The Bedokian Portfolio Blog’s Sixth Anniversary Post

Today marked the sixth anniversary of The Bedokian Portfolio blog.

My anniversary posts were usually filled with tips, advice and pointers; some current, some cliched and most of the time common sense. For this anniversary message, I would like to go into a recent occurrence and hope that there will be some lessons drawn from my opinions. That occurrence would be the crypto meltdown.

 

Crypto Meltdown

 

The first two weeks of May 2022 saw one of the largest events happening in cryptosphere. Known as the Terra-Luna collapse, investors around the world lost millions, if not billions, collectively. Consequently, there were a number of tragic happenings, ranging from big monetary losses to loss of life. 

 

And that is not all. As a result of the collapse, other cryptocurrencies began to fall in value, with Bitcoin, considered the “grandfather of all cryptocurrencies”, fell to a low of almost SGD 26,000 by mid-June 2022, sparking fears of what was called “crypto winter”.

 

While the dust was settling from the Terra-Luna downspiral, there were some aftermath stories emerging from stung Terra-Luna investors and traders, dictating the goings-on and providing learning points and lessons from the whole ordeal. The common points mentioned were the admission of greed and lack of diversification. This is the part where I will give my two cents’ worth (or maybe three cents due to inflation).

                   

The Bedokian’s Opinions

 

Hindsight is always 20/20, mentioned by so many people. Yet, people who are deemed to be highly experienced in the field of investing/trading would sometimes fall into greed and its by-product “all-in” (i.e., no diversification). It is an emotion, after all, and on occasions I do feel this greed coming into my mind, which could be tempting at times. If I could earn a fortune by just going all-in into a rapidly rising asset, why not?

 

Problem is, no asset is growing at a fast pace without retracing, even slightly, forever. If one’s investing/trading (or gambling, a word which I am tempted to use for this post) on a rapidly rising thing, one must know the music would stop eventually, question is when. I understand that one may feel being FOMOed (fear of missing out) by letting go an asset too early in its rise and had languished on the opportunity cost, but the feeling could be worse if the asset’s price come crashing down, hard. One of the advice given in my early trading days was to be satisfied as long as there are profits, and start to prospect for the next potential one.

 

Ideally, investing and trading follow a set of rules, which are different from one person to another. These rules can be changed depending on certain circumstances, but the one thing one must not include in are human emotions, except for using emotions to one’s advantage (e.g., market sentiment and going contrarian). Greed is one thing one must not factor in: if an asset had reached the target price (as per the rules), just sell it, do not arbitrary set another higher sell price on the spot. We do not know what will happen next, and if a bad event does happen, we may be too late to react to it, since we retail investors/traders do not have first-hand information coming in quick. Diversification, which I had harped on so often in my posts, is a must-have to counter big losses in the investment portfolio and the emotion of greed.

 

Stay calm, stay safe, stay diversified, and do not go all-in.

Brace For Impact

A brace, in football terms, is the achievement of scoring two goals in one game. The word brace also means to “prepare for” or “get ready to”. 

Building onto this wordplay, the title of this blogpost means to get ready for two big “goals” that are coming up soon, and they are the expected announcement of interest rate hikes by the United States (U.S.) Federal Reserve (28 July early morning Singapore time) and the results of the U.S. second quarter gross domestic product (GDP) (28 July evening Singapore Time).

 

Goal #1: Interest Rate Hikes

 

The U.S. consumer price index (CPI), commonly referred to as the inflation rate, for June 2022 was at a staggering 9.1%, and the U.S. Federal Reserve is expected to raise interest rates further to combat the rising inflation. Though the expected 75 basis points (0.75%) hike was bandied about, there were some quarters expecting a full 100 basis points (1%).

 

Goal #2: GDP Growth Rate And Technical Recession

 

The general consensus among governments, economists and analysts is a country is in a technical recession if its GDP undergoes two consecutive quarters of negative growth, though this is not really set in stone. The first quarter of 2022 saw the U.S. GDP growth rate at -1.6%, and many are expecting the second quarter will be in negative region as well, thus sparking the technical recession definition (though the U.S. government recently had reiterated that it is not really a recession¹). 

 

So What Now?

 

As of the time of my writing of this blog, the U.S. markets are heading southwards, partially due to the “brace” and the profit warning announced by Walmart. The next two days might see more downward pressure on the markets as the interest rate hike announcement and GDP figures release happen.

 

However, things may not be as bad as it seems as market participants could be expecting hikes and negative GDP growth, thus becoming a non-surprise and result in a not-so-sharp fall in the markets.

 

To me, these times are like shopping sprees as I can pick up bargains of fundamentally sound counters who are inadvertently dragged down along with the rest, therefore it is important that you have a “wishlist” in your mind on what to get. Alternatively, if researching on individual counters are a bit of a hassle for you, then you may consider using exchange traded funds (ETFs) of indices to get into the action. There are many ways to determine when you should enter, as I had described some here.

 

Welcome to the markets.

 

1 – Wingrove, Josh. Biden Team’s Take on ‘Technical Recession’: It’s Not Real. Bloomberg. 26 July 2022. https://www.bloomberg.com/news/articles/2022-07-25/biden-team-s-take-on-technical-recession-it-s-not-a-real-one (accessed 26 July 2022)

The Uniqueness Of The Singapore Savings Bond

The Singapore Savings Bond, or SSB, was introduced by the Singapore Government as a safe, long term and flexible means of investing. Unlike normal government bonds, in which a fixed coupon rate is paid at a prescribed pay date, the SSB rates steps up as each year goes by, thus it is more worthwhile to keep it long term. Also, the SSB is not subject to market volatility; once redeemed, you will get back the whole sum, plus any interest amount accrued.

