You Only Live Once

credit: http://www.flickr.com/photos/49568889@N08/7684077336/sizes/m/in/photostream/

I’m a HUGE fan of Lonely Island. Came across this awesome music video titled YOU ONLY LIVE ONCE, feat Adam Levine and Kendrick Lamar (who?).

I love it because it makes fun of people who take risk a little too seriously (“Two words about furniture: KILLING MACHINES!!”).

But while we scoff at the idea that we should stop going to clubs because loud music is bad for your ears, it amazes me that so many young people adopt that very same mindset when it comes to investing.

Here’s an interesting thought: Investing in the stock market is risky in the short run, but it’s the safest investment you can have in the long run.

The stock market is risky in the short run

Let’s tackle the first half of that last para first. Check out the returns from the stock market’s five worst years, from Financial Ramblings:

  1. 1931, -52.7%
  2. 2008, -33.8%
  3. 1930, -33.8%
  4. 1937, -32.8%
  5. 1974, -27.6%

So yep, in the very short term, buying and holding stocks is risky. Based on what history tells us, you could lose as much as half of your portfolio in a single year – Investors sure as hell weren’t popping champagne in 1931.

But it kicks ass in the long run

But it’s a very different story when you’re holding stocks for long periods of time.

Jeremy Siegel (whose classes I used to crash in college to leech off his market insights – woot woot!) argued in Chapter 2 of his book Stocks for the Long Run, that with a sufficiently long holding period, stocks are actually less risky than bonds.

According to Wikipedia, “During 1802–2001, the worst 1-year returns for stocks and bonds were -38.6% and -21.9% respectively. However for a holding period of 10-years, the worst performance for stocks and bonds were -4.1% and -5.4%; and for a holding period of 20 years, stocks have always been profitable.” Bonds, however, once fell as much as -3% per year below inflation.

In short, Siegel found that if you held stocks for 17 years or more, you never lost money even in the worst case scenario. 

Okay, so critics might claim that his findings are way too optimistic, and that the stock market’s prosperity in the 20th century may not necessarily repeat itself. But what’s the alternative? Investing in scammy gold buyback schemes?

The truth is, based on any historical record so far, the safest, and best, long-term investment for most young people has clearly been a diversified portfolio of stocks. Yes, even after you account for the stock market crashes in the past couple of years.

Young Heart, Run Free

And therein lies the awesomeness of being young and sexy – as young people, we have the luxury of having enough time. Enough time for a long career of earning money ahead of us. Enough time to hold on to our stocks without worrying about their fluctuations in any given day/month/year, knowing fully well that in the long run, we’ll come out on top.

So please. Stop getting intimidated by the stories of banks failing, and quantitative easing, and Justin Bieber’s Twitter account getting hacked. These are all short run risks (especially if you’re Justin Bieber), which are irrelevant if you’re holding out for the long term.

Take a little bit of risk in the short run to enjoy some awesomeness in the long run.

You only live once.

Image credit: TheOnyxBirmingham

Passive Investing: The Movie

Credit: http://www.flickr.com/photos/cheriejphotos/7158114527/sizes/m/in/photostream/It’s only 2 weeks into 2013 and I’m already swamped! These few weeks are absolutely packed for me, with work guzzling most of my brain fuel, and an upcoming work trip to Beijing. I’m also sticking with my 2013 goal schedule, as well as finding time to work on a free ebook (woot!) that will be making its way here soon, I promise!

So whenever life hits me with a gazillion things to do, I usually take things a little slower, kick back and do something chill like watch a movie. But because I’m a huge financial nerd, I get my kicks watching stuff like Passive Investing – an awesome 54-minute video on passive investing (duh) and why it rocks.

While there’re tons of books and articles written on the subject, I believe that this is the first time someone has made an entire documentary on it. The PF community has already been excitedly sharing it for a month or so now (yeah, I know, I’m a little late in the game.. my bad).

It features some of the biggest, badass (in a good way) names in the index investing industry, such as John Bogle, Kenneth French, William Sharpe, Burton Malkiel, and Rick Ferri. The production is pretty high quality, and there are summaries at the end of each chapter in case you get too distracted by the super strong British-newscaster accent.

So grab some popcorn, snuggle down on the couch, and enjoy 🙂

A caveat: While I agree with most of the concepts presented, I don’t fully agree with everything in the film. One of my biggest bugbears is their assertion that the Capital Asset Pricing Model (CAPM) is the “mathematical foundation of passive investing.” I won’t go into a snooty academic diatribe about the the flaws of CAPM here, but it suffices to say that you don’t need CAPM to hold in order to show that passive investing is still the best way to invest for most people.

