This is why some people trade – rather than invest
“Investing should be like watching paint dry or watching grass grow. If you want excitement… go to Las Vegas.”This quote from American economist Paul> READ MORE
“Investing should be like watching paint dry or watching grass grow. If you want excitement… go to Las Vegas.”This quote from American economist Paul> READ MORE
There are plenty of great reasons to own residential real estate – you need a place to live, it’s cheap to borrow money, you get a tax break, and you pay your> READ MORE
In many parts of the world – depending on the period and place – buying a house or flat has the reputation of being a one-way ticket to wealth. Buy, hold, and> READ MORE
To create wealth from investing, you need time, money and a positive rate of return. But maybe not in the combination that Personal Finance 101 suggests. It’s> READ MORE
How do you feel about money? Do you think it’s dirty? That it’s just a little bit… bad? Does liking money, or the things you can buy with it, mean that> READ MORE
Record-low – and negative – bond yields. Stagnant economic growth. Nosebleed levels of economic and political uncertainty. Looming deflation. Meanwhile, some> READ MORE
In an investment world suffering from thirst because of zero interest rates, real estate is cool water. As we’ve written recently, government bond yields in many> READ MORE
Sovereign wealth funds (SWF) are like a country’s savings account. They’re money a country doesn’t need right now that’s saved for a future rainy day. And> READ MORE
“Investing should be like watching paint dry or watching grass grow. If you want excitement… go to Las Vegas.”
This quote from American economist Paul Samuelson sums up the difference between investing and trading – investing is for the patient… trading is for those who want more excitement as they search for profits.
Any kind of investable asset, whether it’s individual stocks, stock index ETFs, bonds, commodities or foreign exchange, can be held as a long-term investment or traded for short-term profit. The major difference has to do with how long you hold on to the asset.
Traders will buy an asset and hold it anywhere from a few seconds to a few weeks. Over the last decade or so, and thanks to the exponential growth in computing power, a growing number of traders – called high-frequency traders – hold positions for only fractions of a second. Some of these traders even make use of algorithms to automate their trades.
All types of traders have one main objective – to make short-term gains on an investment, then sell it and move on to the next idea.
Different types of trading strategies
Some are momentum traders who look for assets that are making a major move up or down and have a large number of shares trading hands, or high trading volume. They hope the momentum will continue, and they hold the asset until the price reaches a pre-set level – which can take minutes or an entire trading day.
Technical traders look for patterns or trends in stock, bond, index or currency charts. They then make trades based on what those same patterns have done in the past. They may not know anything about the asset they’re buying or selling. Their decision is only based on what the chart looks like.
The patterns may have names like a “double-bottom,” a “V-reversal,” a “head and shoulders top” or a “rounding bottom.”
Day traders are often technical traders – they may look at various charts and indicators before the markets open in the morning. They’ll then make trades throughout the day to try and profit from how they hope the chart will look later in the day.
Other technical traders will hold an investment for several days or several months. Investors will also use technical research to make long-term investment decisions, but they usually base the decision on long-term charts that show longer-term patterns, not just on what happened the day or month before.
There are also fundamental traders. They base their buy and sell decisions on an asset’s fundamentals – things like earnings, profits and debt levels. The short-term fundamental trader may buy or sell a stock based on what an upcoming company earnings report will say or an anticipated acquisition.
Since a change in company fundamentals can take time to significantly affect a stock price (although a surprise change in fundamentals, like when a company doesn’t make as much money as analysts expected, will have an immediate affect on the share price) fundamental traders often hold a position for several days or weeks.
Trading isn’t for everybody
Being a short-term, active trader can be a lot of work and very stressful. We’ve known quite a few bright people who thought they would do some day trading in the morning, make $1000 by noon and take the rest of the day off. But they soon discover that doing that day after day is not that simple – and you can just as easily lose $1000 by noon if you’re on the wrong side of a trade.
That said, many investors who do make a living as traders – but they know what they’re getting into. And that being a successful trader takes more hard work than luck.
Successful traders have three things in common: they choose one short-term trading strategy (like momentum, technical or fundamental, mentioned above) and stick with it, they take a disciplined approach… and they have nerves of steel.
