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Finance Singapore http://financesingapore.com Discuss anything related to finance Sat, 29 Oct 2016 03:30:57 +0000 en-US hourly 1 https://wordpress.org/?v=4.7.6 http://financesingapore.com/wp-content/uploads/2016/05/cropped-Finance-Singapore-Logo-32x32.png Finance Singapore http://financesingapore.com 32 32 Investment returns vs Investor returns – The human performance penalty http://financesingapore.com/investment-returns-vs-investor-returns-human-performance-penalty/ http://financesingapore.com/investment-returns-vs-investor-returns-human-performance-penalty/#respond Sat, 11 Jun 2016 03:16:43 +0000 http://financesingapore.com/?p=431 Allow me to cut through the foreplay and get straight to the point. What we are discussing today is something very crucial to all investors. The topic today is about […]

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Allow me to cut through the foreplay and get straight to the point. What we are discussing today is something very crucial to all investors. The topic today is about Investor Returns.

Now we all know what returns are. It is an indication of how hard our money is working, of how many percent we have eked out from the markets. It could the interest from fixed deposit accounts, the coupon payments from bond subscriptions, dividends from REITS, capital gains from stocks or even the difference in price between what we paid for and what we sold our gold hoard for.

Positive returns makes us happy, negative returns makes us want to do this.

Investment Returns

In the simplest form, investment returns is net profits divided by total assets. For simplicity sake, let us take the example of Apple Inc (AAPL).

Assuming you have purchased one share of AAPL on 31st May 2011 (first day on the chart) for $49. And you have decided to sell it last Friday for $100. Your returns on that investment would have been 105%. Awesome returns on first glance.

To find out your yearly returns over the previous five years, we use a simple Compounded Annual Growth Rate (CAGR) calculator. It clocks in at 15.3% per year. Respectable returns indeed, I will take that any day.

What we have just calculated is the Investment Returns. In this case, it is also the Investor Returns. As you would have noticed by now, Investment Returns can only be achieved with a one time buy and hold strategy. Unfortunately, few investors operate that way.

What is more likely to happen is that an increase in Apple price will bring about renewed interest in the stock. This is accompanied by an increase in trading volume and various analysts will be clamouring over themselves to write good things about it.

source: yahoo

Having already owned the stock, and having seen its meteoric rise in your portfolio, you would choose to seek out confirming evidence and read nothing but justifications as to why it is such an excellent stock to own.

Comes a day when you are certain that Apple can do no wrong, you went out and bought another share. Let’s call that day 18th May 2015. Unfortunately a situation we are all rather familiar with arises. The price begins to decline almost immediately after your purchase.

Your simple returns on this one investment now becomes [(100 + 100) – (49 + 132)] / (49 + 132) = 10.5% over five years. (IRR in case the geeks are reading is 4.7%)

There remains little argument that it has now become a rather pathetic investment. Have you left the money in a fixed deposit account, the returns might have been better.

Investor Returns

In this case, Investment Returns and Investor Returns becomes radically different. The difference between the two lies in the human intervention in investing.

I picked the all time high in order to accentuate the difference between the two but even if I were not to do so, Investor Returns will lag Investment Returns on almost every occasion. (For those of you who still insist that you can bottom pick and sell at the peak, I have an investment recommendation for you – here).

The ‘investor’ is often the weakest link in the investment process. As human beings we are prone to biases. We process information using heuristics. We make decisions based on our emotions. We are over confident, we over trade and we under diversify. These are but a few causes of the behavioural gap we are talking about. As an active human investor, there is a Performance Penalty we have to pay.

 

 

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How Saving 10% Of Your Income And Your Annual Bonus Can Change Your Retirement Completely http://financesingapore.com/saving-10-income-annual-bonus-can-change-retirement-completely/ http://financesingapore.com/saving-10-income-annual-bonus-can-change-retirement-completely/#respond Mon, 06 Jun 2016 10:47:44 +0000 http://financesingapore.com/?p=377 People sometimes think retirement planning is tough. It takes a long time and requires a lot of money. For example, to achieve the CPF Life Enhanced Retirement Sum and enjoy […]

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People sometimes think retirement planning is tough. It takes a long time and requires a lot of money. For example, to achieve the CPF Life Enhanced Retirement Sum and enjoy a monthly income of between $1,770 and $1,920 from age 65 onwards, an individual would need to set aside $241,500 in their CPF Retirement Account at age 55. And if we assume the individual wants to retire at age 55 with a monthly income of $1,800, then the person would need an extra $216,000 to see him through from 55 to 65.

Is a total of $457,000 a target too much to accumulate by age 55? Let’s take a look at it.

Balancing Your Spending And Saving

It is easy to go on either extreme when it comes to money management. There are people who simply do not save, and are constantly finding new ways to spend away any pay increment or bonuses that they get. On the other spectrum, there are those who scrimp and save every single penny to the extent that daily spending becomes so stressful to deal with.

We want to advocate that you should enjoy life today without having to sacrifice your enjoyment tomorrow, or when you finally decide to retire.