Other than that though, the film is excellent. I also love how they display all the logos of actively managed funds throughout the film, subtly dissing the crap out of them without actually naming any names. It’s a little more subtle than my usual practice of pointing and loudly jeering at fund management ads displayed on the subway, causing people around me to move slowly away from me and whisper under their breath. I can only assume that they must be talking about how wise I am.

If you’re looking to learn a little bit more about passive investing but aren’t inclined to read a book, you could totally start here. It could be the most profitable 54 minutes you’ve ever spent. 🙂

Image credit: cheriej

The Great Index Unit Trust Hoax

Whenever I check into a hotel, I get really fascinated by just how crazy expensive some of the items in the minibar are.

One time when I was on vacation, I felt a little hungry so I lumbered over to the minibar and pulled out a pack of cashew nuts – just the regular kind you’d find at any convenience store. Just to be safe, I checked the prices before I tore the pack open, and involuntarily yelled: “NINE DOLLARS FOR A PACK OF TWELVE NUTS?! ARE YOU OUT OF YOUR FRICKIN’ MIND???”

It’s absolutely crazy how people are perfectly willing to pay several times the price for the EXACT SAME PRODUCT – a product that they could have gotten much cheaper elsewhere. We see this everywhere: a Nike sneaker vs a non-branded one, Tropicana orange juice vs a house brand, and beer that costs $12 in a restaurant and $2.50 in the supermarket.

A pack of nuts from the minibar might do a little damage to your wallet, but it’s nothing compared to the damage a unit trust (also known as a mutual fund for my American friends) could do to your long-term wealth.

Costs Matter

I’m not even going to discuss actively managed unit trusts with their high management costs. Nobody takes those seriously anymore – There’s more than enough research that shows that as a whole, actively managed unit trusts are a terrible choice compared to index funds.  Check out here and here.

Today, I’ll just uncover a pricing anomaly I like to call The Great Index Unit Trust Hoax, which involves 2 unit trusts being sold to Singaporean investors. Both charge exorbitant amounts to essentially help you invest in portfolios that you could have easily put together yourself… at a fraction of the cost.

To Infinity… and Beyond!

Exhibit A is the Infinity US 500 Stock Index Fund, which is supposed to help you track the return of the S&P 500. To accomplish this, it hits you with a whopping 0.98% expense ratio.  Now 0.98% may not sound like too much of a big deal, but try compounding that over 30 years and you’re talking about a difference of tens of thousands of dollars of extra cash that’s coming out of your pocket.

But hold on – there’s another, cheaper way for you to track the return of the S&P 500 on your own. You could buy an ETF from Vanguard, which gives you the EXACT SAME RETURN, while charging a mere 0.05% expense ratio. This makes the Infinity unit trust almost 20 TIMES MORE EXPENSIVE than the Vanguard ETF. Yeah, I know.

Home Sweet Home… For 4x The Price

Okay, I hear you say, so maybe that’s a problem unique to the USA.

Oh wait, it’s not.

Presenting Exhibit B, the patriotically-named unit trust MyHome Fund run by Singaporean asset management company Nikko AM. It invests in 1) an ETF tracking the Straits Times Index and 2) the ABF Singapore Bond Index Fund ETF. They’ll charge you a ridiculous expense ratio of 1.2% for all their hard work.

But wait! Did you know that you could totally log onto your online brokerage and invest in 2 ETFs which track the EXACT SAME THING for a fraction of the cost? Namely:

1. SPDR Straits Times Index ETF (SGX Ticker: ES3) – Expense ratio: 0.30%

2. ABF Singapore Bond Index Fund ETF (SGX Ticker: A35) – Management fee + trustee fee: 0.20% (I couldn’t find an exact figure for the total expense ratio on their website – those sneaky bastards – but it shouldn’t  be too far away from the sum of these 2 fees).

Total weighted expense ratio: 0.28%

Ta-daahh! You’ve constructed the exact same product, at a quarter of the cost. And that’s not taking into account sales charges, redemption charges, front-end charges, admin charges, and hire-an-attractive-banker-to-convince-you-to-part-with-your-money charges.

Do Yourself a Favor

My point here is to always, always, read the fine print. The finance industry loves to play down details like these because it means higher commissions for them – commissions that come right out of your pocket.

