Permanent Portfolio is a self-directed long-term passive investment strategy, introduced in 1981 by Harry Browne and Terry Coxon and simplified into 4 asset class in 1987. It aims to provide consistent market returns and protections in different economic cycles of growth, inflation, recession and deflation. The strategy does not rely on market timing, and requires yearly management and minimal monitoring. This site is to provides educational information for learning about my research and implementation of Singapore version of Permanent Portfolio. Readers can also use the Permanent Portfolio knowledge to diversify their stock heavy portfolio into long term government bonds and gold for better portfolio protections in recession, deflation and inflation. Disclaimer: Use of information on this site represents acceptance of the disclaimer at bottom of this page and Disclaimer page.

Wednesday, 24 October 2012

STI Review 2012 Oct and Guide 3 to Investing Plan A and Plan B

Here is the third action plan continued from previous two posts.

3. Plan B: What to do with existing stock portfolio now if market is really 'not cheap'?

This section is more for newer investors who may not have made suitable contingency plan B for market downturns. So what has been your plan B when stock market is not going for a downturn? Basically there are 5 possible kinds of plan B.

First kind of plan B is to hold on to stocks and hoping the market goes up, up, up, and never come down, while having no clear idea when to sell to lock in profit - this is just pure gambling, not investing. In investing there is no hoping. Investing follows a clear plan regarding when to enter or exit positions and rebalance assets in different possible market conditions. So better start adopting one of the next few plans now.

Second kind of plan B is to sell off some stock to lock in capital gains profit when warning signs of market turning are apparent, then to hold some cash and ride the market down with rest of stock assets, and wait till market bottomed adn turn upwards to buy back cheap stock with cash. This way, in case the market downturn is a very short one, there will still be stocks to take advantage of the next leg up in stock prices. In my opinion, it is more correct to say a pure equity portfolio has 2 kinds of assets – stocks and cash savings. It may be 90% stock and 10% cash savings now. If a major market downturn is expected, an investor may wish to sell some stocks and leave the defensive stocks, so that stocks become 50%, cash savings become 50%. The 50% cash will create buffer to reduce overall portfolio loss. The 50% stock is in case the stock market keeps on going up, which is why one may need to always be invested in market. Seeing a stock portfolio as 2 assets and in terms of percentages can make it easier and more mechanical to do such profit taking and rebalancing.

Third kind of plan B is to sell off part of stock portfolio and buy some government bonds to buffer and reduce potential stock losses, before downturns happen. For a pure equity portfolio, this will be selling some equity to take some profit and diversifying into bond to reduce the portfolio risk. If one already has a bond and stock portfolio, this is just normal rebalancing and profit taking. For a current pure equity portfolio, switching partly into bonds also allows profiting from the appreciating bond prices so that at suspected market bottom, the appreciated bond price can be sold to buy more cheap stocks. Another advantage is that since portfolio losses are smaller, when cheap stocks are bought and the market recovers, the losses are recovered more quickly and portfolio can also get bigger gains.

Fourth kind of plan B is to sell off entire portfolio at suspected market top and call it a good run. This is market timing and this game plan is not suitable for most people, since it takes unique skill to market time correctly and consistently and one has to be sure one has the correct psychology to really be able to let go and sell everything when the telltale warning signs appear in market. The bad part is if the investor mind is not strong enough and has no clear exit strategy, it then became a gamble. So if the market downturns suddenly, and the investor keep waiting for price to retrace back up before selling, and when price retrace back up a little, wait some more for price to rise only to find that the price keep dropping and dropping already, until investor panic and sell at small profit, to break even and forfeit profits, or even incur losses.

The fifth and last but not least plan B is to buy value stocks or dividend stocks and do not sell them ever, unless under specific circumstances. This is the Warren Buffet plan B and we all know how successful he is at value stock picking. and growing portfolio If one has the Midas touch and is successful at stock picking of value companies and business, then this is the way. Otherwise for typical investors who do not have this magic touch of picking correct value stocks, this buy and forever hold approach is not suitable.

