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

Advertisements

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

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!

Just In Case

So I’m just gonna say it – I’m a really big wuss when it comes to personal finance.

Some of my friends get a big kick by bragging about how they lose like thousands of dollars every day on their own accounts. I totally get it. Hell, I’ve been there before. I used to watch the futures and forex markets all the time, throwing my dad’s money down and watching with nail-biting intensity, mentally willing those little candlestick charts to go in the direction I wanted, as if I could control the markets if I just concentrated hard enough.

Some of my other friends take their entire life savings and throw them into commercial properties, apartment-flipping, businesses, and art. It’s a helluva sexy isn’t it? Like it could totally be the plot of one of those rags-to-riches movies. (Raspy-voiced narrator: “He started with nothing. Life was tough on the streets. But one man would overcome the odds, take all the risk… and emerge a winner” Cue: inspiring music)

Some people view investing with a “go hard or go home” philosophy – by throwing everything into it. But just because you did a heroic Hail Mary pass doesn’t mean that the market, or your investments, are going to romantically work out for you in the end. If you throw your entire weight behind one, glorious, inspiring, guns-blaring Blitzkrieg, you’re going to be caught with nowhere to run if it doesn’t work out for you.

I’m all for investing, but let’s be smart about it. First, I’d recommend building a hugeass emergency fund. Like 6 months of your income would be good. A year’s worth would be better, but not necessary if you’re young since it’s probably not gonna be that hard for you to find another job if you lose yours. But yeah, there’s nothing more reassuring than having a cool pile of cash sitting in your bank account.Totally baller.

One more reason why having an emergency fund is awesome – it helps you to keep a cool head. And having a cool head is absolutely critical to your success in investing. Here’s a fun fact: the number one reason why most people don’t succeed in investing is because they care too much about it. When the market tanks, most people panic and sell their holdings, which is almost always the wrong decision to make. With an emergency fund, you’re not dependent on your investments to pay your bills, so you won’t go making stupid decisions with your investments.

Secondly, make sure your savings are covered. If you’re planning on buying a house, or getting married, or having a kid, save for those and keep them separate from your investments. Investments, by nature, involve a certain amount of risk, and depending on what you invest in, you don’t want your kids’ college fund to disappear when the stock market takes a nosedive. I have a separate long-term savings account that I contribute towards every month, and I never, ever touch that, not even to buy more stocks.

Next, split your salary and work towards building your emergency funds, your savings, and contributing towards your investments. Personally, I concentrated on building up 6 months’ worth of my salary for my emergency fund first. With that done, I could focus on allocating my money purely towards savings, investments, and expenses.

Lastly, if your investments are relatively low-cost like stocks or bonds, I’d recommend using strategies like dollar-cost averaging to diversify your risk over time.

That’s it! No sexy strategies, no Hail Mary passes. Just smart, common-sense investing, which, in all likelihood, will let you come out ahead in the end.

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.

Should I Buy 16 Exxon Mobils, or a Lump of Gold?

Everyone’s caught up in the gold bug these days. They see the meteoric rise in gold (check out the chart below) and their palms get all sweaty, they start breathing heavily, and they yell “GOTTA HAVE THAT AWESOME SHINY STUFF, AHHHHHHHH!!” Gold has risen a whopping 500% since 2000, especially during the last couple of years when everyone got really scared that the world was coming to an end. (I never got the logic of that: the world is coming to an end, and you think a piece of pretty shiny metal is going to save you?)

Even my dad, who got me interested in finance in the first place, turned to me really seriously one night and said “Gold should be an essential part in everyone’s portfolio”. He cited numerous convincing reasons: it’s an inflation hedge, the US dollar is falling, it’s the world’s ultimate reserve currency, etc etc. I didn’t really know how to respond to that at the time – it’s really easy to get swayed by complicated, convincing arguments on why you should buy gold, or junk bonds, or tulips, or Moroccan camels.

And then I came across this awesome article in Fortune Magazine written by Warren Buffett, the world’s greatest investor. It’s an adaptation from his upcoming shareholder letter – if you’ve taken a basic Finance 101 class, you can totally appreciate the obvious, simple truths in it. I loved this one particular analogy:

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

Would you? I wouldn’t.

Today, you can put your money into hundreds of investments – A colleague complained to me once that there are just “waaaaay too many choices out there” – How do you choose? Personally, I find it a lot easier to make sense of the whole mess by taking Warren’s advice and looking at all the investment assets in the world as just three types:

1. Currency-denominated assets: Think bonds, money markets, CDs, or your simple POSB savings account. These are supposedly the “safest” kinds of assets to invest in, but you’re really losing money every day because of inflation.

