5 Expert Tips for Long Term Investing
Investments are easy to understand. Assuming you have 20 years experience, a Masters in finance, and are a prime candidate for a CFO position. For the rest of us, it involves Power Point graphs and a fund managerâs meaningless squawking. Tip for fund managers: Whatever you say, it comes out sounding like: âBlah, blah, something-something, stocks, give me money.â In this article, I try to pick out the facts from the gibberish:
Itâs like Wall Street: Full of bull
Tip 1: Start As Soon As Possible
Retired broker Michael Chiam is helping me out here. Michael worked in Europe and Asia for over 18 years, and heâs an advocate of starting your investments early.
According to Michael, time makes investments more predictable:
âInvestments behave as they should when given time. For example, take a generalisation such as âequities beat cashâ. It may turn out false over one or two years, but over a 10 year period? It will almost certainly prove true. Thatâs why the generalisation exists.
Iâm not a property investor, but doesnât this hold true in property as well? If you invest in property for three years, thereâs a chance that a house may not appreciate, or the value can even drop. But if you hold the property for 10 to 20 years, the investment is more likely to behave as it should. It will almost surely appreciate in value.
This is why you want to start early; to give your investments time to behave as they should.â
âSo if we apply a capital asset pricing modelâŚhey are you paying attention? Customers these days.â
2. Mix Bonds and Equities
Just so weâre on the same page: Equities refer to stocks. Bonds are a different form of financing.
When you buy stocks, you get a share of the companyâs profits. They company may or may not pay out dividends. When you buy bonds, you are effectively lending money to the company. The company has to pay it back. As a gross generalisation, bonds are slower but more consistent
Michael suggests that you mix bonds and equities for the long run:
âOne rule of thumb is to own your age in bonds, and put the rest in equities. If you put everything in equities, you could be very rich or very broke at the end of 20 years. I donât know, no one does. If you put everything in bonds, thereâs more certainty.â
Certainty of crap returns you mean.
âThat could be true. Many bonds donât have as high returns. So have a good mix.â
âAbout that rule of thumb? Uh, bonds are for the long term, andâŚâ
3. Donât Be a Market Timer
If thereâs new resources in Argentina, you quickly move your investments there. If smartphones are the in-thing, you invest in phone companies. Thatâs how it works right?
Yeah, for investors like Mr. Lodge in those Archie comics. Sadly, real investors are a lot less exciting. Michael says:
âMarkets are strong form efficient. That means by the time you hear the news, itâs already factored into the stock price. The news wonât give you privileged information that will make you a millionaire. Anyway, itâs not good to chase returns like that.
When you chase high returns, you are following emotional and short term market pressures. There is a classic study done by William Sharpe, which all investors should be aware of.
Sharpe found out that to time the market correctly (shift assets around to maximize returns â Ed.), the market timer must be correct more than 70% of the time. Only then can the market timer beat someone who just picks a strategy and sticks to it.â
Why is a broken clock better than a fund manager? Answer: Itâs right at least twice a day.
Michael says that smart investing is:
ââŚdeciding on a long term strategy, re-allocating to avoid loss rather than chase returns, and minimising fees.â
Which leads me to say:
4. Know The Management Fees and Costs
Oh come on, how much can the management fees possibly cost? Itâs like, one measly percent. ItâsâŚwhat the hell is this study?
âOne must invest about ÂŁ1.50 in an actively managed unit trust or through a life office in order to obtain the market rate of return on ÂŁ1.â â The Price of Retail Investing in the UK (Kevin R James, 2000)
Please tell me thatâs exclusive to the UK.
Donât be ridiculous, Singaporeâs not like the UK. Fund managers rip you off in a totally different way.
âUnfortunately, financial products are overpriced in most parts of the world. As the saying goes, the best question to ask a fund manager is âWhere are your customersâ yachts?â
Michael gives me an impressive list of additional costs. Apart from the management fee, there is often:
Loading, also called upfront fees.
Brokerâs Commission
Price Effect
Taxes / Stamp Duties
Note that in certain products, such as life insurance, such fees are often bundled under âdistribution costsâ. Michael says:
âWithout a long lesson, itâs hard to teach someone how to spot these costs. I would advise that you ask the seller what the total expense ratio (TER) is, then get them to put it on paper.
(You can also follow us on Facebook; weâll be looking more into high TERs in future â Ed.)
Later, if you find out itâs untrue, you have a good case against them. Most sellers will not lie, because they know the risks of misrepresentation.
I do not accept a TER above 0.7%, but you can decide for yourself whatâs fair. I advise against paying any sort of loading or upfront fees, as this adds nothing of value.â
5. Diversify Your Investments
I donât get the âeggs in one basketâ saying. Shouldnât that be âput more products besides eggs in one basket?â
You know how this works: Donât put all your eggs in one basket.
Michael suggests investing in an index fund, or cherry-picking your equities to cover several market segments. Heâs sceptical of an argument used by some Singaporean fund managers:
âThey love to tell you that, oh, an index fund gives you a lot of rubbish stock. You better just offload the rubbish stock and keep the good ones.
I always ask them to tell me exactly which ones are rubbish, and which ones are good. How would they know? Where does their crystal ball come from? The fact is, most fund managers cannot distinguish between good stocks and rubbish stocks.
Remember how badly Apple did in the 90â˛s? How many fund managers could foresee the value of ârubbishâ Apple stock? Donât take their word for it. They are no more psychic than you or me. â
If you want to know more about index funds, you need to take up some courses. The lowest cost program right now is from FISCA (Financial Services Consumers Association of Singapore).
Image Credits:
herval, kodomut, Mike Miley, Brenda Anderson, mbrochh, EpSos.de
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