Friday, 16 January 2015

Thoughts on Investment on a Friday

Apparently, some people want their CPF out in one lump sum in order to be able to invest at age 55. They think they can do better than CPF.

You are thinking of investing?

Here are the usual investment advice you will get:

1) "Do your homework before you invest."
Sure. with your part-time homework, if you beat a full-time analyst you can be sure of one thing. You're not smarter or better than him. You're just luckier. Most full-time investment analysts can't predict with much accuracy stock price performance. And they have the luxury of working at it full time, being paid to talk to these company leaders, and focusing on a specific sector or industry. So, sure, with your part-time homework, you might get lucky.

2) "Diversify your portfolio."
That means buy one lot here, one lot there so in the end you may have a diversified portfolio of say 10 stocks in 10 companies. That way if any one lose money, the other 9 may average out the loss so it is not so painful. Conversely, if any one makes big gains, the big gains is diluted by the other stocks. What you are hoping to do with a diversified portfolio is to spread the risk, and play the odds. Odds are on average, you will do better than inflation.

There are two problems:
a) Most people don't have the discipline to hold a diversified portfolio. Even if you did, at the end of year one (or some period of time), you will probably sell the under-performing or losing stocks, and double down on the better performing stocks. So over time your "diversified" portfolio will become less diversified, until you end up with a few "winners". Then the stock market will crash. Or maybe your "winning" stock will run out of luck and lose.
b) Most people don't have enough money to hold a diversified portfolio. That's why penny stock are so popular - it's what small investors can afford. And the returns as a ratio to the price is disproportionate.
"This is also why Singapore investors have a distinct preference for penny stocks, which have low prices and skewed returns, just like lotteries...."
However, there is a reason these are "penny stocks".

SGX recently (19 Jan 2015) moved to allow smaller board lots - 100 shares instead of the usual 1000 shares per lot:
"investors will be able to buy the shares of the three largest banks for a minimum investment sum of less than S$5,500 — or S$5,385 — based on the closing prices today of S$23.36, S$20.05 and S$10.04 for UOB, DBS and OCBC, respectively. Without the board lot reduction, the amount would be S$53,850, putting the stocks out of reach for many new investors."
This would help. But note that with $5500, you would get 1 "mini" lot (of 100 shares) each of UOB, DBS, and OCBC. So that's the banking sector covered. Just the banking sector. For a truly diversified portfolio, you need to cover several sectors/industries.

But this is a help for young investors.

But think also about this advice I read somewhere: investment is for wealth preservation, not wealth creation.  

You have a million dollars, you can afford an adequately diversified portfolio.

If you're thinking of doubling your money in a short period of time (say at age 55, before you retire by age 62), your investment will need to have high returns, and high returns usually come with high risk, and basically, what you are doing is gambling.

3) "Compound. Compound. Compound." 
"Let the power of compounding interest help you. Start saving and investing early. The sooner you start, the smaller your monthly savings can be."

But guess what? Retirement is always a long way away, and your needs are immediate. Life is uncertain. Eat dessert first. So you don't save, and you're not prepared for, and don't have enough for retirement. Ideally, you should start saving for your retirement early. Start small. But reality always gets in the way of ideally. There are bills to pay, dates to go, social functions to attend, a car/a flat to buy, a wedding to plan, a baby to pay for.

4) "It's never to late to invest."
This is the classic sales pitch of desperate investment agents smelling the CPF lump sum 55-year-olds have withdrawn from their CPF. If your CPF is not enough (in your estimation), age 55 is not the time to think about doubling it. or even significantly increase it. The only way to do so via "investment" is with very aggressive, very risky investment. It is basically gambling. So there IS a time when it is too late to invest. (Actually, my point is that there is NEVER a good time to invest unless you have a million dollars TO SPARE. But this is for the desperate 55 year old.)


The problem is the best time to invest aggressively is when you are young and can afford to absorb losses. But that is the time when you have NO money to invest. By the time you have money to invest (for most of us, that would be age 55, with your CPF withdrawn), you are close to retirement and CANNOT AFFORD to take big risks. So you can only invest in the safest blue chip stocks. That cost a lot. And even the safest stocks are not without risk.

Take SIA for example. That's a blue chip stock. If SIA were to have the year MAS had in 2014, its stock prices will tumble overnight. Yes, the risk is lower, and you might even argue (patriotically) that SIA is better managed and better run than MAS.

And that it wouldn't have taken the same risks as MAS.

Sure. (

The point is risks can be managed but not eliminated. Some risk are pure chance, plain dumb luck.

So those investors who think that they can do better than the guaranteed 4% from the CPF retirement account, they are deluding themselves.

Here's a statistic to blow your mind: 90% of drivers think that they are above average drivers. 90% of investors think they are smarter than full time investment analysts. One is statistically impossible. The other is only statistically improbable.

Only 18% of CPF members who invested through the CPFIS between 2004 and 2013 made more than the 2.5%. Almost half (47%) lost money. Another 35% made up to 2.5%. Most (82%) should have just left their money in the CPF. Do you think you are in the 18%?

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