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

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