2. “Bigger sucker” assets: Assets that never produce anything, but are purchased with the hope that another buyer will pay more for them in the future. I call these “bigger sucker” assets. Gold falls in this category, along with oil, internet stocks in the early 2000s, silver, cattle, lean hogs (no, seriously, you can invest in them), art, wine, country club memberships, and tulips during the 17th century. You buy them, and after the price rises, you can sell them to a bigger sucker who will pay more than you did. And yes, houses fall into this category too, if you don’t rent them out.

3. Productive assets: these are assets that produce more and more cash flow as time goes by. Think businesses (which produce earnings), stocks (a proxy for owning businesses since they pay you dividends), real estate (which earns you rents), factories, farmland, etc. Sure, the economy is pretty shitty right now, but is the Coca-Cola company going to stop selling Coke, or is P&G going to stop selling shampoos? Doubt it.

No prizes for guessing the best type of investment to put your money in. Hint: it’s not number 2, or whatever assets that’s hyped up at the moment. It could be tulips in the 17th century, or gold today, or Hello Kitty paintings in the Baroque style in the year 2050 (gawd, I hope not). Investments make a lot more sense when you just focus on the basics: when you invest in something, does it actually produce anything? Will it earn an income for you? If it does, you’re probably on the right track.

To my knowledge, there’s only one type of asset that has stood the test of time with 200 years of history, will allow you to invest in real, tangible productive assets, and is still doing amazingly well today. Ladies and gentlemen, stocks are the clear winner in this race. Name any other asset, and I’m willing to bet that they don’t have as long, or as awesome, of a track record as stocks have had.

Could gold outdo stocks in the next couple of years? Sure. But I’m pretty sure that a lump of gold the size of a baseball infield is not going to be more valuable than 400 million acres of farmland and sixteen Exxon Mobils in the long run, no matter how pretty it is.

Be Choosy About Choosing

Today’s TED Thursday talk (woah, talk about mega alliteration – yay literary devices!) is about choosing. Or more precisely, how to be choosy about choosing. Sheena Iyengar raised an interesting point about how having more choices may not actually help you, but cause you to give up altogether.

Last week, I was trying to figure out what I should blog about next, so I asked several friends what they thought was the biggest challenge that prevented them from investing. I expected the answer to be something like “because I’m afraid of losing money”, or “because I don’t know enough about it”. But I was wrong. Surprisingly, the number one reason why people don’t invest their money is because there are way too many choices out there.

The more I thought about it, the more it made sense. There are dozens of things you could invest in: stocks, mutual funds, REITs, fixed income, ETFs, futures, options, foreign exchange, commodities, unit trusts, money market funds, art, wine, etc. And within each category, there are even more choices. Take a boring product like fixed income: there are government bonds, corporate bonds, CDs, zero coupon bonds, high yield bonds, junk bonds, bond indexes, bond funds.. Wanna buy stocks? There are literally thousands to choose from in any stock market around the world. It’s enough to scare the shit out of any novice investor trying to get started in investing.

First, let’s agree that investing is generally a good thing. Keeping your money in your stupid POSB savings account earning zero-point-lame % per year is not going to make you rich. What about bonds? For the past 200 years, bonds would’ve squeezed you about a 1% return rate after inflation. Stocks, on the other hand, have yielded an average of up to 7% each year after inflation over the last 200 years, according to Wharton professor Jeremy Siegel (Totally irrelevant but I used to crash his classes while studying at Penn and he’s a helluva awesome. And smart). So yes, investing in riskier assets, especially while you’re young and you have many years of income ahead of you to ride out the risk, is generally a good thing for us young, sexy, just-started-working adults.

We know that investing is good, but we’re just so damn overwhelmed by all the choices out there. Well you know what? I’m a big fan of the 85% solutiongetting started is way more important than becoming an expert. From I Will Teach You To Be Rich:

“Too many of us get overwhelmed thinking we need to manage our money perfectly, which leads us to do nothing at all. That’s why the easiest way to manage your money is to take it one step at a time – and not worry about being perfect. I’d rather act and get it 85 percent right than do nothing. Think about it: 85 percent of the way is far better than 0 percent. Once your money system is good enough – or 85% of the way there – you can get on with your life and go do the things you really want to do.”

Over the next couple of weeks/months, I’ll be blogging about some simple, straightforward assets you can start investing in. Really basic, nothing fancy – you won’t have to learn about stupid terms like “ROI” or “derivatives” or “CAGR” – but they’ve been proven to beat at least 80% of the popular, expensive, actively managed unit trusts out there. Hint: They don’t involve watching the market every day. Stay tuned.