Tuesday, 30 September 2014

Do you play to win or not to lose?

Over last few years, many investors have made great fortune in the historical stock market up and downs. Some shrewd investors with primary objective of income generation, have done successfully too with dividend stock, especially with the REITs. If you have picked up those beaten-down counters at the blessed timing and have held them through today, your portfolio is probably enjoying healthy high yield on cost, and probably having good capital gains also. Well, three factors contributed to this success. 

Firstly, the once-a-century event produced an extremely opportune window. When all stocks were beaten down, at the "diamond bottom" price range, it is hard for you to buy anything wrong; ( Whether the GFC is good or bad, it really depends on individual. To those laid-off workers who have been unemployed or underemployed since, and to the wealthy and shrewd who bought S&P500 index when it was below 800, the meaning of GFC is totally different )   

Secondly, the years following GFC saw unprecedented easing monetary policies taken by all countries. With which the stock market quickly recovered and kept breaking with new high record and the real estate property price surged. Besides, with extremely low interest rate and bond yield, dividend investment theme were favored by global investors including institutional investors. In a word, the post-GFC environment could not be more accommodative to REITs. It should be a surprise if REITs price were not gone up since they were reaping all the policy benefits 

Thirdly, Singapore, with tax efficiency and provision of governing regulations, become a magnet for local and foreign to list Reits and business trust. With which, it drew interest and money from abroad. When money flows in, you know which direction prices go. 

But we are now at an another historical junction as Fed is set to begin its interest rising cycle within less than one year's time. It does not mean that REITs or dividend stocks will be crushed then. (see earlier post about S-Reits in 2013 ) In fact, if you look back, S-Reits in general did quite well in last interest rising cycle(2005-2008). I am still optimistic with my income portfolio full of dividend stocks and REITs, as my goal  is for them to generate income, not for capital gain, not primarily. 

But with all the factors weighed and balanced, is it still good time to invest in S-Reits and dividend stocks? Well, it depends on your investment objectives. 

What are your investment objectives? Do you play to win or not to lose? 




To preserve the value(against inflation) of what you already have? 

To generate a regular stream of income to supplement life expenditure? 
To expand your net worth? 
Other goals? Or combination of the above? 


Of course, you will agree with me that it would be good if there is a way to take care of all that. But, is that possible and how to realize that? 


If your investment goal is mainly to preserve capital and to generate regular and stable income, and if your investment horizon is long, it is still suitable to look at S-Reits. But one should be more selective of course. Reits with quality properties that have good earning power with strong sponsors should be preferred.  Debt must be closely examined. One should not be enticed by a few percentage higher yield at this point of time. 

However, if your investment goal is to expand your wealth, Reits may not be the most ideal instrument, at least not for now. But even if the primary goal is capital growth, one may wish to construct a balanced portfolio, so how much shall one allocate among divided counters, risky assets and cash? 

I made a simple calculation. Suppose one need to allocate her asset into 3 categories, 
Asset 1(risky): for capital growth, assume the annual return rate 25% ( how? I don't know. Maybe buy index, S&P500 increased over 30% in 2013) 
Asset 2(income): for Income generation, assume annual yield is 6% with no capital gain or loss, pure dividend play. 
Asset 3(cash): cash, assume annual interest rate is 3% ( it looks ridiculously high as most saving a/c in SG gives less than 0.1%. But you may have heard OCBC 360 Account, if you have not, you want to go to OCBC website to check. ( Disclaimer: This is not an advertisement and I have no interest related at all. ) 




The purpose is to find out the impact of asset allocation to total asset return. As can be seen, with allocation to risky asset fixed, altering the allocation among asset 2 and asset 3(cash) does not generate much difference in total return rate. The difference is even smaller when allocation to risky asset is bigger.

The main point that can be taken away is: If your portfolio's main objective is capital growth, you may wish to leave all the unused fund into cash account and put nothing into pure dividend income account, because allocating fund into income account does not boost total return much, while losing the liquidity offered by cash. Cash is a scarcity when market crushes. 
Think of cash as an buy option, or as of an insurance. The low yield of cash account is the price to pay. My instinct is that at this point of time, one should load cash instead of Reits.

Mature investors typically have large size of capital, short investment horizon and less risk tolerance. Their main objectives are to preserve what they have, and to expect regular income for retirement. Dividend counters especially good reits are surely most suitable vehicle. 

But young investors are usually have less capital, longer horizon and more risk tolerance. Hence, to expand wealth and increase the return on equity/assets, it is better to look at growth opportunities, and not to be engaged too much on pure dividend-play counters. Young investors, if they wish, can take more risks and grow their capital over long time horizon, instead of focusing on pure dividend play. 

The last few years saw many Reits and dividend stock price gone up together with their increasing dividends. But last few years should not be considered as common baseline. We may have to change our expectations for reits in the years to come. Maybe reasonable dividend growth, slow and bumpy price appreciation. 

Again, all depends on your objectives. Do you play to win? or not to lose?

3 comments:

  1. play to win, but don't think too much. in the long run, market will still go up, that's what i believe....we have come a long way from the cave man time to this current tech time and its still advancing.....

    markets will advance upwards in the long run...imo

    visit me when u r free

    paullowinvestmentjourney.blogspot.sg

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    1. Added your links. Thanks for viewing my blog and yr comments

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  2. "In the long run, we are all dead. "

    No one's investment horizon is infinite. It could take painfully long time for a wrong move to recover itself. Besides, in history, many good companies no long exists. Technology advance made them irrelevant. Today's Apple or alibaba may be tomorrow's Kodak or Nokia. Countries and regimes may change, just 50 yrs ago, singapore is not a country. Who knows whether it will still be in 50 years?

    So we must think before moving. Of course, we also need courage to take actions after thinking.

    I don't quite agree with bold optimistic views about long term.

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