If you plan on investing passively, do yourself a favor and skip out on the unit trusts. You’re way better off buying the equivalent ETFs instead. Of course, there are a few disadvantages in buying ETFs (eg brokerage commissions, currency exposure, inability to invest in small amounts), but they can be easily circumvented (eg investing regularly using no-minimum commission brokers,  or in the case of the STI ETF, setting aside an amount every month until you can afford one lot). None of the disadvantages of ETFs justifies the tens of thousands of dollars you’re giving up in expenses if you invest in unit trusts.

It would be totally awesome if a reputable fund provider like Vanguard would set up an index fund in Singapore (are you reading this, John Bogle?), which would eliminate all the disadvantages in the para above, and yet charge a reasonable expense ratio that doesn’t require us to give up our first-born child.

In the meantime, stay smart and read the fine print. Save your money for those overpriced cashew nuts from the minibar. At least they’re tasty.

The Top 10 Investor Errors (And How You Can Overcome Them)

Have you ever checked out the finance section of your local bookstore? That’s usually the first place I zoom into, because I’m nerdy like that. The first thing you usually see is a SEA OF PURPLE in that hugeass shelf of Rich Dad, Poor Dad books. Don’t ask me why, but the gaudiness kind of turns me off. And then there are the shelves and shelves of books on awesome investment strategies: value investing, day-trading, swing-trading, volatility arbitrage, investing in wine/land/oil/Oompa-Loompa sex slaves..

For the amount of ink that’s been spilled to write about these sexy strategies, the hard truth is that 90% of investors will never be successful at any of them, because of their own inherent biases.

Barry Ritholtz wrote this great article on the Top 10 Investor Errors which I thought I’d share with you. If you’re just starting out in investing, or are thinking of doing so, I highly recommend that you read it – it’ll put you ahead most investors who don’t have a clue about the game that is being played around them.

The Top 10 Investor Errors:

1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Mutual Fund vs ETFs
5. Asset Allocation Matters More than Stock Picking
6. Passive vs Active Management
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For

At the risk of sounding like I’m under the influence of Error #8 (Cognitive errors – one of which is: “We selectively perceive what agrees with our preexisting expectations and ignore things that disagree with our existing beliefs.”), I’d like you to consider that a passive, low-cost, index-based, diversified and automatic (PLIDA) investment strategy will help you to overcome 9 out of 10 of these errors – pretty much everything except error #10 (because you don’t need to pay for a financial advisor). Check out my previous posts on investing if you need a quick refresher on a PLIDA strategy.

So how will PLIDA help you to be more baller than 90% of investors out there?

1. Investing in low-cost ETFs is – by definition – a low-cost strategy, which eliminates errors 1, 4 and 6. “Fees are an enormous drag on long-term performance… Typical mutual fund or adviser fees of 2 to 3 percent may not sound like a lot, but compound that over 30 or 40 years, and it adds up to an enormous sum of money.”

2. A diversified portfolio of index-tracking ETFs will take care of your asset allocation for you, eliminating errors 2, 5 and 7. When you’ve got a good mix of assets (say stocks, bonds, and real estate, diversified geographically), at least one of them will perform well at any given point, regardless of whether you’re in a bull or bear cycle.

3. An automatic investment strategy of dollar cost averaging, (investing the same amount of money at regular intervals while ignoring the price) will let you overcome the cognitive biases of trying to time the market, eliminating errors 3 ,8 and 9. Here, you don’t care about whether the stock market did well or whether the Fed is going to raise interest rates or what Ben Bernanke had for lunch today. You would calmly and surely stick to your strategy of investing, buying more when others are fearful (and prices are low) and less when others are greedy (and prices are high).

Meanwhile, back at the bookstore…

Go back to that finance section at the bookstore and try to find a book that’s written about PLIDA. Chances are, you won’t find that many. Not many people care to learn about the one strategy that offers them the highest chance of success. Instead, they prefer to bury themselves in their copy of Make Big Money And Retire Early By Investing With Covered Calls, and continue to delude themselves. How about you?

Some Fund Recs (Because I Survived the Wilderness)

Hola! It’s been awhile, hasn’t it? I’m back after an epic 2-week hiatus where I was literally sleeping in the wilderness, scaling great heights, and constructing a makeshift boat with my bare hands. Okay fine, it’s less awesome than it sounds – I was away at my company’s Outward Bound course for a grand total of 5 days. And the remaining 9 days was spent… recovering. Yeah, you know I’m sexy and rugged like that.

