Friday, 14 June 2013

My investment strategies

I spread out my investment across different strategies at the moment, so that hopefully in the next 5 to 10 years, I will have first hand experience on which one works better. Another reason is that it is still scary to put all you money into one strategy (e.g. Permanent Portfolio as  the actions you do is really counter-intuitive/scary). However, there is one thing common among all the different strategies, and that is not to buy in heavily on the asset class which price has gone up significantly. This is much easier to put in action compared to selling and locking in profits after price has run up signifcantly.

The following is a brief description of what I am vested in:
1) Unit Trusts consisting of bonds and equities
2) Stocks, which contains REITS and STI ETF only at this moment
3) Modified Permanent Portfolio made up of US ETFs

Unit Trusts
My plan for this investment class is to use Mebane Faber Timing model as a guide to determine my buy-sell decision. As mentioned before, this investment class also contain "Short Term Bonds" which serves as alternative to my bank deposits. I'll try to allocate funds in excess of my 6-month salary into the "Short Term Bonds". They will also serve as opportunity funds to buy into equities when there is a crash.

Have dabbled/speculate/invest a bit in these since University days. Don't really want invest heavily in individual stocks at current levels. Only actively buying 100-200 shares STI ETF about once a month over the past year. I prefer to wait for market crash (be it 5 years or 10 years) before investing significantly in it, for margin of safety.

Modified Permanent Portfolio
Ideal allocation:
25% US Equity (VTI)
25% World Stocks (VEU)
20% Gold (IAU)
30% 20+ year Treasury Bond (TLT)

I started this around Jun 2012, and initially I bought into the 4 different asset class every month. After a while, I realise this is not very effective, and hence decided to buy in only every 6 months. I last rebalanced in around April 2013, after which gold crashed. As of now, profits can be considered negligible since the Bonds and Gold asset class has negated the gains achieved by the equity classes. I'll have to wait till about October before rebalancing it again.

I will stress again that being diversified on different asset classes makes your overall portfolio less volatile, compared to say 100% invested in stocks. An indirect effect is that you will be affected less emotionally during large price swings, as your overall portfolio value will not swing as much. This will prevent you from making any rash decision. Investing after all shouldn't involve our emotion.

Sell in May and go away?

It seems that critics were wrong again for the 2nd consecutive year that this "Sell in May and go away" rule won't materialise (additional proof why you shouldn't pay much attention to those experts/analysts you read or see in the news, they don't know any better than you). The mayhem started in late May this year, after a strong run up. What is happening exactly? I only know this (after I got back from overseas on 30th May), Ben Bernanke hinted that QE3 may start slowly tapering off. This means less money to buy bonds and shore up equity prices, and interest rates will rise. What is the effect on the different asset classes? I'll give my 2 cents on the effect on equities and bonds.

As mentioned in my previous post "Alternatives to bank deposits", I mentioned rising interest rates are what I will watch out for, due to the high danger of the bond bubble bursting. Hence, I divested all my high yield bond unit trusts. What about the lower yielding ones like the 2 relatively safe short term bonds recommended previously? Below is the chart showing their performance:
Well, fluctuation is not much. Nevertheless, I still sold a portion of both bonds to lock in some gains. Note that since these bonds are short-term, hence their prices are less susceptible to interest rate changes.

Moving on to equity, what is happening now presents buying opportunities. For those in the know, P/E ratio for US equity indicates that the prices are still cheap despite the recent run up. This is due to the strong corporate earnings. Corporate earnings are what ultimately drive up stock prices. Hence, I hope the equity market will experience a much greater drawdown, so that I can finally increase my equity allocation substantially.

For those who still subscribe to "Market Timing" strategy,  you would have sold off in late April or early May. (Which is what I mentioned in this post). Did you?

For those who subscribe "Security Selection", the stock you hold should be able to withstand the recent selldown. If it did not, your belief should be that is will rise back in value. The last thing you want to do for the above 2 strategies would be to "buy high, sell low".

Till now, I haven't mentioned in detail what mix of strategies I am adopting. Will do so in my next post, and also shed some light on how my "Perfect Portfolio" has performed.