Sunday, 12 August 2018

Sunday Times Article - 53 Tips for Better Financial Health

I read with interest this article on Sunday Times today on the 53 important points about personal finance.

There are few points which I think are absolutely critical to one's financial well-being, especially for beginner anyone or working adults just started on his investment/financial journey.

11 - The 50/20/30 Budget. A budgeting guideline that suggest spending 50% of income on living expenses and essentials; 20% for financial goals like savings and investments; 30% for discretionary spending.

I feel that 20% for financial goals is actually too low. If one is serious about growing wealth, one should place protection and investment as top priority. Why not inverse the percentage allocation to 50% wealth building, 30% living expenses and essentials, 20% discretionary spending?

Of course this is just a guideline, and no guideline will suit every individual's lifestyle, life circumstances etc. So its really up to individual to make necessary adjustments to his lifestyle and spending patterns to channel a bigger portion of income to wealth building. Just make up one's mind and have that resolve to pull it through. Initially it will be difficult, but it will get easier as time passes.

21-Too much cash in savings? The article mentioned about 6 to 12 mths of emergency cash.

How much is enough? I would think 6 mths is sufficient. Some sources would suggest 3 mths. End of the day, consider how likely are you to be jobless or income-less for 6 months or more? The possibility is rather low. And I would suggest 6 mths of expenses instead of 6 mths of income, which is equivalent to half your annual income that is too high.

In my line of work I have seen some really large savings stashed in Fixed Deposit or high interest rate account earning next to nothing that cant even match inflation. Some are in 6 digits worth, or even sufficient to sustain the person's lifestyle for up to a jaw-dropping 7 years. Perhaps this gives the person a peace of mind, but such mental comfort comes with high opportunity cost of missed investment returns.

So whatever amount above what your reasonable expected maximum time frame of not earning an income, put them to investment to earn better returns.

22-Hospitalisation and Surgical Insurance. This is the basic insurance that is an absolute must regardless of age, gender, family illness history, due to hospitalisation and surgical cost in Spore being sky high.

If affordability is not an issue, go for private hospital coverage simply because of the shorter waiting time and option to go with one's preferred surgeon/doctor that has been treating you and have a better grasp of you illness history, thus higher chance of more effective treatment.

Do consider those plans with Letter of Guarantee so one can seek treatment immediately with a peace of mind and one less worry about forking out the treatment costs in cash later, before seeking reimbursement.

While coverage from first dollar (ie include deductible and co-insurance) is often cited as the reason for ever-increasing premium, it is deemed un-necessary and government has already plugged the gap by removing riders that cover from first dollar expense.

23-Commitment. While the article states that buying life insurance is a long-term commitment and pre-mature terminations will likely result in loss, the same applies to investing too. Investment, very often, needs long term commitment to see returns. Commitment in investing is not bounded by contract, but often by one's mental fortitude and determination to stay the course. Hence it is much trickier as it large depends on individual.

36-Rule of 72. Divide 72 by the expected return would give you the number of years required to double your money. Investors can use this as a rough gauge to estimate how long it takes to see his investment double.

Do use as conservative a return rate as possible when using this formula. Reason is that earning good annual returns over extended period is extremely difficult. As it stands, beating STI ETF return of ~6%-7% per annum is already hard enough. And investors often over-estimate their ability to earn a profit. Hence to reduce negative surprise, do use a conservative figure.

Also, the key word here is 'expected return'. It doesn't mean that returns every year will always be at, for example 5%. There will be up and down years. So bear in mind the expected returns take time to attain, and its an average annual rate over more than few years probably.

41-Don't Try to Time The Market. I wrote about this in previous article. My definition of timing the market is 'buying/selling based on gut feel about near future price movement derived from quick glance at price chart and forming an opinion about near term price pattern, with the goal of buying at lowest and selling at highest.'

Develop your investment rules and system. Should it work for you, stick with it.

Saturday, 4 August 2018

You Could be Unknowingly Timing The Market with These Actions

Most, if not all, of the investors I encountered agree that it is extremely difficult to time the market successfully, meaning trying to buy at absolute bottom and sell at absolute high to earn maximum profits.

But I see many investors deciding their buying and selling that are supposedly based on sound rules and experience, but are actually timing the market unknowingly.

I believe the underlying reason for such behaviour is due to emotional biases in investing. One is the anchoring bias, and the other is the tendency to project future price movement based on recent patterns. For the latter I can't find an official name for it. I suspect it could be Status Quo bias.

Anchoring and 'Status Quo' Bias
Investopedia define Anchoring Bias as 'the use of irrelevant information, such as the purchase price of a security, as a reference for evaluating or estimating an unknown value of a financial instrument.'

'Status Quo' bias, applied to investing, should be the action expecting a share price to further move along the same trajectory in the period right before the mental decision is set.

How do they play out in real life?
Let's take Singapore's arguably favourite share - DBS as an example.

In the case of anchoring bias, an investor could have bought DBS at below $20 early 2017, held  and sold it at $25 early 2018. In his mind $25 is the anchor price above which he would never consider to buy at all. In his mind he is probably thinking that i sold it at $25, it would be foolish to buy now at $27 as it is so much more expensive now. This decision to withhold from buying is purely derived from mentally dropping a pin at $25 price, regardless of improvement in DBS business fundamentals and increased earnings.

