Three Lessons From A Singaporean Favourite Game

Apart from red packets and delicious snacks, there is one other thing that everyone look forward to during the Lunar New Year. It’s Mahjong! On top of being a good game to stimulate your brain and catch up with your relatives and friends, this household favourite game yields many lessons about investing and life.

Lesson 1: You can’t win it all

The first lesson is a tough pill to swallow. No matter how skilled you are at reading the cards of others or how disciplined you are at playing defence, you cannot always win in Mahjong. Sometimes, people just keep winning from 自摸 (drawing the tile themselves). Disgusting! Trust me, I understand how frustrating this is (been on the receiving end of that multiple times). Unfortunately, this is something that is completely out of our control. You win some, lose some. Sometimes you are lucky, and sometimes you are not.

Thankfully, doing nothing is perfectly fine! Luck comes and goes, but in the long run, over many repetitions, what gives one an edge is skill and the right mentality. Thus, by directing our efforts to the things we can control, we can poise ourselves to seize opportunity when the tides turn.

This is very applicable to investing and anything that involves a mixture on luck and skill, even life. Given the infinite number of factors affecting the outcome, there is a infinite possibilities that could occur. Even if we have done everything we can to the best of our ability, some things are just out of our hands. In investing, we should expect a third of our decisions to not work out. With that in mind, we should have a sound plan and take precaution to ensure that we can remain financially resilient. Eventually, lady luck will once again shine on us.

Lesson 2: Take calculated risk

Mahjong also teaches us a thing or two about risk, something that is hard to understand simply by reading or listening. This makes it challenging to learn anything much about risk from our formal education. Yet, risk is pervasive in life. At every step of the way since birth, luck and risk is at play regardless of whether we are aware of it, and arguably much more so in investing. In my opinion, the best way to learn about risk is to learn from experience, and playing Mahjong is an excellent opportunity to do that.

Take for example a situation where someone is calling (waiting to win) a 满台 (the maximum “points”, usually 5 in Singapore) and the best you can do with your hand is 三台 (three “points”). In this case, the downside if you throw the winning tile is huge while the potential gain of winning a 三台 is relatively small. So, what would you do in that situation? As rational players we should play defence when we draw a tile that we think may be the winning piece for the other player. While doing so may mean that we submit to fate that we won’t win this round, we do not risk losing more. We much rather wait for another round where the reverse is true, when we are calling a 满台 and others are calling only two or three 台. These situations where the payoff is skewed in our favour present excellent opportunities to play aggressively.

In investing, we want to “bet” big on situations which has a huge upside and minimal downside. Or in the words of Monish Pabrai, “heads I win, tails I don’t lose much”. The converse is also true. We should ignore investments that have small upside but could potentially lead to large permanent losses. We much rather wait for the low risk high reward opportunity. Following this logic, I never short a stock. This is because the upside is at most a 100% while the downside is unlimited. When we invest in a company, the upside is unlimited. Why would I take the first bet? When we make rational decisions based on this sound principle, they cease to be bets. Instead, they are strategic moves involving calculated risks. Such opportunities are few and far between so when we are lucky to find one, make sure to capitalise on it.

In both Mahjong and investing, there are many nuances that writing cannot encapsulate. However, the idea of looking for “bets” with huge upside and minimal downside remains the core of a winning strategy. As mentioned above, the best way to learn about risk is by experiencing it. In order to truly appreciate how luck and risk come into play, one has to put themselves through those situations, and one of the best ways to do so is playing Mahjong.

Lesson 3: You can’t know everything

Building on the concept of risk, the next lesson drawn from Mahjong applies to investing and life as well. Picture this:

You are calling a 满台 and it is your turn to draw. You look at the tiles on the table and know that another player is gunning for a 清一色 (full suit) 索子 (bamboo). You pray to god to draw anything but a 索子. As you draw your tile and slide your thumb across the face of the tile, you feel sticks… and you heart drops. You know that he wants 索子 but you are not sure which exact piece he needs (unless you have a PhD in mahjong like the Aunties and Uncles). At this point in time you face a major dilemma. Do you throw the 索子 and risk losing a lot of money? Or do you play defence and miss out on the potential of winning a lot of money? In such situations, there is no easy way out. Neither is there a correct answer. It all depends on you.

Similarly in investing, you cannot pinpoint what the future beholds. The best you can do is assess all available information and make a decision that you are comfortable with based on your current financial situation, risk appetite and goals. If you think that the risk-reward ratio is attractive after thorough assessment of the available information, you just have to take the leap of faith. As such, we can expect that unknown unknowns may occasionally derail some of our theses. This makes the case for a certain degree of diversification, never put all your eggs in one basket.

That being said, I am not promoting gambling. We all have to take responsibility of our actions and know our limits. Sometimes before making a big decision, a certain friend of mine will look in his drawer to count his chips. In both investing and Mahjong, we only risk what is reasonable. And what is reasonable, depends on a variety of factors such as our risk tolerance and financial resilience. I simply hope to share that there is value we can gain from playing intricate games such as Mahjong that formal education cannot offer us. So, the next time you play Mahjong, pay attention to the life lessons that this Singaporean favourite game has to offer.

Supplementary Retirement Scheme – The $1 Hack!

“Top up $1 to your Supplementary Retirement Scheme (SRS) account to lock-in your retirement age!”

Some of you may have heard about this hack from your savvy friends. This article is a complete guide on what the SRS is and why everyone should make use of this $1 SRS hack.

What is the Supplementary Retirement Scheme (SRS)?

The SRS was started in 2001 and is part of the Singapore government’s multi-pronged strategy to address the financial needs of an ageing population. Similar to the Central Provident Fund (CPF), the SRS was conceived to encourage Singaporeans to save more for their retirement.

This begs the question, “If they both serve a similar purpose, what’s the point of having another scheme?” Before I answer that question, here are a few important things you need to know about the SRS.

Unlike the CPF, which is an involuntary savings scheme that aims to provide Singaporeans with a very basic retirement, the SRS is completely voluntary. Thus, the SRS can be seen as an additional retirement savings scheme for those who wish to set aside more money for their golden years.

Since the SRS is for your retirement, you are only able to make a withdrawal without facing penalties after the statutory retirement age. Upon reaching the retirement age, you can withdraw up to $40,000 per year from your SRS account tax-free (read below to find out how the statutory retirement age is determined.

However this is where the SRS differs from the CPF. With the SRS, there is greater flexibility if you wish to take the money out before your retirement age. However, much like a typical fixed deposit with the bank, doing so will subject you to a penalty. If you perform an early withdrawal before the stipulated retirement age, there will be a 5% penalty and the amount withdrawn will be taxed. These penalties are implemented to ensure that Singaporeans actually put money in for their retirement.

Of course, there are incentives to use the SRS. Similar to the CPF, making contributions to your SRS account by 31 Dec of every year will qualify your for tax relief. As with the CPF, there is a contribution cap as well. For Singaporeans and PRs, the cap is $15,300. For foreigners, it is $35,700.

Why set up an SRS account on top of the CPF account?

Now that we have laid out the basics of the SRS, here are some benefits of setting up an SRS account on top of CPF.

1. Money in SRS can be invested more flexibly

While CPF money in your CPF can be invested as well, there are certain limitations that make it very restrictive. First, your ordinary account (OA) savings can only be invested after setting side $20,000 in your (OA) while your special account (SA) can only be investing after setting aside $40,000 in your SA. Furthermore, you can only invest up to 35% of your investible savings in stocks.

