Protecting your investments against the storms

Our journey towards financial freedom will be fraught with storms and showers that threaten to challenge each step that we take towards our goal.

Preserving capital amidst the financial storms
Investments is about growing your money at a reasonable rate of return for the risk you take. I am still reading "The Intelligent Investor" by Benjamin Graham and am struck but his thoughts on the level of risk that one should take. By Graham's reckoning, the amount of risk we take should be commensurate to the amount of time and effort that we can put into monitoring, selecting and managing your investments.

Many of us (and I include myself) are unsophisticated investors and need to be careful about market timing. No other time does this ring true that our recent stock markets in the Singapore Exchange (SGX) and the NY Stock Exchange (NYSE). Recession fears as well as fear of contagion by the sub-prime write-downs on some of the largest US banks on Wall Street have affected the US economy and the investor is starting to get very nervy about the stock market. This has seen my portfolio move towards the red in terms of unrealised losses and I have had to take some unpopular measures of cutting losses and preserving capital.

If you have holding power, i.e. can hold on to your investments for next 10-20 years without liquidating them, you will have a high chance of riding out these recent storms unscathed. However, if you need some cash for unexpected big ticket item, then our SGX may not yield much as many of the blue chips even are languishing in anticipation of a US recession despite Singapore Inc's engine still churning strongly.

Where do we find safe havens?
The closest thing to safety for me is treasury bills and Maybank iSavvy savings. Treasury bills are now yielding pretty low returns of around 1.7%+. Time deposits are not that much higher for lock-in tenures of easily 6 mths and above and for large denominations of $25,000 and above. Maybank's iSavvy still gives a return of 1.68% on balances exceeding $5,000 and is still decent considering the liquidity it offers.

I have pared down my asset allocation in equity to 70% plus from an earlier 90% plus. I have eaten realised losses on two speculative punts that went sour. Enough punting for 2008! It's time to relook at fundamentals by being focussed at quality stocks without trying to beat the market. 2007 was good to me as the market was generally bullish for the 1st 2.5 quarters. The latter part of the calendar year was more volatile.

What now, brown cow?
Given my propensity to punt on the counters that give me a negative return, i.e. make me lose money, I will use this opportunity to stop punting and focus on finishing "The Intelligent Investor" by Benjamin Graham. One of the lessons I learnt during this period is that the market is there for us. So long as I continue to live within my means, save and invest (safely now in treasury bills and iSavvy), my journey towards financial freedom still goes on albeit at a slightly slower pace. :-)

Part of winning the game of financial freedom is to preserve capital and to be patient. Invest safely and remember that it's not wrong to be defensive and let your money grow at 1.8% in treasury bills while reviewing your investment strategy.

Be well and prosper!

Staying on course in equities

Why invest in stocks and shares (equities)
Investing in stocks and shares (equities) is not without risk. Prices of shares can go up and they can go down. However, one of the historical facts that most investment books will tell you is that over the long term of 20-30 years, investments in shares have generally beaten the rate of inflation.

Inflation eats into the purchasing power of our savings
In Singapore, recent data for August 2007 inflation rate or the Consumer Price Index shows an increase of 2.9%. This is the comparison against the rate of inflation in August 2006. It is not difficult to see from our own experiences of the increase in the prices of drinks in coffeeshops and foodcourts as well as increase in prices of groceries that inflation is happening in the booming Singapore economy.

One of the reasons I became interested in investing in equities was that it provided you with an investment asset that could yield dividends in excess of the bank savings rate of 0.25% or even treasury bills at around 2%+ or fixed deposits. The rate of inflation in Singapore is guaranteed to be higher than the 0.25% savings we are getting from our bank savings, hence, in order for us not to see our purchasing power decline, we have to look for higher yielding investments.

Advantages and benefits of investing in equities
The main advantage of investing in equities is that if the company is profitable and growing in its earnings, the share price will tend to rise to reflect its growth and prospects. In addition, if you invest in sound, well-run companies in businesses that are growing in tandem with the growing economy, such companies tend to reward investors with dividends and the discounted cash flows from its future earnings will be reflected in its share price.

Historically, if you had invested in the S&P500 for the last 20 years and benchmarked it against the rate of inflation, you would have easily beaten the rate of inflation from your investments.

When you invest in a company's shares, you are participating in the profits (and possible losses) of the company. The company works to make money for you day and night since management is there to oversee the operations and companies that pay dividend generate passive income even while you are working on your day-job.

