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.

 

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Disclaimer

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

2 – ibid, p135-137

Is The United States Dollar Losing Its Importance?

When I was young during the 80s and 90s, I remembered those crime thriller movies and series where the bad guys would often demand United States Dollars (USD) for illicit goods transactions and/or ransom amount. Being a naïve kid, I asked my parents why it must be in USD and not Hong Kong or Singapore dollars since the shows were set in those countries, to which they replied, “because it is the most powerful currency in the world”.

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Since the Bretton Woods system started in 1944, USD had slowly gained its ascendancy over the previously dominant currency, the British pound. While the system eventually ended with the delinking of gold to the USD in 1971, and the subsequent rise of other currencies such as the Japanese Yen, Euro, Swiss Francs and later the Chinese Yuan, the greenback (a common nickname for the USD notes) still held its supreme status as of 2024, with it being the world’s reserve currency and accounted for 89.8% of foreign exchange transaction volume, 58.2% in official foreign exchange reserves, and 47.9% in international SWIFT payments¹.

In recent years, however, there has been talk of USD losing its top status, especially with the buzzword “de-dollarisation” being bandied about. The current U.S. administration’s trade policies (tariffs, tariffs and more tariffs, implied or real), the threat of another reserve currency replacement from BRICS countries (Brazil, Russia, India, China, South Africa, and some others), the rise of gold holdings in foreign reserves, and the downgrades by rating agencies of U.S. credit ratings, among other news, spelt some pessimism for the USD. 

In my opinion, the scenario of de-dollarisation is not going to happen, not at least in the space of two decades, and even so, it would be gradual, not overnight like falling off a cliff. There are a few reasons for this.

First, when compared between 2014 and 2024, the amount of USD in foreign exchange transactions and international SWIFT payments had risen 7.1% and 2.9% respectively, and the U.S.’ share of global gross domestic product (GDP) increased by 3.3% to 26.5%². The use of USD is still prevalent, and for the next two places down the line, the Euro and the Japanese Yen (who are not part of BRICS), stood at around 31% and 17% respectively (as of 2022)³. It would take a huge undertaking and a global shake-up more disruptive than tariffs, to usurp this current order.

Second, a global reserve currency would need to have characteristics that include global acceptance, stable political and strong economy, and liquidity. The latter is important especially when capital and transactions are needed to cross borders easily. 

Third, the U.S. economy is still a powerful entity for its global companies, strong consumer market, huge source of capital and an incubator for innovation. Though the world is polarizing and signs of autarky amongst regions and countries are increasing, trading with the U.S. is unavoidable as the globalized trade network is still in place. The recent deemed rush of tariff negotiations by countries with the U.S. had clearly shown the importance of this network.

For most investors, the important question coming out of all these would be: is the U.S. still investible?

My answer is: yes, for now.

 

1 – Buchholz, Katharina. U.S. Dollar Defends Role as Global Currency. 22 Jan 2025. https://www.statista.com/chart/30838/share-us-us-dollar-in-global-economy-global-financial-transactions/(accessed 26 May 2025)

2 – ibid

3 – Triennial Central Bank Survey. Bank for International Settlements. 27 Oct 2022. https://www.bis.org/statistics/rpfx22_fx.pdf (accessed 26 May 2025)

 

Disclaimer

The Rationale Of The Asset Classes: The Bedokian Portfolio 300th Post Special

I was asked a few times on the asset classes in the Bedokian Portfolio, specifically on why I had included them. In fact, I had mentioned the rationale in my eBook, which I will reproduce here¹:

“Both equities and REITs provide dividends, with the former having higher potential capital growth; Bonds give a stabilising effect when equities and/or REITs are weakening, while still earning coupon payouts; Commodities, though it is a non-yielding asset class, give the necessary softening of the overall portfolio from volatility; Cash, though acting as a pool of liquidity, could still be an interest-bearing instrument.”

 

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For the past decade, we had seen the “Sunday” and “Monday” moments for each of the asset classes; equities lead the charge most of the time, save for the COVID and accelerating interest rate periods in 2020 and 2023-2024 respectively; REITs were the darlings for dividend investors, until COVID and high interest rates pressed them down; bonds were riding high during COVID as a flight to safety; commodities in general were muted until the post-COVID geopolitical uncertainties kicked in; cash languished until high rates spurred interest in treasury bills and fixed deposits.

