How I would allocate my portfolio in 2024 (a joke, sort of)

Photo by LJ on Pexels.com

I’ve been seeing these sorts of posts on my feed and most of these posts are so badly written because they don’t consider any individual investor’s circumstances and/or no finance theory behind the allocation so I thought I’d ask Google’s Gemini Pro (GGP) to take a stab at it.

The rest of the post is the response from GGP.

What do y’all think of GGP’s take on asset allocation for 2024?

**Asset Allocation:**
* Stocks: 70%
* Bonds: 15%
* International Stocks: 10%
* Singapore Real Estate: 5%

**Index Funds and ETFs:**

* **Singapore Stocks:**
* **STI ETF (SGX: STI):** This ETF tracks the Straits Times Index, which represents the 30 largest and most liquid companies listed on the Singapore Exchange (SGX).
* **Nikko AM Singapore Dividend Leaders ETF (SGX: NDLV):
** This ETF invests in Singapore companies with a history of paying dividends.

* **International Stocks:**
* **Vanguard Total International Stock Index Fund (VXUS):
** This fund offers exposure to stocks from developed and emerging markets outside Singapore and the U.S.
* **iShares Core MSCI EAFE ETF (IEFA):
** This ETF provides exposure to developed markets outside Singapore and the U.S.

* **Bonds:**
* **ABF Singapore Bond Index Fund (SGX: A35):
** This ETF tracks the FTSE Singapore Bond Index, which represents the Singapore dollar-denominated bond market.
* **LionGlobal SGD Enhanced Duration Bond ETF (SGX: LDS):
** This ETF invests in Singapore government and corporate bonds with longer maturities.

* **Singapore Real Estate:**
* **Ascendas REIT (SGX: A17U):
** This REIT invests in a portfolio of industrial properties in Singapore.
* **CapitaLand Integrated Commercial Trust (SGX: C38U):
** This REIT invests in a portfolio of shopping malls, offices, and serviced residences in Singapore.

**Investment Strategy:**
* **Regular Contributions:
** * Consider setting up a recurring investment plan to contribute a fixed amount to your investment accounts each month. This strategy, known as dollar-cost averaging, can help reduce the impact of market volatility and potentially increase your returns over time.
* **Rebalance Annually:**
* Once a year, review your portfolio’s asset allocation and rebalance it if necessary. This means selling some assets that have performed well and buying more of those that have underperformed. Rebalancing helps maintain your desired asset allocation and risk level.

* **Stay Invested for the Long Term:**
* Remember that investing is a long-term game. Avoid making impulsive decisions based on short-term market fluctuations. Stay invested through market downturns, as history has shown that stocks tend to recover and reach new highs over the long term.

**Additional Considerations:**

* **Tax-Advantaged Accounts:**
* Consider investing in tax-advantaged accounts, such as the Supplementary Retirement Scheme (SRS) and the Central Provident Fund (CPF), if available. These accounts offer tax benefits that can help your investments grow faster.

* **Emergency Fund:**
* Before investing, make sure you have an emergency fund with 3-6 months of living expenses saved up. This fund can help you cover unexpected expenses without having to sell your investments. *

**Investment Goals:**
* Keep your investment goals in mind when making investment decisions. If you have a long-term goal, such as retirement, you may be able to tolerate more risk in your portfolio.

* **Risk Tolerance:**
* Assess your risk tolerance and invest accordingly. If you are uncomfortable with the potential for large swings in your portfolio’s value, you may want to allocate a larger portion of your portfolio to bonds and other less volatile investments.

**Disclaimer:** Investing involves risk. Past performance is not a guarantee of future results. The information provided is for general informational purposes only and should not be construed as investment advice. It is essential to consult with a qualified financial advisor before making any investment decisions.

**Note:** The investments mentioned above are just examples, and the specific funds or ETFs you choose may vary depending on your individual circumstances and investment goals. It is always a good idea to consult with a qualified financial advisor in Singapore who can provide personalized advice based on your unique situation.

Goodbye 2023

Photo by Eric Christian Capilador on Pexels.com

This year has been tiresome.

