Investing Your Supplementary Retirement Scheme Account?

Supplementary Retirement Scheme, or SRS for short, was introduced in 2001 and it is part of the Singapore Government’s multi-pronged strategy to address the financial needs of a greying population. It is a voluntary scheme that complements the Central Provident Fund (CPF). Thus, the SRS forms part of the basic make-up of our portfolio multiverse structure, along with the CPF and investment portfolio using disposable income. 

Besides saving for retirement, the monies that go into the SRS account are eligible for tax relief, so there may be some tax savings depending on the total relief amount and income bracket of the individual. The contribution limit for Singapore Citizens and Permanent Residents is SGD 15,300 and SGD 35,700 for foreigners per calendar year, and that means the deadline for the contribution is on or before 31 December.

 

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Should I Open An SRS Account?

Before jumping into the how of investing in one’s SRS, we need to address the why first, and honestly there is no correct answer. In my view, if you have some spare cash lying around and want to reduce your tax bill, why not start it? 

Granted that the spare cash can be deployed into your disposable income portfolio, but that does not bring down your tax payable. Similarly, you may have maxed out your CPF contribution limit and still have some more headroom to the SGD 80,000 personal income tax relief cap. If you had hit both aforementioned conditions, then the case for opening an SRS account is stronger.

Even then, if you had not hit those conditions, you could still open an SRS account, like my case; I want to reduce my tax payable, so I just contribute to it. When I started my SRS, my CPF SA had already hit the prevailing full retirement sum for some time, so any further topping up via voluntary contribution does not invite tax relief. Also, I view SRS as a form of forced savings from which I have a stash of funds by age 62 (for me. Now is 63).

 

Investing Your SRS

If left uninvested, the funds in the SRS earn 0.05% per annum based on the latest information available, which is akin to a typical savings account. From an investment viewpoint, that yield hardly compensates for the inflation rate, hence investing it is a no-brainer option.

Unlike CPF where there are limited investable amounts and choices, you can plonk in the entire SRS into various financial instruments (shares, bonds, exchange traded funds, unit trusts, etc.), endowment annuity plans, bank fixed deposits and bank structured deposits. As with any investment decision, the choice of what to invest in depends on your product preferences and familiarity, risk appetite and tolerance. You can have more than one type of product within your SRS, for it is in itself, a portfolio universe.

 

Open Your SRS

If you have yet to open an SRS account, it is advisable to do so as soon as possible. The official retirement age in Singapore is set to go higher at 64 after 1 July 2026¹. Opening the SRS account would “lock” the withdrawable age at the prevailing retirement age, i.e. if you open now, you are able to start drawing down your SRS account from age 63, regardless of what is the prevailing retirement age when you reach 63. You can have only one SRS account, and you can open your SRS account with either DBS, OCBC or UOB.

 

Bonus Paragraph: What Is Inside The Bedokian’s SRS?

Now I am doing a regular contribution to a robo-advisory portfolio consisting of 60/40 fixed income/equities make-up, with an annualized internal rate of return of 9.48% so far. As I do not invest the whole works and have spare funds inside, I may deploy the balance in individual securities. 

Disclaimer

Reference

Supplementary Retirement Scheme. Ministry of Finance. 7 Dec 2017. https://www.mof.gov.sg/docs/default-source/default-document-library/schemes/individuals/supplementary-retirement-scheme/srs_booklet---7-dec-2017e42cafd2dab847f78b5cfb6919b476b2.pdf  (accessed 20 Oct 2024)

 

1 – Boo, Krist. S’pore retirement age to go up to 64 in 2026, re-employment age to rise to 69. The Straits Times. 6 Mar 2024. https://www.straitstimes.com/singapore/politics/s-pore-retirement-age-to-go-up-to-64-in-2026-re-employment-age-to-rise-to-69 (accessed 20 Oct 2024)

Know This, And You Are Halfway Knowing How The Market Works

I admit that the title of this post sounds like a click bait, but it is mostly true, at least based on my observations and conclusions.  In a way I had somehow stumbled upon a hypothesis that works most of the time.