 

The basis for all these is due to the different behaviours of each asset class under different economic conditions; in other words, they have different correlations with one another. If you had read the previous paragraph, not all of them had a bad time together, nor a good time together, too. In this way, our Bedokian Portfolios do not suffer the high swings of down and up experienced by an individual asset class, because if one or some asset classes plummet, the others would somehow “hard carry” up for the team.

 

Thus, the above example serves as an important lesson on diversification; the act of not putting all of one’s eggs into a basket. Though the gains may not be as much as placing all into one asset class (especially equities), but at least the risks and losses can be mitigated via diversifying. 

 

1 – The Bedokian Portfolio (2^nd Ed), p71

Where Did You Get The Capital From?

During an investment discussion, one of my acquaintances had asked an interesting question, which is:

“You have been updating about which counter you had bought into, and you seldom sell any. Where did you get the capital from?”

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Here are the capital sources:

Capital Source #1: Cash Injections

If you had read the makeup of The Bedokian Portfolio, there is a small portion (earmarked 5% for our case) dedicated to cash. This amount is purely used for investing, and it is not mingled with our normal savings and emergency funds. This is the major capital source especially for our portfolio build with disposal income.

So, what are the tributaries contributing to this cash portion?  On a regular basis there are two: from the portfolio itself (dividends from equities, distributions from real estate investment trusts, coupons from bonds and interest from cash in banks) and monthly contributions from our salaries. This is typical for most people who have an investment plan and portfolio in place. 

As the portfolio grows over time thanks to capital gains and compounding, so does the yield amount, which is fed into the cash part. A 5% cash yield on a $10,000 portfolio is $500, but a 5% cash yield on a $100,000 one is $5,000, and $5,000 could purchase more securities than $500. Add this to your regular contribution, which may have increased thanks to rise in salaries, you would have a larger cash pool to invest with.

There are further exceptions unique to us, such as liquidating our past investment-linked plans, endowment funds and a matured child education endowment policy, and they greatly increased our cash injections.

Capital Source #2: CPF-OA And SRS

The next capital source for us is our CPF, specifically the CPF Ordinary Account (CPF-OA). Since we had finished our mortgage payments and had hit our prevailing Full Retirement Sum, the door for investing the CPF-OA had opened. The main aim of investing in CPF-OA is to have better returns than the current 2.5% rate, though with some added risk. The use of CPF-OA as a capital source comes with limitations, such as the choice of securities and the amount used.

35% of the investible CPF-OA savings can be used for individual local securities and selected exchange traded funds (known as the “35% stock limit”), and a larger amount is allowed for professionally managed products. We invested using funds from these two sub-pools in the CPF-OA, though not to the limit, giving us some spare capital for future allocation.

For our SRS, though miniscule as compared to our CPF, it is still a source of capital that can be deployed, if necessary, though for now it is used on a robo-advisory portfolio.

Conclusion

My acquaintance was a bit surprised and felt “awakened” by the answer, because it is obvious yet hidden in plain sight. I am glad that he had learnt something new, and I hope you had some takeaways, too.

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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.

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).

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. 

Rate Cut, Whenth?

One of the most anticipated moments in the market would be the announcement of a rate cut by the United States (US) Federal Reserve (Fed). In the recent Fed meeting held around a week ago, they are expecting to go through three rate cuts in 2024. This news had sent the markets to a rally (at least for the US and our local Straits Times Index). While we feel some exuberance over this, we need to be cautious, too, on how the actual thing may unfold in the months to come on interest rates. Below I will describe four snippets on why we should not be too held up by excitement and exercise some prudence in our investment decisions.

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#1: Markets Are Forward Looking

This is typically a given, as expectations are a major driving force in determining the market sentiment. Some of these expectations are calculated by analysts, e.g., a fall in x% in interest rates would reduce y% of interest costs of a company or industry, thus providing an additional z% of profits. Other expectations, however, are fuelled by blind optimism which are usually baseless and this may cause them to be overblown. If the super-optimistic target is not reached after reality sets in (e.g., rate cuts did not happen, see #2), then the price or index will fall hard.

 

#2: Rate Cuts Expected

When one expects something, the person is holding the hope that it should happen. As this is real life and not a fairy tale, the word “hope” is one of the dangerous words to use in investing, for one does not know whether it will happen or not. It is important to know that the Fed makes interest rate decisions by looking at economic data such as inflation and unemployment. A plan is made when certain conditions are met, but if during its execution something else crops up then it must be readjusted. This meant there is a possibility that the Fed may rescind on their three-cuts schedule.