I’ve never been so overwhelmed and bored at the same time. I’ve been filled with both worry and hope, and the year has come and gone without major disaster in my life.

My heart goes out to those whose lives continue to be affected by the wars in Ukraine and the Gaza Strip and it’s a constant reminder of how lucky I am to live in a country where the biggest gripe in recent memory seems to be how Ya Kun has raised the price on their kaya toast set from S$4.80 to S$6.30 within a year.

Once I realise how peaceful life here is, it turned out my year had been good after all.

Portfolio

Alas, I wish I could say that my portfolio did wonders this year but if you were invested outside of the major indexes like I was, this year would have been very subpar in terms of returns.

Nevertheless, my portfolio^ has reached a new milestone because of my high savings rate and because I let the dividends compound. The negative sentiment surrounding interest rates staying higher for longer in September and October also provided a good opportunity to deploy a little more investments into REITs which were beaten down further although there has been quite a sharp rebound since November.

^(To be clear, my portfolio only includes cash set aside for investments and the market value of my money invested in equities, bonds, and other financial instruments. I DO NOT include the value of my share of the property used as a residence and the monies in my CPF. I track these numbers as part of my Net Worth but when I say “portfolio”, I’m referring to the value of my investments alone.)

For privacy reasons, I won’t report the actual amount in the portfolio. Let’s just say that it’s a six-figure portfolio which is not quite F- You money but it isn’t chump change either. Based on growth rates, the portfolio’s CAGR is around 23% over its lifetime of 15 years but much of this is due to the low starting base (a low five-figure sum) and subsequent stuffing of cash into the portfolio over that same period.

Yes, I’ve been saving a lot of money and the main reasons for that are: (1) I’ve worked in the government all my life, drawing a decent (but not obscene) salary that would put me around the 70-80th percentile of income earners in Singapore, (2) I have family (spouse included) that are pretty self-sufficient although I have been giving a token sum to my parents all these years, and (3) I don’t have kids.

I hope the above reasons are clear to demonstrate that not everyone in Singapore will be able to get to where I am in 15 years but I estimate that even without the second and third reasons, my portfolio would still be six figures but half or a third of what it currently is. I also hope that this doesn’t come across like I’m bragging because I’m not. In fact, if I were more disciplined with my investments, I reckon my portfolio would be seven figures or at least it would be very much closer to that milestone.

Money, Money, Money

In terms of net worth, it has continued to climb in line with the portfolio and no thanks to the forced CPF contributions required by the government. The property market in Singapore has continued to remain resilient despite higher interest rates and the new models that the Government has introduced to the BTO market. Nevertheless, I don’t track the market value of my property and value it at cost.

The biggest epiphany I’ve had this year is that many people in Singapore are probably not going to do well in retirement because they have little to no assets (besides their primary residence) that can help fight against inflation.

This year is probably the year where the mental budget for the cost of dining out in Singapore has reached a minimum of S$10 per meal. I remember visiting either the UK or Australia as a kid and thinking that dining out in those countries was so expensive because the average meal cost between 10-15 units of their currency.

Ladies and Gentlemen, I think this year will be the year where we can say that Singapore has reached that mark. If you dine out at any one of the newer hawker centres or coffeeshops, you’ll see that many of the mains are priced at around S$6-8. Once you add a cold drink, that’s easily close to S$10. If you go beyond the hawker centres and coffeeshops, it’s going to be very difficult to stay under S$10 per meal.

The wonderful thing about high(er) interest rates this year is that many risk-averse individuals learned about the joys of investing in T-bills. While that helped with the inflation situation a little, it didn’t actually help people get wealthier. If you think of someone running on a super long treadmill, T-bills just prevented someone from falling off the treadmill, it didn’t necessarily help them get ahead of the pack.

Invest in real assets, my friend.

This year really underscored the importance of owning real assets – businesses, real estate, or anything that allows for increasing prices over time.

While the principle is simple, the difficulty is in identifying which assets to own. Furthermore, the assets have to be purchased at a reasonable price, or the rate of return may not be sufficient to provide a return high enough to beat inflation.

Despite it being a difficult task, I don’t think one should avoid it unless you have a huge enough source of capital such that mediocre returns will still provide enough dollar returns for any current and future expenses.

