Author: Managing Your Money

Blog #48 A Random Walk on the Stock Market

Did you wonder how the ‘fake’ stock prices in the previous blog were generated?  Statisticians have long noticed that stock prices bump around in a way that can be described as a random walk. Random walk is the technical name given to a statistical process where the object fluctuates in a totally unpredictable manner, much like the results from tossing a fair coin (the chance of each throw landing on a head (H) or tail (T) being equal to 0.5). As anyone who has thrown coins in their spare time knows, occasionally one sees ‘nice’ sequences like HHHH or...

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Blog #47 Try this on Your Chartist

In my previous blog, I showed that investors tend to chase trends but don’t do a good job relative to a passive buy-and-hold investment strategy. Since you may not be convinced by research based on aggregate data, here’s a simple test of your prediction skill.  Below are eleven charts of daily “stock prices”. Only 5 of these charts are the prices of real stocks. The rest are fake prices, generated based on a random process much like flipping an unbiased coin. The test: identify the 5 real stocks (answers are at the bottom). Answer: Series number 3, 5, 7,...

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Blog #46 Fool’s Game

Most of us aren’t investment geniuses, so a passive “buy-and-hold” strategy will beat “active” investing hands down most of the time. But we are restless creatures; buy-and-hold sounds like a boring cop-out. Active investment is about market timing and stock selection. It is the stuff that mutual fund and hedge fund managers do for the fat fees they charge. Legions of ordinary investors also try to pick stocks and predict markets on their own.  How these individual and professional investors actually perform has piqued the curiosity of academic researches for decades. Fortunately, we do have a trove of hard...

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Blog #45 Are Index Trackers Created Equal?

Investors who don’t want to pick stocks have a simple and attractive investment option in the form of index trackers. An index tracker is a fund designed to investors exposure to a basket of stocks that comprises an index. This means investors get the benefits of diversification at (usually) relatively low cost.  For tracking the popular Straits Times Index (STI), the lowest cost options are two ETFs traded on the SGX – the SPDR Straits Times Index Fund (SPDR STI) and the Nikko AM Singapore STI Fund. The average total expense ratios (TER) of these two ETFs in the most...

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Blog #44 Humpty Dumpty Markets

I want to revisit an aspect of global equity diversification that I haven’t covered in my previous posts. This is the fact that diversification will not protect you from losses if the global economy tanks. As the nursery rhyme says, “all the king’s horses and all the king’s men could not put humpty dumpty back together again.” Market risk is what investors bear when they hold a diversified portfolio. Just as a rising tide lifts all boats, a crashing tide dumps all boats! That is the bad news.  The good news is that global diversification may still offer better protection...

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Blog #43 A Fresh Start for Investing

I’ve devoted quite a lot of space to the topic of long-term strategic investing (the discussion runs from Blog #35 and I’m not done yet!). The reason why I’m harping so much on this topic is because I’m wedded to the idea that investment should be simple (but not simplistic).  There is a huge difference between them. Simplistic investing implies that one is naive, easily influenced by hearsay and sound bites, buying stocks for no better reason than everyone at the office water cooler is buying, flipping your stocks like burgers, chasing hot markets and so on. These are...

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Blog #42 Fresh Starts

It’s back to school for everyone.  And I mean everyone. Because there is such a thing as the School of Life – learned wisdom from personal and shared experiences to see us through the vicissitudes of life. The first months of the year are times when many people come up with resolutions and lofty goals, with the good intention of sparking new beginnings in the way we manage our expenses, investments and sundry habits. Unfortunately, if you’re like most people, your January resolutions will likely vanish into thin air before the first quarter ends. That’s okay, according to psychologists. Just...

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Blog #41 How Would You Like the Year to End?

It’s that time of the year again for reflections and resolutions. How did your year go? Okay, that’s too broad a question.  Let me rephrase. How did your investment plans do?  Does it look like you will end this year with regret over missed opportunities? Or much rejoicing over capital gains?  Or with equanimity and thankfulness? I chose equanimity and thankfulness trying my best to be calm, composed and thankful for whatever has transpired during 2017. Did I have any regrets over missed opportunities? That’s actually a silly question to ask, even without looking about at the meteoric rise of bitcoin. At...