 

#3: Cuts Are Not Drastic

Even with rate cuts imminent, it is likely not going to be reduced by a huge number each time. The Fed had mentioned that the cut, if it comes, would be on a gradual approach, so if the no-cut scenario in #2 does not happen, then it is probably a gentle step-down rather than a big drop.

 

#4: Effects Of Cuts Take Time

Though a rate cut signifies cheaper borrowing costs, this effect takes time to realise as some of the current debt held by companies and real estate investment trusts (REITs) were based on rates during the last couple of years. This means at least for another year or two, the companies and REITs are shouldering the high cost of borrowing until the debt could be swapped or restructured to the current lower rates. Hence, looking out for strong balance sheet and cash flow are important during one’s analysis of a security in question, like whether it can sit out comfortably in the next few years or so.

 

What Now?

REITs had been hammered, and treasury bills and fixed deposits were getting popular in the last two years, all thanks to a high interest rates. If you are an active investor, and if your portfolio allocation allows it, you may want to consider looking at the above two, for the former they may not stay low for long, and for the latter they may not stay high for long. For REITs, as I had highlighted in #4, it is preferable to go for the healthy ones, like with lower gearing and in a region/country/sector which is thriving come rain or shine, e.g. Singapore retail scene, provided the price is right.

 

Related post:

ZIRP Is An Anomaly

My Child’s Education Endowment Policy

When our children were born, we heeded the advice from a colleague on purchasing an education endowment policy for them.

Back in 2003, we had purchased a 20-year policy term. The savings amount was SGD 995.55, with the accompanying riders of SGD 73.78, bringing the total annual premium to SGD 1,069.33. The premium payment would stop at year 17, after which in years 18, 19 and 20, the guaranteed portion (cash survival benefit) of SGD 15,000 would be paid out SGD 6,000, SGD 6,000 and SGD 3,000, respectively, with year 20 saw the additional payout of the non-guaranteed component.

 

In totality, the amount of premiums paid was SGD 1,069.33 x 17 = SGD 18,178.61, while the total guaranteed and non-guaranteed amount was SGD 26,558.48. This represented a value return of SGD 8,379.87, which in very simplistic annualized return (i.e., taking the paid value and end value for calculation), it would be 1.91%. However, if we only focus the savings portion and treat the riders as costs, the annualized would be 2.28%. Note that we did not reinvest the first two SGD 6,000 back into the policy.

 

As I had emphasized on the word simplistic, the annualized return would be different as it was not a lump sum payment in the beginning but rather periodic across the policy life. As endowments were better off being seen through in its entirety, hence it was fair to treat the calculations from a lump sum perspective instead.

 

Was It A Good Deal?

 

The question of whether the policy was a good deal is dependent on how and when one sees it. Hence, it is one of those “it depends” answer that I love to dispense.

 

The year was 2003, and as I had shared before, I was in the ignorant zone on investments and stuff, and endowment plans were one of my better-known tools on growing wealth. It was a form of forced savings, which was good, and the returns of the policies were attractive as compared to the usual bank savings account. Looking back, based on statistics from the Monetary Authority of Singapore, annual savings accounts and 12-month fixed deposit accounts were never above 1% between 2003 and 2020, thus from this angle it was a good deal.

 

Of course, at present we have attractive interest rates and the availability of Singapore Savings Bond (SSB), so the 1.91% or 2.28% looked like a not-so-good deal now. With fixed deposits we could project one year in the future, and with SSB could look 10 years ahead, but for a 20-year plan, what would the returns be like? To be honest and fair, I did not sign up for any endowments recently and thus unable to see what the annualized would be like for comparison.

 

Speaking of projected returns, from the original benefits illustration of my child’s policy, the annualized return was quite close to the actual (SGD 996 x 17 savings paid and SGD 28,090 guaranteed and non-guaranteed payout) which was 2.27%, so in this viewpoint it was a good deal.

 

Finally, if we match it with investments on certain equities, returns wise endowments would lose out by a mile (1.91%/2.28% vs. S&P500’s 8% to 10%), but we do need to factor the volatility and risks that comes with them. Depending on the insurance firm and subjected to a limit, endowment policies are covered by the Policy Owner’s Protection (PPF) under the Singapore Deposit Insurance Corporation Limited (SDIC), so there is a safety net of sorts. Risk and returns go hand-in hand.

 

What To Do With The Payout?

 

As there was no immediate use of the funds, it would be injected into our Bedokian Portfolio allocated under our child’s contribution. We had deployed some of it to our equities buy (the first SGD 12,000 paid out in the previous two years were vested) and are planning to deposit the remainder into the coming SSB tranche in December 2023 to slightly rebalance our bond component.