Your Monthly Spending Should Be Reasonable

All of us working adults should be responsible enough to be able to manage our month-to-month budget. We all know how much we earn, and what we can or cannot afford. If you are earning $2,500 a month but enjoying restaurant meals and shopping spree every weekend, along with an expensive $150 gym membership and regular taxi rides, then you my friend, have bought in to the idea of consumerism as a way of life.

With all things being the same, someone who earns $2,500 a month should not be spending in the same way as another person who is earning $5,000 a month. Likewise, a person who has to take care of multiple dependants in his family should not be spending in the same way as someone who does not have any dependants.

Can you save 10% of your monthly income each month? This is a question that everyone should answer for themselves. Some people are already doing it (and more), others will find ways to do it and there will be some who can’t do it because they have a standard of living to upkeep.

 

 

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The Fine Line Between Diversification And Over Diversification http://financesingapore.com/fine-line-diversification-diversification/ http://financesingapore.com/fine-line-diversification-diversification/#respond Mon, 06 Jun 2016 10:44:06 +0000 http://financesingapore.com/?p=374 Diversification is an important investment strategy that helps investors reduce overall portfolio risk. It does so by allocating investments across various asset classes that have low correlation.  The aim of […]

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Diversification is an important investment strategy that helps investors reduce overall portfolio risk. It does so by allocating investments across various asset classes that have low correlation.  The aim of diversification is simple,  minimise risk while maximising returns.

The Importance of Diversification

Let’s say your portfolio only contains Food and Beverages (F&B) stocks. It is then made known to the public that all livestock is contaminated due to certain farming practices.  The share prices of your F&B stocks will definitely drop in value, and your portfolio is inadvertently affect.  If you were well-diversified, you would have protected yourself from such unsystematic risks.

The lower the correlation between investments, the better it is. Unsystematic risks will only affect specific targeted industries and companies. It is important to diversify among different asset classes. They usually perform differently in adverse situations.

While many agree that diversification is no guarantee against market swings and systematic risks, it is still an important strategy to adopt to achieve your goals and objectives.  This spreading of wealth to many unrelated financial products helps to reduce volatility and unsystematic risks that may affect your portfolio negatively.

Read Also: Why This Nobel Prize-Winning Theory May Be Hurting Your Investment Portfolio

Over Diversification

 

 

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Is Buying An Annual Travel Insurance Plan Worth Your Money? http://financesingapore.com/buying-annual-travel-insurance-plan-worth-money/ http://financesingapore.com/buying-annual-travel-insurance-plan-worth-money/#respond Mon, 06 Jun 2016 10:38:20 +0000 http://financesingapore.com/?p=372 In recent years, taking multiple overseas trips in a year has started becoming the norm, rather than the exception. Singaporeans take overseas trips for all sorts of reasons, family holidays, […]

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In recent years, taking multiple overseas trips in a year has started becoming the norm, rather than the exception. Singaporeans take overseas trips for all sorts of reasons, family holidays, a friend’s wedding or even business meetings.

A common policy to purchase prior to an overseas trip would be travel insurance. When it comes to travel insurance, consumers can choose either for single trip coverage, or annual coverage. But which should you be choosing?

Single Trip Coverage

Single trip coverage is pretty straightforward. You purchase coverage each time you take a trip overseas. Cost of insurance would depend on where you are going, the duration and the extent of coverage that you seeking.

Typically, most insurance providers would allow customers to decide for themselves between basic and premium coverage. Generally speaking, the main differences between the two would be the extent of coverage, with the premium coverage costing more in return for greater coverage.

It is important to note that not all travel insurance policies are created equal, and that consumers shouldn’t be comparing products simply based on the cost.

Before purchasing a travel insurance policy, ensure that the coverage provided are what you need for the trip. For example, if you are doing winter sports and need to ensure coverage for rental of equipment, be sure that the policy you are looking at provides it.

Annual Coverage

Annual coverage is for travellers who travel overseas frequently. Rather than to purchase the single trip coverage each time they travel, consumers can pay for a one-time fee policy that provides coverage for all overseas travel within the year.

The clear advantage in this is that if you travel often enough, it would make financial sense to purchase an annual policy, instead of the single trip coverage. But how much do you need to travel before this makes sense?

 

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Why Buying A Bad Shirt Is Like Buying A Bad Stock http://financesingapore.com/buying-bad-shirt-like-buying-bad-stock/ http://financesingapore.com/buying-bad-shirt-like-buying-bad-stock/#respond Mon, 06 Jun 2016 10:33:10 +0000 http://financesingapore.com/?p=369 Not all of us can relate to buying a bad stock. Some of us may be frequent buyers, while others may have zero knowledge on what stock to buy and […]

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Not all of us can relate to buying a bad stock. Some of us may be frequent buyers, while others may have zero knowledge on what stock to buy and how much to pay for it.

Today, we will share about how buying a bad stock is similar to buying a bad shirt. We believe this would be much more relatable for most people.

