Money issues top the list of marriage grouses, so it makes sense for the conversation to start even before you get hitched.
Lorna Tan
Invest Editor/Senior Correspondent
The Sunday Times
FEB 17, 2019
It's an issue couples need to discuss, given differences in investment behaviour
Finance is a difficult subject for many couples to broach and it takes time before they feel comfortable discussing it.
Yet money issues top the list of marriage grouses, so it makes sense for the conversation to start even before you get hitched.
Any marriage preparation programme worth its salt would include a session on financial management where couples share their spending and saving habits, concerns and aspirations.
Studies show there are gender differences in investing behaviour. State Street research indicated that female investors tend to be more long-term and goal-oriented, less inclined to risk, not so overconfident and not as trusting. Women trade less frequently than men, for example, with 65 per cent of them trading at least quarterly versus 75 per cent of men.
Fewer trades mean lower costs, which may lead to the outperformance found in some studies.
Volatility is more bearable for men, with 58 per cent of them moving to a more conservative strategy after a loss of greater than 20 per cent, compared with 70 per cent of women, notes the State Street research.
Ms Evy Wee, head of financial planning and personal investing at DBS Bank, says that in the bank's experience, investment activity among women tends to be lower than that among men.
Visits made to the investments page of DBS' financial adviser, Your Financial GPS, also tend to be from men.
"This might not necessarily be driven by a lack of interest but time - an OECD (Organisation for Economic Cooperation and Development) global study has shown that women work nearly an hour longer than men every day when unpaid tasks are factored in," Ms Wee notes.
"The upside is that many recent studies have shown that when women do invest, they do tend to make more informed and calculated decisions, with male investors more inclined towards competitiveness."
Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore), notes that less than a third of women in Singapore rate themselves as well informed on financial matters compared with almost half of the men surveyed in a 2018 HSBC study.
When it comes to household financial responsibility, women respondents (who have a partner) felt that they take a dominant role in day-to-day purchases like groceries while men take on greater responsibilities for investment decisions, including managing credit cards and paying household bills.
TIPS FOR WOMEN
BUDGET, INVEST AND JUST DO IT
Time is money, and procrastination is a thief of time. This takes on greater significance when it comes to the compounding power of money over time.
Ms Evy Wee, head of financial planning and personal investing at DBS Bank, suggests starting by budgeting, which is the key enabler for everything else. Once you know where your money goes, you can make adjustments to carve out a designated budget for saving and investing consistently.
"If in-depth research to 'spot the star product' is too arduous, tap options like a regular savings plan or invest in an exchange-traded fund that tracks one or more market indices to leverage the benefits of dollar-cost averaging and longer-term market cycles," she advises.
MASTER THE BASICS
Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore), says many people, including women, lack the knowledge and confidence to invest. The best place to start is to master the basics.
"Differentiate between your needs and wants, identify your goals and prioritise them, and understand your risk appetite."
TAKE OWNERSHIP AND CONTROL
Mr Sam Phoen, co-founder of investment-management firm Wateram Capital, advises women to have their own investment plans and coordinate with their spouses on securing the family's financial future.
"Draw up investment and cash flow plans to ensure your current living expenses and retirement needs are adequately covered and robust enough to stand the test of time."
REFRAME HOW YOU THINK ABOUT INVESTMENT
It is easy to put off investing, so reframing your perception is important. Think of it as a first step to achieving your dreams, passions and new adventures. Make sure you make the most of it by planning ahead, suggests Mr Khanna.
INCREMENTAL RISKS, INCREMENTAL RETURNS
No pain, no gain, so the only way to make higher returns is to take on more risks. But many women would rather avoid the pain of negative drawdowns if they can, notes Mr Phoen.
"Anyone who promises higher returns without the need to take on more risks is not telling you the whole truth," he adds. "Ask, and understand the worst-case scenario. If you think you can stomach the losses in the worst case and the corresponding higher returns are fair, then consider investing.
"If you are a conservative investor, consider taking incremental risks in exchange for incremental returns. Most times, mildly risky investments are needed to ensure your returns are higher than your time deposit rate and inflation."
FROM MANAGING TO PLANNING
Managing your finances is not enough. You need to plan where you can save money and by how much, says Mr Khanna. "Use online tools such as saving calculators and budgeting apps to help identify the changes you need to make which will reduce your expenditure and redirect these funds towards savings for your future."
ASK THE EXPERTS
Mr Khanna's advice is to seek professional advice, especially if you are a novice in investing and financial planning.
"Having an independent and objective adviser to guide you will help you adopt the best approach. Don't be afraid to ask questions and get clarity before making decisions. Do approach a few professionals to obtain several opinions before making a decision," he adds.
TIPS FOR MEN
INVESTING IS NOT A COMPETITION
Ms Evy Wee, head of financial planning and personal investing at DBS Bank, reminds men that investing is not a competition with yourself, your peers or the market. So when you are investing, it is important to construct portfolios that are positioned for the long term, with a clear risk-return objective in mind.
When crises unfold, and they inevitably will, such a portfolio will be well poised to withstand big swings in the market. More importantly, it will help you stay focused and avoid any over-reactions.
Adopt a "core" and "satellite" approach to portfolio building where the core portfolio provides stability.
AVOID FOLLOWING A TREND
Don't buy a security or asset just because the price has rallied in the past, advises Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore). Instead, evaluate the suitability of the security or asset based on your own circumstances, especially its risk and reward trade-off.
AVOID OVER-CONCENTRATION
It is prudent to diversify your assets and ensure you have a good mix (and not necessarily an equal mix) of assets.
"Do not over-concentrate yourself in single securities or an asset class or invest in only those you are familiar with. A portfolio approach also helps to overcome loss aversion where an investor may be reluctant to invest in asset classes based on past experience. It is good to seek professional guidance for this process," says Mr Khanna.
EQUATING TRADING TO PROFIT
Mr Sam Phoen, co-founder of investment-management firm Wateram Capital, notes that to a certain extent, profit from trading appears macho to men.
"Many also love to share their success stories in trading, while keeping mum about their losses," he adds.
"Active trading may not mean higher profit, it depends on many things, no less your ability to beat the market. Temper your overconfidence, know that you might be wrong, don't trade for the thrill, trade only when you have strong convictions."
LONG TERM IS GOOD
The biggest advantage that long-term investing brings is compounding, says Mr Phoen.
"Instead of turning over your entire investment portfolio frequently to lock in profit, many times it might be more profitable to invest for the long term and let compounding work on making your money grow for you," he adds.
By investing for the long term, you avoid tracking the market daily and reacting to panic buying or selling. Overtrading is expensive and should be avoided, notes Mr Khanna.
REMEMBER TO REVIEW
Regular review of your investment portfolio ensures two things.
First, it stops you from the urge to check your portfolio every now and then and bearing the brunt of overtrading.
And it allows you to review your investment objectives and the suitability of the underlying investments, including assumptions that were made based on certain opinions or conditions that may not have materialised over time, advises Mr Khanna.
TIPS FOR BOTH MEN AND WOMEN
UNDERSTAND THE PRODUCT
Almost all investments have risks, and most investments are not principal-protected. Avoid products you don't understand and which promise you high returns. Risks aren't bad, but taking risks you don't understand is to be avoided at all costs.
"Read widely, listen to market news regularly, like Money FM 89.3, ask your bankers to explain more, and verify with friends who are well versed in investments before you take the plunge," says Mr Sam Phoen, co-founder of investment-management firm Wateram Capital.
USE FACTUAL INFORMATION
Many money-matter decisions are based on our behavioural biases. Most investors tend to make investment decisions derived from individual feelings, perceptions, past experiences, information from peers, or just out of greed or fear.
One way to counter this, says Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore), is to try to distinguish opinions from facts.
"Take into consideration both positive and negative facts for securities or assets that you hold or plan to invest in. If you are basing your decision on an opinion - for example, a research report which contains investment views - make it a point to understand the assumptions behind the views."
If the assumption doesn't materialise - say an asset class view is based on a gross domestic product forecast that turned out to be off the mark - make it a point to review your portfolio and take timely action, he adds.
INVEST RIGHT FOR YOUR PERSONALITY
There is no one-size-fits-all investment portfolio. The key is to know what your investment personality is like and construct a portfolio that fits your personality, says Mr Phoen, who wrote the book Personality-Driven Portfolio: Invest Right For Your Style.
For example, if you are a long-term investor, please ignore "short-term hot tips" that you may receive, because they are just not suitable for your style and most times you won't be quick enough to get out with a profit. Don't adapt yourself to your investments; adapt your investments to suit you, he says.
DIVERSIFY YOUR INVESTMENTS AND REVIEW REGULARLY
Diversify your investments by allocating into a balanced portfolio of cash (including an emergency fund) and investments that will allow you to achieve your goals (with a mix of equities and bonds), with a view on currencies to invest in.
"Since career income will be generated over only a limited number of years while expenses are a lifelong affair, it is important to save regularly and stay invested despite the markets' ups and downs," says Mr Khanna. "Review your portfolio at least once a year and rebalance it according to changes to your investment goals and risk tolerance."
UNDERSTAND PROTECTION NEEDS
It is important to review the level of protection cover you need in order to be financially independent, especially on the death or disability of key income-earning family members. Protection coverage should also be sufficient to cover medical costs and long-term medical care, adds Mr Khanna.
Showing posts with label Investment. Show all posts
Showing posts with label Investment. Show all posts
Monday, February 18, 2019
Monday, January 9, 2017
A new year of investment resolutions
David Kuo For The Straits Times
PUBLISHED JAN 9, 2017, 5:00 AM SGT
Set some clear goals, plan how to get there, enjoy the successes and lessons that follow
Have you made your new year's resolutions yet? It's OK if you haven't, or if you have already broken any of them. Resolutions are merely a statement of intent.
I gave up making new year's resolutions a long time ago. I now make resolutions all year round, instead. I find that I have a greater chance of succeeding when the added pressures of the new year are lifted from my shoulders. If truth be told, the new year is a terrible time to set about doing something important. It is much better to set out our stall when we are more relaxed, more in control. Investing can be like that too.
In the same way that we should not make too many resolutions, we should not try to take on too many different styles of investing, either. We stand a greater chance of success if we channel our energies into just one type of investing. For some, it could be income investing. For others, it could be growth or maybe value investing. Whatever style you choose, aim to be as expert as you can with the discipline. If it is income investing, then focus on shares that can deliver a sustainable and growing income for your portfolio.
Don't get distracted by what others may do. Instead, ask whether a share is capable of generating sufficient cash, while retaining enough money to continue paying you a rising dividend.
Don't join the crowd and simply go with the usual resolutions. Investing can be a bit like that also. Too many people run with the crowd because it seems like the safest thing to do. But it is better to think about what you really want to achieve from your investments.
Work out where your finances are now and set some clear objectives for where you would like to be in 10 or 20 years' time. Calculate how much you would need to invest regularly to achieve those goals. With the three parameters, you should have everything you need to get from where you are now to where you would like to be.
Share your goals with your friends and family. You might even want to share them with like-minded people.
Join an investment club where you can chat with fellow investors who share your passion for investing. Warren Buffett once said: "I learnt that it pays to hang around with people better than you are, because you will float upward a little bit."?
It's quite uncanny how that seems to work. By sharing your fears and concerns with other investors, you may find that you could achieve your goals sooner.
To stay motivated, make a checklist to see how you are doing.
If one of your resolutions is to walk a little farther every day, then you would probably buy a device that counts the number of steps you take. When you invest, you should try to follow the companies in your portfolio to see how they are performing. Watching the share price may not tell you much. But watching the financial performance of a company could.
In the short term, there is no correlation between the performance of the company and its share price. But in the long term there is. So monitor the progress of the company. If the opportunity presents itself to buy more shares at a better price, then don't hesitate to do so.
Give yourself a reward whenever you achieve a goal or an important milestone. That can apply to both resolutions and investing. Incentives can be empowering. They can be motivating. They can give you a sense of progress. If your portfolio has outperformed your objectives, give yourself a little treat from the proceeds.
You might want to buy yourself a small present from some of the dividends that you receive. We invest for a purpose. It is not always about giving up the best things in life but to enjoy the proceeds.
Don't be discouraged if things don't always go swimmingly. Treat any failure as a temporary setback rather than a reason to give up altogether. When we invest, we should expect to run into impediments. Peter Lynch once said that we should consider ourselves good investors if we are right six times out of 10. We are never going to be right nine times out of 10. So, enjoy your successes. Enjoy learning from your failures. Enjoy 2017.
• This is a regular column on stocks and investing by David Kuo, chief executive officer of The Motley Fool Singapore.
PUBLISHED JAN 9, 2017, 5:00 AM SGT
Set some clear goals, plan how to get there, enjoy the successes and lessons that follow
Have you made your new year's resolutions yet? It's OK if you haven't, or if you have already broken any of them. Resolutions are merely a statement of intent.
I gave up making new year's resolutions a long time ago. I now make resolutions all year round, instead. I find that I have a greater chance of succeeding when the added pressures of the new year are lifted from my shoulders. If truth be told, the new year is a terrible time to set about doing something important. It is much better to set out our stall when we are more relaxed, more in control. Investing can be like that too.
In the same way that we should not make too many resolutions, we should not try to take on too many different styles of investing, either. We stand a greater chance of success if we channel our energies into just one type of investing. For some, it could be income investing. For others, it could be growth or maybe value investing. Whatever style you choose, aim to be as expert as you can with the discipline. If it is income investing, then focus on shares that can deliver a sustainable and growing income for your portfolio.
Don't get distracted by what others may do. Instead, ask whether a share is capable of generating sufficient cash, while retaining enough money to continue paying you a rising dividend.
Don't join the crowd and simply go with the usual resolutions. Investing can be a bit like that also. Too many people run with the crowd because it seems like the safest thing to do. But it is better to think about what you really want to achieve from your investments.
Work out where your finances are now and set some clear objectives for where you would like to be in 10 or 20 years' time. Calculate how much you would need to invest regularly to achieve those goals. With the three parameters, you should have everything you need to get from where you are now to where you would like to be.
Share your goals with your friends and family. You might even want to share them with like-minded people.
Join an investment club where you can chat with fellow investors who share your passion for investing. Warren Buffett once said: "I learnt that it pays to hang around with people better than you are, because you will float upward a little bit."?
It's quite uncanny how that seems to work. By sharing your fears and concerns with other investors, you may find that you could achieve your goals sooner.
