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Portfolio and Risk Management

It’s a boring topic, but when money is involved, is it still boring? I hope not! Investing is more than just buying and selling, it’s the art of handling risk and emotions. Having read through many blogs and seen many portfolios, there’s one similarity among all of them. They all have Portfolio Management. If the rich are doing it, there must be a compelling reason why they are doing it right? Having a good portfolio management can help enhance returns and reduce risk. Not everyone wants to have a portfolio that moves together all in the same direction, and not everyone realise that they may be having it. A good portfolio should comprise of several forms of assets and preferably in different industries because that way your risk will not be concentrated in a single industry. Yes, you may have a chance of making it big when the sector goes into a boom, just like the technology stocks prior to the .com bust. It is one thing to be overweight on an industry, but it is foolish to allow yourself to take on a risk that you may not be able to afford. The last thing you want to do when investing is to be wiped out completely. In this article, I wish to share using a top-down approach and gradually zoom in on how one can have a good Portfolio Management and avoid undertaking too much risk.

Portfolio Management

As mentioned, a good Portfolio would be one that can withstand years of market movements and still stand strong. The word ‘Diversification’ may come to your mind when Portfolio Management is mentioned. There tend to be a misconception about diversification, especially towards investors. To most investors, diversification simply means diversifying your money into different sectors of the market. This isn’t entirely wrong, and there are indeed benefits to diversifying into different sectors. However, may I present to you a broader view of what diversification means. Diversify into different asset classes. A truly good portfolio should be one that is invested into different asset classes – Stocks, Bonds, Commodities, Forex, Properties, etc.

Having a portfolio that is diversified into different asset classes will save you from having your hard-earned money from being wiped out in a black swan event. You can be sure that even if the stock market crashes, you still have other streams of income from your different asset classes like bonds or rental income from your residential properties (Note that REITs is still classified as stocks). Imagine if all your money were in just the stock market alone, perhaps even diversified into a few sectors. Your portfolio would have experienced a hard pounding and it served as a wake-up call for many who did not diversify across the different asset classes. That’s not to say that being diversified into different asset class will make you immune to any big worldwide crisis like this, but at least it mitigates the damage dealt.

Risk Management

In theory, everything sounds perfect. However, not everyone of us can afford the luxury to be invested in all the 5 asset classes mentioned. It would be nice to try to be as diversified as possible, but even if it’s just stocks, there’s another way to manage your risk. A part of portfolio management is Position Sizing. Always consider how much risk you are willing to take in a trade, preferably in dollar amount rather than in %.

Step 1: Consider the maximum loss(in $ amount) you’re willing to accept.

Step 2: Set a stop-loss level

Step 3: Calculate the capital exposure per unit (Entry price – Stop loss price)

Step 4: Maximum position size = Step 1 / Step 3

This formula can be found in Robert C Miner’s High Probability Trading Strategies book. If you’re interested, do head down to NLB to borrow because that’s where I got the book from! Although not everyone has the luxury to take up the maximum position size for every trade, it will still serve as a good gauge as to how much the maximum should be. This prevents you from over trading beyond your risk tolerance level. There are many strategies available and this is one of the strategies that I have found to have served me useful because I know exactly how many shares should I limit myself to. Hopefully you would re-look at your investment strategies and identify if you are carrying too much unnecessary risk.

The Greatest Investment Of Your Lifetime

When considering the topic of ‘Investment’, we almost always think about Equities, Bonds or Forex first. We hear questions like “What stock is good?” or “How should I begin investing?” The growing interest in investment here in Singapore is definitely growing and we can begin to see a new generation of investors who are more daring and knowledgeable than their parents. We all have heard of stories about how other people’s parents or even our parents had their hands burnt in the past due to buying stocks or mutual funds. This has left a bad impression on many of the kids of my generation and have grown to become interested, but afraid of the risk of losing their hard-earned money as well.

Every once in awhile, we hear people talking about how this stock is going to skyrocket or that stock is going the be the next big thing. Are these truly the investments worth chasing after, or is there an even bigger and more important investment that you can and might not have begun investing in? There are many proven cases even today that those who invest in this boasts of superior returns and is still experiencing compounded growth. I hope you’re interested in what this investment is, because you should. This investment has no barriers to entry, does not cost beyond what you can afford(possibly free) and can make you incredibly rich (both in monetary and non-monetary terms). However, this investment requires a lot of time, effort, and determination.

This investment is you.

Investment in yourself is the best and the most important investment everyone should make. Cliché as it might sound, it’s one investment that many people have overlooked. The younger you begin, the more time you have to compound this investment. The rewards can come in many form, depending on what you seek from this investment – Money, Happiness, Relationships, etc. You name it, you can have it!