Ok, that’s all I have to say. I know I haven’t been blogging much but that’s life.

Best Things I’ve Read All Week (20 Aug ’23)

It’s official. Singapore goes to the polls to elect a President on 1 Sep 2023.
In other news, markets have been coming down over the last couple of weeks. Bitcoin has also fallen off a cliff in the span of 3 days.

Photo by Mikes Photos on Pexels.com

$1b anti-money laundering raid in Singapore: Who are the 10 people charged? (Asiaone)
$1b money laundering case: 11 more properties linked to suspects (Asiaone)

I think what amazed me was the sheer number of properties in Singapore linked to this case. Also, given the information needed to even move money here and complete the transactions, wouldn’t all this have been flagged a lot sooner?

My tongue-in-cheek personal conspiracy theory is that the authorities identified the gang earlier on but allowed for the gang to complete moving a sizable sum here before nabbing them. The reason? So that the assets get sold once (benefitting sellers) and then get seized so that they can be sold again to generate another round of taxes collected.

If this were true, that’s some serious 4D chess that the authorities just played.

It Takes Nearly 3 Decades And Half A Million Bucks For An Average Singaporean To Feel Financially Free; 2023 Singlife Study Finds (Yahoo Finance)

$500K SGD seems rather low to me. I’m not sure what the survey asked to get the number but I expected the number to be closer to a million.

Nvidia circa 2023, Cisco circa 2000
(FT.com)

Hidden behind a paywall but greats charts showing the similarities between Nvidia’s shares today and Cisco’s back during the dot-com boom (and subsequent bust).

Finfluencers can’t finance: The Fifth Person edition

In a previous post, I wrote about how one Singaporean personal finance/investing personality got it totally wrong about Dollar-Cost Averaging.

Recently, another local outfit that purports to teach people about investing went into the same topic and came to terrible conclusions on the back of bad analysis.

The Fifth Person created a video titled “Lump Sum Vs Dollar-Cost Averaging – Which Is Better? Truth Revealed…” which came to several dubious conclusions.

Around the 11:55 mark, one of the presenters makes the claim that Dollar-Cost Averaging (DCA) or Lump-sum investing won’t work if you have markets that went nowhere and he cited the example of the Japanese stock market and presented this travesty of a chart.

Source: The Fifth Person YouTube channel

The biggest problem I have with this chart is the fact that these are price returns. Although the chart doesn’t explicitly say that these are price returns, I went to Yahoo Finance and pulled up the chart of the S&P500 over the same period, and lo and behold, it is indeed a price chart.

(note: you can tell it’s the same returns from the same of the curve or if you want to do your own due diligence, what I did was look at the returns from 1 Jan 1993 to 31 Jul 2023 which comes up to 953.21% which is roughly what’s indicated in the chart above.)

Source: Yahoo Finance

Dividends are part of returns

So why is this a problem? Well, finance 101 tells us that the source of equity returns can be divided into two parts – returns from income and returns from multiples expansion.

When you look at price returns, it only accounts for the returns due to increased earnings (which are only one part of earnings) and multiples expansion. A large part of returns from income comes in the form of dividends or in more recent times, share buybacks.

Finance theory tells us that when a company makes money and pays dividends, it reduces earnings left to reinvest in the business and therefore isn’t reflected in the price of the stock as those returns have already been realised (or consumed, if you like) by the shareholder and therefore should not be reflected in the price.

And the data proves it.

Total returns are often higher than Price returns and studies have been done to show that dividends provide anywhere from 30-50% of returns to an investor. For example, see this white paper by Hartford Funds.

Back to DCA

So back to the topic at hand.

In fact, logic would dictate that DCA would do better than lump-sum when markets are trending down or going nowhere since you keep accumulating additional shares at lower prices. In the case of the Nikkei, others have already done the work.

This post by A Frugal Doctor shows that an investor who DCA-ed $833 per month from Dec 1989 (the height of the Nikkei bubble) to Dec 2019 would have a portfolio of $617,545 while an investor who started with a lump-sum of $300,000 would have seen their portfolio shrink to $272,318 within the same period.

