Investment plan for 2018 and beyond (DCA of STI ETF)
DCA of STI ETF
I have started my investment journey since June 2016 in the depths of the Singapore recession. Graduating at the onset of a recession is a calamitous time. Nonetheless, after I have built up sufficient savings to meet any immediate needs for the next 3-6 months, I started on DCA of STI ETF (ongoing) on a monthly basis and OCBC (discontinued since Apr 2017) since then. There had been many bloggers espousing on the merits of the STI ETF and equally vocal opponents criticising on its numerous limitations. On my personal front, I adopt a hybrid (passive + active) approach towards my portfolio.
I have started my investment journey since June 2016 in the depths of the Singapore recession. Graduating at the onset of a recession is a calamitous time. Nonetheless, after I have built up sufficient savings to meet any immediate needs for the next 3-6 months, I started on DCA of STI ETF (ongoing) on a monthly basis and OCBC (discontinued since Apr 2017) since then. There had been many bloggers espousing on the merits of the STI ETF and equally vocal opponents criticising on its numerous limitations. On my personal front, I adopt a hybrid (passive + active) approach towards my portfolio.
My passive approach is to allocate fixed sum of my monthly income into DCA STI ETF.
My tactical approach whereby I actively screen and pick stocks. I will plant them in my watchlist and monitor them if they have dropped down to attractive valuation levels. I will set aside a war chest to capitalise on potential market dips / heavy correction / general optimism and pessimism and do active buying / selling based on a holding period of 3-5 years or more.
For active stock selection, I usually initiate a position based on the conviction of my analysis and performance of the company, then proceed to average down / up if performance improves. If the performance deteriorates, I will proceed to sell 30/70/100% of my holdings if it doesn't live up to its thesis.
Now the important question. Why STI ETF?
For active stock selection, I usually initiate a position based on the conviction of my analysis and performance of the company, then proceed to average down / up if performance improves. If the performance deteriorates, I will proceed to sell 30/70/100% of my holdings if it doesn't live up to its thesis.
Now the important question. Why STI ETF?
Proponents views of STI ETF
https://www.drwealth.com/sti-etf/
https://www.drwealth.com/sti-etf/
Opposition views of STI ETF
https://financialhorse.com/sti-etf/
https://www.my15hourworkweek.com/2017/10/24/what-if-i-had-invested-in-the-sti-etf-for-the-past-7-years/
https://financialhorse.com/sti-etf/
https://www.my15hourworkweek.com/2017/10/24/what-if-i-had-invested-in-the-sti-etf-for-the-past-7-years/
What is the STI ETF. Why the STI ETF?
Low cost diversification and ownership of 30 stocks with highest market cap
Low cost diversification and ownership of 30 stocks with highest market cap
1) Low cost
Pros
i) It is easier to buy 1 ETF that tracks the index rather than buying the stocks of 30 companies, and manually adjust portfolio to track the market. Passive ETF management fees is generally lower than active fund managers.
ii) For people with small investment capital or are unwilling / unable to fork out larger lump sum trades for individual companies, it is a cost efficient approach.
Cons
i) There might be overseas Vanguard funds that beat Nikko AM and State Street SPDR STI ETF management costs by a significant margin. I have not researched on them sufficiently. Nonetheless, as I mature as an investor, I might be considering those ETFs as I may not have sufficient competence in quantitative and qualitative analysis of stocks in different markets. Different accounting methods and financial reporting standards can greatly distort the quality of my analysis and it may be Garbage In Garbage out.
2) Exposure to 30 stocks
Pros
i) Diversification across different sectors reduces risk of crippling losses on one single company or industry.
ii) Inbuilt portfolio management mechanism without any additional intervention required.
iii) I can better utilise my time to research on specific companies within my circle of competence. I can gain exposure to large companies which have great potential but not within my circle of competence, and also focus on smaller cap stocks / non STI stocks that are neglected by the market.
iv) Academics have touted the Efficient market hypothesis and Markovitz efficient portfolio theory, whereby it is very difficult to beat the market. The ETF should track the overall market closely and theoretically reflect the optimal results with respect to time spent.
ii) Contrary to popular belief, I do not believe that the STI ETF will suffer from country concentration risk (Singapore). Country concentration risk is not severe if evaluated from bottom up analysis. Companies like Singtel, local banks, Jardine Matheson, and the other constituents have multiple revenue sources from different countries. They are growing towards the Singapore MNC thesis and I see the STI ETF as a ASEAN exposed ETF (hopefully) if the growth story of ASEAN plays out.