Three keys to disciplined trading
A disciplined approach to trading involves the right mix of assets and knowing how to set your position size and stop-loss levels.
Many would-be traders put a lot of time into researching what stock to buy. But they hardly give any thought to how many shares they should purchase. Knowing your optimal position size is vital to a well-thought out investment strategy. The amount to buy should be determined, not by how much money you want to make, but how much money you can handle losing.
To help determine your position size, you also need to know your stop-loss levels. A stop-loss, or trailing stop, reflects the most amount of money you’re comfortable losing on an investment. So, if you don’t want to lose more than 25 percent of your position on a stock, you set your stop-loss price at 25 percent below the price you paid for the stock. So, if you paid $20/ share, your stop-loss level would be $15 ($20 – 25%).
As the share price moves higher, and you now don’t want to lose more than 25 percent based on the new higher price, you would establish a trailing stop level. So, if that $20 stock has moved up to $25, your trailing stop level would be 25 percent below that – or $18.75 ($25 – 25%). If the price goes to $30, your trailing stop would be $22.50, and so forth.
Now, you can use your stop-loss target to figure out your position size.
Let’s say you’re buying the $20 stock and you couldn’t handle it if the share price dropped below $17. So, $17 would be your stop-loss level.
Now, consider how much of a paper loss (that is, how much it’s gone down on paper, before you crystallize the loss by selling the position) you can handle. With a $100,000 portfolio, you may feel that a $2000 loss will make you nervous. So, simply divide $2000 by that $3 per share loss you decided you could tolerate ($20 – $17 = $3), and you get your position size. In this case, that would be 667 shares.
Here’s the basic formula (this is just one out of dozens available) and a table to illustrate:
(Maximum $ Risk)/ (Current Stock Price – Stop Price) = Position Size
Asset allocation and risk management
The other part of being a disciplined trader is to know what asset allocation is best for you. Asset allocation refers to the mix of stocks, bonds, cash and other assets in your portfolio. Some say asset allocation is the number one factor affecting investment returns.
For instance, it’s a terrible idea to use all your savings to “play the market” as a trader. The prudent thing to do would be to just use a portion of your overall portfolio to trade – and leave the rest as a mix of good long-term investments, like dividend paying stocks, bonds, cash and some gold.
For the portion you do want to use to trade with, make sure you spread your exposure around a few different sectors. For example, you probably wouldn’t want to just trade energy company shares or make short-term foreign currency trades. Instead, get familiar with a few different sectors so you can make informed trades in any of them. That way, if one sector tanks your entire trading portfolio won’t go down the drain.
And even if it does, because you’ve “diversified your assets” by having the rest of your portfolio in long-term investments, it will be a little less painful.
This article was sponsored by IG. All views expressed in the article are the independent opinion of Truewealth Publishing.
There are plenty of great reasons to own residential real estate – you need a place to live, it’s cheap to borrow money, you get a tax break, and you pay your own mortgage instead of someone else’s.
But there are also bad reasons to own real estate. They’re misleading and deceiving and can lead to life-defining bad decisions. Here are two of them.
1. “There’s no better way to get rich than real estate.”
Dozens of “buy real estate today with nothing down and own twenty apartments tomorrow” seminars will tell you this. And real estate allows for leverage (that is, borrowing) that can amplify your returns (as well as your risk). Some countries offer big tax incentives for real estate buyers.
But as we wrote a few weeks ago, a house or apartment often generates returns that are lower than those of the stock market. Since 1975, stock market returns for the S&P 500 have far outstripped those of real estate. Hong Kong property similarly underperformed the Hang Seng. Only in Singapore did residential real estate appreciate more than the stock market over the long term.
So in fact there is another, better way to get rich besides real estate. It’s called the stock market.
2. “I love collecting rent every month”
Yes, collecting rental checks is nice. But you can earn potentially higher monthly payments – without all the headaches of being a landlord.
The table below shows gross rental yields for various residential real estate markets. Some of them look quite attractive… until you realise these are before maintenance fees, ongoing expenses and taxes. Once fees and taxes are factored in, some of these yields get pretty close to zero. (Please note that this is national data – local data can of course vary considerably.)