(Note: For those that prefer rates of return, DCA-ing into the Nikkei would have given a Money-Weighted Rate of Return of 4.22% p.a.. In a world where interest rates were zero or even negative, I think many Japanese would have been happy with 4.22% p.a..)

I’m not sure what those guys from The Fifth Investor consider “doesn’t work” but a result that is 227% better than the other option is a result that works for me.

Final Thoughts

I’m not saying that DCA is the best strategy out there or that it provides superior returns to lump-sum investing. I’m just saying that you have to know when it works and when it doesn’t. You also have to know how to measure returns accurately otherwise you’ll come to very wrong conclusions.

If you’re a beginning investor, you really need to be aware of the kind of advice that many finance YouTubers are peddling. Very often, these guys know a little to get started but not enough to get it right.

They’re also incentivised to get views so that they can make money from ads or through their affiliate links so they’ll do stuff like put a very click-baity title to get you to watch their videos. Oh, and those that sell a course for a few hundred bucks are the worse because all they teach are stuff cobbled together from the internet which you could have done for free.

All it takes is some time and effort.

Best Things I’ve Read All Week (6 Aug ’23)

The weekend before Singapore’s National Day!

Singapore turns 58 and having been born in Singapore and lived here all my life, I am proud to say that I have no regrets. While Singapore’s not perfect, I think it’s one of the few countries in the world where it’s safe even for a woman to go home alone at night. The public transportation here is also amazing – it’s affordable, convenient, and (mostly) reliable. Government spending is also not profligate, which is reflected in our fairly stable and strong currency. Lastly, while the ingredients are not the freshest because almost all of it has to be imported, the food is still amazing.

Happy National Day, Singapore!

Photo by Mikes Photos on Pexels.com

THE ROBO-ADVISOR CHOICE PARADOX
(cheerful.egg)

I didn’t realise that Endowus now has nearly 190 funds available for retail investors to choose from. That’s a ridiculous number of funds and really shows that they’ve lost the plot. In my course of work, I’ve met many fund houses trying to pitch different products and honestly, after hearing so many different pitches, they all sound the same.

Recently, I’ve been talking to many fund managers about ESG investing and it turns out that all of them pretty much tell me the same thing – it depends on what you want.

Need a product that excludes contentious sectors? No problem.
Need one that focuses on aligning the fund’s investments with the Paris Agreement? Sure, we have it.

And therein lies the rub. Fund managers just want your money. They don’t really care whether ESG makes sense as an investment or whether the way they implement ESG in investments makes sense; they’ll come up with products that they think clients will buy and the reason they have so many different types of products is because they have as many different types of clients.

If you ask me, a great fund is like a sushi master. A great sushi master focuses on making great sushi. If you don’t like sushi, that’s your right. Just go eat something else. The sushi master doesn’t care about your business, he just wants to be good at what he does.

Safe Withdrawal Rates Reading

The Problem with the 4% Rule (and Why You Could Retire Even Sooner) (madfientist)

The Problem With FIREing At 4% And The Need For Flexible Spending Rules (kitces.com)

Decision Rules and Maximum Initial Withdrawal Rates
(Journal of Financial Planning)

Kyith from Investment Moats did a great in-depth video on the 4% rule which led me down this rabbit hole because I’ve been aware of the other research surrounding safe withdrawal rates.

The first link provides a great point on a strategy that adjusts withdrawals based on returns in the stock markets (which impact portfolio values) and incorporates the idea that not all spending is necessary. If one is willing to adjust withdrawals for discretionary spending when times are bad, that greatly mitigates the sequence of return risk and therefore extends the longevity of the portfolio.

The second link provides an overview of safe withdrawal strategies alternative to the 4% rule.

The third link is to a paper by Guyton and Klinger which, using monte carlo simulation, provides insight into how different withdrawal rules affect a portfolio over a 30- and 40-year period. The findings of when portfolios are likely to run out of money also point to the usefulness of having a flexible withdrawal strategy (such as the strategy outlined in the first link). Very interesting paper.

Best Things I’ve Read All Week (16 Jul ’23)

What a week in Singapore and the markets.

