Waiting for the stockmarket to bottom

A few months ago, when the ST index was around 1,500, some people commented that they will buy when it reached 1,200. That was their target for the stockmarket to bottom out.

But, it did not reach that level. Instead, the ST index had recovered 1,100 points (more than 70%) over the past few months. Those who waited for the stockmarket to reach 1,200 missed the boat.

Lesson 1: Do not be greedy. If you find the stocks to be of good value, you should buy and keep for the long term.

I bought my shares when the stockmarket was around 2,500. I did not sell the shares when they lost nearly half of its value. I kept them for the long term. These shares have since recovered in value (nearly).

Lesson 2: Avoid trying to catch the right time to sell or buy. If you are not sure, keep the shares for the long term, provided that they are blue chip shares. Do not sell, when the share price is depressed due to liquidity or fear.

NJ sues Merrill Lynch over $300 mln stock purchase

NEW YORK, July 28 (Reuters) - New Jersey sued Merrill Lynch for selling its pensions $300 million of preferred stock in January 2008 "based on misleading information" about the brokerage's finances, the state attorney general said on Tuesday.

Anne Milgram, the state attorney general, said in a statement that the lawsuit, filed in the Law Division of state Superior Court in Hudson County, also names Bank of America Corp as a defendant.

Bank of America acquired Merrill Lynch last year and is named as "a successor entity," Milgram said.

Reuters: Investors dump brokers to go it alone online

Article.

Quote: "I will never again trust anyone who is commission-driven to manage my portfolio," said Mallah. "If they're not making money off you, they have no use for you."

Advice on individual shares

Dear Tan Kin Lian,
I had bought a China counter Sino Environment Tech shear by using my CPF investment account. But now the shear price drop to 30 % and looks the company is having some internal problem. They did not announce the 1st Qtr result and all investment funds also selling there holding. Could you advice me is it wise decision to sell and investment other counter instead of loosing all?

REPLY
I do not give advice on individual shares. Sorry.

Interest rate on 25 July 2009

Here is an update of the interest rate on savings account and fixed deposit as at 25 July 2009. It is for your easy reference. Hope you find it useful. As the interest rate changes, please verify with the financial institution.

http://spreadsheets.google.com/ccc?key=0AgCAW6IhYkVZdGNXMjZaU19oWW9aMk1pT1lxeGJMU1E&hl=en

Investing in gold

Dear Mr. Tan
Since bank interest rates have been very low recently, a friend has recommended me to invest in gold. The buying and selling of gold is through this company. The company’s website is (link deleted)

REPLY
I do not know if this organisation is reliable. You should not invest in any organisation that you are not familiar with. If you wish to invest with this organisation, you must do your research well. Some banks in Singapore offer similar facilities for you to invest in gold. I think that UOB is one of them. I suggest that you find out more about their offer.

If you wish to invest in gold, make sure that it is not more than 10% of your total savings. And hold it as a long term investment.

Investing in a property for rental

Hi Mr Tan,
My wife and I own a HDB executive apartment, fully paid with CPF and cash.

We have some investments. We are considering to cash them for 20% down payment for a private property. We will rent the property to pay the monthly instalment.

Should we go for a second property or continue investing in equity? We are now in our 40s. It is for retirement use.

Hi
This is a personal view. It is all right to buy a property for one's occupation but not a good idea to invest in a property for rental.

I dislike investing in a physical property for the following reasons:
a) the price is too high
b) the return, after deducting expenses, is too low
c) it is a hassle to rent out the property
d) it does not offer diversifcation.
e) it is highly speculative and depends on making the right decision on timing and choice of property.

Investing in REITS may be a better idea, as it offers the same opportunity to make the same kind of potential gain as physical property, has less hassle in managing the property and offers diversification over several properties.

All the best in your decision!

Low interest rate

Interest rate globally is at a low level. Central banks have pumped a lot of money into the economy to stimulate its recovery. The hope is that low interest rate will encourage some people to buy to buy houses or cars, or businesses to invest and produce goods.

