Friday, November 20, 2020

When The Sky Is Falling…

When it looked like the sky was falling for the markets back in March 2020, do you remember what was your first reaction? 


If your answer to the first question was “fear”, “panic” or any other associated synonyms, then you are normal. This feeling stems from our basic instinct of “flight or fight” when faced with precarious situations.


And what was your first decision that came to your mind after the reaction?


If your answer to this question was “liquidate”, “sell everything and run for the hills” or something like that, it is still normal. This is the feeling of “loss aversion”, where (according to studies) people prefer not to have losses than to have gains.


Imagine if you had carried out that decision, and looking at it retrospectively, what would be your immediate feeling and thoughts?


If your answer is “regret”, “I should have known” or something along that line, it is normal. This is called “seller remorse”, a feeling of regret and waste in selling off and you would have wished you did not do it earlier.


Looking back at the above answers, you would have noticed that it is normal to have such sentiments in our minds when presented with the questions. Being human, there is nothing wrong as we are naturally emotional creatures. However, from the investment and trading perspective, going with the flow of those same thoughts would bring more pain to your portfolio.


When one wanted to start investing, the typical advice would be to start reading up on material about things like equities, bonds, portfolio management, etc. However, after seeing some live examples around me, I would say the first thing to do is to prep one’s mind and emotions. It sounds easy but it is difficult to carry out as we have the tendency of not admitting our faults and over-estimate our abilities. Even if you think you have emotional control, when the actual crunch time comes, the original “you” will take over your supposedly calm “you”, since the former is your basic personality and character.


I admit there is no way one can completely switch from one emotional mode to another within a short moment (unless that person has a split personality or probably a robot instead), but we can reduce such emotive interferences in affecting our analysis and decision making. Here are a few tips you can use in bringing the rational “you” into the picture:


Tip #1 – Keep calm

Keeping calm is the very first thing you need to do when faced with news of a plunging market. Running around like Chicken Little does not help to alleviate the situation, and the situation itself is very much beyond your control, so there is no point fretting over. Investment is a long-term journey and plunges such as the one back in March 2020 are part and parcel of the market and economic cycles. Instead, take stock of the whole thing and look at the next tip.


Tip #2 – Think contrarian

Rather than viewing a down market with doom and gloom, why not see it as an opportunity to grab? In March 2020 (and also during 2008), almost all share prices were dragged down due to the fear and subsequent sell-out by investors who did not keep calm. It was also precisely at this moment that bargains were galore. However, it is also important to sieve out the good bargains from the bad, therefore some analysis and discretion is necessary to look for the right ones.


Tip #3 – Relook at money

Most of us love money, so much so that most people would attach a huge dose of emotions to it. Imagine the investment portfolio that was built up over time with your hard-earned savings, suddenly lost 10%, 20% or even 50% of its value; I could imagine the pain of the loss (hence the phenomenon of loss aversion). We have to train (and meditate to) ourselves that, once money had crossed into an investment portfolio, it becomes nothing more than a resource in your portfolio building journey. Move them around as if they are pieces on a chess board or units in a computer wargame, and deploy them wisely at the appropriate places and portions in your asset allocation.


Tip #4 – Remain diversified

Adopting a diversification strategy would save you some headaches as it remains a good hedge of protecting your portfolio. Though some said diversification dampens your overall returns (e.g., I gained 20% overall in a 100% equity-only portfolio as compared to just 10% returns from a mixed equity-bond one), it could also dampen your losses if you look the other way around. There will be a compromise between returns and risk, but I always advocated getting lesser returns than to have a greater risk, due to future uncertainties.


Tip #5 – Stay invested

As I had stated in Tip #1, investment is a long-term journey (at least 10 years in my definition). Do not let the poor market conditions scare you off from investing; good times and bad times, they are here to stay. Carry on with your strategy and style, learn from the markets and the economy and move on. Just like your school, work and personal lives, there will be ups and downs in investing. Strength is not all about winning, but also how you pick yourself up after a fall.


I hope the tips above would strengthen you mentally and be prepared for the roller-coaster ride that the markets bring us.



Sunday, November 1, 2020

Is The Straits Times Index That Bad In Performance?

I have been hearing comments and opinions about how not-so-good the Straits Times Index (STI) is doing for a long time. In this post, we shall find out quantitatively if this is true.

But first, a little caveat…


Introducing The iShares MSCI Singapore ETF


Since it was the weekend and I did not want to burn my brains calculating past returns from the two available local ETFs that tracked the STI, I had gone the easier way of using a proxy: the iShares MSCI Singapore ETF (EWS). The EWS ETF was launched in the US markets on 12 Mar 1996, which by the way was “older” than our very own SPDR STI ETF (ES3, listed on 17 Apr 2002) and the Nikko AM STI ETF (G3B, listed on 24 Feb 2009), so at least we could gather data a bit further back.


EWS tracked the MSCI Singapore 25/50 Index (Note: prior to 1 Dec 2016 it was tracking the MSCI Singapore Index), and the constituents and their respective weightages are comparable to the STI’s (see Figures 1 and 2 below):


Fig.1: Constituents of EWS (did not include cash component of the fund)1. 


Fig.2: Constituents of the STI2.


To top it off, here is a screenshot from Yahoo Finance, showing the close correlation between EWS, ES3 and G3B:


Fig.3: Chart of EWS, ES3 and G3B3.

