Don’t Know What To Get? Get An ETF!

A few days ago, we had received our proceeds from the delisting of Paragon REIT. As per our portfolio management practice, these would be parked at the cash portion of our Bedokian Portfolio. The recent inflow had increased the cash allocation to about 8%, which went above the allowable threshold of 7.5% (for us, we set the level of cash at 5%, with an allowance for 2.5% deviation). This meant that as per our guideline, it is preferred to deploy at least 0.5% to other asset classes.

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While the past couple of years had seen cash being a good asset class, the declining treasury bill and fixed deposit rates reverted it to become what is known as “cash drag”, the opportunity cost of holding too much cash is the missed potential higher returns from it being invested into other financial instruments, though in our personal opinion we should hold some in case of opportunistic play (e.g. our 10-30 Rule¹). Also, the cash portion is where cash injections and dividends/coupons/interest would flow to, so it is like a reservoir of sorts with the necessity of having some water in it.

Still, there are times (like now) when it is difficult to determine where to deploy the cash to. The general idea of allocation is to put it at the asset class portion that is about to hit or hitting the negative deviation allowance, but the execution part is usually marred by this question: what to get?

There are three ways to go about it, but I shall highlight on the first two: prospecting and adding onto current holdings. For prospecting, it is understood that time and effort is needed to look for new counters to invest in (e.g., for me I did not prospect for a few years as mentioned here), and for those who cannot afford these resources, looking at current holdings is another way, but it is less incentivising to load them if their valuations are not favourable.

This brings us to the third way: going by exchange traded funds (ETFs), specifically those which are passive and follow indices. This method is in the domain of passive investing; investors would just rebalance their portfolios either via cash injections or selling deemed overvalued asset classes and buying into deemed undervalued ones. For ETFs, one need not to worry about valuations of individual counters since they represent (sort of) the entire asset class in general; in other words, it is buying into the asset class.

Of course, the caveat is to look for diversified ETFs that covers different geographical regions and sectors/industries for the “go the ETF way” to be effective. It could be a good jumpstart the portfolio into a core-satellite model².

 

Related post

Tired From Looking For New Companies To Invest? Read This (Very) Short Post

Disclaimer

1 – The Bedokian Portfolio (2^nd ed), p131-133

2 – ibid, p135-137

The Quandary Of Rebalancing

The two main ways of rebalancing one’s investment portfolio are either through cash injections, or the selling of an asset class and buying into another. During rebalancing, some investors may face a dilemma of sorts in the form of opportunity costs (or reinvestment risk, depending how one views it), and the need to maintain the portfolio asset allocation. 

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Putting it into an example of a simple equities/bond portfolio, at the point of rebalancing, the equities portion is already over the allocation, yet an investor is not willing to tip the scales over to bonds due to its current lower returns compared with equities. If this investor goes ahead with plowing more into equities instead, he/she had defeated the purpose of rebalancing, and subsequently diversification.

Unless the portfolio is concentrated for a known purpose or for trading, having a heavily skewed investment portfolio would bring unnecessary risks. Yes, one may forego the additional gains and yields that the additional capital may bring, but for the sake of portfolio preservation and being in the comfort zone of one’s risk tolerance and appetite, rebalancing is a must-do.

Borrowing a saying heard in team sports:

No player (asset) is bigger than the team (portfolio) itself. 

Regulatory, Liquidity And Counterparty Risks

We are rapidly seeing the increase of multiple polarisations of geopolitical blocs and the complicated world order that we may be heading into, and these may amplify some of the risks that most investors tend to overlook. Most of us would associate risks as total loss of an investment due to market and economic forces, but we need to be aware of other forms of risks that, though the probability of it happening may seem be remote. Examples of these risks are regulatory, liquidity and counterparty risks.

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Regulatory risks are events where regulations, legislation and/or standards have a negative effect on certain sectors/industries. There are a few examples, one of which is the ever-present government antitrust suits against the technological giants.

Liquidity risk, from the market perspective, is one where a counter could not be sold, or liquidated, in required time, because of low or no demand for it. Some may have experienced liquidity risk when their shares/bonds were suspended on an exchange, oftentimes stuck there almost forever.

Counterparty risk is the failure of the other side (i.e., the counterparty) in carrying out their obligations of a financial transaction, such as the delivery of securities after payment has been made, or the failure of a bond to distribute a scheduled coupon payment.