An investor has to choose a suitable Plan B plan for market downturns, else risk losing all the 'paper profits' or worse, incur losses. Capital protection is as important as capital appreciation and income in investments. There is no point to grow a 100k portfolio by 100% to 200k, only to have a major market downturn decrease portfolio by 50% and make the 200k back to square one 100k again, or worse. Capital loss can be made back, but the time and years that were used to get the 100% gain will be wasted and the time cannot be recovered. Having Plan B is especially important for a pure equity investor as such pure equity portfolio is very volatile, and equities can lose a lot quickly in times of stock market distress. Wiht a suitable plan B, the investor can keep calm instead of panicking and doing disastrous things to portfolio. For a bond and stock passive portfolio investor, Plan B is already built into portfolio through mechanical rebalancing and having the negative correlation between stocks and bonds, so passive portfolio investor just ride the ups and down more calmly.

So in summary, Plan A is for new investor to decide when and how to start a portfolio in order to start investing on a firm foundation. Plan B is for investor to decide how to preserve capital and retain profits. There is another Plan C which is to decide how to drawdown the money from a portfolio at a sustainable rate during retirement so the drawdown can last for a lifetime, and so Plan C is another topic to be discussed separately.

My view on STI is not a market prediction to sell now, it is just the warning signs as I see it, and your investment decision should not be based on my input alone. Rather, I am using this example to point out possible good and bad entry strategies for potential new stock investors so that they can avoid costly entry mistakes, and to get new and existing investors thinking about having a strategic game plan B to preserve investment capital during future market downturns. If my views on STI prove true in next few months, then hopefully more investors will be prepared to weather downturns well. If my views are absolutely wrong in next few months and STI rose like nobody’s business, then new investor can still take heed to formulate a strategic plan B so that new profits can be kept in future downturns. Good luck and good investing to all.

Disclaimer: I am not a financial adviser and I am not working in finance related industry. I am an investor for my own assets and speaking from my personal viewpoints. Readers should do their own due diligence and learn about any investing strategy and suggestions well before using them. I will take no responsibility for your investment results. I am currently vested in 4 assets, namely SPDR STI ETF (ES3), 30-year Singapore Government Bond (PH1S), Gold ETF (O87), and my own cash savings.

Go to:
Part 1 of Article -
Guide 1 to Investing Plan A and Plan B
Part 2 of Article - Guide 2 to Investing Plan A and Plan B

STI Review 2012 Oct and Guide 2 to Investing Plan A and Plan B

Here is the second action plan continued from previous post.

2. Another Plan A: Enter a 'not cheap' market now with a diversified portfolio.

What if you don't want to risk missing the boat and for some reason you have to start investing now, even when the market is 'not cheap'?

I know the feeling, been there myself also. When I started my diversified passive portfolio, no time seems like a good time to start - when there is a cheap asset, there may also be an expensive asset. The best time to start a portfolio is at the bottom of a recession, when many investment assets are very cheap and people are staying away from these assets like they are smelly tofu. I'll say the smellier the smelly tofu, the better it is eat. So learn to eat smelly tofu already...haha.

That said, I think only experienced investor will have the guts and know-how to start investing at market bottoms. So back to the question of new investor, what to start investing in when market is 'not cheap'. In my opinion, when stock market is 'not cheap', it is better to start a diversified portfolio.

By diversified I mean besides buying stocks, buy also Singapore government bonds. The way it works is government bonds price will move in opposite direction to stock market price. If stocks are 'expected to rise' for long period, bonds price will drop as people leave bonds to chase better returns in stocks. On the contrary, if stock prices are 'expected to fall for long period', people will drop stocks and run to bonds for the relatively safer and consistent yield.

Now if you have both stocks and bonds when market is 'not cheap' this is what is going to happen usually. If bet correctly and stock market goes up, stock price will normally rise faster than bond price drop, hence you will still make a net profit. If bet incorrectly and stock price drops, bond price will rise and offset some or most of the big drop in stock prices, therefore your net loss will be lesser than the average stock market loss, hence making your lesser loss more bearable. At the bottom turning point of market, or when stock price has been at or below 200MA for a long while and there may be price divergence with MACD again, perhaps that will be a good time to sell off some or most of your profitable bonds and buy into cheaper stocks.