Don’t understand what I just said? Not to worry, you are not alone.

These rules make it troublesome to invest using CPF monies. SRS, on the other hand, is much more flexible in terms of investing and there is a much wider range investment options available.

Here are some examples of government-approved SRS investment options:

  • Bonds
  • ETFs
  • Fixed deposits
  • Life cover
  • Real Estate Investment Trusts (REITs)
  • Robo-Advisors
  • Shares
  • Singapore Savings Bonds
  • Single-Premium insurance products (both annuity and non-annuity plans)
  • Unit trusts of Mutual funds

2. SRS is more flexible than CPF in terms of withdrawal

Unlike the CPF, money in your SRS account can be withdrawn at any time albeit with some penalties. However, this can serve as a last resort in the event that you require a large sum of money for an emergency and do not have sufficient cash set aside. That being said, it’s still better to have an emergency fund and avoid having to drawdown your SRS savings.

3. Greater tax breaks

Currently, the maximum CPF cash Top-up Relief per year is $14,000. This is broken down into a maximum of $7,000 if you top up for your own CPF account and a maximum of $7,000 if you top up your family members’ accounts. If you max out the CPF tax relief, any additional amount you contribute to your CPF accounts will not provide you with additional tax benefits. If you wish to set aside even more money for retirement, a SRS account will allow you to do so while enjoying even more tax reliefs at the same time (up to $15,300).

Of course, there are trade-offs between choosing to top up your CPF or SRS account. While SRS has greater flexibility than CPF in terms of withdrawal and investments, CPF provides 2.5-5% interest guaranteed by the Singapore government. On the other hand, cash left in the SRS will earn a measly 0.05% interest. This means you have to invest in assets (equities and/or bonds) to earn a fair rate of return. This would also mean that you will be taking on greater risk than if you topped up your CPF account. However, I do think that an SRS account on top of a CPF account do provide many benefits.

How is the stipulated retirement age determined?

The stipulated retirement age at which you can withdraw money from your SRS account without incurring penalties is the prevailing retirement age (set by the government) when you open the account. This retirement age is “locked in” when you open your SRS account and make your first contribution.

This means that if you open an account this year, the “locked in” retirement age on your account will be 62 years old, no matter what your age is today. However, starting from 1 January 2022, the prevailing retirement age will be raised to 63 and this will be the retirement age at which you can withdraw your money if you set up your SRS account next year. While one year may not make a huge difference, it is worth noting that the government has plans to raise the statutory age of retirement to 65 years old by 2030!

The $1 SRS hack

If you are still on the fence about the SRS but you are worried that the government will keep raising the retirement age in the future, this $1 SRS hack is for you!

Simply create your SRS account and top up $1 into your SRS account before 2022 (just a heads up, at the time of writing, there’s only 21 days left!). This “locks in” your retirement age at 62 years old, regardless of whether you make contributions to your SRS account in time to come.

You can choose to open your SRS account with any of the following banks in the private sector: DBS, OCBC, or UOB. The good news is, you can set up the SRS account online in under a minute!

I personally used DBS as that is my savings account but I do not think that the choice of bank really matters. Here’s how to create your SRS account for DBS users:

  1. Open the digibank app
  2. at the bottom panel, select “more”
  3. Under the “apply” section, find “SRS Account”
  4. Create an account and contribute $1!

Additionally, here are more information about creating your SRS accounts with the respective banks.

Personally, I find the SRS a complement to the CPF. On top of setting aside more money for retirement, the SRS will allow us to enjoy greater tax reliefs and tax-free returns. Even if you are not sure whether you will make use of the SRS, I think everyone who is eligible should create an SRS account before 2022 to lock in their retirement age. There is no costs involved and you only stand to gain from locking in the retirement age earlier.

Okay fine, I lied. The cost is $1 and a minute of your time.

The Resilient Investor

Black Swans are events that come as a surprise but have a major and disproportionately huge effect. In his book, “The Black Swan”, Nassim Nicholas Taleb argues that in today’s increasingly winner-takes-all world, Black Swans are becoming more frequent. Though not always bad, some Black Swans can lead to severe market crashes (most notably the Global Financial Crisis and the Covid-19 Pandemic). Somewhat related to my previous article on change and uncertainty, in this article, I will cover how investors can remain resilient in the face of volatility and uncertainty which is characteristic of our world today.

1. Respect uncertainty

While it is impossible to reliably predict recessions and market crashes, we can prepare for them by removing our vulnerabilities. As Charlie Munger once said “all I want to know is where I’m going to die, so I’ll never go there”. By reflecting on our potential pitfalls, we can become more financially resilient to crises. This applies not just to our portfolio but to almost all areas of life.

The most straightforward way to respect uncertainty is to have enough cash in reserve to act as a cushion because we never know what the future may hold. This is a point that I often repeat because having an adequate emergency fund is crucial. Having sufficient cash will help tide us over in the event of a prolonged downturn. For instance, if we did not have an adequate emergency fund during the Covid-19 Pandemic and were one of the unfortunate people who were furloughed, we would be forced to dip into our portfolio to tide us over. However, that period also coincided with a severe market downturn. Thus, we would have wound up selling some stocks at a significant loss. This highlights the importance of having sufficient cushion to avoid such a precarious situation which will require us to liquidate our portfolio at a loss. While this will mean that we will have idle cash on hand, this is the price to pay to be resilient, and one that we should be willing to pay.

2. Never depend on the kindness of strangers

Next, as resilient investors, we should never depend on the kindness of strangers. This means that we should avoid being in a spot where we are at the mercy of someone or something that is completely out of our control. A good example of this is to avoid excessive borrowing. While leverage can boost our returns in the short term, it diminishes our ability to stay afloat when disaster strikes. In other words, debt erodes our “staying power”. This is because when we take on debt, we are essentially promising the bank, or whoever we borrowed from, that we will consistently make a series of payments no matter whether times are good or bad. Thus, during periods of downturn when we may not have a stable source of income and our portfolio will likely be performing poorly, we will still be obligated to make payments. This is one scenario where we will be at the mercy of the creditor. More often than not, one will be forced to liquidate his assets at a loss just to meet the obligations. Thus, during the good times, take the opportunity to reduce and eliminate bad debt and avoid excessive leverage.

A corollary to this is that we should also avoid investing in businesses that take on excessive debt and/or are capital intensive. Such businesses have high fixed costs that need to be paid no matter whether times are good or bad. For instance, airlines consistently incur high fixed costs in terms of aircraft maintenance and typically have a debt-laden balance sheet. This means that even during periods where few planes are being flown (such as the past year and a half), cash is continuously being burnt. A company with high fixed costs will require a constant cash flow just for survival, making them more risky as they are more likely to go bankrupt during a severe crisis.

3. Instead of fixating on short-term gains or beating benchmarks, we should place greater emphasis on becoming shock resistant, avoiding ruin and staying in the game

As previously covered in my article on diversification, a certain degree of diversification can reduce the risk of our portfolios as the complete failure of a single holding will not lead to financial ruin. Indeed, doing so will incur an opportunity cost in terms of potential returns forgone. For instance, instead of having a hundred percent of our portfolio in cryptocurrencies that can potentially return 2x, 3x, or even 10x our money, we may be holding blue-chip stocks or making contributions to CPF that have lower returns. While I agree that diversification will mean that we will not be maximising our returns, I would argue that a sufficiently diversified portfolio is necessary to avoid financial ruin.