Another way to earn a steady monthly income is by investing in dividend paying stocks, bonds or REITs (real estate investment trusts). You have to pay taxes on that income as well, but depending on where you live, it can be a much lower tax bracket than rental income.
There are also no maintenance fees, no late-night clogged-toilet calls to take care of, or “the power went out” texts to disturb you. And it’s a lot easier to sell a stock than it is to sell a rental property.
As you can see below, you can often earn higher yields from these investments than from being a landlord (except bonds at the moment).
The best reason to own real estate today is for diversification – to diversify your income and assets. But real estate isn’t the sure path to riches some claim it to be.
In many parts of the world – depending on the period and place – buying a house or flat has the reputation of being a one-way ticket to wealth. Buy, hold, and be rich.
That’s worked for some generations, in some countries – including in much of Asia. But residential real estate’s reputation in many parts of the world as the ultimate wealth creator is often just wrong. In many markets, stocks do a lot better.
There are plenty of good reasons to own residential real estate. You need someplace to live, and you get tired of paying rent. You can borrow money for almost nothing. You can use your retirement money for a down payment. You saw your parents and grandparents grow rich by buying real estate when they were young. You like the tax advantages (in some countries) of owning real estate. You like cashing the checks that your tenants send you.
But owning a house or apartment, or several of them, often generates returns that are lower than those of the stock market. The chart below shows the long-term returns for the Singapore, Hong Kong and U.S. housing and stock markets. (Stock market results do not include dividends, and housing prices are nominal returns.)
Stock Market vs. Real Estate (R.E.) Performance
The U.S. and Hong Kong stock markets win hands down when compared to house prices over time. It’s only in Singapore where owning a house instead of stocks has made more money.
The U.S. stock market rules
For the U.S. market, the results aren’t even close. The S&P 500 has averaged an 8 percent annual return since 1975. U.S. house prices have earned just 4.8 percent a year since 1975. In fact, over nearly every decade, the S&P 500 does better than housing.
The only decade when housing did better encompassed the recent housing bubble, from 2000 to 2010. Even accounting for the sharp decline in the last two years of that period, U.S. housing prices still outperformed the S&P 500 for the decade.
So far this decade, the U.S. stock market is ahead once again. And for the past 40 years, it would have earned you almost 4 times as much as U.S. residential real estate.
Hong Kong – stocks win again
Hong Kong house prices have done much better than U.S. housing prices (Hong Kong house price data since 1980). But since 1980, Hong Kong real estate (up about 1,500 percent over the period) has trailed Hong Kong’s Hang Seng stock index (up nearly 2,700 percent).
And only since 2000 have Hong Kong house prices started to catch up to stock market performance. During the 1980s and 1990s the stock market was unbeatable. Since 2000, Hong Kong housing has performed much better.
But residential real estate has beaten stocks in Singapore
Since 1980, Singapore real estate has generated better returns than Singapore-listed stocks. It’s the exception in the three markets we looked at.
Singapore house prices have averaged 6 percent annual returns since 1980; stocks have only returned 5 percent a year (based on data from Datastream and the Straits Times Index). But stocks did better than housing in the 1980s and the 2000s. It was Singapore’s hot property market in the 1990s that made the difference. But so far this decade, neither house prices nor stock prices have done well.
Real estate should be part of a well-diversified portfolio. But not at the cost of investing in shares.
To create wealth from investing, you need time, money and a positive rate of return. But maybe not in the combination that Personal Finance 101 suggests. It’s never too late to start saving – and even if you’re starting late, you could be in better shape than you think.
Two hypothetical – and simplified – savers, Lee and Ann, will show how.
Lee – the slow, steady saver
The day Lee is born, his parents start to invest $100 for him every month in a special investment account that yields 5 percent (during a period when zero and negative interest rates are as foreign as chicken rice on Mars). For 60 years, they make a deposit every month, and interest builds every year.
So at the end of 60 years, Lee’s parents invested a total of $72,000 ($1,200/year). Thanks to the magic of compounding, when the interest earned is reinvested and starts earning more interest, Lee’s account balance after 60 years (he never touches it) stands at $424,300.