For 'Status Quo' bias, let's use another Sg favourite share - Singtel. Its share price has been dropping from around $3.80 to low $3. It recently found a low at $3 and rebounded a little. An investor who had long been attracted by the stability of this company and its enticing yield of > 5% wanted to buy. But he mentally projected that Singtel would continue falling to sub $3 soon simply based on the relentless fall in share price past 9 months.

Both cases illustrate the way our cognitive brain functions. Given human DNA to look for pattern and reasons in short term share price movement that can be random, these investors base their investment decisions upon mental shortcuts played up by the brain that are often fickle. Just where/how do people conjure up reasons to substantiate above actions are intriguing, but they without fail still legitimise these buying behaviours.

Sounds familiar? These may be some subconscious market timing that many many investors engage it unknowingly.

These Are Not Market Timing
If one buy/sell using Technical Analysis, premised upon a set of well-defined rules developed from deep understanding of technical indicators and own market experience, and these rules don't change on the whims, he is not market timing.

If one buy/sell based on careful considerations of company's past results, qualitative factors such as its competitive edge over competitors, and in turn forming an opinion about its prospect and an expected pricing outcome in a rough timeline, he is not market timing.

If one aims to profit from trend reversal and set up his trade plans based on thorough study of volume, price charts, coupled with independent opinions on funds flow and corporate actions, with corresponding loss-mitigating trade actions in case his opinions are wrong, he is not market timing.

But if he/she is buying/selling based on gut feel and quick 5 seconds glance at price chart, motivated by the underlying desire to buy at lowest sell at highest, he/she is market timing, no matter how 'legitimate' his reasons are.

When such actions are undertaken regularly on a long term basis, his/her investment actions plans are not based on rules, system and logic, but rather, hunch and luck. Chances are long term returns would not be satisfactory.

So do spend some time to think about if you are actually investing or timing the market.

That aside, would you like to gain insight into current Spore stock market status and its outlook for the rest of year? And take advantage of the recent property cooling measures to refine your portfolio for better profits? Attend my free seminar to learn more.

Simply click here to sign up today!

Tuesday, 31 July 2018

Reflections from Recent Seminar

Or rather, observations, from my recent seminar held just over the weekend.

I shared how should investors go about analysing investment moat of a company, identifying stocks with modest growth rate and comfortable yield so not to be affected by market's sudden change of trend, and selecting strong REITs using the GOV framework and balance sheet analysis.

There was also a major segment dedicated to investor psychology with my personal experience/tricks to better handle the emotional roller coaster, and practical portfolio management.

It was a good session with active participation from audiences. At least they were awake, listening and engaged. Some also stayed back after the talk for quick chats.

These interactions with participants, coupled with my meetings and discussions with clients so far, also provide some revelations about the characteristics of majority of the retail investors out there.

Stock tips are highly coveted
I started the session by showing the standard disclaimer, and stating that I hope to teach audiences how to fish, instead of giving them fish served readily to eat.

But there were quite some questions on stock tips. It is understandable that most investors hope to receive stock tips. The more specific the tip is, the better. Sometimes name of share is not enough. Would be ideal if there was entry price, exit price, time frame, and cut loss price if applicable.

While illustrating certain points and investment concepts, it is inevitable to quote certain stocks as example. So I tried to share their investment merit based on fundamentals and my personal opinion, without being too certain about the returns and outcome.

I hope audiences can understand that being able to perform investment analysis and form a sound, reasonable opinion about the company independently, is one of the, if not the most, criteria for a fruitful investment. Only then can an investor make it far on this investment journey.

Usually free tips should not be taken as gospel truth. And real, solid tips (or intel) don't come free.

Lacking an investment system
By system I mean a comprehensive framework to guide a person on various aspects of investment decisions ranging from stock analysis, buying decision, profit taking, portfolio management, limiting risks, diversification, dealing with psychology biases etc.

Of course there wasn't enough time to cover all the aspects above. But just from portfolio management and investor psychology, it seems that most just invest based on feel or a mesh of half-baked rules and criteria.

It is still ok in an up trending market like 2017. But when it starts turning down with increased volatility, most investors do not know what to do. Because their rules are untested and perhaps not robust enough.

There is no short cut to formulating an investment system that suits each individual. It takes knowledge, experience, and probably a fair bit of hard knocks in the market. But everyone has to start somewhere.

Different profile, different focus, different asset allocation
The younger audiences seem more receptive towards foreign-listed stocks. There were quite some questions on Tencent and some HK listed stocks, while the matured investors were more interested in stocks that were household name or STI components.

The more matured audiences also seem to be more interested on strategic asset allocation, branching away from just stock holdings. Probably they have been through more cycles and are concerned about potential fall during downturn, or its a result of life stage with more family commitment.

But asset allocation to reduce portfolio value swing and protect downside risks is of paramount importance to investors no matter what age group you are at. Market crash can be really scary and its not for the faint hearted. The problem is investors always over-estimate their ability to stare at huge paper loss, and by the time they realise that, we are probably already deep in a downturn.

Its necessary for all, but actual implementation differ by extent/degree between different groups.

There were several good feedback received, which will be incorporated into next run for a better seminar.

My next sharing is on Market Insights and Sector Update, different content from the recent one. Do sign up here if you are keen to attend.

Sunday Times Article - 53 Tips for Better Financial Health

I read with interest this article on Sunday Times today on the 53 important points about personal finance. There are few points whic...