Don’t Buy A Stock Just Because It Is Cheap

One of the oldest yet most effective sales strategies that marketers frequently employ is to give customers the impression that they are getting a great discount. For example, you will see shops littered with signboards claiming that a $100 shirt is now being sold at $40, or a discount of 60%!

This sales strategy is simple. Sell the shirt initially at a high price, and get some people to buy it first. This locks in a high profit margin for the initial sales being made. After some time, lower the price substantially. This would help convince other customers who have not bought the shirt yet to think they are getting a wonderful deal.

When it comes to buying stocks, there are always people out there who are justifying their investment decisions based on the fact that a stock that used to cost $2.00 six months ago is now $1.00 today. They reason to themselves that since the stock used to cost $2.00, it’s a good deal today at $1.00.

This logic is about as intelligent as a person walking in to a shop and buying a shirt for $100 just because the signboard said it used to cost $200.

Buy A Stock Because It Is Good

You should always buy a shirt because it is good, and not cheap. The same rational applies to buying a stock. Buy a stock not because it is cheap, but because it is good.

Avoid buying a stock just because it is now much cheaper than it used to be as there is usually a good reason why that is the case.

Regardless of how cheap a stock appears to be, don’t add it to your portfolio just because it is bad. That’s like buying a shirt that has terrible quality and looks bad on you just because it costs $5.

If you see a good shirt at a good price, you can consider buying it. Still, we shouldn’t just go around buying everything that is cheap and good.

Read Also: 6 Problems I Faced When Learning How To Buy My First Stock

Consider Your Own Portfolio First

Let’s say you already have 5 white long sleeve shirts in your wardrobe. Should you add a sixth shirt just because you found something that is cheap and looks good? Probably not.

Likewise, when you buy a stock, it is important to consider your personal needs, and the existing portfolio that you already have. If your portfolio is full of REITs and banking stocks, adding another stock from the same sector may not enhance your portfolio.

Likewise, a retiree who is no longer working and relying only on passive income from his investments may not want to invest too much into growth stocks. This is like how he wouldn’t need 6 white sleeve shirts at home.

 

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4 Reasons Why Refusing To See A Doctor Is Like Holding Onto A Losing Position http://financesingapore.com/4-reasons-refusing-see-doctor-like-holding-onto-losing-position/ http://financesingapore.com/4-reasons-refusing-see-doctor-like-holding-onto-losing-position/#respond Mon, 06 Jun 2016 10:28:33 +0000 http://financesingapore.com/?p=367 Know someone that always refuses to see the doctor when they’re unwell? Is this person similar to someone that refuses to let go of their losing position? Here are 4 […]

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Know someone that always refuses to see the doctor when they’re unwell? Is this person similar to someone that refuses to let go of their losing position?

Here are 4 reasons why refusing to see a doctor is like holding onto a losing position.

#1 Overconfidence 

You are overconfident of your immune system to clear the virus. You insist you don’t need a trip to the doctor’s to get prescribed medicine. Sometimes you think the medicines you get from the pharmacy are enough to fight the illness.

People holding on to losing positions are often overconfident when choosing the stock. In some cases, this might be true. Their analysis and research on the company might have been thorough, and the stock does eventually show the results. However, this overconfidence is often a negative investing trait.

Overconfidence is common among investors. They perceive their skills and analysis to be superior to that of others. Many people overestimate their capabilities, and accuracy of their predictions

No one is superior to the market. We are at the mercy of it.

#2 Denial

You shake off big issues as small issues.

You insist your cold is a common cold, just sinus or simply high sensitivity to the environment. Your “common cold” might just be a virus that will pass to your family members, friends, and colleagues. It’s better to be sure.

 

 

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3 Psychological Biases That prevent us from making sound investing decisions http://financesingapore.com/3-psychological-biases-prevent-us-making-sound-investing-decisions/ http://financesingapore.com/3-psychological-biases-prevent-us-making-sound-investing-decisions/#respond Mon, 06 Jun 2016 10:20:48 +0000 http://financesingapore.com/?p=365 In order to make better decisions, we need to be keenly aware of the biases that affect our decision making. Here are three that every investor should constantly bear in […]

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In order to make better decisions, we need to be keenly aware of the biases that affect our decision making. Here are three that every investor should constantly bear in mind.

1. Confirmation bias.

Let’s face it. We all want to be right as often as possible. No one enjoys being told that they are wrong. Nobody likes to read about things that could imply that they are wrong. None of us ever want to be wrong, if we can possibly help it. Beside the psychological feel good factor about being right, being right is also economical on the thought process. Being right is the end game, but being wrong implies that there is a ‘Right’ out there waiting for us to recognize and process. It is tiring to be wrong, or even to entertain that thought that we could possibly be wrong.

Hence the confirmation bias. We seek out evidence to confirm that we are right while at the same time denouncing other factors that could point to us being wrong. This bias is abound in many aspects of our lives. If you are a religious person and believe in the existence of a certain God, chances are you will not bother to study the teachings of other religions, but rather seek to confirm your already unshakable faith by attending services and ceremonies, reading material from the same source, and surrounding your cliche with friends of the same belief. The same goes for political and sporting affiliation, where we would be resistant to, and constantly downplay any negativity surrounding the parties and teams we are rooting for.