To stay motivated, make a checklist to see how you are doing.
If one of your resolutions is to walk a little farther every day, then you would probably buy a device that counts the number of steps you take. When you invest, you should try to follow the companies in your portfolio to see how they are performing. Watching the share price may not tell you much. But watching the financial performance of a company could.
In the short term, there is no correlation between the performance of the company and its share price. But in the long term there is. So monitor the progress of the company. If the opportunity presents itself to buy more shares at a better price, then don't hesitate to do so.
Give yourself a reward whenever you achieve a goal or an important milestone. That can apply to both resolutions and investing. Incentives can be empowering. They can be motivating. They can give you a sense of progress. If your portfolio has outperformed your objectives, give yourself a little treat from the proceeds.
You might want to buy yourself a small present from some of the dividends that you receive. We invest for a purpose. It is not always about giving up the best things in life but to enjoy the proceeds.
Don't be discouraged if things don't always go swimmingly. Treat any failure as a temporary setback rather than a reason to give up altogether. When we invest, we should expect to run into impediments. Peter Lynch once said that we should consider ourselves good investors if we are right six times out of 10. We are never going to be right nine times out of 10. So, enjoy your successes. Enjoy learning from your failures. Enjoy 2017.
• This is a regular column on stocks and investing by David Kuo, chief executive officer of The Motley Fool Singapore.
Saturday, November 26, 2011
Understanding investment strategies
by Benedict Koh
Nov 26, 2011
In the third of a four-part series on financial planning for different life stages, we turn our attention to investment for working adults.
Investment is a critical component of personal financial planning. It requires you to postpone current consumption and invest savings in investment instruments to grow your wealth. Through investments, you are accumulating the necessary financial resources to finance your future goals such as purchasing assets (car or house) or financing your children's education.
Furthermore, with increased life expectancies, the average person is expected to spend close to 20 years of his life in retirement. This implies that you will need substantial savings to support a comfortable retirement. It is, therefore, crucial that you start saving early and regularly, and investing these savings while you are gainfully employed.
Investment strategies for growing savings
The key drivers of wealth creation are: The initial amount of capital for investment, return earned on various instruments and holding period of investment, as illustrated in Table 1. What is obvious from these three investment strategies is that for wealth accumulation to take place, individuals must: A) invest sufficient amounts of savings during their working years; b) invest as early as possible; and c) invest in high-yield instruments.
The results in Table 1 may tempt you to invest only in high-return investment instruments, but beware that such instruments come with a high risk. This means that there is a chance that you may lose part or all of your capital from such risky investments.
The appropriate choice of investment instruments depends on both your goals as well as your risk appetite. Only if you have an appetite for risk and can afford to take losses should you invest in high-risk investments. For example, elderly investors who have school-going dependants and are near retirement should avoid high-risk investment instruments.
Asset allocation
Inexperienced investors often look for a single successful investment to grow their wealth. These are the ones who wished that they were able to identify stocks such as Google or Microsoft which saw their initial public offering (IPO) prices appreciate multiple times over.
Such strategy of betting on one stock or investment is highly risky and not recommended. Finance researchers tell us that a key determinant of returns from investments is asset allocation, which refers to the mix of asset classes that you select in your portfolio. These assets can include deposits, bonds, equities, properties; and other alternative assets such as commodities, hedge funds, structured products, etc.
Asset allocation is a form of diversification since deposits and bonds are not highly correlated with equity and properties. By including lowly correlated asset classes in your portfolio, your investment risk can be reduced significantly.
Your asset allocation should also vary with age. As you age, your risk appetite tends to diminish, which in turn affects your asset allocation. For example, investors who are in their 20s and have no dependants may aim to grow their wealth as quickly as possible. Consequently, they may wish to invest a higher proportion of their savings in stocks.
As they move into their 30s and 40s, they should be more prudent and shift more of their investments into high yield corporate bonds and money market funds. Table 2 shows some possible asset allocations for investors in different age groups.
Besides age, asset allocation also depends on the risk appetite or risk tolerance of the investor. If you are very risk-averse, then you should invest a substantial portion of your savings in low-risk instruments such as deposits and bonds. On the other hand, if you are able to take more risk, then consider investing more of your savings in equities or equity-linked instruments such as unit trusts, commodities and hedge funds.
Since investors have different goals, financial circumstances as well as risk appetite, they must engage financial advisers to perform fact finding, needs analysis and risk profiling before customising an asset allocation that suits them.
Consistent saving and investing requires a lot of discipline. Therefore, it is important to learn such virtues at a young age and continue with this habit well into adulthood. The earlier you start saving and investing, the more likely you will succeed in growing your wealth.
Sound and prudent investing allows you to enjoy the standard of living that you desire. Seldom do people attain their goals and desired standards of living through luck. They must commit their savings to investment to achieve them.
Another reward of sound investment is the accumulation of substantial wealth to cushion you against financial disasters. Should you be struck with prolonged illness or experience retrenchment, your accumulated wealth will tide you over such challenging episodes in your life.
Most importantly, you would have accumulated a significant nest egg for retirement. This will allow you to enjoy your golden years without the distress of having financial problems.
Dr Benedict Koh is a professor of finance and the director of the Centre for Silver Security at Singapore Management University. This article is drawn from Personal Investments by Benedict Koh and Fong Wai Mun (1st Edition, Prentice Hall 2011).
Nov 26, 2011
In the third of a four-part series on financial planning for different life stages, we turn our attention to investment for working adults.
Investment is a critical component of personal financial planning. It requires you to postpone current consumption and invest savings in investment instruments to grow your wealth. Through investments, you are accumulating the necessary financial resources to finance your future goals such as purchasing assets (car or house) or financing your children's education.
Furthermore, with increased life expectancies, the average person is expected to spend close to 20 years of his life in retirement. This implies that you will need substantial savings to support a comfortable retirement. It is, therefore, crucial that you start saving early and regularly, and investing these savings while you are gainfully employed.
Investment strategies for growing savings
The key drivers of wealth creation are: The initial amount of capital for investment, return earned on various instruments and holding period of investment, as illustrated in Table 1. What is obvious from these three investment strategies is that for wealth accumulation to take place, individuals must: A) invest sufficient amounts of savings during their working years; b) invest as early as possible; and c) invest in high-yield instruments.
The results in Table 1 may tempt you to invest only in high-return investment instruments, but beware that such instruments come with a high risk. This means that there is a chance that you may lose part or all of your capital from such risky investments.
The appropriate choice of investment instruments depends on both your goals as well as your risk appetite. Only if you have an appetite for risk and can afford to take losses should you invest in high-risk investments. For example, elderly investors who have school-going dependants and are near retirement should avoid high-risk investment instruments.
Asset allocation
Inexperienced investors often look for a single successful investment to grow their wealth. These are the ones who wished that they were able to identify stocks such as Google or Microsoft which saw their initial public offering (IPO) prices appreciate multiple times over.
Such strategy of betting on one stock or investment is highly risky and not recommended. Finance researchers tell us that a key determinant of returns from investments is asset allocation, which refers to the mix of asset classes that you select in your portfolio. These assets can include deposits, bonds, equities, properties; and other alternative assets such as commodities, hedge funds, structured products, etc.
Asset allocation is a form of diversification since deposits and bonds are not highly correlated with equity and properties. By including lowly correlated asset classes in your portfolio, your investment risk can be reduced significantly.
Your asset allocation should also vary with age. As you age, your risk appetite tends to diminish, which in turn affects your asset allocation. For example, investors who are in their 20s and have no dependants may aim to grow their wealth as quickly as possible. Consequently, they may wish to invest a higher proportion of their savings in stocks.
As they move into their 30s and 40s, they should be more prudent and shift more of their investments into high yield corporate bonds and money market funds. Table 2 shows some possible asset allocations for investors in different age groups.
Besides age, asset allocation also depends on the risk appetite or risk tolerance of the investor. If you are very risk-averse, then you should invest a substantial portion of your savings in low-risk instruments such as deposits and bonds. On the other hand, if you are able to take more risk, then consider investing more of your savings in equities or equity-linked instruments such as unit trusts, commodities and hedge funds.
Since investors have different goals, financial circumstances as well as risk appetite, they must engage financial advisers to perform fact finding, needs analysis and risk profiling before customising an asset allocation that suits them.
Consistent saving and investing requires a lot of discipline. Therefore, it is important to learn such virtues at a young age and continue with this habit well into adulthood. The earlier you start saving and investing, the more likely you will succeed in growing your wealth.
Sound and prudent investing allows you to enjoy the standard of living that you desire. Seldom do people attain their goals and desired standards of living through luck. They must commit their savings to investment to achieve them.
Another reward of sound investment is the accumulation of substantial wealth to cushion you against financial disasters. Should you be struck with prolonged illness or experience retrenchment, your accumulated wealth will tide you over such challenging episodes in your life.
Most importantly, you would have accumulated a significant nest egg for retirement. This will allow you to enjoy your golden years without the distress of having financial problems.
Dr Benedict Koh is a professor of finance and the director of the Centre for Silver Security at Singapore Management University. This article is drawn from Personal Investments by Benedict Koh and Fong Wai Mun (1st Edition, Prentice Hall 2011).
Monday, October 17, 2011
Important to do the necessary homework
Published October 17, 2011
MINDY TAN highlights various methods that will help you in making better investment decisions
PLAYWRIGHT and writer Kin Hubbarb once said: 'The safest way to double your money is to fold it over and put it in your pocket.' Wise words in today's stock market? When markets tumble due to external factors, investors may get cold feet and decide to divest their investments to cut losses. Is this necessarily the best strategy to take?
While the strategy an investor decides to employ depends on a number of factors, rule No 1, in the wise words of author Douglas Adams, remains: 'Don't panic.'
Company's fundamentals
Before buying any stock, it is important to do the necessary homework to assess the stock's fundamentals, notes associate professor Fong Wai Mun, department of finance, NUS Business School, citing the profile of the company, the company's strengths and weaknesses, and studying industry trends as examples.
'For a more formal approach, discount the firm's projected profits or cash flows using a suitable discount rate that reflects the stock's risk,' he adds. This should not be a one-off process, he notes.
'One should revisit and perhaps rework this process every now and then, to keep up with changes in the economy, industry, and the firm,' he says. In the event that an investor thinks the fundamentals have changed, it may be necessary to sell the stock and cut losses.
Time horizon
The general rule of thumb states that property and shares are growth investments that are best suited to those with time on their side - at least five years.
Having a longer time horizon is useful, in that it allows investors to wait for markets to recover, given that stock markets are exposed to fluctuations and are sensitive to global shocks.
Assuming that a long-term investor has done his/her due diligence, dips in the stock market 'may present an excellent opportunity to add to the portfolio if the stock's fundamentals remain good', notes Prof Fong.
He adds: 'I generally do not subscribe to the view that one should time the market by buying or selling when sentiments are good or poor, as such sentiments can easily change and lead to surprises. It is far better to adopt a buy-and-hold strategy for quality stocks.'
Risks vs returns
Investments that yield higher rates of returns are also ones that carry greater risk, which means you face a higher chance of losing money or bearing greater losses along the way.
While there is a fine line between being too risk-averse and missing out on good investment opportunities and making overly risky investments, the question of how much risk you feel comfortable with is something that only you can answer.
This may be a good time to relook your priorities and ask yourself - what do you want to achieve by investing? Are you trying to build up wealth in the short term, or are you looking to grow your retirement fund in the long term? After that, assess your risk appetite. These two factors will figure prominently into the shaping of your investment plan.
Rebalancing your portfolio
When constructing your investment portfolio, it is important to allocate your assets wisely to ensure they support your risk appetite. Despite the best intentions, portfolios often go out of balance in the course of investing. It is thus important to rebalance it from time to time, to bring the proportions back to its previous weight.
If your portfolio has veered off-kilter and you find yourself exposed to a higher level of risk than you are willing and able to accept, it might be time to consider 'safer' alternatives like government bonds or term deposits.
While these investment instruments give relatively low returns, they produce fixed incomes and can go toward balancing other high-risk investments.
Do note though, that while bonds are stable and give regular returns, they are not designed to keep pace with inflation. In times of high inflation, you may see your investment shrink in value.
Index-linked instruments such as exchange traded funds (ETFs) are also a good alternative. Given that ETFs allow investors to buy a basket of stocks that mimic the performance of the entire stock market, they may be a useful tool to diversify risk.
Dollar cost averaging
'Don't try to guess if the stock market has bottomed' is perhaps the golden rule in equity investments. The modern-day equivalent of crystal-balling, even when stocks seem to be at their cheapest, there is no guarantee that the market will recover in the immediate future.
In order to minimise potential losses, investors may consider investing continuously through all the market cycles - a strategy called 'dollar cost averaging'.
Instead of investing all their money in a lump sum, investors gradually build up a position by purchasing smaller amounts over a period of time. This process spreads the average cost over the period, hence providing a buffer against market volatility.
While it is impossible to constantly beat the market, thoroughly understanding the investment vehicle, industry, and company fundamentals of a stock/fund you are purchasing will go a long way in helping you make better decisions.
MINDY TAN highlights various methods that will help you in making better investment decisions
PLAYWRIGHT and writer Kin Hubbarb once said: 'The safest way to double your money is to fold it over and put it in your pocket.' Wise words in today's stock market? When markets tumble due to external factors, investors may get cold feet and decide to divest their investments to cut losses. Is this necessarily the best strategy to take?
While the strategy an investor decides to employ depends on a number of factors, rule No 1, in the wise words of author Douglas Adams, remains: 'Don't panic.'
Company's fundamentals
Before buying any stock, it is important to do the necessary homework to assess the stock's fundamentals, notes associate professor Fong Wai Mun, department of finance, NUS Business School, citing the profile of the company, the company's strengths and weaknesses, and studying industry trends as examples.
'For a more formal approach, discount the firm's projected profits or cash flows using a suitable discount rate that reflects the stock's risk,' he adds. This should not be a one-off process, he notes.
'One should revisit and perhaps rework this process every now and then, to keep up with changes in the economy, industry, and the firm,' he says. In the event that an investor thinks the fundamentals have changed, it may be necessary to sell the stock and cut losses.
Time horizon
The general rule of thumb states that property and shares are growth investments that are best suited to those with time on their side - at least five years.
Having a longer time horizon is useful, in that it allows investors to wait for markets to recover, given that stock markets are exposed to fluctuations and are sensitive to global shocks.
