[Ask FH] Building a balanced investment portfolio for Singaporeans – Part III

Taking the opportunity to respond to reader’s queries on portfolio building, investment advice, or anything finance related at all. I know I’ve been a bit slow on this one (some questions are from a month or two back), so my sincere apologies for that.

As always, if you have any burning questions on investing at all, drop me an email at [email protected] with the subject title [Ask FH], and I’ll respond to you personally via an article.

Note: I’ve tweaked/omitted some of the information below to protect the privacy of the readers. Accordingly, any resemblance with a person you know is purely coincidental. Please note that this article should not be construed as formal investment advice. If you are uncertain as to the steps you should take, please consult your stockbroker or a financial advisor. 🙂

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Dear FH 

I have chanced upon your article recently and have been following all your weekly blog since then. 

Your generosity in sharing your knowledge is most admirable and appreciated.  I am writing to you as I am at the crossroad of my investment journey. 

This is my profile n investment experiences thus far … 

I am fifty x years old n have retired two years ago after making sure I have enough to live on. 

Currently I have two fully paid condo with one on rental at $2.5k per month for my expenses and another for my own stay. 

In CPF under RA I have set aside $160k expecting $1100 monthly payout after age 65. Have withdrew rest of money under OA and RA to invest with a boutique fund manager.  These are my current investment 

• $1.8m with a boutique fund mgmt co based on 20% performance fees on high waterrmark. 
  • This fund focus on value investment in Asia market primarily with assets focusing in hang Seng 32% ,22% in South Korea , China h shares @6.5% n with rest in Malaysia , Taiwan , Japan , sin and Philippine . 
• SRS – $40k 
• $150k -with poems equity with 30% in  hkg market , 35% in US equity and 35% in sin market . 
• $180k – cash and/or for investment opportunity when market is down. 
• $250k – in corp bond. This will give me abt $9k yearLy for my expenses. 

With recent market correction, my portfolio with the boutique fund mgr have been badly affected. 

I have also realised that I have put 70% of my retirement fund in a single product and this may not be wise given my age n and that I have retired. 

I would like to withdraw some funds from my boutique fund mgmt and invest it myself.  Read about your portfolio allocation (Ray dalio]

but unsure how to proceed .. 

Do u manage portfolio for clients? And or do u have any recommendations for me?

I hope to achieve a regular passive income of $7k monthly .. sincerely appreciate ur advice in ways fwd .. 

Looking fwd to hear from u 

Many thanks 

 

FH Says: First off, welcome to Financial Horse!

As you have rightly mentioned, about 70% of your investments are concentrated in one single fund manager. Active fund management is a tricky thing. Once in a while you find an amazing fund manager who outperforms the market even after fees, and is able to do so for extended periods of time. If you find them, absolutely stick with them. These guys usually go on to become Hedge Fund legends (Ray Dalio, George Soros, Stan Drunkenmiller), and investors who managed to get in early, became really rich. And you really had to get in early because by the time the fund manager made a name for himself, there was no way you could get in unless you had at least S$100 million in assets.

Unfortunately, not all fund managers are this good. There are many who fail to outperform a broad stock market index after fees, and with these, you really need to decide if you want to stick with them. There’s a good article here on how to evaluate fund managers, and I’ve set out the broad criteria below:

1. An investment philosophy and process that systematically exploits market inefficiencies in a way that is consistent with the manager’s strengths and weaknesses
2. The temperament to remain rational and stick to the process when under tremendous psychological pressure
3. A structure that has an alignment of interests with the client, which usually means the manager has to be willing to make less money than they could if they just followed industry norms
4. A passion for more than just money – intrinsic motivators that will reinforce the above

As you can imagine, it’s incredibly difficult to evaluate something like this for your fund manager, who may not always be the most direct with you.

You mentioned that your fund focuses mainly on Asia, with a large concentration in Emerging Markets, so 2018 would have been an absolute disaster. It may recover in 2019, but it’s really hard to say with active management, because it really depends on how good the fund manager is. You do need to speak with him to understand his investment philosophy, and decide whether you want to continue sticking with him.