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So, what is this wondrous hypothesis that could half answer how the markets work?

It goes like this:

Capital, assumed it is limited at the point of time, would either flow to assets that provide the most deemed yield, or to perceived safe assets, or both.

In layman speak, it would be:

Capital would go to securities that provide “more bang for the buck” and/or to a perceived safe haven.

If you had been reading my blog for at least the past three years, you may find the second italicized quote familiar; I had mentioned something along that line in this post, where I also emphasized on the importance of diversification. However, we can apply more from this hypothesis besides just diversification, and the accompanying trait of rebalancing. One way is to go contrarian.

 

Going Contrarian

The good thing about this hypothesis is that you can counter its logic and still profit from it. This is known as “going contrarian”.

When capital starts to move fast and huge, like a flash flood, you will notice big movements in the prices of assets and securities. As a retail investor, when these things are happening, it may be a bit late as other people would have jumped on the bandwagon before you, although maybe you are lucky enough to be at the tail end of it. The contrarian part is, since most are going with the metaphorical wave, why not go against it?

The thing about going contrarian is not to do it wholesale and blindly; it is important to pick the right ones and capitalise on it. For instance, if you are an active investor who goes for individual equities and real estate investment trust (REIT) counters, picking those that were financially healthy but got unfortunately dragged down by the overall bear situation was a good case of going contrarian intelligently. 

Though the contrarian way sounds like an act of portfolio rebalancing, which is long term in nature, it could also be used in medium term or short trading terms, too. 

Going The Way Of The Dodo

As an investor, whether going for growth or dividends, we like to own companies that are near-monopolistic, or at least having a wide moat, as they are seen to be financially stable and strong given their steady or growing user base of their products and services. However, due to some poor management decisions and foresight, a great company may devolve into good, then bad, and then gone, either being bought over by someone (partially or fully) or doing business in some other fields. There are a few classic examples of these companies; the oft-reported stories would be Kodak and Nokia, where they had lost their dominance in their main products.

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While it is easy to point out the causes of past declines due to hindsight, at present we do not know if a company and/or its product and/or service is facing obsolescence. While there are many potentials out there now, sometimes a change in management team, product or service range, or “white knight” investors, may save the situation.

The Bedokian’s View

As mentioned, it is not easy to identify such companies especially when things are still in a flux. The good thing is, except for companies that engage in financial fraud and/or suffering from a huge unmitigated public relations disaster, this decay generally would take several months to years to develop, so observant investors could see the writings on the wall and get the hint that it is time to say farewell.

The first thing an investor must know is not to fall in love with any counter, and not to harbour any hope given the known not-so-good circumstances surrounding the company. Love and hope, though good attributes in a personal sense, are not to be brought into investing, where staying objective and rationale is key.

Next up, we shall look at the numbers, in particular revenue and free cash flow. A profitable company would minimally have a slight growth in revenue and a not-so-volatile free cash flow. There are other metrics such as return on investment (ROI) and return on equity (ROE), but these are sector/industrial specific and cannot be applied in general. Though typically I tend to look at over two to three years, if the situation deteriorates faster than it should be, then I may set up an exit sooner.

As for how to tell whether the company is getting worse in a short time, I would look at what I call trends and fads (mentioned here). Though this method of mine is to look out for the next big (profitable) thing, it could be adapted for use in guesstimating negative outcomes.

The final word here is that, even after a thorough analysis conducted and yet you still feel queasy on a counter (that unexplainable “gut feel”), then prudently it is better to just let it go. Having a good sleep is good for your physical and mental health.

Macroeconomic Lessons To Learn From The Past Two Years

Due in part to the spike in demand and limited supply of products in the aftermath of COVID-19, and a host of other reasons such as geopolitical ones (e.g. Russian-Ukrainian conflict) and the long period of low interest rates which flushed the economy with cheap-loan capital, caused inflation to rear its ugly head. The subsequent accelerated rise of interest rates that was never seen before since the mid-2000s had brought an unprecedented economic environment in which most younger investors had not experienced before.