The bias is unmistakable in investing. Alvin and myself were trading in Research in Motion (RIMM – BBRY) shares about a year ago. He was optimistic and considered the stock to be undervalued and irrationally sold down considering their huge cash stash. I was fully negative on the prospects of the company and considered it to be going the way of the Dodo – extinct soon. BBRY happened to be followed by many analysts and I ended up spending huge amounts of time on the web reading reports of the company. On hindsight, I realized that the reports and analysts I followed were all bearish. The effort I put in to make me feel good only served to make myself feel better but did nothing to enhance my overall awareness of the company and did nothing to allow me to make better trades.

2. Loss Aversion bias

Another undisputed fact: We all hate losing. Some of us more than others, but basically, we all hate losing.

Imagine the following scenario. You have bought shares of Creative Technologies a decade ago when it was the undisputed market darling and breaking new highs every week. Unfortunately it has since fallen on hard times and the share price is barely a fraction of what it used to be. However, the loss is just too painful to bear and you have put off selling the stock for years and years on end.

One day however, you receive a statement from your broker stating that a trading glitch occurred and that you Creative Holdings have been mistakenly disposed off. The brokerage is offering to buy back the shares for you at no charge and just needs your consent. Would you give the consent? My guess is that you would simply let it pass. Chances are you would be relieved that someone else has pulled the trigger for you and happy for the extra amount of money you find in your bank account from the sale.

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How to handle stock market crashes http://financesingapore.com/handle-stock-market-crashes/ http://financesingapore.com/handle-stock-market-crashes/#respond Mon, 06 Jun 2016 06:05:21 +0000 http://financesingapore.com/?p=361 I must confess. I used the word ‘crashes’ in the title even though I do not view the current stock market condition as a crash. The purpose was to sensationalise […]

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I must confess.

I used the word ‘crashes’ in the title even though I do not view the current stock market condition as a crash.

The purpose was to sensationalise it to get your attention.

Jokes aside.

I think these few weeks have been miserable for stock investors and some may have believed this is a crash.

The downturn was pretty much unexpected as we crossed over the new year. But there will be some smarty pants who would boast about their ‘accurate’ predictions, which they have been calling an impending crash since 2010. Just keep calling it and one day you will be right.

Prediction Eases Your Anxiety About Uncertainty, It Doesn’t Increase Your Profitability
Are crashes predictable?

Efficient Market Hypothesis (EMH) said that stock prices reflect all known information and there is no way for someone to make more money than the overall stock market returns consistently. While I do not agree in its absolute form, I believe EMH holds true most of the time.

There are two drivers of stock prices – expected and unexpected returns. Expected returns are closely tied to EMH whereby all information are known and reflected in the stock market.

Nassim Taleb coined the now-famous term, ‘Black Swan’, which explained the unexpected part. Too many investors have been concentrating on expected returns, using known information to predict stock prices, which they are just running circles within EMH. What is going to give above average returns is actually taking a position to harness the unexpected returns.

You must be asking ‘how’?

The general principle is that you must be doing things different from a crowd, using a strategy that most investors would find uncomfortable executing it. If you run the strategy through others, most of them will have a lot of critique about your strategy because intuitively it doesn’t sound right.

For example, when we talk about small cap stocks which have low volume and liquidity, plus a dead stock price, most people will snide it. Precisely nobody could know in advance what are the catalysts to unlock the value so it operates in the don’t know-don’t know domain with the potential of unexpected returns.

I get this scenario often – Someone would ask, “why do you buy this stock?”

“It is undervalued,” I said.

“But undervalued doesn’t mean it would go up. I mean the price looks dead and it is not going anywhere. I won’t want to get stuck in this. Is there something brewing behind the stock?”, someone asked again.

“I only know it needs a catalyst to unlock the value, but I don’t know when and I don’t know what it is.” I replied.

Most, if not all, will be puzzled or even be pissed with my answers.
It isn’t easy to position your investments to profit from the don’t know-don’t know domain. Most investors prefer to invest in stocks which have obvious reasons to own it. If it is obvious to you, it is safe to assume it is obvious to others. Which means the stock price have factored the reasons.

And do not predict, because how can you know what you don’t know that you don’t know about?

You Need An Approach To Anchor Yourself

Most investors do not have a well-defined investment approach. Their investment decisions rely on gut feel, tips and rumours. When the stock market turned down, their gut feel turned rotten and confidence wavered. They are not sure what to do. Buy more, hold or sell?

A well thought out approach will come in handy to anchor you when other investors are emotionally swayed by the fear in the stock market. I couldn’t stress this enough.

Think of it like a checklist; a set of rules to guide your investment decisions. Without a checklist, it is easy to go astray. Professionals like pilots, doctors and engineers use checklists. Why shouldn’t an investor do too?

