Last Saturday, I was invited by SGX Regular Shares Savings event to present to over hundreds of young investors who were very eager to kickstart their investing journey.
The topic I was sharing was portfolio building through the use of stock ETF and bond ETFs. This is a very simple idea for investors who like to DIY their investment to achieve decent returns without spending too much effort.
You can even save the fees from using online platforms like robo advisor. So it’s a bit like saying “No thanks to robo advisor cause you can do it by yourself.”
So here’s the write-up & slides in case you missed my talk last week!
- If you just started to have a regular income but yet to have a pool of money to invest, you can look at RSS to sock away a part of your salary to investments. And you can achieve 5% – 10% returns by building a stock-bond portfolio.
- Principle #1: Build a stock-bond portfolio to achieve safe and reasonable returns of 5% – 10% depending on your allocation and market conditions. Stocks generally produce higher returns but riskier compared to bonds which have lower returns but safer.
- Principle #2: Choose the losses you are willing to swallow and the gains would take care of itself. Refer to the chart below!
- Principle #3: Rebalance at least once a year (preferably your birthday). This helps you realize your gains and maintain your target stock-bond allocation.
- When looking at ETFs, look at those with low expense ratio, large fund size and Cash ETFs (instead of synthetic).
First… let us define the meaning of portfolio (for complete newbies)
It’s a combination of stocks and/or bonds you accumulate.
Just like how it takes both ingredients – chicken and rice to make a delicious plate of chicken rice… you need both stocks and bonds to build a profitable portfolio.
It’s just that simple.
Now, let’s jump into the meat of the content:
Principle #1: Build A Portfolio Consisting of Stocks and Bonds
Before you even start investing, you might want to ask yourself a simple question:
“How much can you lose if the stock market goes down?”
The higher this number, the higher your risk tolerance.
And the lower this number, the lower your risk tolerance.
The question is crucial because most investors typically burn their fingers because they overestimate their upsides (potential gains) and underestimate their downsides (risks).
If you want to be profitable, you’ve got to manage your risk very carefully – invest safely and then gains will follow.
Once you get clarity on your risk tolerance, you can start determining the % allocation of your stocks-bonds.
If you can’t tolerate a lot of risks, I’d advise that you allocate more of your portfolio to bonds.
Also, do consider that the stock market performs inversely to the bond market most of the time (e.g. when stock market tanks, usually bond markets will do well)
Principle #2: Establish your bond-stock allocation. Choose the losses you are willing to swallow from the chart.
Most traditional investing experts would recommend that you allocate more of your portfolio to bonds as you grow older. That means if you’re 30 this year and you’ve 30% of your portfolio in bonds, you might want to look at raising that percentage to 35% 5 years later once you hit 35.
Of course, this is a recommendation – not a hard-and-fast rule.
But always be clear of how much can you afford to lose.
If you can only stomach a 30% loss, you should put 70% in stocks and 30% in bonds. If you can stomach only 10% loss, you should have 20% in stocks and 80% in bonds.
Principle #3: Rebalance at least once a year
Now you probably have heard of this phrase:
What’s get measured, gets improved.
You should review your portfolio performance at least once a year. The important action to take is to rebalance your portfolio.
Rebalancing helps you to realise your capital gains every single year.
You can’t expect to build a portfolio once and let it run – it’s not a Robo-Advisor or some algorithmic investing machine.
Don’t worry. Rebalancing is not cheem at all.
Lemme run an example with you:
Let’s say you built a portfolio with 50-50 allocation to both stocks and bonds.
At the end of the year if you’ve 60-40 allocation to stocks and bonds (e.g. your stocks outperformed your bonds and made 10% gains).
Bearing in mind that stock market usually performs inversely to bond markets, you rebalance your portfolio by selling the 10% increase in stocks at a high and buying an additional 10% in bonds on a low.
Can you see how exactly it’s helping you buy low, sell high?
Of course, I used a 50-50 stock-bond portfolio allocation – you can apply this rebalancing strategy to your own personal portfolio ratio.
One thing to remember is:
You MUST at least rebalance once a year
Just like how companies have their AGMs, or organisations have their annual financial audit…
It’s necessary for you to review your portfolio annually so you know how much gains exactly you’ve made.
Alright. These are the 3 principles to managing a profitable portfolio.
Now, I’m sure as a new investor, you might not be comfortable with picking specific stocks or bonds.
That’s why I’d usually advise new investors to go with ETFs.
However, not all ETFs are safe – buy the wrong index and you can see your money burst into flames.
When you’re looking for good ETFs, pay attention to:
- ETFs with lower expense ratio, the lower the better.
- ETFs with Bigger fund size. Bigger ETFs have lower expense ratio since they have better economies of scales which allows them to lower their index fees. Also, the bigger the fund size, the better the longevity of the fund.
- Always pick Cash ETFs over synthetic ETFs. Cash ETFs are ETFs which are invested directly into the assets that make up the index (stock/bonds). Synthetic ETFs involve the use of derivatives like contracts or options to replicate the index they’re following. As a beginner, you should avoid Synthetic ETFs.
- Fund manager’s reputation – always check the reputation and credibility of the fund manager before you buy into the ETF. The reputable ones in the local market are Nikko AM and Phillip
- Index reputation – Avoid the niche indices and go with the mainstream indices like FTSE (Financial Times Stock Exchange), MSCI (Morgan Stanley Capital International) and SPDR.
Portfolio Building Walkthrough With 2 Examples
I also offered some examples of how you can build your own portfolio using ETFs listed on SGX. The examples are built based on a 70% stocks and 30% bonds portfolio. You can tilt the portfolio focus by geography or yields:
This is a classic Singapore portfolio involving the STI ETF and ABF Bond ETF. STI consists of the top 30 Singapore listed blue chips while the ABF Bond ETF invests mainly in Singapore Government bonds.
This portfolio takes a wider geography exposure to Asian stocks and bonds. This is beyond just investing in Singapore.
You can also add more ETFs if you like. Considering 70% is allocated to stocks in this example, one can split the stocks exposure to two ETFs. A REIT ETF might be interesting to some people especially if they like properties and dividends.
This last example tilts the portfolio to higher dividends and interests. There are ETFs like Phil Sing Inc ETF that invests in dividend-paying stocks in Singapore without being too concentrated in REITs. This would bode well with investors who prefer more diversification. The bond component could also be enhanced for higher interest by going with the iShares Asia High Yield Bond ETF but it would come with higher credit risk.
That’s all! I hope the above provides you some vulnerable insights to start your investing journey.
If you like the strategy I shared with you above and want to achieve even better returns safely with minimal effort, I’d like to invite you to my upcoming Factor Based Investing workshop. It is free and I’ll be sharing many real-life case studies of a very systematic investing approach that you can use for finding profitable stocks.
Co-Founder. Believer of the Factor-based Investing approach. Running a Multi-Factor Portfolio that taps on the Value, Size, Profitability and Momentum Factors. Quant at heart. Believe the financial industry can treat their customers better. Wants to change the world.