During those 60 years, Lee takes the scenic route through life. He doesn’t save a penny. On the day he starts his seventh decade, he’s the proud owner of absolutely nothing. But he also owes nothing. So his net worth is solely the account that his parents started for him when he was born.
This is a (very) simplified version of one of the foundations of personal finance: Start saving early, even if it isn’t very much. Skip the cappuccino, put the kids in bargain basement castoffs instead of Nikes, and keep your iPhone 4 in a world of iPhone 6’s. Take a short flight to Phuket or Orlando (depending on where you are), rather than a luxury cruise to Tierra del Fuego.
But a life of sacrifice doesn’t suit everyone. More importantly, it doesn’t have to be that way. For many people, the structure of lifetime earnings is very different. Compounding works, especially over longer periods of time. But it’s not the only way to build wealth.
Ann starts late – but makes it up
If you know early on that you’re going to take Lee’s career route, you’d better start saving early. But many people are more like Ann.
Ann’s parents didn’t open an account for her at birth. They bring her up and put her through school and let her figure out how to earn a living. So Ann gets a job and rises through the ranks.
Ann isn’t a good saver. She fancies Jimmy Choo and Kate Spade, and bright cars that roar. She gets a puffy coffee beverage every day and doesn’t even learn how to use her own stove. By middle age, she owns nothing – and owes nothing. She’s like Lee, but without a parental safety net.
Unlike Lee, Ann has been building her “personal equity.” She has a career and her earnings are rising every year. On her 45th birthday, she changes course and resolves to save $20,000 every year until she’s 60 (totalling 15 years of savings). She also earns a 5 percent return on her capital, compounded annually.
Ann banks a total of $300,000, and thanks to compounding, by the time Ann is 60, she has a net worth of $431,500, very close to Lee. Ann starts four and a half decades after Lee, so the power of compounding has much less time to work for her. But she saves a lot more. And Lee and Ann get to about the same financial place by the time each of them turns 60.
Ann isn’t so unusual
Ann’s scenario happens all the time. Saving when you’re younger is difficult for many people. Eventually, your kids leave home, or finish university, and suddenly you have more money to spend. Or the flat or house is paid off and the monthly mortgage bill vanishes. Or an aunt or a parent passes and leaves a small bundle. (In Hong Kong, 70% of adults expect to leave an inheritance and the average amount left behind is US$146,000.)
Or you get a raise at work, and decide to put off the five-star holiday or the new car or the bigger house in favour of starting a nest egg. Whether it’s a lump sum or an accelerated savings plan, it can save the Anns of the world.
In Asia, many entrepreneurs spend decades building up their businesses and paying themselves very little so that they can reinvest in their business. When the business is ready to be sold or passed on, the founders will be older – and will suddenly have a lot of money on their hands.
It’s never too late to start saving. Saving a big chunk of money later in life is a realistic scenario for a lot of people – maybe more realistic than saving a regular amount every month starting from a young age. If the amount you’re able to save later on is large enough, it can compensate for less time to compound (and a lower savings rate).
If you’re middle-aged and haven’t really had a chance to save much yet, you can start right away and still retire comfortably. It’s never too late to start creating wealth.
How do you feel about money? Do you think it’s dirty? That it’s just a little bit… bad? Does liking money, or the things you can buy with it, mean that you’re selfish and greedy?
If any of this rings a bell with you, bad news: You’re probably never going to be rich. If on some level you don’t like money, you’ll probably never have a lot of it.
That’s because your emotions will get in your way. If you think money — and being rich — is “bad,” it means that you don’t really want it. There’s a voice in your head — maybe you can hear it, maybe you can’t — that’s going to stand in your way.
For a lot of people, money isn’t important. They have other goals in life, whether it’s Baroque art or finding the perfect wave or eating their way across Asia, that don’t require much cash. And that’s fine.
But if you’re not like that, and if you want money, don’t get in your own way. We’ve written a lot about how your emotions can get in the way of making good investment decisions. But not liking or being afraid of money is probably the biggest barrier to wealth of all. And it’s one you might not even recognise.
