Returns for investing in STI index for the past 10 years

In an earlier post, I did some backtesting to find out the estimated returns of investing in the STI ETF once every 6 months.

In order to "simulate" an even more real life scenario, I backtested the returns of investing in the SPDR STI ETF through "POSB Invest-Saver", an monthly investment plan with the option to invest in Nikko AM STI ETF or ABF Singapore Bond Index Fund. This is the most cost efficient option for someone who invests in small amount monthly, e.g. $100.

The reason for using SPDR STI ETF is because it has a 10 year history data to work with (Nikko AM STI ETF was introduced in 2008). I used price data from Jan 2005 to Dec 2014, and investment was made roughly once every 4 weeks.

Results

With $100 monthly investment, an internal rate of return (IRR) of 6.4% was achieved. Let's not forget in this 10 year period, the 2nd worst global financial crisis in history happened in 2008, and also the rather serious European crisis in 2011.

Total Cash Outlay	$12,906.69
Portfolio Value (+dividends collected)	$17,387.56
ROI	34.72%
IRR	6.43%

The backtest spreadsheet can be found here.

With a 10-year track record (and numerous historical studies highlighting the long-term growth of equity markets worldwide), I think the risk of making meagre returns or loss by investing in stock indices is quite slim. Of course, future performance is not guaranteed, and this is the inherent risk in investing.

P.S. If one is still not persuaded by the returns of this investing method,  perhaps one could consider alternatives like this or this that give returns of 20% annually, a year or two of holding period, with the returns "guaranteed".

Year 2014 Recap and moving forward in 2015

About a year and a half have passed since I started writing about investing strategies and I thought I could do a recap:

1. Asset Allocation. The most important factor out of the 3 that determines an investor's returns. The most basic being a combination of bonds and stocks. It is up to an individual's risk profile to decide what assets to buy, and percentage allocation to it. I also covered how to buy into different asset classes in Singapore. I implement this strategy through my Permanent Portfolio made up of US ETFs.
2. I touched on index investing in a few posts and how we shouldn't belittle the returns of investing regularly in STI ETF. This is a strategy even Warren Buffet encourages. I started accumulating STI ETF again in Dec 2014 after selling a portion of it earlier in the year, and plan to continue doing so in 2015.
3. Personally took on more risk in 2014 in exchange for higher returns by investing heavily in individual stocks. I had to make sure it is worth the effort and thus spent a great deal of time tracking my performance via
1. Money-weighted returns (a.k.a IRR)
2. Time-weighted returns (using Modified Dietz method)

Year	Time-weighted Returns	IRR
2013	7.8%	5.7%
2014	15.2%	15.6%

My Permanent Portfolio also has a cumulative IRR of around 6.5%, partly helped by the stronger US dollar. 

Going into the new year, I wish that my stock portfolio will continue outperforming the index and gives a long term average of 10-12% compounded annually.

Market crystal ball gazers Pt 2

In a post in Oct 2014, I noted down some of the predictions of some of people working in the finance industry for the rest of the year. So this post is to see how true their predictions are.

UOB Asset Management chief investment officer for equities and multi-assets, Mr John Doyle:
" Given the cyclical pickup in demand, we are overweight on the technology sector, which continues to benefit from rising corporate expenditure and the  IT upgrade cycle that has been suppressed so far due to prior uncertainties" -Re-read the sentence a few times and still don't quite understand what he means.

"Mr Doyle is most bullish on US stocks and neutral on Asian markets." S&P500 up 5% from 1967 to 2059, iShares MSCI All Country Asia ex Japan ETF remains at 16.

"Singapore market will likely remain range-bound in the quarter ahead" STI up ~3% from 3253 to 3365

OCBC Investment  Research head, Carmen Lee:
"As such, for the Singapore market,..., we expect the typical year end lull period to persist"

In addition, OCBC Bank economist Barnabas Gan gold price will drop further for the rest of the year while Mr Lim Say Boon, chief investment officer of group wealth management and private banking, believes gold "is likely to be trapped sideways over coming months" iShares Gold Trust (IAU) almost flat at end of 2014 at USD11.53.

For the fun of it, I'll give my take: Equities worldwide, especially the US market will suffer a drop and gold will rebound. I'll revisit these predictions towards the end of the year. I'm totally wrong.

So based on this post, will you put more trust in the professionals in their future predictions? I'll leave it up to you to decide.