The past two years or so had provided useful insights and learning opportunities for us investors, and that is attributed to one macroeconomic policy: interest rates. What I would be sharing in the next few paragraphs are theoretical knowledge found in economics and finance textbooks, and most of the occurrences did happen, thus giving a sort of “classic textbook examples”.

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Inflation And Interest Rates

When inflation is perceived to be happening, countries whose central banks can control interest rates (like the United States or U.S.) would raise them to bring inflation down. The rationale behind this is that when interest rates go up, the cost of borrowing would go up, and this slows down capital investments by companies as loans are getting expensive. Simultaneously, for consumers, higher rates meant higher returns from safe instruments such as short-term treasuries and bank deposits, which in turn encourages saving and less spending. All these cool down the economy and lower inflation.

For Singapore, instead of interest rates, our central bank (Monetary Authority of Singapore, MAS) used the exchange rate policy to manage the monetary policy. However, it is noted that our interest rates are very closely correlated with that of the U.S.’ in terms of direction and movement (see here and here for further explanations).

Effects On Asset Classes

Now that you got the gist from the previous paragraph, you could roughly tell what are the asset classes affected by high interest rates. Positively, as mentioned, are cash (in banks and money market funds) and short-term treasuries (less than two years). Negative ones include real estate investment trusts, or REITs (being leveraged investment vehicles, higher rates affect distributions to REIT unitholders), bonds (interest rates and bonds are inversely correlated) and lastly, commodities (which do not provide yield). For equities, though the cost of borrowing may affect the growth of companies, for some sectors such as finance (banks) and technology, as well as cash-rich companies, enjoyed some boom time.

True enough to a certain extent, we saw that REITs were hammered, a lot of people flocking to erstwhile boring treasury bills and fixed deposits, and gold was somehow muted throughout 2022 and 2023, to name a few.

Everything Is A Cycle

Good times do not last, and so are bad ones. All markets and economies go through a cycle, from bust to boom to bust to boom again. Now that the U.S. Federal Reserve had brought down rates, with more planned ahead, we could see treasury bill yields going down, REITs roaring back up, gold surging ahead, etc. The undulating nature of the market and economy, and the behaviours of the asset classes during these cycles, proved the importance of having a diversified portfolio with periodic rebalancing. With diversification and rebalancing, your investment portfolio can be protected from huge downswings and capital losses can be lessened. 

Ceteris Paribus

Last but not least, all economic scenarios and assumptions are accompanied by the term ceteris paribus, which translated from Latin is “all things being equal” (read here for more information). As we know, the economy is like a machine with many moving parts, working and affecting one another at the same time (read here for the economic machine analogy). Thus, even though we can observe “textbook examples” happening, sometimes it may not go according to theory, or even so, it might be other factors at play to give it a “textbook answer”.

Still, in my view, it is better to have some basic economic and financial knowledge to get a grasp of the complicated, yet simple, world of investing.

Frasers Centrepoint Trust: Good To Go?

Most real estate investment trusts (REITs) were having a field day with the not-so-unexpected cut of 50 basis points of interest rates. One REIT stood out as seen not benefiting from the rate cut, which is Frasers Centrepoint Trust (FCT).

 

Screenshot of FCT properties from presentation slides of FCT’s business updates for the Third Quarter ended 30 June 2024.

 

Looking at its price movement, it had seen a huge rise during the month of August, where the United States Federal Reserve (or Fed) had dropped a big hint on interest rate cuts. It reached a peak of SGD 2.41 just around a week before the Fed’s announcement, but after which, it went down to SGD 2.27 when the market week ended on 20 September.

There were people whom I know asking about what was happening, and I just shrugged (read here about why asking “what is happening” does not help much in the situation). From their third quarter financial highlights, the gearing level stood at 39.1% and their average cost of debt was 4.1%¹. This meant that the rate cut should benefit FCT given the not-so-high-but-high-enough gearing ratio and the cost of loan they were getting, so theoretically there are some justified push-up factors for its price instead of going opposite.