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On some level, all of this might sound silly. Who doesn’t like money (especially if you’re a subscriber to an e-letter about investing)? But ask yourself if you have these sorts of thoughts about money…
You might have picked up these beliefs — or any of dozens of similar feelings — from your childhood, from your faith, from your parents, from your friends, or anywhere else. Ask yourself: Why do you hold these beliefs? Are they something you actually feel strongly about? Or are they something you’ve grown up with that you’ve never really thought about much?
If you believe some of these things about money, and you embrace it as part of you, congratulations. You know who you are. And you’ve accepted that you’ll probably never have a lot of money. And if somehow you do acquire a lot of money, you’ll probably wind up feeling badly about it, as if you don’t deserve it, and that you don’t really want it.
But if you don’t see the point of letting your brain get in the way of having money try this: Decide what you really believe about money. Is money OK? Is it alright to want money? Is there a good reason that you should not have money?
Don’t get me wrong. By itself, a positive attitude won’t get you far. Just deciding that you’re OK with wealth doesn’t mean you’re going to become a money magnet. Making money takes time, effort, sweat and work.
I can guarantee that rich people don’t have mixed feelings about money. Alibaba chairman Jack Ma, one of the richest people in Asia, doesn’t feel badly about being rich. Warren Buffett doesn’t frown at himself in the mirror every morning because he’s one of the world’s wealthiest people. Billionaire hedge fund managers got rid of their bad feelings about money a long time ago — if they ever had any in the first place. Rich people don’t feel badly about money. They wouldn’t be rich if they did.
But a first step is to make sure that your brain isn’t working against you. So if you think that you’d like money… but you’re somehow afraidof it or think it’s bad, you’re just fighting yourself. You need to stop and think about your real attitude. And either embrace it… or start with a clean slate that says, “Money is good.”
Record-low – and negative – bond yields. Stagnant economic growth. Nosebleed levels of economic and political uncertainty. Looming deflation. Meanwhile, some stock markets – most notably, the U.S. – are hitting record highs.
As we’ve written before, if you really want to know what’s happening in the world economy you need to look at what the bond market is saying. But these aren’t normal times, and looking to the bond market for guidance is, well, misguided.
What falling bond yields usually mean
Under normal circumstances, falling government bond yields often signal trouble. (Bond yields and bond prices move inversely – when one rises, the other falls, and vice-versa.) This is partly because when more investors feel the economy is headed for trouble (and/or they think that stock markets will fall) they buy bonds. Government bonds usually weather economic storms better than most investments.
When there are a lot of bond buyers, bond prices go up – as with anything where there are more buyers than sellers. When bond prices go up, bond yields fall. So when you hear that bond yields are at new lows, it means bond prices have gone up.
Right now, government bond yields all over the world are at historic lows. As we’ve explained before, some have even gone negative. What this means is that there are a lot of investors buying bonds. But in this instance, the signal the bond market is sending isn’t at all clear.
What the yield curve is saying
As we explained before, when the yield on 10-year U.S. government bonds, or treasuries, drops below the yield on shorter-term U.S. Treasuries, it’s called an “inverted yield curve.” This almost guarantees a recession is coming.
Even though 10-year U.S. Treasury yields are the lowest they’ve ever been, the yield curve has not yet inverted. That’s because 2-year Treasury yields are also at historic lows. Short-term yields, like for 2-year treasuries, are so low it might not be possible for the yield curve to invert.
But the spread (that is, the difference) between the two is shrinking, which is not a good sign. When we wrote about the yield curve in February, we noted how the spread between the two had fallen below 1 percent for the first time since the 2008 financial crisis.
The spread has narrowed even further since then – the 10-year yield is now only 0.86 percentage points higher than the two-year yield. This is also normally not a good sign. Because of this, Deutshce Bank analysts recently said that they think there’s a 60 percent chance that the U.S. economy will fall into recession within the next year.
But bond yields may not be the reliable indicator they once were
But despite the danger that comes with saying that “this time it’s different”, there is a big difference now compared to what’s usually the case. The difference is quantitative easing (QE), which has turned the world of finance upside down.
