Recently the financial markets are jittery
over trade issues between the two largest economies of the world, China and the
United States. With figurative blows at each other, the markets are
experiencing a roller coaster ride of sorts. Over the past five days from 2 Apr
to 6 Apr, the S&P 500 index swung between 2558 and 2671 points1,
while our STI fluctuated between 3339 and 3445 points2.
While it is not confirmed whether some or all
of these tariffs will come to fruition, such news could bring butterflies to
most stomachs. Though some may consider these market swings as minor, in
reality we do not really know what is in store for investors in the future. So
in case of a trade war happening, what should we do about it?
Think Regional and Country
Though the atmosphere of the markets may be
pessimistic, there are some places in the world that are not affected by
tariffs totally. Since tariffs work on imports and exports, economics 101
dictate that if goods from a certain place get more expensive, it would be
natural to source them cheaper from another location. This “another location”,
in turn, would reap the benefits, ceteris paribus.
For example, Australia is seen as one of
the likely beneficiaries if a trade war happens, as it could provide what is on
China’s tariff list of American products, such as wine, steel, etc3.
Also, China’s proposed tariffs on American soybean imports may prompt Chinese
buyers to source the beans from elsewhere, which could be Brazil or Argentina,
the next largest producers4.
With this information, you could consider
investing in counters and ETFs that has exposure to these regions and countries.
Ironically, we could also look at the domestic
markets of China and the United States. Sounds oxymoronic? Not really. Again a
reminder, tariffs affect imports and exports, so we could look at sectors and
companies in those countries that have minimal exposure to the items on the
Goldman Sachs recommended companies that
have large domestic sales exposure5. This seems to be a legitimate
reason as the revenues of such companies are not affected by trade wars, since
their customer base is mostly from within.
Overall the strategy and maintenance of the
Bedokian Portfolio in terms of your preferred asset allocation, as well as the
basic rules such as the 12% limit6 still holds paramount.
Furthermore, we do not know if the looming trade war is ever going to happen. In
investing, the most important thing is to stay calm and react accordingly
should any event occurs.
After starting this blog back in 2016, I
realised that I have yet to write a single post on bonds. Let me start the bond
ball rolling by explaining bond coupon rate and the two common bond yields
used, current yield and yield to maturity.
Coupon Rate and Current Yield
The coupon rate of a bond is always
calculated based on its par value. If a $1,000.00 bond’s annual coupon rate is
5%, the bondholder will get $50.00 per year (5% of $1,000.00 = $50.00).
Like any investments, the market value of a
bond will fluctuate depending on its demand and supply. Since the coupon rate
is fixed, we could use current yield calculations to see if it is higher or
lower than the coupon rate.
If the market price of the bond is $950.00,
the current yield would be $50.00/$950.00 x 100% = 5.26%.
If the market price of the bond is $1,050.00,
the current yield would be $50.00/$1,050.00 = 4.76%.
From the calculations, it is observed that
if the bond is at a premium (above the par value), the yield would be lower
than the coupon rate, and vice versa if the bond is at a discount (below the
Yield to Maturity
Another way to look at bond yields would be
the yield to maturity (YTM). According to Investopedia, YTM is “the total return anticipated on a bond if
the bond is held until it matures”1, and some bond investors
prefer to look at YTM as it could be used to compare with other bonds that have
different coupon rates and tenures.
Calculating YTM is a bit more difficult
than calculating current yield as the former involves present value
calculations, but the good news is there are online calculators available.
Providing some examples, if a $1,000.00
bond with a 5% coupon rate (paid annually) and 10-year tenure is priced at
$950.00 in the financial markets, the YTM would be 5.67%. If the same bond is
priced at $1,050.00 instead, the YTM is 4.37%.
Relationship Between Coupon Rate, Current
Yield and YTM
From the above example calculations, we can
clearly see the relationship between the coupon rate, current yield and YTM. Below
shows the relationship summary conveniently.
Bond priced at par: coupon rate = current
yield = YTM
Bond priced at premium: coupon rate >
current yield > YTM
Bond priced at discount: coupon rate <
current yield < YTM
Everyone loves a sale. It is during a sale
period that you can shop for things at a bargain. There are sale periods in the
financial markets as well, but there is a huge difference; Department stores
will tell you when the sale starts and how long it will last, but financial
markets will never tell you such things.