You may not know where to begin, as it usually is the case. So here’s a simple step-by-step guide to get you started on your investment.

Step 1: Do a self-assessment of what you love doing or want to achieve 5-10 years down the road. This would create a purpose and a direction to work towards to in your life.

Step 2: Do an inventory check of what you have and what you are missing in your pursuit towards achieving an even higher returns on your investment. Knowing what you have (Tangible and intangible) and what you don’t have allows you to work more efficiently and purposefully since you can leverage on what you have and gather what you don’t have in your free time.

Step 3: Start off with baby steps. The idea is to keep things manageable instead of taking a leap of faith. Create habits that lasts rather than simply to achieve something at the spur of the moment and allow the flame to die off after minor achievements. This could range from borrowing a book from the library once a month to taking up classes on a regular basis.

Step 4: Along the way, find a higher purpose. Sometimes we are simply not focused enough to have the fuel to keep chasing after that one dream. While it is good to be focused, it can get tiresome at times to keep at it. When you continually find a higher purpose, you will find it more enjoyable to continue the journey! This could range from teaching others what you have learnt to having the current purpose fit into an even bigger purpose! The key to it is to make slight deviations instead of totally pursuing something new. It would have been wasted effort.

I hope this article has helped you to realise that the biggest investment of your lifetime is waiting for you to invest in it. Stop looking elsewhere because it begins with you. If you have time on your side, even better! Allow time to compound the knowledge and skills that you have gathered.

Some practical tips:
If you are an investor in the stock market, you would have experienced times when you are already fully invested in the market and there seem to be nothing else you can do except to wait. It’s easy to convince yourself that it is time to take a back seat and relax. However, I urge that you keep looking out for the next investment opportunity and sharpen your skills and knowledge by reading! Books are a great source of knowledge and inspiration for trade ideas. Just don’t stop investing in yourself and you’ll see the compounded fruits of labour in years to come. Make it a point that when others have yet to begin, you’re already leaps and bounds ahead of them by the time they begin!

Technical Analysis – The answer to “When to buy?”

Why Should I Consider Technical Analysis?

For questions like “What to buy?” requires fundamental analysis. But when someone asks, “When to buy?” This is when technical analysis comes into play. Technical analysis is the other approach of investing. When you talk about technical analysis, you’re looking at things like charts, chart patterns, technical indicators, etc. It gives you a visual information about how the stock price moves for the minute, the hour, the day, week and even month! This information is useful because it can give you a better sense of how the stock is doing right at the moment. Fundamental analysts usually have to deal with information that isn’t updated because company reports would only come out quarterly, or even annually! Many things happen in between the quarters but you could possibly be trading based on the previous quarter’s results which may no longer be relevant.

Pure technical analysts are not interested in the research of a company’s fundamentals because the way a stock price moves would have indicated how much everyone thinks the stock is generally worth. When an undervalued stock moves because it was uncovered by a fundamental analyst, it wouldn’t be missed by technical analyst who watch price-volume action of a share price. As long as a stock moves, the technical analysts will be there watching it as well! Price movements can give a technical analyst a lot of information such as breakouts, psychology of the market players, trend, reversal patterns, etc. These days, there are a lot of people relying on charts when buying a stock. You would only be putting yourself in a disadvantaged position if you choose not to avail yourself to the same information they are receiving. With more and more speculators in the market, fundamentals might be ignored for short moments and only technical analysis can help you for the moment to be profitable.

Here’s an example:

A pure fundamental analyst would not know where the support or the resistance is. He would know what the company should be valued at but he may not know when is the best time to enter. For example, NOL is down-trending from $2.30. A fundamental analyst values it at $1.50 based on Price-Book ratio, P/E ratio, or other metrics available to him. When NOL sells down to $1.50, the fundamental analyst would make the purchase because he thinks that is what it is worth. However, from a technical analyst point of view, he would wait to see if $1.50 is supported or not. If the price is not supported, he waits for the share price to continue falling and test the next support level at $1. When share price eventually gets to $1 and shows that it is supported with a high volume, the technical analyst buys it.

At the end of the day, both analysts got NOL, but the technical analyst got a better price because he knows that from past price movements that $1 is a strong psychological support and buys it at a support instead of simply buying it because he thinks that is what it is worth. Past price actions can give you a hint about the future price movement because of many reasons, largely psychological support and resistance levels. The fact is that many people are relying on such information, and if you aren’t, you will lose out and the market will not make sense to you. Having a visual image of how the stock market is going will be very much easier for you to find support levels such as in the case above.