This way, if you win you won’t win too much but at least as a new investor in a 'not cheap' market, having some win is better than facing potential big loss. If you lose, it will be more bearable as your total loss is lower compared to the average stock market loss, and you may also take some comfort at watching how the bond keep growing when stock prices are dropping. And even if you lose, you will still have a 2nd chance to sell the profiting bonds to buy cheap stocks later on, hence making back the loss faster than if you were to buy only stocks at possible height of market.

Having a diversified stock and bond portfolio is a way to reduce 'volatility' in a portfolio, meaning reducing the potential loss (and gain) in a portfolio. Avoiding big loss is important for new investors so that new investor will not panic, cut loss, and throw away the investment strategy. A diversified stock bond portfolio, rebalanced yearly, has practically the same returns as a stock index portfolio over the long run, so stock/bond portfolio is not missing out on much while enjoying lower volatility. So how to start a stock bond portfolio? There are 3 things to decide: asset allocation ratio, which particular stock to buy, and time to rebalance.
First thing, about allocation ratio. If you are conservative investor who do not like large losses, use 50% stock and 50% bond, which will offer lesser potential loss and more stable portfolio returns. If you are young and aggressive investor, or with high stream of future cash income, use 70% stock and 30% bonds (or 80% stock and 20% bond if you have very high stream of cash income), which will offer more stock returns and also potentially higher stock loss - higher stock loss may be alright if you have future high streams of cash income which allows you to average down on stock all the while when the market is falling.

Second thing, about what particular assets to buy. For bonds, I would say get 30 year Singapore Government Bond only. Choosing only local bond to avoid currency risk. Choosing government bond instead of municipal and corporate bonds to avoid default risk during bad economic times, and Singapore Government bond is rated AAA, so why not? Choosing 30 year long bonds instead of 10 year medium bonds or 2 year short bonds, because 30 year bonds is more volatile than short or mid-term bonds. In recession, higher volatility of 30 year long bond will allow this bond price to spike up more and greatly offset potential drops in stock price. If stock goes up instead, this long bond will drop faster also than short or medium term bonds. This is ok because normally, historically and practically speaking, stocks will rise faster than drops in this bond, which will still allow net profits for stock bond portfolio. About interest rate risk for bonds, long term 30 year bond price are also negatively affected by rising interest rate, more so than short term adn mid term bonds. In the next couple of years, I do not foresee risk of rise of interest rate, since U.S. central bank is committed to maintaining interest rate low till 2015 and Singapore government will likely follow suit. The European situation will also take some more years to resolve till it does not negatively impact on global economy.. Even if interest rates rise in future, if you are a long term diversified portfolio investor, it will still be good to be consistent and hold on to 30year long bond for the long term volatility protection. Consistent strategy is key for diversified portfolio investing. 

Third thing, what is rebalancing and when to do it. If you invest in such stock bond portfolio for long term, then some time after you start the portfolio, stock and bond prices will change and the stock bond allocation ratio will change accordingly. Let's say after one year, a 50/50 stock bond portfolio becomes 60/40, meaning stock has had a good run and overtake bond price drop. So at end of the year, sell stock to buy bonds, or top up with fresh cash on new bonds, to get back to 50/50 allocation. In this way, you are forcing yourself to mechanically sell for profits and buy assets when they are cheap. This is called rebalancing, and is preferably done every year, or sometimes every quarter or even month, depending on the optimal commission costs and availability of fresh funds. You may say you are missing out on stock profit by selling stocks every year, but if there is a sudden stock market correction, teh 50% bonds is there to ensure you keep most of your profits instead of throwing profits back to the market.

If you are looking to implement a more diversified long term portfolio now or in future, you can check out the Permanent Portfolio passive investing strategy which holds stock index fund, government long bond, gold and cash. Permanent Portfolio is an unconventional strategy offering even lower volability while offering similar long term returns to sotck index fund.There are also other mroe conventional passive portfolio strategies available too under different names. Also, stock and bond portfolio like this are not unique, it is the basic building block of many fund managers and their diversified investment and retirement funds. So you can also choose to maintain a simple diversified passive portfolio for yourself one day if your investment needs change and you become more risk adverse.