After having introduced the risks and bringing back to the point said in the first paragraph where these risks are amplified, the growing geopolitical tensions would probably have, or had have, them manifesting as a sequence of events. A famous instance was the SWIFT (pun intended) sanctions placed on Russia the moment they invaded Ukraine, which led to, among others, the severance of the Russian market from Western investors. Regulatory risk (brought about by sanctions), then liquidity risk (unable to access the Russian markets to liquidate holdings) and at the same time, counterparty risk (defaults occurred in the trading of Russian securities individually or by fund houses).

While accordingly investors had gotten back their monies from their respective exchange traded funds (ETFs) that had Russian securities, the period in-between would be harrowing especially for those who may have a huge position in them. This is a clear demonstration that governmental actions could bring about a huge dent in one’s investment portfolio.

The abovementioned scenario could well play out if non-Western region or country is trying to do something funny in the great global game, and I could probably hear murmurs of turning away from global diversification and stick to local companies for safety. However, the best way to manage these risks is diversification itself.

Some may view this blogpost as scaremongering, but I must highlight that all investments carry risks, and it is up to the individual to determine the probability and one’s weightage of each of the risk types happening. Via diversification along the descending degree of asset classes, regions/countries, sectors/industries and then companies, and along with portfolio sizing (in my opinion, not more than 12% holdings for a company or a sector-based ETF), losses can be mitigated and limited in contrast to a wipeout had one instead concentrated. 

Disclaimer

Maximising Returns

Many times, I have been hearing others on the hypotheticals of getting rich from certain assets/securities if he/she had gone in earlier (GameStop, anyone?). Similar for portfolio make-ups, where certain asset allocation provided the best returns for certain periods.

For the above to happen, one’s foresight would truly need to be accurate, but as I had shared countless times, no one can predict right to the exact detail, so there is no point lamenting on missed chances. 

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I acknowledge that it is in the interest of every investor and trader to maximise their returns from their investments and positions, but it is near impossible to win all the time. The best one could do is to stick to one’s plan that works, perform due diligence in carrying out portfolio building and fundamental analysis, and realise that ups and downs are inherent in the investing/trading journey.

Though it is good to know about how much returns investing greats and some individuals on social media generate, it is preferable to gain some insights and learning points from them, rather than invoke feelings of envy and jealousy. Everyone’s financial journeys and objectives are unique from one another.

Disclosure

The Bedokian is not vested in GameStop.

Disclaimer

Dark Side Factors That Could Derail Your Investment Portfolio

As part of the Star Wars Day (May the Fourth) special, I will share a post on dark side factors that could derail an investment portfolio.

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Dark Side Factor #1: No Diversification/Under-diversification

Imagine an investment portfolio that consists of only one counter, and if anything extreme happens to it, be it a company bankruptcy or a bond default, the whole portfolio goes poof. In non-extreme cases, a price drop of its securities would bring put a big dent, since basically the portfolio equals to that one counter.

Going further, though with the safety of numbers, there is this risk of under-diversification as well, especially if investments are on basically one sector/industry and/or one region/country. Think about an event that affects the entire sector/industry (e.g., airlines and travel during the COVID19 pandemic) and/or country/region (e.g., the Asian Financial Crisis of 1997) and what would happen to the portfolio.

The answer to deal with this would be adequate diversification, and for the Bedokian Portfolio’s case ranks in the following order: asset classes, region/country, and sector/industry. In this way the risks are spread, with the downside mitigated due to the net effects of correlation between the counters.

Dark Side Factor #2: No Rebalancing

Rebalancing and diversification go hand in hand, thus even with diversification done but with no rebalancing performed, there is still a danger to one’s portfolio. Allowing an asset class to deviate from the preferred or designated allocation would create concentration risk akin to #1, lost opportunities to invest in other asset classes at their lows, and not to mention compromising an investor’s risk tolerance when the portfolio moves away from the set make-up.

Rebalancing can be done in two main ways: either passive or active. Passive rebalancing is usually done periodically, e.g., quarterly, half-yearly or annually. Active rebalancing involves re-allocation to the portfolio make-up constantly or within a short period. Either way, if it is done, one will be steered away from the dark side.

Dark Side Factor #3: Getting Emotional

The Jedi practised emotional control so as not to be affected by them, and this extends to how one should manage their portfolios whether during happy and crunch times. Many times, I have had heard of the phenomenon of “buy high sell low”, and dumping everything to “run for the hills”, only for the investor to regret the decision later.

