Timing the market

In one of my previous posts, I mentioned about timing the market, which is difficult to execute well in reality. However, there is one strategy which one can apply to do this.

I came across this book "The Ivy Portfolio" by Mebane Faber, in which he talks about the exceptional performance of Harvard and Yale endowment funds (That is how I knew about David F Swensen). Similarly, he preaches about asset allocation. In addition, he introduced readers to a method of when to buy and sell the assets.

The rule is simple. Dedicate one day of every month, check if the price of the asset class is above or below its 10-month simple moving average (SMA). If it is below the 10-month SMA, sell. If it is above, hold or buy. This strategy was backtested in his book and the annualised returns are about 9%. This review is done once a month only to factor out the noise in the market.

A link is provided at the end of the post, which shows the price charts of several asset classes with their 10-month SMA. The site also provides a link to a paper published by Faber, where this model is looked into in more detail.

Mebane Faber Site

Alternatives to bank deposits

I was introduced to the world of unit trust (or mutual fund) about two years back when my financial advisor introduced it to me. However, it was about a year back when I started looking into the funds available, and it led me to discovering a class of funds which have very good risk-adjusted returns. They all belong to the "Bond" asset class. I put in apostrophe because unlike traditional bonds, their price or Net Asset Value (NAV) generally rise in tandem with the equity markets. I shall be highlighting two such funds which I think are great alternatives to leaving your cash in banks or fixed deposits.

The first is "Nikko AM Shenton Short Term Bond Fund (SGD)", which has an annualised returns of about 3% (about 30x of bank deposit interest rate). It has very low volatility, and its maximum drawdown is 4.3% during the end of 2008. This means you would have lost the maximum amount of 4.3% on your investments if you had invested during that period, which is much less worse than the 40% drawdown suffered by equity markets around the same period.

Next, there is the "UOBAM SGD Fund Class A", with an annualised returns of about 4.6%. Of course, a higher returns would mean a little bit higher volatility. Its maximum drawdown is 3.4% and it occurred during the a start of the European crisis in Aug 2011.

A 5 year chart of these 2 funds (from dollardex) are shown below, illustrating that both the Nikko AM and UOBAM funds would have netted you about 30% and 12% gains respectively over this period. Their relatively low volatility (minimum price fluctuations) and above average returns are why I park my excess cash in these two funds rather than in banks.

For comparison purpose, I am showing another chart below which factors in the STI and Dow Jones indices. A mix of these 2 bond funds easily beat the Equity indices. Also note their price fluctuations compared to the 2 equity indices.

Hence I personally really like these 2 funds. If you still require additional incentives, some fund distributors (like dollardex) charge 0% sales charge. Thus you pay nothing to buy, hold and sell these funds!

For those who plan to invest in these bond funds, do take note of the "bond bubble" which some experts cautioned will eventually burst. When the economy has really stabilised, the stock market starts entering a bull run, that is when the interest rates will rise. When that happens, I expect to watch the price movements of these funds more carefully.

Buying into different asset classes in Singapore

First let me start off with the most simple and straightforward asset class, which is Singapore equity. There are currently two Mainboard listed ETFs on the Singapore Exchange, SPDR STI ETF (ES3.SI) and Nikko AM STI ETF (G3B.SI). There are arguments supporting the former being a better choice of the two, citing reasons such as lower expense ratio, better index tracking, higher volume etc., which I don't think those really matter much if you take a long term view. However, I do want to point out one main difference in these two ETFs, which would be a decisive factor for many to choose which of the two to invest in, and that is their board lot size.

Nikko AM STI ETF board lot is 100 shares, which mean that the minimum investment is around $340 at current levels. On the other hand, SPDR STI ETF has a board lot size of 1000 shares, making the initial and subsequent cash outlay to be around $3300. Therefore buying into Nikko AM ETF makes it easier to invest monthly or to rebalance. Consequently, you would have to use Standard Chartered as your brokerage for such trades as they do not charge the minimum commission of $25 per trade.

Investors in Singapore faced a problem if they want to buy into other asset class, such as bonds. The purpose of including bonds in the portfolio is due to its negative correlation with stocks. However, a retail investor can't find a local bond investment product  that meets the requirements of high liquidity, low minimum investment amount, and denominated in SGD currency. One exception to this might be Singapore Government 30-year bond (PH1S) traded in board lot of 10 shares, making a minimum investment/rebalance amount of around $1000. I have read from certain blogs recommending UOB Kay Hian to transact this bond as its bid-ask spread is more reasonable compared to say DBS Vickers. Another fellow blogger also highlighted this to me, quoted from SGS site, "The SGS Primary Dealers are appointed to act as specialist intermediaries in the SGS and S$ money markets. Primary Dealers are obliged to provide liquidity in the SGS market by quoting prices on all SGS issues under all market conditions."However, the bid/ask spread might still be wide if there is low demand for them. Since I personally am not vested in this, I won't be able to comment much on this bond. A chart showing the negative correlation between this 30-year government bond can be seen below:

Moving on to the other asset class, Gold, there are options available in Singapore such as UOB Gold Savings Account. You can read more about it from the links I posted in the previous post. Why it might not be suitable for some is because of its administrative fees. Depending on the investment amount, the fees might work out to be around 3% annually.


For reasons such as liquidity, minimum investment amount etc., I decided to invest in the different asset classes via US ETFs. For US ETFs, the choice is abundant, as there are ETFs tracking all sorts of indices, such as the US Total Market index Wilshire 5000, US Large cap index S&P500, FTSE All World index, and the list just goes on. The drawbacks of investing in US ETFs include currency fluctuation and the initial "sales charge" which is derived from the currency exchange bid-ask spread. Standard Chartered FX spread is around 2%. One solution I have adopted is to forecast the USD amount you will need to rebalance in 6 or 12 months time,  and exchange a small amount every month, thus averaging out the fluctuations. Fortunately, USD is near an all time low against SGD, so it should not be much of a worry at the moment.


