Sunday, February 11, 2018

Before You Jump In, Some Admin Stuff To Look Into

It felt good being a first time investor; after reading The Bedokian Portfolio or some other investment books or material, you will feel the urge to jump straight into the action. You may quickly want to open up a brokerage and/or regular savings plan account, start to look for securities to invest in, and voila, you have started an investment portfolio.

Then as the months or years gone by, suddenly you have discovered something; your Company A and REIT Z shares are straddled between your Central Depository (CDP) and your regular savings plan accounts. Your Corporate Bond Q is split between a custodian brokerage and a bond fund brokerage account. If you want to sell say, Company A shares, you may have to incur twice the transaction costs because they are placed in different platforms. Ditto for buying with the added headache of choosing which platform to buy.

Just as you had taken the time to learn about investing, you should also take the time to do some research into how to go about it. Administrative matters, though they are trivial, must be aligned with your overall investment strategy. They will sometimes give you the greatest headache if things are not falling into place.

Brokerages and Trading Platforms

A few fellow investors and traders I spoke to placed commission charges as the top priority. While this is correct as such transaction costs erode our returns, we have to consider other factors in place, such as where the securities are being kept (CDP or custodian), further charges like custodial and dividend handling fees, and the value added features, e.g., reports, videos, etc. in the trading platforms.

For myself, I use CDP-linked brokerages for local individual securities (equities, REITs and bonds), and a custodian brokerage for foreign securities and exchange-traded funds (both local and foreign). The main reason why my securities are with CDP is to have more control when corporate actions occur, like rights issue, attendance of annual general meetings, etc.

Regular Savings Plan

Firstly I would like to declare that I do not have any regular savings plan (RSP) in place. I had mentioned in my ebook that it is preferred to have your holdings in a good-to-look number to facilitate ease of transaction during rebalancing1. Since RSP uses dollar-cost averaging in the form of a fixed dollar amount per month, the chance of having odd-lots (number of shares not in multiples of 100s for locally-listed shares) is very high.

That being said, I am not against RSPs. In fact, I have thought of a way to incorporate RSPs into your regular Bedokian Portfolio. Remember the core-satellite approach?2 For RSPs, it is better to use them to purchase ETFs for your core, since the core would be rarely touched during rebalancing. You could also view your holdings in the RSP as the “inner core”, with ETFs bought using usual brokerage means as the “outer core”, so in case that the rebalancing reaches the core, the outer ones would be transacted first.

One More Thing

The last part of the admin of your portfolio management would be the securities themselves. If you have bought Company A shares from a brokerage using CDP as custodian, then any further purchase of the shares must be bought using this same channel. This is to prevent additional transaction costs incurred as stated above, and also an accidental short sell. The latter could happen if you cannot recall the quantum of shares allocated between the types of custodian and unintentionally oversold.

As for ETFs, following the RSP section recommendation, you could use RSP to buy in regularly for the inner core, and select one form of custodial arrangement for the outer core.


1 – The Bedokian Portfolio, p77-79
2 – ibid, p122-123

Further references

The Bedokian Portfolio, Chapter 2 – The Workings

Sunday, February 4, 2018

Seeing Red?

Just last month, I had written about bull market investment strategies, and within the past week, we had seen some red. No doubt red is good for the upcoming Lunar New Year festivities, but seeing this colour in the markets is a real bummer. Ah, such is the roller coaster nature of the financial markets.

I have been hearing from some sources, online and in person, that the bear is going to come, and along with it some panic and a possible trip to a reservoir that bore my namesake. First things first, let us all calm down.

Is this going to be just a correction? Is this going to be the beginning of something worse? Is this going to be the next GFC?

Well, I don’t know.

But, as investors, particularly the Bedokian Portfolio ones, we must be prepared. Again, if you are in the passive side, just wait for your next rebalancing cycle and reallocate accordingly, and move on. If you are in the active side, there are a few strategies to adhere to, like the 10-30 Rule1, look out for bargains in fundamentally strong equity/REIT counters that fall for no reason, or consider other asset classes.

Remember, investing is a long journey that goes uphill and down.


1 – The Bedokian Portfolio, p119-120

Friday, January 19, 2018

Bull Market Investment Strategies

2017 was a bull year in the financial markets, and there are some opinions that 2018 would be the same as well. We cannot exactly predict the future, but the fact remains that as a Bedokian Portfolio investor, we have to stay invested, whether bull or bear.