Every time you need to make a buy, hold or sell decision, refer to the checklist no matter how seasoned you are. Even seasoned investors may missed out certain steps at times and make investment decisions that deviated from their principles.

Conviction In Your Investment Approach

The next problem investors face is the lack of conviction in their investment approach. This links to the previous point. Due to the lack of a well-defined approach, the investors do not have the confidence when the market turned against their positions.

Having a checklist based on sound principles is a must. An investor must have the basic knowledge about investment and researched sufficiently to build a checklist. The effort and time spent on learning and building the checklist will grow his confidence.

Before conviction, there is commitment. The investor must be committed to learn and establish his set of investment criteria. Committed to put in the effort and take things in his own hands.

And it doesn’t stop.

Because the investment checklist needs to be reviewed and refined continuously.

 

 

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THE ROLES OF INSURANCE IN YOUR JOURNEY TO FINANCIAL FREEDOM http://financesingapore.com/the-roles-of-insurance-in-your-journey-to-financial-freedom/ http://financesingapore.com/the-roles-of-insurance-in-your-journey-to-financial-freedom/#respond Mon, 06 Jun 2016 06:01:03 +0000 http://financesingapore.com/?p=358 In life, most of us are looking to retire freely. We want to achieve financial freedom so that we do not have to worry about money. We are all working […]

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In life, most of us are looking to retire freely. We want to achieve financial freedom so that we do not have to worry about money. We are all working hard in our own ways – some choose to be an employee, others start their own business and yet others invest so as to make their money work harder and arrive at financial freedom earlier.

However, as we know, life is uncertain. The road to financial freedom is not a straight line. There will be ups and downs in life. We may get promoted, and we may secure new contracts for our businesses.  There will be down times as well, we may fall ill, meet with an accident amongst others. This is the time where we need to incur a large sum of money to pay for hospitalisation cost.

Moreover, most of the time we do not live alone. We are carrying someone else in our life. We will have assets, property, cash, investment. We will also have liabilities, mortgages and loans to repay.

Some of us have dependents. Our children and parents are depending on us for their living expenses. If an unfortunate event occur such that we pass on prematurely, who will be the ones taking care of our dependents? In the worst case, if we are unable to service our liabilities, we might even lose our hard earned assets.

Some of us may think that we have siblings who can take care of my dependents. They can take over my assets and liabilities in the event of premature death. But think carefully, our siblings also have their own dependents or liabilities to take care of. We should be responsible of our own dependents and liabilities. A responsible person would not want to burden others.

And in the event that we manage to recovered from our illness or accident. We may be disabled or work with limited ability. We will need a sum of money to take care of our own living expenses.

 

Even if we are able to achieve financial freedom without any incidence, as life expectancy becomes longer, up to a certain age in our life that we might need someone to take care of us as we may not be able to perform daily activities. There will be another cost of long term care.

So in our path to financial freedom, insurance plays a part. The role of insurance is to protect ourselves and our family in the event of these unforeseen circumstances. I will examine how government policies and private insurance can protect and provide for our 1. Hospitalisation expenses, 2. Death, critical illness and total permanent disability, 3. Long term care and finally how 4. insurance can help us achieve our retirement and financial goals.

1.Hospitalisation Expenses

Government Policies

In Singapore, we are quite fortunate that Singapore government has come out with few policies to take care of these costs.

For protection of hospitalisation expenses, CPF board has introduced Medishield Life. However, Medishield Life do not cover all hospitalisation expenses. Deductibles and co-insurance is not covered and there is a claim limit for hospitalisation expenses.

Private Insurance

To make sure ourselves are fully covered for hospitalisation expenses, we need to get private integrated shield plan from private insurer. For more details about Medishield Life and private integrated shield Plan, please read here.

 

Death, Critical Illness and Total Permanent Disability

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CHAMPIONING THE PERMANENT PORTFOLIO AS A FAIL-SAFE INVESTMENT STRATEGY – CRAIG ROWLAND http://financesingapore.com/championing-the-permanent-portfolio-as-a-fail-safe-investment-strategy-craig-rowland/ http://financesingapore.com/championing-the-permanent-portfolio-as-a-fail-safe-investment-strategy-craig-rowland/#respond Mon, 06 Jun 2016 05:53:24 +0000 http://financesingapore.com/?p=356 Craig, thanks for doing this interview. I was researching for information about Permanent Portfolio and your blog www.crawlingroad.com came up in the search results. I’m glad I found the blog […]

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Craig, thanks for doing this interview. I was researching for information about Permanent Portfolio and your blog www.crawlingroad.com came up in the search results. I’m glad I found the blog because it really contained a lot of information on Permanent Portfolio. It almost answered my queries, but I do have some questions that I would like to ask you in this interview. There is no doubt that you are an authority on this subject and to begin, can you explain what Permanent Portfolio is all about?

