Finance 101: What is Gold?

Hi friend,

Today I shall be looking at Gold as a financial instrument. From ancient times, Gold has been an extremely sought-after object, from the ancient Egyptians to wall street investors. Gold has always been perceived as a form of luxury and riches. Even though Gold has few practical usages outside of industrial applications, and there are metals that are rarer than Gold on Earth, Gold is the highest-priced rare metal.

This concept of Gold having a high perceived value is important to us. As it would mean that Gold has value because we believe that it has value collectively. With that understanding, let us move onto the definitions:

Gold is often looked at as a store of value, but it's also a highly speculative asset linked to currencies and interest rates. - Investopedia

Erm... This is the first time where Investopedia's answer is not comprehensive. 

Allow me to explain the Unique-Selling-Point (USP) of Gold:

1. Function as a store of value - Gold is widely accepted in the world. This is important in countries where the currency is unstable. 

2. Negatively correlate to the market in times of volatility - Example would be during a financial crisis, Investors would flock to Gold due to its relatively stable prices. 

#I will be doing a study to look at the correlation of different financial instruments with stocks. #

3. Limited supply - Has a tendency to increase in value

"That's great! How do I invest in it?"

Woah. Wait, let me go through the advantages and disadvantages. 

Advantages:

1. Acceptable form of currency everywhere

2. Hedge against inflation and a down market (When the market is fearful)

3. Easy to buy and well-established financial institutions that regulate Gold

4. It makes you happy when you physically touch it. 

Disadvantages:

1. Large spread and fees if you were to buy it

2. Storing physical Gold is troublesome

3. Gold can still have fluctuations in prices

4. If your country does not have establishments that allow you to liquidate Gold at a fair price, it will be useless to have Gold. 

How to buy Gold?
1. Physical Gold (In Singapore, you can purchase it from UOB, or Gold retailers, or Gold Jewellery) 
2. Gold Certificates (These certificates allow you to exchange for cash or Gold readily)
3. Gold Savings Accounts (UOB has this. It saves you the hassle of finding a place to store the physical Gold)
4. Gold ETFs or other funds (SPDR Gold Shares ETF)
5. Buying Gold-related companies (like K92 Mining Inc. (KNT) - Gold Mining Companies)

Thoughts and Comments:
I cannot deny that looking at a pile of glittering Gold invokes an irrational sense of joy in me (I have never seen it before. If you have, I would like to see it please). There is a reason why we would want Gold in our portfolio as well. It can serve as a damper to it, especially in times of market volatility. 

However, Gold does not produce any value by itself. It is just that; Gold. Warren Buffett does not believe in it as it does not create value to itself and its speculative nature. There is not much practical usage to Gold, hence, we cannot rely on market demands in our investment strategy. I do appreciate the value that Gold brings to our portfolio and it is included in Ray Dalio's all-weather portfolio. You can also see that Gold underperforms the S&P 500 in the picture below

Essentially: If you want to incorporate Gold into your portfolio, sure. But it should not be all of it. 

With that, I hope that you have a better understanding of Gold as a financial instrument. 

Till next time, 
Stay vested, stay frugal my friends. 

Dionysius

Blue line is the Dow Jones Industrial Average (30 most influential stocks in the US) and the Orange line is Gold.


Sources:
https://www.investopedia.com/gold-4689769
https://www.thegoldbullion.co.uk/the-advantages-and-disadvantages-of-investing-in-gold/
https://www.thebalance.com/pros-and-cons-of-owning-assets-like-gold-1290619
https://thecollegeinvestor.com/12481/the-pros-and-cons-of-investing-in-gold/
https://blog.moneysmart.sg/invest/investing-gold-singapore/
https://blog.seedly.sg/how-to-invest-in-gold-singapore/
https://www.fool.com/investing/does-warren-buffett-invest-in-gold.aspx
https://www.marottaonmoney.com/since-1979-the-sp-500-grew-13-5-times-greater-than-the-price-of-gold/
https://www.macrotrends.net/2608/gold-price-vs-stock-market-100-year-chart

Read More

May 2020 updates

Hi friends, 

Hope that you guys are holding up well during this circuit breaker period. I wish that all of you are safe and that your incomes are not affected that badly. But, good news, I have managed to find a new internship. This should allow me to tide over until school starts again. Also, another good news, I have managed to get a professor for my Final Year Project (FYP). 

