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Year-In-Review 2022

Regrettably, it’s been a long while since I’ve written an article. Initially due to NS and subsequently because I had to hit the ground running at my internship. Now that I’m starting to get used to the intensity (hopefully), I am looking to get back into writing because I enjoy sharing what I have learnt and have also found it to be beneficial in terms of helping me collect my thoughts. In fact, this year I am hoping to write more broadly about things I’ve observed/read and learnt that may be useful to you guys. For now, since it’s the start of the year, I thought I’d take the opportunity to do a review and layout my plan for the year ahead money-wise.

Disclaimer! Nothing written in this article should be construed as investment advice.

Where are we headed in 2023?

As I am not a seer, I won’t try to predict where the markets are headed, but I will lay out some facts. From its trough in October 2022, the S&P500 has rebounded by 12%. This rally suggests that investors are optimistic that the worst is behind us – that inflation has peaked and that would prod the Fed to cut interest rates later this year, even as Fed officials insisted that it was too early to think about shifting policy.

However, recent macro economic data seems to suggest otherwise. U.S. job growth accelerated at the start of the year as employers added a robust 517,000 jobs, well above the 2019 pre-pandemic average of 163,000. This pushed the unemployment rate to a 53-year low of 3.4%, raising doubts on whether inflation is under control.

When I first saw these numbers, I couldn’t wrap my head around it. During the same period, big tech companies were announcing massive layoff every other day. How could all the huge layoffs and the talk of recession be reconciled with the strong macro economic data? I did some research and it turns out that these tech companies account for only 2% of the American workforce. The hiring is happening in a much bigger part of the economy, the service sector, which includes all kinds of businesses – everything from restaurants and hotels, to dry cleaners and hospitals. The employees in those sectors account for about 36% of all private sector payrolls.

So while I don’t know where the markets are headed, I would be cautious of declaring that inflation has peaked and I wouldn’t rule out the possibility of the Fed keeping interest rates higher for longer.

Portfolio Review

Since the start of 2022 until today, my portfolio has suffered from a decline of ~9%, slightly better than the S&P500, which is down more than 16%. While a significant portion of my portfolio is in the index, the decline was partially offset by the relatively strong performance of my Singapore investments.

Still, this is nothing to be satisfied with as it is now plain as day that it was much better to hold cash throughout 2022. However, hindsight is 20/20 so I try not to harp on it too much. The bright side is that because I deploy my capital in tranches instead of in a lump sum, I still have dry powder to take advantage of the correction that is still playing out.

After a review, I don’t see any deterioration in the fundamentals of my portfolio companies that warrants selling any of them. As I genuinely don’t know where the markets will be tomorrow, one month or six months from now, I am happy to hold what I already have in my portfolio and continue dollar cost averaging as the year progresses.

Note: This only includes my invested capital and does not include cash

Plan for 2023

As of now, I have no plans to divest any of my holdings and intend to continually invest more throughout the year, no different than what I have been doing last year. I do however, plan to make minor tweaks in allocation as I add to my portfolio.

Broad-based ETFs tracking the S&P500 and the world index will continue to form the foundation of my portfolio and I will continue to DCA throughout the year, maintaining my allocation to ETFs.

One thing that will be different for me this year is that I will be less active in looking for individual businesses to invest in, simply due to limited time and capacity. That being said, I will still continue to monitor those that are already on my watchlist. One of which, I will share more on below.

At the time of writing, I find REITs to be priced at a very attractive level with some of the well established REITs boasting 5-6% yields. The somewhat depressed prices could be attributed to the high interest rates, which translates to increased cost of borrowing for REITs. However, I believe that well-managed REITs with comfortable gearing ratio, high proportion of fixed interest debt and high interest coverage ratio will have no issues delivering satisfactory returns to shareholders. On top of that, REITs remain my only viable mean for exposure to real estate at the moment and their steady dividends can provide stability to my portfolio if markets make a turn for the worse. Thus, I have taken the opportunity to increase my exposure to REITs in the first two months of 2023 and will likely continue to add to my position if prices become even more attractive.

Finally, T-bills remain a good place to park short term cash, with the latest issue yielding 3.9%. As I’ve mentioned on my telegram channel multiple times, I have been adding to my T-bills position throughout 2022. However, they are more of a short term investment and I hope to recycle the capital into equities and REITs should prices become more attractive in the later part of this year.

Biggest Mistake of 2022

No doubt, I have made many mistakes in 2022. None, however, is as costly as this one of omission. In mid 2022, I had my eye on LVMH, and conducted due diligence on the business and its various brands. Even without owning any of their products, I appreciated the ubiquity of their brands and how they are synonymous with wealth and status. The brilliance of Bernard Arnault has also been something I have read about and admired for quite some time. The world’s largest fashion house thus checks all the right boxes. Ultimately, I chose to hold off on buying any LVMH shares because the market levels looked frothy.

Fast forward to today, the share price has increased by more than 40% while my portfolio has slumped along with the markets and I still don’t own a single LVMH share, so I am literally slapping myself for that mistake.

At today’s prices, I am calling it over-priced, so check back in a year to see whether I am right about that… Nonetheless, LVMH is one of the companies that I will be watching closely this year.

I must admit, it’s great to be writing again and I really hope the stuff I share is beneficial to you guys. In view of my commitments, I am looking to publish less often but dive into greater detail each time and hopefully provide greater value in each article. I already have a couple of exciting ideas, so stay tuned!

Posted on by CTKS · 3 Comments

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
  2. STI ETF or S-REITs ETF
  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.