With the last known book value of SGD 2.26 as of 31 March 2024², at SGD 2.27 it represented a good bargain, since FCT was one of the stronger retail REITs known, and with 100% exposure in Singapore properties, thus could command a higher premium. This is a good example of a fundamentally sound counter that was somehow being dragged down for reasons, obvious or not, and for us this show of price weakness meant a good chance to average up our FCT holdings.

Disclosure

The Bedokian is vested in FCT.

Disclaimer

1 – Fraser Centrepoint Trust. Business updates for the Third Quarter ended 30 June 2024. 24 Jul 2024. https://fct.frasersproperty.com/newsroom/20240724_193109_J69U_7OBO7A3PF3O39XSV.1.pdf  (accessed 22 Sep 2024)

 

2 – Fraser Centrepoint Trust. Results Presentation for the First Half Financial Year 2024 ended 31 March 2024. 25 Apr 2024. https://fct.frasersproperty.com/newsroom/20240425_075534_J69U_VG71VYH4JFEHK0J8.3.pdf  (accessed 22 Sep 2024)

25 Or 50 Basis Points?

The investing and trading world will be waiting with bated breath this coming Wednesday and Thursday (17 and 18 September); the Federal Open Market Committee, better known as the Fed, is expecting to announce an interest rate cut for the first time in around three years. After the intent was made known by the Fed back in August, you could observe equities, real estate investment trusts (REITs) and even gold were rising in anticipation.

 

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While the consensus among economists, analysts and retail investors were looking at a highly probable 25 basis points cut, there were some quarters that speculated a higher rate cut at 50 basis points. The reason for the latter is mainly on the viewpoint that the prolonged high interest rates are hurting the market more than it should, and this opinion is gaining traction. As of 13 September, the CME FedWatch had placed an equal probability (i.e., 50%) for a 25 and 50 basis point cuts; just the week before, the 50-basis point cut was given only a 30% chance¹.

 

Potential Reaction Of Markets 

Interest rates play a huge part in the performances of the various asset classes; equities, REITs, long term and corporate bonds, and gold are on the uptrend, while short term treasuries and cash are seeing a downside. From my observations and guesstimates, my conclusion is that the markets are currently pricing in a 25-basis points reduction. However, if 50 basis points is announced, the market volatility would be higher, whether is it upwards or downwards is depending on which asset class, sector / industry and companies that you are looking at. 

This means REITs may rise further, gold may yet reach another all-time high, banks may feel a slight downward pressure due to the deemed lower net interest income, the USD/SGD exchange rate may go down to the level not seen since late 2014, etc. Notice the word “may” used, because we do not really know how the markets will react, hence the word “potential” for this section heading.

For this round, I may adopt the following actions (not exhaustive):

• Change more USD and/or buy more USD denominated counters.
• Average up fundamentally sound equities and REITs that do not rise much vis-à-vis the general market rise. 
• Average up corporate bonds.
• Buy into banks if price weakness is shown

Whatever the interest rates, and macroeconomic conditions, good or bad, there is always an opportunity to invest in the markets.

 

Disclaimer

1 – FedWatch. CME Group. 13 Sep 2024. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html (accessed 15 Sep 2024).

The Only Answerable Person On One’s Investment Is To Oneself

On top of financial news channels and websites, there are also hundreds, if not, thousands of, blogs, video channels and chat rooms/forums discussing about investment and trading in general. While most of these resources are informative, there are some which, put it mildly, trying hard to prove or disprove certain viewpoints. A healthy discussion/debate is constructive and learning points can be taken from them, but there exist participants where his/her convictions on certain opinions are so strong that he/she would commit most or all resources just to make a point.

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Frankly, this “I will prove that I am right by (doing something)” existed way before the internet came about, or even newspapers and smoke signals. The propensity to prove correct one’s assumption/prediction is one of the basic human biases known as overconfidence. Amplified by the easy access to mass communication tools and means, it could also develop into stronger narcissistic tendencies, which includes the hyper-aversion to “loss of face”. 