A quick note on the S$250k in corporate bonds, I presume you are invested in 1 lot of corporate bonds as an accredited investor? That’s quite a huge concentration risk there as well. Of course, if it’s a bond by a CapitaLand or DBS then obviously I wouldn’t be concerned (judging by the 3.6% yield it probably is a safe one?), but if its S$250k with a junk rated company I would be concerned.

Given your personal situation, your risk appetite should be low, and it should generally be geared towards capital preservation. I do agree that the All Weather Portfolio is a great place to start, as it’s designed to perform well in all financial conditions. I think your investments in SRS, cash, bonds, property, are all fine. You can also keep the Hong Kong, Singapore, and US shares as a hedge in case the stock market continues to go up. But the biggest decision point here, is really going to be about your funds with the investment fund. It generally sounds like the fund has a high risk profile that may not be ideal given your personal situation, but again, I don’t have the full details here, and you should probably have a conversation with your fund manager before making any decisions.

Good luck with your investment journey! It’s never too late to start, and if you ever have any queries, my door is always open.

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Hi!

Recently I came across quite a few advertisements on micro-investment apps/platforms that helps to save your spare change and invest them. From what I read it’s only available in the Western part of the world (do correct me if I’m wrong). I believe this concept has been around for couple of years, but just wanted to ask your opinion on it:

1) Do you think this platform will eventually be set up in Singapore? (especially since the government is recently seen as an advocate for fintech)

2) How viable is this sort of business? Will it just end up becoming another fad?

3) Do you encourage this sort of investment? 

Thank you in advance for answering my query.

Really enjoyed reading your site as well!

 

FH Says: That’s an interesting question. I’ve been to quite a few talks by these micro-investment apps, but I’ve never understood the need for them. Why do I need an app to help me save money, and to invest that money? If you’re doing it right, you should be saving a set amount of your income every month, and there should be a well thought out investment plan on how to invest it, whether on a monthly basis or quarterly basis.

My gut feel though, is that a lot of this is due to cultural differences between Asians and Americans. Asians love to save. We don’t need an app to help us do it. Americans on the other hand, spend almost all their income, and save whatever is left, so an app like this could be fantastic for them.

To answer your question, I think such apps definitely have a role to play in western markets, but may not fare so well in Asian markets. That said, if you find that the app works for you personally, then absolutely go with it! It really doesn’t matter whether it helps others, as long as it helps you.

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Hi FH,

I am a 52 year old Singaporean male who has recently(last 3 mths I think) started to read your articles which appeared in Finance.sg & now go direct to your site. I throughly really enjoy them & it’s different from the other blogs out there in sense it’s refreshing & independent.  Also I Guess I am not the average millennial who would be your main readership following 🙂

My question is – I am thinking to retire now(tired of working, last 28 years).  

Will the ‘All Weather Singapore Portfolio(Ray Dalio) version work for someone like me? (Assumption life to age 82)

Also your version has no Europe/Japan/EM exposure.  Any reason?

Really look forward to your reply & hopefully my retirement!

Thank You

 

FH Says: Thank you for the support! Absolutely not, as I’m starting to realise, there no longer is a “main readership” for this website. The only common thread here is that we are all fellow investors, which is something that I absolutely love. No matter our education background, our race or our age, in the world of investing, we are all equals and united by our love for investments.

Yes, your risk profile is similar to the lady in the first question above, because you’re looking to move into your wealth preservation phase (rather than wealth creation). Again the All Weather Portfolio is a great starting point, but of course, feel free to make personal changes to the template, as long as you keep to the broad asset allocation.

For example, in the stock component, I didn’t include Europe/Japan/EM because I’m quite wary of their growth going forward. But if you are bullish on them, you can swap out some US/Singapore exposure, and replace it with Europe/Japan/EM. Asset allocation is by far the most important consideration for a retail investor, so as long as you keep to the asset allocation in the all weather portfolio (ie. The allocation between bonds (intermediate and long term bonds), stocks, gold etc), you should be generally okay.