Yes sure. Thanks for having me on, I’m happy to do this interview with you. The Permanent Portfolio was created by a gentleman named Harry Browne and his associates in the late 1970s and it was a way to protect the money they had made as gold speculators. Harry Browne was getting out of the speculation business as he realized it was not a good long term strategy and he wanted to diversify his money. And in the United States at that time, the inflation was very bad because the government had taken off the gold standard and gold prices had gone up quite a bit. So they were looking to spread their money around in case the gold market crashed. They came up with this idea of designing a portfolio that was based on a wide asset diversification based on economic movements. This was fairly unheard of because most people were doing market timing and technical analysis and all sorts of stuff. So the idea of having a portfolio that was very passive, that had no market timing and had a wide variety of assets was very unusual. Also what was unusual for him at the time was he was known as a big gold advocate and all of a sudden he made the Permanent Portfolio and he started saying we should own stock and long-term bonds, both of which did very poorly in relation to inflation and his readers thought he was crazy. It ended up he was right. By the early 1980s the US inflation came under control, and the gold price crashed and stayed low for twenty years. It was the stocks and long-term bonds that he had in the portfolio that really did all the work. So the idea of the Permanent Portfolio is basically to have a completely passive strategy. The portfolio doesn’t time the market, it doesn’t try to guess what the future is going to do and you hold the assets all the time, not knowing what’s going to do best and periodically you look at it to balance it. So basically, it’s a strategy designed to work under all economic conditions, even under extreme market conditions, in order to protect and grow your wealth.

And to elaborate on the Permanent Portfolio, it consists of four asset classes; cash, bonds, stocks as well as gold; and they are all equally weighted at 25% each. By equally allocating to each asset class, we do not try to forecast the future which asset would perform better, am I right to say that?

Yes, that’s correct; it holds equal asset weighting, which is also fairly unusual for a portfolio. A lot of portfolios today, even passive ones, might tell you to overweight stocks or overweight gold or to overweight bonds or this or that. This really assumes that any one of those assets at any time can be better than the others. The problem with this strategy is that you never want to own so much of a particular asset that if it were to drop sharply in value, you’d take a big loss. So owning 25% in each allocation, even if an asset were to drop by 50% tomorrow morning, you’d wake up tomorrow and see the gold or the stock market had dropped in half. That loss will be about a -12.5% to the portfolio, which isn’t great but it’s not a disaster. Now you compare that to other portfolios where, let’s say hold a 100% stocks or 80% stocks or hold 100% gold in goldmining companies, if you start doing stuff like that and if the market goes against you, you can really take a very, very big loss. And so, this portfolio is designed again to grow your money and also to protect you in case of a problem. Now the thing is, with those assets, the stocks, bonds, cash and gold, each one is linked to a state in the economy. Stocks work very well under prosperity, a prosperous economy; bonds work very well under a deflationary economy, they also do alright under prosperity as well; gold tends to do very well under inflationary economy or what we might call negative interest rate environment like what we are getting today; cash is kind of a buffer, it doesn’t really excel under any particular economy except maybe what we call tight money recession, but they serve as an anchor to the portfolio when things are going up and down so that when investors are getting a crazy volatility and getting scared and wanting to leave. So that’s how the assets are basically designed to work.

That’s right. I guess most people, when they look at these portfolio, they’ll say, “oh it’s only 25%” and most people are very used to having a very equity heavy portfolio, which even the Yale endowment fund manager, David Swensen, is pretty weighted to equity. We’ve seen pretty good growth in terms of annual returns for the past twenty years in stocks and since most people believe that stocks is the best performing asset class over the long run, would having just 25% in the portfolio actually slow the growth of our capital?