In fact, maximising returns should not be the goal if you are looking to create long-term wealth for your family and retirement. The goal should be wealth preservation and growing your savings at an adequate rate so that you can enjoy your golden years. If you are looking to create long-term, resilient wealth, you cannot operate like a heat seeking missile. Always be wary of greed.

This will also mean that there will undoubtedly be times when you may lag the market, but you must have the resilience to stay the course and trust in your framework.

4. Beware of overconfidence and complacency

During a bull market such as the one we are in the midst of now, we may be seduced by a false sense of safety. With every stock taking off to the moon, we may fall into a state of complacency and be overconfident of our ability to pick individual stocks. During such instances when the entire market seems to be defying gravity, we as investors should be keenly aware that this may signify excessive optimism in the market.

This quote from Warren Buffet can provide insight into how we should behave, “be fearful when others are greedy, and greedy when others are fearful.” When the market seems to be obsessed with chasing high returns, driving the valuations of companies sky high, all the more should we be wary of chasing fads.

This is not to say that we should attempt to time the market. We should stay the course and continue to dollar cost average. At the same time, abide by the timeless laws of the stock market which act like the laws of gravity. Continue to follow sound principles and invest in great businesses at a cheap prices. This will protect us from permanent loss when disaster strikes.

5. Always require a margin of safety and be keenly aware of your exposure to risk

Last but most definitely not least, the fifth method of being resilient is to always demand a margin of safety. A margin of safety in terms of investing can be seen as the percentage difference between the stock price and what each share is actually worth. A company selling at a price significantly below the intrinsic value of the company is said to provide a margin of safety. As resilient investors, we should demand an adequate margin of safety which acts as an insurance against mistakes, which are bound to happen. It is said that we should expect to be wrong a third of the time. Having a margin of safety means that even when we are wrong, we will not be severely wrong such that we will incur devastating losses. Shoot for the stars and land on the moon. On a similar note, we should focus on our exposure to risk. Always ask yourself “what could go wrong?” and “what is the consequence going to be?”. A margin of safety will help reduce the consequences of mistakes on our portfolio.

Similarly, the concept of a margin of safety applies to life as well. When we are making plans, we should also factor in a margin of safety. For instance, if we want to retire with a million dollars at 65, aim to hit a million by 55 and everything else will be icing on the cake. This way, even if we suffer a setback such as getting retrenched or falling severely ill, we have sufficient cushion and may still be on track to hit our goal. Shoot for the stars and land on the moon.

I find this quote from Jeffrey Gundlach, a successful investor and businessman, apt to sum up this article on how to remain financially resilient: “Make your mistakes nonfatal. It’s fundamental to longevity. And ultimately, that’s what success is in this business: longevity.” In essence, limiting our downside is key to building long-term wealth.

Change And Uncertainty

“The only constant in life is change.” – Heraclitus, Greek philosopher

The everchanging and unpredictable nature of markets is a going concern that stresses many investors out. Perhaps we have an innate desire for order and predictability, which explains why uncertainty and change make us uneasy. Whatever the reason, given that change and uncertainty is inextricably tied to investing, we investors can do better if we face the truth. In this article, I will share three main ideas pertaining to change and uncertainty.

1. Everything changes, embrace the idea of impermanence

For how much the world changes, it is unexpectedly difficult to visualise how quickly the world changes. A simple experiment borrowed from Warren Buffet illustrates this perfectly. Below is a list of the top 20 companies by market cap as of March 21st, how many companies do you think will remain in this list 30 years from now?

Surely Apple, Alphabet (Google) and Facebook will still be here, there is no other company like them!

Now, let’s take a look at the same list in 1989, 30 years ago…

You will see many familiar names on this list in 1989. However, what is striking is that none of these companies remain in today’s list. Zero. This goes to show how hard it is to predict the trajectory of businesses. This is not to say that it is impossible for the 20 largest companies today to remain on that list in 30 years time but whatever number we think it will be, chances are it is less. It is thus foolish to believe that certain things will NEVER change.

As investors, we need to be realistic and doing so will involve admitting that we cannot predict or be certain about the future. Instead, we should view the world through a probabilistic lens. Some companies have a higher probability of doing well and becoming successful, while others have a higher chance of failing. There is no such thing as a sure win. In fact, if anyone tells you that a company is sure to return you many times your money, take your money and walk away.

Looking at investing in terms of probability can help us make better decisions. As uncertainty cannot be completely eliminated, we should accept that there will always be a certain degree of risk in investing (i.e. there will always be a chance of failure). The goal is to find investments that has a high probability of working out and even if it does fail, the loss is marginal. In other words, a huge upside and limited downside. Therein lies the argument for having a certain degree of diversification. By having our eggs in different baskets, we significantly decrease the probability that our entire portfolio will go to zero. Even if the worst happens (the business fails due to low cost competitors or lawsuits or another recession hits), and it will, we can avoid crippling losses.

2. Even in an unpredictable world, certain things are surprisingly predictable

The future may be extremely unpredictable but history repeats itself. In the markets, cycles are surprisingly predictable. In the business and credit cycles, period of expansions are followed by periods of contraction. Likewise, in the stock market cycle, periods of euphoria are followed by periods of depression, which are then followed by periods of optimism again.

Thus, it is possible to study patterns in the past and use them as a rough guide for what could happen next. One such example is the stock market cycle.

As seen in the S&P500 chart above, a period of euphoria (from 1997 to 2000) is followed by one of despondency (2000 to 2002), which is then followed by another cycle of extreme optimism and greed (2002 to 2007) which is followed by severe pessimism (2008-2009). More recently, the Covid-19 pandemic resulted in a huge market sell off in March of 2020. Soon after, the markets rebounded to all time highs. Thus, it is inevitable that cycles will reverse and reckless excess will be punished, and vice versa. Therein lies a possibility of turning cyclicality to our advantage by behaving countercyclically.

However, this is not to say that we should start timing the market and enter at the bottom to sell at the top. After all, it will be foolish to think that we can predict when the tides will turn.

Since we cannot change the environment or predict it, we have to adapt to the prevailing climate by being more aggressive or defensive. Instead of thinking of whether to invest or not as a binary decision, we should see it in terms of a spectrum. When the market crashed in March of 2020, wise investors would have acted counter cyclically by deploying their cash reserves and picking up more shares in great businesses. At times like today when the markets seem to be approaching dangerous levels, we can perhaps hold back a little and start to accumulate some cash, waiting for opportunity to present itself. Some may even consider trimming their positions. However, I personally would never completely sell out of my holdings in expectation of profiting from a market crash. The expectation of successfully doing so is simply unrealistic in my opinion. As Warren Buffet puts it, “be fearful when others are greedy and greedy when others are fearful.”

3. First be lucky, then be humble

In being honest with ourselves about our limitations and vulnerabilities, we will come to appreciate the role of luck and risk in our lives and investing. Regardless of whether we like it or not, the two cousins play a role in every part of our lives and even more so when the markets are concerned. Where there is luck, there is also risk. From the lottery of birth to the successes in life, luck plays an elusive yet decisive role.

Thus, we should always remain humble and never get ahead of ourselves. We may make a series of successful investments/bets, but never take it for granted that our future endeavours will see the same success. As quickly as luck can bestow us with an obscene fortune, risk can take it all away.