In Singapore, almost everything that anyone wanted to talk about this week was the high-profile investigation into an alleged corruption case linking Singapore’s Minister of Transport and a Malaysian billionaire based in Singapore.

As I read some of the alleged reasons for the probe, I can’t help but think that if true, it is what some would call the cost of doing business in other countries. In Singapore, we just don’t take this kind of stuff too lightly.

As for markets, investors are bulls again following the lower-than-expected CPI report in the US. The icing on the cake was the resignation of Bullard, one of the Fed members who is a notable hawk. Sadly, this means that valuations in US markets are getting more expensive.

Despite the higher valuations and turn in optimism, my gut feeling is that it’s too soon to turn bearish. Markets may climb higher for a while before the bears get to see their day.

Photo by Mikes Photos on Pexels.com

Against Cassandras: The government debt ‘bomb’
(Klement on Investing)

Joachim Klement provides a good argument on why those worried about Government Debt are likely to be wrong. Here is his summary of the entire argument:

Central banks have and in my view will continue to monetise government debt to keep long-term bond yields low if they have to. People who are afraid that this may create runaway inflation have to explain why this was not the case in Japan over the last three decades. The ageing demographics in the US and Western Europe even help governments in keeping demand for their bonds high and reduce the need for central bank intervention. And in the US, there is additional support from the fact that the US Dollar is the world’s reserve currency and foreign investors have to hold US Treasuries, whether they like it or not.

Gig workers ‘most financially stretched’ group in Singapore; spending exceeds income: DBS study
(ChannelNewsAsia)

Do we really need a study to tell us that the groups of people most vulnerable to inflation and rising interest rates are gig workers, boomers, and those with low income?

South Korea’s archaic rental system is costing people their life savings
(The Business Times)

I first read the full article on Bloomberg. It’s really interesting that a rental system like this exists because it is just so different from other residential rental markets around the world. Here’s a description of the system:

Under a system that’s unique to South Korea, landlords collect a deposit called jeonse that’s equal to anywhere from 50 per cent to 90 per cent of a property’s value at the start of the lease period, which typically runs for two years. Tenants usually pay no rent for the duration, while the property owner profits by investing the funds, often to buy or build more apartments. Landlords are contractually obligated to refund the deposit at the end of the lease term.

And this is how the scheme has endured and why it’s finally unravelling:

What’s essentially a government-sanctioned pyramid scheme – in which landlords pay back the deposits of tenants whose leases are expiring with funds obtained from new renters – worked relatively smoothly when property prices in the country’s major cities were climbing. But that decades-long trend was thrown into reverse when the Bank of Korea began aggressively raising interest rates in 2021 to tame inflation.

I’m just amazed that no one packaged these loans into securities and tried to offload the risk to retail investors when times were good. Imagine you owning the liability to pay your neighbour’s jeonse and your neighbour owning yours.

Who would have your back, a Skrull or a commissioned FA?
(Growing your tree of prosperity)

Why it makes perfect sense that real estate/insurance agents and FAs are braggy
(The Woke Salaryman)

Sunday double feature on Financial Advisors in Singapore. As usual, Christopher Ng writes well and The Woke Salaryman tries to put across a point of view that isn’t very controversial or antagonistic. I don’t disagree with their points.

In fact, I agree that the system as it is designed right now, doesn’t benefit the customer.

Best Things I’ve Read All Week (9 Jul ’23)

It’s already July.

Photo by Mikes Photos on Pexels.com

Are Singapore properties becoming hot potato investments?
(Growing your tree of prosperity)

Christopher Ng shares a personal take on why being “asset-rich” is better than “cash-rich”.

I love personal stories like this. In my view, whether to have cash or property is a matter of switching out one asset class for another. The different asset classes just have different risk and reward characteristics. As he points out, over the long run, it’s very hard to get rich if you hold on to too much cash as inflation will eat away at your purchasing power.

The thing about property which my family had to learn the hard way is that you need to be able to have holding power in order to see those returns over the long term. And those returns depend heavily on which part of the property cycle you sell the asset. My family had to sell off a condo unit in order to fund my brother’s education. The property was bought before the onset of the Asian Financial Crisis and despite it being rented out for many years, my parents sold it for pretty much the same price they paid for it which meant they hardly made anything after accounting for transaction costs, operating costs, taxes, and inflation. Throw in opportunity cost and they probably lost money from this investment.