Let's talk about the recent stock market rally. It is really irrational, the US unemployment is at an all-time high, businesses are closing down, and yet, the stock market is rallying and we are having a 27% increase from the recent trough. 

This would land us directly in a technical bull-market territory. But if we were to look at the recent financial crisis, the 2000 and 2007, we can see that the market would go through a series of sell-down and rallying before reaching the true bottom. Hence, I would say that we are quite far away from the true bottom. You should wait (not financial advice, just my idea) for the second round of panic selling.

Let's talk about my portfolio
1. Stashaway (Invested $3,306, current value $3,418) 4.91% return
2. Stashaway Simple (Invested $10,250, current value $10,285.73) 0.35% return
3. Coasset (Invested $1,000, expected return of $1,090 in 2020)
4. Funding Society (Invested $2623, current value $1,948)
5. Endowment (Invested $6,000, expected return $6,556.4 in 2022)
6. FSMone - Nikkoam STC Asia REIT ETF (Invested $1,548, current value $1,632) 5.4% return

This would bring my returns to -2.22% (if I include the losses from funding society)
This would bring my returns to 1.86% (if funding society's losses were not included)

The reason why I separated the payment into two different portions is that Funding Society's losses are not yet confirmed. I bet a lot of you guys have heard of this news already (https://www.straitstimes.com/business/companies-markets/collapse-of-singapore-commodity-firm-agritrade-leaves-lenders-exposed). There is a high chance that the loss will be permanent and that I will lose my money. But. When I have signed up with Funding Society, I have already known about the risk. But ... IT'S STILL $675 OUCH MAN. :')

I will continue to put into money by DCA for Stashaway. The $10,000 in Stashaway Simple should last for 12 months of investing before I need to push in fresh funds again. Meanwhile, for FSMone, I will try to time the market for the FSMONE REIT ETF. Wish me luck with that. 

Till next time,
Stay vested, stay frugal my friends.

Dionysius

Read More

Finance 101: What is a REIT?

Hi friends,

I shall be talking about something that is considered safe and value would never fall in a country with a limited supply of land: Properties, more specifically; Real Estate Investment Trusts (REITs):

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves. - Investopedia
When you invest in a real estate investment trust (REIT), your money is pooled together with other investors' in a collective investment scheme that invests in a portfolio of income-generating real estate assets such as shopping malls, offices, hotels or serviced apartments. - Moneysense.gov.sg

As we can see from the definitions, the keywords are:
1. Owns real estate 
2. Pool the capital of other investors - Similar to ETFs and mutual funds
3. Income-generating investments - The income is generated from the rents paid by the tenant of these real estates 

So.. What is a REIT? 
Essentially, the trust managers would take the money gathered from a pool of investors, to buy properties like malls, office buildings, hospitals, etc. The spaces are leased out to tenants (think of shops in a shopping mall - Uniqlo, h&m, texas chicken). The profits from the rent collected after paying off the loans and fees borrowed to buy the properties are then distributed to the unitholders (similar to stockholders receiving investments). This is called distribution yield.

Here are the sectors that a REIT may specialise in:
1. Retail: (Shopping malls):

This is the most common one in Singapore, however, it is also easily affected by economic conditions. In a downturn like 2020, there might not be visitors to a mall and the tenants may default on their rents. A strong REIT would be one with a lot of stable tenants (think big brands) that can afford to pay the rent during an economic downturn and good foot traffic.  

2. Hospitality (Hotels, some residences)

This also easily affected by economic conditions, in a downturn like 2020, where there are basically no tourists, hospitality REITs are at a disadvantage as they no longer have any income. Hence, they will experience more volatility because of external market conditions. 