These traits and behaviours in the world of investing/trading are a definite no-no; yet, despite these basics, there were those who fell into such traps. With social media and the deemed credibility that comes with it, the negative impact of having a wrong outcome is very great. This is why mistakes are usually either glossed over, or defended with more vigorous “convictions”, to maintain the presumed invincible aura. When we are investing or trading, we are doing it for ourselves. When we are showing it the world, we are sharing the tools and tips so that we can learn from one another.

Borrowing a famous saying about fooling someones and everyones all the time or sometimes, I had modified it to the following:

We can be always right some of the time.

We can be sometimes right all the time.

But we cannot be always right all the time.

Remember the title of this blog post.

Is It A Good Time To Buy REITs Now?

Yes, interest rates are (very likely) going to be lowered, judging from the message given by the United States Federal Reserve last week. Soon, financial news and blogosphere were filled with questions like the blog title above, or something similar. It is natural for investors to ask such a question as REITs, or real estate investment trusts, are a leveraged asset class, and a fall in interest rates meant that cost of loans would go down, which subsequently increases distributions.

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To answer the question, I would dish out the same old answer which I love to dispense; it depends. Ideally, a good time to buy REITs would be when they were at their lowest and/or weakest. Using the iEdge S-REIT Leaders Index, during the past five years, the two weak points were sometime in March 2020 (COVID-19) and October 2023 (accelerated interest rate growth). Granted that these were hindsight views and true bottoms are very hard to catch, but with sound fundamental analysis implemented (REIT financials, environmental factors and economic conditions), plus a bit of price action model at play, chances are higher of getting at least around the deemed bottom of the moment.

If you did not catch the bottom, rest assured; if you had vested earlier in the REITs in your portfolio, now is a good time to average up, provided that the current prices ticked off your valuation checklist, and there is a great potential that your selected REIT prices will rise. If you had not, however, and/or not that good in analysing REITs, then perhaps you can start off with REIT ETFs (exchange traded funds), which currently there are five listed in the local Singapore Exchange. As the REIT ETFs are, to a certain extent, seen as representatives of the asset class, making periodic entries into them (monthly, quarterly, half-yearly or yearly) would at least give you exposure, thus for this method, “any time to buy REITs is a good time”.

Ethical Investing? It Depends On Whose

In recent years there was a spike in interest on ethical investing, which comes in different names and sub-forms such as sustainable investing, ESG (environmental, social and governance) investing, green investing, etc. Many institutions offered mutual funds and exchange traded funds (ETFs) focused on such investment principles, examples of which would be the iShares Global Clean Energy ETF (ticker: ICLN) and the Lion-OCBC Securities Singapore Low Carbon ETF (ticker: ESG.SI) in our Bedokian Portfolio.

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Although there are set standards on what ethical investing is, based on quantifiable numbers such as ESG scores, or industries directly or indirectly related to the cause (like our ICLN for green energy and ESG.SI for low carbon), ethics overall is still very much open to interpretation and subjectivity. While there are general beliefs in what “ethical” means, like not investing into tobacco stocks as an illustration, it would be surprising to find out otherwise if one digs deep enough. An ex-colleague of mine refused to invest in real estate investment trusts (REITs), on the rationale that “bad landlords” increasing rents would contribute eventually to increasing prices and costs of living (it is his viewpoint, so please do not complain on me for this). Another anecdotal story (a friend of a friend) refrained from buying large cap stocks due to the “bad corporations” image (do not flame me for this, too).

As what some said, the best investments are the ones that could make you sleep well at night. Not only this adage applies to the financially healthy companies, but also those whose businesses benefit many, i.e., making money in a “cleaner” sense (quotes emphasized by me as this is subjective).

In the Bedokian’s opinion, if the investible assets and financial instruments are open and legal, it is up to the individual investor’s views and values on determining what ethical means to them.

 

Disclaimer

Cash Is King…For Now

The past few days had seen the markets taking a deep dive far more spectacular than those in the Olympics. Whatever the reasons presented; the United States jobs report, the unwinding of the Yen carry trade, the potential of a further blowout in the Middle East crisis, etc., panic is seen among investors and traders. The VIX index, colloquially known as the market fear index, spiked more than 200% over the past few days.