It also follows that we should be grateful and contented with what we have. Do not succumb to greed and take riskier bets or taking on too much leverage such that when the unexpected happens, we will be in financial ruin and unable to climb back.

Exercise adequate scepticism and prudence in this uncertain world. Do not take anything for granted, be it that Apple will continue its dominance or that a company will continue its growth trajectory linearly. Yes, this may mean that we will miss out on some of the explosive returns we are witnessing in meme stocks today. However, it also means we are protecting ourselves from financial ruin and remaining in the game, making sure that we always have another chance for luck to be on our side. This is perhaps the only way to deal with luck and risk.

Diversification – Wisdom Or Folly?

Diversification is perhaps one of the most highly contested topics amongst investors. Many super investors are of the opinion that diversification is the guaranteed road to being average. Warren Buffet once said “Diversification is a protection against ignorance… Makes very little sense for those who know what they’re doing.” However, there are many other world renowned investors that are in support of diversification. Even Benjamin Graham, Buffet’s mentor, advocates for diversification as a way to reduce portfolio risk. How can there be such contrasting viewpoints amongst a group of people with seemingly similar mindsets? In this article, I discuss the cases for and against diversification, some potential reasons behind the differing viewpoints, as well as my thoughts on diversification.

The case against diversification

Many investors such as Warren Buffet, Charlie Munger, Monish Pabrai and many more have very concentrated portfolios. The reason for doing so is to earn outsized returns and beat the market. The idea is very straightforward. In the entire stock market, there are some stocks that will lag the average and some that will lead the index by huge margins. The goal is to identify these businesses and concentrate your holdings in them. After all, if you were to diversify across hundred of stocks, you are better off just buying the index which saves on time, effort and costs. In his book, “The Dhando Investor”, Monish Pabrai encourages making few bets, big bets and infrequent bets, arguing that the results of those who place many bets, small bets and frequent bets are predictably pathetic. These investors walk the talk and have demonstrated their willingness to put a disproportionate amount of their portfolio in a few stocks. For instance, Buffet has been willing to put up to 40% of his portfolio in a single stock on certain occasions (Apple and American Express). As for Munger, his entire personal portfolio consists of just 5 holdings!

The logic here is surprisingly simple. If you are able to identify the few businesses that are going to do exceptionally well, it makes very little sense to invest in a bunch of other businesses for the sake of diversification.

However, it is important to note these investors still have a certain degree of diversification. This is a point that I will return to later on. For now, let us look at the case for diversification.

The case for diversification

Billionaire and hedge fund manager Ray Dalio, a proponent of diversification, famously created what he termed the “holy grail of investing”.

According to the holy grail, diversification can reduce risk without hurting your returns. Furthermore, the lower the correlation between the asset class, the better the effect of diversification (with uncorrelated assets giving the best effect). Ray Dalio recommends investors to find 15-20 uncorrelated streams that will allow for the most return on investment while cutting risks. Ray Dalio also recommends diversifying across asset classes, sectors, currencies, countries, and investment “styles” (like small cap, growth, etc., in equity markets).

Sir John Templeton, who’s fund averaged annual returns of 15% for 38 years, also advocates for broad diversification to guard against our own fallibility. He tells investors to expect a third of their investments to go south. In essence, these investors recognise that not everything in this world can be known. Thus, they argue that diversification is the key to build a resilient portfolio as it guards against the unknown unknowns.

Diversification exists on a spectrum

It is important to note that diversification exists on a spectrum. On one end, we can have a portfolio consisting of only one stock and on the other, we can buy the entire stock market. Additionally, risk and returns can also be placed along a similar spectrum.

Different definition of risk

The first possible explanation for the contrasting opinions on diversification could be the different definition of risk that these investors believe in. There are two main school of thoughts here. Those who favour concentrated portfolios belong to the camp that believes that risk is the probability of permanent loss in capital, while the advocates of diversification are likely to measure risk as the volatility of the portfolio (i.e. the chance of suffering a loss in a given time period). This begs the question, which definition is right? I believe that investing is a craft, not a science. Thus, there is no universally correct definition, only what is right for you. If you are like Warren Buffet or Charlie Munger who possess the ability to tune out the market noise and ignore volatility without losing sleep, risk is perhaps better defined as the probability of permanent capital loss for you. In this case, holding only a handful of businesses that you thoroughly understand can be justified. However, if you find yourself fretting over the daily ups and downs of the stock market and at risk of acting on impulse and based on your emotions, volatility is the better definition of risk for you. This is because volatility increases the risk of you acting on impulse and making a mistake (selling at the bottom or buying at the peak). In this case, it will likely be prudent to reduce volatility by diversifying broadly. Of course, this means that you may be subjecting yourself to lower potential returns, bringing me to the next point on personal goals.

Varying aims

Investors such as Buffet and Monish Pabrai pride themselves on achieving high returns in excess of the market average. Many shareholders put their money with these investors in hopes earning market beating returns. For these investors, it makes perfect sense to concentrate their portfolio in a few holdings that they believe can deliver higher returns than the market in order to maximise returns for their shareholders. On the other hand, Ray Dalio is a hedge fund manager and has structured his fund around delivering decent returns with minimal volatility. It is worth noting that investors in his fund include many pension funds. Thus, countless people rely on his fund’s returns no matter whether the stock market is up or down in a particular year. It’s money that they cannot afford to lose. In this case, diversification across a broad range of asset classes and industries with minimum correlation is the means to smoothen the ride for their shareholders without compromising on returns. Hence, the duty to shareholders also influences their strategy. In other words, the difference in their degree of diversification arises from what the investor seeks to achieve.

Conclusion: diversification for the retail investor

Unlike fund managers, we retail investors do not have to answer to shareholders. The only person we are answerable to is ourselves (and our family). This means that we are free to structure our funds according to our own definition of risk and personal goals.

If you do not have the temperament to watch your portfolio tank 40% or more during a recession without losing sleep and/or you are contented with average or slightly above average market returns, the view that the definition of risk is volatility may be most suited for you. In that case, seek to reduce the volatility of your portfolio by diversifying across various asset classes (bonds, commodities, stocks), industries and geographies. For starters, check out my article on an adaptation of the three fund portfolio to the Singapore context.

If your goal is to compound your money at upwards of 15% per year and you can stomach volatility without losing sleep, you can consider adopting the view that risk is best defined as the probability of permanent capital loss. As long as you invest in sound businesses that continue to grow, the stock price will eventually converge on intrinsic value and volatility is merely noise. However, super investors such as Buffet and Munger possess a unique ability to analyse businesses and much more resources to gather information not available to the layman. We should be humble and recognise that we cannot be a 100% sure about any investment. Hence, I believe the ideal diversification (based on the definition that risk is the chance of permanent loss, not volatility) lies somewhere in between the concentrated portfolios of super investors and buying the entire index. My personal preference is to have 10 to 15 stocks, with no more than 10% of my portfolio in a single holding.

In fact, there is nothing that is stopping us from doing both. We can allocate a sizeable chunk of our portfolio to index tracking ETFs (for instance 50-80%, depending on our preferences) and have the rest in a handful of businesses that we believe are undervalued. This portfolio may not achieve returns in excess of 20% but it can still deliver slightly better than average returns, as proven by Ray Dalio and Sir Templeton, who both edged out the market over extremely long periods of time while maintaining a high degree of diversification.

