Tan Kin Lian's Blog: Difficult to make timing decisions

Thursday, October 22, 2009

Difficult to make timing decisions

Sir,
I am an avid follower of your blog. It has been a source of enlightment that exposed the misleading practice that has been rampant especially in the last decade.

Currently I am in my mid twenty with stable income of a typical young graduates. I have saved approximately $10,000 so far. I am determinded to invest it wisely.

You has been highlighting the benefits of STI ETF which is now my choice due to its diversification and low charges. However recently the price has been rather high on 2600 - 2700 band. I am not sure whether I should buy it now OR wait for the price to go down?

REPLY
It is difficult to make timing decisions. I am not an expert on this matter.

For my personal investments, I have decided to sell some of my shares, as I expect that the Singapore and global economy has still not solved the underlying problems. I have decided to keep some of my spare money in cash.

Wish you all the best.

21 comments:

isabel said...: Hi Mr Tan,

Can I understand your logic. You used to advocate buying ETF for the long term holding -4-5yrs. But you are selling out now. Are you taking interim paper gain first before going in when it dips again?

rgds; October 22, 2009 7:39 PM
Anonymous said...: "Market timing" is one of the more controversial topics in finance.

Part of the problem is that the phrase "market timing" is not very precise.

What exactly do you mean by market timing? Being able to buy the exact low and sell the exact high 6 times a day? 6 times a month? 6 times a year? 6 times a decade?

The high you sell today may be the low 10 years from now if for example the STI ETF were to triple 10 years from now.

Nobody ever accuses Warren Buffet of being a market timer. But isn't that what he is doing when (eg)he tells you that he thinks stock prices have exceeded his valuation models... and he is staying in cash.

A better question is: If we cannot use fundamental and technical analysis as a crystal ball ... can we use them as a wind sock?

OR

How can we differentiate between a bear market (prices have a downward bias) and a bull market (prices have an upward bias)?

Can the markets be clearly defined so that we can pin-point to the day when a bear market turns bullish and vice versa?

It took me many years to figure out the right questions to ask. I'll leave you the fun of answering these questions.; October 22, 2009 8:21 PM
Tan Kin Lian said...: Hi Isabel
For people who does not know, they should stay invested for 20 to 30 years.

For people like Warren Buffet, they can make some decision to overweigh or udnerweigh. But, even Warren Buffet does not make big changes, only modest ones.

I am not as good as Warren Buffet, so I make small changes. I am selling 20% of my holdings and still keep invested for 80%.

If you still don't understand the logic, keep invested and don't ask for market timing advice.; October 22, 2009 9:33 PM
Anonymous said...: I think everyone should be responsible for their own investment decisions.

Do your own homework. Your risk appetite is different from another persons. Your cashflow situation is different too.

Asking for timing advice is like asking what numbers to buy.

Good luck - you will need it.

Regards,
An insurance agent.; October 22, 2009 10:22 PM
Anonymous said...: buy low sell high & if u think u have made enuf, then is enuf..wat market timing & if u seek opinion, then take opinion on face value ans stop 'question' precision timing or insinuate otherwise, isabel, if u r asking for advice, go direct & i guess TKL will give u direct opinion, otherwise rightly said so; keep invested and stop asking market timing bcus, this is not a broker blog nor 'morning star' rating agency, sometime juz go with your guts & then win then win, lose too bad! somehow, singapore mentality surprised me alot unlike we HK investing or 'risking' mentality..no money, then stay on the sideline...; October 22, 2009 10:26 PM
jamesneo said...: It is advisable for people to keep adequate cash in case for urgent need. A safe ratio is based roughly on your age and risk factor. I think Mr Tan or Dr money have say before (i forgot who) If you are say 30yrs old and plan to invest for 5-10yrs you can invest up to 70% of your savings in more risky investment such as ETF, funds or stocks depending on your risk level. I think that at age 60+, Mr Tan is clever to reduce the risk because if the market fluctate or crash, it will take years for the market to recover which he cannot wait as the money are for his retirement. Unless the money he invested is for an inheritance for his children, there is no point for him to take too much risk. if one is at 60 yrs old for example, at most 40%( should be even lower close to 20% for low risk people) should be locked in such investment.; October 23, 2009 1:39 AM
Anonymous said...: An insurance agent of October 22, 2009 10:22 PM,

Yes...one has to be responsible after being given advice by the agents. Does that mean agents are no longer responsible for the investment , wash their hand and let the investors be on their own?
Why pay the agents then?