As mentioned before, short of a nuclear winter, an alien invasion or a Chicxulub-level asteroid hitting Earth, life still goes on, and the markets will eventually recover and back on track for their upward trajectory. The main concerns right now should be thinking of what discounted asset classes/counters to buy, and finding the cash to get them, instead of lamenting on the unrealized capital losses one is holding onto.

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Having an ample amount of cash is important in such market sell-off conditions, for it is the best financial instrument to acquire other asset classes without compromising its present value. While in times of boom, having too much cash would result in what is called a cash drag, i.e., the opportunity cost of keeping cash rather than being deployed in assets yielding higher returns. In times of bust, however, it is illogical to sell off a depressed counter to buy another depressed counter, so cash comes in useful here.

For The Bedokian Portfolio, the 5% to 10% cash component is there for this moment, for it acts like a war chest of sorts to take advantage of in down markets. This cash portion is not to be mixed with your daily uses, emergency fund and savings for your discretionary needs, and once inside, it should stay in the portfolio until it is planned for drawdown. It is fed by dividends from equities, distributions from real estate investment trusts, coupon payments from bonds and interest payments from bank accounts or treasury bills, and lastly your own cash injections.

Whatever the markets throw at you, find that sliver of opportunity and capitalize on it. Keep calm and stay invested. 

What A Gr-Eight(h) (Half-)Year!

30 July 2024 marked the eighth anniversary of the blog, but due to work commitments, I had decided to post this two days earlier.

My anniversary blogposts had somewhat become a keynote of sorts, filled with the goings-on of the market and economy, some cliché advice and an occasional preaching of our investment philosophy.

For this round, I will share firstly on the three buys that we made in the first half of 2024 and the rationale behind them (with some takeaways for your learning). Secondly, I will share a bit on where our step-down journey is at, and lastly, a glimpse of my probable next work.

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The Glorious Three

Sounds like a bad tag line but I needed to give it like what others gave the terms “Magnificent Seven”, “FAANG”, etc. So, what are our Glorious Three stocks for the first half of 2024?

#1: Apple

At the end of 2023, Apple was poised to hit USD 200, but alas it was not to be. Then due to a slew of bad news ranging from weak iPhone sales, ban of iPhone’s use in certain quarters in a certain country, and the perceived “same old” new products, the price went down and languished to a low of USD 164.08 in mid-April 2024. Then after a positive 2Q24 report along with news of share buybacks, it rose again, and further turbo-ed with the introduction of Apple Intelligence, also called AI. 

I had indicated here that we had added some positions to Apple at USD 165 when it hit our targeted buy price, and as of 26 July 2024, the price had risen 32.1% to USD 217.96. Never mind the lawsuits brought upon by regulators and authorities; never mind the deemed “nothing new” product and service ranges, and never mind the negative news surrounding it, for the fundamentals of Apple are still strong in my opinion currently, given the wide moat of number of users and their adoption of the ecosystem. 

The lesson here is if a fundamentally strong counter is down due to probable short-term reasons, or being dragged along with the rest, it is a good time to relook and enter at a determined price for averaging.

#2: Salesforce

In end May 2024, Salesforce, a cloud software vendor, reported a revenue of USD 9.13 billion. However, this fell short of the US 9.17 billion expected, and despite its earnings per share of USD 2.44 beating the estimated USD 2.38, the share price fell from USD 27x to around USD 21x.

Salesforce was not in my investment radar but rather an opportunistic trading play. Like the case of Apple, Salesforce was battered just because of certain bad results and news while still holding onto relatively good fundamentals. Thanks to a YouTube video commenting on it, and after quick research of my own, we initiated a trading position at USD 215.66. As of 26 July 2024, the price rose to USD 262.71, a 21.8% increase. The target price to let go of Salesforce is between the USD 280 to USD 290.

The learning points here? There are two: One, fundamentally good companies’ prices do not stay low for long, for eventually they will rise back to their (perceived) value. And two, sometimes you could get some tips and “a-ha” moments by reading or watching other sources and opinions, and by combining your own analysis, could facilitate your next investing or trading decision.