Cons
i) Diversification should be throughout the best companies and not just a convenient basket of companies. If you are willing and able to spend the time and effort to pick the better ones, you can achieve stronger diversification through non-correlated assets
3) Largest Market cap Methodology
Pros
i) Usually, if the companies can grow to a sizeable market cap over time, there are certain qualities / fundamentals that allows it to support its growth and increase its profitability to reach a certain size. Although the capital gain of the company may be limited, the dividend will be generally stronger than smaller companies.
ii) Inbuilt defence mechanism. Companies that consistently underperform will be replaced with others that consistently perform better. The removal of Sing post, Noble, SMRT etc also suggests a evolving portfolio that is able to adjust to auto include the 30 strongest performers and exclude weak performers.
Cons
i) The capital gain of those STI constituents will usually be stunted unless they are successfully growing overseas. Compared to US stocks whereby entrepreneurs are focused on capturing larger local markets, and growing their business overseas, the stronger Singapore local incumbents generally rest on their laurels and is satisfied with milking the local population dry instead of growing the business. Without expansion to overseas markets and stunted profitability of the individual companies, the STI ETF is unlikely to be a high performer.
ii) The largest market cap approach is at conflict with the fundamentally weighted approach. Although the largest market cap methodology will incur lower costs, they will not pick the stocks with the best ROE / lowest P/E / other fundamental metrics. The STI ETF portfolio is not built for performance but for stability.
4) Performance
https://www.drwealth.com/sti-etf/
Pros
i) Generally Strong dividend payout history. Absence of capital gain tax and additional dividend tax in Singapore. Dividends for individual REIT S do not incur additional taxation in Singapore.
ii) Modest and satisfactory return if you do not know how to pick stocks.
Cons
i) Long term underperformance of STI ETF compared to global indices. Does not contain the strongest /most profitable companies in the world. Return on investment is mediocre compared to the low cost US market index Vanguard ETFS
https://www.investopedia.com/articles/investing/040516/10-cheapest-vanguard-etfs-voo-vti.asp
ii) I project STI ETF to have mediocre capital gain, considering Singapore is at its mature phase. The only avenue of growth is for Singapore companies to build up globalised MNCS and grow to the level of Microsoft / Apple / Hershey /MacDonald etc.
iii) Singapore is a small economy exposed to many global headwinds. Any slight change in global-political tensions will be actively reflected in the closely monitored stocks in the STI ETF. For traders whom thrive on volatility, STI ETF is probably a good trading tool. For passive investors like me, it is probably best to do a DCA then to try to divine the actions of irrational Mr Market.
iv) Local companies based on the traditional brick and mortar business model is unlikely to do well as Singapore has incredibly high costs of production, manpower input costs as well as rental. This might present a case to conduct active investing in the following.
REITS is a necessary evil for a profitable portfolio as the fundamentals are very strong in Singapore. Some of the stronger local companies belong to the Construction and REIT sector. Their ability to manage finances to continually expand overseas, utilising the resources of other countries and maintaining profitable malls / estates is greatly underrated. However, IMHO most REITS are overall not undervalued at this moment. Nonetheless, I must be wary of REITS that commit to financial engineering, have low cash flow from operations, often attempt to squeeze money from shareholders, and is close to their Debt cap.
Companies that have their production business overseas but is listed in Singapore. They will incur lower production costs overseas, and yet eliminate the fo-rex risk through hedging. Overseas markets have a much larger population to access, market and sell their products. Knowledge of local market conditions, as well as taste and preferences is something even global MNCS struggle with.