The markets and the economy go through a boom-and-bust cycle, which is part and parcel of the investment journey. As said countless times, stay calm, enjoy the ride, be rational and carry on investing, for its time horizon is long.

 

Dark Side Factor #4: Not Sticking To The Plan

It is good to fine tune a portfolio methodology and make-up to suit one’s preference and risk tolerance, but to do it extremely (e.g., switch totally from equities to cryptos, etc.) and/or frequently (e.g., Bedokian Portfolio this year, 60/40 equities/bonds next year, etc.) would likely bring lower returns and unnecessary risks than one had not made the change in the first place.

When embarking on the journey of investing, it is recommended to know one own’s objectives and risk appetite, and also read up to learn about it, which I had covered here and here respectively. Once these are in place and the investing philosophy and methodology established, it is easier to carry out according to plan, and perform tweaks down the road.

Dark Side Factor #5: Leverage

While using leverage could increase returns based on what some investing books had stated, for the uninitiated it could prove to be a handful when one need to monitor the portfolio and the borrowings simultaneously. With an even greater leverage on leveraged products, where returns and losses are heavily amplified, the risk of margin calls is greater.

When utilising borrowings, it is important that one should have a clear understanding of what he/she is doing, and the advantages and implications behind them. 

 

May the Fourth be with you. 

Sell Banks And Buy REITs?

I have had heard of the above mantra from chat groups and online blogs, possibly due to the perception that banks are (deemed) overpriced, and the recovery of real estate investment trusts (REITs) are in progress as observed from price movements and analyst reports.

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In portfolio management terms, this is rebalancing, where assets of different asset classes/regions/sectors are bought and sold to maintain the desired portfolio make-up. Within the action of rebalancing, however, there are variations in its execution; on one end some do it passively and periodically, while on the other end some do it actively and opportunistically to capture gains from anticipated events and news.

Back on the action of selling banks and buying REITs, it would be dependent on one’s portfolio, investment strategy and methodology used, and which part of the above described active-passive spectrum one is at. Depending on each investor’s circumstance, it may not be necessary to sell one and buy the other. For our case, as we are still in the accumulation phase, we rebalance by injecting capital, thus we buy both banks and REITs.

Providing more context and detail, we had recently deployed into OCBC when its price showed weakness during the middle of March 2025; this purchase is for averaging up our current holdings. For REITs, we had been nibbling them since interest rates started to spike in 2022, with the knowledge that every asset class would go through highs and lows in cycles (my oft stated “Sunday” and “Monday” moments).

Hence, to sum it all up, an investor needs to take stock (pun intended) whether the advice of “sell banks and buy REITs” is suitable for his/her investment philosophy and portfolio situation. If the advice is sound, then it must be rationally substantiated with reasons such as the purpose of doing so, the justification of fundamentals, etc. Following blind advice without facts and context is akin to listening to jumping into the deep end of the pool blindfolded and with hands tied, which someone with a sane mind would not do in real life.

Disclosure

The Bedokian is vested in OCBC.

Disclaimer

Being Opportunistic In the Past Weeks

Uncertainties caused by the threat of tariffs (implied or about to be implemented), and a slew of other minor reasons, had spooked the markets somewhat, with the S&P 500 index down more than 4% year-to-date. A down market is the time to look for bargains, and ample opportunities to buy in counters at relatively less expensive prices and/or to average down on securities that one may have already owned.

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Yes, this smack of the characteristic called market timing, which is usually frowned upon as the future price movement is a big unknown. However, any price is a good price if the investor felt the fundamentals and/or valuations had hit the right spot.

To summarise, since February, we had added the following five assets into our Portfolio Multiverse:

• Alphabet (Bedokian Portfolio)

• Nvidia (Bedokian Portfolio)

• OCBC (CPF Portfolio)

• NikkoAM-StraitsTrading Asia ex Japan REIT ETF (Bedokian Portfolio)

• Cryptocurrencies Bitcoin and Ether (Trading Portfolio)

Frankly, more counters were planned to be added, such as Frasers Centrepoint Trust, Frasers Logistics & Commercial Trust, and some bond ETFs (e.g., ABF Singapore Bond Index Fund, Nikko AM SGD Investment Grade Corporate Bond ETF, etc.) that we had in our holdings. However, these counters had seen a rise from around mid-March that, in my opinion, was possibly due to capital shift and asset class/regional rotation into Singapore assets, among other things.

