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 manager’s meaningless squawking. Tip for fund managers: Whatever you say, it comes out sounding like: “Blah, blah, something-something, stocks, give me money.” In this article, I try to pick out the facts from the gibberish:
It’s 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 he’s an advocate of starting your investments early.
According to Michael, time makes investments more predictable:
“Investments behave as they should when given time. For example, take a generalisation such as ‘equities beat cash’. It may turn out false over one or two years, but over a 10 year period? It will almost certainly prove true. That’s why the generalisation exists.
I’m not a property investor, but doesn’t this hold true in property as well? If you invest in property for three years, there’s 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.”
“So if we apply a capital asset pricing model…hey are you paying attention? Customers these days.”
2. Mix Bonds and Equities
Just so we’re 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 company’s 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:
“One 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 don’t know, no one does. If you put everything in bonds, there’s more certainty.”
Certainty of crap returns you mean.
“That could be true. Many bonds don’t have as high returns. So have a good mix.”
“About that rule of thumb? Uh, bonds are for the long term, and…”
3. Don’t Be a Market Timer
If there’s new resources in Argentina, you quickly move your investments there. If smartphones are the in-thing, you invest in phone companies. That’s how it works right?
Yeah, for investors like Mr. Lodge in those Archie comics. Sadly, real investors are a lot less exciting. Michael says:
“Markets are strong form efficient. That means by the time you hear the news, it’s already factored into the stock price. The news won’t give you privileged information that will make you a millionaire. Anyway, it’s 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 – 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.”
Why is a broken clock better than a fund manager? Answer: It’s right at least twice a day.
Michael says that smart investing is:
“…deciding on a long term strategy, re-allocating to avoid loss rather than chase returns, and minimising fees.”
Which leads me to say:
4. Know The Management Fees and Costs
Oh come on, how much can the management fees possibly cost? It’s like, one measly percent. It’s…what the hell is this study?
“One must invest about £1.50 in an actively managed unit trust or through a life office in order to obtain the market rate of return on £1.” – The Price of Retail Investing in the UK (Kevin R James, 2000)
Please tell me that’s exclusive to the UK.
Don’t be ridiculous, Singapore’s not like the UK. Fund managers rip you off in a totally different way.
“Unfortunately, financial products are overpriced in most parts of the world. As the saying goes, the best question to ask a fund manager is ‘Where are your customers’ yachts?’
Michael gives me an impressive list of additional costs. Apart from the management fee, there is often:
- Loading, also called upfront fees.
- Broker’s Commission
- Price Effect
- Taxes / Stamp Duties
Note that in certain products, such as life insurance, such fees are often bundled under “distribution costs”. Michael says:
“Without a long lesson, it’s 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; we’ll be looking more into high TERs in future – Ed.)
Later, if you find out it’s 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 what’s fair. I advise against paying any sort of loading or upfront fees, as this adds nothing of value.”
5. Diversify Your Investments
I don’t get the “eggs in one basket” saying. Shouldn’t that be “put more products besides eggs in one basket?”
You know how this works: Don’t put all your eggs in one basket.
Michael suggests investing in an index fund, or cherry-picking your equities to cover several market segments. He’s sceptical of an argument used by some Singaporean fund managers:
“They 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 90′s? How many fund managers could foresee the value of ‘rubbish’ Apple stock? Don’t take their word for it. They are no more psychic than you or me. “
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).
What are your long term investment plans? Comment and let us know!
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