3. Commercial (Office buildings)

Commercial REITs are relatively more stable as the lease agreements with the tenants are longer in duration. Also, if the tenants are majority larger and more stable corporations, even in an economic downturn, the inherent income of the REIT would not be affected. 

4. Healthcare (Hospitals, nursing homes)

Healthcare REITs are expensive in Singapore. This is as Singapore is facing an aging population, we expect an increase in the demands for quality healthcare in the future. Singapore is also positioned as a location for quality healthcare for the region and investors know about it. 

I would say that healthcare REITs are stable, provided they have the proper management and loan ratio. 

5. Industrial (Data centers, warehouses, logistics buildings)

Industrial REITs are dependent on the type of industries that they cater to; some industrial REITs may focus on logistics buildings and when imports are not doing well, they would be negatively affected. 

However, they are also more stable as the lease agreements are also typically longer. 

Advantages of REITs:
1. Diversification (You would be investing in more than 1 property most of the time)
2. The steady stream of income through distribution yield (Passive income)
3. The gradual increase in property value (Especially relevant in land-scarce Singapore)
4. Liquidity (As Reits are sold on the stock market, transaction can occur immediately)
5. Low cash upfront (As compared to owning actual properties)

Disadvantages of REITs:
1. Exposure to only one sector (As a REIT usually focus on one sector, you would be exposed to the downside of the sector in certain economic conditions)
2. Management fees (As REITs are actively managed, fees are required to pay for their expertise)
3. Volatility (As a REIT is traded on the stock exchange, it is subjected to fluctuations of the stock market)
4. Subjected to changes in interest rates (Reits are allowed to borrow up to 45% of their total assets in Singapore, changes in interest rates might negatively affect the operations of these Reits) 

How to consider a REIT:
1. Gearing ratio - The ratio of loans to asset, a low gearing ratio would allow the REIT to take advantage of lower property prices in an economic downturn. 
2. Management team - A good management team would make the correct decisions, such as increasing the gearing ratio when property prices are cheap
3. Outlook on the sector/ industry and the properties - If you think that over the long run, the specific sector will not do well, you should probably avoid, likewise for the price of the property that the REIT is managing
4. Occupancy Rate - A higher occupancy rate would mean that there are more distribution yield 
5. Tenants retention rate - A higher retention rate would mean more tenant are willing to continue their lease with the property
6. Fees - High fees would definitely dig into your returns. But if you're paying for the right team to deal with rationale tenants, unlike mutual funds, you would get return for your money 
7. Distribution yield - A history of consistent distribution yield could be an indicator that it will continue to pay out the same distribution yield in the future. 

Thoughts and comments:
For my personal portfolio: I have about half in REITs through my REITs ETF at the moment. If the price of the ETF is to keep falling, then I may consider increasing my weightage to take advantage of the low price. I love the idea of collecting passive income as a landlord. kekekeke. 

Do your own due diligence when it comes to investing, I am not recommending you to buy anything. 

With that, 

Stay vested, Stay frugal my friends, 
Dionysius




Sources:
https://www.investopedia.com/terms/r/reit.asp
https://www.drwealth.com/singapore-reits/
https://www.moneysense.gov.sg/articles/2018/10/understanding-real-estate-investment-trusts-reits

Read More

April 2020 updates + investment strategy for this period

Hi friends,

Wow. Just wow, it was definitely a blood bath the previous week. I am currently writing on the 4th week of march. But in the 2nd and 3rd week of the month, I experienced quite a big loss in my investment. It was an exciting experience. I was elated when the flash drop occur and the circuit breaker happened in the US market.

So, here are my strategy for this period of extremely turbulence (This is not a recommendation. I am just talking about my plans for my personal investments):

1. Increase my DCA into Stashaway to $1000 a month. (I have about $12,000 in my warchest. As a  bear market would last for an average of 13 months, that is how I will allocate my finances)
2. I have allocated $5000 for "timing the market" (NOOOOO, WHY AM I DOING THIS). I am trying to time the Nikkoam REIT ETF as I believe that there are fundamentally strong companies in the etf and I really like the idea of having 4-5% of passive income from the etf. (If I invest in this period of low valuation, I am expecting a higher dividend yield.)
3. If needed, I will be pulling money from my emergency funds and take this opportunity of a lifetime.