There are always buying opportunities abound in the markets, depending on the economic situation, asset classes and market sentiments.

Disclosure

The Bedokian is vested in the mentioned counters/securities/assets in this blog post.

Disclaimer

Investing With Emotions

Yes, you can do that, and I guess most of you would be thinking along this line: 

“Whoa! Wait a moment! Didn’t you say investing must be done on a rational approach, not through emotions?” 

Good question.

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And my answer is: Correct, investing must still be done rationally, but you can capitalise on others’ (not your) emotions to your advantage.

I had mentioned in the ebook that the price of a financial instrument is determined by its demand, supply and market sentiment¹. The emotional factor would come from the market sentiment part; whenever the market is bullish, prices would naturally go up, and vice versa in bear conditions.

It is at these relative extremities that you can consider how to manage your portfolio; when the markets are deemed to be overheated, you could take off some from the table by selling the overpriced securities. And in downtimes, you can look for depressed counters that are still fundamentally strong but got dragged down by negative sentiments. All these actions are also part of portfolio rebalancing, a key component of my oft-preached diversification.

 

1 – The Bedokian Portfolio (2^nd ed), p124

Going REITs Shopping Again

The markets were reeling from the latest not-so-good United States (US) consumer price index results and geopolitical jitters. With a recent capital injection and the resulting asset allocation skewness of our Bedokian Portfolio, plus a perceived delay of US interest rate cuts, it is time to go shopping again for the real estate investment trust (REIT) asset class.

Back in October 2023 I had shared on which REIT we had entered. This time round I will share what we had gone in or planning to go into, our rationale, and our average and entry prices.

REIT #1: Frasers Logistics & Commercial Trust (FLCT)

Based on the latest business update in January 2024¹, the gearing and interest coverage ratios were at 30.7% and 6.2 times respectively, with 76.8% of its borrowings under fixed rates, which indicated a healthy debt profile vis-à-vis other REITs of the same logistical, industrial and commercial sectors. The logistics and industrial arm of FLCT had maintained a 100% occupancy, though the (still) worrying trend of a not-so-robust occupancy rate for its commercial properties, especially for its United Kingdom (UK) properties, is there. The recent passing of UK law of allowing employees to have the legal right of working from home from the onset of employment could likely exacerbate the commercial space situation there.

Despite the downtrend, we believe that the logistics and industrial part still holds relevance in the future markets and economy, and bring about better rental reversions. We had initiated a position of SGD 1.04, with a total average price of SGD 1.07. 

REIT #2: Frasers Centrepoint Trust (FCT)

FCT need no introduction as being the king of suburban malls in the north, east and northeast. Recently in March 2024, FCT had upped its interest of Nex mall to 50%², funded by private placements and debt financing. Accordingly, the acquisition would provide an accretive 1.5% in the distribution per unit³, and the gearing ratio would be at 37.8%⁴ (assuming divestments of Hektar REIT and Changi City Point were adjusted into the financial statements ending 30 September 2023). 

Overall, FCT’s retail malls enjoyed an occupancy rate of not less than 99%, proving the resiliency and relevance of suburban shopping malls in Singapore. Our current average price for FCT is SGD 2.05, and we are planning to enter it around the range of low to mid SGD 2.10s.

REIT #3: Nikko AM – Straits Trading Asia ex Japan REIT ETF (CFA)

OK, this is not really a REIT per se but a collection of REITs from the Asia ex-Japan region. It is part of our core-satellite strategy of having exchange traded funds (ETFs) forming the core and individual counters making up the satellite portion. When there was only three REIT ETFs back then in 2018, CFA was selected due to its diverse REIT holdings in terms of countries and sectors. We had recently bought in CFA at SGD 0.783, and our current average price is SGD 0.953.

REIT #4: Paragon REIT (Paragon)

Honestly, for this round, Paragon is more of a “want” than a “need” for this round of additions, but I will give an honourable mention in this post. Paragon's low gearing ratio, healthy occupancy rate (at least 98% across properties) and its retail profile provided a form of resilience. Recently in February 2024, after a long period of speculation, Paragon had rejected to buy Seletar Mall from its sponsor as part of its right-of-first-refusal⁵. 