It is this feature that led to me classifying the SSB as a form of cash-bond hybrid: cash in terms of depository mechanism, and bond if the cash is kept till the end, i.e., after 10 years. Though the redemption is not as instant as withdrawing cash from a savings account in a bank, the cash in the SSB could be withdrawn possibly in about slightly more than a week’s time, depending on which part of the month the redemption request was submitted.

 

Recently, I could see a lot of hype surrounding the SSB: from investment and non-investment social media chat groups that I am in; from a colleague with whom I had never discussed investing with before; and a relative of mine had suddenly popped me a question about it. This is naturally obvious as SSB are viewed as almost risk-free and the rates are moving up in the past months. The latter is mostly due to the rise of interest rates in the United States, which is positively correlated to our local interest rates, though this relationship is somewhat not so straightforward (and I had explained a bit on this here).

 

What’s the uniqueness, then, for the SSB? Well, I had already described three of the attributes in my above paragraphs. We shall have a look at them in detail below.

 

#1: Step-Up Annual Interest Rates

 

The first unique point about the SSB is the step-up interest rate structure, which is unheard of in other bonds. The rates are published right at the onset of the issuance, therefore you know how much you would be getting from the interest every year.

 

#2: Not Subject To Market Volatility

 

The SSB is traded between yourself and the issuer, the Monetary Authority of Singapore (MAS), and no one else. This means it is not subjected to the volatile forces of the market, where most of the risks are. As we know, bonds are susceptible especially to market (i.e., loss of principal/capital) and rate risks (i.e., bonds with higher coupon/interest rates are favoured over those with lower ones, causing the latter to lose their demand). 

 

The SSB does not have these two big risks: no capital loss (you will get back everything, minus the SGD 2.00 transaction fee if redeemed before maturity) and if the current rates are higher than the one you are holding, you could redeem it and apply again (though fresh funds may be needed as there is insufficient turnaround time to use the redeemed amount to buy the current SSB).

 

#3: It Is A Cash-Bond Hybrid

 

I came up with the conclusion of the SSB being a cash-bond hybrid (from The Bedokian Portfolio’s perspective) is due to the following reasons:

 

Cash – For The Bedokian Portfolio, cash served as a pool where injections, dividends, interest payments and returns are contained, and acts as a starting point to deploy to other asset classes. It is important that cash should not lose its value, which was why I advocated placing them at least in the safety of banks. SSB’s ability to preserve principal (as described in #2) qualifies it suitable to hold cash.

 

Cash as an asset class is dependent on interest rates for returns. For the SSB, its interest rates are based on the reference yield of the various tenures (1, 2, 5 and 10 years) of the Singapore Government Securities (SGS, commonly known as Singapore government bonds), which, through a series of connections, are positively correlated to U.S. interest rates.

 

Bonds – Unlike typical means of cash holdings where there is no expiry date, the SSB has a tenure of 10 years. Thus, if held for the full term, the SSB’s characteristic is akin to a bond asset class.

 

Conclusion

 

The SSB is a good investment vehicle to include in your portfolio, given the good credit ratings of SGS. The caveat is that an individual is only allowed to have a maximum of SGD 200,000 in SSB, so if you are adopting a 60/40 equities/bond portfolio and the size is above SGD 500,000, you would have to look for alternatives like other SGS, corporate bonds or bond exchange traded funds.

 

Disclaimer:

 

The Bedokian is vested in SSB.

The Dreaded “S” Word

By now you may have heard of the possibility of the dreaded “S” word taking over the markets and economies. Yes, that word is “stagflation”. It is a portmanteau of two words “stagnant” and “inflation”.

What is stagflation? Putting it simplistically, it is a situation where we have high inflation, high unemployment and a slow or stagnant economic growth. As you can see, it is a very difficult cycle to escape from once it rears its ugly head: high inflation leads to workers demanding higher wages, but with slow demand, companies find it difficult to do just that without hurting the bottom line. Worse still, companies may lay off workers so that they could keep themselves afloat, let alone giving in to raising pay. 

 

The most famous (and only) real life case of stagflation occurred during the 1970s in the United States, where a combination of factors such as high inflation and unemployment, coupled with the oil embargo by OPEC (Organization of the Petroleum Exporting Countries) that caused oil prices to skyrocket, created a period of stagflation that lasted until around the early 1980s. 

 

The threat of stagflation is not without justification: we are seeing high inflation rates now, coupled with hiking of interest rates which, according to basic market and economic principles, tames inflation but also brings about slow growth. Also, exacerbating the whole thing is the ongoing commodities shock and the global supply crunch. This is like history repeating itself, as what some analysts and economists commented, but others stated that policy makers and central banks would know what to do based on what they had learnt from history. There are also other arguments that the stagflation causes back in the 1970s were slightly different from the present variables that we are seeing.

 

Impact On Investment Portfolio

 

Stagflation is a combination of inflation and recession, and on the asset class level equities, bonds and cash would be negatively affected, with REITs maybe on the borderline (depending on the net result between inflation and recession). The preferable asset class is commodities, which thrive in inflationary environments as a hedge and recessionary environments as a safe haven. To really bulletproof further a portfolio during stagflation, we would need to look deeper within asset classes, like regions/countries and sectors/industries. 

 

Locations not heavily affected by stagflationary factors would be a good go-to place; China is an example where inflation and interest rates are still within economic growth level, coupled with the ability to get cheaper oil. Same goes for sectoral/industrial wise; goods and services which are still needed by the masses, e.g., consumer staples and utilities, can be considered.

 

Now comes the golden question: Will stagflation happen? My answer in seven words: Your guess is as good as mine. Regardless, one’s investment portfolio would be hit by stagflation. Diversification across and within asset classes is still the best defence in such times.

 

Stay calm, stay safe, stay invested.