Tuesday, February 27, 2018

Yield on Cost

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 investment amount.

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.

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