Of course, this is not to say that technical analysis is 100% accurate and gives you pin-point accuracy. What it can provide you is more information that opens up your eyes to more opportunities for buying entries. There is always a time an investor will face where he says “I’m waiting for the right time to enter”. It could be a fundamentally sound company but simply trading too expensively and this is when technical analysis will tell you when the right time is. Or rather, give you a hint of when the right time is. Of course, hindsight is 20/20 and the chart above could have gone in a totally different direction and crashed through $1 rather than stay supported on 2 more counts on Nov 2011 and May 2012. I used an old chart for the purpose of effectively sending my point across rather than try to teach based on current prices where even I don’t know where the future is. No one can predict how the future price will move, they can only get a vague idea of it. By effectively utilising both fundamental and technical analysis, you would put yourself in a profitable position where the odds of a profitable trade is higher.

Important Disclaimer

The above chart is for teaching purposes only and is not a recommendation to buy/sell.

How a Singaporean Grew $112K to $1 Million in 7 Years

Eighteen years ago, Lady (not her real name) entered the workforce like many fresh graduates and earns a humble salary of $2,200 per month.

A sole breadwinner of a family of 4, she need to desperately figure out how to survive and get by should a day she loses her job without sufficient savings.

In 2005, during her career transition, she came across her Central Depository statements and noticed that some of the stocks she bought during the early years has yielded some dividends. That was when it struck her that she could actually work towards generating passive income through dividends.

Back then, she did not have any background knowledge in finance and investment but her determination of working towards her goal of financial freedom has spurred her to learn investing by herself.

Like many young investors, she spent her free time reading investment books, finance blogs, watches CNBC and analyse companies on SGX’s website. Her curiosity has allowed her to equip herself with valuable knowledge in investing which is still relevant today.

In 2012, she made her first million dollar and an annual dividend income of $41K.

Q. Are you a spender or saver?

I am a saver although i have a soft spot for travel

Q. You have grew your portfolio to a million dollar from 2005 to 2012. That’s an incredible feat considering that the collapse of the Lehman Brothers happened in 2008 and the Eurozone crisis in 2009. How do you overcome your loss in 2008 and still hit your million dollar goal?

I didn’t see 2008/2009 as a crisis or a loss although some of my counters were in red. In fact, i felt just like my girlfriends during the Great Singapore Sale, but in this case, instead of buying bags, shoes and clothes, i was buying stocks.

Q. You have not looked back since then and continue growing your portfolio and passive income. Did you suffer any setbacks during this period besides the financial crisis?

I have been fortunate. I did not suffer any major setbacks so far. Although i wished i hadn’t sold away Allergen and Citibank too early.

Q. What’s your best and worst investment? And how’s your current portfolio looks like?

My best investment is Apple (+71%), Facebook (+145%) and Starhub (+85%). Both Apple and Starhub are giving me good returns on dividends yearly. My worst investment of late is Sabana Reit. I share an update of my portfolio every month. You can check out my latest portfolio here: http://ladyyoucanbefree.com/2014/12/23/my-stock-report-card-for-dec-2014/

Q. Are you currently employed or have you retired? If you have retired, what is your current passive income/dividend?

I am currently employed. My current passive income is $59.072.58.

Q. Does your spending habits change as your portfolio grows? Do you spend more than your passive income and how do you manage your personal finance?

I do not spend more than my passive income. I am still learning to improve my spending habits and I learnt that little indulgence do add up a lot. (For example, my indulgence in my favourite iced milk tea) As i said earlier, i also have a soft spot for travel.

Check out my spending habits here: http://ladyyoucanbefree.com/2013/11/30/retirement-planning-project/

Q. What financial planning have you done for yourself? And what’s your retirement plan?

I have just bought myself a retirement home, medical insurance for myself and my family. Moving forward, i will be continuing my journey in accumulating and exploring passive incomes that allows me the freedom to chase after things that i am passionate about and to checkoff my bucket list at http://ladyyoucanbefree.com/2014/05/31/bucket-list/

Q. What is your advice to young adults who have just started embarking on their career journey?

Love what you do and money will follow. Stay Hungry, Stay Foolish. Check out Steve Job’s Stanford Commencement Speech and be inspired!

Q. What about advice to other investors?

I don’t think i am qualified to provide advice to other investors. I would love for them to drop by my blog at http://www.ladyyoucanbefree.com and share notes with me. Let’s learn from one another.

* Lady’s portfolio has now grow to more than $1.6 million and her passive dividend income currently stands at $59,072.58. She is currently aiming for a passive income of $65K.