What matters then is to choose a strategy that is aligned with your personal goals and temperament. This way, we will be able to stay the course even in difficult times that test our faith.

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Three Fund Portfolio – For Lazy Singaporeans

For those who have been following my website for a while, you will know that I am a huge proponent of passive investing. This strategy involves buying and holding ETFs that track a broad index. The philosophy behind this strategy is encapsulated in this quote from John Bogle, the founding father of modern day index funds: “don’t look for the needle in the haystack, just buy the haystack!”. In today’s complex and uncertain world, keeping our investment strategy simple is perhaps one of the wisest things we can do.

Proponents of this method of investing, known as “bogle heads”, have popularised a three fund portfolio that is inspired by John Bogle’s simple and low cost investing strategy. Typically, a three fund portfolio consists of the following:

  1. U.S Stocks
  2. International Stocks
  3. Bonds

However, given that this portfolio was created with the U.S. context in mind, I have adapted the three fund portfolio to suit my personal goals and preferences and Singapore’s unique context (many blue-chip stocks and REITs, no withholding taxes on dividends and the CPF system).

Here is an outline of the three fund portfolio adapted for Singaporeans.

1. An ETF that tracks a broad index

When it comes to passive investing, there is a plethora of ETFs to choose from. For starters, choose which index you would like to track. For instance, there is the S&P 500 index, the total U.S. stock market, the Russell 1000 index, world indices, etc.

If you would like to invest exclusively in the United States, your choice will be between the S&P500 index, the total U.S. stock market and the Russell 1000 index. From here, it will depend on whether you would like some exposure to small and mid cap stocks. If you do, pick the total U.S. stock market fund. Else, the S&P500 and Russell 1000 index are fine as well.

If you believe that the other markets could provide greater returns than the United States in the years to come, I would suggest opting for an ETF that tracks a world index. These indices typically have about 60% allocation to the United States and a 40% exposure to the rest of the world, providing adequate diversification away from the United States.

The ETFs I picked for my own portfolio are CSPX, which tracks the S&P500 Index and VWRA, which tracks the FTSE All-World Index. Both of these ETFs are Irish-domiciled ETFs, which are more tax efficient for Singaporeans compared to their US-domiciled counterparts. Additionally, they are of the accumulating type as I would like to maximise the compounding effect while minimising costs. For more information on Irish-domiciled ETFs and how to choose one that suits your preferences and goals, check out my article here.

For investors who only wish to pick one ETF, I would go with VWRA because it provides greater diversification and exposure to emerging markets such as China as well.

2. Singapore Dividend Stocks

One of the advantages of investing in Singapore is that there are many high dividend yielding stocks (blue-chip stocks and REITs) and no taxes on dividends. This is why so many Singaporeans are obsessed with dividends (myself included). While dividend stocks may not produce spectacular capital gains compared to high growth companies in the United States, I would argue that there is still a place in our portfolio for them. In investing, we should not seek to maximise our returns but instead seek to build a resilient portfolio that generates adequate returns. These dividend stocks are typically more stable and continue to pay dividends during times of economic downturn (albeit less). A steady stream of dividend income is extremely desirable as it can help tide us over a crisis or challenging period. The Covid-19 Pandemic is the perhaps the perfect example to substantiate my point.

In terms of dividend stocks in Singapore, there are two main ETFs to consider.

  1. SPDR STI ETF (Ticker: ES3)
  2. Lion Phillip S-REIT ETF (CLR)

As I am not a fan of the Straits Times Index (STI), I invest directly into the banks (OCBC, DBS and UOB) instead (mainly because they have higher yields than the STI and tend to perform better). If you would like to stick with the most passive form of investing, dollar cost averaging into the STI is fine as well.

Additionally, the S-REIT ETF is an excellent ETF to include in your portfolio. It boasts a higher dividend yield than the STI and Singapore’s vibrant REIT market is definitely something that we should take advantage of. Read my article on REITs to find out why I think they remain a worthy investment today.

At this point, some of you might say that my portfolio has more than three funds and deviates from the most passive form of investing (buy and hold ETFs). However, I would argue that the additional work required to invest in the banks and the S-REIT ETF is minimal and well worth it. Furthermore, no harm in having greater diversification! That being said, there is nothing wrong if you wish to stick with only three funds, just pick either ETF (STI or S-REIT) and stick with it.

3. CPF

Lastly, I have opted to replace bonds with the retirement system that Singaporeans have a love-hate relationship with. Despite the limitations of CPF, namely not being able to receive any pay outs until much later in life, CPF has “bond-like” characteristics that makes it a suitable replacement. Let me explain my thesis.

Firstly, I have an extremely long term horizon as I am investing for retirement. Thus, the fact that I am not able to touch my CPF money does not bother me as I have the intention of leaving the money in there for as long as I can. Of course, there is a chance that I will need cash urgently (due to a recession or emergencies). This makes the case of first having an adequate emergency fund.

Next, CPF provides a 4% rate of return that is essentially risk free (as it is guaranteed by the Singapore government which is rated triple A, the highest possible credit rating). This is much in excess of any triple A rated bond in the world.

Essentially, the CPF system makes it a bond on steroids that can give us steady, guaranteed pay outs well into our retirement as long as the Singapore government does not default. Given our government’s history of prudence and huge reserve, this is extremely unlikely.

Even if you are intending to pursue FIRE, CPF can be your safety net, allowing you to still achieve an adequate retirement in the event that your FIRE plan falls through.

Either way, we are forced to make monthly CPF contributions from our salary, which should be form quite a substantial part of our portfolio. However, if you want to allocate a larger portion of your portfolio to CPF, you can make voluntary contributions which can lower your taxable income as well.

That being said, I would like to add a caveat that I am mainly investing for retirement. The CPF system should only be seen as a replacement to bonds if you have an extremely long term horizon. If you are intending to take money out to make a big ticket purchase, consider having greater allocation to stocks and actual bonds.

Thus, a Singapore three fund portfolio will look something like this:

  1. VWRA
  3. CPF

Finally, we come to portfolio allocation.

Below are rough guidelines I intend to use to portion my portfolio at different stages of my life. Do note that these just rough numbers and are subjected to change depending on numerous factors.

In my 20s, I intend to be aggressive as I wish to attain financial independence as early as possible. Thus, I have a huge allocation to U.S. and international stocks (VWRA and CSPX). I also have a small allocation to Singapore REITs and blue-chips (namely the bank stocks), which I picked up last year when they were at huge discounts. Finally, my CPF makes up less than 10% of my portfolio as I am not working yet. Currently, my portfolio looks something like this:

US + Rest of the world: >70%

Blue-chips and REITs: 20%

CPF: <10%

For the next 5-10 years, my portfolio will likely look similar in terms of allocation. I intend to continue to DCA monthly into CSPX/VWRA, only adding to Singapore REITs and blue-chips if they are selling at huge discounts.

In my 30s-40s, CPF as a percentage of my portfolio will likely increase substantially due to mandatory and voluntary contributions. At the same time, I will start to allocate more money to dividend stocks and cut back on growth stocks in order to start building a dividend income in order to achieve financial independence. My portfolio will likely look something like this:

US + Rest of the world: 40-50%

Blue-chip and REITs: 30-40%

CPF: 20%

In my 50s and beyond, I will hopefully have achieved financial independence. I intend to do this by having the bulk of my investments in dividend paying stocks. This will allow me to have a steady stream of dividends to fund my desired lifestyle. However, I will still be allocating some money to growth stocks so that my portfolio will still achieve desirable rate of return.