In a bull market, exuberance and optimism is in the air, so are the prices of equities and REITs, which typically thrive in such economic conditions. If you are a passive Bedokian Portfolio investor, just stay focused and rebalance to your asset class allocation periodically. If you are in the active camp, or passive with some individual counters and securities, then read on, for I will provide some strategies on how to invest in a bull market.

Averaging Up Smartly

It is a good time to relook at your portfolio and see if you wish to add positions further, if your asset class allocation permits. One way would be to do an averaging up. I had covered the basics of averaging up here, and now I would give you a further tip on how to average up smartly.

Depending on the price of the equity/REIT that you had entered before, the price of the same equity/REIT in boom time now is probably higher than the actual current book value. In this case, you could buy it up to the amount so as the average price across your entire holding of the said equity/REIT is at below or close to the current book value.

For example, you have 1,000 shares of Company A bought at $1.00 back then. Now, the share price is at $1.50 but the actual book value is at $1.20. A purchase of 500 shares will bring your average price to about $1.17 [{(500 x $1.50) + (1,000 x $1.00)}/1,500].

The main advantage in having the average price of the shares (or REITs) below the book value is to provide a sort of price buffer. Should the price of the shares head south, there is still some reaction time for you to decide, through fundamental analysis (FA), whether to exit or to add in more positions.

Sell Extreme Winners and Buy False Losers

If you look beyond this fancy term, it is not really that difficult. In fact, it is one of the main tenets of rebalancing, as in “selling the winners and buying the losers”. What I meant by “extreme winners” was those equities/REITs that had ran up so high during these times that they became much overvalued.

So how to tell if they are much overvalued? We could use one of the selling triggers that I had mentioned in The Bedokian Portfolio, namely the equity/REIT price has gone up by at least the dividend yield. Here, you can even set the bar higher, like 1.5x or 2x the dividend yield before selling off. It is up to you.

Of course, when you sell something, ideally you have to buy something in order to stay invested. Enter the “false losers”, where in other words these equities/REITs may look like losers but not really. For this, the full suite of FA has to be employed, plus good judgment. You could employ any known FA methods out there, or use the ones from The Bedokian Portfolio.

Other Asset Classes, Regions/Countries and Sectors/Industries

From a holistic point of view, going back to the basics of diversification, you can consider the other asset classes. Despite the feeling of everything is up, there are still some different correlations between the asset classes. Using ETFs of major asset classes from the United States, for 2017 there was a correlation of -0.28 between the Vanguard Total Stock Market ETF (VTI) and Vanguard Total Bond Market ETF1, and zero between VTI and the SPDR Gold ETF2.

Cascading down the diversification level, you could also look at other countries/regions or sectors/industries, for correlation differences are applicable here as well. Again using ETFs as references, the regional correlation between VTI and the Vanguard FTSE All World ex-US ETF for 2017 was -0.143. Between sectors/industries for the same year, using the Consumer Staples Select Sector SPDR ETF and Financial Select Sector SPDR ETF, the correlation between them was 0.064.

You could either go for ETFs for a broad exposure to the asset class/region/country/sector/industry, or use FA to prospect the individual securities.

There you have it. The key things are to stay invested, stay focused and observe The Bedokian Portfolio guidelines.



1, 2, 3, 4 – Data source from www.portfoliovisualizer.com. Correlation basis is on monthly returns, from 01 Jan 2017 to 31 Dec 2017.

Monday, January 8, 2018

Is There A Risk-Less Investment?

Quite a while ago I was asked this question, “I am new to investing but I am risk adverse. Is there a risk-less investment that I can go into?”

I could not remember the answer that I gave in verbatim, but I would give a general gist here. If you had asked the above question before, hope this post would give you some clarifications. I tend to be a little bit long-winded and go a bit out of point, but I would prefer to explain some stuff on a holistic basis.

What is Risk?

Risk is a possibility of anyone, anything or any situation that may inflict harm, injury or loss. The key word here is possibility, or what academics called probability. Though you may not be aware, but we face risks all the time. The main reason why we do not take these everyday risks into serious consideration is due to its low probability in happening, and/or we have taken steps in reducing that possibility.

For example, a simple act of crossing the road involves many risks, such as; the risk of tripping while crossing, the risk of a vehicle impacting you, the risk of a sinkhole forming on the road and devour you, etc. OK touch wood.