So I haven’t been doing a very good job at keeping this blog updated on a regular basis. Up till my last post, I’ve been managing about one post a week, partly because my posts are so damn long. I can’t help it – I usually have so much to say when I want to talk about something that I go on and on and on and on and before I know it, I’ve spent like 2 hours on a post. Not to mention the time taken to find that perfect, non-copyrighted title picture. Damn you, intellectual property!!

So I’m gonna try something different from now: I’ll try writing shorter, more regular posts, splitting a huge topic out into different bits. Hopefully this way, blogging’s not going to be as daunting of task to me, you won’t get so damn bored with my 1,000 word essays, I get momentum to write more, and you get more fodder to help you hatch a rich life. All in all a good deal for the both of us. I won’t always be able to come up with superdamnentertaining analogies – some of my posts will be factual and serious, but at least I’ll be able to use those to get some blogging momentum.

Are you ready? Good. Here we go.

So I got a comment from Jing asking if I could recommend some Exchange Traded Funds (or ETFs for short). Okay, I’m not a financial advisor. There’s no way that I can decide if a particular ETF would suit your needs. But I can tell you what’s in my portfolio and then you can decide for yourself, kay? These ETFs suit my own personal investing style of a buy-and-hold, dollar-cost-averaged, and index-based strategy (which you can read about here, here and here). And so the five ETFs I currently have in my portfolio are (drum roll please):

1. SPDR Straits Times Index ETF (Ticker: ES3): Benchmark index of the Singapore stock market, traded on the SGX. Comprises 30 blue chip Singaporean companies, some of which are effective monopolies. I invest in this mainly for the home bias, and to mitigate exchange rate risk from the US Dollar.

2. Vanguard Dividend Appreciation ETF (Ticker: VIG): Comprises US companies that have consistently grown their dividends over 10 years or more. Blue chips like Coke, IBM, McDonald’s. I’m a big fan of dividend investing, especially in companies that consistently grow their dividends. Traded on the NYSE.

3. Vanguard FTSE All-World ex-US ETF (Ticker: VEU): Global stock index fund, to give me some exposure into the developed world outside of the US for diversification. Traded on the NYSE.

4. SPDR Dow Jones Intnl Real Estate ETF (Ticker: RWX): I also believe in diversifying across asset classes, and real estate is one of them. RWX is a global, ex-US, real estate fund, traded on the NYSE.

5. Vanguard REIT ETF (Ticker: VNQ): US real estate fund. Okay I admit – I’m biased towards the US because I went to college there. So a large part of my portfolio consists of US holdings, and I invest a small portion of my portfolio in VNQ because real estate plays a particularly pivotal role in the US economy. Traded on the NYSE.

I’m also looking to invest in the ABF Singapore Bond Index Fund (Ticker: A35), another global bond index fund, and some Singapore REITs to diversify, once I build up a large enough equity base.

Okay but before you get all excited and run out and throw your money in these funds faster than army boys at a strip club, let me just say two things:

1. I have a certain investment style (long-term, buy-and-hold, index-based) which may or may not suit your style of investing. There are literally thousands of ETFs out there that can suit just about any investment style. You should decide on your own style and invest in the assets that suit your objectives.

2. I am not your financial advisor and these are in no way outright recommendations that will guarantee you riches and ca$$$hhh moneyyy baby. DO YOUR OWN RESEARCH before you invest in anything. Investing means taking on risk – please don’t be a baby and blame me (or someone else) if you lose money.

Till next time, assuming I don’t die from my sandfly bites, adios!

It’s Not About the Timing, Timing, Timing

So I have this weird friend who is super random and texts me like the most RANDOM texts ever (No hate here, we’re good friends and she’s totally cool that I’m blogging about her hahahaha). After not hearing from her for like 2 months, I get this text message:

“Hey lionie~ What % of your money do you put in STI and what else do you put your money in? Do you think now is a good time to go in?”

First of all, nobody calls me “lionie” (zomg?!). Next, I really love the phrase “do you think now is a good time to go in?” because hell, it’s on everybody’s minds isn’t it? Everyone is obsessed with when the “right time” is, as if there’s some sort of magical moment to invest that’ll make you rich like, forever. I can totally see why: It’s the same reason why buying McDonald’s lunchtime Extra Value Meals for $4.50 feels so damn awesome – because we’re getting it cheap. Everybody could use a midday Big Mac with fries (mmmmm!) and nobody wants to get ripped off.