#3: Nvidia

This company needed no introduction, and it is still the talk of the market as being the darling stock in the AI revolution. While knowing about its “to the Moon and Mars” rise over the last few years, I did not really look at it, until someone had provided me a tip back in early March 2024. Just like the case for Salesforce, I did my fundamental analysis and although I felt Nvidia’s valuation was high in my opinion, its near monopoly and first mover advantage in the AI processor scene, plus the lackluster performance of its other competitors, made it a compelling case to enter, which we did at USD 935.50 (pre-split) a few days after receiving the tip.

Subsequently, on 10 April 2024, TSMC, one of the largest chip foundries in the world, posted a jump in their March sales. With Nvidia as one of its major customers, this jump could translate to a highly possible revenue jump for Nvidia in its coming reporting, and we averaged down at USD 867.17 (pre-split) on the same day, taking advantage of the price weakness. After splitting, we entered again in June at USD 122.50, and in July at USD 118.00. Initially a trading play, Nvidia had shifted over to our investment portfolio.

The main takeaway for Nvidia is more on the associative investing which I had said about a few times before, which in this case the fortunes of TSMC are positively correlated to that of Nvidia’s (and Apple’s, too). By creating a relationship of sorts among the companies and their sectors and industries, we can see the symbiotic links and identify opportunities more clearly.

 

Step-Down Plan Status

Attributing to the bull run (partially due to the Glorious Three) and the liquidation of two investment-linked plans (which were not factored in our initial step-down planning), our Bedokian Portfolio’s projected year-end value was surpassed by 11.6% by the time of this post. It is great that the target for this year had been reached at this point, but such growth cannot be expected every year, for there will be downtime along the road to our step-down goal. 

Hence, we would view this as a growth buffer that could be cushioned against future drawdowns. As we had stated here our assumed growth is 4% annually with capital gains and dividends, which is a very conservative estimate, and it is a number that can be easily averaged even as a diversified portfolio. For reference, the annualized performance for equity indices like the Straits Times Index and the S&P 500 over a 10-year period was 4.24%¹ and 12.86%², respectively.

 

Future Writing Plans

As you may have noticed in my eight years of writing, there are some issues and points which were written again and again, like a broken record. Things like the psyche of the investor, diversification, rebalancing, etc. are oft mentioned topics. Yes, these may be boring, but they are also necessary to keep reminding oneself in the journey of investing.

I had mentioned here that I might be writing about a trading portfolio either as an additional chapter in future editions of The Bedokian Portfolio, or as a companion e-book. On top of this, I have an additional plan of coming out something on advanced investing. When will these be published is not confirmed yet, but I will announce it on this blog once they are done (maybe some months or years later).

And lastly, back to the blog, you may have noticed that I had introduced more pictures (mostly AI generated) in my posts. This is one way to add some graphical flavour on an otherwise monotonous-looking wall-of-text, or shall I say “beautifying” the blog. Hope you like this new minor modification.

Cheers to all!

Disclaimer

1 – SPDR Straits Times Index ETF factsheet. 30 June 2024. https://www.ssga.com/library-content/products/factsheets/etfs/apac/factsheet-sg-en-es3.pdf (accessed 28 Jul 2024)

2 – SPDR S&P 500 ETF factsheet. 30 June 2024. https://www.ssga.com/library-content/products/factsheets/etfs/us/factsheet-us-en-spy.pdf (accessed 28 Jul 2024)

 

All About Price: The (Price) Margin Of Safety

This is part of my intermittent series on price, one of the most important and commonly encountered considerations in investing and trading. For this post, I will talk about the deemed “price” margin of safety (or price safety margin), and the accompanying concept called “freehold”.

I had mentioned about the price margin of safety in my post on Apple (post here). To have this margin in the first place, a position has to be initiated on a counter, which was selected based on one’s sound fundamental analysis. Subsequently, when the price moves up to its new level due to the company’s value or growth story, the margin is formed.

A few concepts can be derived from this “price” margin, a couple of which are psychological in nature. Let us have a look at these concepts.

