Author: Ho KhinwaiKhin Wai is a Year 3 Banking and Financial Services student from the School of Business Management (SBM). He started his foray in finance in 2011 and has his roots in value investing. Archives
December 2013
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Why Do We Invest?28/12/2013 Adapted from & Inspired by Adam Khoo. The author does not own any original ideas presented in this post. As you are reading this post, hundreds of thousands of people around the world are currently taking their first board on the 'Investing' train. New investors and traders have sprung up in the markets over the recent years, due to increased awareness about financial management (not to mention the ease and availability of financial resources over the net). There are hundreds of books written about investment and trading. And, many of these books will highlight how to make fortunes from the markets by following their strategies, buying into expensive software programs and attending their supplementary workshops. These programs boast supernormal returns that seem justified with their strategies, and give readers the impression that there is a PROVEN way to make money out of the markets by following them. The result: many people get hooked onto the idea that investing/trading is a GUARANTEED money-making SYSTEM that will reap them easy profits. If, out of the tens of thousands of investors and traders in Singapore, one guy was picked out and asked the question "Why do you invest/trade?", the answer would likely be like this, "To make money, of course". So you see, their motivation for investing is almost always PROFIT-DRIVEN. This is the worst mindset any investor and trader can have, and if you are one of these people, pay attention to what I'm going to share with you next. Their desire and GOAL to accumulate Money through trading or investing is set-up right from the beginning, and that will affect any investment decision the person is going to make. With such a hunger for hoarding cash, he will look for the QUICKEST, EASIEST and FASTEST way to make money, and that may potentially result in him making the wrong decisions because of a thing called GREED. As with any good goal, there must be a proper target. "Making money" is not a viable target as it does not reveal WHY you have to make the money. The goal is much more personal and subtle, and this subtlety is what distinguishes long-term successful investors, and unsuccessful folks who believe in the get-rich-quick ideology. The real goal of investing is about making a positive change in your life, about enriching your personal experiences using the extra income made from investments, and ultimately, about being able to live without financial burden and worries and being able to afford the things you want and living the life you desire. This is what is meant by being financially free. Now the focus is shifted from HOW to make money by investing, to WHY you want to make money through investing. This is the mentality that every investor or trader should have before starting. "Why do you invest?" "To create a more comfortable life for me and my family" "How?" "By making money through investing/trading" Once we get this idea in our minds, we can begin to see investing and trading in a whole new light, rather than just two systems of MAKING MONEY. Remember: Money is a means to an end, and not an end in itself".
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Introduction to Exchange Traded Funds15/10/2013 Exchange Traded Funds (ETFs) in Singapore have come a long way since their first inception in 2002, when the first local ETF, STI ETF (formerly known as streetTRACKS STI ETF) made its debut on the Singapore Exchange. ETFs are a type of security that mimics an index's movement, such as the Straits Times Index (STI) in Singapore, and is traded on SGX along with other common stocks. By buying into an ETF such as the STI ETF, the investor gets a wide and diversified exposure into a basket of Singapore stocks that make up the STI. With an ETF, an investor can be said to own ALL 30 of the Singapore blue-chip stocks that make up the STI, without directly investing into each stock individually! Advantages 1. Information readily available If you have ever heard of a unit trust (or mutual fund), you would know that the trading prices are not shown for each minute or hour. Trading prices of unit trusts, which are termed as NAVs(Net Asset Values) are only updated at the end of the day, and they only reflect the prices from the previous day of trading. ETFs work in the same way as unit trusts, in that their underlying assets are a basket of assets that seek to mimic a particular industry or index. However, the main difference is that as they are traded on an exchange like SGX, investors can see price changes immediately, trading volumes and price charts of the ETF at the click of a mouse button! As you can see, ETFs are much superior to unit trusts in terms of liquidity. 2. Lower expense ratio As ETFs trade like stocks on SGX, they only incur trading costs like a normal stock would (GST, broker fees, clearing fees...) which are much lower than a unit trust's fees. Unit trusts are actively managed as compared to ETFs, which are passively managed, which means managers don't actively trade to raise the fund's performance and take a relatively laissez-faire approach to management. Hence, unit trusts incur fees such as management fees, loading (commissions), administrative fees, trustee fees and so on... As you now realize, it is much profitable to be investing in an ETF than a unit trust. 3. Diversification As mentioned, underlying assets of ETFs include a basket of assets that seek to track an index or some other benchmark. In an STI ETF for example, you actually hold an underlying of 30 blue-chip stocks from all types of industries in STI! This provides the investor with diversification benefits that allow the investor to spread his risk across the underlying portfolio. For example, if the commodities market in Singapore tumbles due to sudden news, STI will not be significantly affected, as the stocks from other industries (such as Financial) will offset or minimize the impact from commodity stocks like Olam and Noble. Types of ETFs In Singapore, there are 3 classes of ETFs for investors to choose from - Equities, Bonds and Commodities. Equity ETFs track a stock index such as the STI (STI ETF), bond ETFs track a bond index (eg. ABF Singapore Bond Index Fund) and Commodities ETFs track a particular commodity index (eg. SPDR Gold Trust) There are also other kinds of ETFs that track a particular country's or region's index. Some of the common examples are: Lyxor ETF MSCI India (tracks India's index), CIMB FTSE ASEAN 40 ETF (tracks the ASEAN index). Other interesting ETFs that have appeared on the SGX are money market(CASH) ETFs (eg. DBX SINGAPORE CS) and inverse ETFs which has prices go the opposite direction of the particular index direction (eg. DBX S&P500 SH; shorting S&P 500 index). Risks in ETFs While I may have painted a slightly fancy picture of ETFs as an asset class, do note that there are also risks involved in investing in ETFs. Firstly, you may lose all or part of your invested capital in ETFs as they are not guaranteed products like Fixed Deposits. Secondly, ETFs may not be able to exactly replicate the performance of the particular index due to fees, timing differences and other factors. Favorable price changes in the index may thus not result in a similar movement in the ETF. Third, investors who invest in ETFs that track overseas indexes or assets that are denominated in a different currency must be aware of the Foreign exchange risks involved. Currency fluctuations may hence eat up part or all of your gains! Lastly, investors who favor exotic ETFs (eg. ETFs that track index of a country like Bolivia, maybe?) may face liquidity risks as they may not be able to find a buyer or seller to enter or exit the transaction at the price you want. The bottom line is that ETFs are a revolutionary financial product that can be of enormous benefit to the so-called average investor. In my opinion, no portfolio should be without at least one or two ETFs.
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Quote Of The Day8/9/2013 A little nugget from undeniably the world's greatest investor - Warren Buffett. Risk comes from not knowing what you are doing. |