US + Rest of the world: 10%

Blue-chips + REITs: 60%

CPF: 30%

As with most other things in life, there are no hard and fast rules in investing. What may work for someone else may not work for you. I adapt ideas from other successful investors, copying what I deem fit and omitting the rest. In fact, my own plans, preferences and goals may be subjected to change and so will my portfolio allocation as well. The key is to remain flexible in order to create a resilient portfolio that works for you.

Three Lessons From “Thinking Fast And Slow”

Many often associate rational thinking with investing. However, cognitive biases are in fact widespread amongst investors, limiting their ability to make the optimal decisions. In this article, I share three lessons from Daniel Kahneman’s “Thinking Fast and Slow” that we investors can learn from.

1. The Illusion of Understanding

In his book, Kahneman explains that we humans are prone to suffering from the illusion of understanding. The core of this is that we THINK we understand the past and therefore, can foresee the future. When in fact, we actually understand less than what we think and discount the role of other factors such as luck. In hindsight, we can all agree that Google was a sure success. Two computer science students from Stanford creating a superior search engine. Yet, the founders wanted to sell Google for 1 million at some point, only for the buyer to decline the offer because they think the price was too high. The lesson here is that we should not place too much weight on predictions, especially if they were made by looking at the past. People often overestimate their ability to do things and this applies to analysts and economists as well. By studying how markets perform in history, they think that they can predict when the next crash can occur. In doing so, they fail to recognise that many things are in fact left to chance.

For instance, many analysts have been warning of a stock market bubble since last year. Yet, the S&P500 year-to-date gain is 22.8%. Had we suffered from the illusion of understanding and stayed out of the stock market, we would have incurred huge opportunity costs in terms of potential gains forgone. Thus, don’t let these noise affect your decision making and paralyze you.

There are many ways to manage your emotions. First, do not see whether to invest or not to invest as a binary decision. Think of it as a spectrum. If you think there is a chance that the market will crash soon but are not 100% sure (as no one can be), maybe start by investing 30% of your money you plan to invest and dollar cost average the rest over the coming months. Dollar cost averaging is an excellent method to remove emotion from the decision making process. By investing $200 every month like clockwork, your emotions will not get in the way of decision making.

2. Risk Policies

The next lesson is related to Risk Policies. Read the following and make a decision for BOTH i and ii.

Decision (i): choose between

A. Sure gain of $240

B. 25% chance to gain $1,000 and 75% chance to gain nothing

Decision (ii): choose between

C. sure loss of $750

D. 75% chance to lose $1,000 and 25% chance to lose nothing

When faced with the above two decisions, people tend to choose A for decision (i) and D for decision (ii). Instead, when you look at things from the broader perspective, you realise how irrational we are.

A and D: 25% chance to gain $240 and 75% chance to lose $760

B and C: 25% chance to gain $250 and 75% chance to lose $750

At the heart of this is that humans are naturally risk averse when dealing with gains and risk seeking when dealing with loses. The above experiment substantiates how this can lead to suboptimal outcomes.

The lesson for investors here is that looking at the bigger picture will allow you to make better decision for your portfolio. Do not view each investment individually. Instead, review your portfolio as a whole. No matter how much you know about each business, there is always a chance that things do not go according to plan. Therein lies the case for diversification. Even if there are multiple losers in your portfolio, all you need is one or two big winners to make a worthwhile return (as long as the loses are small and gains are larger). In value investing, we always seek for capital preservation. Which involves careful study of the company’s fundamentals in order to limit our downside. More on value investing philosophies here.

3. Mental Accounts

The third lesson is on mental accounting. Mental accounting refers to the different values a person places on the same amount of money, based on subjective criteria, often with detrimental results. Essentially, we tend to compartmentalize things when making decisions and this often leads to suboptimal decisions being made. Consider the following thought experiment:

Imagine you require money to buy a house. And you own 2 stocks, one is a winner: currently worth more than what you paid. The other is a loser. Which will you sell?

Most investors will sell the winner and add a success to his record. This is because if he chose to sell the loser, he would add a failure to his record.

This is mistake that afflicts individual investors when they sell stocks from their portfolio. As Peter Lynch once said “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” The lesson here is that you should not sell your winners and keep your losers because you don’t want to realize loses. If the winning stock is still undervalued, you will be missing out on a lot of gains by selling it early. Likewise, the losing stock may remain a losing stock due to various reasons. You could have missed out something or the company fundamentals have deteriorated.

Of course, the caveat here is that there are some scenarios where you should sell your winners (when its price is irrationally high) and buy the losers (when the fall in price has nothing to do with its fundamentals). Thus, always fall back on the business fundamentals and not how the stock price has performed in the previous months.

These are merely three lessons for investors from “Thinking Fast and Slow” and is by no means exhaustive. In his book, Daniel Kahneman also tackles other heuristics and biases. It is a book filled with wisdom and countless lessons for life and more. It is a book I will definitely recommend to anyone who wants to learn more about the human mind and how decisions are made. If you are interested in learning more about investing, check out my other article on 7 Timeless Concepts From “The Intelligent Investor”.

5 Myths About The Stock Market

Maybe you’ve read my previous articles and are convinced that investing is a necessity. However, there are just a few things you have heard that are stopping you from taking that first step. This article seeks to debunk 5 myths about the stock market.

1. The professionals know better

Many think that we should leave investing to the “pros”. After all, they do this for a living, so they should know better. This thinking results in retail investors blindly follow financial advice or entrusting their life savings to fund managers. While there are indeed some financial advisors and fund managers who have our interest at heart, this line of thought is not always true for various reasons.

First, there is a conflict of interest as these advisors typically make money by selling us a financial product. Thus, they are inclined to sell us any product regardless of how good they actually are. This can be likened to asking a fruit seller if his fruits are fresh. There is a clear misalignment of interest.

Secondly, the people in the financial industry sometimes do not completely understand their products as well. Take the case of the global financial crisis for instance. Most investment bankers did not even understand the financial product they were selling due to the high degree of complexity.

The combination of a conflict of interest and poor regulatory oversight means that not everything financial “experts” say can be trusted. We must always do our own due diligence and follow up by doing more research. Have a healthy dose of skepticism, especially if the returns sound too good to be true. After all, no one else has our interest at heart more than ourselves.

Furthermore, according to a report, over 15 year periods, 90% of actively managed investment funds failed to beat the market. This means that simply dollar cost averaging monthly into an ETF tracking a broad based index beats 90% of the “professionals” that seek to beat the market. Still think the pros know better?

2. Retail investors are bound to lose money in the stock market

In our traditional Asian society, many amongst the older generation have negative impressions of investing. This is probably due to their experience during the dotcom bubble in 2000 and global financial crisis in 2007/2008, where periods of euphoria has resulted in many losing their life savings.

We have all heard many stories about people who have ruined their lives trying to make a quick buck through investing in the stock market. This makes the stock market seem like an obscure place where we retail investors are bound to lose money. In my opinion, this is one of the biggest misconception of the stock market as it merely tells half the story, painting a bias against the stock market in our minds. While it is indeed true that one can lose everything in the stock market, I would argue that this happens when people view the stock market as a mean to get rich quick, chasing high returns in short time periods and blindly following others.