Assuming that a long-term investor has done his/her due diligence, dips in the stock market 'may present an excellent opportunity to add to the portfolio if the stock's fundamentals remain good', notes Prof Fong.
He adds: 'I generally do not subscribe to the view that one should time the market by buying or selling when sentiments are good or poor, as such sentiments can easily change and lead to surprises. It is far better to adopt a buy-and-hold strategy for quality stocks.'
Risks vs returns
Investments that yield higher rates of returns are also ones that carry greater risk, which means you face a higher chance of losing money or bearing greater losses along the way.
While there is a fine line between being too risk-averse and missing out on good investment opportunities and making overly risky investments, the question of how much risk you feel comfortable with is something that only you can answer.
This may be a good time to relook your priorities and ask yourself - what do you want to achieve by investing? Are you trying to build up wealth in the short term, or are you looking to grow your retirement fund in the long term? After that, assess your risk appetite. These two factors will figure prominently into the shaping of your investment plan.
Rebalancing your portfolio
When constructing your investment portfolio, it is important to allocate your assets wisely to ensure they support your risk appetite. Despite the best intentions, portfolios often go out of balance in the course of investing. It is thus important to rebalance it from time to time, to bring the proportions back to its previous weight.
If your portfolio has veered off-kilter and you find yourself exposed to a higher level of risk than you are willing and able to accept, it might be time to consider 'safer' alternatives like government bonds or term deposits.
While these investment instruments give relatively low returns, they produce fixed incomes and can go toward balancing other high-risk investments.
Do note though, that while bonds are stable and give regular returns, they are not designed to keep pace with inflation. In times of high inflation, you may see your investment shrink in value.
Index-linked instruments such as exchange traded funds (ETFs) are also a good alternative. Given that ETFs allow investors to buy a basket of stocks that mimic the performance of the entire stock market, they may be a useful tool to diversify risk.
Dollar cost averaging
'Don't try to guess if the stock market has bottomed' is perhaps the golden rule in equity investments. The modern-day equivalent of crystal-balling, even when stocks seem to be at their cheapest, there is no guarantee that the market will recover in the immediate future.
In order to minimise potential losses, investors may consider investing continuously through all the market cycles - a strategy called 'dollar cost averaging'.
Instead of investing all their money in a lump sum, investors gradually build up a position by purchasing smaller amounts over a period of time. This process spreads the average cost over the period, hence providing a buffer against market volatility.
While it is impossible to constantly beat the market, thoroughly understanding the investment vehicle, industry, and company fundamentals of a stock/fund you are purchasing will go a long way in helping you make better decisions.
Tuesday, June 28, 2011
Why markets are now so difficult to forecast
Published June 28, 2011
Central banks, politicians and bankers have turned global investment arena into a casino
By NEIL BEHRMANN
LONDON CORRESPONDENT
PREDICTIONS are a waste of time in today's volatile global markets. Rather than follow usually wrong central bank prognosis, economists' forecasts, chartists' configurations or charlatan soothsayers, it is safer to assess the situation on the basis of what is happening here and now.
Reckless experiment: The Fed's monetary policy is one of the main economic and financial risks in global markets. Mr Bernanke's initial liquidity injection helped ease the 2008 credit crunch, but his subsequent quantitative easing programmes in 2009 and 2010 have created a host of global problems
Current news reports, anecdotes, in-depth investment analyses and healthy scepticism for dated statistics are the necessary tools to gauge risks against potential rewards. After the market depression of late 2008 to 2009, the subsequent steep bull market and this year's small correction, the following maxim applies: 'If in doubt, stay out!'
Now, more than ever, institutional and retail investors need to be on their guard against frantic banker and broker advice. The investment bank business is under acute strain. Volatility is driving away customers. Trading volumes and commissions have fallen sharply and investment bank proprietary traders are struggling to cope with unpredictable price gyrations.
The result is that investment and private bankers are under severe pressure to encourage clients to either overtrade or buy hedge funds and other products.
The antidote for the investor is to stand back and carefully assess the risks. Even though money is being offered at almost zero interest, it is better to be liquid and await opportunities than to hold something that is falling in value.
Here are some of the main reasons why currency, equity, bond and commodity markets have become increasingly risky and exceedingly difficult to forecast.
Much has been written about the Greek and European crisis in recent weeks and some 1.2 trillion euro (S$2.1 trillion) exposure of the European Central Bank (ECB) and German, French, British and other commercial and investment banks. Western geo-political worries about Iran and the rest of the Middle East persist, while Japan is struggling following the tsunami and nuclear power plant disaster.
The two main economic and financial risks in global markets, however, are Ben Bernanke's Federal Reserve Board's monetary policy and China's bubble.
Fed chairman Bernanke's initial liquidity injection helped ease the 2008 credit crunch, but his subsequent quantitative easing (QE) programmes in 2009 and 2010 have created a host of global problems. QE is an untried reckless monetary experiment of the Fed and Bank of England while the ECB is applying it through the back door.
In essence, these central banks purchase hundreds of billions of bonds from banks and other institutions and investors, and the money flows into the banking system. Interest rates have been kept at almost zero levels for banks borrowing from central banks.
The aim has been to bolster economies and reduce unemployment. QE succeeded in boosting US and global shares and corporate bonds from their 2008-2009 bear market lows. This helped raise confidence and enabled companies to raise capital. QE, unfortunately, also has inherent weaknesses.
Since the Fed has been purchasing government bonds, it has been monetising the state's debt. The flood of money into the banking system has caused US dollar devaluation and consequently a surge in prices of oil and other commodities, and contributed to an increase in global inflation.
China factor
Banks have used the money to speculate in foreign currencies and commodities and encouraged their customers to do the same. QE thus caused 'mal investment', or misallocation of capital and a business climate that did not bolster job-creating businesses.
In the meantime, confidence and consumption slid because higher energy prices and inflation have been an effective tax on the consumer. Retired people relying on income have been panicked and are risking their hard-earned savings. Banks charge corporations and individuals much higher rates and since they are encumbered by many dud loans, they have a much stricter lending policy.
The 'misery index' of stubbornly high unemployment and inflation has turned sharply upwards. QE has also caused instability in Asia as funds poured into Singapore and other nations, followed by inevitable increases in property prices and inflation.
China, a semi-command economy, also embarked on stimulation and monetary ease to counter recession early in 2009.
Now the authorities are trying to curb monetary excess, inflation and wild speculation in property, gold and commodities. Global investors have also become alarmed by numerous reports of listed China companies' opaque account keeping.
Since growing numbers of China's directors are allegedly issuing crooked reports, global investors are becoming worried that the authorities are also rigging economic statistics.
Several Western economists and business people are maintaining that China's business conditions are deteriorating. They do not believe the propaganda of the regime and allege that it is overstating growth and under-reporting inflation.
Anecdotes are doing the rounds of suppressed protests about the high cost of food and goods while corrupt wealthy businessmen and officials are living the high life. Some have contravened exchange control regulations and have funnelled money into real estate, art and various funk holes.
Wild market fluctuations in recent months are a warning sign that investors are worried about America's QE failures and events in China and Europe. The tide has begun to turn as investors have become fearful of high-priced financial assets and commodities.
Markets are up one day and down the next as whipsawed investors and traders grapple with unpredictable moves and fear economic downturns and a decline in corporate profits.
These are classic danger signs for long-term investors. Foolhardy, closeted central bankers, China's authorities and US and European politicians and bankers have turned the global investment arena into a casino.
Central banks, politicians and bankers have turned global investment arena into a casino
By NEIL BEHRMANN
LONDON CORRESPONDENT
PREDICTIONS are a waste of time in today's volatile global markets. Rather than follow usually wrong central bank prognosis, economists' forecasts, chartists' configurations or charlatan soothsayers, it is safer to assess the situation on the basis of what is happening here and now.
Reckless experiment: The Fed's monetary policy is one of the main economic and financial risks in global markets. Mr Bernanke's initial liquidity injection helped ease the 2008 credit crunch, but his subsequent quantitative easing programmes in 2009 and 2010 have created a host of global problems
Current news reports, anecdotes, in-depth investment analyses and healthy scepticism for dated statistics are the necessary tools to gauge risks against potential rewards. After the market depression of late 2008 to 2009, the subsequent steep bull market and this year's small correction, the following maxim applies: 'If in doubt, stay out!'
Now, more than ever, institutional and retail investors need to be on their guard against frantic banker and broker advice. The investment bank business is under acute strain. Volatility is driving away customers. Trading volumes and commissions have fallen sharply and investment bank proprietary traders are struggling to cope with unpredictable price gyrations.
The result is that investment and private bankers are under severe pressure to encourage clients to either overtrade or buy hedge funds and other products.
The antidote for the investor is to stand back and carefully assess the risks. Even though money is being offered at almost zero interest, it is better to be liquid and await opportunities than to hold something that is falling in value.
Here are some of the main reasons why currency, equity, bond and commodity markets have become increasingly risky and exceedingly difficult to forecast.
Much has been written about the Greek and European crisis in recent weeks and some 1.2 trillion euro (S$2.1 trillion) exposure of the European Central Bank (ECB) and German, French, British and other commercial and investment banks. Western geo-political worries about Iran and the rest of the Middle East persist, while Japan is struggling following the tsunami and nuclear power plant disaster.
The two main economic and financial risks in global markets, however, are Ben Bernanke's Federal Reserve Board's monetary policy and China's bubble.
Fed chairman Bernanke's initial liquidity injection helped ease the 2008 credit crunch, but his subsequent quantitative easing (QE) programmes in 2009 and 2010 have created a host of global problems. QE is an untried reckless monetary experiment of the Fed and Bank of England while the ECB is applying it through the back door.
In essence, these central banks purchase hundreds of billions of bonds from banks and other institutions and investors, and the money flows into the banking system. Interest rates have been kept at almost zero levels for banks borrowing from central banks.
The aim has been to bolster economies and reduce unemployment. QE succeeded in boosting US and global shares and corporate bonds from their 2008-2009 bear market lows. This helped raise confidence and enabled companies to raise capital. QE, unfortunately, also has inherent weaknesses.
Since the Fed has been purchasing government bonds, it has been monetising the state's debt. The flood of money into the banking system has caused US dollar devaluation and consequently a surge in prices of oil and other commodities, and contributed to an increase in global inflation.
China factor
Banks have used the money to speculate in foreign currencies and commodities and encouraged their customers to do the same. QE thus caused 'mal investment', or misallocation of capital and a business climate that did not bolster job-creating businesses.
In the meantime, confidence and consumption slid because higher energy prices and inflation have been an effective tax on the consumer. Retired people relying on income have been panicked and are risking their hard-earned savings. Banks charge corporations and individuals much higher rates and since they are encumbered by many dud loans, they have a much stricter lending policy.
The 'misery index' of stubbornly high unemployment and inflation has turned sharply upwards. QE has also caused instability in Asia as funds poured into Singapore and other nations, followed by inevitable increases in property prices and inflation.
China, a semi-command economy, also embarked on stimulation and monetary ease to counter recession early in 2009.
Now the authorities are trying to curb monetary excess, inflation and wild speculation in property, gold and commodities. Global investors have also become alarmed by numerous reports of listed China companies' opaque account keeping.
Since growing numbers of China's directors are allegedly issuing crooked reports, global investors are becoming worried that the authorities are also rigging economic statistics.
Several Western economists and business people are maintaining that China's business conditions are deteriorating. They do not believe the propaganda of the regime and allege that it is overstating growth and under-reporting inflation.
Anecdotes are doing the rounds of suppressed protests about the high cost of food and goods while corrupt wealthy businessmen and officials are living the high life. Some have contravened exchange control regulations and have funnelled money into real estate, art and various funk holes.
Wild market fluctuations in recent months are a warning sign that investors are worried about America's QE failures and events in China and Europe. The tide has begun to turn as investors have become fearful of high-priced financial assets and commodities.
Markets are up one day and down the next as whipsawed investors and traders grapple with unpredictable moves and fear economic downturns and a decline in corporate profits.
These are classic danger signs for long-term investors. Foolhardy, closeted central bankers, China's authorities and US and European politicians and bankers have turned the global investment arena into a casino.
Sunday, May 8, 2011
How the sexes invest differently
Men and women should know their strengths and shortcomings to cut risks and boost returns
By Lorna Tan
Sunday Times
8 May 2011
Much has been written on how men and women are wired differently, and the way this permeates almost every aspect of daily life.
Little wonder then that experts suggest these gender differences can surface even in the way we invest. So it is only prudent to understand and manage these differences effectively so that they do not impair our investment choices.
Mr Victor Wong, director of wealth management at Financial Alliance, said male investors tend to be more confident as they believe that they possess a better understanding of financial matters and wealth management.
This explains why men are often more decisive and aggressive when investing.
However, this overconfidence could also result in financial disasters as men are often victims of their own ego, as they may think they are always right.
Conversely, women often lack confidence and frequently seek opinions when it comes to investing. 'Women usually want more details before committing their monies and will not hesitate to dig deeper during the initial information-gathering phase,' said Mr Wong.
Men usually do not pay much attention to details and adopt a more macro view when it comes to investing.
United States fund house Franklin Templeton Investments recently conducted a global investor sentiment survey of 13,076 respondents across 12 countries in Asia, Europe and the Americas.
Besides findings on investor sentiment and the outlook, the survey also unveiled some interesting trends among 1,000 Singapore respondents aged 18 to 24:
~ More women (71 per cent) than men (64 per cent) have bank savings, fixed deposits and money market accounts.
~ More men (64 per cent) than women (47 per cent) own stocks.
~ More men (20 per cent) than women (11 per cent) own bonds.
~ More men (21 per cent) than women (15 per cent) are likely to expect a stock's performance to be the best over the next 10 years.
~ More men (54 per cent) than women (43 per cent) invest outside of the domestic market.
~ More men (71 per cent) than women (59 per cent) intend to invest this year.
~ More women (18 per cent) than men (12 per cent) are likely to expect precious metals to perform the best this year.
These findings point to a number of traits that behavioural finance experts have traditionally associated with male investors, said Mr William Tan, head of sales at Franklin Templeton Investments, Singapore.
The traits include the tendency for men to be more overconfident than women, resulting in their openness to investments perceived as more risky, such as stocks and bonds.
Mr Tan believed that this overconfidence is fuelled by a mix of optimism and an illusion of control. This can lead them to underestimate risks and be overly aggressive in their investing pattern.