Permanent Portfolio Oct 2014 Rebalancing

Due to the excess USD I got after I abandoned my "Decision Moose" strategy, I decided to buy all 4 asset classes during the latest round of re-balancing. Of course, the majority of the fund is used to buy Gold, which has not seen any recovery thus far.

My percentage gains will drop each time I rebalance as the same absolute gain is now divided over a larger capital base. Below is the result:

Market crystal ball gazers

In today's Sunday Times (5th Oct 2014), there is an article interviewing professionals about their outlook on the different asset classes. Well I thought it would be interesting to note down their views and see how the real scenario will pan out towards the end of the year. Well, here goes...

UOB Asset Management chief investment officer for equities and multi-assets, Mr John Doyle:
" Given the cyclical pickup in demand, we are overweight on the technology sector, which continues to benefit from rising corporate expenditure and the  IT upgrade cycle that has been suppressed so far due to prior uncertainties"

"Mr Doyle is most bullish on US stocks and neutral on Asian markets."

"Singapore market will likely remain range-bound in the quarter ahead"

OCBC Investment  Research head, Carmen Lee:
"As such, for the Singapore market,..., we expect the typical year end lull period to persist"

In addition, OCBC Bank economist Barnabas Gan gold price will drop further for the rest of the year while Mr Lim Say Boon, chief investment officer of group wealth management and private banking, believes gold "is likely to be trapped sideways over coming months"

For the fun of it, I'll give my take: Equities worldwide, especially the US market will suffer a drop and gold will rebound. I'll revisit these predictions towards the end of the year.

Why pick individual stocks?

From my own observation, people who pick/buy stocks do so for the following 2 reasons

1. They enjoy either the thrill or promise of  their stocks' prices skyrocketing, and probably can't sit back and do nothing while hearing stories from their friends how well their stocks are doing.
2. They want to beat the returns of the index.

It is easy to see which group you belong to. If you belong to the 2nd group, you will know the annualised returns of your stock portfolio. Else you probably belong to the 1st group.

One possible index investing scenario

Take for example, an investor who invest 1000 shares in the SPDR STI ETF every 6 months, and he started just before the financial crisis in 2008, which is around May 2008. Thereafter, the index dropped by a whopping 50%.

Taking into accounts of dividends payout (which is not re-invested) and excluding commission charges, the result as of September 12th 2014 is as follows:

Total capital invested	$40,730
Portfolio Value + Dividends	$51,319
Profit	$10,589

This translates to a 26% in absolute gains or an internal rate of return (IRR) of 10.25% over a 6.5 year period. This is a strategy that even a high school student can execute, just buy the index every six months! No need to read annual reports, examine charts, listen to financial news, stock tips etc, and you can beat the returns of banks interest (0.05%), bonds and inflation rate (~3%).

Spreadsheet of the above calculation available here.

What I am trying to show here is that we should not belittle the returns of index investing. Yes it will be boring and takes a lot of discipline to stick with it (Even I sold of portion of my ETF recently to invest in stocks). But the above result speaks for itself.

Back to the original topic, for those of you who pick stocks, you better be sure that you are beating the returns of the index. Else you are probably "paying expenses" just to enjoy the thrill of stock picking.

Portfolio Restructuring

Over the past few months, there has been some changes to my investment portfolio mainly due to a need for cash in the near future.

I stick to the following allocation for my liquid assets:
Say if I have $50,000 in invested amount, I will target to have at least another $25,000 in opportunity fund plus at least 6 months' worth of my monthly expenses.

Morgan Housel has this plan to deploy the opportunity fund which I think is a good guide to follow:

The last 10% drop in STI occurred earlier in January this year, and the next one might happen sometime end of this year.

Earlier this month, I have also fully liquidated all my unit trusts and slowly sold some of my STI ETF to meet my asset allocation requirement. In addition, the reallocation involves increased investment in individual stocks for higher potential returns.

I also stopped the Decision Moose strategy sometime in July. As I only invested a very small amount in it, I find that the time and effort spent to track and monitor its performance is not worth it.

The fully divested unit trust portfolio performance over the past 2+ years has a CAGR of 5.98%. Nothing fantastic about it.

As of now, I am left with the following investment holdings:

1. A basket of stocks consisting of REITS, STI ETF and companies listed both local and overseas for both growth and dividend yield.
2. Permanent Portfolio made up of US ETFs.