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Blog #40 Exotic ETFs: Who Ordered That?

I had coffee with an old friend the other day. Midway through our conversation, the topic turned to exchange traded funds (ETFs). Diversified bond and equity ETFs are something I’ve mentioned quite a bit in my recent blogs. My friend is financially savvy and didn’t want another exchange on standard ETFs like those that track the S&P 500 or the STI. He wanted to talk about something sexier: ETFs that offer investors exposure to private equity (PE). PE comprises venture capital (VC) funds that invest in start-ups and buyout funds that take public companies off the exchange. It conjures images of...

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Blog #39 On the Lifetime Retirement Investment Scheme (LRIS)

The Lifetime Retirement Investment Scheme (LRIS) provides another avenue for CPF members to invest their OA and SA savings. At the time of writing, this scheme is not in operation but soon will be. LRIS is meant to simplify investment choice for CPF members. Although the CPFIS has good intentions (to provide members with a wider range of investment options), the take-up rate under this scheme has been dismal. For example, as of Q3, 2017, only 1,252 members were CPFIS investors. Their total investment amounted to only $22 billion, a paltry sum compared to the aggregate OA and SA balance...

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Blog #38 Asset Allocation with the CPFIS

My last two blogs was about investing for the long run. Specifically, in Blog #36, I showed how easy it is to be your own robo-advisor using nothing more than Excel and an add-on software to simulate and visualize investment outcomes. The example in that blog simulates the terminal wealth distribution of a “glide path” over a 35 year period based on a stock-bond portfolio where the allocation to stocks declines as the investor ages. This investment approach focuses on long term results and prudent risk management. It goes by the name of lifetime asset allocation. Some readers wrote in asking whether...

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Blog #37 How Long is the Long-Term?

This is another hairy question in investment planning that defies easy answers.  To say that “it depends” seems to be a cop-out, but is actually an accurate answer, qualitatively speaking. Yet I think many investors would like quantitative answers, even if this requires making certain assumptions. This is what I plan to do in this blog. The reason why there isn’t a single right answer to the “how long” question is because many factors determine investment wealth.  The careful reader of my last blog would have picked up some of these factors, but here is a recap: Investment goal...

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Blog #36 Asset Allocation with a Spreadsheet

Okay guys – time to roll up your sleeves and start long term investment planning. Success in investment depends less on IQ than the discipline to save consistently and manage risk.  To put it starkly – to be successful in investment, you need to take time and take risk.  In fact, time and risk taking are mutually dependent. Young investors have the luxury of time and the capacity for risk taking than retirees don’t. This is why I often remind undergraduates in my personal finance class to start investing early even if this means taking baby steps. The second...

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Blog #35 Let’s Fuss over Asset Allocation

It’s time to face the elephant in the room: how to save enough to enjoy a well deserved, comfortable retirement in the future? By any measure, this number is going to be a humongous sum because we are living longer and cost of living never seem to stop rising. Yet, for all its epochal significance, few people actually make the effort to quantify “THE NUMBER”.  Those who do it correctly will probably fall off their chair after seeing the mega amounts. To give you a ball park figure, I’m going to assume that you are 30 years old, earning a...

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Blog #34 What Moves SGX Stocks?

I’m often asked whether it is sufficient for a Singapore-based investor to hold the STI instead of the world portfolio. After all, the reasoning goes, “the biggest SGX-listed companies have extensive businesses all over the world”. My response is two-fold. First, many investors may not know that although there are 30 stocks in the STI, six of these 30 firms account for more than half the index’s market capitalization. These six companies are: Jardine Strategic, Jardine Matheson, Singapore Telecoms, and the three local banks. It is true that these firms do have meaningful businesses outside Singapore. Nonetheless, these businesses...

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