of monies from investment inflows and current account surpluses to China.

I am eagerly awaiting the “next phase” up in markets. It won’t be quite as spectacular as the rise we had in 2009. But there is still some decent upside left in markets and I think a lot of investors will be surprised as markets quietly continue to creep up. Of course, as always, keep diversified. I have already shifted twice from bond funds into equity funds this year already, so I confess I am rather heavily overweighted equities at this point in time. As markets go up, I will be locking in some of my equity profits back into my bond funds.

Psycologically, this is actually quite difficult, because if markets go up from here, the more you have in equity funds, the better your profits. But ultimately, its about not being too greedy when markets are up, and not panicking when markets are down. I forced my self to shift more into equities when markets were down this year. So, in the same vein, as markets rebound, I will force myself to lock in some profits and shift to a more neutral weighting that is not so heavily overweight in equities.