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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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In accounting term, equity refers to the portion which a shareholder is entitled to in a company. The equity of a company is Assets less liabilities. Equity is also equal to Retained Earnings at the beginning of the period + Income + Other comprehensive Income - Dividends paid in that period.
In investment terminology, equity refers to investing in stocks. Because stocks are traded on the stock exchange, its stock price is often subjected to the demand and supply factor.
The risk of equity investments are: a) Market risk (i.e. when the equity market is in general downward direction, most stocks will also move in the similar direction) b) Liquidity risk (i.e. some stocks are thinly traded and hence difficult to buy or sell) c) Non-systematic risk (i.e. company's insider trading, fraud, mismanagement, etc)
For equity portfolio, we mean investing in a basket of many stocks either usually through a fund. By investing in a large basket of stocks, non-systematic risk can be eliminated and the remaining systematic risks remain. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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Fixed-income or bonds refer to the debt issue by a company. When a company wants to borrow money from the public, it will issue bonds. Lenders or investors buy these bonds. These bonds will pay a regular fixed interest through the tenure of the bond. When the bond matures, the company returns the "par" or face value of the bond. The risks of fixed-income are
a) default risk (i.e. the company simply has no money to repay its obligations), b) interest rate risk, when interest rate rises, the bond value decreases in value c) maturity period risk (i.e. the longer the maturity period the greater the sensitivity to interest rate risk) d) Credit risk (i.e. if the company is viewed as less credit worthily, the bond value decreases) e) Foreign currency risk if the bond is denominated in foreign currency f) Liquidity risk (i.e. there may not be sufficient buyer/seller in the market place) g) Non-systematic risk (i.e. company's insider trading, fraud, mismanagement, etc)
Fixed-income portfolio means that the investor invests in many bonds usually through a fund. By investing a large basket of fixed-income, non-systematic risk can be eliminated by the remaining risk remains. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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For equity investment, the sources of profit are capital gain, dividends and reinvestment income.
Take for example the MSCI World Index from 31 May 1989 to 29 May 2009, capital gain represents 47.41% of the profit while dividends & reinvestment income consists of the remaining 52.59% of the profit.
Dividends and reinvestment income are extremely important but it is often ignored and disregarded. For more information, read HERE (login required, clients only) |
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Last Updated ( Sunday, 05 July 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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It has been said to get potentially higher return, one must take risk. This is not entirely correct. There are two main sources of risks namely systematic and non-systematic risk.
Systematic risks are those which affects the entire broad market. Examples are interest rate risk, money supply, political risk, etc.
Non-systematic risks are those which are peculiar to the company concerned and does not affect the broad market. Examples of non-systematic risks are fraud, mismanagemnet, accounting "creativity", insider trading,etc.
Research has shown that taking on non-systematic risks do not translate to a potentially higher return in investments. Those who invests in a concentrated portfolio of stocks and bonds expose themselves to high non-systematic risk.
To eliminate non-systematic risk, diversification is the usual way to do that. Once non-systematic risk is eliminated through diversification, what is left is the systematic risk which research has shown to be the risk that translate to higher potential return. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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Most people lose money from investments because of: a) Speculation and investing in higher non-systematic risk b) Market timing such as investing when market is going up (thus buying at highs) and "cutting lost" when market is coming down which is selling when lows. c) High cost. High cost of investments comes from trading fees (i.e. brokerage fees), bid-ask spread, management fee, impact cost, sales charge (for unit trusts) and soft dollar commissions.
Most people would only invest when the economy is doing well but actually they are merely buying when market is already very high. The right way is to start investing when economy is not doing well because it is when the market is at low points.
Because of all the above reasons, most people has and will lose a lot of money investing. That's why investment is difficult primarily because of the human (wrong) behavior.
Investors can hire financial advisers to help them invest. However, clients will only listen to financial advisers when the overall economy is doing well. Thus, most investors will still lose a lot of money investing even if they hire financial advisers to help them. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Saturday, 08 August 2009 |
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The best time to invest is when there is fear; the worst time to invest is when there is greed in the market.