Low interest rate is bad for savers. They will not earn sufficient interest on their savings. To earn a higher return, they have to take the risk and invest in stocks or other assets.

Eventually, the economy will recover. At that time, the prices of equity, property and other assets will increase. Those who take the risk now will benefit from the recovery.

The alternative is to avoid risk and accept the low rate of interest, which is now less than 1% per annum. This is not sufficient to cover inflation. In my case, I prefer to remain fully invested and wait for the recovery.

Tan Kin Lian

Tiered interest rate

Several banks have offered tiered interest rate on savings accounts. A different interest rate is applied to different tranches of savings. This type of complicated structures bring two issues:
a) does the bank state clearly how the interest is to be computed?
b) is the customer able to check that the correct amount of interest has been credited?
In a savings account, the balance can fluctuate every day. Does the bank apply the tiered interest calculation on the daily balance?
Will the bank be willing to show each customer how the interest credited in each month is calcuated?
I hope that bank customers are given the correct amount of interest and are not short changed, due to their inability to check on the calculation of the interest.

Best fixed deposit rates

A reader asked me to post the best fixed deposit rates available in Singapore. As I do not have the time to be doing this research, I have to engage someone to do this research and to pay this person for the time spent.

I hope that FISCA can do this work at a later date. FISCA will also have to pay people to do the work.

I enourage Singaporeans to join FISCA and pay $36 a year as membership fee for FISCA to meet its expenses. Please support FISCA, so that it can take care of your interest. FISCA will be calling for membership in August, when its website is ready.

Unable to take up rights issue

Dear Mr. Tan,
I have invested in REITS. Due to the recent right issues carried out by several REITS, I have been forced to buy more shares or suffer dilution. Can you advice on:

1. Could you please kindly advise if it is worthwhile to buy & hold REIT for many years (i.e. 10-20 years)?

2. Should I switch into high dividend yield blue chips, as they do not issue rights often?

REPLY
All shares are subject to rights issue, i.e. not just REITs but other shares as well.

If you are not able to take up the rights issue, you have the option to sell the rights. The amount that you get for the rights should be almost the same as the amount of dilution in your shares.

For example,
Price of shares before rights issue $5
Rights issue (1 for 1) at $3
Share price after rights issue, due to dilution: $4
Value of rights, if sold in the market, should be $1.

The value of the rights is usually the same as the loss due to dilution, but it may vary somewhat, due to market condition.

Whether you should invest in REITS or blue chips is a different matter. Usually, it is better to be well diversified, e.g. buy a ETF of shares and REITS (if available).

How to construct a diversified portfolio

Dear Mr Tan,
I've read several articles that you've written where you've advocated buying the STI ETF. Thanks for taking the time to explain in simple terms the pros and cons of the issue.

I belong to the passive investing camp and believe in buying and holding a diversified basket of index-tracking, low-cost funds tracking several world markets and different asset classes. The STI ETF appears to be one such index-tracking, low-cost fund.

However, investing in the STI ETF only gives you exposure to the Singapore market, which is less than 1% of the global market. While it is a good way to participate in the local stock market, it is certainly inadequate if one wants to create and hold a diversified portfolio.

I'm interested to know if you or your readers have managed to construct a portfolio of low-cost (less than 1% expense ratio), passively managed index funds that track global market indices, investing from Singapore?

REPLY
I advise people to invest in an ETF rather than to manage their own stocks. They may forget to take up rights issue or sell the rights, leading to loss due to dilution of their shares. The dividends due to them may be paid to the wrong account. To avoid these losses, the investor has to keep track of the shares - which is quite tedious. It is better to leave these matters to the fund manager of the ETF.

Incomplete information on shares

Dear Mr. Tan
It is easy for an ordinary share investor to be cheated when they are provided with incomplete information. Below are some examples:

1) The investors are told that a company has huge cash on hand to the tune of say several hundred millions of dollars which give the impression that the company is cash rich and hence will pay good dividend or ready for business expansion. But they are not aware that the company also has huge debt to the tune of say several billions of dollars to clear.

