Friday, March 26

The fallacy of long term investing

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It is often advocated that investing in the long term for equities is the way to go. That is because equities are volatile so in the short term, one may suffer a temporary drop in the price of their holdings. But it has been seen historically that equities has a strong tendency to trend up over the long term thus that is why it is important to invest for the long term to ride out the volatility. However, it does not mean that one should buy at anytime and hold it for a long period of time as this period of time that is required to ride out the volatility can be really long. So how long is really long ? Let me illustrate with one situation below.



Let's assume that you bought at near the beginning of the purple line as listed on the chart below. The beginning of the purple line coincides with 6th of February 1996 and at that point of time, the STI was at a level of around 2493. Unfortunately, as you can see from the chart, STI went on a decline. It will take you another 1416 days or close to 4 years before you will break even on your investment on the 2nd of January as seen by the end of the purple line.

What if you decide to hold your investment since it is suggested that you should hold your investment for a long period of time ? Another breakeven point will occur on the 2nd of October 2006 at the end of the blue line which will take 3881 days or around 10 years and 7 months. If you still decide to hold your investment, you will suffer a paper loss on your investment as signified by the green circle once again although you will enjoy some minor gains currently as the STI approaches the level of 3000. And that is after holding your investment for around 14 years.

As you can see from the scenario I painted above, a long period of time can really be long. I'm not suggesting that investing for the long term is a wrong concept. To me, it is a sound concept but that comes attached with conditions. So what are the conditions that you should take note of ?
  • Point of entry is of utmost importance. As illustrated above, buying near the peak will result in poor returns on your investments. Even if you did not manage to sell out near the peak but if you had bought near the bottom, you will still be sitting on a respectable amount of return after a long holding period.
  • Choice of investment is of utmost importance similarly. Buying a stock of a fundmentally lousy company and holding it over the long term will not yield you any decent return. The choice of investment should be an investment that has a strong tendency to rise in the long run such as index funds, ETFs that tracks major indices or a diversifed portfolio consisting of stocks of fundamentally strong companies.

Tuesday, March 16

Raising the Threshold for CPFIS-SA Investment

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Raising the Threshold for CPF Investment Scheme-Special Account Investment

From 1 July 2010, the first $40,000 of members’ Special Account balances will no longer be allowed to be used for investments. Given the higher risk-free interest rate on the Special Account, it is better to be more conservative than to subject these savings to the uncertainty of CPFIS returns.

There is no change to the requirement for members to set aside $20,000 in the Ordinary Account before they can invest their Ordinary Account monies.

(Taken from the CPF Board's official website)
That is bad news for investors who can potentially generate a higher return on their funds sitting in their CPF SA. However, that group of investors belongs to the minority. For the majority, the interest for the CPF SA is already very decent if you take into account that the return is risk free.

Sunday, March 14

Definition of Critical Illness

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Critical illness plans are insurance policies which will pay out a sum of money if the policyholder is diagnosed as having a critical illness. However, if you are having such a plan, have you ever seen the definition of the critical illnesses which must be met first before the full sum of money will be given out to you ? I managed to find the definition of the critical illnesses on the website of the Life Insurance Association of Singapore here and we can take a look at some of the definitions.
1 Major Cancers
A malignant tumour characterised by the uncontrolled growth and spread of malignant cells with invasion and destruction of normal tissue. This diagnosis must be supported by histological evidence of malignancy and confirmed by an oncologist or pathologist.
The following are excluded:
• Tumours showing the malignant changes of carcinoma-in-situ and tumours which are histologically described as pre-malignant or non-invasive, including, but not limited to: Carcinoma-in-Situ of the Breasts, Cervical Dysplasia CIN-1, CIN-2 and CIN-3;
• Hyperkeratoses, basal cell and squamous skin cancers, and melanomas of less than 1.5mm Breslow thickness, or less than Clark Level 3, unless there is evidence of metastases;
• Prostate cancers histologically described as TNM Classification T1a or T1b or Prostate cancers of another equivalent or lesser classification, T1N0M0 Papillary micro-carcinoma of the Thyroid less than 1 cm in diameter, Papillary micro-carcinoma of the Bladder, and Chronic Lymphocytic Leukaemia less than RAI Stage 3; and
• All tumours in the presence of HIV infection.
I am not legally or medically trained so my apologies if I have failed to misunderstand any of the terms clearly. It is stated above that Carcinoma in situ is excluded from the definition of the critical illness. A search on Google for this term reveals that it is cancer that involves only the place in which it began and that has not spread. Thus, if you have cancer which have not spread, do not be surprised if you cannot receive any payout from your critical illness plans.
14 Major Burns
Third degree (full thickness of the skin) burns covering at least 20% of the surface of the Life Assured’s body.
Here is another definition from the definitions of critical illnesses. Notice that the definition of major burns is defined very clearly and concisely. Thus, any major burns that does not meet the above definition may result in non-payment of the policy.

As such, you may wish to take a closer look at the critical illness riders or plan if you are buying one and ask your financial adviser for a more detailed explanation.
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Wednesday, March 3

Individual investors' SGS holdings to shift to CDP

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Individual investors' SGS holdings to shift to CDP
Taken from The Business Times on the 2nd of March, 2010

THE Singapore Exchange (SGX), DBS Bank, United Overseas Bank (UOB) and OCBC Bank yesterday announced that all Singapore Government Securities (SGS) holdings of individual investors will be migrated to the Central Depository (CDP) for safekeeping starting from next month.

The SGS migration exercise is part of the Monetary Authority of Singapore's (MAS) initiative to make the SGS market more accessible for individual investors.

Other elements of the SGS migration exercise include consolidating details of investors' SGS and securities holdings into a single CDP account; making SGS valuations and details of investors' SGS holdings available online at www.cdp.com.sg; making available day-end SGS/ T-Bill prices at www.sgx.com; and allowing investors to freely buy or sell SGS through any SGS agent bank, to improve their access to the most competitive SGS market prices.

Currently, individual investors are restricted to dealing SGS only with their agent bank.

The SGS migration exercise will be conducted from April 1 to June 30. SGX, DBS, UOB and OCBC Bank will contact investors with more details on the exercise.

During the exercise period, SGX will waive the CDP transfers fees in relation to the SGS holdings being migrated. SGX will also waive fees for the SGS holdings services for a three-year period from April 1, 2010. SGX does not currently charge fees for CDP account opening.

CDP account opening fees and the securities and/or SGS holding fees are subject to a review process that SGX conducts every three years.
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