That is to say that the best time is when market is down and that the economy is in despair, when job losses are high with massive retrenchments. However, avoid individual stocks because companies can close down if economy becomes very bad.
The worst time to invest is when unemployment rate is low, when economy is good, when wages keep on increasing and when the equity market is marching higher and higher everyday.
In practice, most people will only seek financial advice when market is “good” which ironically is the worst time to buy. Financial advisers who could only earn a commission selling investment products will tell their clients to buy despite it being the worst time to do so.
Hardly anyone would seek advice from financial adviser when times are bad. In fact, many financial advisers themselves would recommend “safer” products such as a commission paying single premium endowment when actually it is the best time to enter into equity markets.
That is why most people will never earn anything from investing – whether they have a professional adviser or Do-It-Yourself.
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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Most people will exaggerate earnings from investments due to the following reasons:
a) It is shameful to tell others you have lost a lot of money. Thus people will tend to exaggerate earnings when it is actually quite small b) People tend to "write-off" past investment mistakes and pretend it never happen and so they don't tell people about their shameful past c) Earnings are exaggerated because of failure to take into account of cost and time value for money. For example, those invest in properties tend to exaggerate their earnings because they fail to take into account i) cost of capital, maintenance cost, conservancy charges, transaction cost such as agents' fees and legal fees and time spent. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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Property appears to be a better investment due to the following reason: a) The property value appears to be less volatile than the stock market b) The capital gain seems to be larger compared to stock investments
For (a), the property value appear to be less volatile is due to the fact that property are illiquid assets that are seldom traded on the open market. At any one time, the number of properties being traded is many time less than the total properties in the market. Due do this lack of liquidity, those who wish to know their property value is required to make a valuation. The valuator will use various appraisal techniques which tends to "average" out the property price. What will be observed will be a property price that seems to be less volatile compared with other type of investments such as stock. In reality, the fair price of a property is the actual transaction by two informed parties at arm's length. Since properties are seldom traded, the "fair price" is only estimated using appraisal techniques. In other words, the seemingly low volatility of property price is merely an illusion.
b) The capital gain appears to be larger because most property investors leverage using mortgage loans. Secure loan such as mortgage loan is easier to obtain than unsecured loan. The leverage effect tends to amplify the gains (or losses). However, the cost of capital which is the interest of these loan is based on the borrowed amount and not the investor's own capital. Thus, many people fail to account for the large interest that they are paying. Hence the seemingly larger capital gain can be quickly eroded by the high interest being paid. Much of the transaction cost (like agents' fees) are based on the price of the property and not the investor's own capital. Thus, the transaction fee is extremely high for leveraged purchase. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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Research has shown that 90% of the portfolio return variability can be explained by asset allocation.
By mixing a combination of bonds and equities, it is possible to adjust the risk of the portfolio and at the same time determine the potential return. A greater proportion to equities increase the risk of the portfolio but provide a potentially higher return on a long run. On the other hand a lower proportion to bonds decreases risk but also decreases potential return. It is important that what make up the bonds and equities are very important. If the bonds consists of non-investment grade bonds, it the risk of such bonds are high (not low). On the other hand, if the equities consists of all defensive stocks, than the long term return of such equity portfolio will be potentially low, not high.
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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The market return refers to the performance of the broad equity market. For Singapore, the STI index is commonly used as a market return. For US, the S&P 500 is often used. For global but developed countries, the MSCI World Index is commonly used. For emerging market, the MSCI Emerging Market Index is often used.
When refer to an index, it is important to ask when is the index merely tracking the price index of the underlying securities or does it take into account of reinvesting the dividends. This is very important because dividends and reinvestment income takes up as much as half of the total profit over a long-term basis. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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A "benchmark" is the how a fund manager is judged against. It is often a market index such as S&P500, STI or MSCI World index, etc. If a fund manager can consistently outperform the index, it means the fund manager is good otherwise the investor is better off investing in the benchmark itself using index funds. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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For unit trusts, the cost of investment is sales charge, management fee, soft dollar commissions, bid-ask spread, impact cost and brokerage fee. My estimate of these cost is between 4.55% pa to 9.2% pa. The cost is even greater if the fund size is small.
