Sunday, 20 September 2015

My STI ETF Strategy

I believe in Singapore's economy and its good governance. I am sure many opposition supporters will flame me for this, but lets face it, Singapore has come a long way from a third world country, and I have faith in the Singapore economy, though stagnating growth is more likely than not.

And it seems like the STI ETF is a great proxy to ride on Singapore's market. Well, we can continue to invest in the STI ETF via the many plans offered in the market by banks such as POSB, OCBC, Philips which takes a monthly contribution to invest into Singapore's index ETFs regularly. For more information, you could refer to a more comprehensive post by Bowen from Giraffe Value here. Personally, I feel that such "forced" investment plans are only for those who feel that they will not be disciplined to invest regularly, particularly in turbulent times like this, they might face the jitters and stop investing altogether. But if you feel you have the discipline and the plan to invest despite market conditions, then I would recommend that you DIY. 

DIY has a huge benefit, mainly because the "forced" investment plans do charge you a fee for doing the buying for you, I mean everyone don't work for free right? So if you DIY, it is guaranteed to reap much savings. I did mention in a previous post that this DIY is actually through Standard Chartered's (SCB) online trading platform. The no minimum charge works wonders for Dollar Cost Averaging (DCA) and the charges are a way a lot lower than the other "forced" investment plans. Of course, we need to know that SCB will be holding the shares in a custodian account for you instead of the STI ETF shares being put into your CDP account. I have no qualms about SCB holding the shares for me, after when we put money into a bank, we are kind of taking the same risk, if we neglect the SDIC coverage of $50k per bank. So the choice is yours, whichever makes you sleep well at night should be the better option.

The first step of investment is to decide how much to invest. The amount you can feel comfortable investing and probably losing as much as 50% of. Yes, and I mean half of your value invested wiped out, that is the likely scenario if a full blown crisis is to occur. If you feel you are ready, then put that cash to work. For myself, I have tentatively allocated only ~$10k for the purchase of STI ETF shares.

Next, I have to decide when and how we deploy our funds. The "how" part has been answered earlier. For myself, I have decided on DIY and DCA through SCB. The "when" is a bigger and more important question to answer.

The above is what I would do if the STI ETF were to hit certain price levels, which I have done a bit of research on the probabilities and a suitable proportion of investable funds to put in when the market has reached that certain valuations. Some inspiration I took from was from this article.

Observant readers would notice that I did not completely follow the guide given in the article. But the article did most of the work for me. If you haven't read the article, basically what the writer did was to use the historical frequency of crashes of certain magnitudes and then put a certain sum to invest based on the frequency of occurrence. Because we can't possibly have money waiting in the warchest wasting away waiting for another big crisis to come, we allocate majority of the funds to crashes which occur more frequently and with moderate magnitudes. This clearly made sense to me.

However, upon further analysis, I noticed one thing. The historical frequency is more applicable to the US stock market, since when I compared that to the performance of the US market, aka the DJIA, the occurrence of huge crises was indeed 2-3 times per century, for example the Great Depression, and more recently the Global Financial Crisis (GFC) of 2008. They don't happen too often in the US but upon looking to our local index, the frequency of crashes looked much more often, maybe because we are a young market compared to the US. But we had the Asian Financial Crisis (AFC) in 1997-98, a long bear market from 2000-04, and another big crash in 2008-09 just a decade after. And if we look deeper, the AFC has almost no material impact on the US market at all! Of course, the situation is much different now, with the China market crash dragging global indices lower.

So in view of this observation, I have decided to set the 50% decline as occurring once every decade. For the amount set aside for the supposed every few decades and 2-3 times a century, the amount will be spilt into similar proportions as given in the table and added to the funds invested. Furthermore, as I felt the reference point of $3.50 of STI ETF as a little overvalued, I removed the tranche of funds which was to invest after a 10% drop, starting the investment only after the market has fallen 15% from $3.50. After all this are done, voila! I have created my own customised table for systematic purchase of STI ETF. Do note once again that this is for my reference only, follow at your own risk!

Of course, feel free to take my table as reference to formulate your own strategy. If you have more funds to allocate, then simply bump up the investable amount by the same proportion. It seems a lot clearer and less "risky" when you do put pen and paper together your strategies. It is through this that fear would not be excessively paralysing when it comes to market crashes, and also no need to hope for market to crash crazily just so that you can use all your funds! Do know that extreme market crashes cause misery and hardship to everyone including yourself. Many might lose their jobs in the process so its really no point to hope for a crash.

So, as the moment, I am holding 500 shares of STI ETF at the time of writing. If the market continues to surprise us further, then you can reasonably know who is picking up more STI ETF. (:

Saturday, 5 September 2015

Portfolio Update - August 2015

*As of 31 August 2015

Counter No of Shares Average Price Amount Paid Yield on cost(%) Weightage
Croesus Retail Trust
Accordia Golf Trust
Ascendas Hospitality
Asian Pay TV Trust
Soilbuild Business REIT


Total Invested Capital = $14,866.60

Total Expected Dividends/month = $80.90

Average Dividend Yield = 6.53%

As mentioned in the previous post, I took the opportunity of the market turmoil to add some stocks. Having liquidated half of Croesus Retail Trust, the funds released was used to pick up some stocks using the standard chartered platform. A variety of high-yield REITs/trusts were targeted to form an experimental micro-portfolio. I am very interested to see the performance of this micro-portfolio as the Fed begins to hike interest rates soon, particularly since it is a predominantly REITs/trusts portfolio.

In addition to this, I have partially used some of the funds to buy into OCBC bank, which I think has high growth potential as well as a good counterbalance against the micro-portfolio of REITs/trusts, since banks are likely to enjoy higher incomes from interest rate hikes while REITs/trusts are likely to face higher interest expenses.

Meantime, the strategy to buy STI ETF as the market breaks certain levels continues. This is where using standard chartered becomes absolutely useful. The ability to buy 100 shares each time without minimum commission is a great advantage here. I personally do not believe markets will plunge to the worst case scenario that I have prepared my funds for, so I expect not all available funds will be used when the market recovers. Well, having a conservative approach sometimes results in opportunity costs. Perhaps I will talk about this in another post.