While in my opinion the establishment of another foothold in the Singapore suburban mall landscape (after its foray into Clementi Mall, which to me is a good move) was gone, but with their explanation of that it is a dilutive acquisition, plus the uncertainty of the interest rate situation (their last known interest coverage ratio was about 3.5 times), prudence is key in such conditions.

Conclusion

If you had noticed, Reits #1, 2 and 4 were mentioned in my October 2023 post, so this was just a rehash. Frankly I had been prospecting other REITs to enter but eventually decided to just look at the present holdings and determine their current health and price to enter. It is alright to just add on to one’s existing portfolio and it is not necessarily to look for new ones to enter simply because it is a must to get it.

1 – 1QFY24 Business Updates. Frasers Logistics & Commercial Trust. 30 Jan 2024. https://flct.frasersproperty.com/newsroom/20240130_214656_BUOU_QWI72KXHOX61KRIR.1.pdf (accessed 14 Apr 2024)

2 – Completion of the acquisition of the remaining 49.0% interest in each of Nex Partners Trust and its trustee-manager as an interested person transaction. Frasers Centrepoint Trust. 26 Mar 2024. https://fct.frasersproperty.com/newsroom/20240326_212947_J69U_JBZQX6UOU2EAHM9N.1.pdf (accessed 14 Apr 2024)

3 – Circular to unitholders in relation to the proposed acquisition of the remaining 49.0% interest in each of Nex Partners Trust and its trustee-manager as an interested person transaction, p30. Frasers Centrepoint Trust. 4 Mar 2024. https://fct.frasersproperty.com/newsroom/20240305_225314_J69U_L8NR94BDT0MKA9D7.2.pdf (accessed 14 Apr 2024)

4 – ibid, p32

5 – Lim, Jessie. Paragon Reit rejects Cuscaden Peak Investments’ offer to buy The Seletar Mall. The Straits Times. 29 Feb 2024. https://www.straitstimes.com/business/companies-markets/paragon-reit-rejects-cuscaden-peak-investments-offer-to-buy-the-seletar-mall  (accessed 14 Apr 2024)

 

Windfall And What To Do With It (Investment Wise)?

Sometimes we may have the chance, whether known (e.g., endowment payouts, inheritances, etc.) or by luck (e.g., lotteries), of obtaining a windfall, which is the sudden drop of cash or capital onto one’s lap. It is a pleasant surprise to get one, but the main challenge comes immediately after, which is what to do with it. On a personal level and being materialistic as most humans are, the urge to splurge on things that were both wanted and needed is there, such as the fancy car one desired, a meal at a high-end restaurant, and/or giving money away for altruistic or ego reasons, or both. The examples cited are not far-fetched as I had witnessed them personally, and in some instances the windfall dried up as fast as it came, and the recipients just went back to their normal lives.

One of the etiquettes that I had learnt about personal finance is that finances are personal. Unless being requested, I would not advise in what they wanted to do with the monies and/or capital, and even if they did, it is just an advice and up to them whether to take it or not. Admittedly deep inside me, I may be lamenting on the way how the windfall recipient is spending on some deemed frivolous stuff, but I also remember that those are their monies, not mine.

 

Windfall Planning

Though sounded a bit absurd, I do have a “windfall planning” spreadsheet in place to guide me on what to do should it fall onto my lap. I had initiated this after seeing the aforementioned examples about people not knowing what to do windfalls and then just spend it off, mostly without thinking. Though the numbers vary, but the splitting percentages are about the same across; portions to charity, contributing to family, partial/full settling of long-term loans, etc., and of course, investment. For this post I will focus on the investment part, because gaining a windfall is one thing, holding it sensibly is another.

 

Deploying The Windfall For Investment

The deployment would very much depend on the stage of investment one is at. If the recipient is a total newbie, then the windfall would be better off being in a safe institution such as the government (via Singapore Savings Bonds and treasury bills) or in a bank (as a savings or fixed deposit) for the time being as he/she is learning more about investing.

If there is sufficient investing knowledge obtained, then it could be used to start a portfolio consisting of one’s preferred asset class allocation. This can be done immediately to capture the current characteristics of the asset classes as at a particular economic situation, or done gradually over a year’s time if immediate is not comfortable.      