Continue to read Part 3 using below link.
Go to:
Part 1 of Article -
Guide 1 to Investing Plan A and Plan B
Part 3 of Article - Guide 3 to Investing Plan A and Plan B

STI Review 2012 Oct and Guide 1 to Investing Plan A and Plan B

Singapore STI Review 2012 Oct and Guide 1 to Investing Plan A and Plan B

Here is my view on current Singapore Straits Times Index. First see the current STI chart:

STI is making newer one year price high this year. Is now a good time to start your new stock portfolio or buy new units to ensure you get into action for a possible next leg up in stock market? There are a few warning signs against doing so now:

1. The STI is way above 200 days moving average now. When the price is way above 200 MA, in my opinion this is a gauge that the price is definitely not cheap to buy.

2. There is a price divergence between the higher high in price and the lower high in MACD indicator, see the orange lines. This usually points to 2 things:

a. The uptrend momentum of STI has weakened and a possible reversal downwards of price may be coming.

b. The uptrend momentum is still strong and price will keep making newer high and MACD will keep making lower high.
c. Price is consolidating and ranging horizontally, before price keeps making newer high and MACD will keep making lower high.

Looking at price movement, there is no way I can say the uptrend is quite strong; at most what I see is a weak uptrend. So without strong price uptrend, possibility b. seems less probable. We are left with possibility a. which means uptrend momentum has really weakened and we are in for a possible downturn in STI. A market downturn can come silently without warning, and by the time investor is convinced market is in downturn, they can already be faced with losses and some may be clueless what to do. Market downturn can also be a good thing for investors who are prepared to pick up cheaper stock later when market is near the bottom. We are also left with possibility c. which is not so bad as price may be consolidating to go higher. If price is consolidating now, in my opinion there is no need to hurry to buy yet, just wait for price to be at the 200MA before entering, to reduce risk.

Currently I also hear people talking about how the market is not cheap right now, if so there will eventually be fewer buyers than sellers and the market may have to take a break and reverse downwards, in a so called technical market correction. Also, I keep hearing people talking about how profitable Singapore Reits are and also how not cheap it is now. Some people even start suggesting to just jump into buying S-Reits without needing to think - I disagree. Let's look at a quote from 'An investor's guide to famous last words":

"You can't afford not to own this stock." - As close as it gets to ringing a warning bell at the top of a bubble. So start be alert for people who are saying these 'last words', so called because this will be the last thing we will hear them say before the market turns down and prove them very wrong.

Are we at a turning point in STI soon? Fundamentally there is not much growth engines in the global economy to support good growth in Singapore economy, and just recently, we were lucky to have been told we avoided a technical recession. The U.S fiscal cliff is approaching, so current uncertainties faced by U.S. businesses is not good for business growth. Think of how uncertain the market was during the episode last year when U.S. politicians were haggling over raising the debt ceiling, and how the stock market rapidly dropped during that period from August 2011 onwards. Now after the U.S. election on Nov 6 2012, the market may also make a correction. Another thing is the market may act strange also when Dec 21 2012, the end of Mayan calendar, is approaching... maybe this is a myth, well, like the Y2K event, we will have to see whether this particular period will be a non-event or not.

With the not so cheery view above, what can I conclude? First, I am not claiming to be a financial guru and I am not claiming to make prediction that the STI is going to reverse. I just sharing my views on the warning signs and offering few personal viewpoints here regarding what to do or what not to do now. I see 3 broad action plans now:

1. Wait for lower price to enter into stock market.
2. Enter a 'not cheap' market now with a diversified portfolio.
3. What to do with existing stock portfolio now if market is really 'not cheap'?

Here are the broad action plans.