Disadvantages and risks of investing in equities
In reality, share prices can go up and they can go down even if the fundamental business of the company is sound, it is profitable and it is paying dividends. For instance, the recent sub-prime issues arising from the US affected many blue-chip shares in Singapore Exchange even those that did not have much exposure to it as the US New York Stock Exchange and consumer sentiment about the liquidity crunch affected investors short-term expectations of share prices.

The STI dropped to 2900+ levels even when fundamentally the Singapore economy was on track and poised to hit the 4-6% growth estimates by the Government. Therein lies the risk of the stock market. As much as the prices of stocks theoretically are expected to reflect the future earnings of a company, it is also driven by investors sentiment and expectations of the fair value of these companies given all the various factors. Therefore, even if the Singapore economy is on track for a good performance and companies are on track with profit estimates, share prices in the short-term can fluctuate wildly and if you are strapped for cash and need to sell your shares to raise money to pay for your car or house loans, then you would have been hit very hard and made big capital losses on your share investments.

Investing in equities also requires some degree of understanding of the stock market and about stocks and shares and the company's business in general. However, if you are interested to become financially free, to grow your retirement nest and to be responsible for your own financial situation, then it is not a black box you should be afraid of!

I too knew little about the stock market until the Singtel initial public offer turned almost 1 in 3 Singaporeans into share owners. However, it was not until 2003 that I really got involved in managing my own money and actively investing in the stock market.

My track record has been reasonable as I managed to achieve 8-10% compounded annual grow rate in my returns over the last 5 years. It is not the Berkshire Hathaway standard but it beats the rate of inflation hands-down.

If you apply the rule of 72 to 8%, then my investments will double in value in 72/8=9 years' time. :-)

Decide for yourself
Before you decide for yourself whether you have what it takes to invest in the equity market. Do consider the following:

• Your risk tolerance
  
• Your investment horizon (time period)
• Your targetted rate of return
• Your own personality, knowledge and skill

No one can guarantee that you can make money in the stock market. There is a very real risk of losing ALL of your money investing in shares in any stock market, including the Singapore Exchange. You have to decide for yourself if equities are an appropriate asset class for your investment portfolio and then take action to participate in this market.

Remember, doing nothing or investing in fixed deposits and treasury bills alone is also risky. The risk comes in inflation eroding away the value of your savings. Investing in equities comes with a much higher risk that investing in fixed deposits and equities and you must know what you are doing. But there is no perfect investment that yields a high return and virtually no risk.

Whatever you choose, be well and prosper.

Alternative investments

In our modern era of "get rich fast or die trying" culture, investments promise both financial freedom and financial ruin both in equal measures to the unwary and the unprepared investor.

Why is this so?

There's a sucker born every minute
As the famous saying goes, "There's a sucker born every minute." Investment scams abound in today's world especially with the internet replacing face-to-face interactions with websites, URLs, forums, MSN, emails and electronic communications. This helps to create an environment where fraudsters, scammers and other unethical scoundrels can leverage on the internet to lure you, yes -- you! the unsuspecting investor with lures of low risk and high returns. "Sure-thing" type of investment products and packages.

In order for us to be equipped to know more about the risks of investing, especially in fraudulent schemes, the Better Business Bureau (BBB) has some useful resources for us to check out.

The BBB warns us to consider the following taken from http://www.bbb.org/alerts/article.asp?ID=358, article titled, "Investment Fraud Proliferates":

• Take your time before investing your money. Don't be pressured into buying. Be wary if you are urged to "buy now or forever lose your opportunity to profit."
• Research the investment opportunity. It's unlikely you will make money in a business deal you can't understand or verify.
• Find out about the company's reputation. Invest only in offers you know something about.
• Obtain all the information you can about the company and verify the data with impartial, outside sources. Contact the Better Business Bureau to get a reliability report on the company.
• Be extremely skeptical and cautious about any unsolicited phone calls you may receive about investments.
• Also, don't believe everything you read - or assume that all slick promotional materials and web sites offering investment deals are legitimate.
• Don't send money by overnight delivery or wire transfer, or authorize a credit card, payment or automatic debit to your bank account to anyone you don't know.
• If in doubt, do not part with your money. Seek professional advice."

One of the key reasons why people lose money to scams and fraudulent schemes is the lack of understanding of the investment product or scheme. We fall prey because of lack of knowledge and sometimes because of lack of due diligence on our part to find out more about what we are investing in.

Before you go on into the next "sure make" type of investment be it land banking, wine investments, paintings, commodities, practice what Confucious said, "know what you know and also know what you know not, that is true knowledge."

Be well and prosper.