If an investment portfolio is already in place with the set asset allocation, a windfall would bring in cash injection that would enlarge the cash portion of the portfolio (in terms of The Bedokian Portfolio). Theoretically, it would be preferred to deploy the capital immediately to rebalance back to the desired allocation levels, especially for passive investors like Bob, and to avoid cash drag. However, for an active, active-passive, or passive-active investor with some individual counters and exchange traded funds (like me), he/she could deploy quickly in the latter and keep some for the former, as the counters may not be in the “price is right” range.

Related post:

Gaining And Holding

Late In The Game: Dividends Are Cautionary?

A couple of months ago, there were debates in some discussion groups on whether reliance on dividends as an investment and/or retirement strategy is (picking the appropriate word) cautionary. The side which provided the caution cited several reasons, such as the companies may reduce the amount or change their dividend policies, and the obsession with yield over everything else clouded the judgement of total returns of a security, to name a few.

While we are primarily dividend investors, we agree with some of the points highlighted by the cautionary side. However, as with most issues in general, it depends on which facet we are looking at and the approaches to it, and it is mainly a case of theoretical/academic versus operational/practicality viewpoints.

 

While I would not be going through all the arguments, let us look at the two points that were brought up between the two camps, and my takes on them.

 

#1: The Fallacy Of Dividends

The first point was put forth in a paper¹, which stated that many investors view capital gains and dividends as separate variables rather as the same thing, i.e., total returns, and dividends are seen as free money. However, the share prices of the dividend-paying companies would reduce by the amount of dividends paid out.

 

Addressing the latter, it is true to an extent and this can be observed. The drop in accordance with the dividend payout is very pronounced on dividend ex-dates, ceteris paribus. However, we should not look at this alone as there are many factors dictating the rise and fall of the price of a counter. Also, there were instances where prices dropped after dividends were announced and rose after ex-dividend.

 

On total returns, I have been emphasizing they are made up of capital gains plus income (dividends), so as investors we need to fit this equation in our heads. Going a bit further, unlike capital gains where we need to sell the counter to realize it, the income component is realized all the time. The liquidity of the dividends gained could be deployed on other more productive securities and not just on the same one, thus overall on a portfolio level there could be more gains collectively than what the fallacy holds for individuals.

 

#2: Safe Withdrawal Rate Vs Dividends For Retirement

 

This next point which saw a lot of comments for and against is the safe withdrawal rate (SWR) versus dividend streams for retirement income. In summary, on one side SWR posited a drawdown of a certain percentage from one’s investment portfolio to provide an income, while the other supported using dividends only as an income stream.

 

SWR was formulated by a financial adviser named William Bengen in the 1990s², and from his analysis a 4% withdrawal rate was the sweet spot, though a higher or lower withdrawal rate could be employed depending on the comfort levels and income required for a retiree, and the prevalent market conditions on how the asset classes behave. In the eBook, I had provided a basic example of the 4% withdrawal rate at play³.

 

Despite the arguments, the main underpinning reason against SWR and the proposition for dividends was that the latter was more easily understood and to operationalize. People can see how much dividends they are getting and adjust their expectations of the amounts that could be obtained in the near future. For SWR, one would have to calculate the withdrawal amount based on perceived statistics such as inflation rates, and at the same time to determine which asset class(es) to drawdown the capital from, a daunting task for a retiree who did not have financial know-how.

 

Overall, I would like to bring additional opinions with regards to this dichotomy. Firstly, on the dividend stream, I had written a post on a way to manage this method (mentioned here), which it mitigates current year income by using last year’s and adjust one’s lifestyle accordingly. Secondly, there can be a compromise between the two, by employing the SWR with the withdrawal coming from dividends first and the shortfall from liquidating some of the capital.

 

Thirdly, and most important, is that we do not just rely on just one portfolio. Depending on one’s age, there are CPF Life, Supplementary Retirement Scheme (SRS, if one had started with investments), rental (for multiple-property owners or those who could spare a room or two), etc. in providing the streams, dubbed the income bucket strategy, which warranted a whole new write-up. Making the drawdown more robust, portfolio diversification by time (mentioned here)  may dampen the sequence of returns risk.

 

In conclusion, regardless of whether dividends are good or bad, in managing one’s portfolio, I would like to give this one-liner modified from a famous saying by Thomas Jefferson, the third President of the United States: 

 

“The price of (financial) freedom is eternal (portfolio) vigilance.”