Now, let talk about my portfolio:
1. Stashaway (Invested 2900, current value 2777 )
2. Stashaway Simple (Invested 6900, current value 6929.13)
3. Coasset (Invested 1000, expected return of 1090 in 2020)
4. Funding Society (Invested 2623, current value 2720)
5. Endowment (Invested 6000, expected return 6556.4 in 2022)
6. FSMone - Nikkoam STC Asia REIT ETF (Invested 1548, current value 1584)

That would bring my returns to 1.41%. Not including cpf, life insurance etc.

There is this financial saying that more millionaires are made in a crash than a bull market (I will be putting that to the test). I cannot be a millionaire from the amount that I have, but I believe that I can set myself in a good financial position from this turbulent period.

Till next time,
Stay vested, stay frugal my friends.

Dionysius

Read More

Active management allows for better performance in market downturns?

Hi friends,

One of the counter-arguments brought-forth by active management believers would be that they can utilise some other instruments (bonds, derivatives, or even cash) in a market downturn to achieve better performance in a market downturn (like the one that we are having now). Thus, I will be examining if this saying holds up when we look like historical data:

Links:
1. https://www.onedayinjuly.com/active-vs-passive-in-down-markets
2. https://advisors.vanguard.com/iwe/pdf/FASAPMSM.pdf
3. https://advisors.vanguard.com/iwe/pdf/FASAPCM.pdf
4. https://www.morningstar.com/articles/852864/will-active-stock-funds-save-your-bacon-in-a-downturn
5. https://us.spindices.com/documents/spiva/persistence-scorecard-december-2019.pdf?force_download=true

From the POV of active investment:
Passive investments would rely on the market index (index funds/ etfs) for their investments. As the market goes into a downturn, active investment would shine as they would often own stocks that are outside of the index. This would mean that they have the potential of performing better than the market index when it goes down. A skilled manager would only pick the good stocks in the stock market and hence, it should perform a lot better than just buying all the stocks in the market using index funds.



Looking at the figure above, we can see there in a bear market, active managers do perform better than compared to a bull market. Hence, from a short-term perspective, active managements can be considered as a way of investment (Provided that we can choose the ones capable of choosing the right stocks)


However, when we attempt to look at things from a long-term perspective (i think of around 10 years?). The graph above actually shows that for the top 20% actively-managed funds in one crisis, only 23% would remain in the top 20% for the next crisis.

Effectively, only 4.6% of actively-managed funds would remain in the top 20% in their performance for a period of 2 crisis. The issue of how we want to select this 4.6% is beyond me, as I believe that it is more likely due to luck that they actually remained in the top 20%. Evidently from the 77% that actually slide below the quintile.

The same also applies if we look at the US small-cap funds and emerging market fund. Please look at link number 1 for that.

Also, looking at the SPIVA scorecard, which includes 12 equity buckets spread across Large-Cap, Mid-Cap, Small-Cap, and Multi-Cap. Each of those four broad categories is further divided into Core, Growth and Value sub-categories. The 13th category is Real Estate funds. The SPIVA score card has data started in 2001. 

Looking at the 2001 dot com bubble burst and the 2008 financial crisis, only 4 out of 13 of the categories has more than half of the active funds beating their respective index in 2001. In 2008, only 2 our of 13 of the categories has more than half of the active funds beating their respective indexes.  

Hence, even in a market down turn, we are unable to see substantial evidence that active management would perform better than their respective indexes. This is especially evident in the previous paragraph, where only 4/13 of the categories of active funds out perform their indexes in 2001, only 2/13 of the categories of index funds out perform their indexes in 2008. 

In conclusion: when we look at the short-term perspective, there are indeed a substantial proportion of active funds that will outperform the market (50%, so if you would want to choose a fund, you can choose to flip a coin), However, in a long-term perspective, there is no substantial evidence that active management would consistently perform better than passive-investments. Between one crisis to another, there is no consistency in which fund will always do well in the crisis. 

Read More