1. Plan A: Wait for lower price to enter into stock market.

For new stock investor, now is 'not cheap' to start buying into stock market. Price moving above the red 200MA lines means there was a good run behind the current price, so when you buy into stock market now, people may be already selling for profits. A better entry point may be when the STI turns back down and touch the 200MA line, which means there has been profit taking and price has become average. Another good entry point will be when price is below the 200MA line for some time, when stocks have become relatively cheaper and maybe undervalued. For good entry point at or below 200MA, new investor will have to figure out for themselves.
All I am saying is, if you start buying into stock market now, there is little headroom left to support much price appreciation. Then if price eventually turns down and you are caught with negative profits in your portfolio, what are you going to do? Average down and hope to breakeven someday... while worrying how much more is the drop?
Investing is about planning, not about hoping. It seems a better way to just wait for market corrections, which will probably happen once or twice a year at least. Then when market corrections happens, pinch your nose and buy cheaper stocks at 200MA and if price drop further below 200MA, be contrarian and average down - pick somewhere after market bottom up then pinch your nose again and buy into stocks again when people are avoiding stocks as if they were smelly tofu. When you buy stocks cheap, you are actually lowering your risk a lot since there is already lesser room for the stock price to fall compared to if you buy stocks at the top above 200 days MA.
Waiting for a lower better entry price to buy cheap is better than potentially watching your stocks plunge from high and averaging down. I have been down this road before, buying pure equity portfolio at 'not cheap' level when price was way above 200MA, price drop and I average down, price drop and I have no more money to average down. Price drop till I cannot tolerate it, cut loss and conclude I did not have a good strategy. I was not a good market timer back then and knew much less about how market works than now. Now my investment strategy does not require market timing, and through learning about the Permanent Portfolio, I also learn more about how the stock and other asset market works.

Continue to read Part 2 using below link.
Go to:
Part 2 of Article - Guide 2 to Investing Plan A and Plan B
Part 3 of Article - Guide 3 to Investing Plan A and Plan B

Saturday, 20 October 2012

The Reasons for Using Passive Investing Strategy

My Passive Investing Portfolio
Both my cash and CPF are invested into passively managed portfolio using Permanent Portfolio strategy. I am able to justify investing with passive portfolio because i have studied this strategy in depth, though about the potential good and bad points, and conclude the risk reward of this portfolio is suitable for my investment aim: preserve capital, reasonable growth, no need for market timng, stock picking and company research, and no need for constant monitoring. The final aim is to grow my investments into the millions to secure my retirement. Having financial security and independence along the way will be nice too.
My CPF portfolio is 30% STI ETF, 30% 30-year S'pore Govt. Bond, 30% CPF Cash, 10% Gold ETF, to be rebalanced yearly - all bought at once using multiple brokerage in April this year. Total returns including cash interest, for last 6 months, is about 4.25%, not bad for half year of doing nothing. My cash Permanent Portfolio portfolio started off from February to April this year with 25% equal split of STI ETF, UOB Gold savings account, 30-year Singapore Government Bond, and cash, and is having similar returns as the CPF portfolio now. This is not a bad start for me, as being able to make some significant profits without me having to do much managing of my portfolio is much better than having the cash sitting in the bank or having a stranger 'manage' my investment capital with dubious results.
Self-learning on Passive Investing
Do be careful and learn any investment strategy well, to know the pros and cons and whether the risk and returns meets your investment objective. Good thing is passive investing does not need much talent to learn and implement. If you wish to learn more about passive investing, do read on.
To start off your learning, read this to know what a basic passive portfolio investing is about:
This is basic stock index ETF+bond passive portfolio - personally i think this portfolio is ok and is simple to implement, though IMO this 2 assets is not diversified enough for me.
Next, read this about more diversified passive portfolio using Permanent Portfolio Strategy:
This uses 3 highly volatile assets'stock index ETF, long govt bond, gold' and low volatility cash to create a overall low volatility portfolio. You have to learn about why people such as fund managers invest in govt. bonds and gold, in order to have confidence to invest with Permanent Portfolio strategy. As the saying goes, do not invest in something you do not understand. I'll admit long bond and gold may take people mroe time to learn and use comfortably, though the rewards of understanding how these 2 assets can be used is probably worthed it.
Then you can go explore this blog for ideas about local implementation of Permanent Portfolio passive portfolio:
PP strategy is also widely explained in the Internet.
Which ever passive portfolio strategy you use is up to your comfort level. The main things about passive investing is choosing asset allocation, yearly rebalancing and keeping long term running cost low.
Advantages of Passive Portfolio
I will highlight advantages of passive portfolio here:
-No need to monitor portfolio consistently, or pick stocks, or market time entries and exit - this removes a lot of human errors.
-Lower maximum potential loss in major market downturn, due to bonds prices rising during stock market downturns.
-Near market bottom, there is potential to sell off bonds that are doing well to buy cheap stocks in larger quantity.
-Force investor to be contrarian and buy assets when they are cheap and sell expensive asset to realise profits. Eg. buy cheap bonds when stocks are going up, buy cheap stocks when stocks has had a bad year.
-Long term returns of passive portfolio is similar to that of pure stock index ETF.
-Stock/bond portfolio has lower risk compared to pure equity portfolio.
-Aim of passive portfolio is for reasonable 'market returns', not for 'beating the market'. IMO, in general, expected long term returns for a passive portfolio should be around 7%~10% per year.