2) The investors are told that the current year profit of a company will exceed say $100 millions which give the impression that the company is making a lot of money. But the investors are not aware that the earning of the company is only a mere 5 cents per share because there is a total of 2 billions shares in the company.

3) The investors are told that the earning of a company has increased 100% over the past 3 years but they are not aware that the company share price has increased 500% over the same period.

4) The investors are told that a company is wining a big contract worth $50 millions which give the impression that the company business is very good. But they are not aware that the wining of a $50 millions contract is not significant to a company with annual turnover of several billions of dollars.

Pang

Independent finacial adviser - ad on CNBC

There is an advertisement by Interactive Brokers on CNBC TV. It shows an independent adviser describing her job as helping clients to monitor their investments and trading through a low cost internet platform offered by the advertiser. The adviser gives value to the clients by getting access to the suitable financial products traded on the exchange, at the lowest possible cost.

I hope that independent financial advisers will move to this business model, i.e. give value to the clients and earn a fee for their service. This fee is adequate for the time spent and is not so large as to make the client poorer off.

It is possible for a finacial adviser to make a living with this model, just as a doctor makes a living by giving medical advice for a fee.

Tan Kin Lian

Finding financial advice in an age of bad behaviour

Read this article. It shows that wealth managers and financial advisers cannot be trusted.

Invest in land banking

Dear Mr Tan,

Recently I have been approach by a friend to invest in land in the US. In your opinion, how safe is this kind of investment?

 REPLY

My views on land banking are set out in various articles in my blog. See below.

http://tankinlian.blogspot.com/search?q=land+banking

I do not like this type of investment. All the best!

Rights issues - risk to small shareholders

During the recent credit crisis, many listed companies are have rights issue to raise additional capital. The new shares are issued at a lower price than the existing shares. This will cause the existing shares to be diluted and the price to fall.

Here is an example. If the share price is $4, and new shares are being issued at $2 (on the basis of 1 new share for 1 old share), the share price is expected to drop to $3 after the new shares are issued. This is caused by "diluation".

The practice of rights issue has the following risk to small policyholders:

a) Difficulty in finding the additional money to take up the new shares. If you are offered to 10,000 new shares at $2, you have to find $20,000 to take up these shares. If you are not able to find this spare cash, you can sell the rights during a certain period.  In theory, the rights should be worth the expected drop in the price of the old shares.

b) Oversight. You may not be aware of the rights issue and you forget to take it up or to sell the rights. This will cause your investments to drop in value, as the avlue of the old shares would have dropped due to dilution. This oversight is easy to happen, as you may be busy with work or overseas, when the rights issue are announced.

At each rights issue, there will be a certain proportion of shareholders who fail to take up or selll the rights due to oversight. These investors lose out and the benefit is given to other shareholders who take up the new shares at the lower price. (In some companies, the directors take up these excess shares).

To avoid this risk, it is better for small investors to invest in a professionally managed fund, such as a ETF (exchange traded fund).  The professional managers will take care of the work of monitoring the investments, including collecting the dividends, subscribing to rights issues and other matters.

 

Perils of global banking

Dear Mr. Tan,

This article shows how global banks have packaged toxic products to be sold to investors. Please highlight this in your blog.

Strong recovery in Singapore stockmarket

The Singapore stockmarket recovered by 50% from 1400 to 2100 (on the ST Index) over the past two months.

I did not buy any shares during this period, so I missed the rally. But I did not sell any shares either, during the decline from 2400 to 1400. So, they cancelled out.

This illustrates the importance of staying invested, for a long term investor. If one gets out of the market, when conditions are gloomy, one is likely to miss the rally. It is difficult to time the market. It is better to invest for the long term, and take a long term view.

Even the experts like Warren Buffet adviced investors to take a long term view and invest over a time frame of 10 years or longer.

Advice from three religion on how to handle debt

Read this.