Future Tech companies. It is an irony that despite government claims to restructure Singapore to a future economy, that is simply no technology companies listed in the STI ETF. The same holds true for medical tourism, biomedical pharmaceuticals, as well as Fin-tech companies. Despite claims that the government is touting that they are preparing students for the future economy, the fact is there are no visionaries like Goh Keng Swee to lead the charge or move towards a defined direction.
5) Is the Efficient market hypothesis valid? Am I wasting my time?
Efficient market Hypothesis and Markowitz efficient portfolio theory
I am wasting my time
i) Most active fund managers with better resources cant even match or beat the market, least to say a part time amateur investor.
ii) When comparing my portfolio to the STI ETF
I have beat the market when it is at its recessionary phase, but was not even close to matching its returns when it is recovering.
My short term performance underperformed the market. My shorter term performance beat the market. I am tracking my portfolio through stockscafe at the moment to see if it plays out .
I am not wasting my timei) Markowitz did not even practise his theory on his own portfolio.
Benjamin Graham, Peter Lynch, Warren Buffett, John Templeton have shown the ability to beat the market consistently. If I can unite the underlying fundamentals and principles, I may not massively over-perform but hopefully match / slightly over-perform the market return.
https://alphaarchitect.com/2014/10/17/harry-markowitz-an-equal-weight-investor/
http://www.mymoneyblog.com/harry-markowitz-personal-investment-portfolio.html
ii) STI ETF dosen't capture the market portfolio. It doesn't capture the global portfolio.
It is not even representative of the local market portfolio.Too skewed towards telcos and financial industry. No exposure to technology / IT companies. No exposure to utilities. (Although utilities is usually a bad investment due to high capex)
iii) Inherent weakness of EMH. Too many cases of personal observations whereby the stock price performance does not correlate with company profitability and performance in the short run and long run.
iii) Ascendas REIT
https://www.straitstimes.com/business/companies-markets/ascendas-reit-to-be-a-straits-times-index-stock-from-june-4
Ascension of this stock into STI ETF in 2014
Constituents of the ETF can change over time. What was a good company may not continue to perform and there is better upside to choose the strongest companies before they are included in the index.
iv) I believe I can beat the market over the long run . I have passion for it and wish to see if I can identify the elusive multi-baggers, and let winners outnumber the losers.
If my performance is still dismal over the long run and I do not have the emotional fortitude to be a good investor, at least I tried and I have no regrets. I can adjust my plan as I mature as an investor. It is better to make mistakes when you are young and have the lowest opportunity costs, than make fatal mistake in high stakes situations or near retirement.
Pros
i) It is easier to buy 1 ETF that tracks the index rather than buying the stocks of 30 companies, and manually adjust portfolio to track the market. Passive ETF management fees is generally lower than active fund managers.
ii) For people with small investment capital or are unwilling / unable to fork out larger lump sum trades for individual companies, it is a cost efficient approach.
Cons
i) There might be overseas Vanguard funds that beat Nikko AM and State Street SPDR STI ETF management costs by a significant margin. I have not researched on them sufficiently. Nonetheless, as I mature as an investor, I might be considering those ETFs as I may not have sufficient competence in quantitative and qualitative analysis of stocks in different markets. Different accounting methods and financial reporting standards can greatly distort the quality of my analysis and it may be Garbage In Garbage out.
2) Exposure to 30 stocks
Pros
i) Diversification across different sectors reduces risk of crippling losses on one single company or industry.
ii) Inbuilt portfolio management mechanism without any additional intervention required.
iii) I can better utilise my time to research on specific companies within my circle of competence. I can gain exposure to large companies which have great potential but not within my circle of competence, and also focus on smaller cap stocks / non STI stocks that are neglected by the market.
iv) Academics have touted the Efficient market hypothesis and Markovitz efficient portfolio theory, whereby it is very difficult to beat the market. The ETF should track the overall market closely and theoretically reflect the optimal results with respect to time spent.
ii) Contrary to popular belief, I do not believe that the STI ETF will suffer from country concentration risk (Singapore). Country concentration risk is not severe if evaluated from bottom up analysis. Companies like Singtel, local banks, Jardine Matheson, and the other constituents have multiple revenue sources from different countries. They are growing towards the Singapore MNC thesis and I see the STI ETF as a ASEAN exposed ETF (hopefully) if the growth story of ASEAN plays out.