Can a kitchen helper or cleaner read and understand investment so that they can be responsible?

Why use an agent and pay the commission? for what if the cleaner knows and understands and can DIY?

Don't push responsibility to your customers. They come to you becuase they don't know and need yuor help and advice. If you don't know about investment don't sell.; October 23, 2009 8:51 AM
Anonymous said...: One of the more practical problems of building a portfolio is how to get started.

Using the example in the blog posting, suppose you have $10,000. Should you invest all of it in 1 go or should you do it in installments?

The efficent market hypothesis (EMH) tells us that if you diversify your holdings, you are able to maintain your rate of return while reducing risk. It is also tells us that it is impossible to accurately time the market.

By investing in a low cost ETF, you are using first part of the (EMH). You diversify across a basket of instruments to decrease the systematic risk of each instrument while maintaining the level of return.

If you want to apply the second part of the EMH, you should invest in installments. In this way, you diversify your risk across time. In other word other than decrease the systematic risk of each stock, you also decrease the systematic risk of each time period.

When doing this, you of course take into account the minimum charges in order to keep transaction costs down.

The ideal size of each investment transaction would therefore be the minimum size that would let you break even with the minimum charges.

A simple investment strategy for the lay person would therefore be to put aside a small sum of money every month. The amount set aside should be enough to make the minimun ETF investment at a attractive transaction cost. Every quarter, you take the money and invest it into a low cost ETF, regardless of whether the market is in a bull or bear run.

If you do this dilligently over a 20 year period, you would probably outpeform many of the "top" investment gurus.; October 23, 2009 1:14 PM
Anonymous said...: To Aurvandil

The young graduate has $10,000.

Are you asking him to split $10,000 over 20 years i.e. invest $500 into STI ETF every year for the next 20 years?

So every year, say every 31st January, for the next 20 years, invest $500 into STI ETF ?; October 23, 2009 6:57 PM
Anonymous said...: I refer to Aurvandil's last paragraph "If you do this dilligently over a 20 year period, you would probably outpeform many of the "top" investment gurus."

The practical problem is whether you are lucky in your choice of a 20 year period.

Following are some unfortunate periods to be invested in stocks (using American stockmarket data).

Percentage returns are after adjusting for inflation during that period:

1966-1982: -1.5% per annum
1929-1949: 1.2%
2000-present: ??; October 23, 2009 7:31 PM
Anonymous said...: wat a joke...if i am u, i go to Sand Casino & bet on the Red Black and 50 50% chance..sometime...really, simple investment and with u Singapore no risk appetite, then put under ur bed..only 10k crack so much thinking!; October 24, 2009 12:52 AM
Anonymous said...: To: Anonymous of October 23, 2009 8:51 AM

One has be responsible for one's financial decision. Regardless of whatever the agent says, the consumer can always say no if he/she does not want product.

I don't quite understand what you want the agent to be responsible for. If the agent is transparent and clear in explaining the product's features, the pros and cons of the products and how it impacts the consumer and addressed the consumers needs and concerns, he has done his job and he gets paid. No one can force the consumer to sign on the dotted line.

Do you mean, a property agent sold you a house and a few years down the road, you sold the house and did not make as much as you want to, the agent is responsible? Get real.

If Mr. Tan, based on his own judgement felt that ETFs is the best way to go and if someone took up the advice and bought ETFs and lost money, is Mr. Tan responsible? Of course not.

Regards

An insurance agent.; October 24, 2009 12:55 AM
Everlearning said...: $10,000 is neither a big nor small sum of money to start out in investing. It is commendable to want to make an effort to invest it wisely.

I took Mr Tan's advice to invest in STI ETF last year in the month of August. And of course he did not prepare me for the roller coaster I was in for when the share price could dive to half of its value.

But, I believe that it is better to stick to my plan in investing for more than 3 to 5 years for dividend payouts, I continued to buy in 2 lots when the price of STI ETF was low.

So, these 2 lots of STI ETF helped bring down the 2 lots I bought when I started out initially in entering the stock market.

I recognise my perspective and expectation of my investment approach. You have to experience what it feels liked when you take charge of your investments than leaving it to the fund managers.

All I have to say is that when you think the price of your investment is too high, start out small by buying 1 lot. When the price dips you may like to buy 2 or 3 lots to increase your shareholdings.