We take this psychology to the investing arena, and suddenly, we’re lost. Suddenly, those chicken mcnuggets that were $4.50 an hour ago are now $6.20! Wtf?!! But if I don’t get them now, what if they rise to $12 a piece? Or maybe I should wait and let them fall back to $4 for a six-pack? When is a good time to go in? When? When??? You’re not alone – the professional investing community is obsessed with the idea of timing. Pick up any business newspaper, turn on CNBC, and you’ll see stock calls screaming at you to “Buy” and “Sell” NOW, or be forever banished to the poor house. I hate it – I hate anything that pressures me to do something with my money NOW. This applies to stocks, and those annoying “Call now and receive a new abdominizer absuh-lutely FREE!” informercials”. They are way too stressful, and they cause you to make terrible decisions with your money.

What’s the trouble here? This philosophy assumes that investing is a huge, epic, life-changing moment. My friend was super concerned about when she should invest because she saw it as a significant, one-time decision. But think about it – there are a gazillion moments in life. What are the odds that the one you pick to invest your money in will be that one, magical moment when the market bottoms out?

Instead, let’s forget about being “right” and let’s focus on seeing investment as a lifestyle decision, just like brushing your teeth or cleaning up your dog’s poop. It isn’t sexy, it isn’t the most fun, and you’ve got to do it regularly or you’ll end up with a big mess. But if you don’t get it right a couple of times, no one is going to die. That’s a whole lot less stressful, isn’t it? The truth is, the market goes up and down and is volatile as hell. In all likelihood, we’ll never be able to pick the “best” or the “right” time to invest, so why bother trying? So when the ladies come up to me and adoringly ask “Oh, Lionel, tell us when is the best time to go in?” I put on my most charming smile ever and go “Baby, just dollar-cost average.” (Yeah, you know that totally gets me laid).

What is dollar-cost averaging and why is it awesome? Dollar-cost averaging means that you invest a fixed amount of money into the same stock, or ETF, or fund, at fixed intervals. So, for example, you might invest $500 into a certain stock every month, or $1,500 every quarter. The actual interval doesn’t really matter. What matters is that you invest a fixed amount every time. Unlike the “invest all your money at once” mentality, which forces you to predict when is the best time to invest in, dollar-cost averaging is a system, a system that lets you invest at the overall average price of the market and lets you smooth out the price which you enter in.

Say you invest like $1,000 per month into a stock market index ETF. Some months you may be investing when the market is super cheap at $100, so you manage to buy 10 units of it. The next month the market rises to $200, so you only buy 5 units of it. The next month the market falls to $50, so with that same $1,000 you load up on 20 units of it. So when the market is cheap, the system lets you buy more of it, and when the market is expensive, you buy less of it. Overall, you’re pretty much guaranteed the average price of the market. You’re not getting in at the bottom, but you’re also not running the risk of putting all your money into the market, just before it takes a nosedive southwards. With the reasonable assumption that the market is likely go up in the long run, getting in at the long-run average price means that you’re likely to end up in the black, given a long enough time horizon (we’re talking 20-50 years here).

What about periods like 2008-2009, when the market was trending down? People who dollar-cost averaged got themselves into market at lower and lower prices as the market fell, accumulating all those units at cheap prices and making themselves well-positioned for the recovery from March 2009. Contrast this to the herds of investors who piled into housing stocks at the height of the bubble, only to watch their nest egg crumble in 2008, and then panicked and sold right before the recovery. Dollar-cost averaging works best when the market is at its most volatile, because it helps you to take advantage of the volatility by buying a both high and low prices to average out your buy-in price. I’ll spare you the details, but this video from Mike at Oblivious Investor shows how with dollar-cost averaging, the volatility in the market goes from being your enemy to your friend.

What’s even more awesome? Most academics and economists are already predicting that we’re going into an age of increased volatility with more crashes and more bubbles, occurring at increasing frequency. Even more reason not put all your money in at any one time, because you never know what’s going to happen tomorrow. So why risk it?

Like any system that I love, it can totally be automated. Most fund providers offer the option of a “Regular Savings Plan” or a “Drip-feeding” plan that lets you dollar-cost average a pre-determined amount into whatever security you choose. Even if you choose not to automate it (I don’t because my broker doesn’t let me), it takes a couple of clicks to invest a fixed amount at regular intervals. No stress, and no worries about where the market is going to go tomorrow. Just a plain, simple system. It ain’t sexy, but it works.