Building a newbie portfolio

So someone asked me for help to build a portfolio. Our hypothetical investor wants to start with an initial investment of $3000, and a regular monthly contribution of $300, and not a whole lot besides that. Because the investor doesn’t have a whole lot of investment knowledge, they aren’t afraid to ask important questions that aren’t easily answered, such as:

‘So how much can I lose?’

‘Who am I investing with?’

‘What am I investing in?’

‘How much can I get out of this?’

‘How long will it take?’

‘Can I trust you?’

I do like big butts.

In other words, all very good questions that many salespeople will finesse their way through without giving you a straight answer. The reason for this pervasive evasive is somewhat nefarious, and not entirely relevant to for the purpose of this post, but suffice to note, these are all important questions that should be asked for all investments.

While the answers are important, so are the logic and assumptions behind the answers. After all, Bernie Madoff could easily answer any of the above six questions without breaking a sweat or, apparently, making an investment (link leads to an interview with Madoff, it’s pretty illuminating).

And regardless of what the recent crop of Sunday Times stories about young investor profiles will tell you, not everyone has the upper income parents/ financial advisor background/(very) high risk appetite/ $50k from parents/multi-industry business owner parents/multiple bank accounts and credit cards/ modeling career/frugal thrift to start off with a $20k portfolios. Personally, I question the message the Sunday Times investor profiles is sending. Advertisers should really find a better place for their ads. I’ve always admired the sports correspondents at TNP.

Back to the matter at hand; a starting amount of $3000 and a monthly contribution of $300, and about 40 years to play with till 65. Let’s also be really conservative and assume a nominal return of 3% p.a.

Say the investor retires at 65, and lives to a ripe age of 80.

Assuming all the above, we’re looking at a monthly income of around $4000 until 80 rolls along and our hypothetical investor dies gracefully. A couple of things I don’t know how to account for are inflation and the time value of money, but I’ll just leave that for now.

Peaking at around $743k, the question is then how can we achieve that 3% p.a. over a long period of 40 years. With only $3000, we’re looking at around one or two funds at best.

With that cap on options, I’m thinking of a half and half equity-bond mix. Given that bonds have had a terrific run over 2007 to 2012, I’m willing to take a little more risk on equity exposure right now. But for the sake of my sanity, I’ll go with the textbook 60/40 mix between equity and bonds.

To represent equity, I’m using the MSCI AC World TR, and for bonds, I’m looking at the Barclays Multiverse TR USD Unhedged, both in SGD terms. Drawing on 9.5 years of data (no real reason for that number, its entirely arbitrary), you see a good range of 12-month returns.

Based on the chart, one has a rough idea of how much one can win, lose and expect over a 12-mth period. This settles a good number of the above questions, with exception of ‘Who am I investing with?’

Suicide by statistics

A recent report titled ‘suicides hit all-time highs in Singapore’ first broke on the AFP, and subsequently got picked up by Bangkok Post, Yahoo! News Singapore, and even Fox news.

With all this attention, I wouldn’t fault someone for thinking that life in the land of eternal sunshine is a weary façade for depressed souls trying to claw their way out of Singapore Inc. 

Foolish Singaporeans, there is no escape!

It’s a catchy headline, I can’t fault them for that, but out of curiosity, I went looking for the dataset from the Samaritans of Singapore, and the claims are entirely true:

Suicides in Singapore hit an all-time high of 487 in 2012 as more young people bogged down by stress and relationship woes took their own lives, a charity group dealing with the problem said Friday.

The tally, a 29 percent increase from the 2011 total, was boosted by an 80 percent rise in the 20-29 age bracket, the Samaritans of Singapore (SOS) said in a statement. (Link)

But what feels a little lacking is some perspective. 

After all, a one year 29% increase in suicides does not a trend make. Drawing up the data showed the absolute number of suicides was indeed at all-time highs, but given a larger population to begin with, it doesn't seem entirely alarming.

I should probably point out that suicide through the lens of data and statistics is not the same as drilling down to the experience of each individual. The question I’m asking is not about the individual, it’s about the population as a whole, and every individual’s case is uniquely tragic.

But overall, society seems to be doing fairly all right.

Sources:

Total suicides, Source: Registry of Births and Deaths, Immigration and Checkpoints Authority, Singapore. Last accessed: http://www.samaritans.org.sg/National-Statistics.pdf

Population: Extracted from www.singstat.gov.sg

From a different angle, if total number of suicides is expressed as a percentage of total population, it still looks fairly stable.

