Opportunities

A latest read of the Wall Street Journal brings to light a couple of decent investment opportunities which could yield to a long term total return of 10% p.a. compounded or doubling your money in 7 years:

• NASDAQ - This technology heavy American stock market is home to some of the best and fastest growing companies in the world. Yet the current earnings power (inverse of price earnings ratio) is well over 7% p.a. with an annualised compounding growth rate of over 12%.
  
• KOREA - The PE ratio of the KOSPI index is just 11 which gives it a pretty high earnings power. Plus Korea is a stable developed economy, home to several large technology leveraged chaebols (conglomerates) that are world leaders in several niches. The economy as a whole is also growing at the pace comparable to emerging economies.
  
• THAILAND - This Asian tiger has posted 32% gains in the last one year and yet its current earnings power is at an exciting 10% and growing fast. Why this market now deserves a look is because it has emerged from its political turmoil circa 2009 stronger and more stable.

Dollar Cost Averaging Versus Lump sum investing : what wins?

Dollar cost averaging (DCA) is a fundamental investment strategy.  It is implemented by a regular savings plan (RSP) which makes it easy to allocate a fixed amount of money every month to a diversified portfolio.

Understandably, the benefits of DCA have been extolled by experts and financial institutions alike. After all, what's not to like about disciplined investing, without the destructive effects of our emotions, where we get to take advantage of the inevitable short term market price volatility - buy more units of blue chips when the markets swing downwards and yet are protected because we buy fewer units during price spikes.

Myth - High Return Equals High Risk

I met a gentleman this morning at an international university gathering. He told me how interested he was in growing his money through 'investing' - but not for the long term.

After further investigation, it was revealed that anything over a year was long term for him! His idea was trading leveraged instruments like Forex and options with a holding period of days, sometimes hours!

I had to share with him a few key points.

10 Ways to Tackle Inflation

The Consumer Price Index climbed to 3.1% in July 2010 as reported in The Straits Times on 24 August. This rise is in line with the expectations of economists for the second half of the year. The increase in costs of food, housing, transport, electricity and clothing have primarily contributed to inflation.

So, how does this affect you and me?

Singaporeans who are uncomfortable taking financial risks and who are happy parking money in bank deposits, playing ‘safe’, are now facing an even bigger risk – that of not protecting themselves against inflation. 

In the long run, your savings will actually shrink and you could become poorer, not richer because of inflation.

Q: How much will S$10,000 in today’s value be worth at different inflation
    rates in 10 years time? 
A: At 2% inflation, it will be S$8,171. At 3%, it will be S$7,374. And at 4%, it
    will be S$5,987.

Therefore, it takes discipline and a sound investment strategy to cushion the impact of the shrinking dollar.

1. Reduce spending and live within your means
Buying things on impulse and on big ticket items beyond your means could cause you to spend beyond your means. It is time to review your spending pattern and your lifestyle. For example, you could substitute a branded item with a no-frills one or switch to a cheaper mode of transport like the public trains and buses etc.

2. Try to save 20% or more of your pay cheque
Pay yourself first before you start paying your bills. Saving 10% is good but if you can manage 20%, you’re giving yourself a bigger head start in building surpluses for long term investments.

3. Do not be overly conservative
Invest your money instead of putting it in fixed deposits or saving deposits. These instruments do not help to overcome the effects of inflation. Another alternative will be to place your money in money market funds that have low sales charge and offer better rates than the deposits.

4. Do not rely on guaranteed products
They guaranteed the principal upon maturity. Returns are almost negligible and they do not provide any protection against inflation.

5. Save regularly via an investment platform
Dollar Cost Averaging is one of the best ways to complement your lump sum investment. This method reduces risk in the long term and it provides a disciplined way to save. The earlier you start investing a fixed sum regularly, the quicker your investment will grow to a significant amount in your later years.

6. Take on sensible level of risk
You do not need to be an aggressive investor overnight. You can build an investment portfolio that is well diversified in the various asset classes that suit your risk profile.

7. Invest for returns that will beat inflation
Consider investing in a diversified portfolio of stocks and bonds over the long term. A moderate-risk portfolio with 70% equities and 30% bonds could generate 6%-8% return a year over the long term.

8. Understand the Power of Compounding
The Rule of 72 will help you to understand how long it takes for your money to double. Simple take 72 and divide by the percentage return. For example, with a return of 9% a year, you will need 8 years for your money to double. If you invest S$100,000 in a portfolio that can give you an annual return of 8%, this amount can grow to about $467,000 after 20 years.

9. Invest in asset classes that appreciate
Property investment is not for everyone. But this can be a good investment only if it is within your means. If rents increase at a faster rate than inflation, your property yield will provide a healthy return.

10. Limit exposure to depreciating assets
A depreciating asset would be cars. If there is no necessity to change your car, then stay with your existing vehicle.