 

 

1 – Hartzmark, Samuel M. and Solomon, David H. The Dividend Disconnect. 30 Jul 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876373 (accessed 7 Dec 2023)

 

2 – Bengen, William P. Determining Withdrawal Rates Using Historical Data. Financial Planning Association. Oct 1994. https://www.financialplanningassociation.org/sites/default/files/2021-04/MAR04%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf (accessed 7 Dec 2023)

 

3 – The Bedokian Portfolio (2^nd Ed), p142-143

Going All-In Into Treasury Bills And Deposits?

With interest rates now at an all-time high since around 16 years ago, short term treasuries and bank deposits are providing a much safer and better deal in providing more bang for the buck (from a risk premium point of view). It is basically common sense; why would I want to plonk my monies in an investment with possible capital loss for maybe an additional 1-2% yield when I could put it in an almost-capital guaranteed place at an almost-guaranteed return?

Yet, investors (including myself) are going for the former, scrolling through numerous screeners, scrutinizing the ratios and financial numbers, getting knowledge on the company’s/sector’s/industry’s goings-on, and understanding the macroeconomics of the time, etc. I must confess it is hard work, and all these could be dealt away with by just applying the latest treasury bill and/or going down to the bank/financial institution that offered the best rates.

 

You can still do that, but for myself I would not switch 100% of my capital to them. As the adage goes, “Good times do not last forever”. We cannot expect that interest rates would stay high, and just like other forms of investments, they will go down eventually. This is because markets and economies go through a cycle, and other instruments would provide a better bang for the buck than treasuries and deposits. We need not look further than just two years ago when little people paid attention to them due to the low interest rate environment.

 

This is where we need to capitalise on the (deemed) only free lunch in the investing world, which is diversification. By diversifying, you can capture the prevailing highest return offered by an asset class / region / country / sector / industry / company on part of your investment portfolio, while at the same time protecting it from extreme drawdowns suffered by other asset classes / regions…etc.

 

Quoting the second part of the adage mentioned above, that is “Bad times do not last forever, too”, brings us to the diversification-related property of rebalancing. Depending on the preferred make-up, or asset allocation, of your investment portfolio, if an asset class begins to grow/decline beyond the set allocated level, you can either start selling/buying counters from that said asset class, or inject funds to buy up others, or both, to bring balance back to the portfolio.

 

Whilst some critics may say the method above reduces overall returns as compared to having a concentrated portfolio, which is correct, the main aim is to try to reduce as much risk as possible. Sure enough, we have had heard of success stories of investors/traders going all into one counter and reaped exorbitant profits, but what if the call was wrong? We cannot predict how the markets and economies turn out, and investing gurus and fund managers are not correct all the time, same as us retail investors. Thus diversification, rebalancing and asset allocation are a better defence against volatility and outright 100% capital loss (save for alien invasions and nuclear winters).

 

A final word for dividend investors: high interest rates are not favourable for equities and REITs due to high costs of leverage, and this brings a bargain for erstwhile healthy counters which were depressed overall by the situation. As we know current yield = dividend / current price, if the leverage is low, cash flow is strong and there are still profits, it is a good consideration to look at it further and swoop in if it is worth.

The Gold Rush

An article from the Straits Times a few days ago caught my attention, which read:

Singapore’s central bank the world’s third-largest gold buyer from Jan to Sept 2023¹

 

It reported that Singapore had purchased 75 tonnes of the precious yellow metal during the first nine months of the year. While sitting at third, the purchase was slightly dwarfed by the largest buyer, China (181 tonnes) and second-placed Poland (105 tonnes) for the same period. 

 

Gold is recognized globally and used by central banks as reserve assets, which could prop up the country’s currency and economy in times of need. The buying-up of gold by central banks had increased since 2022, with that year well over 1,000 tonnes were purchased, mainly fuelled by the Russo-Ukrainian conflict and soaring inflation then. The recent crisis in the Middle East had made the price of gold jumped to above USD 2,000 before settling down to the current USD 1,980-ish.

 

Photo credit: istara from pixabay.com

The Importance Of Gold

 

Gold is usually seen as a safe haven by many investors, which explained its price spikes in times of uncertainty. Yet it is an asset which, unlike most other asset classes, does not provide growth in terms of yield.

 

For The Bedokian Portfolio, gold comes under the category of commodities asset class, which also includes silver and oil. Commodities (especially gold) forms as a dampener in reducing volatility and stabilizing the overall portfolio, as demonstrated in my post here.