Couple’s two-home dream lands them in heavy debt
(The Straits Times)

This piece of news has been floating around the local investment blogosphere.

This tale follows more recent warnings on decoupling and I cannot verify if this is a true story or not but whether the tale is fiction or not can teach some lessons.

This cautionary tale sounds like the perfect story to warn would-be property buyers to be careful of what many property agents suggest to do when it comes to buying property in Singapore – have the property of residence in one spouse’s name so that the other spouse’s name can be used to buy another property for investment. When my wife and I were looking to buy our new place, this is the same strategy that a property agent floated to us.

If we had taken up this suggestion to decouple and buy two properties, we would probably have faced a little more stress as interest rates increased over the past year although it might have been a profitable operation seeing how home prices and rents have both increased as well.

But we didn’t go ahead because the tradeoffs that come with this investment are hefty. The first would be the need to use cash to pay for any excess that can’t be paid with CPF monies. Second, having two mortgages weighing down our necks would mean less flexibility in terms of any change in lifestyle (e.g. if either of us wanted to switch to part-time employment).

In general, decoupling to buy two properties less little room for error. In the case of the article, shit happened and they lost it all because their system was too tightly coupled. While Investment Moat’s take is that it was a run of bad luck, this couple obviously took on a lot of risks that they couldn’t afford to:

• Husband ran a business and businesses are notoriously tied to cycles. Would he have been comfortable paying for the mortgage if business was bad?
• One property was seized by creditors. This wouldn’t have happened if the property under the husband’s name was an HDB flat.
• Did they not stress test their comfort with interest rates rising? I remember a friend buying a property sometime around 2015 or 2016 and one of the things I asked him was “What’s the mortgage going to be if interest rates go up?”

In short, you don’t have to optimise to the point that there is no slack or buffer in the system. Be happy with lower rates of return if it means taking on non-fatal risks.

He Got Us to Diversify
(HumbleDollar)

Markowitz passed away earlier this week.

What a great post. The poem by John Burr Williams, Markowitz’s impact on the industry, and Peter Bernstein’s point on more volatile investments also bring more prone to permanent losses.

A must read.

Investing 101: DCA works when markets go nowhere

INVESTING 101:
DCA WORKS WHEN
MARKETS GO NOWHERE

In life, many people offer all sorts of advice. Some advice is based on facts and some, on anecdotes. Some advice will turn out to be useful and some, just plain wrong. Of course, most advice is well-meaning and if it turns out to be true or its effect, benign then there isn’t much harm in listening to it. But occasionally, some advice turns out to be very costly to those who listen to it.

I learned this the hard way many years ago when my mother advised me to study a certain combination of subjects for my ‘A’ level exams. At the time, being a 17-year-old who didn’t know better and couldn’t care less, I just took the advice at face value and followed it accordingly.

I suffered from the advice because I ended up studying subjects that I had no interest in and I wasn’t very good at. But you know what, my life turned out ok in the end so at least that advice wasn’t fatal after all.

Mr. Loo says DCA doesn’t work

In a recent video, Mr. Loo of 1M65 fame said that dollar-cost averaging (DCA) as an investment strategy doesn’t work. To be fair, he did elaborate that in his opinion, DCA doesn’t work because people are unlikely to stick to it rather than because DCA is mathematically flawed.

It is also true that research (most notably from Nick Magiulli) shows that lump-sum investing beats DCA most of the time, hence as an investor, odds are you should do a lump-sum investment rather than DCA into an investment.

Somewhere around the 17min 30s mark is where his advice gets into false and dangerous territory and this post is to call him out on that. Specifically, Mr. Loo said DCA-ing into the Straits Times Index (STI) over the last 15 years would leave an investor “dead”.

Now, I don’t know what he means by “dead” but I suppose a fair guess would mean that your returns would be sub-par or non-existent.

STI returns if you DCA-ed

The nice thing about people making statements about investing returns is that if you have the data, you can easily fact-check it.