I hope my sharing can shed some provoking thoughts should you decide to invest money on your own.; October 24, 2009 9:48 AM
Anonymous said...: To Anon October 23, 2009 6:57 PM

The young person had accumulated $10,000 over two to three years. It would seem somewhat unlikely that this $10,000 is all the money that needs to be invested over the course of 20 years.; October 24, 2009 11:44 AM
Anonymous said...: To Annon October 23, 2009 7:31 PM

This highlights the point of why you need to diversify across time.

Using the example, if you had invested all of your money in 1966, you would have returned -1.6% in 1982.

You would however have a much better return at lower risk if you had invested a small amount every 3 months from 1966 to 1982.

If you have the time series handy, maybe you can put the numbers into Excel and show what is the rate of return.; October 24, 2009 11:54 AM
Ghim Moh Resident said...: Hi Tan Kin Lian, you rocks.

Thanks for your effort in providing financial education to people. Its a very selfless act. I believe its very satisfying for you to do so too.

Yah i agree with you that there are still problems in the world and local economy. Nothing much has changed, just printing of more money.

In fact i am quite convinced that this crisis is just the beginning and the letter for my recession is not L, V or U. Its inverted squared root.

I also seriously think people should buy non perishables like gold coins or bars, rice and mineral water to keep to protect themselves in future.; October 24, 2009 3:13 PM
Ghim Moh Resident said...: Forget to add, canned foods are also non-perishables. We should keep some just for protection.

As for stocks, its is important not to look for price appreciation only. Good dividend yield is as important if not more. In this case you have 2 weapons to win, price appreciation and good dividend yields instead of 1 weapon which is just price appreciation.

We need to reinvest our dividends too to make use of the law of compounding. In fact as I mentioned before a few times actually that the Law of compounding is one of the wonders in the world according to Albert Einstein.; October 24, 2009 3:19 PM
Anonymous said...: To Aurvandil

Respectfully, you have still not answered the young person's question.

He has $10,000 of investible funds. So how should he go about "investing" it into STI ETF funds?

a. Invest all $10,000 in a single day.

b. Invest once every quarter? If so, how much per quarter?

You have done a better job than most in explaining the application of the efficient market hypothesis.

I'm only belabouring the point because I want to raise the awareness of the practical issues of a "regular" investment plan (sometimes called dollar cost averaging").; October 24, 2009 3:56 PM
Anonymous said...: I refer to Annonymous (12.52am)

"wat a joke...if i am u, i go to Sand Casino & bet on the Red Black and 50 50% chance..sometime...really, simple investment and with u Singapore no risk appetite, then put under ur bed..only 10k crack so much thinking!"

The real prize is not $10K. It's whether you can invest or bet in such a way that you can guarantee yourself an advantage. Just like the casino always has the house advantage. The prize is to develop an automatic, guaranteed money-making system.

If you can develop an investing edge, you want to be betting at least $10 million or a $100 million.

But before you do that, you test out your ideas or skills with smaller amounts of money first.; October 24, 2009 4:08 PM
Anonymous said...: To Annon October 24, 2009 3:56 PM

Apologies if my posting was not so clear.

By dollar averaging, I assume you refer to the technique deployed by pundits who try to average down their losses. For example you had lost $1,000, you buy more units to try and average down the price of your investment. Alternatively if you had made some money, you average up your gains by investing in more units.

The practice I am referring to is not to average your price but rather to diversify your risk across time.

As mentioned before that there are 2 types of systematic risk in investment. You should diversify not only the systematic instrument risk but also the time risk of your investment.

Back to the $10,000 investment, a simple strategy would be to split the investment into 4 segments of $2,500 each. You then make an investment every 3 months. When deploying this strategy, you can aovid distortion by timing your investment so that it does not coincide with the futures expiry (usually Mar,Jun,Sep,Dec).

The risk, mesured by the standard deiviation of the expected return, is much lower than if you invest all $10,000 in 1 go.; October 25, 2009 7:48 AM
Anonymous said...: But by buying on a seperate time, you have to understand that the cost would increase therefore lowering rate of return.

Most pro-DCA would illustrate the benefit without taking into account the cost of buying the unit hence making the move appears attractive.

DCA therefore need to be use with caution as it can be a double-edged sword, depends on the kind of product and the commision rate paid to buy it. Some charge a one time payment while others charge on percentage.; October 28, 2009 1:43 PM

Thursday, October 22, 2009

Difficult to make timing decisions

21 comments:

Blog Archive