That said, I’ll touch briefly on why I’m not a fan of Europe/Japan/EM:

• Europe – Europe no longer has the secular tailwinds it had during the 19^th century. There was a time when Europe was the premier superpower in the world (almost all superpowers in the past 500 years save the US came from Europe). That time is long gone. Since 2012, the ECB has kept interest rates in the negative territory, and has been buying copious amounts of corporate debt. All that is going to end in 2019, and with the state of the European economy, I’m not confident their corporations can survive without this central bank life support. They’re also going through a period of political uncertainty (Brexit, Macron, and Merkel’s leaving will create a power vacuum in Germany), the Italian banking system is still on the verge of falling apart (this time there’s no Merkel to hold everything together), and chronic youth unemployment. None of this makes me bullish on the European economy, especially when compared to the US or China.
• Japan – Japan faces a lot of the problems that Europe does. Interest rates have been kept artificially low for almost 2 decades. This has given the Japanese economy a zombie-like feel, as large conglomerates are kept alive through cheap borrowings. They’ve been in and out of recessions over the past 10 years, simply because there hasn’t been that kind of “reset” of the debt cycle, where you allow the existing companies to burn and new ones to rise from the ashes. Couple that with an aging population, and huge competition from China, and you’ve got a horrible situation. Japan will never quite go away, they’re the third largest economy in the world, but the growth prospects here are not attractive, at least to me.
• Emerging Markets – Emerging Markets are too big of a category to discuss generally, because they include everything from Brazil to Argentina to Vietnam. I wasn’t bullish on EM in 2018 because the US Federal Reserve was on an aggressive rate hike cycle, which would have pressured these EM countries who borrowed heavily in US debt, and pressured their currencies as foreign investors withdrew investments (forcing them to raise interest rates to defend the currency, slowing the domestic economy). In 2019, it looks like the Federal Reserve is going to be a lot more cautious on raising rates, so EM may have a less horrible year. Unfortunately, I don’t think this EM crisis has played out fully yet, there hasn’t been that kind of bloodbath in the forex markets and an investor run in sentiment that would characterize the end of the deleveraging process.

That said, if you are bullish on either of the 3, you can always get exposure via a total stock market ETF. My approach is a more tactical one where I make certain allocation decisions based on my macro outlook. This can pay off if I’m right, but when you diversify, you lose less if you’re wrong.

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Dear FH,

My wife currently has 2 Living Plans from NTUC Income, LP1 paying a premium of $51.50/mth with cash value of $28,543.00 and LP2 paying a premium of $64.70/mth with cash value $15,578.00. The LP plans can be terminated after age 85, ie another 24 years to go.

During a recent appointment with NTUC Income manager, she was advised to give up her LP2 first and then followed by LP1 to fund for the recommended RevoRetire Plan which she has to pay premiums over a period of 5 years ie $15,500/year x 5 years or $77,500.00 total.

The monthly cash benefit after 5 years for the RevoRetire Plan is $881/mth for 10 years or $105,720.00.

Is it advisable for her to give up her Living Plans and opt for the RevoRetire Plan as recommended by the NTUC Income adviser?

With Best Regards,

 

FH Says: Wow that’s a really specific question. Unfortunately I don’t have the necessary information on your personal finance situation to really provide sound advice here.

However, from what I’m hearing, it sounds like you’re cancelling 2 living plans to purchase a new RevoRetire Plan? From where I’m sitting, my most immediate question is what makes this RevoRetire Plan so good that it justifies cancelling 2 existing plans for it?

The financial advisor earns a hefty commission from any new plan, so I can definitely see why they are keen on it, but you should also really understand why this new plan helps you. If you’re unable to fully understand the policy documents, you can always speak to the financial advisor again. Try to ask clear and direct questions, with a yes/no response, and don’t settle for vague answers. You really need to understand why the financial advisor is asking you to cancel 2 existing plans to purchase a new one, and what is in it for you. You can’t trust anyone other than yourself to safeguard your financial wellbeing, so don’t settle for anything other than the best for your financial situation.

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Hi FH,

I am new to investing and have been actively reading your articles as I found them to be objective and easy to understand for a newbie. I just left my job recently due to a reorganisation, luckily my severance package is pretty decent and I have also managed to build up a healthy pool of funds. I am 36 years old this year married with no kids. I read a lot about the global economy going through correction in 2019 after the long period of bull run, hence making me more weary about investing in equities.