For ETFs, the cost of investment is bid-ask spread, brokerage fee, management fee, impact cost. My estimate of these cost is between 0.90% pa to 1.55% pa.
Because of unit trusts extremely high cost, I do not recommend investing in unit trusts unless there are restrictions.
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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The duty of the investment adviser is to determine
a) The clients' financial goals and time horizon b) Determine the clients' risk appetite c) Determine the clients' ability to take risk d) Construct and recommend a suitable portfolio e) Make adjustment to the portfolio based on any changes to the clients' financial situation
If the investment adviser cannot guarantee outperformance to the market return, the adviser should recommend a portfolio of index funds. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Monday, 22 June 2009 |
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Let's assume the dividend yield is 3% per annum. To get $100 in dividends per year, you will need to have a portfolio size of 100/0.03=$3,333.00. This assumes that the expense ratio do not exceed 3% in a year otherwise there will be no dividends. Many unit trusts have expense ratio + hidden fee exceeding this amount. It is best to consider using ETFs for a low cost and diversified instrument. |
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Last Updated ( Monday, 21 September 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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Because investment entail risks, it is not necessary to take such risk if you are not required to do so. For example if you are a high income earner and a good saver and do not mind a modest retirement lifestyle, you do not need to take risk as your savings could be sufficient to support your retirement. You should check with your financial adviser to deterimine whether is your current savings sufficient for your retirement. However, do be careful that many financial advisers will try to sell you investment products to earn a commission. You should consider someone who is fee-based and ethical. |
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Last Updated ( Sunday, 28 June 2009 )
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Written by Wilfred Ling
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Sunday, 28 June 2009 |
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No, fixed-deposits could be the worst place to save to. Firstly, when you place money with a bank, the bank will always try to ask you to invest in some structured products and "favor of the month. You will be constantly harassed. Secondly, only the amount insured by the Singapore Government is safe. Anything that is not insured is subjected to the credit risk of the bank. Thus, if the bank default, only the amount insured by the government is safe. Thirdly, there exists a risk-less instrument called Singapore Government Securities (SGS) which you can buy that has no risk. This is a bond guaranteed by the Singapore government and it represents the safest instrument in Singapore you can find. The interest rate for SGS is lower than a fixed deposits. However, the higher interest rate from the bank is merely to compensate you for the default risk and the potential to be mis-sold dangerous products when you visit a bank. If you end up being mis-sold or the bank defaults, even if the fixed-deposit earns you 10% in yield you will also not be interested. My advice is that if you cannot afford to lose your money or you have no wish to be harassed, you may want to consider the SGS. You can speak to a financial adviser if in doubt but remember that financial advisers earns nothing from recommending SGS bonds and hence you are likely to be recommended a commission paying product. |
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Written by Wilfred Ling
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Sunday, 09 November 2008 |
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Many people like to buy structured product. Although this product is currently not popular anymore due to its poor publicity, but it will become very popular again because people has very poor memory. Some of these structured product is really lousy. To understand why, you will need to use probability maths to figure it out. |
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Last Updated ( Monday, 29 June 2009 )
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Read more...
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Written by Wilfred Ling
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Monday, 29 June 2009 |
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Structured product usually provide some form of capital protection with the potential of upside. It is usually require the client to hold on to the investment for certain number of years. At maturity, the principle is returned. An additional bonus is provided if the underlying investments meet certain target. A structured product in reality invests in derivatives. Here is an illustration of how this work: |
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Last Updated ( Wednesday, 01 July 2009 )
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Read more...
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Written by Wilfred Ling
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Monday, 11 January 2010 |
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Very often I come across cases in which the client is unable to distinguish between investment and savings. The confusion is usually related to the unfamiliarity with the different asset classes. |
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