A study found that using a one year time frame, the worst year experienced by the S&P500 delivered a return of -43% while the best year delivered a 61% return. As the time horizon increases from one year to 20 years, the likelihood of experiencing negative returns steadily decreases. Most notably, there is no 20 year period in which the market has produced negative returns. The worst 20 year period delivered an average annual return of 6.4%. This means that by adopting a long term outlook and staying invested in the stock market, we can enjoy the wealth creation by the stock market.

3. Investing in the stock market is akin to gambling

This is similar to the previous point. Some may compare investing to gambling, where one puts up money for a chance to win even more. This cannot be more misguided. While there are indeed some people who gamble on the stock market, proper investing requires skill, knowledge and the right temperament. It is because of these qualities of a successful investor that I find investing more like a job than gambling, where the house always wins.

The difference between investing and gambling is delineated by Benjamin Graham in The Intelligent Investor, where he defined investing as “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return”. Investing serves to protect our capital while providing a decent rate of return. Gambling, on the other hand, provides the possibility of a windfall but also a high chance of losing everything.

Based on the study cited in the point two, there is no 20 year period where the S&P500 produced negative returns. If investing were gambling, that seems like pretty good odds to me!

4. You need a lot of money to invest

Many often think that investing is for the rich as it is only worthwhile when you have a lot of money. This is because a 10% return on $10,000 is only $1,000 while a 10% return on $1,000,000 is $100,000. This is true but this line of thought discounts consistency and compound interest, two things that are key to successful investing. For instance, by investing $350 a month at 8% per annum, we will have more than a million dollars at the end of 40 years.

$350 is not an exorbitant amount of money that is out of reach of the layman. Yet, over a period of 40 years, it can completely change our lives. All we need is consistency, time and the right mindset.

The misconception here is that the stock market is a means to make people extremely rich, therefore one would need a lot of money to make even more money. Instead, we should adopt the view that the stock market is for protecting our money against inflation and to create long term wealth. Any little amount that we have and do not need for the foreseeable future is worth protecting and compounding.

5. You need in-depth financial knowledge to invest

When ask to picture what an investor does, many picture someone with three or four screens who spends his day analysing charts, graphs and statistical models. This impression makes it seem like one needs in-depth financial knowledge to begin investing. Furthermore, there are many jargons that simply put people off and make investing seem very technical and hard to understand. However, I would argue that these jargons are created for that very purpose, by those in the financial industry to give the general public the false impression that investing requires superior inside knowledge. This increases demand for their services. In my opinion, once you understand some basic investing principles and grasp your head around compound interest, you will find that investing is not as difficult as it seems.

Let me substantiate my argument with the story of Ronald Read. Read lead an extremely low key life. He fixed cars at a gas station for 25 years and swept floors for 18 years. He lived a frugal life, staying at the same two-bedroom house which he bought at the age of 38 for $12,000 for the rest of his life. When he died at age 92 in 2014, he made the headlines for having a net worth of $8 million dollars! This came as a shock to the world, including his friends. What is more shocking to many is that there is no secret behind it. He saved money and invested them into blue-chips and let compound interest do the work. He stayed the course and continued to do so no matter rain or shine.

The fact that someone with no financial background can amass such a huge amount of wealth is a testament to the potential of the stock market to create wealth for anyone with the right mindset.

All that being said, I have to caveat that these misconceptions are not entirely baseless. They each stem from one misunderstanding or another. What we need to have is a proper understanding of the stock market and how it works. From there, by adopting a proper mindset and sound principles, we can begin our journey to creating long term wealth for ourselves and loved ones. Want to learn about investing and the stock market? Click here to join The Dollar Sapling telegram channel!

Real Estate Investment Trusts (REITs)

The Singapore Stock Exchange hosts a vibrant ecosystem of Real Estate Investment Trusts (REITs). From homegrown names such as CapitaLand to foreign REITs such as Manulife US, there is a plethora of REITs for us to pick from. In this article, I will cover the basics of REITs and what makes them a great investment vehicle for building long term wealth.

What are REITs?

REITs, or Real Estate Investment Trusts are companies that own income-producing real estate across a range of property sectors. The shares of such REITs are traded on stock exchanges just like those of a typical business, giving the shareholders a right to a small portion of the rental income the REITs collect from renting out their properties.

REITs structure

Before investing in REITs, it is essential that you understand the typical process of how a REIT operates in Singapore.

  1. Unitholders and REIT sponsor come out with initial capital
  2. REIT manager is employed to manage the group of properties
  3. REIT manager receive fee for its asset management service
  4. Capital employed to acquire income-producing properties
  5. REIT manager hires team of property managers to run day-to-day operations
  6. Property managers receive fee for services provided
  7. Net property income is deposited in trustee’s account
  8. A trustee is employed to safeguard unitholders’ interests. Trustee only release funds when property deeds are properly accounted for and verified
  9. Trustee earns fee for services provided
  10. Unitholders (you and I) receive income distributions every 3 or 6 months

For a more detailed explanation of how REITs in Singapore work, read this article.

Reasons you should invest in REITs

1. Allow retail investors to take part in the wealth creation by the real estate sector

Of the 10 richest people in Singapore, 5 of them derived their wealth partially or wholly from real estate. This is a testimony to the wealth that the real estate sector can create. While investing in REITs will not make us a millionaire overnight, it allows us to take part in the wealth creation of real estate. This is because REITs make investing in real estate affordable and accessible to retail investors. Few people will be able to fork out millions to invest in real estate but REITs will allow us to gain exposure to real estate investments with only a few hundred dollars.

Granted, past performance does not guarantee future performance. However, there are many factors that point towards a buoyant real estate sector in the years to come. First, Singapore’s land is scarce, limiting the supply of real estate. Additionally, as a politically stable country with a business friendly government and high skilled workforce, Singapore remains an attractive location for many businesses to set up their operations. Thus, Singapore continues to enjoy strong demand for real estate. These factors exert an upward pressure on rental and property prices. With many multinational corporations looking to enter the ASEAN market and the rise of high tech manufacturing, Singapore’s real estate sector will likely continue to enjoy tailwinds for the foreseeable future.

2. Pays good dividends

REITs in Singapore are required to distribute 90% of their taxable income to unitholders to qualify for tax transparency treatment. Under this treatment, the REITs are not taxed on income distributed to shareholders. Essentially, this regulation encourages REITs to pay higher dividends. This is why REITs have such high dividend yields compared to other blue chip companies. For instance, S-REITs (Singapore REITs) average a dividend yield of 5.6% in April 2021. This is very impressive compared to the 3-4% dividend yield of the Straits Times Index, which tracks the 30 largest public listed companies in Singapore.

Furthermore, unlike the United States which levies a 30% withholding tax on dividends for non-residents, Singapore does not tax dividends. This means that what we see is what we get. The dividend paid by REITs go straight into our pockets!

3. Provides diversification away from stocks

The third reason to include REITs in your portfolio is that it provides some diversification away from stocks. Despite their slight correlation, a mixture of REITs and stocks will make your portfolio less volatile (as observed from the graph below).