Sources:

Total suicides, Source: Registry of Births and Deaths, Immigration and Checkpoints Authority, Singapore. Last accessed: http://www.samaritans.org.sg/National-Statistics.pdf

Population: Extracted from www.singstat.gov.sg

Now, if we were to compare suicides with total death rate, the picture shifts slightly.

Sources:

Death rate: CIA World Factbook

Total suicides: Source: Registry of Births and Deaths, Immigration and Checkpoints Authority, Singapore. Last accessed: http://www.samaritans.org.sg/National-Statistics.pdf

Population: Extracted from www.singstat.gov.sg

Things might look quite alarming, if not for the fact that while suicides are at all-time highs, death rates are at all-time lows: 3.41 deaths per 1000 population, according to the CIA World Factbook.

So the question becomes: why don't the all-time low death rates make headlines?

Numbers on a page

I’m generally wary of writing about data.

Numbers are a different language from words, the former developed primarily for quantifying, measuring and, in my case, stultifying.

Words on the other hand, being the general-purpose tool evolved over lifetimes of use and abuse, have the unenviable task of deal with the amorphous category of the immeasurable.

So while I can throw data on to a blank page, it generally looks much prettier when vomited onto a chart.

That's quite a lot of money.

The chart shows the growth of 60k, with an annual 12k investment, compounded at 8% per annum, will grow to roughly 2.2m in 30 years. The key question in this case is to find an investment that can reasonably be expected to compound reliably at 8% yearly for 30 years.

I’ve been told early-stage Ponzi schemes make excellent investments, but they seem to be in short supply.

Eat thine own cooking

I would have written this a long time ago, if my motivation wasn’t so readily eroded by distractions and general inertia.

Say you have about S$100,000 to invest, and in 10 years, you want to grow it to S$1,000,000. The actual numbers are unimportant, but the point is the compounded growth rate needed to achieve that goal. To get there in 10 years, you would need to grow that S$100,000 by around 26% every year, for 10 years.

When I was 20, I thought I’d be a millionaire by 30, and retire by 40 to live by the beach and surf and dive all day; and I thought 26% compounded over 10 years was a realistic rate of return. Ah, youth.

Merlyn Ee of the MAS was recently quoted saying, ‘We need to do more to help Singaporeans better prepare for life's unexpected events and to set aside adequate savings for their golden years.’ And citing a HSBC survey done,

Over half of Singapore respondents feel their financial preparations for a comfortable retirement are inadequate: 44% feel their preparations are not enough, whilst 12% are not preparing at all.

She does have rather lofty aspirations for financial advisors in Singapore:

Financial advisory firms can help Singaporeans realise these goals. My vision for the financial advisory industry in Singapore is for financial advisers to be viewed as professionals, just like lawyers, engineers and accountants, with their own code of conduct and high standards of practice.  We are not there yet.

With the exception of the last sentence, real reform lies in a more informed group of consumers, who won’t end up buying structured products, neglecting their investments, and falling for sales tactics practiced by some in the industry. The tricky bit is finance isn’t something people think about a lot. Sure those of us in the industry spend quite some time on it, but I would wager a good number of us, myself included, have quite a few blind spots when it comes to the financial 

phantasmagoria of products.

I can think of two reasons why. Firstly, many don’t have a foundation in finance. I certainly didn’t study finance. What I know has been gleaned over years of experience and a hodge-podge of financial literature often written for larger markets. I’d like to think I know the basic tents of investing but that leads to my second point; knowing versus doing.

This doesn’t get talked about enough. Doing finance is a bit like doing a budget. It sounds and feels good talking about it, but actually sitting down and itemizing income and expenditure ranks somewhere below watching grass grow. Picking investments is the fun part, like shopping for nerds. Portfolio maintenance, rebalancing, and creating excel models is the boring stuff.

If finance is going to be a bigger part of Singapore’s economy, it’s peculiar that not much emphasis is placed on the financial skills needed to make sense of the discipline, especially in schools. 

Some might say it’s a responsibility.

People on streets

After just under two weeks of haze craze, PSI numbers fall, visibility clears, and the air tastes refreshingly free of burnt rubber. Since no one knows if this recent development is mere respite or remission, I figured I’d grab the chance for a walk in the park.

PSI fell off a cliff, and hopefully never bounces back.