And it so happens that I have total returns data for the STI for the last 15 and 3/4 years. In this case, total returns matter since we’re talking about buying and holding the index as an investment and therefore your returns would be a combination of income (also assuming you reinvest the income) and price appreciation.

I played around with different numbers and it turns out that if you start with a principal of $1,000 and DCA $100 every month into the STI, you would end up with a total of $29,299.67 (22.32% p.a.). With a starting sum of $10,000 and $100,000, you would be looking at final values (CAGRs) of $44,288.21 (9.89% p.a.) and $194,173.57 (4.45% p.a.) respectively.

As a comparison, investing the same amounts ($1000, $10,000, and $100,000 with a monthly inflow of $100) in the CPF SA (I assume the return to be 5% p.a. for the sake of easy math) would get you $4,469.23, $23,876.93, and $217,953.88 respectively.

If you would like to check the calculations, you can check out my Google spreadsheet here.

Notice something?

The larger the starting value, the lower the returns, which makes sense because the STI went nowhere in terms of price appreciation. More importantly, the higher the starting principal, the more it behaves like a lump-sum investment since the monthly amount ($100) is small relative to the initial sum and therefore, most of the returns are based on how much the initial sum compounds over time.

For smaller initial sums, you get much better returns because the amount that you DCA is large relative to the initial sum and therefore, makes a much bigger impact on the portfolio through the passage of time. The returns due to income compounded as prices remained low and DCA-ing meant investing at better yields.

In this very case, DCA works much better than you would expect it to EXACTLY because the index performed terribly in terms of price appreciation and went nowhere in the last 15 years. If it went down, adding to your investment lowers your cost, and since it never went up that much, the cost price didn’t get much higher.

I’m assuming that most people beginning their investment journey (and I also assume that a fair amount of Mr. Loo’s audience fall into this category) would fall into the scenario where they have a principal amount of $1,000 or $10,000 and are able to DCA $100 per month. This means that if they had DCA-ed into the STI, they would be anywhere from 1.85-6.55x better off than had you DCA-ed into the CPF SA.

If you happen to be one of the few able to start with $100,000, it’s also likely that you would be able to DCA more than $100 a month. If you could DCA $1,000 per month, that would give you roughly the same kind of CAGR as the scenario where one starts with $10,000 and invests $100 per month. To be exact, if you started with $100,000 and invested $1,000 a month, you would end up with $442,882.11 (10.38% p.a) which is a pretty good return without being exposed to foreign exchange risk and less volatility compared to US markets. If it were possible to invest the same initial and monthly amounts in the CPF SA at 5% p.a., you would have $238,769.27.

For most people, I’m guessing they would prefer $442K in their brokerage account versus $238K in their CPF.

I know investing in the STI carries a different sorts of risks compared to the CPF but what I’m trying to point out is that even relatively “dead” markets can provide good returns. For those that argue that the fairer comparison is the STI vs. the S&P 500 (which Mr. Loo advocates investing in), let’s just be clear that if you’re a beginning investor, you would prefer that the S&P be a “dead” market too as you are more likely to be able to DCA into an investment and if so, you don’t want prices to keep going up as you get invested over time.

Final thoughts

There is a lot of free advice on the internet nowadays and many people can seem like gurus thanks for one great idea that they had but if they haven’t really had much experience in a field, I would think twice about believing everything that they say.

In this particular case, listening to a so-called expert say that an investing strategy doesn’t work, especially in a moribund market is exactly the opposite of what you need to do. DCA-ing into falling or stagnant markets is exactly when the strategy works.

From the Nick Magiulli post above (emphasis mine):

I say “generally” because the only time when you are better off by doing DCA is when averaging into a falling market. However, it is precisely when the market is falling that you will be the least enthusiastic to keep buying. It is difficult to fight off these emotions, which is why the times when it is best to DCA, most investors won’t be able to stick to the strategy.

Case closed.

Best Things I’ve Read All Week (2 Jul ’23)

Biggest news of the week is the release of the report on the Ridout Road saga. Plenty of opinions floating around the internet on the report which makes for an interesting read.

