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 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.