I don’t think much of PSI numbers. I’ll concede it can be a very useful measure of a very specific set of pollutants, but for an individual, there’s an easier way, called sticking your head out and taking a whiff. After all, I live in the East, and work in the South (as per NEA’s geographical definitions). As much as I miss the smell of burnt cocoa at Boon Lay MRT, (thanks Cadbury and ADM cocoa) my lungs can’t inhale that far.

Back in East Coast Park, feet slapping pavement, two items catch my attention.

One; there are a lot of people in East Coast on a Saturday night. Two; more than two aforementioned people are lying/sleeping/passed out on the floor.

By passed out on the floor, I don’t mean curled up with a makeshift pillow and a blanket under the numerous shelters along the park. I mean like this dude below, who looks like he sleep-rolled off the bench and onto the floor.

Sleeping like a baby.

Or like the young indian girl who was sprawled by the overhead bridge. I’m going to risk belaboring the obvious, but if you’re a slim female, with large breasts and a very short skirt, it might be a good idea to be very careful with what you consume. 

For reasons of modesty, I didn’t snap a picture. Her crotch was visible enough that would likely get my blog noticed for the wrong reasons. It was particularly troubling, because she didn’t reek of alcohol, and was fairly young and attractive. My first guess is date rape drug. But I’m no expert in these matters.

Thankfully, I wasn’t the only one who stopped to help. A few good Samaritans, including a rather hot milf in red shorts, a burly Indian man, a homely pinoy woman, and a trio of young NS men came along and started helping in ways that could only be described as random. While I’m trying to rouse indian girl, Burly tells pinoy to fetch some water. She returns, and Burly instructs me to stand back.

Stand back? Dude, how much water are you going to planning to – he pours a handful of water into his palm, and flings it against her face with somewhat more force than I was anticipating. No response.

Somewhere in the background, one of the NS trio goes, ‘fwahlaueh’.

Somewhat startled by Burly’s enthusiasm, I start shaking her with more urgency, lest he decides to douse the entire 1.5L bottle on her. Meanwhile, pinoy and milfy are tending to the delicate task of hiding too much crotch with too little skirt. They settle for placing her handbag strategically between her legs.

Meanwhile, burly has slapped at least three palms of water to the girl’s face, and I’m half-worried she’ll drown before she wakes up. Finally, she stirs, muttering and sputtering weakly. Of course, Burly then proceeds to grab her by the hair and tug her into a sitting position.

I’m convinced Burly is a time-travelling caveman; give him a stone axe and a shopping list that includes mastodon meat and sabre-toothed tiger pelts.

Somehow, we manage to raise indian girl to her feet with no hair loss, although the same can’t be said for her memory; she has no clue how she got here. Troubling to say the least, but at least she’s sober enough to protest against being sent to a police station to sleep off her condition. Round of discussion. 

Burly, clearly a man of action, starts speaking loudly in Tamil. I have no clue what he’s saying, but my sympathies lie with indian girl, who after recently revived, nearly drowned, and barely able to stand, now has to contend with a mustachioed caveman gibbering loudly to her face.

Eventually we decide to get her into a cab. Next issue, she says she has no money - nothing like budgetary constraints to stop a discussion in its tracks. Finally, milfy steps in, opens the handbag, and rummages through indian girl’s belongings.

‘I have no money,’ indian girl murmurs…then somewhat brightly, ‘but I have cigarettes!’

Thanks to milfy, turns out Indian girl does have money ('Oh, I do?' she says), and enough to get her home by taxi. But not before one of the NS trio suddenly swoops into interrogator mode, firing off questions, ‘What do you last remember? Who were you with? What were you doing?’ More than a few of us frowned, including Burly, although it’s hard to tell from his Neanderthal uni-brow whether he was perplexed or thinking of his next meal.

Finally, we get her into a cab, and the entire episode is punctuated by Burly slamming the taxi door.

I hope indian girl is home safe.

Alternatives to big Asia Pac funds

Following a raft of closures of top GEM funds, the next region to see a number of closures seems to be the Asia Pacific region, with at least one top Aberdeen executive providing guidance that the fund’s closure will come ‘sooner rather than later’, while another Aberdeen vet was quoted saying, ‘we wouldn’t be keen on having US$5b flood through the door’.

I like how Hugh Young probably evokes envy and annoyance by speaking plainly. Many an Asia Pacific and Asia Pacific ex-Japan equity fund love a US$5b flood like a desert in search of a fire hose. But investors, oh fickle souls they are, will tend to seek funds with the potential to turn their bucket of liquidity into a monetary oasis, from which springs forth the fruits of no labour. Or so they hope.