Cons
i) Diversification should be throughout the best companies and not just a convenient basket of companies. If you are willing and able to spend the time and effort to pick the better ones, you can achieve stronger diversification through non-correlated assets
3) Largest Market cap Methodology
Pros
i) Usually, if the companies can grow to a sizeable market cap over time, there are certain qualities / fundamentals that allows it to support its growth and increase its profitability to reach a certain size. Although the capital gain of the company may be limited, the dividend will be generally stronger than smaller companies.
ii) Inbuilt defence mechanism. Companies that consistently underperform will be replaced with others that consistently perform better. The removal of Sing post, Noble, SMRT etc also suggests a evolving portfolio that is able to adjust to auto include the 30 strongest performers and exclude weak performers.
Cons
i) The capital gain of those STI constituents will usually be stunted unless they are successfully growing overseas. Compared to US stocks whereby entrepreneurs are focused on capturing larger local markets, and growing their business overseas, the stronger Singapore local incumbents generally rest on their laurels and is satisfied with milking the local population dry instead of growing the business. Without expansion to overseas markets and stunted profitability of the individual companies, the STI ETF is unlikely to be a high performer.
ii) The largest market cap approach is at conflict with the fundamentally weighted approach. Although the largest market cap methodology will incur lower costs, they will not pick the stocks with the best ROE / lowest P/E / other fundamental metrics. The STI ETF portfolio is not built for performance but for stability.
4) Performance
https://www.drwealth.com/sti-etf/
Pros
i) Generally Strong dividend payout history. Absence of capital gain tax and additional dividend tax in Singapore. Dividends for individual REIT S do not incur additional taxation in Singapore.
ii) Modest and satisfactory return if you do not know how to pick stocks.
Cons
i) Long term underperformance of STI ETF compared to global indices. Does not contain the strongest /most profitable companies in the world. Return on investment is mediocre compared to the low cost US market index Vanguard ETFS
https://www.investopedia.com/articles/investing/040516/10-cheapest-vanguard-etfs-voo-vti.asp
ii) I project STI ETF to have mediocre capital gain, considering Singapore is at its mature phase. The only avenue of growth is for Singapore companies to build up globalised MNCS and grow to the level of Microsoft / Apple / Hershey /MacDonald etc.
iii) Singapore is a small economy exposed to many global headwinds. Any slight change in global-political tensions will be actively reflected in the closely monitored stocks in the STI ETF. For traders whom thrive on volatility, STI ETF is probably a good trading tool. For passive investors like me, it is probably best to do a DCA then to try to divine the actions of irrational Mr Market.
iv) Local companies based on the traditional brick and mortar business model is unlikely to do well as Singapore has incredibly high costs of production, manpower input costs as well as rental. This might present a case to conduct active investing in the following.
REITS is a necessary evil for a profitable portfolio as the fundamentals are very strong in Singapore. Some of the stronger local companies belong to the Construction and REIT sector. Their ability to manage finances to continually expand overseas, utilising the resources of other countries and maintaining profitable malls / estates is greatly underrated. However, IMHO most REITS are overall not undervalued at this moment. Nonetheless, I must be wary of REITS that commit to financial engineering, have low cash flow from operations, often attempt to squeeze money from shareholders, and is close to their Debt cap.
Companies that have their production business overseas but is listed in Singapore. They will incur lower production costs overseas, and yet eliminate the fo-rex risk through hedging. Overseas markets have a much larger population to access, market and sell their products. Knowledge of local market conditions, as well as taste and preferences is something even global MNCS struggle with.
Future Tech companies. It is an irony that despite government claims to restructure Singapore to a future economy, that is simply no technology companies listed in the STI ETF. The same holds true for medical tourism, biomedical pharmaceuticals, as well as Fin-tech companies. Despite claims that the government is touting that they are preparing students for the future economy, the fact is there are no visionaries like Goh Keng Swee to lead the charge or move towards a defined direction.