In the Permanent Portfolio model, there is a cash component as well. Rather than having this cash component in lying banks earning around 0.1% interest, I think there are better places to park them. I will elaborate more on this in my next post.

Asset Allocation

        David F. Swensen is the chief investment officer of Yale University, and has been known to generate good returns consistently over the past decade. In his book I have read, “Unconventional Success”, he states that there are three factors that influences the returns on an investors, namely

1. Asset Allocation
2. Market Timing
3. Security Selection

Asset Allocation refers to how your investments are spread out across the different asset classes, such as equity, bonds, etc. Market Timing refers to when you buy and sell, and lastly Security Selection which company’s stock you select to buy. A study has shown that the factor that plays the greatest part on investors’ returns is Asset Allocation.

The result of this study makes sense to me. The “buy low, sell high” mantra is a no-brainer, but unfortunately I think humans’ brain is not psychologically wired to do that. How many of us did dump in our money during the 2008 crisis buying stocks at low prices? At time of writing, the STI index has hit a five-year high, and how many of us are selling at this five-year high? Due to our greed, wanting to catch the peak, this “buy low, sell high” principle is difficult to apply in reality.

            Next, on stock picking, I mentioned in the previous post that unless you have the time and talent for analysing companies’ annual report, business models, competitive advantage, etc, picking “hidden gems” before their prices have run up is not easy. Only when the price of those companies have risen significantly before people starts to take notice, and of course do what we are psychologically wired to do, and that is to “buy high”.

           

            Moving on to the all-important factor of Asset Allocation, it involves how you divide your investment into different asset classes. The most common being stocks and bonds (Difficult to achieve this in local context, which I will touch on in the next post). There are several other allocation models and I will be introducing two models, which I find are worth adopting. The first is “The Permanent Portfolio” devised by Harry Browne in the 1980s and the other is a mixture of bonds and stocks proposed by local expat Andrew Hallam. I won’t rehash  their strategies here, readers can follow the links at the end of the post to find out more.“The Permanent Portfolio” historical record can be trace back to 1972, and has a decline in portfolio value of 0.7% when the world equity market plunged by 37% in 2008. Similarly in Andrew Hallam’s blog, you can read about how he constructs his portfolio using low cost index funds. You can click on the related links at the end of this post or google them to find out more information.

            What makes the Asset Allocation method works is that you must rebalance your portfolio, once or twice or year depending on preference. It involves selling the asset classes that has risen in value, and buying those that has fallen to return individual asset to their original allocation. This achieves the “Buy low sell high” principle. Do note that this requires discipline to do so. For example , if you were rebalancing during end of 2008, you would be buying into plummeting stock prices. Or if you are rebalancing during this period (Apr 2013), you will probably be selling your equity funds, and putting money in gold!

            Although in Andrew’s blog, he does mention how to implement such a strategy in Singapore’s context, I think there can be certain tweaks that can be made. I will elaborate more on this in the next post.

Related links:
Permanent Portfolio Historical Returns
Implementing SG version of Permanent Portfolio Resource A
Implementing SG version of Permanent Portfolio Resource B
Andrew Hallam's Blog

Introduction

         My aim of setting up this blog is to share my personal views and experience on investing in Singapore's context. In particular, this blog is targeted at those with no experience in investing but wish to take their first steps. It might be scary for those taking the plunge for the first time, for example, putting down your first few hundreds or thousands you have saved up into a company's stock, and watching its price fluctuations for the next couple of weeks. Some might also find it not worth the effort to invest, thinking that the initial meager returns do not justify putting in a few hundred dollars each month into a regular savings plan. The money could have been spent on holidays or buying a car etc.

     

         Unfortunately, our schools did not equip us with the knowledge, tools and the benefits of making our money work for us, maybe aside from the power of compounding learnt in our Math lessons. The power of compounding is one of the reasons extolled by many to start investing at a young age, however, I feel the exponential growth story does not really reflect the realities of the market, which has its ups and downs. To achieve the "exponential growth", one might require certain strategies. These strategies are what I what to share through this blog.

         Personally, I think I am quite a risk-averse investor, which is the stance I feel most should take if they are just starting their investment journey. Ultimately, capital preservation is one of the key tenets of Warren Buffet's investment principles. Hence the strategies I will be proposing will be of lower risk (low volatility), takes a long-term view, but still gives decent returns. I am not an expert in economics or finance, thus I do not know the nitty-gritty details of the European crisis, US fiscal cliff, etc. Neither do I have the know-how of dissecting a company's annual report and forecast its future growth. Luckily, you do not need to know those things in-depth (maybe just know of their existence if you must) to invest successfully. This also mean you can ignore analyses by the so-called "experts", which can influence your investment decisions. (A case in point: I remember reading an article painting a gloomy picture of Starhub losing its BPL rights, leading my to sell my Starhub shares in late 2009 at around $1.90. As of today, its share price is above $4.) Fundamental analysis does have its merits though, but unless you are half as good as Warren Buffet, it is more of an art, which just improves your odds when investing.

         In my next few posts, I will cover some of the strategies proposed by others which I have come across, and  am adopting myself. They are my own personal take, so feel free to tweak them to suit your own expectations and goals if necessary. It has been about a year since I started, and there has been no significant market crash to test the resilience of my strategy. Hence, one should keep in mind of the risks that are inherent in any kind of investments.