This is how her December’s portfolio looks like:

(Source: ladyyoucanbefree.com)

(Source: ladyyoucanbefree.com)

To get updates on her future portfolio, please visit her website at http://ladyyoucanbefree.com

* Edited to include US’s portfolio that was left out

Things to look out when investing in 2015

An investment can often be effected by unforeseen circumstances. No matter whether it is a financial crash like in 2008 or a natural disaster like the earthquake in Japan – the market is never entirely save from unexpected disturbances. Therefore, expecting the unexpected will also be a credo for 2015. There is more to be considered. The global market seems surprisingly stable and might be able to excel further in 2015. But there are still a few things to keep in mind when putting your money in the market.

The oil price has fallen significantly within the last three months and even went to $53 US dollar on the last trading day of 2014. Although the supply has been reduced in order to stop the landslide, it doesn’t necessarily mean a halt for now. The oil price will most likely continue to affect the markets for a substantial part of the year. Sudden unforeseen events, like a military conflict or further overproduction, could trigger the oil price to go either way. This could therefore heavily disrupt an oil-dependent economy, such as Russia that is already unstable. When investing in 2015, one should consider to what extent the invested industry is subject to the oil price. If an investment is co-dependent on the rise and fall of the black gold, a seemingly stable share can fall rapidly just like the oil price and the Ruble did. Therefore, it is advisable to check the loose ends of your investments in order to see where they might get caught up in 2015.

The Federal Reserve in the US is said to raise the interest rate again later this year. Why is this interesting for anyone outside the US? At first glance it isn’t. But it is nonetheless a factor that one should keep in mind when investing internationally. Firstly, the raising of the FED interest rate can have a significant impact on the other markets in Asia and Europe. The markets are especially unstable in the days before the Federal Reserve is going to announce the raise. There is a good chance that shares will start to wager heavily for a short while. This might be a good chance to jump on some low prices before they will regulate themselves after the excitement around the interest rate has quietened down.

It might seem very obvious, but IT sector should not be left out of sight. Several shares are continuing to grow beyond everyone’s expectations. Certain stocks have been growing for more than five years straight and there isn’t an end in sight. That means not only that an investment in the IT and tech sector is potentially very lucrative and brings favourable returns, but is also a possible long-term investment that is crisis-safe. Tech shares have gained up to 20% and more in 2014. Charlie Morris from the HSBC Global Asset Management said that the tech sector will literally go ‘nuts’ this year. Stocks like Facebook, Google and Apple seem a very obvious choice – this is for a very good reason though. Investors have made profitable returns in the last years and will do so in 2015 as well. There are however more tech stocks to watch out for. Furthermore, paradoxically some tech indices have fallen throughout the year. They are predicted to take up speed this year again, as the tech stocks are gaining too. Therefore, the low prices of the tech indices offer an interesting opportunity to get involved and make reasonable profits. Even though the indices aren’t bringing as much return as perhaps Facebook and Apple, they still can be very beneficial for investors.

There are, however, certain investments one should be careful with, but definitely watch out for. One of those is gold. The price for the shiny metal has fallen to $1131,24 US dollar an ounce in November, which was the lowest in four years. Part of the reason for the drop is the US dollar, as gold is priced in the American currency. As the US dollar has become very strong throughout 2014 and risen to a seven-year high, the gold price went down. Furthermore, the price had suffered due to the low inflation. The latter is used as a hedge to prevent rising prices. This however makes gold more expensive in other currencies. However, there are analysts that predict the gold price could rise up to $1500 US dollar an ounce in the next years. Depending on the inflation rate, some even expect a raise to $3000 US dollar in the next ten years. This could mean a high potential benefit for investors in the long-term. Even though the very near future of the gold price might be rather slow, it seems very unlikely to fall substantially further. The demand for gold in China, India and other Asian markets is already growing and will continue in 2015. Jeffrey Nichols from Rosland Capital predicts a move of investments away from stocks and bonds back to gold. It seems that the signs are all set golden.

When investing within Europe, one should keep certain dangers in mind. The most prominent for numerous analysts is the political situation. If the UK was to vote on exiting the EU, the financial sector could be shaken up significantly. The European market has been suffering from a lack of trust for several years now. The rebuilding of faith in the industry has started, but remains slow. One should take the political instability in consideration when investing within the EU.

Although there isn’t much trust from the public and the politicians, the global financial market has recovered. Indicators such as the S&P 500 have gained over 12% throughout the year. Many analysts even claim the market is doing too well. Hence, there could be an instant eruption. Therefore, depending on your financial goal, it might be wise to only take the risks that are really necessary. The risk one takes with its investment should be matched by the financial aim of the investor. If risks are being taken then it is advisable to invest within one’s comfort zone. Don’t invest in what you don’t know.

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