To overcome this, he suggested that male investors ask to be fully apprised of potential risks of making certain investments. They should also adopt a more patient and long-term approach in evaluating their investments.
On the other hand, female investors tend to be more risk-averse and overly cautious, which might cause them to miss out on valuable opportunities and close themselves to other asset classes, or markets with potential upside.
The survey also indicated that men are willing to look for opportunities beyond the field they are familiar with, and they trade more frequently.
Mr Wong concurred with this finding and said that the average turnover of portfolios owned by male investors is usually about 25 to 50 per cent higher than those of their female counterparts.
When it comes to investing in precious metals, Franklin Templeton said the trend indicated by the survey is likely to stem from a 'familiarity bias' on the part of the females. After all, female investors would tend to be more familiar and comfortable with gold and precious metals due to their exposure to such items either in the course of shopping for their bling, or through jewellery advertisements targeted at them.
By the same token, women may be more receptive to owning shares of consumer goods firms, or luxury houses such as French luxury goods group LVMH Moet Hennessy Louis Vuitton, as they can relate to the performance of these luxury brands through their personal observation or simply by keeping abreast of buying trends.
So which of the genders usually comes out on top in the investment stakes?
Ms Yash Mishra, head of private client advisory services at ipac financial planning Singapore, said that the most extensive study was the 2001 paper by professors Brad Barber and Terrance Odean, Boys Will Be Boys: Gender, Overconfidence And Common Stock Investment.
The paper concluded that single women's portfolios exceeded those of men by 3 per cent annually. For married couples, the difference was lower but women still outperformed men by 1.4 per cent. A 2005 British study corroborated this as well, added ipac.
Mr Wong and Ms Mishra said both genders can learn from each other. Men can learn from women the importance of seeking more detailed information before investing, adopting a longer-term horizon and being more patient. After all, time in the market is better than trying to time the market. This is because those who get out to avoid downturns typically make the mistake of not knowing when to return, staying on the sidelines as markets recover.
Women can learn from men to be more decisive when making investment decisions, though only after they have gathered the relevant information. And if a female investor has a long investment horizon, she is in a more comfortable position to take on more risk, said Mr Wong.
Women should learn that by being more risk-averse and just sitting on cash, it will lead to losing out in the long run because of inflation, added Ms Mishra.
Irrespective of your gender, Mr Tan said it is always important to be aware of one's limitations and shortcomings, and not take previous investing successes or failures as an accurate indication of what the future is likely to hold.
Managing psychological factors
Besides gender-related characteristics, investors generally fall prey to certain common psychological factors when it comes to investing.
In its latest analysis report on investor behaviour, US-based research firm Dalbar sets out nine psychological factors which help to explain why investors often make poor investment decisions. Dalbar said these factors overtake rational decision-making and drive investors to do the wrong thing.
1. Loss aversion
You are affected by loss aversion when you expect to find high returns with low risk. It causes you to search for investments that do not exist and results in either taking no action or later discovering that the selected investment fails to meet your expectations. This also often results in selling the investment at the wrong time.
2. Narrow framing
This results from making decisions without considering all the implications. The outcome is quick decision making with the consequence that facts are uncovered only after inappropriate investments are made.
For instance, Mr Tan observed, many investors have been moving their savings, previously invested in fixed income, into equities, as they expect interest rates to go up.
'These 'see-saw' swings in their investment mentality - and as a result, extreme allocations - are potentially debilitating for their investment portfolios in the long run, as they can create extreme volatility and lower their returns.'
He added that one of the best risk management strategies an investor can employ is true diversification, that is, across geographical and asset classes.
3. Anchoring
Most of us tend to relate to familiar experiences and reference points but the danger is doing so even when it is inappropriate. This can mislead investors unless it is used with caution.
For example, some investors find themselves investing in firms where their stock prices have plunged in a very short amount of time. In this case, the investor could be anchoring on a recent high that the stock has hit and believes that the price dip provides an opportunity to buy the stock at a discount. But without doing proper due diligence, these investors could be ignorant that it was the changes in their underlying fundamentals that led to stock prices declining.
As such, anchoring can lead to investors selecting investments that cannot reasonably be expected to produce the expected returns.
4. Mental accounting
Investors should rationally view every dollar as identical. But when we fall prey to mental accounting, we tend to designate some of our dollars as 'safety' capital which we invest in low-risk investments, while at the same time treat our 'risk capital' quite differently. By taking undue risks in one area and avoiding rational risks in others, we might be misled into inappropriate investments.
5. Diversification
Experts typically advise investors to diversify their investments to reduce risk. But the effect is not achieved when the diversification is done from simply using different sources. Instead, it creates a false sense of protection.
Ms Mishra said a diversified portfolio means spreading your investments over and within asset classes, fund managers and industries, and not just buying a handful of funds or stocks.
'Diversification means there will be times when one part of your portfolio may be making less or negative returns than other parts.'
She added that this approach meant the investor should have have the discipline to stick to the asset allocation and not move from one asset class to the other.
Mr Tan also cautioned investors against adopting a 'home country bias', which can result in a poorly diversified portfolio that affects returns.
According to the recent global investor sentiment survey conducted by Franklin Templeton Investments, 'home country bias' is especially prevalent among older investors (33 per cent for those aged 55 and above compared with 18 per cent for those aged 18-34) when it comes to equity investments.
'This could be due to historic reasons, which make them less familiar with overseas markets or investments due to the lack of exposure and opportunities available to them when they were younger,' said Mr Tan.
On a positive note, the same survey indicated that three in four Singapore respondents - significantly higher than the rest of the countries surveyed - plan to invest globally over the next decade compared to fewer than half who currently do so.
6. Herding
We become victims of a herd mentality when we allow ourselves to be influenced by our peers to follow market trends in our investment decisions. This copying of the behaviour of others even in the face of unfavourable outcomes is not desirable. Investors who go along with the crowd simply because there is a crowd tend to avoid catastrophic errors but seldom achieve above average results, said Dalbar.
Mr Wong said herding is a common mistake among investors as we often hear about the chase after the next hot stock or investment trend. To avoid it, do your homework before sinking your money into the investment.
7. Regret
Investors tend to treat errors of commission more seriously than errors of omission. Dalbar suggested that investors also make poor investment choices through inaction or reversals.
8. Media response
Investors have a tendency to react to news without reasonable examination, leading to poor investment decisions. Not all media use very thorough authentication which can make their news unreliable.
Mr Wong said the proliferation of round-the-clock news adds a lot of noise which causes investors to be reactive.
One way to counter this is to review your investment portfolio on a half-yearly basis. Do it too frequently and you may be emotionally disturbed by the fluctuation, he added.
9. Optimism
This is a belief that bad things happen only to others. This optimism results in investors holding on to poor investments even after it becomes evident that it will be difficult to recover the losses.
Adopting a long-term view
Besides the importance of understanding and managing our personal investing bias, experts extol the advantages of taking a long-term investing view.
Said Mr Tan: 'If you take a long-term view of the world and the markets, you are likely to make less emotional decisions and thus less costly mistakes, see beyond the short-term volatility of the market, and see broader patterns of market, political and economic behaviour that may not be evident to a short- term observer.'
Copyright © 2010 Singapore Press Holdings. All rights reserved.
By Lorna Tan
Sunday Times
8 May 2011
Much has been written on how men and women are wired differently, and the way this permeates almost every aspect of daily life.
Little wonder then that experts suggest these gender differences can surface even in the way we invest. So it is only prudent to understand and manage these differences effectively so that they do not impair our investment choices.
Mr Victor Wong, director of wealth management at Financial Alliance, said male investors tend to be more confident as they believe that they possess a better understanding of financial matters and wealth management.
This explains why men are often more decisive and aggressive when investing.
However, this overconfidence could also result in financial disasters as men are often victims of their own ego, as they may think they are always right.
Conversely, women often lack confidence and frequently seek opinions when it comes to investing. 'Women usually want more details before committing their monies and will not hesitate to dig deeper during the initial information-gathering phase,' said Mr Wong.
Men usually do not pay much attention to details and adopt a more macro view when it comes to investing.
United States fund house Franklin Templeton Investments recently conducted a global investor sentiment survey of 13,076 respondents across 12 countries in Asia, Europe and the Americas.
Besides findings on investor sentiment and the outlook, the survey also unveiled some interesting trends among 1,000 Singapore respondents aged 18 to 24:
~ More women (71 per cent) than men (64 per cent) have bank savings, fixed deposits and money market accounts.
~ More men (64 per cent) than women (47 per cent) own stocks.
~ More men (20 per cent) than women (11 per cent) own bonds.
~ More men (21 per cent) than women (15 per cent) are likely to expect a stock's performance to be the best over the next 10 years.
~ More men (54 per cent) than women (43 per cent) invest outside of the domestic market.
~ More men (71 per cent) than women (59 per cent) intend to invest this year.
~ More women (18 per cent) than men (12 per cent) are likely to expect precious metals to perform the best this year.
These findings point to a number of traits that behavioural finance experts have traditionally associated with male investors, said Mr William Tan, head of sales at Franklin Templeton Investments, Singapore.
The traits include the tendency for men to be more overconfident than women, resulting in their openness to investments perceived as more risky, such as stocks and bonds.
Mr Tan believed that this overconfidence is fuelled by a mix of optimism and an illusion of control. This can lead them to underestimate risks and be overly aggressive in their investing pattern.
To overcome this, he suggested that male investors ask to be fully apprised of potential risks of making certain investments. They should also adopt a more patient and long-term approach in evaluating their investments.
On the other hand, female investors tend to be more risk-averse and overly cautious, which might cause them to miss out on valuable opportunities and close themselves to other asset classes, or markets with potential upside.
The survey also indicated that men are willing to look for opportunities beyond the field they are familiar with, and they trade more frequently.
Mr Wong concurred with this finding and said that the average turnover of portfolios owned by male investors is usually about 25 to 50 per cent higher than those of their female counterparts.
When it comes to investing in precious metals, Franklin Templeton said the trend indicated by the survey is likely to stem from a 'familiarity bias' on the part of the females. After all, female investors would tend to be more familiar and comfortable with gold and precious metals due to their exposure to such items either in the course of shopping for their bling, or through jewellery advertisements targeted at them.
By the same token, women may be more receptive to owning shares of consumer goods firms, or luxury houses such as French luxury goods group LVMH Moet Hennessy Louis Vuitton, as they can relate to the performance of these luxury brands through their personal observation or simply by keeping abreast of buying trends.
So which of the genders usually comes out on top in the investment stakes?
Ms Yash Mishra, head of private client advisory services at ipac financial planning Singapore, said that the most extensive study was the 2001 paper by professors Brad Barber and Terrance Odean, Boys Will Be Boys: Gender, Overconfidence And Common Stock Investment.
The paper concluded that single women's portfolios exceeded those of men by 3 per cent annually. For married couples, the difference was lower but women still outperformed men by 1.4 per cent. A 2005 British study corroborated this as well, added ipac.
Mr Wong and Ms Mishra said both genders can learn from each other. Men can learn from women the importance of seeking more detailed information before investing, adopting a longer-term horizon and being more patient. After all, time in the market is better than trying to time the market. This is because those who get out to avoid downturns typically make the mistake of not knowing when to return, staying on the sidelines as markets recover.
Women can learn from men to be more decisive when making investment decisions, though only after they have gathered the relevant information. And if a female investor has a long investment horizon, she is in a more comfortable position to take on more risk, said Mr Wong.
Women should learn that by being more risk-averse and just sitting on cash, it will lead to losing out in the long run because of inflation, added Ms Mishra.
Irrespective of your gender, Mr Tan said it is always important to be aware of one's limitations and shortcomings, and not take previous investing successes or failures as an accurate indication of what the future is likely to hold.
Managing psychological factors
Besides gender-related characteristics, investors generally fall prey to certain common psychological factors when it comes to investing.
In its latest analysis report on investor behaviour, US-based research firm Dalbar sets out nine psychological factors which help to explain why investors often make poor investment decisions. Dalbar said these factors overtake rational decision-making and drive investors to do the wrong thing.
1. Loss aversion
You are affected by loss aversion when you expect to find high returns with low risk. It causes you to search for investments that do not exist and results in either taking no action or later discovering that the selected investment fails to meet your expectations. This also often results in selling the investment at the wrong time.
2. Narrow framing
This results from making decisions without considering all the implications. The outcome is quick decision making with the consequence that facts are uncovered only after inappropriate investments are made.
For instance, Mr Tan observed, many investors have been moving their savings, previously invested in fixed income, into equities, as they expect interest rates to go up.
'These 'see-saw' swings in their investment mentality - and as a result, extreme allocations - are potentially debilitating for their investment portfolios in the long run, as they can create extreme volatility and lower their returns.'
He added that one of the best risk management strategies an investor can employ is true diversification, that is, across geographical and asset classes.
3. Anchoring
Most of us tend to relate to familiar experiences and reference points but the danger is doing so even when it is inappropriate. This can mislead investors unless it is used with caution.
For example, some investors find themselves investing in firms where their stock prices have plunged in a very short amount of time. In this case, the investor could be anchoring on a recent high that the stock has hit and believes that the price dip provides an opportunity to buy the stock at a discount. But without doing proper due diligence, these investors could be ignorant that it was the changes in their underlying fundamentals that led to stock prices declining.
As such, anchoring can lead to investors selecting investments that cannot reasonably be expected to produce the expected returns.
4. Mental accounting
Investors should rationally view every dollar as identical. But when we fall prey to mental accounting, we tend to designate some of our dollars as 'safety' capital which we invest in low-risk investments, while at the same time treat our 'risk capital' quite differently. By taking undue risks in one area and avoiding rational risks in others, we might be misled into inappropriate investments.
5. Diversification
Experts typically advise investors to diversify their investments to reduce risk. But the effect is not achieved when the diversification is done from simply using different sources. Instead, it creates a false sense of protection.
Ms Mishra said a diversified portfolio means spreading your investments over and within asset classes, fund managers and industries, and not just buying a handful of funds or stocks.
'Diversification means there will be times when one part of your portfolio may be making less or negative returns than other parts.'
She added that this approach meant the investor should have have the discipline to stick to the asset allocation and not move from one asset class to the other.
Mr Tan also cautioned investors against adopting a 'home country bias', which can result in a poorly diversified portfolio that affects returns.