Well, that’s a good question, you understand my background as a sort of an entrepreneur, I believe in the power of companies to grow and create wealth for the people who own stocks. But as someone who has founded companies, run companies, and seen other companies, I’m also very acutely aware of the risks involved in a business and that sometimes, things don’t go according to plan. With the stock heavy portfolios in particular, I noticed no growth or even negative growth for long periods of time. For instance, I’m talking about the US stock market here as I know you’re in Singapore. During the 1970, the US stock market had basically 0% real returns after inflation. Now sure, you might say, well the stock market returned 8% to 10% in the 1970s. But inflation was 8% a year, so you had no real growth. The 1980s and 1990s were fabulous; stocks had an annual growth around 15% a year. People thought it would go on forever and then the Internet bubble burst in the early 2000s and we had a real estate bubble burst. So over the past ten years in the stock market here in the United States, again you had basically zero or slightly negative growth. For the past forty years of stock market history in the United States, twenty of those in the decade of 1970s and the decade of the 2000s were zero growths. So that means 50% of the time, the stock market was not giving you after inflation returns. Okay, so flip a coin. When the stock market is working well, it’s great, I don’t deny it’s an outstanding way to grow your money, but when it’s not working well, you have to diversity out. So, what I notice when I started looking up the strategy, I used to think the same, 25% is not enough because that’s what all these academic people were telling me and I started looking at the data myself. I never go to the experts, I always want to go look at things myself, it’s always how I look at things, it’s always how I’ve done everything in business, I never go to the experts. So, I went and I looked at it myself and I realized that basically, they’re wrong in that this portfolio in a four way split has generated somewhere around 9.5% compounded growth over the past forty years alone. But more importantly, it was able to generate positive real returns between 3% to 5 % over any rolling ten year period. So that means in the 1970s, the stock portfolio had 0% real growth after inflation, Permanent Portfolios had 3% to 5% the entire time, it did the same 3% to 5% after inflation returns in the 1980s, it did the same thing in the 1990s and it did the same thing in the 2000s. So over a past thirty period, I was able to generate real after inflations for the entire time, whereas stock and bond portfolio was not able to do it in nearly half the time. So that’s why when people say 25% is not enough, I’m always like well, show me your proof and when you go back and you look at the data, it just isn’t true, you should be much more widely diversified. Stock, bonds are fine, but they show a tremendous risk at times. You mention the Yale endowment fund, in 2008 they took a tremendous loss. It lost almost a third of the value of the endowment. Most people can’t lose a third of their life savings and stay in the markets. So another thing I’ll talk about too, is that the Permanent Portfolio by having this four way split, is a very stable portfolio. The worst loss it had up to this point was about -5% in 1981 and in the 2008 market crash, it was basically flat for the year, it didn’t lose anything. What I find for most people, they need to avoid big losses, because as soon as they get those big losses, they’re going to abandon the strategy at the worst possible time, right at the market bottom when they shouldn’t be doing anything. And again linking my experience as an entrepreneur, I’m used to taking high risk and so I have a certain mentality that most people don’t have. I’m the guy who’s buying stocks during market panics. I don’t want buy when everyone is talking about them and what I find in the Permanent Portfolio is that it forces peoples’ mentality, because when the stock markets crash, you’re always going to have another asset going up in value and you can use that money in order to rebalance. So it’s kind of a long answer to your question but I don’t believe in the idea that you should own a lot of stocks. If you look at non-US markets, the Japanese market for instance, has not generated returns for Japanese stock investors since 1989. So I’d caution people not to load up on a lot of stocks, you should look beyond US markets and also consider a time in the US market when the stock market did not do well and just acknowledge that sometimes this happens. And I’d be very, very careful about concentrating bets, I don’t concentrate my bets in any asset, that’s the advice I give to people, don’t make concentrated bets on anything because you might be wrong.

Yes, that’s right. I like the way that you talk about the Permanent Portfolio by limiting loses. Indeed, most people would not have a sold out their portfolio if it did not drop too much. When they try to time the stock, they always buy and sell at the wrong time. How about gold, we know that it is a negative yielding asset and most people will not even consider it as a traditional asset class like stocks and bonds to be included in the portfolio. By having 25% in gold, are we losing a lot of negative yield in this instance?

Gold is an interesting asset because when I first read about the Permanent Portfolio, when I saw 25% gold, I thought Harry Browne was nuts and I almost disregarded the whole thing. But I was researching everything at the time and I said nothing is off the table, I’m going to consider everyone’s argument even if I disagree with it right now. I went and looked at the data myself, about putting gold in my portfolio, and I found that a stock and bond portfolio should always hold some type of hard asset. Now, when I say hard, it’s something tangible, the Permanent Portfolio uses gold; other people might say it’s commodities and other people might say it’s real estate. Basically it’s something you want to own that is detached from the currency of the country where you live. This is because paper currencies are very, very unstable. They appear stable but they’re really not. What’s going on in Europe right now, the euro is a perfect example, it’s a very major currency and they’re having a lot of problems. It can blow up any day or it may not, but we don’t know. So I always tell people by owning a hard asset, you are taking a portion of your life saving and you’re setting it aside in a way that is immune from political antics. So when we look at 25% gold and people say that’s too much, my answer is I’ve got 75% invested in these other things. I acknowledge that over time, gold is basically going to match the rate of inflation at a small cost of storage. But, I will also say that there are times in the market where it is so volatile on the upside just like the 1970s where gold performed very well against stocks and bonds. People might write it off when gold had fallen in price all through the 1980s and 1990s, while stocks had gone up way in price. With the Permanent Portfolio though you would be selling stocks and buying gold when nobody wanted it. People thought the late 1990s and early 2000s if you bought gold you were a fool. What happened is that gold went from three hundred an ounce to sixteen hundred today. People can say all they want that gold didn’t do anything in the portfolio, but when I look at data, I don’t care about your opinion, I don’t care about anyone’s opinion, I look at the data and having gold in your portfolio works. Gold works under emergencies too. If you have a currency emergency people are going to be running towards the door looking for gold, they’re not going to want stocks and bonds. I’ve seen this happen in other countries as well that have had currency emergencies. So again, it’s hedging. You always want to hedge everything and not take too much of a gamble. Gold is an insurance against the other 75% of your portfolio, but at the same time your 75% in your portfolio is a hedge if gold is going down, so you want a balance for everything.

Well said and the point about always do your homework, always check and not trust anybody out there is important. We do not know their true agendas in promoting anything. And by rebalancing the portfolio, it forces a person to always be a contrarian to the general market, to buy low and sell high.