Some may argue that REITs do not provide sufficient diversification away from stocks due to their correlation, citing the example where both stocks and REITs alike suffered greatly during the 2009 financial crisis. However, this observation fails to take into account the underlying reasons of the 2009 financial crisis. The 2009 subprime mortgage crisis stems from the real estate bubble and was one that affected the entire world economy. Thus, it is to be expected that both stocks and REITs will be similarly impacted. On the other hand, in instances such as dotcom crash in 2000, stocks suffered greatly while REITs continued to deliver solid returns. This is because the dotcom bubble was mainly confined to technology stocks. In cases such as this, REITs do serve as an adequate diversification away from stocks. For additional reading on the correlation between REITs and stocks, check out this article.

4. REITs are relatively stable

The stability of REITs can be attributed to the stringent regulation implemented by the Monetary Authority of Singapore. One of which, is the maximum gearing ratio (debt-to-equity) of REITs. In essence, this regulation limits the amount of debt REITs can take. In light of the Covid-19 Pandemic, the Monetary Authority of Singapore raised the gearing ratio limit for REITs from 45% to 50%, giving REITs more leeway to take on more debt in these trying times. If you think about the ongoing Evergrande saga, excessive debt will make a company more risky.

Additionally, there are many more intricate details of the regulation of REITs in Singapore. These regulations are outlined by MAS and can be found here. In my opinion, these regulations are very desirable as they make the REIT environment in Singapore controlled one. This protects retail investors (you and me), making REITs relatively stable investments for investors seeking passive income.

Limitations of REITs

  1. Securitization of REITs resulted in them behaving like stocks

Much like stocks, REITs are traded on a stock exchange and volatility. This is unlike traditional real estate, which have relatively more stable prices.

  1. May not experience that much growth

This is because majority of earnings are paid out as dividends and are thus not reinvested to achieve more growth.

That being said, I would not see these as disadvantages or risks of REITs. The two points above come as a trade-off, something like a necessary evil for us to take part in the real estate investment and enjoy the high dividend yields synonymous with REITs.

The simple way to invest in REITs

Those who have been following my blog for some time already know what I am going to say. As I have previously wrote in my article titled “How To Start Investing With Little Money”, ETFs are the perfect way for the novice and/or lazy investor starting with a small capital. With as little as a $107 dollars at the time of writing, you can gain exposure to 27 high quality REITs in Singapore by investing in the Lion-Phillip S-REIT ETF (ticker: CLR).

For a more in depth comparison between the 3 REITs ETF that are listed on SGX, refer to this Seedly article.

Finally, I would like to end of this post by debunking a common misunderstanding that REITs are for those nearing retirement and unable to take on greater risks. In my opinion, there is a place in everyone’s portfolio for stable income producing assets such as REITs. The pandemic is perhaps the best argument for this as stable dividend pay outs can potentially tide us over a tough period. As usual, the exact proportion of your portfolio allocated to REITs should be tailored to your personal goals and preferences. Join my telegram channel here where I share more of my research!

4 Common Investing Mistakes

When I first dipped my toes into investing, I made many mistakes. These mistakes have cost me much in terms of realised losses and profits forgone. Yet, I am glad that I have made these mistakes when I am young and can afford to. This gives me the opportunity to learn from them and avoid repeating them again. Here are four mistakes I made when I first started investing.

1. Trying to make a quick profit by trading/buying on the news

When I first started “investing”, I would frequently browse the news to find companies to invest in. Whenever a company announced positive news, I would do a quick search on the company. For instance, Pfizer made a series of announcements about their break through in their covid-19 vaccination research last year. Wanting to make a quick profit, I jumped on the train and bought a few shares of Pfizer. However, by the time I had gotten in, Pfizer’s share price had already increased substantially. Later, when the news had died down, I sold the shares for a small loss because I realised that I was trying to trade. This proved to me the futility of trying to buy on the news. This is because by the time news such as this are published, many would have already known about it and bought the stock. Thus, the positive news would have already been priced in. Fast forward to today, Pfizer shares are around 100% higher than what it was last year. This goes to show the importance of knowing what you are buying instead of just buying on the news. I bought an excellent company at an excellent price but still manage to lose money on it, all because I did not do my due diligence.

2. Selling a stock because it’s share price has risen

I made this mistake earlier this year when I sold off my Bank of America and Goldman Sachs shares because the prices had continuously increased into what seemed like overpriced territory at that time. Afraid that the shares prices may dip, I decided to sell my shares to lock in my profits. To my horror, the share prices of these companies continued their upward climb and I ended up missing out on those returns. A quote from Peter Lynch sums this up nicely: “selling your winners and keeping your losers is like cutting the flowers and watering the weeds.” This event also goes to show that just because a company’s share price has seen a huge appreciation does not mean that it has realised its true potential. A truly great company will continue to grow for many years. Since then, I have shifted my mentality to one of adopting a long term outlook. This means buying great companies that will grow for the foreseeable future and leaving my money to compound. Additionally, this served as a reminder that fluctuations in share prices are part and parcel of investing. Thus, I should not sell my investments simply because I am afraid of a pullback in the near term. That is too near-sighted and can be a costly mistake.

3. Trying to time the market (waiting for the price to dip)

Similar to the previous mistake, this mistake has caused me to miss out on significant amount of potential returns. Since the market started its recovery in 2020, many have been warning of a potential market crash. With many indicators pointing towards a significantly overvalued market, I had reservations on investing. As such, I halted dollar cost averaging into the S&P500 index for 3 months. In April, I realised that waiting on the side lines for a market correction was counterproductive as my excess cash was incurring opportunity costs in terms of potential returns forgone. This reminded me of the saying that “time in the market beats timing the market” and proved to me the futility of trying to predict where the market will head in the near term. I have since continued to dollar cost average monthly without fail. So far, this has been paying off. While it is a fact that the market will eventually crash, I will never know whether it will occur tomorrow, next month, next year or even 5 years down the road. Thus, I will continue to stay the course and DCA monthly no matter rain or shine. In the event that the market crashes, I will buy even more.

4. Not having the conviction to buy more

This stems from a combination of not doing enough research and having enough faith. Sometimes, companies that I invest in may trend downwards and end up 10% below my entrance price. At this point, I want to buy more shares to lower my cost basis and because the lower price does not signify risk but opportunity instead. However, I often end up doubting myself. Thoughts that I could be wrong about this company or I could have missed out something fill my mind. I often let my self-doubt get the better of me and end up sitting on the side lines. Only a few months later, the share price has increased to hit all time highs. I am left with excess cash in my hand and full of regret that I did not buy more. Upon reflection, I attribute the self-doubt I experience to not doing sufficient due diligence and planning. Now, I deploy my cash in 2 tranches. The first when I find that the stock price has given me an adequate margin of safety and the second if the stock price ever dips substantially. While this may mean that I may sometimes never deploy all the cash I planned to, it gives me confidence that I will not panic to see my investments dip 10-20% for no valid reason.

You may be wondering why I still make these basic mistakes despite many investors already warning about them. Well, I may know the theory but when it actually happens to me, I start to doubt myself and become hesitant to act. This goes to show that investing is not a science, but a craft, where one has to learn from experience. If that’s the case is there a point in studying the mistakes of other investors? I would argue that studying the mistakes that others make will help us recognise our own mistakes when we do make them. This is the first step in learning from our mistakes and never repeating them again. Lastly, I would like to end this post by saying that mistakes are part and parcel of investing. What matters is that we ensure no mistake is crippling such that we will not have the opportunity to learn from it. This makes the case for diversification. But that’s a discussion for another time!