 

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Concept #1: “Freehold”

“Freehold” in some investors’ lingo meant that the initial capital on an investment had at least doubled, either through capital gain, or dividends or both. Since the investment had paid off itself, it is deemed as “free”, and the price margin of safety stands at 100%. While the thinking is purely psychological, the next step is what to do with these gains. If the growth story continues, then it could just sit there and continue to evolve to multi-baggers with a huge capital gain, or some or all of the gains can be redeployed, either on itself via averaging up (see Concept #2) or on other counters.

 

Concept #2: Averaging Up

If the belief of a continued growth story is there (with an analytical basis or “guesstimate”, of course), then one could continue to average up the counter. Though by averaging up, the price safety margin would be reduced, but overall it is still lower than the present price. 

For example, let us say that one bought 100 shares of  Company A at $10, and after a while the price rose up to $20, thus having this 100% gain. Since fundamentally Company A has a long way to go in its growth, an additional 100 shares were bought, thus making the average price at [(100 x $10) + (100 x $20)] / 200 shares = $15, which is lower than the present $20.

 

Concept #3: When The Going Gets Tough

Conversely, if the price is heading downwards, one would have to see his/her average price overall. Given the example in Concept #2, when the price of Company A falls to $18, there is still a $3 price safety margin as buffer ($18 - $15 = $3), and it would still be in an overall profitable position if the decision to liquidate is there, though some may comment the loss of $2 as an opportunity cost of not releasing it earlier.

However, when things get tough, one would also need to see the reason(s) behind the fall, and if the company is still fundamentally sound, then it is not an excuse to exit (unless he/she is one of those panicking investors that shouts “run for the hills” at the very sign of a price downtick), but rather a chance to do the opposite of Concept #2, which is averaging down. This is logical, for the price would most likely go back up, and in turn, create a larger price safety margin overall.

 

Concept #4: Coverage By Dividends

Relating back to Concept #1, the use of dividends to provide the price safety margin is based on the total returns equation, which is capital gains + income, where the income part are dividends. Supposedly, looking at the performance of a company’s share price, if the price remained constant throughout the past year, but it paid a 5% dividend yield at the same period, then it could be assumed that the price margin of safety is 5%.

It is not wrong to view it this way, though looking deeper we need to know why the share price did not budge; is it because there may be some future valuation issues, or is it because no one gives a hoot on this counter? The reasons could be varied and mixed, though not all are seen as negative.

 

As an active investor, one need to scan, scrutinize and scour one’s counters, whether inside the portfolio or on the watchlist.

 

Check out the other posts in my All About Price series.

All About Price: Introduction & Valuation of Value 

All About Price: Buyer/Seller Remorse and Premorse

All About Price: The 52-Week High/Low

All About Price: Reversion To The Mean

All About Price: Bottom Fishing

 

Illiquid Liquidity

The term may sound like an oxymoron, but what I meant is the pool of cash that cannot be withdrawn or spent easily due to regulatory reasons. With this reasoning, one of the first things that come to mind for a local would be one's Central Provident Fund (CPF) monies, and the next would be the Supplementary Retirement Scheme (SRS) funds.

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But these pools can be invested, though subjected to selected financial instruments and for CPF, quantum quotas. Currently CPF is paying at least 2.5% for the Ordinary Account (OA), and 4.08% for the Special Account (SA).

 

Whilst for my case I would not use the SA for investing given the relatively high and almost riskless rate, the 2.5% yearly returns for OA can be statistically surpassed depending on the duration and type of assets invested, though with an element of risk. Similarly for SRS, which are typically under the prevailing bank savings account rates (now is less than half a percent), the impetus to invest it is even greater.

 

As the saying goes, make money work harder for you. Granted that placing them as they are (i.e., inside OA and the SRS account) would still bring the dough albeit on a safer side, I would like to have more by taking on some risk and volatility. This is for getting a higher amount when OA (at least from age 55) and SRS (for me from age 62) turned liquid, which in turn increase the funds to supplement our step-down/retirement phase of life.

 

Related post:

 

Should I (Really) Invest My CPF? (Part 1)