Comparison With S&P500


I will use the SPDR S&P 500 ETF (SPY) for our analysis, since a number of people were using it for comparison. SPY has an even older history (incepted on 22 Jan 1993), so it is quite fitting to “track” their journeys together. I used Portfolio Visualizer ( to generate the numbers and here it is:


Fig.4: Performance Summary between EWS and SPY, with an initial USD 10,000 investment from Apr 1996 to Oct 2020. Final Balance and CAGR numbers are shown before inflation.


The statistics in Figure 4 did not paint a very good picture for EWS on all fronts, including returns and risk factors. Making it worse, after factoring in inflation, we get negative returns (CAGR -0.38%) instead.


So, is EWS (or STI) really that “bad”?


We return to the same figures came out by Portfolio Visualizer, and look at the annualized rolling returns:


Fig.5: Annualized rolling returns of EWS and SPY, based on full calendar year periods.


Assuming that EWS and SPY were bought on 1 Jan and sold on 31 Dec (hence the stated full calendar year) and going by my philosophy of holding your investments for at least 10 years, EWS actually performed better, with an average of 7.89% as compared to SPY’s 6.20%. Going down further, for the 15-year annualized rolling return, EWS returned an average of 7.54% over SPY’s 6.28%.


Judging from the results in Figures 4 and 5, it seems that the performance is neither good nor bad, because whatever the views on the outcome and answer, it boils down to the two famous words that I always use in replying to questions: it depends. We shall not touch on why SPY’s performance is better than EWS’/STI’s, but rather we would tackle it from a portfolio management perspective.


It Depends #1: The Holding Period


If you noticed in Figure 5, EWS’ 10-year annualized rolling period ranged between 1.89% and 16.57%, which meant that certain 10-year periods gave better results than others. Delving deeper, this is akin to a gamble; a lucky investor would get 16.57% per year after 10 years while another would get back a measly 1.89% annually if he/she picked the wrong 10-year window. 


The problem is we do not really know what would happen to our investments after 10 years, and if we are unlucky to plan the withdrawal on years like 2008, 2009 or even 2020, then it would be better to put it off and maybe wait for another few years to withdraw when things get better.


It Depends #2: Past Performance Is Not Indicative Of Future Results


This is a very common clause (or something similar to it) found in almost all investment literature, like prospectuses, factsheets, etc. I am bringing this up because what we were looking at was past data and we were inferring the results based on them. As reiterated in the previous section, we do not know what is in store for us; who knows, suddenly Singapore may become a hub of sorts and companies flock to set up shop and/or list in our exchange, thus growing our markets comparable to the S&P500’s.


On a macro scale, business and consumer trends, geopolitical issues and economic conditions may change the factors and parameters that produce the results that we obtained from our backtesting. Rather than hoping for things that may or may not happen, it would be prudent to adopt a more diverse and defensive approach to prepare for multiple scenarios, and this goes back to my basic emphasis on diversification, first by asset classes, then by regions/countries, sectors/industries and finally companies.


It Depends #3: Diversification Is Important


The scenario in Figure 4 assumed that an investor only held EWS since its inception and was the only holding in his/her investment portfolio. What if we used the famous 60/40 equity/bond portfolio, with EWS making up the 60% and the remaining 40% with a bond fund (I used a mutual fund, the Vanguard Total Bond Market Index Fund Investor Shares, or VBMFX, as it is currently one of the oldest bond funds around to match with EWS’ history)? Using the same timeline (Apr 1996 to Oct 2020), here are the results:


Fig.6: Performance Summary of portfolio with EWS (60%) and VBMFX (40%), Apr 1996 to Oct 2020, with an initial investment of USD 10,000. Rebalancing is done annually. Final Balance and CAGR numbers are shown before inflation.


Fig.7: Annualized rolling returns of the same portfolio, based on full calendar year periods.


With diversification, the results are more positive as compared to the ones in Figures 4 and 5. The returns are better, the volatility is lesser (based on standard deviation, worst year and max drawdown) and you still get almost the same average 10-year and 15-year annualised rolling returns, albeit with better “Low” scores (which mitigates the issue faced in ‘It Depends #1’). 




It is natural to view individual counters and assess its past performances and analyse its fundamentals as stock picking is a common trait among most investors (myself included). However, it is advisable to see things on a higher level, which is why I kept on harping about looking at our investments on a macro, portfolio level and the importance of diversification.


The STI ETFs (ES3 and G3B) are just a type of equities, which in turn is a component of a larger investment portfolio, akin to a piece of furniture (ETF) within a room (asset class) in a house (portfolio). While it is a good practice to look and inspect the furniture individually, we must not forget its place and role in the room and finally, in the house. 


1 – Detailed Holdings and Analytics. iShares MSCI Singapore ETF. iShares. 29 Oct 2020. (accessed 30 Oct 2020).


2 – STI Constituents. FTSE ST Index Series. FTSE Russell. 19 Aug 2020. (accessed 30 Oct 2020).


3 – Yahoo Finance as at 30 Oct 2020.


Further Note


There are a few assumptions on the statistics generated by Portfolio Visualizer, some of which includes (from the Portfolio Visualizer website):

  • All portfolio returns presented are hypothetical and backtested. Hypothetical returns do not reflect trading costs, transaction fees, or taxes.
  • The results are based on information from a variety of sources we (as in Portfolio Visualizer) consider reliable, but we (as in Portfolio Visualizer) do not represent that the information is accurate or complete.