According to the recent global investor sentiment survey conducted by Franklin Templeton Investments, 'home country bias' is especially prevalent among older investors (33 per cent for those aged 55 and above compared with 18 per cent for those aged 18-34) when it comes to equity investments.
'This could be due to historic reasons, which make them less familiar with overseas markets or investments due to the lack of exposure and opportunities available to them when they were younger,' said Mr Tan.
On a positive note, the same survey indicated that three in four Singapore respondents - significantly higher than the rest of the countries surveyed - plan to invest globally over the next decade compared to fewer than half who currently do so.
6. Herding
We become victims of a herd mentality when we allow ourselves to be influenced by our peers to follow market trends in our investment decisions. This copying of the behaviour of others even in the face of unfavourable outcomes is not desirable. Investors who go along with the crowd simply because there is a crowd tend to avoid catastrophic errors but seldom achieve above average results, said Dalbar.
Mr Wong said herding is a common mistake among investors as we often hear about the chase after the next hot stock or investment trend. To avoid it, do your homework before sinking your money into the investment.
7. Regret
Investors tend to treat errors of commission more seriously than errors of omission. Dalbar suggested that investors also make poor investment choices through inaction or reversals.
8. Media response
Investors have a tendency to react to news without reasonable examination, leading to poor investment decisions. Not all media use very thorough authentication which can make their news unreliable.
Mr Wong said the proliferation of round-the-clock news adds a lot of noise which causes investors to be reactive.
One way to counter this is to review your investment portfolio on a half-yearly basis. Do it too frequently and you may be emotionally disturbed by the fluctuation, he added.
9. Optimism
This is a belief that bad things happen only to others. This optimism results in investors holding on to poor investments even after it becomes evident that it will be difficult to recover the losses.
Adopting a long-term view
Besides the importance of understanding and managing our personal investing bias, experts extol the advantages of taking a long-term investing view.
Said Mr Tan: 'If you take a long-term view of the world and the markets, you are likely to make less emotional decisions and thus less costly mistakes, see beyond the short-term volatility of the market, and see broader patterns of market, political and economic behaviour that may not be evident to a short- term observer.'
Copyright © 2010 Singapore Press Holdings. All rights reserved.
Wednesday, April 20, 2011
Don't Follow the Herd
Start by being intellectually honest and transparent.
By JAMES CHENG
20/04/2011 BT
I RECENTLY had dinner with three portfolio manager friends whom I have known since I started my career. Collectively with over 100 years of investment experience in Asia, what had we learnt? We debated the following ideas: first, growth is over-priced because most investors look for growth; second, easy money encourages undisciplined investment; and third, when markets turn bearish, investors look for safety and make defensive stocks over-priced. In essence, what we have learnt is centuries-old wisdom - be contrarian and don't follow the herd.
Buy sheep, sell deer: Buying cheap and selling dear is easier said than done - in a deep crisis, investors always expect the low to get lower
As Barton Biggs, founder of Morgan Stanley Investment Management, puts it: 'buy sheep, sell deer' (buy cheap, sell dear), but it's easier said than done. Experience tells us that in a deep crisis, we always expect the low to get lower. In the dark days of February 2009, we noted that the price to book value for Asian corporates was at an all-time low, but everyone made compelling arguments that markets would go even lower.
Was that greed or fear? I argued to get invested because risk had become asymmetric - in other words, the upside potential was much larger than the downside risk given market psychology (drawing on my experience during the unprecedented sell-off in Hong Kong during the Asian Financial Crisis). After you overcome the psychological barrier to buy, beware that you may end up with a portfolio of fully priced safe stocks that will lead to under-performance. Such is the complex behavioural biases that investors have to deal with everyday.
2008 was the fifth major crisis I had experienced close-up in my career: the others being June 4, 1989; the 1994 Tequila Crisis; the Asian Financial Crisis; and 2000's Tech Bubble.
My first lesson in contrarian investing happened in June of 1989. Our chairman, a Wall Street legend, told us to 'buy Hong Kong'. Then I had the audacity to say, 'I don't think this is a good idea.' Fortunately for clients, I was not the one who mattered (the Hang Seng has appreciated 934 per cent from June 30, 1989 to March 31, 2011). In the process, I learnt a Chinese proverb - newborn babies have no fear of tigers. (In a secular bull market, hire young managers and let them loose!) My reaction to crises also matured over time, but it took a lot of discipline and painful reflection.
But how do you define a contrarian position? Technology has enabled instantaneous information flow and market reaction, making it extremely difficult to tell how the market is actually positioned. Financial innovations also made possible faster and deeper reaction to events. Price signals may be inadequate.
The Pavlovian response that worked well 25 years ago may be a ticket to trouble. Having a longer investment horizon is also contrarian today as the market has transformed from one dominated by long-term investors to one where hedge funds, proprietary trading and high frequency trading dominates.
Over time, I have come to realise that modifying mean reversion with a philosophical understanding of the Taoist saying that 'all things taken to the extreme, change form' allows one to handle the dynamic and uncertain nature of developing markets and economies better.
We started turning positive on the Indonesian market in early 2007 and carried the position over a multi-year period. A simplistic use of mean reversion would have led us to exit too early as the market started to move above its long-term averages driven by structural changes. The volatility we sat through was massive.
To cope, we mentally prepared ourselves by developing a thesis for the structural change which we constantly reviewed, tested and updated, while maintaining the flexibility to discard it if we found a flaw. One has to be prepared to spend time developing deep knowledge and careful analysis to manage risk. It is not only about what you can win, but also understanding what you can afford to lose.
In this game of managing human behaviour, the one replicable skill set is discipline. We can start by being intellectually honest and transparent with our decisions. The explosion in the availability and speed of information and limitless computing power has created a delusion of control and a dangerous sense of complacency.
The ego is our biggest enemy. However, a true ego is one that learns from mistakes; understands that they don't have all the answers; always feels the need to constantly regenerate themselves; and understands the need to be constantly at risk in the marketplace. I rely on the 'neural network', a team of portfolio managers who work to ensure intellectual honesty through rigorous debates. However, one has to ensure diversity to avoid groupthink and understand that investing is a lonely pursuit.
How is all this relevant to the market today? A senior UK politician recently remarked: 'There is no recognition in the US and Europe of the sheer change in Asia and the sheer scale of competitiveness emerging.' The semantic debate on decoupling misses the point. The world is getting more 'global' with non-G-7 countries now constituting a meaningful portion of global gross domestic product (GDP) and at the margin, the main driver of global growth.
Going global
Thirty years ago, global really referred to the G-7 and the rest was irrelevant. The composition of the 'global average' has fundamentally changed, something not obvious if we just focus on the 'mean'. That is why in the past when the US/EU sneezed, we caught a cold; but today, they can catch pneumonia and we will still only go down with a cold.
Today, Asia-Pacific ex-Japan market capitalisation is larger than Europe, compared to 35 per cent of Europe's market capitalisation in 2000. What makes this so hard to believe is the lack of theories in understanding why a world that for the past 200 years has less than 20 per cent of its population controlling more than 80 per cent of global GDP is now changing for good.
Part of the reason lies in Lin Yifu's theory of the advantage of backwardness, with information technology enabling rapid dissemination of knowledge and unprecedented economies of scale. In 1800, the midst of the Industrial Revolution, the UK had a population of 10 million and the US five million. Today, China is industrialising with 1,300 million people. Unprecedented economy of scale is a thesis that we are developing to understand the changes taking place.
How else can you explain the rapid price drop in goods such as mobile telephony as China entered the space? Many choose to believe the demographic explanation to everything - that China grew because it had a large population. If this is true, China with more than 300 million people in 1800 would have been the largest economy in the world for the past 200 years. The irony is that the best performing economies for the past 200 years are actually European countries with small population bases.
This powerful secular shift is underpinned by a shift in the global balance of science, with research powerhouses now emerging in the developing world. Today, South Korea has the highest per dollar capita R&D spend globally. For the first time since World War II, developing economies are also producing capital equipment previously dominated by Western companies and at a much lower price. Chinese mobile telecom equipment suppliers such as Huawei and ZTE are supplying equipment at US$50 per subscriber capital expenditure and sub-US$50 handsets, empowering five billion emerging market consumers. This secular shift in favour of developing economies will continue for the foreseeable future.
Are you prepared to bet that this powerful trend will continue and how do you overcome all the noise that will try to convince you that historically, this is not possible?
The writer is managing director and senior portfolio manager, Morgan Stanley Investment Management (MSIM)
By JAMES CHENG
20/04/2011 BT
I RECENTLY had dinner with three portfolio manager friends whom I have known since I started my career. Collectively with over 100 years of investment experience in Asia, what had we learnt? We debated the following ideas: first, growth is over-priced because most investors look for growth; second, easy money encourages undisciplined investment; and third, when markets turn bearish, investors look for safety and make defensive stocks over-priced. In essence, what we have learnt is centuries-old wisdom - be contrarian and don't follow the herd.
Buy sheep, sell deer: Buying cheap and selling dear is easier said than done - in a deep crisis, investors always expect the low to get lower
As Barton Biggs, founder of Morgan Stanley Investment Management, puts it: 'buy sheep, sell deer' (buy cheap, sell dear), but it's easier said than done. Experience tells us that in a deep crisis, we always expect the low to get lower. In the dark days of February 2009, we noted that the price to book value for Asian corporates was at an all-time low, but everyone made compelling arguments that markets would go even lower.
Was that greed or fear? I argued to get invested because risk had become asymmetric - in other words, the upside potential was much larger than the downside risk given market psychology (drawing on my experience during the unprecedented sell-off in Hong Kong during the Asian Financial Crisis). After you overcome the psychological barrier to buy, beware that you may end up with a portfolio of fully priced safe stocks that will lead to under-performance. Such is the complex behavioural biases that investors have to deal with everyday.
2008 was the fifth major crisis I had experienced close-up in my career: the others being June 4, 1989; the 1994 Tequila Crisis; the Asian Financial Crisis; and 2000's Tech Bubble.
My first lesson in contrarian investing happened in June of 1989. Our chairman, a Wall Street legend, told us to 'buy Hong Kong'. Then I had the audacity to say, 'I don't think this is a good idea.' Fortunately for clients, I was not the one who mattered (the Hang Seng has appreciated 934 per cent from June 30, 1989 to March 31, 2011). In the process, I learnt a Chinese proverb - newborn babies have no fear of tigers. (In a secular bull market, hire young managers and let them loose!) My reaction to crises also matured over time, but it took a lot of discipline and painful reflection.
But how do you define a contrarian position? Technology has enabled instantaneous information flow and market reaction, making it extremely difficult to tell how the market is actually positioned. Financial innovations also made possible faster and deeper reaction to events. Price signals may be inadequate.
The Pavlovian response that worked well 25 years ago may be a ticket to trouble. Having a longer investment horizon is also contrarian today as the market has transformed from one dominated by long-term investors to one where hedge funds, proprietary trading and high frequency trading dominates.
Over time, I have come to realise that modifying mean reversion with a philosophical understanding of the Taoist saying that 'all things taken to the extreme, change form' allows one to handle the dynamic and uncertain nature of developing markets and economies better.
We started turning positive on the Indonesian market in early 2007 and carried the position over a multi-year period. A simplistic use of mean reversion would have led us to exit too early as the market started to move above its long-term averages driven by structural changes. The volatility we sat through was massive.
To cope, we mentally prepared ourselves by developing a thesis for the structural change which we constantly reviewed, tested and updated, while maintaining the flexibility to discard it if we found a flaw. One has to be prepared to spend time developing deep knowledge and careful analysis to manage risk. It is not only about what you can win, but also understanding what you can afford to lose.
In this game of managing human behaviour, the one replicable skill set is discipline. We can start by being intellectually honest and transparent with our decisions. The explosion in the availability and speed of information and limitless computing power has created a delusion of control and a dangerous sense of complacency.
The ego is our biggest enemy. However, a true ego is one that learns from mistakes; understands that they don't have all the answers; always feels the need to constantly regenerate themselves; and understands the need to be constantly at risk in the marketplace. I rely on the 'neural network', a team of portfolio managers who work to ensure intellectual honesty through rigorous debates. However, one has to ensure diversity to avoid groupthink and understand that investing is a lonely pursuit.
How is all this relevant to the market today? A senior UK politician recently remarked: 'There is no recognition in the US and Europe of the sheer change in Asia and the sheer scale of competitiveness emerging.' The semantic debate on decoupling misses the point. The world is getting more 'global' with non-G-7 countries now constituting a meaningful portion of global gross domestic product (GDP) and at the margin, the main driver of global growth.
Going global
Thirty years ago, global really referred to the G-7 and the rest was irrelevant. The composition of the 'global average' has fundamentally changed, something not obvious if we just focus on the 'mean'. That is why in the past when the US/EU sneezed, we caught a cold; but today, they can catch pneumonia and we will still only go down with a cold.
Today, Asia-Pacific ex-Japan market capitalisation is larger than Europe, compared to 35 per cent of Europe's market capitalisation in 2000. What makes this so hard to believe is the lack of theories in understanding why a world that for the past 200 years has less than 20 per cent of its population controlling more than 80 per cent of global GDP is now changing for good.
Part of the reason lies in Lin Yifu's theory of the advantage of backwardness, with information technology enabling rapid dissemination of knowledge and unprecedented economies of scale. In 1800, the midst of the Industrial Revolution, the UK had a population of 10 million and the US five million. Today, China is industrialising with 1,300 million people. Unprecedented economy of scale is a thesis that we are developing to understand the changes taking place.
How else can you explain the rapid price drop in goods such as mobile telephony as China entered the space? Many choose to believe the demographic explanation to everything - that China grew because it had a large population. If this is true, China with more than 300 million people in 1800 would have been the largest economy in the world for the past 200 years. The irony is that the best performing economies for the past 200 years are actually European countries with small population bases.
This powerful secular shift is underpinned by a shift in the global balance of science, with research powerhouses now emerging in the developing world. Today, South Korea has the highest per dollar capita R&D spend globally. For the first time since World War II, developing economies are also producing capital equipment previously dominated by Western companies and at a much lower price. Chinese mobile telecom equipment suppliers such as Huawei and ZTE are supplying equipment at US$50 per subscriber capital expenditure and sub-US$50 handsets, empowering five billion emerging market consumers. This secular shift in favour of developing economies will continue for the foreseeable future.