The most recent sale period was during the
market downturn in early February. As above, there was no announcement that share
prices were going to take a dip, and also in my post here I had stated that we
do not know how long this was going to last.
Looking back, the question asked was did we
miss the sale during those few days? For me, it would be yes, for I had only
bought into one REIT during that period, and before I could deploy my resources,
things were going back to normal.
However, we could learn something from this
episode and better prepare ourselves for the next sale. Like an avid shopper,
we could draw up a wishlist or shortlist of sorts.
Prepare a Shortlist
In my ebook, I had mentioned about
preparing a shortlist of the financial instruments available for your Bedokian
Portfolio1. The shortlist contains counters that you are interested
in, but it is not at the right time to enter. Also, it could be a list of your
existing counters in your portfolio with a new target price of entry.
It is entirely up to you on how much
information and parameters to put in the shortlist, but it is important to keep
it updated. You could pluck off the figures from Google or Yahoo finance for a
first glance, and if you want to go deeper, read them off the last quarterly or
annual report available from the companies’ websites.
Such a shortlist serves as a useful quick
reference in a sale period, so that you could make a fast decision of whether
to buy in or not.
When it comes to the realm of investment
books, there are tons of them. Some are written by famous greats, like Benjamin
Graham’s The Intelligent Investor and
Peter Lynch’s One Up On Wall Street.
There are also books on the different portfolio styles, like The Permanent Portfolio by Craig Rowland
and J.M. Lawson, Pioneering Portfolio
Management by David E. Swensen, and not forgetting my humble contribution
in the form of The Bedokian Portfolio.
There is another investment book which I
felt is a must-read by both beginners (for learning) and seasoned investors
(for re-learning), and it is Essentials
of Investments. It is written by finance professors Zvi Bodie, Alex Kane
and Alan J. Marcus.
Hold On, Is This a Textbook?
Well, yes it is, and it is about 700-plus
A school textbook usually provides the
basics of a subject in a structured, topical manner, along with worked
examples, problem questions and a few real-life articles pertaining to the
topics covered. Essentials of Investments
is just that, as it covers almost everything you need to know about
investing (and trading), plus the whats, whys and hows. It talks about
equities, bonds, portfolios, options, futures, basic economics, financial
statements, etc. Now you know why the book is that thick.
But 700+ Pages, It May Take Too Long To
In my opinion, if a reader has the drive,
focus and passion, no measurement of book thickness is able to stop him/her
(Harry Potter book fans are a good example). Granted, however, that the
mathematics and formulae inside may be a bit daunting and dry to some, but you
could casually read through at your own leisure or you could just jump around
the chapters; After all your time limit is not one semester.
I personally feel the key takeaways in
terms of additional knowledge gained are priceless and can open additional
doors in your investment journey.
can purchase Essentials of Investments from bookstores such as Amazon and Books
Kinokuniya, or borrow it from the public and institutional libraries (use the
respective library portals to search for it). Currently it is at the tenth
edition, but you could still read up the previous editions.
We all know that by normal convention,
yield is calculated as the annual dividend/coupon/interest amount divided by
the current price of the security, which is current yield. However, some
investors, instead of using current price, used the entry price as the
denominator. This is also known as yield on cost. They would prefer to look at
this version of yield as they wanted to know the returns based on their initial
For example, a person bought Company A’s
shares at $1.00 a few years ago. Fast forward to the present day, the share
price had risen to $1.50.If the current
year dividend was $0.15, the “normal convention” would be $0.15/$1.50 = 10%,
but to him/her who uses yield on cost, it would be $0.15/$1.00 = 15%.
Do note that for yield on cost, we would
have to take in two major considerations. The first would be the inflation
effect. Assuming he/she bought the shares at $1.00 each back in end 2010, and
with a 3% annual inflation rate, the new cost at the end of 2016 (for six
years) would be about $1.19. Using the above example, the yield would actually
be $0.15/$1.19 = 12.6%.
The second major consideration would be the
factor of capital gain/loss. What if the share price dropped to $0.80 and the
dividend is at $0.20? It would be $0.20/$1.00 = 20% for him/her, which looks
good, but (not taking inflation into play here) there is a capital loss of
$0.20. Of course, any investor would have noticed it, but if one concentrates
on this yield only, the capital loss would be like the elephant in the room
that was not addressed.
Whether an investor wants to look at
current yield or yield on cost, it is entirely up to his/her preference.