 

And to add, we are servicing one more education plan policy. More of that in a few years’ time.

Lock-Up Savings Accounts: An Idea To Stash Your Emergency Fund?

In response to the prevalence of online scams, the three major local banks DBS, OCBC and UOB had introduced lock-up savings accounts, where you could park your monies safely and they could only be withdrawn via physical means (either in person over-the-counter and/or ATMs – automated teller machines). 

Since the roll-out was just a couple of days ago, you could find out more from the respective banks (click DBS , OCBC , UOB).

 

Whilst reading up on the lock-up accounts, an idea sprang up: why not use them for starting up an emergency fund?

 

The gist is simple; the idea of the emergency fund is to tide over unexpected situations in life, such as sickness, unemployment of just about anything that would eat into your money. The advantages are two-fold: there is a behavioral disincentive in touching the fund, thus it is protected against frivolous spending, and the lock-down can also protect against scammers wiping clean your monies. 

 

However, as sometimes spillovers from the set quotas in the emergency fund are used to fuel investments and/or other savings, it would be a slight hassle to do the non-digital way of withdrawing. But hey, at least one could experience nostalgia by learning how to use an ATM and/or encountering the goings-on within the bank branch. 

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.

Is My Money In The Bank Safe?

The recent debacle on banks, their liquidity issues and bank-runs had prompted this question that was seldom asked before among my circles: is my money in the bank safe?

Short answer: it depends.

 

Before going on a panic spree upon my answer, we shall take a deeper look at why I gave my reply as such.

 

Enter SDIC

 

If you have heard of the Federal Deposit Insurance Corporation, or FDIC, on the news where it protected depositors of Silicon Valley Bank a while ago, we have an equivalent here in Singapore, called Singapore Deposit Insurance Corporation (SDIC). I had covered SDIC in my eBook on the chapter on cash¹, but to provide a summary, the SDIC insures Singapore dollar (SGD) denominated deposits placed with a Deposit Insurance (DI) Scheme member in any of its branches in Singapore, up to SGD 75,000 (depending on type of account) per DI Scheme member. Foreign currency denominated accounts, structured deposits and investment products are not insured under SDIC.

 

You may check out who are the DI Scheme members, the calculation of the SGD 75,000 compensation, and the types of accounts insured in the SDIC website (provided under Reference below).

 

Diversifying Deposits?

 

If you had delved into the SDIC website on the compensation scheme, the first concern that may come into your mind would be: given the SGD 75,000 limit, should I diversify my deposits across different banks/finance companies?

 

As a proponent of diversification, I would say yes. Personally, I have accounts in two separate banks: one bank as my main salary crediting/bill paying account(s), and another just to store my emergency cash. However, we need to consider between balancing the risk(s) of having a financial institution defaulting, and the inconveniences of having one’s monies all around the place (long live FAST?), and other factors in-between.

 

In our local context, a bank/finance company collapsing is a very rare occurrence (the last one I heard of was Barings in the 1990s, and its collapse was due to a rogue futures trader), so that means the probability (and risk) of happening is very low. I would dare not say never, but the low risk of it happening does not warrant me to fret much over the issue, which in fact, there are other bigger things with higher risks to be concerned of (e.g., share prices of individual companies diving).

 

Stay calm, stay vested.

 

Reference

 

SDIC Website –  https://www.sdic.org.sg

 

1 – The Bedokian Portfolio (2^nd Ed), p54-55

 

When USD Is Up, The Price Of Gold Goes Down…

And vice versa.

This was one of my first financial advice dished out by my father while I was young. Somehow this sticks in my mind for a long time, like those childhood experiences, good and bad, where it remains with you forever.

 

When I started to know more of economics, finances and investing, it was obvious that this was a result of one of the most important attributes in an investment portfolio: correlation.

 

The current times are challenging due to rapid inflation followed by increasing interest rates, macroeconomic factors that had not been seen in at least a decade and a half. Major asset classes fell, yet there are some still holding, or even profiting, from the prevailing economic environment. Drilling down further, some regions/countries’ asset classes may have performed better than others; and going down even further, some sectors/industries of some places may be better than other sectors/industries of other places.

 

Such is the levels of diversification, another important aspect of portfolio management. It is not advisable to concentrate all into one asset class, region/country or sector/industry, for one big bang will bring massive pain to an investment portfolio (afterthoughts on SVB’s client base). Diversification is designed for two things: to prevent greater than normal losses in down times, and to let you sleep somewhat better at night.