Cons of passive investing strategy?
-When stocks prices are soaring in bull markets and people with pure stock portfolio are saying how they are making above 40% returns, passive portfolio with its decreasing bond prices will make less returns at say 20% only - so no bragging rights of very high wins for passive portfolio holders. IMO this is not a disadvantage, because the maximum loss and gains of passive portfolio are both lesser. So passive portfolio holders suffer less and are more likely to stick with their passive strategy during market downturns.
Effects of Big Capital Losses
Regarding stock market losses, I will quote from this article:
"If you are to look back at past trading trends, you would realize that in a bear market, stock markets typically fall by over 50%. In Singapore, the STI fell from 2,500 points in 1996 to just 800 points in 1998, representing a 68% fall. In 2000, STI fell from 2,500 points to 1,200 points in March 2003, representing a 52% drop. And in 2007, STI fell 62% from 3,900 points to its lowest of 1,456 points in March 2009."
Seems like recessions can happen 2 to 4 years after the last recession has ended? I am not predicting that we are due for a recession in 2013, and I am not saying that the stock market will be in a 10 year bull run till 2019. I cannot predict market future like that, and most people cannot predict market conditions in future accurately and consistently also. I can only say with confidence that each investor will meet with severe recession eventually and each investor is better off having a simple workable contingency plan to avoid losses and preserve capital during economic downturns.
During such recessions as described above, will you stick with your investing strategy when stock markets just keep on dropping towards -10%, -20%, -30%, -40%, -50% or more? Note that in these recessions, your job security in that job you love may be threatened, or you may have suffered a pay cut or retrenchment, or someone in the household may have lost job and you have to pay for more of the bills. In such low moody and unsure environment, how many percent of paper loss in your investment do you think you can mentally take before deciding to cut loss and preserve your capital to tide over the crisis? Not to mention, possibly seeing your 40% paper profit in shares becoming -20% loss or so is such a demoralising event.
Ultimate Passive Investment Aims
In passive investing, the one of the ultimate aim is to preserve capital and not lose too much when market is bad. When your losses are smaller during recessions, in the subsequent recovery period you need less profit in order to recover the loss. Take for example an investor in pure equity took a 50% loss during recession - subsequently he had a 60% profit in the post recession recovery period. Did he do well enough? Not really: (100-50)*1.6=.80%, meaning, he still suffer -20% loss even after having a fantastic 60% gain. Now look at a passive portfolio investor owning bonds in the portfolio. During recession, perhaps the portfolio went down by 20%, and in subsequent post recession recovery period, his investment gained 30% only. How has this passive investor done? (100-20)*1.3=104%. This passive investor has managed to recover his portfolio more quickly and completely during the post recession recovery period of high stock growth.
Therefore, a pure equity investor had to endure large paper losses during recessions, or else market time to get out before recession and get back in after recession, while noting psychology plays big part in market timing and most people cannot market time correctly. On the other hand, a passive investor can ride out the economic turmoil more calmly knowing the portfolio strategy is on the investor's side to reduce volatility, preserve capital, and allows disciplined investing. So the lack of very high rewards and corresponding lack very high risk in passive portfolio is actually an advantage from several different perspectives.