Investment Risks and Diversification

In The Bedokian Portfolio ebook, I had listed down a number of risks related to each asset class, including the all-encompassing volatility risk. In fact, for all the investment risks that I had noted, the main thing about them was the loss of profit and/or loss of capital. Yes, it was this simple.

Investment risks are part and parcel of investing, and there is no escape from them, so we would need to manage these risks. By managing them, you could reduce risks and prevent huge losses to your investments. For the simple investor, the main way to do so would be diversification of the asset classes, followed by regions/countries and industries/sectors. What we are banking on is the different correlations existing between the things being diversified, which is proven in numerous studies and historical examples.

So, Is There A Risk-Less Investment?

Yes, I remembered that question popped up in the middle of our talk, and my flat answer to him was a big “NO”.

Remember, risk is about probability, and some forms of investments are labelled as risk-less is probably due to two reasons; firstly, the very low probability of risk happening and secondly, it could be the various perceptions of risk by different individuals on the same investment.

Using government bonds as an example, the probability of a default is very low, hence proving the first reason in the previous paragraph. For the second point, many people tend to view exclusively the almost non-default of government bonds and called it risk-less, but they probably did not see the other risks that come with all bonds, such as reinvestment and rate risks.

And If You Do Nothing

The most powerful, yet almost unseen risk of all would be coming if totally no investment is done, not even on bank interests. Yes, you have guessed it, that risk is inflation. I recalled that I used this risk as my parting shot in my conversation, and that jolted him a bit.

So what is the moral of this story? Keep invested to secure your future.


Sunday, December 31, 2017

2017 Review, 2018 Preview, and Bob

2017 Review

Many people had cited 2017 as a strong bull market year; for the Straits Times Index (STI), which is considered a proxy for the local equity market, it opened at 2,887 points on the first trading day of 2017 and closed at 3,402 points1 at the last trading day of the year, giving it a 17.8% rise.

In fact, we do see a bull of various degrees across other asset classes as well; for REITs, the FTSE ST REITs index showed an increase from 711.54 points to 855.88 points2, a whopping 20.3%. On the gold front, it rose from USD 1,150.00 to USD 1,306.303 throughout the course of 2017, a 13.6% improvement (barring forex gain/loss). Even for local bonds, using the Thomson Reuters/SGX Singapore Fixed Income (TR/SGX SFI) index, it rose 6 points from 124.5 to 130.5 between 3 Jan and 29 Dec 20174, a miniscule rise of 4.8%.

In the United States, one of the biggest economies in the world, the S&P500 enjoyed a 416-point run which attributed to a +18.4%5, while its bond index (through the S&P US Aggregate Bond Index) also managed to post a small increase6.

But perhaps the headline of the year is of course, cryptocurrency, which some had generated thousands of percentage points in returns in 2017, depending on which one you are in. There are many critics on cryptocurrencies, although there are stories and anecdotes on how some made it big with them.

2018 Preview

Frankly, I do not know what exactly lies ahead, but we could make educated guesses of what is coming based on indicators and signs, which I had covered here. In my opinion, disruptive technology would continue to reign in the next year. Sector or field wise, I would consider looking at cybersecurity, payment solutions and alternative energy.

Nevertheless, it is important to keep the course of your investment and adhere to the basic rules of The Bedokian Portfolio such as rebalancing to your preferred asset class allocation.

Bob

Since Bob had started out his Bedokian Portfolio with an initial capital of SGD 30,000 and a mid-year injection of SGD 5,000, he had collected SGD 868.88 in dividends, while also enjoying some unrealised gains from his ETFs. Bob would rebalance his portfolio on 2 Jan 2018, the first trading day of the new year, with an additional SGD 5,000 injection. Also, he is considering on whether to go into a bit of active investing, so do stay tuned on his counter picks.

A Happy 2018 to all of you!


1,2 & 4 – Singapore Exchange. Indices. http://www.sgx.com/wps/portal/sgxweb/home/marketinfo/indices/indices (accessed 30 Dec 2017)

3 – Goldprice. Gold price chart.

5 – Yahoo Finance. S&P500. https://sg.finance.yahoo.com/quote/%5EGSPC?ltr=1 (accessed 30 Dec 2017)

6 – S&P Dow Jones Indices. S&P US Aggregate Bond Index. http://us.spindices.com/indices/fixed-income/sp-us-aggregate-bond-index (accessed 30 Dec 2017)