Photo by Mikes Photos on Pexels.com

Workers want to stay remote, prompting an office real estate crisis
(Washington Post)

Uh-oh, this can’t end well.

I guess that at the end of the day, something will have to give.

Either (1) companies will force employees to return to the office which I think is doable if the labour market is softer, (2) banks get hit by the fallout from Commercial Real Estate (CRE) which is probable but creditors will probably extend and/or negotiate terms, or (3) it will be a long-drawn wringing out of all the excess in the market which could take decades.

Inside North Korea: “We are stuck, waiting to die”
(BBC)

When you read stuff like this, it makes you appreciate the fact that no matter where you were born, at least it isn’t in a place like North Korea where the odds are most probably stacked against you.

When Home Furnishing Instalment Plans Land Buyers in Debt
(RICE)

It’s funny that this is only on the news now because I recall hearing from someone many years ago that the business plan behind the installment plans provided by big-box retailers is precisely to entice more financially vulnerable consumers to buy big ticket items which can then be repossessed if the consumer defaults on payment, restored/repaired for cheap, and resold to another buyer.

I suppose this doesn’t work as well for electronics which can go obsolete pretty quickly but for sofas, mattresses, and the like, that’s what I heard.

Yeah so it’s funny that this is only making the news now when there’s a new business model – Buy Now Pay Later (BNPL) that is probably a concern as well. If you have a business touting great sales because of BNPL, don’t expect that to last.

How to spot a house price bubble
(Klement on Investing)

Great points on bubble watching.

The Dutch experience described in the post probably mirrors the situation in Singapore:

First, they show that until the 1970s, house prices were mostly determined by the cost of materials and labour to build a house, the supply of houses and population growth. But since the 1970s the drivers have shifted. Between 1970 and 2012 about 70% of the house price increase can be explained by the increase in capital and the cost of capital, while an additional 20% is explained by population growth. In other words, people have increasingly bought houses on debt (i.e. using mortgages) rather than buying them outright. And as mortgage rates dropped, people could afford to pay more for a house.

An equally important point made in the post is how you have to be careful about interpreting the results from too long a time series due to how the drivers of price in the market change over time.

Best Things I’ve Read All Week (25 Jun ’23)

It’s the final week of June.

Half the year’s over and markets have been surprisingly rosy. Not much in the financial news this week although news headlines have ranged from a private submersible vanity project blowing up, the astonishing popularity of Coldplay and Taylor Swift concert tickets, and as I write this, a possible turning point in the Russian-Ukraine war (?) with a Russian private military contractor going rouge.

Moving from financial stability to financial abundance takes Singaporeans 32.3 years: Study
(The Straits Times)

The study by wealth manager, St. James’s Place terms the different stages of wealth as financial stability, financial security, financial flexibility, financial freedom, and financial abundance.

I’m not sure whether the respondents in the survey are more conservative than usual but for it to take someone roughly 20 years to go from financial stability (being able to save money) to financial flexibility (sufficient financial assets to cover living expenses for up to one year) seems rather long to me.

How Should You Judge Your Investment Performance?
(A Wealth of Common Sense)

S.A.M.U.R.A.I

What a great acronym to remember what makes a proper benchmark. I’ve made comments on the appropriateness of benchmarks before so I won’t repeat them here.

Property Stories: 23 Jun ’23
(Stacked Homes)

Even though they can be quite long, I generally like the articles from Stacked Homes. I read this particular story about why the couple featured in the article decided to pay down their HDB loan and I saw this:

I don’t doubt the math but this is exactly the problem I have with the 1M65 movement. Even if you have $1.3 or $1.7 million, that amount of money won’t mean much in 35 years. To be clear, that sum of money is better than nothing but given the recent bout of inflation, you would think that people would be more aware of the impact of inflation.

However, it seems that many people still think in nominal terms and it’s a real concern because people are going to be in for a rude shock when they find out at the end of their working lives that all the money that they’ve saved away doesn’t necessarily translate into a better quality of life.

Doing some rough math, if inflation averages 2-3% p.a. for the next 35 years, $1.3 million will have the equivalent purchasing power of $450,000 – $650,000 today. As I said, it’s not nothing but I hesitate to call it a retirement plan.