5) Is the Efficient market hypothesis valid? Am I wasting my time?
Efficient market Hypothesis and Markowitz efficient portfolio theory
I am wasting my time
i) Most active fund managers with better resources cant even match or beat the market, least to say a part time amateur investor.
ii) When comparing my portfolio to the STI ETF
I have beat the market when it is at its recessionary phase, but was not even close to matching its returns when it is recovering.
My short term performance underperformed the market. My shorter term performance beat the market. I am tracking my portfolio through stockscafe at the moment to see if it plays out .
I am not wasting my timei) Markowitz did not even practise his theory on his own portfolio.
Benjamin Graham, Peter Lynch, Warren Buffett, John Templeton have shown the ability to beat the market consistently. If I can unite the underlying fundamentals and principles, I may not massively over-perform but hopefully match / slightly over-perform the market return.
https://alphaarchitect.com/2014/10/17/harry-markowitz-an-equal-weight-investor/
http://www.mymoneyblog.com/harry-markowitz-personal-investment-portfolio.html
ii) STI ETF dosen't capture the market portfolio. It doesn't capture the global portfolio.
It is not even representative of the local market portfolio.Too skewed towards telcos and financial industry. No exposure to technology / IT companies. No exposure to utilities. (Although utilities is usually a bad investment due to high capex)
iii) Inherent weakness of EMH. Too many cases of personal observations whereby the stock price performance does not correlate with company profitability and performance in the short run and long run.
ii) OCBC
https://www.drwealth.com/dbs-vs-uob-vs-ocbc/
www.ocbc.com › pdf › quarterly-results
https://www.drwealth.com/dbs-vs-uob-vs-ocbc/
www.ocbc.com › pdf › quarterly-results
OCBC
has the best fundamentals amongst all the other stocks. But when the
other 2 banks announced larger increase in dividend while OCBC is more
conservative in dividend payout, share price dropped. It is not like the
cash evaporated into the air but reinvested into the company, but the
market gave it a negative valuation despite the best bottom up performance
. In addition, high dividend payout in a leveraged and cyclical company
is ultimately unsustainable and I am not sure why the public is valuing
it so highly.
iii) Ascendas REIT
https://www.straitstimes.com/business/companies-markets/ascendas-reit-to-be-a-straits-times-index-stock-from-june-4
Ascension of this stock into STI ETF in 2014
Constituents of the ETF can change over time. What was a good company may not continue to perform and there is better upside to choose the strongest companies before they are included in the index.
iv) I believe I can beat the market over the long run . I have passion for it and wish to see if I can identify the elusive multi-baggers, and let winners outnumber the losers.
If my performance is still dismal over the long run and I do not have the emotional fortitude to be a good investor, at least I tried and I have no regrets. I can adjust my plan as I mature as an investor. It is better to make mistakes when you are young and have the lowest opportunity costs, than make fatal mistake in high stakes situations or near retirement.
6) Why a dollar cost average approach on STI ETF? Why not active timing?
i) Volatility is too high. It takes a lot of emotional strength to buy into stocks that are declining continually. My active investing process has seen my fair share of this before the stock prices start to recover.I have not yet succeeded to buy at absolute low and sell at absolute high.
I prefer an automated approach to prevent behavioural bias and buyer remorse. There is in-built emotional cushion in DCA approach to buy more when stocks are cheap and buy less when they are expensive.
I prefer an automated approach to prevent behavioural bias and buyer remorse. There is in-built emotional cushion in DCA approach to buy more when stocks are cheap and buy less when they are expensive.
ii) To have some personal time apart from investments. I don't want to spend too much time and effort on predicting market sentiment.
iii) Sucking at technical analysis and market timing. It is better to acknowledge and define my personal circle of competence. I am a fool when it comes to market timing and technical analysis. It is better to acknowledge that you are a fool, than to rush in blindly and remove all doubt (and lose unnecessary money)
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