Are you prepared to bet that this powerful trend will continue and how do you overcome all the noise that will try to convince you that historically, this is not possible?
The writer is managing director and senior portfolio manager, Morgan Stanley Investment Management (MSIM)
Saturday, April 16, 2011
Avoiding buy-high, sell-low syndrome
In its new study, Dalbar shows how investors can manage their psyche to capture 'alpha' or excess returns.
Mon, Apr 18, 2011
The Business Times
By Genevieve Cua
BY NOW, you would be familiar with the defeating pattern of investors buying high and selling low. It crops up almost invariably at moments of stress in markets.
In its latest Quantitative Analysis of Investor Behavior, US-based Dalbar comes up with suggestions on how to overcome the behaviours that tend to rob investors of 'alpha' or excess returns.
'It continued to be a struggle to help investors protect and grow portfolios by taking advantage of the behaviour of investments and using the available time horizons . . .
'When investor behaviour is anticipated and investment plans are developed and maintained, investors will capitalise on the alpha created by the strategies and tactics of financial advisers and portfolio managers. Investors must be guided to rely more on the probabilities of history than the possibilities of emotion - this seems possible but is complex.'
Dalbar has been studying US investor behaviour through mutual fund flows, using data from the Investment Company Institute, S&P and Barclays Capital Index Products. The latest study spans 1991 to end-2010. It uses mutual fund sales, redemptions and exchanges to surmise investor behaviour.
The study shows that across almost all periods, investors did markedly worse than the respective benchmark indices. One exception is the one-year period in 2010 where the average equity investor saw a return of 13.6 per cent against the S&P 500's 15 per cent return.
Against inflation, there are some long periods where the equity investor did beat inflation. Over 20 years, for instance, the investor earned an annualised 3.83 per cent, against inflation of 2.57 per cent. Dalbar says this is due more to unusually low inflation rates, rather than improved investor returns.
The fixed-income investor appeared to fare relatively much worse, ironically in a long period hailed by fund managers as the best for the asset class. Over a 20-year period, the bond investor saw annualised returns of just 1.01 per cent, against the Barclays Aggregate Bond Index's return of 6.89 per cent and inflation of 2.57 per cent. Ten-year returns were relatively worse; the investor earned 0.77 per cent against the index's 5.84 per cent and inflation of 2.48 per cent.
Average holding periods based on 20 years of data have improved somewhat but remain relatively short at about 3.27 years for equity investors, 3.17 years for fixed-income investors, and 4.29 years for asset allocation investors.
This relatively short horizon is part of the reason for the gross underperformance. 'One of the most startling and ongoing facts is that at no point in time have average investors remained invested for sufficiently long enough periods to derive the benefits of a long-term investment strategy.'
Dalbar says its charts show that 'recommendations by many mutual fund companies to remain invested have had little effect on what investors actually do'. 'The result is that the alpha created by portfolio management is lost to the average investor, who generally abandons investments at inopportune times, often in response to bad news.'
Still, a year-by-year analysis shows that the underperformance gap has actually narrowed. In 2000, the investor underperformed the S&P 500 by 10.97 per cent. By 2010, this had narrowed to 5.31 per cent. Dalbar says this could be due to the fact that investors who had been in the market in the 1990s would have experienced multiple market corrections and recoveries and might have learnt from the experiences.
Some investors and advisers, however, have been able to avoid 'alpha robbing behaviour'. This was achieved through better understanding and management of the psychological factors, and a better understanding of the investments as well.
'While a buy-and-hold strategy prevents a loss of alpha . . . effective management of psychological factors, and an understanding of the 'behaviour' of investments being used, combine to produce positive alpha.'
Alpha is the excess return of a fund over its benchmark index. It is the value that a manager is able to add to a fund's return. Dalbar defines 'investor's alpha' as the value a retail investor adds or subtracts from the value delivered by the fund manager.
It says the key to curbing undesirable behaviour - such as the urge to sell when markets tank - is to simply pause and assess the facts.
In this pause, investors should assess whether they are falling prey to any of nine psychological factors. These include loss aversion, where one expects to find high returns with low risk; and narrow framing, where investors make decisions without considering all implications.
Other flaws are mental accounting, where the investor takes undue risk in one area and avoids rational risk in others; and anchoring, where investors relate their current situation to familiar experiences, even if they are inappropriate. One example is to anchor a stock price to a previous high, even if that high was excessive. This could lead investors to hang on to loss-making investments.
The second part of the solution is to understand and choose appropriate asset classes and their allocations in a portfolio.
There are some broad categories of investments depending on who is expected to seek out alpha. One are investments that alone seek alpha - that is, portfolio managers are able to enter and exit markets to outperform their benchmarks. A second category is that of 'zero alpha' - or investments that have 'styles' that remain consistent regardless of market conditions. Here, the expectation is that investors will make changes to their allocations to achieve alpha.
This article was first published in The Business Times.
Mon, Apr 18, 2011
The Business Times
By Genevieve Cua
BY NOW, you would be familiar with the defeating pattern of investors buying high and selling low. It crops up almost invariably at moments of stress in markets.
In its latest Quantitative Analysis of Investor Behavior, US-based Dalbar comes up with suggestions on how to overcome the behaviours that tend to rob investors of 'alpha' or excess returns.
'It continued to be a struggle to help investors protect and grow portfolios by taking advantage of the behaviour of investments and using the available time horizons . . .
'When investor behaviour is anticipated and investment plans are developed and maintained, investors will capitalise on the alpha created by the strategies and tactics of financial advisers and portfolio managers. Investors must be guided to rely more on the probabilities of history than the possibilities of emotion - this seems possible but is complex.'
Dalbar has been studying US investor behaviour through mutual fund flows, using data from the Investment Company Institute, S&P and Barclays Capital Index Products. The latest study spans 1991 to end-2010. It uses mutual fund sales, redemptions and exchanges to surmise investor behaviour.
The study shows that across almost all periods, investors did markedly worse than the respective benchmark indices. One exception is the one-year period in 2010 where the average equity investor saw a return of 13.6 per cent against the S&P 500's 15 per cent return.
Against inflation, there are some long periods where the equity investor did beat inflation. Over 20 years, for instance, the investor earned an annualised 3.83 per cent, against inflation of 2.57 per cent. Dalbar says this is due more to unusually low inflation rates, rather than improved investor returns.
The fixed-income investor appeared to fare relatively much worse, ironically in a long period hailed by fund managers as the best for the asset class. Over a 20-year period, the bond investor saw annualised returns of just 1.01 per cent, against the Barclays Aggregate Bond Index's return of 6.89 per cent and inflation of 2.57 per cent. Ten-year returns were relatively worse; the investor earned 0.77 per cent against the index's 5.84 per cent and inflation of 2.48 per cent.
Average holding periods based on 20 years of data have improved somewhat but remain relatively short at about 3.27 years for equity investors, 3.17 years for fixed-income investors, and 4.29 years for asset allocation investors.
This relatively short horizon is part of the reason for the gross underperformance. 'One of the most startling and ongoing facts is that at no point in time have average investors remained invested for sufficiently long enough periods to derive the benefits of a long-term investment strategy.'
Dalbar says its charts show that 'recommendations by many mutual fund companies to remain invested have had little effect on what investors actually do'. 'The result is that the alpha created by portfolio management is lost to the average investor, who generally abandons investments at inopportune times, often in response to bad news.'
Still, a year-by-year analysis shows that the underperformance gap has actually narrowed. In 2000, the investor underperformed the S&P 500 by 10.97 per cent. By 2010, this had narrowed to 5.31 per cent. Dalbar says this could be due to the fact that investors who had been in the market in the 1990s would have experienced multiple market corrections and recoveries and might have learnt from the experiences.
Some investors and advisers, however, have been able to avoid 'alpha robbing behaviour'. This was achieved through better understanding and management of the psychological factors, and a better understanding of the investments as well.
'While a buy-and-hold strategy prevents a loss of alpha . . . effective management of psychological factors, and an understanding of the 'behaviour' of investments being used, combine to produce positive alpha.'
Alpha is the excess return of a fund over its benchmark index. It is the value that a manager is able to add to a fund's return. Dalbar defines 'investor's alpha' as the value a retail investor adds or subtracts from the value delivered by the fund manager.
It says the key to curbing undesirable behaviour - such as the urge to sell when markets tank - is to simply pause and assess the facts.
In this pause, investors should assess whether they are falling prey to any of nine psychological factors. These include loss aversion, where one expects to find high returns with low risk; and narrow framing, where investors make decisions without considering all implications.
Other flaws are mental accounting, where the investor takes undue risk in one area and avoids rational risk in others; and anchoring, where investors relate their current situation to familiar experiences, even if they are inappropriate. One example is to anchor a stock price to a previous high, even if that high was excessive. This could lead investors to hang on to loss-making investments.
The second part of the solution is to understand and choose appropriate asset classes and their allocations in a portfolio.
There are some broad categories of investments depending on who is expected to seek out alpha. One are investments that alone seek alpha - that is, portfolio managers are able to enter and exit markets to outperform their benchmarks. A second category is that of 'zero alpha' - or investments that have 'styles' that remain consistent regardless of market conditions. Here, the expectation is that investors will make changes to their allocations to achieve alpha.
This article was first published in The Business Times.
Thursday, March 3, 2011
Investments: Be prepared to wait it out to reap benefits
3 March 2011
Lim Say Boon
Investors usually greet with scepticism bankers who come bearing messages of long-term investment.
"So you mean I won't make money in the short term?" And you know what? The only honest answer is this: You may or you may not.
Over short periods of time - periods less than a year for example - your probability of making a profit on equities is probably 50-50.
Yes, even for fundamentally sound investments. But the longer the time frame, the greater the probability of you making a profit. That is not just an article of faith. That is an observation based on historical data over many different periods of time.
Indeed, it is not the banker who comes bearing the message of the long-term you should greet with scepticism. It is the financial industry players who come bearing messages of doubling or tripling your money with this or that stock you should regard with a lot of scepticism.
You know the old saying - if it is too good to be true, it probably is not true. Does it pass the common sense test?
That is, if the guy coming to you with what the industry calls a "double bagger" (that is, a stock proposition which can double your outlay in a short time) is so confident of the outcome, why would he bother sharing it with you just to make a percentage of one per cent on commission? It is a bit like those e-mails from Nigeria promising huge profits if you transfer a sum of money into a dodgy bank account.
Few bankers will tell you this. So let me do it for you. Making money is difficult. And the sooner one accepts that, the easier one's wealth accumulation journey becomes.
Any business person - including the most successful - will testify to the difficulty of making a profit. Open market places throw competition at any money making proposition and in the process erode profit margins. Why should we expect making money from the stock market, for example, be any different? The stock market is after all a huge collection of different businesses and money making propositions.
Indeed, if I knew 30 years ago what I know now, I would be a lot wealthier today. I would not have been the only person in Singapore who has wasted lot of money trying to catch the elusive "double bagger"; wasted a lot of time waiting for the perfect moment to buy assets; wasted a lot of opportunities to make money from just buying good, buying cheap, and buying into the power of returns compounding over the years.
Assets, from properties to stocks, do appreciate over time. The logic is simple. As societies become more productive, as they become wealthier, the value of assets in that economy should appreciate.
Suppose you were a manufacturer. The technologies available to you in your business inevitably advance with time, so you can make more "stuff" in any given period with the same factory and the same workforce.
That is, your factory becomes more productive. In that way, your revenue should rise and your profits should grow. As a result, your company's net asset value rises and its share price grows with that. And the land on which your factory is located should be worth more as businesses (including yours) earn more profits from any given piece of real estate.
Of course, none of this would be true if the global economy goes into a long economic "winter" - an extended deep recession or depression.
But fortunately, over the past hundred years or so, periods of recession have generally been growing shorter while periods of economic expansion have been growing longer. There have been more growth years than recessionary years. That is the basic factor underlying the phenomenon of more positive annual returns on stock markets than negative years.
Mind you, there will always be economic and market cycles for all manner of assets - including equities, bonds, commodities and properties. But the value of assets does not fluctuate on a flat line. The march of productivity and prosperity suggests that asset values tend to fluctuate on rising trend lines. So there are cycles and there are trends.
The investor must be prepared to ride out the cycles to avail himself to the benefits of the long-term trend.
There is a line from an ancient Persian fable of Indian origins: "The nightingale which cannot bear the thorn, it is best it should never speak of the rose."
Lim Say Boon is the chief investment officer of DBS Bank.
Lim Say Boon
Investors usually greet with scepticism bankers who come bearing messages of long-term investment.
"So you mean I won't make money in the short term?" And you know what? The only honest answer is this: You may or you may not.
Over short periods of time - periods less than a year for example - your probability of making a profit on equities is probably 50-50.
Yes, even for fundamentally sound investments. But the longer the time frame, the greater the probability of you making a profit. That is not just an article of faith. That is an observation based on historical data over many different periods of time.
Indeed, it is not the banker who comes bearing the message of the long-term you should greet with scepticism. It is the financial industry players who come bearing messages of doubling or tripling your money with this or that stock you should regard with a lot of scepticism.
You know the old saying - if it is too good to be true, it probably is not true. Does it pass the common sense test?
That is, if the guy coming to you with what the industry calls a "double bagger" (that is, a stock proposition which can double your outlay in a short time) is so confident of the outcome, why would he bother sharing it with you just to make a percentage of one per cent on commission? It is a bit like those e-mails from Nigeria promising huge profits if you transfer a sum of money into a dodgy bank account.
Few bankers will tell you this. So let me do it for you. Making money is difficult. And the sooner one accepts that, the easier one's wealth accumulation journey becomes.
Any business person - including the most successful - will testify to the difficulty of making a profit. Open market places throw competition at any money making proposition and in the process erode profit margins. Why should we expect making money from the stock market, for example, be any different? The stock market is after all a huge collection of different businesses and money making propositions.
Indeed, if I knew 30 years ago what I know now, I would be a lot wealthier today. I would not have been the only person in Singapore who has wasted lot of money trying to catch the elusive "double bagger"; wasted a lot of time waiting for the perfect moment to buy assets; wasted a lot of opportunities to make money from just buying good, buying cheap, and buying into the power of returns compounding over the years.
Assets, from properties to stocks, do appreciate over time. The logic is simple. As societies become more productive, as they become wealthier, the value of assets in that economy should appreciate.
Suppose you were a manufacturer. The technologies available to you in your business inevitably advance with time, so you can make more "stuff" in any given period with the same factory and the same workforce.