Besides, I could use a little practice with new software.

Pulling up a list of funds sold in Singapore, with a minimum 5-year track record and focused on the Asia Pacific/Asia Pacific ex-Japan region, I rank them based on their calmar ratio.

Not to be confused with the calamari ratio: the ratio of sauce to squid. 

Cal-what? Good question, prior to writing this article, your humble writer had no clue either.

The calmar ratio divides the average compounded return (of at least 36 months) by the maximum drawdown over the same period. I like it because it’s simpler than the Sharpe ratio, and the calmar ratio doesn’t muck about with nefariously misunderstood terms like volatility.

So from end-May 2013 to end-May 2008, the top 20 funds ranked by calmar are:

5/31/2008 to 5/31/2013	Calmar ratio
Name
Schroder ISF Asian Total Return A Acc	0.29
Value Partners High-Dividend Stocks Fund A1	0.22
CAM-GTF Ltd	0.20
First State Asian Equity Plus I (Distributing)	0.17
First State Dividend Advantage SGD	0.16
Aberdeen Pacific Equity SGD	0.15
Lumiere Value	0.14
First State Asian Growth I Accumulation USD	0.14
Schroder Asian Growth SGD	0.14
First State Asian Growth SGD	0.13
Legg Mason WA Southeast Asia Special Sits Trust	0.12
Aberdeen Global - Asia Pacific Eqty A2 USD	0.10
Old Mutual Pacific Equity A USD	0.10
Henderson HF Asian Dividend Income A2 USD	0.10
Schroder ISF Asian Equity Yield A Acc	0.09
Schroder Asian Equity Yield A	0.09
Barclays GA - Pacific Rim (ex-Japan) M Inc	0.09
Fidelity Funds - Asia Pacific Dividend A-USD	0.08
Invesco Pacific Equity A	0.08
Schroder ISF Asian Opportunities A Acc	0.08

Now, bearing in mind this is nothing more than a ranked list based on a ranking criterion selected more for simplicity than convention, there are obvious limitations to what you can draw from the list.

But safe to say, there are options.

For posterity #FreeMyInternet@Hong Lim Park

Yes, I did this. None of the photos belong to me.

I’m planning to be at Hong Lim Park from 4pm today. It’s a three hour investment, which I’d much rather spend in many other ways, so I guess I better pen down for posterity, ‘what was I thinking?’

#FreeMyInternet (#FMI) protesters in Singapore tend to get lumped into all sorts of different categories.

The government, or at least the ones that are publically quoted, seem to think #FMIers are either

a) overreacting and upsetting the status quo (i.e. the shit stirrer image), or

b) just need an outlet to vent (i.e. the cry fathermother image)

The participating online community, and there’s no shortage of comments posted online, are either

a) bastions of the freedom of expression (i.e. unrealistic idealist image)

b) protesting the absence of engagement (i.e. I’m angry because you didn’t invite me to the meeting!)

The mainstream media thinks the whole protest doesn’t exist. I’m exaggerating, but only slightly. SPH and Mediacorp’s absence is can only be explained by a) coercion (bor ji), b) cowardice (hum ji), or c) incompetence (pua ji).

To be fair, the government clearly has mainstream media’s balls in an ice-kachang machine. Cheong Yip Seng’s memoir explains it way better than my balls-in-a-dessert-machine analogy.

So why will I be there?

I’m not sufficiently annoyed to be angry, not sufficiently idealistic enough to think the protest will actually achieve much, nor sufficiently symbol-minded to think I’m making some statement about the state of freedom in death-penalty Disneyland.

Still, I think it’s important as Singapore’s online community negotiates its relationship with the world offline. If you take a global view, it’s a continuation of a trend that includes Occupy Wall Street, Arab Spring, Gezi Parki, and more relevantly, SOPA and PIPA.

Incidentally, Singapore signed the pending ACTA treaty, so it’s not like there was no foreshadowing of the approach of the MDA. The difference is ACTA was done on a global scale, with no consultation with international civic groups, yet there was little global outcry. So it’s an established trend: governments are finding ways to legitimize their claim to the internet staking out their domain, so to speak, and the law is a key tool to mark boundaries.

The key question for me is how the interaction between these two communities will play out. So I’m curious at best, which is a nice way of saying I’m bloody kaypoh.

Plus, I like my Youtube unfiltered please. 

So I can watch videos of a voluptuous woman dancing on butter to Adele.