Below is my financial situation

Cash holding – $200k
SRS – $45k (not invested)
Singapore Saving Bonds – $100k

Given I have max out my SSB, I wanted to look for other ways to maximise the dividend/ interest I am getting. I would rate my risk appetite as low given my current job situation and also that I am not familiar with investments. I would need about $80k for 12 months living expenses so technically I have about $120k to invest, including SRS that would be about $160k. Given my situation, I would love to hear your recommendations on investment options. I have been looking at Singtel shares and REITS due to their strong dividend yield and relative stability.

Thank you so much in advance for your time.

FH Says: Welcome to Financial Horse! So sorry to hear about your company reorganisation, but I’m confident you’ll be able to tide through this and find a better job.

That said, I would be wary of putting too much money into the stock market now as well, simply because we are likely nearing the end of this economic cycle, and there may be a global slowdown sometime in the next 2 to 3 years.

I don’t like Singtel for reasons discussed in a previous article. They’re very exposed to Emerging Markets, and there’s a lot of downside here in a recession. I like blue chip REITs, but a lot of these REITs have gone up in price significantly the last month, ever since the US Federal Reserve indicated they would be more cautious on rate hikes (eg. MCT, CCT, CMT).

Netlink Trust is an interesting one that you can look at, and that I like personally. Keppel KBS US REIT is too high risk for your profile.

Personally though, I’m actually putting a large amount of my new money into Singapore Savings Bonds. With the 1 year rate at 1.98% now, cash is no longer a terrible investment. And with stock prices where they are now, and the stage of the economic cycle, cash may actually be a good bet. It’s okay to sit on the cash for 2 to 3 years while it’s earning 1.98%, and deploy that into the stock market once there is a recession. That’s market timing sure, but I don’t really see any really compelling buys out there right now (except maybe Netlink Trust).

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Hi FH,

I am currently 25 and plan to invest around $1000 monthly in S&P 500. 

1. Would it be better for me to buy the Lion Global Infinity US 500 Stock Index monthly or accumulate my funds and buy the SPY:SPDR S&P 500 Trust ETF quarterly?
2. I’m concerned about liquidity issue if I were to cash out my investments in say 40 years as the Lion Global index fund has only SGD$44 million AUM whereas the SPY has around USD$280 billion.
3. I also have a hard time understanding the relevant fees involved in both instrument.
4. Would you consider a 100% allocation to S&P500 a risky / less diversified plan?

Regards,

 

Hi there! Congratulations on starting your investment journey! Let’s go through the questions individually:

1. Personally, I would do it quarterly and buy the SPY. Monthly is just too much work, and the transaction fees as a percentage of the investment will be too large. I also prefer the SPY because of the greater liquidity. The Lion Global Fund is an incredibly small fund with low trading volumes, and I hate low liquidity counters (you never know how they respond in times of financial stress). Okay, these days with algo-trading and high frequency trading nobody really knows how anything trades in times of financial stress, but I would still sleep easier at night holding the SPY with a US$250 billion market cap.
2. Absolutely right. Stick to the SPY. You can actually invest in the S&P500 via a London listed vehicle (VUSD) to save on withhold tax (15% vs 30%). I wrote on this previously, do check it out here.
3. It’s basically just a yearly management fee. With Lion Global you pay 475% a year to the fund manager (it’s deducted directly from the fund assets, so you don’t have to do anything). With the SPY, the fee is 0.09% a year. Seriously, just forget about Lion Global, the fees are about 5 times higher and it does the exact same thing with lesser liquidity.
4. 100% allocation (as a percentage of your investment assets) to the S&P500 is a high risk investment strategy. It’s basically a 100% allocation to stocks, with no diversification outside of the US index. Over a 30 year horizon, the returns are probably going to be decent, but in the shorter term, there could be a lot of volatility, and you really need to have the stomach to watch your investments fall 50% and not sell. I know it sounds easy on paper, but when the S&P500 fell 20% back in December, I myself was considering whether I had made the right investments. Don’t forget that we’re likely nearing the end of the cycle here, so the upside over the next 2 to 3 years may be limited, but the downside risk is very real. Of course, if your plan is to add S$1000 monthly over the next 30 years, then yeah I would say absolutely go for it, but perhaps add a bit more Asian exposure (via Singapore or Hong Kong stocks), because I do really like the Asian growth story over a 30 year time period.

All the best with your investment journey!

Till next time, Financial Horse, signing out!

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