That’s right yes, and so the Permanent Portfolio is a simple allocation, 25% of each, when one of your assets gets up to 35% in value, you sell it down and you balance everything back to 25%. If an asset were to fall to15% or less, then you sell profits from your other assets and you buy the asset to make up for the 25% level with everything else. So it’s forcing you to do this mechanically, as taking your emotions out of it and if you follow the strategy you’re going to be fine. If I look at the 1970s for instance when gold was going through the roof, nobody wanted stocks and long term bonds because they’d done so badly. You would have taken profits from gold and buy stocks and bonds. At that time, long term bonds were yielding over 10% a year. Can you imagine a bond in the US paying 10% a year for thirty years? But nobody wanted bonds. The same thing with stocks, it was about to be begin, the biggest bull market in US history. You were buying stocks at a big discount and you made off like a bandit. Now during 1980s and 1990s, the bonds and the stocks had done very well and the internet bubble was growing. The stock market was at an all time high, there were books saying Dow would reach 30,000, whatever it was. You would have sold those stocks and bought gold at an all time low price like three hundred an ounce! Then in 2008 my long term bonds went up 35% in value during crash so I sold them down and I bought stocks at a decade low price. So it really beats this market-timing thing. Market timing doesn’t work, I’ve never seen it work for anybody, I don’t care how often that they say it does, you just need to get out of this mode of trying time market to predict the future. The6 Permanent Portfolio forces you to do that.

And probably when people are laughing at you, you are making a right decision.

Usually you are. It’s one of these things where everyone says they’re contrarian, but it’s very hard to act. So that’s why if you stick to rebalancing, you just tell yourself mentally, well I’ve hit 35.1% on gold, it’s time for me to sell it and buy the stocks or bonds. Now, you might not personally like stocks, you might personally not like bonds, but you’ve got to do it, because it’s usually the right thing to do. I don’t know why people get wound up about this, I love buying stuff on sale. So, the Permanent Portfolio forces me to buy stuff on sale and it’s really a great thing to do. So it forces you to be contrarian and it’s the way the strategy works.

And from your past experience how have you been rebalancing your portfolio?

I think it may be once every two or three years. That’s important for someone who has a taxable account, you don’t want to touch your portfolio often because every time you do, you’re going to have a capital gains tax. I don’t know what the situation is in Singapore (Alvin: there is no capital gain tax in Singapore). In the US, if you’re doing a lot of transactions you’re typically going to have a lot of taxes with it, so a portfolio that has low turnover is going to be much more tax efficient. More money gets to stay invested and compound. I had to rebalance in 2008, and maybe I’ve had another one in 2010. Last year I had zero transactions in my portfolio and that’s typical. I’d go to my accountant and I’ll do all my taxes and he sees I had no selling transactions. That’s unusual for him to see with his clients because most people constantly buy and sell. The truth is the less you touch the portfolio, the better you’re going to do.

Yes. I believe most people are convinced about the advantages of a Permanent Portfolio at the moment and to help the readers, what are the available financial instruments to construct their own Permanent Portfolios?

Well, the easiest ones are these all-in-one funds. So, there’s actually a Permanent Portfolio fund listed on NASDAQ (PRPFX) where they try to do everything for you. They’re a slight variant on the traditional portfolio, but if you want something simple and you’re willing to pay a little higher expense ratio that might be what you want to do. I prefer that people own the assets themselves because you eliminate something called manager risks – the managers behind the fund could do something that puts your money in jeopardy. The next step is, you could just do all exchange traded funds, you can own a Vanguard total stock market fund for a US investor; you can own the iShares long term treasury bond funds (TLT). I didn’t talk about this, the bonds in the Permanent Portfolio are US treasuries or the bonds of your government wherever you live, like if you’re in Singapore. And for the cash, very short term T-bills. Again, it should be issued in the place you live. Gold should preferably be physical gold bullion and not gold mining companies. You can store the gold yourself or store it outside the country where you live as an additional emergency measure. That would generally be what I recommend. You could even go one step beyond that to own the treasury bonds directly. That’s even better because you eliminate the manager risk. You can use a bond desk at your brokerage, tell them that you want to own Treasury bonds between twenty-five to thirty years maturity and just buy them and it will sit in your account, there is no expense ratio. Interest is distributed twice a year and you don’t have to touch them. When they get to twenty years maturity, you sell them and you buy new bonds so it’s a very simple process. You should buy gold bullion too but if that’s too much of a hassle then consider an ETF but just recognize ETF is for convenience and not for safety.

Yes, definitely. The other question is that for someone without sufficient capital, it’s very difficult to just sell part of a piece of gold bullion. So I guess most people could start with the gold ETF.

They could start with gold ETF or their first gold coin. They can park the rebalance money in cash until they can go for the second gold coin and work up from there. But you’re right, if someone was in the situation where they didn’t have a lot of capital, they can consider going to the ETF and then move up to physical gold.

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