 

I had described the various ways of owning gold in the eBook², but since this post started off from the news of central banks buying gold by the tonne, it would be appropriate for me to share on the various aspects of owning physical gold.

 

Owning Physical Gold

 

Before going in, you must be clear on the objective of owning gold; you are owning based on the market value of the commodity, nothing else. Thus, if the design of the gold bar/coin intrigues you and you are willing to pay (very much) extra for it, then it would be in the alternate investment form of collectibles called numismatics. These should not be in your normal investment portfolio but be held in a separate one instead.

 

That aside, let us go into the key points of owning the metal itself.

 

Find a reputable dealer/bank

 

This would be the first thing in my mind before going around and buy gold. Recent years had seen several bullion dealers setting up shop in selling physical precious metals, which is good as there is a freedom of choice and comparison. As a rule of (my) thumb, a dealer with a physical shop, and with a few years’ presence is preferred. Also, it should carry some gold from LBMA (London Bullion Market Association, more on this later) accredited refineries and mints.

 

If your trust level is for dealers are still low, perhaps you could try out the banks. To my knowledge, United Overseas Bank (UOB) is the only bank that sells physical gold over the counter, but only at UOB Plaza in Raffles Place (disclaimer: I am not sponsored by UOB).

 

Know the form and weight

 

Physical gold comes in two forms: bars and coins, which are both self-explanatory. Within the bar itself, there are two sub-types: cast and minted. Cast bars looked rugged and rough, while minted ones are more refined looking, hence the former would have a lower premium (see later) than the latter.

 

Next up, there are different weight (or mass, for those who are particular on the term) steps; the smallest is one gram, while the largest can go up to one kilogram. Though some of the weights are in metric, there are also weight steps in imperial system called troy ounces (oz), as international gold prices are determined per oz.

 

The premium

 

One of the main disadvantages of getting physical gold is you cannot buy it at its spot price. This is fair as the refinery/mint would need to bear additional costs for smelting, packaging, transport, etc. Since we are investing on the value of gold itself, we would try to look for physicals that has the lowest premium over spot.

 

Other than cast and minted conditions (for bars), the weights do play a part in premiums. Ideally, the heavier the weights, the lower the premium portion of the overall cost. For example, using gold prices and USDSGD exchange rate on 6 Nov 2023, and using a dealer’s online prices, a one-gram bar’s premium is about 33% over spot, as compared to 0.4% for a kilogram.

 

Of course, for retail investors it would be a tall order to get a kilogram of gold (commonly referred to as kilobar), so the sweet spot for premium would be to keep it within 5%. For myself, it would be minimally 1 oz, which is around 3.2%, and I could make a quick check of gold prices since it is based on oz.

 

LBMA

 

The LBMA is a trade association that governs the standards for the global wholesale market for precious metals, and that includes their purity. If a refinery/mint is a member of the LBMA, it would be subject to the rigour of the LBMA and thus the gold bars and coins produced would be of the highest standard that could be traded (and of investment grade quality). Additionally, in Singapore, physical gold that are LBMA approved would be exempted from the Goods and Services Tax, therefore there would be additional cost savings.

 

Storage

 

Physical gold being a tangible asset requires the use of storage. If the quantity is small, you can keep it at home (or other storage options such as a bank safe deposit box), or if the quantity is large, you can engage with the dealer to use their storage facility, though this would bring additional costs.

 

Other administrative stuff

 

Some nitty gritty stuff before I sign off from this post. First, an invoice/receipt is issued whenever you buy a physical. Keep this piece of document as it is needed when you decide to sell it back to the dealer/bank or other dealers. Second, for minted bars, it normally comes in a package denoting the serial number and an assayer’s (an entity that tests the metal’s purity) verification. Do not remove it from the packaging as doing so would make the trade-in difficult as the dealer has the right of not accepting it.

 

I hope the above would provide some helpful tips in starting your physical gold journey. Remember, gold is just one of the assets for your investment portfolio, and diversification is still important on the overall scheme of things.

 

1 – Tan, Angela. Singapore’s central bank the world’s third largest gold buyer from Jan to Sept 2023. The Straits Times. 2 Nov 2023. https://www.straitstimes.com/business/singapore-s-central-bank-is-the-world-s-third-largest-gold-buyer-from-jan-to-sept-2023 (accessed 6 Nov 2023)

 

2 – The Bedokian Portfolio (2^nd Ed), p38-41