That is, your factory becomes more productive. In that way, your revenue should rise and your profits should grow. As a result, your company's net asset value rises and its share price grows with that. And the land on which your factory is located should be worth more as businesses (including yours) earn more profits from any given piece of real estate.
Of course, none of this would be true if the global economy goes into a long economic "winter" - an extended deep recession or depression.
But fortunately, over the past hundred years or so, periods of recession have generally been growing shorter while periods of economic expansion have been growing longer. There have been more growth years than recessionary years. That is the basic factor underlying the phenomenon of more positive annual returns on stock markets than negative years.
Mind you, there will always be economic and market cycles for all manner of assets - including equities, bonds, commodities and properties. But the value of assets does not fluctuate on a flat line. The march of productivity and prosperity suggests that asset values tend to fluctuate on rising trend lines. So there are cycles and there are trends.
The investor must be prepared to ride out the cycles to avail himself to the benefits of the long-term trend.
There is a line from an ancient Persian fable of Indian origins: "The nightingale which cannot bear the thorn, it is best it should never speak of the rose."
Lim Say Boon is the chief investment officer of DBS Bank.
Tuesday, October 12, 2010
Don't follow your heart in the market
Following the market is one of the worst ways to make investment decisions, experts say.
Tue, Oct 12, 2010
my paper
IT'S A well-known fact that investors love "hot" stocks.
They're always interested in learning about the latest market sentiments, which companies other investors are putting their money on, and chasing stocks that are on the upswing.
But following the market is one of the worst ways to make investment decisions, experts say. Investors miss prime buying opportunities and lose out on good returns, especially if they focus only on the short term.
"Value in the long run is determined by (company) fundamentals, while short-term gyrations reflect market participants' psychological weaknesses, such as herding," Georgetown University accounting and finance professor Prem Jain wrote in his latest book, Buffett Beyond Value: Why Warren Buffett Looks To Growth And Management When Investing.
"Knowledge is the best antidote to making wrong decisions," he said.
Such knowledge applies on a variety of fronts: understanding market psychology, examining the intrinsic value of a stock, and identifying your own buying and selling patterns.
Know what drives the market
Prof Jain may have highlighted the importance of fundamentals, but he and other experts would add that fundamentals alone do not drive stock prices - investors' emotions also play a role.
Stock prices often move in wild swings, particularly in the short run, because they are driven to a large extent by emotions and human behaviour.
Fear, greed, attachment, overconfidence, denial and optimism drive the market, often without much basis. Most investors also don't have the self-discipline to overcome these emotions.
Market trends leading to booms and busts do not last forever and will eventually reverse. As historical data shows, there are few warning signs for investors to take heed of before the market moves in the opposite direction.
Investors thus need to learn how to spot when emotions and human behaviour are driving stock prices.
They need to look beyond what others are buying and think of a winning strategy instead.
Commit to a strategy
As investors may well point out, it's easy to talk about behaving rationally, but it's immensely difficult to walk the talk
Essentially, investors need to prepare and pre-commit, argued Mr James Montier, author of The Little Book Of Behavioural Investing: How Not To Be Your Own Worst Enemy.
He pointed out that investors can and do control the process by which they invest: They simply need to remove the drivers of forced decisions from their portfolios.
To do that, they need to do their research in a cold, rational state. They must seek out the intrinsic value of a stock, and then pre-commit to following their own analysis and prepared steps of action.
Firstly, an investor might want to evaluate the fundamentals on a combination of fronts, such as the price-to-earnings ratio of the stock, its track record, how conservatively the company is financed, and what makes the stock likely to be worth more in the future.
Mr Montier also pointed out in his book that it's useful to have a "wish list" of companies you believe to be well-run and have sustainable potential, but are priced too high.
Standing orders can be placed with brokers to buy these stocks if, for some reason, the market brings their prices down to bargain levels.
Still, it might be also a good idea to follow Mr Buffett's core investment principle of investing only within your circle of competence, buying stocks of companies whose businesses you truly understand.
Understand your own investment behaviour
Another notable point highlighted by experts is that investors should focus more on the process of investing, rather than on just the outcome, as there are no magical short cuts to being a good investor.
Investors need to understand their own investment habits, particularly where their weaknesses lie.
And this is best done by putting it all down on paper, said Prof Jain.
He encouraged investors to write down the various investment decisions they made, what types of stocks they bought, pinpoint the reasons behind the decision, and separate all the months the market went up from the months it went down.
This would enable an investor to establish if he is a net buyer or net seller during the various months, and whether he may have a herd mentality.
"Systematic thinking will help you determine what you know or do not know, and help to overcome your psychological biases," said Prof Jain.
"Ultimately, everyone has to make judgment calls, but following a systematic approach will help you know when you are making a judgment call."
reicow@sph.com.sg
Tue, Oct 12, 2010
my paper
IT'S A well-known fact that investors love "hot" stocks.
They're always interested in learning about the latest market sentiments, which companies other investors are putting their money on, and chasing stocks that are on the upswing.
But following the market is one of the worst ways to make investment decisions, experts say. Investors miss prime buying opportunities and lose out on good returns, especially if they focus only on the short term.
"Value in the long run is determined by (company) fundamentals, while short-term gyrations reflect market participants' psychological weaknesses, such as herding," Georgetown University accounting and finance professor Prem Jain wrote in his latest book, Buffett Beyond Value: Why Warren Buffett Looks To Growth And Management When Investing.
"Knowledge is the best antidote to making wrong decisions," he said.
Such knowledge applies on a variety of fronts: understanding market psychology, examining the intrinsic value of a stock, and identifying your own buying and selling patterns.
Know what drives the market
Prof Jain may have highlighted the importance of fundamentals, but he and other experts would add that fundamentals alone do not drive stock prices - investors' emotions also play a role.
Stock prices often move in wild swings, particularly in the short run, because they are driven to a large extent by emotions and human behaviour.
Fear, greed, attachment, overconfidence, denial and optimism drive the market, often without much basis. Most investors also don't have the self-discipline to overcome these emotions.
Market trends leading to booms and busts do not last forever and will eventually reverse. As historical data shows, there are few warning signs for investors to take heed of before the market moves in the opposite direction.
Investors thus need to learn how to spot when emotions and human behaviour are driving stock prices.
They need to look beyond what others are buying and think of a winning strategy instead.
Commit to a strategy
As investors may well point out, it's easy to talk about behaving rationally, but it's immensely difficult to walk the talk
Essentially, investors need to prepare and pre-commit, argued Mr James Montier, author of The Little Book Of Behavioural Investing: How Not To Be Your Own Worst Enemy.
He pointed out that investors can and do control the process by which they invest: They simply need to remove the drivers of forced decisions from their portfolios.
To do that, they need to do their research in a cold, rational state. They must seek out the intrinsic value of a stock, and then pre-commit to following their own analysis and prepared steps of action.
Firstly, an investor might want to evaluate the fundamentals on a combination of fronts, such as the price-to-earnings ratio of the stock, its track record, how conservatively the company is financed, and what makes the stock likely to be worth more in the future.
Mr Montier also pointed out in his book that it's useful to have a "wish list" of companies you believe to be well-run and have sustainable potential, but are priced too high.
Standing orders can be placed with brokers to buy these stocks if, for some reason, the market brings their prices down to bargain levels.
Still, it might be also a good idea to follow Mr Buffett's core investment principle of investing only within your circle of competence, buying stocks of companies whose businesses you truly understand.
Understand your own investment behaviour
Another notable point highlighted by experts is that investors should focus more on the process of investing, rather than on just the outcome, as there are no magical short cuts to being a good investor.
Investors need to understand their own investment habits, particularly where their weaknesses lie.
And this is best done by putting it all down on paper, said Prof Jain.
He encouraged investors to write down the various investment decisions they made, what types of stocks they bought, pinpoint the reasons behind the decision, and separate all the months the market went up from the months it went down.
This would enable an investor to establish if he is a net buyer or net seller during the various months, and whether he may have a herd mentality.
"Systematic thinking will help you determine what you know or do not know, and help to overcome your psychological biases," said Prof Jain.
"Ultimately, everyone has to make judgment calls, but following a systematic approach will help you know when you are making a judgment call."
reicow@sph.com.sg
Thursday, September 16, 2010
The 7 deadly investment myths
Believing in such false notions can cause investors to either lose money or miss out on opportunities.
Thu, Sep 16, 2010
The Business Times
By Vasu Menon
Vice-President, Wealth Management
Singapore, OCBC Bank
SUBSCRIBING to investment myths can cause investors to either lose money or miss out on opportunities. Understanding some of these myths and their pitfalls can result in better investment decisions.
Here are seven investment myths to be wary about.
Myth #1: Investing is exciting.
It is important to draw a distinction between investing and trading and speculating. Trading and speculating can give you the adrenaline rush and even make you fast money, but they can also cause you heartaches and leave you disillusioned if your bets go the wrong way.
Investing may be unexciting in the short term and may not yield you quick profits, but if you do your homework to identify good opportunities and invest prudently and set reasonable targets, it can provide you with decent returns over a three to five year period.
So investing requires patience but it carries less risk than trading or speculating, as it allows a greater time for your money to grow.
Myth #2: Good brand names make good investments.
Companies with established brands do not necessarily equate sound investments that assure good returns.
Take established US companies like Enron and WorldCom for example. They collapsed after being embroiled in accounting scandals and fraud. The former oil giant Enron filed for bankruptcy in December 2001 while WorldCom which was a telecom giant did the same in July 2002.
A more recent example is oil major, British Petroleum, which saw its share price plunge after its oil well in the Gulf of Mexico ruptured, resulting in the worst disaster in maritime history. No matter how established a company is, there are no guarantees it will not pull unpleasant surprises.
So, irrespective of how strong a company's brand name is, do not fall in love with it and over invest in its shares.
Myth #3 : The best way to make fast money is to invest in what's 'hot'.
Related story:
» Where best to park your money
» Making sense of financial jargon
Do not be a mere follower and purchase a popular stock or investment just because its 'hot' and everyone else is buying.
It's dangerous to adopt the herd mentality and take comfort in numbers.
Do your own research and analysis before taking the plunge.
Buy only if you fully understand what you are buying into and have the appetite to stomach the risk. If not, stay away.
Myth #4: Stay clear of investing when the outlook is uncertain.
In times of uncertainty, jittery investors tend to steer clear of markets or even sell off their investments, even if it means suffering losses.
While it makes sense to be cautious when the outlook is uncertain, there is also an opportunity cost to being too cautious, especially if markets suddenly turn around and surprise on the upside. For example, many nervous and panicky investors bailed out on their investments when markets were close to the bottom in the first quarter of last year.
As a result, they suffered losses and missed the subsequent strong market recovery which resulted in gains of more than 100 per cent in some instances.
Similarly, many overly cautious investors who were sitting on cash missed the boat, failing to buy when valuations were extremely low and attractive.
Looking ahead, uncertainty and volatility looks set to remain a fixture for several months. Instead of staying clear of markets completely and risk missing the boat, it makes more sense for investors to buy gradually and systematically over several months to mitigate the downside risk.
Myth #5: Always invest in the best performers.
Often, investors make decisions based on historical performance because of the mistaken believe that an investment which has done well in the past will continue to do well in the future.
However the strong historical performance may not recur if it was due to exceptional factors or because of undue risks taken by the fund manager.
So when buying into a unit trust for example, you should go beyond its past performance.
Other factors to look at include the risk adjusted returns of the unit trust, the kind of stocks or investments the fund manager buys into, the robustness of investment process and the experience of the investment team.
If you're not sure how to get this information, seek help from a financial adviser.
Myth #6: You have to be super smart to invest.
Related story:
» Where best to park your money
» Making sense of financial jargon
You don't need to be a financial wizard to invest.
Don't let the lack of knowledge or fear of financial jargon turn you off.
You can always start by attending basic courses on investments, reading books and online articles, consulting the right people and asking questions to address your discomforts or fears.
Also, check out investment seminars to pick up useful tips.
Myth #7: You need to be rich to start investing.
Wealth management and investments are not just for the wealthy. It's for everyone, no matter how much wealth you may have.
In case you are not aware, you can begin investing with just $100 each month through a regular investment plan. Such plans offer the additional benefit of dollar-cost-averaging.
Also, when you start investing early, you benefit from the power of compounding as well.
OCBC shall not be responsible for any loss or damage whatsoever arising directly or indirectly howsoever as a result of any person acting on any information provided herein.
This article was first published in The Business Times.
Thu, Sep 16, 2010
The Business Times
By Vasu Menon
Vice-President, Wealth Management
Singapore, OCBC Bank
SUBSCRIBING to investment myths can cause investors to either lose money or miss out on opportunities. Understanding some of these myths and their pitfalls can result in better investment decisions.
Here are seven investment myths to be wary about.
Myth #1: Investing is exciting.
It is important to draw a distinction between investing and trading and speculating. Trading and speculating can give you the adrenaline rush and even make you fast money, but they can also cause you heartaches and leave you disillusioned if your bets go the wrong way.
Investing may be unexciting in the short term and may not yield you quick profits, but if you do your homework to identify good opportunities and invest prudently and set reasonable targets, it can provide you with decent returns over a three to five year period.
So investing requires patience but it carries less risk than trading or speculating, as it allows a greater time for your money to grow.
Myth #2: Good brand names make good investments.
Companies with established brands do not necessarily equate sound investments that assure good returns.
Take established US companies like Enron and WorldCom for example. They collapsed after being embroiled in accounting scandals and fraud. The former oil giant Enron filed for bankruptcy in December 2001 while WorldCom which was a telecom giant did the same in July 2002.
A more recent example is oil major, British Petroleum, which saw its share price plunge after its oil well in the Gulf of Mexico ruptured, resulting in the worst disaster in maritime history. No matter how established a company is, there are no guarantees it will not pull unpleasant surprises.
So, irrespective of how strong a company's brand name is, do not fall in love with it and over invest in its shares.
Myth #3 : The best way to make fast money is to invest in what's 'hot'.
Related story:
» Where best to park your money
» Making sense of financial jargon
Do not be a mere follower and purchase a popular stock or investment just because its 'hot' and everyone else is buying.
It's dangerous to adopt the herd mentality and take comfort in numbers.
Do your own research and analysis before taking the plunge.
Buy only if you fully understand what you are buying into and have the appetite to stomach the risk. If not, stay away.
