In For The Long Haul

The United States (U.S.) Federal Reserve had signalled a few days ago that there would be one more interest rate hike before the year ends, and that the rates would be held steady for a longer time.

The latter point above would have severe downstream repercussions for the markets and economies. Optimistic predictions and estimates of a drop in interest rates in at least the first half of 2024 had evaporated, and with such high numbers, leverage itself had turned to the other edge of the sword and cut into companies and organisations so used to having cheap loans.

 

This meant companies and real estate investment trusts (REITs) with high gearing, lower fixed rate loans, shorter debt maturity profiles and/or poor cash flow would be in for a ride in trying to navigate these high-rates waters. This is why in your fundamental analysis, it is important to select healthy companies and REITs for your portfolio.

 

On the other hand, cash and short-term treasuries are experiencing high yields. With Singapore’s interest rates somewhat correlated with the U.S. side, the past year or so had seen the popularity of erstwhile boring treasury bills (T-Bills), Singapore Savings Bonds (SSBs) and banks’ fixed deposits.

 

We are entering into relatively new stage of our investing life. Never had we seen a sharp rise of inflation and interest rates within a short time, and the last time this happened was in the last century’s 70s and 80s. For those whose investment portfolios were formed after the 2008/2009 financial crisis, like myself, this is unexplored territory. Yet, if your investment journey is a quarter/third/half way, you still have a long runway ahead of you, and definitely it will be full of events, good and bad.

 

However, if you do the following two things, your investment journey would be less daunting and you are better prepared for the things to come. 

 

The first is to stay diversified; it has been demonstrated in the past that different asset classes have different correlations with one another in different market and economic situations. Coupled with the act of rebalancing, your investment portfolio could at least withstand the storms with lesser detriment while enjoying some fruits during fine weather.

 

The second is to remain calm in good times and bad. Do not get overhyped when every day is a Sunday and gloomy when every day is a Monday. Follow through your tested investment philosophy and style methodically, which in this way the element of emotion is reduced.

 

Remember, we are in for the long haul, so keep calm and stay invested.

Of Custodians And Ringfencing

Occasionally there will always be a question popping up on the safety of having one’s securities in a custodian account. Time and again, some people will have the impression that if the brokerage who is holding their shares in custody goes under, there goes the shares. And I am quite surprised that due to this, a few investors would rather invest locally and have their shares custodised with the Central Depository, or CDP, which to me is a missed opportunity on diversifying into other markets outside of Singapore.

This thinking is not without basis. In 2011, a now-defunct U.S. based commodities brokerage firm MF Global had misused customers’ funds by using them to cover their liquidity shortfalls, and there were Singapore customers included. It was till 2016 that MF Global’s liquidators returned all the funds to the affected customers. Due to this experience, I have heard of at least one ex-MF Global client swearing off custodian accounts.

 

By legal right, the assets of investors are separated from the assets of the brokerage with whom the investors invest with. This is the “ringfencing” described in the title. In the rare event where the creditors are acting against the brokerage, they are going after its assets, not the investors’.

 

As the adage goes, however, anything can happen, and skeptics will argue the scenario of another “MF Global happening” and if so whatever safeguards and legal protections would be thrown into the wind. I do not dispute of such possibilities manifesting, since I acknowledge that there are many risks involved in investing, though in terms of probability, it is very rare.

 

Rather than restrict oneself from investing in overseas markets (or local markets if wanting cheaper transaction costs), why not diversify across different custodian brokerages? Recent years had seen several discount brokerages popping up, and adding a layer of safety and security is that they are (mostly, if not all) licenced by the Monetary Authority of Singapore. Perhaps these may convince those to try out (or retry) custodian brokerages, and from there, invest in the rest of the world?

 

 

References

 

Ross, Marc L. What Happened At MF Global? Investopedia. 17 Jan 2023. https://www.investopedia.com/financial-edge/0312/what-happened-at-mf-global.aspx (accessed 17 Sep 2023)

Portfolio Pivoting

We had made a major pivoting decision with regards to our Bedokian Portfolio. It was not an overnight decision and sudden course of action. The transformation had taken place for the past six to nine months.

Okay, so what is the pivot all about?

 

For our Bedokian Portfolio built with our disposable income, we had followed the balanced allocation since its inception, which was 35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash.

 

Then what is our new allocation?

 

That would (currently) be 40% equities, 35% REITs, 15% bonds, 5% commodities and 5% cash. Basically, we had reduced the bond component by 5% and added it to the equities part.

 

I could call this “balanced-plus” Bedokian Portfolio, or “aggressive-minus” (for information, the aggressive Bedokian Portfolio make-up is 40% equities, 40% REITs, 10% bonds, 5% commodities and 5% cash)¹, because it sits right in between balanced and aggressive.

 

Okay, it is just a shift of 5% from bonds to equities.

 

But that is not all. To “complicate” things a bit (and not advisable for passive investors), the combined equities-REITs would stand at 75%, with either component not going above 60% of the 75%, or below 40% of the 75%. In other words, we are “free-floating” the two asset classes between 60/40 and 40/60.

 

The next thing popping up in your mind would probably be “why the pivot?”.

 

After a few lengthy discussions with my other half, we had settled (somewhat) at an age where we would “step-down”. Contrary to “retire early”, step-down would be when we intend to leave the rat race and settle for a job with lesser responsibility (and lesser pay) and/or a more freelance role (and lesser pay). Several major factors contributed to the age number, and that includes our children’s age of entry to the workforce, the maturing amounts of our savings plans, the CPF amounts that we (might) take out to augment the Bedokian Portfolio, etc.

 

With our current runway, we decided to accelerate things a bit by going slightly aggressive not just on our Bedokian Portfolio, but on our investments via CPF and SRS, too. The key word is “slightly”; we are not going full retard into 100% equities. Diversification is still key in our overall approach.

 

 

1 – The Bedokian Portfolio (2^nd Ed) p75