 

Going back to the assumption in this blog post’s title, there is truth to it, to a certain extent.

 

Since gold is priced in USD, the argument for this assumption is that a weakened USD makes the price of gold cheaper, hence the latter’s higher demand, and the reverse, i.e., stronger USD, would make gold more costly, thus lowering its demand. However, there are other reasons, too, such as periods of inflation where gold is favoured due to its deemed hedging properties. Sometimes in moments of economic crises, USD and gold had shown some positive correlation. 

 

As with most relationships in the intricate world of economics, finance and investments, there is no single absolute link between the various asset classes, sub-asset classes, etc., let alone the one between USD and the price of gold. And these links may be positive or negative. In short, correlation does not imply causation, and all assumptions are made on certeris paribus (assume all things equal).

 

It is precisely this correlation, positive and negative, that brings variation in protecting an investment portfolio, and this variation is important in navigating the not-so-smooth path of investing and building the retirement pot.

 

Hence, this is why most in the investment circles would say that diversification is probably the only free lunch around.

Mad About Fixed Deposits, SSBs And T-Bills…How About The Others?

I believe now it is super obvious that a lot of investors are mad on fixed deposits, Singapore Savings Bonds (SSBs) and treasury bills (T-bills). There will always be a moment where these things are mentioned, from informal conversations to family groups on chat apps. This is akin to a mania, which is usually associated as something bad. But unlike manias of the past (tulips) and present (meme stocks), this is a good one, for these financial instruments and their returns are reliable and almost guaranteed.

While people are clamoring for these products, other asset classes such as equities and REITs are being forgotten, and rightfully so, since they are currently experiencing a volatile period in a southerly direction. Though it may sound counter-intuitive at this moment, I believe it is the right time to look at them now. As per the principles of diversification (and rebalancing), we should not be overweight on a particular asset class.

 

While it is very tempting to capitalise on the high interest and coupon rates, we can consider capitalising on the equities and REITs fronts, too, since they are quite battered. With good selection criteria, for growth investors this means a potential capital gain; for dividend investors there might be a higher yield on cost at play; and for index investors the indices may go to yet another all-time high after recovery.

 

Cheers and Merry Christmas!

Bank Interest Rates: It’s Like Back In 2001

I recalled the time when I was flipping through a newspaper trying to find out the latest fixed deposit rates of the banks and finance companies. Yes, the internet back then was not so friendly in terms of having consolidated information within a click, so going for print media was the next best thing on seeing things in one page.

I was trying to park SGD 10K for about a year, as back then I did not know much about the stock market (and buying shares meant getting minimally 1,000 of them, which I could not afford, and through a phone call), interest rates was the main passive money making concept that I knew (and to think I had just graduated from an economics discipline).

 

The highest one-year fixed deposit rate then was about 3.25% from a finance company. This finance company had (and still has) a branch in Bedok, so I decided to walk around the vicinity to look for it (again, back then there was no smartphone for me to google the address on the spot). In the end, I went to another finance company instead (offering 3%) as I was lazy (and inherently cautious carrying SGD 10K worth of cash) to walk around further to look for the one that I had planned originally to go to (turns out that if I had persevered my journey to the next block, I would have had earned an extra 0.25%).

 

Interest rates were quite high then; I remembered mortgage loans were around 5% to 6%, and savings accounts were about 1.x% to 2%.

 

Also back in 2001, the United States (U.S.) federal funds rate was around 5.x%. Tracking the movements of both rates, it is obvious that our local interest rates and the U.S.’ were (and still are) positively correlated. Therefore, when news of the U.S. Federal Reserve planning for more rate hikes, expect our side to do the same, be it on fixed deposits, savings and mortgage rates.

 

Fast forward to now, we are now seeing bank fixed deposit interest rates going up into the regions (around 2.x% for a 12-month tenure) where it was unheard of for almost 15 years (I picked fixed deposit rates for a clean comparison as they are typically unencumbered with step-up and promotional rates, which are typical of savings accounts). And these rates are relatively comparable to the current offerings from treasury bills and Singapore Savings Bonds.

 

Having a 3% fixed deposit rate is unprecedented now, but remember, it was the norm back in 2001. Being in a near zero-interest-rate-period (ZIRP) for a long time, it is hard to blame new investors, most of whom entering the markets within the ZIRP, of not factoring in interest rates in the overall scheme of things. A diversified portfolio approach is still prudent in certain and uncertain times, and times of differing economic conditions, including interest rate movements.