Myth #4: Stay clear of investing when the outlook is uncertain.
In times of uncertainty, jittery investors tend to steer clear of markets or even sell off their investments, even if it means suffering losses.
While it makes sense to be cautious when the outlook is uncertain, there is also an opportunity cost to being too cautious, especially if markets suddenly turn around and surprise on the upside. For example, many nervous and panicky investors bailed out on their investments when markets were close to the bottom in the first quarter of last year.
As a result, they suffered losses and missed the subsequent strong market recovery which resulted in gains of more than 100 per cent in some instances.
Similarly, many overly cautious investors who were sitting on cash missed the boat, failing to buy when valuations were extremely low and attractive.
Looking ahead, uncertainty and volatility looks set to remain a fixture for several months. Instead of staying clear of markets completely and risk missing the boat, it makes more sense for investors to buy gradually and systematically over several months to mitigate the downside risk.
Myth #5: Always invest in the best performers.
Often, investors make decisions based on historical performance because of the mistaken believe that an investment which has done well in the past will continue to do well in the future.
However the strong historical performance may not recur if it was due to exceptional factors or because of undue risks taken by the fund manager.
So when buying into a unit trust for example, you should go beyond its past performance.
Other factors to look at include the risk adjusted returns of the unit trust, the kind of stocks or investments the fund manager buys into, the robustness of investment process and the experience of the investment team.
If you're not sure how to get this information, seek help from a financial adviser.
Myth #6: You have to be super smart to invest.
Related story:
» Where best to park your money
» Making sense of financial jargon
You don't need to be a financial wizard to invest.
Don't let the lack of knowledge or fear of financial jargon turn you off.
You can always start by attending basic courses on investments, reading books and online articles, consulting the right people and asking questions to address your discomforts or fears.
Also, check out investment seminars to pick up useful tips.
Myth #7: You need to be rich to start investing.
Wealth management and investments are not just for the wealthy. It's for everyone, no matter how much wealth you may have.
In case you are not aware, you can begin investing with just $100 each month through a regular investment plan. Such plans offer the additional benefit of dollar-cost-averaging.
Also, when you start investing early, you benefit from the power of compounding as well.
OCBC shall not be responsible for any loss or damage whatsoever arising directly or indirectly howsoever as a result of any person acting on any information provided herein.
This article was first published in The Business Times.
Monday, June 7, 2010
Five tips on investing despite the bear
A financial downturn presents opportunities for savvy investors who bear these pointers in mind. -ST
Mon, Jun 07, 2010
The Straits Times
By Gemma Tay
One does not require much money to start building up wealth. Each small step can take us a long way. What is most important is to remember the basics of wealth preservation and investing.
I run through a check-list of investment principles and review my investment portfolio annually to ensure I am effectively preserving and growing my wealth. Here are some investment tips.
Investing tip 1
It is better to remain focused and stay invested during volatile times
During volatile times, it is important to remember to stay focused and stick to your long-term investment strategy.
An investor who panics and sells his investments when markets are down is likely to incur losses.
In addition, he may also miss out on potential gains when markets recover. Historically, markets have rebounded and eventually returned to or even surpassed previous levels.
By investing over the long term, you can ride out the volatility.
Investing tip 2
The three Rs: Revisit goals, review portfolio and rebalance your investments
Over time, our financial goals and needs may change.
For example, you may want to set aside funds to cater to growing expenses when new members are added to the family. Your financial objectives will have to be reviewed to meet this need.
The components in your investment portfolio may also need to be readjusted to generate higher potential returns. You may do this by taking on more risks.
Even if your financial objectives or risk profile remain the same, market movements may tilt the weightage of each investment in the portfolio, exposing the overall portfolio to more risks than intended.
A rebalancing of the portfolio is required to bring it back to its original risk-return parameters.
Generally, you should review and rebalance your investment portfolio every eight to 12 months.
Investing tip 3
Spread out your risks, diversify
Diversification is important as most investors are not able to predict the performance or returns of one particular asset class.
Equities, bonds, different geographic regions, sectors or even various investment styles react differently to market events and cycles.
Hence, investing in multiple asset classes and types will help to buffer the impact of any non-performing investment in a portfolio.
Diversifying your portfolio can also help you weather the ups and downs of the market cycle.
Investing tip 4
Have a balanced portfolio
Invest in a balanced portfolio to better manage risks and returns.
A balanced portfolio is designed to achieve higher returns than debt securities or cash, but at a lower risk than a pure equities portfolio.
A fund offering a balanced approach should include both equity and fixed-income components, which can help to provide cushioning when either one of the asset classes is down.
Equities and bonds usually show low correlation to each other and behave in an opposite manner under the same market conditions.
Hence, when equity prices are down, bond prices usually rise, and vice versa.
Investing tip 5
Market corrections can mean opportunities; use dollar cost averaging to smoothen price swings
Market swings and volatility are part of stock market movements.
They present opportunities for investors to buy on dips or enter into dollar-cost averaging (DCA).
With DCA, a set amount of money is invested at regular intervals over a long period of time. It can lower an investor's cost of investment and reduce the risk of investing at a peak.
For example, when prices are high, the set amount can buy fewer investment units or shares. Likewise, when prices are low, more units or shares can be bought with the same amount. It helps to smoothen the ups and downs in market volatility.
Most importantly, bear in mind one golden rule: The chain is as strong as its weakest link.
Regardless of the size of your investments, be vigilant and disciplined when it comes to preserving, investing and growing your wealth.
The worst of the financial crisis may be over, but the global economy is not totally out of the woods yet. Lingering problems still exist, especially in the developed countries. However, opportunities exist even in the worst of times.
To stop investing is to allow your money to diminish in value as inflation will erode its purchasing power. Keep these basic investing principles in mind and let them underline your investment success.
The writer is the head of deposits, investment & insurance (Singapore) at United Overseas Bank
This article was first published in The Straits Times.
Mon, Jun 07, 2010
The Straits Times
By Gemma Tay
One does not require much money to start building up wealth. Each small step can take us a long way. What is most important is to remember the basics of wealth preservation and investing.
I run through a check-list of investment principles and review my investment portfolio annually to ensure I am effectively preserving and growing my wealth. Here are some investment tips.
Investing tip 1
It is better to remain focused and stay invested during volatile times
During volatile times, it is important to remember to stay focused and stick to your long-term investment strategy.
An investor who panics and sells his investments when markets are down is likely to incur losses.
In addition, he may also miss out on potential gains when markets recover. Historically, markets have rebounded and eventually returned to or even surpassed previous levels.
By investing over the long term, you can ride out the volatility.
Investing tip 2
The three Rs: Revisit goals, review portfolio and rebalance your investments
Over time, our financial goals and needs may change.
For example, you may want to set aside funds to cater to growing expenses when new members are added to the family. Your financial objectives will have to be reviewed to meet this need.
The components in your investment portfolio may also need to be readjusted to generate higher potential returns. You may do this by taking on more risks.
Even if your financial objectives or risk profile remain the same, market movements may tilt the weightage of each investment in the portfolio, exposing the overall portfolio to more risks than intended.
A rebalancing of the portfolio is required to bring it back to its original risk-return parameters.
Generally, you should review and rebalance your investment portfolio every eight to 12 months.
Investing tip 3
Spread out your risks, diversify
Diversification is important as most investors are not able to predict the performance or returns of one particular asset class.
Equities, bonds, different geographic regions, sectors or even various investment styles react differently to market events and cycles.
Hence, investing in multiple asset classes and types will help to buffer the impact of any non-performing investment in a portfolio.
Diversifying your portfolio can also help you weather the ups and downs of the market cycle.
Investing tip 4
Have a balanced portfolio
Invest in a balanced portfolio to better manage risks and returns.
A balanced portfolio is designed to achieve higher returns than debt securities or cash, but at a lower risk than a pure equities portfolio.
A fund offering a balanced approach should include both equity and fixed-income components, which can help to provide cushioning when either one of the asset classes is down.
Equities and bonds usually show low correlation to each other and behave in an opposite manner under the same market conditions.
Hence, when equity prices are down, bond prices usually rise, and vice versa.
Investing tip 5
Market corrections can mean opportunities; use dollar cost averaging to smoothen price swings
Market swings and volatility are part of stock market movements.
They present opportunities for investors to buy on dips or enter into dollar-cost averaging (DCA).
With DCA, a set amount of money is invested at regular intervals over a long period of time. It can lower an investor's cost of investment and reduce the risk of investing at a peak.
For example, when prices are high, the set amount can buy fewer investment units or shares. Likewise, when prices are low, more units or shares can be bought with the same amount. It helps to smoothen the ups and downs in market volatility.
Most importantly, bear in mind one golden rule: The chain is as strong as its weakest link.
Regardless of the size of your investments, be vigilant and disciplined when it comes to preserving, investing and growing your wealth.
The worst of the financial crisis may be over, but the global economy is not totally out of the woods yet. Lingering problems still exist, especially in the developed countries. However, opportunities exist even in the worst of times.
To stop investing is to allow your money to diminish in value as inflation will erode its purchasing power. Keep these basic investing principles in mind and let them underline your investment success.
The writer is the head of deposits, investment & insurance (Singapore) at United Overseas Bank
This article was first published in The Straits Times.
Wednesday, December 5, 2007
Useful Investment Links
Welcome to the world of stock investing. Before you start investing or trading please spend sometimes reading the following articles, it will help you to become a better investor or trader.
"Don't invest in or buy products you don't fully understand. Don't try to out-smart the market. Investment is about adopting a disciplined aproach based on your strategy and risk appetite. It is not about listening to rumours or timing the market." -- Anonymous
Investing
http://www.investmentu.com/research/timelessrules.html
http://starones.blogspot.com/2008/03/contrarian-investing.html
http://starones.blogspot.com/2008/03/templetons-10-investment-principles.html
http://starones.blogspot.com/2009/07/rules-of-trading-and-investing.html
http://starones.blogspot.com/2009/07/importance-of-risk-management.html
http://starones.blogspot.com/2008/10/eight-pearls-of-investment-wisdom-for.html
http://starones.blogspot.com/2008/03/when-you-to-sell-your-stocks.html
http://starones.blogspot.com/2008/06/warren-buffetts-stock-portfolio.html
Trading
http://starones.blogspot.com/2008/03/secrets-for-profiting-in-bull-or-bear.html
http://starones.blogspot.com/2008/07/high-probability-trading-take-steps-to.html
http://starones.blogspot.com/2008/03/ganns-24-never-failing-rules.html
http://starones.blogspot.com/2008/03/how-and-when-to-sell-stocks-short.html
http://starones.blogspot.com/2008/03/how-to-make-money-in-stocks-william-j.html
http://starones.blogspot.com/2008/03/9-deadly-trading-mistakes.html
http://starones.blogspot.com/2008/03/study-guide-for-come-into-my-trading.html
http://starones.blogspot.com/2008/03/stock-market-rules.html
http://starones.blogspot.com/2008/03/richard-rhodess-trading-rules.html
http://starones.blogspot.com/2008/03/trend-following-trading-turtle-trading.html
http://starones.blogspot.com/2008/03/technical-analysis-power-tools-for.html
http://onlypill.tripod.com/toolsofthetrade/id7.html
http://www.rb-trading.com/begin.html
http://www.swing-trade-stocks.com/
http://www.dtjr.com (Chinese)
ADX: The Trend Strength Indicator
http://www.investopedia.com/articles/trading/07/adx-trend-indicator.asp
Capturing Trend Days
http://www.traderslog.com/capturing-trend-days.htm
Momentum Trading with Discipline
http://www.investopedia.com/articles/trading/03/092403.asp
Selling Strategy
http://www.stockhouse.com/help_technical.asp?subitem=euphoria
Spotting Breadouts
http://www.investopedia.com/articles/technical/04/032404.asp
Ten Steps to Building a Winning Trading Plan
http://www.investopedia.com/articles/trading/04/042104.asp
"Don't invest in or buy products you don't fully understand. Don't try to out-smart the market. Investment is about adopting a disciplined aproach based on your strategy and risk appetite. It is not about listening to rumours or timing the market." -- Anonymous
Investing
http://www.investmentu.com/research/timelessrules.html
http://starones.blogspot.com/2008/03/contrarian-investing.html
http://starones.blogspot.com/2008/03/templetons-10-investment-principles.html
http://starones.blogspot.com/2009/07/rules-of-trading-and-investing.html
http://starones.blogspot.com/2009/07/importance-of-risk-management.html
http://starones.blogspot.com/2008/10/eight-pearls-of-investment-wisdom-for.html
http://starones.blogspot.com/2008/03/when-you-to-sell-your-stocks.html
http://starones.blogspot.com/2008/06/warren-buffetts-stock-portfolio.html
Trading
http://starones.blogspot.com/2008/03/secrets-for-profiting-in-bull-or-bear.html
http://starones.blogspot.com/2008/07/high-probability-trading-take-steps-to.html
http://starones.blogspot.com/2008/03/ganns-24-never-failing-rules.html
http://starones.blogspot.com/2008/03/how-and-when-to-sell-stocks-short.html
http://starones.blogspot.com/2008/03/how-to-make-money-in-stocks-william-j.html
http://starones.blogspot.com/2008/03/9-deadly-trading-mistakes.html
http://starones.blogspot.com/2008/03/study-guide-for-come-into-my-trading.html
http://starones.blogspot.com/2008/03/stock-market-rules.html
http://starones.blogspot.com/2008/03/richard-rhodess-trading-rules.html
http://starones.blogspot.com/2008/03/trend-following-trading-turtle-trading.html
http://starones.blogspot.com/2008/03/technical-analysis-power-tools-for.html
http://onlypill.tripod.com/toolsofthetrade/id7.html
http://www.rb-trading.com/begin.html
http://www.swing-trade-stocks.com/
http://www.dtjr.com (Chinese)
ADX: The Trend Strength Indicator
http://www.investopedia.com/articles/trading/07/adx-trend-indicator.asp
Capturing Trend Days
http://www.traderslog.com/capturing-trend-days.htm
Momentum Trading with Discipline
http://www.investopedia.com/articles/trading/03/092403.asp
Selling Strategy
http://www.stockhouse.com/help_technical.asp?subitem=euphoria
Spotting Breadouts
http://www.investopedia.com/articles/technical/04/032404.asp
Ten Steps to Building a Winning Trading Plan
http://www.investopedia.com/articles/trading/04/042104.asp
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