The U.S. spent US$3.5 trillion on U.S. Treasuries, or government bonds, and other debt instruments like mortgage-backed securities during its QE programmes that ran from November 2008 to October 2014. The goal was to buy so many bonds that bond prices would climb and stay high, which would force bond yields, and borrowing costs, lower. (This, in turn, was to help spur borrowing, and thus, economic growth.) And in this respect, it worked spectacularly.
Japan and Europe joined the QE party, with the European Central Bank (ECB) currently buying 80 billion euros (US$88 billion) worth of securities each month, mostly government bonds. And they plan on doing this until at least next March, on a programme that will total over US$1 trillion.
The Bank of Japan (BOJ) has officially said it will spend US$750 billion per year on its QE programme (some say it is spending more than that). The BOJ now owns about one-third of all outstanding Japanese government debt.
Then add that to the US$3.5 trillion already spent by the U.S. Fed for its QE programmes, and the sharp decline in bond yields in recent years makes sense.
Importantly, this is all additional demand – besides the normal demand for bonds from pension funds, banks, insurance companies and asset managers.
And since many governments don’t want to take on more debt than they already have (which is also at record levels), there is a falling supply of new bonds to buy in some countries.
In fact, according to Bloomberg, the ECB may soon run out of German bonds to buy because the negative yields on a growing number of German bonds are ineligible for purchase under their QE programme. This will only force it to buy, and drive up the prices of, other eligible bonds.
What it all means
Bond yields have declined partly because trillions of dollars of QE money are being used to buy bonds at just about any price. Additionally, investors – fearful of the uncertainty of Brexit, the scope of an economic slowdown in China, and many other factors – are buying U.S. Treasuries in a “flight to safety,” despite low yields.
Falling yields could be another symptom of the “everything bubble” that central banks around the world have inflated. Everything from bond yields to stock markets to real estate are at historic levels because of low interest rates and easy money.
As concerning as the recent fall in bond yields has been, it may not be the reliable indicator it once was. In the past, falling bond yields were a good signal the economy was heading for trouble. But it’s hard to trust this indicator now, when there’s so much noise and capital chasing bonds.
But rock-bottom yields mean that things aren’t right – whether it’s a recession or something else coming soon.
Investors who think that bond yields will continue to contract – and that U.S. Treasuries will be the next to pierce the negative interest rate horizon – might consider the iShares 20+ Year Treasury Bond Fund (New York Stock Exchange; ticker: TLT), an ETF that tracks the price of 20-year U.S. Treasuries. It’s up 20 percent over the past year, and 7.4 percent over the past three months.
But betting on the continuation of a multi-decade bull market in bonds, at this late date, is a risky trade.
In an investment world suffering from thirst because of zero interest rates, real estate is cool water.
As we’ve written recently, government bond yields in many markets are negative, or at historically low levels. This is due in part to quantitative easing efforts by central banks, and a “flight to safety” by investors eager for certainty – even if the “certainty” is that they’ll lose money in government bonds.
As a result, the yield on a ten-year U.S. Treasury bond is now at 1.48 percent. For Japan and Germany, 10-year bonds now have negative yields. And in Switzerland, all government bonds that mature within the next 30 years pay negative interest.
Singapore and Hong Kong bonds aren’t much better
Singapore’s government bonds are not in the negative yield club yet. But they are at historic lows. Right now on a 10-year government bond, Singaporeans will earn just 1.75 percent a year for the next ten years. Hong Kong’s bond yields are at historic lows, too. A ten-year sovereign bond is paying just 0.85 percent.
Extremely low bond yields are a problem for investors searching for income. They don’t want to earn (literally) less than nothing owning government bonds. Real estate is one answer.
Real estate vs. bond yields
In a recent study, commercial real estate giant Colliers International suggested that the Asia Pacific real estate market may benefit from Brexit. This is in part because Great Britain’s exit from the EU may result in more market uncertainty and a “flight to safety” by investors, and thus lower bond yields.
This may push some investors to look more closely at real estate as an investment option for yield. (Also, of course, lower interest rates make borrowing cheaper – which helps boost real estate returns.)
Lower government bond yields make the yield on rental properties that much more attractive by comparison. The table below shows the spread, or difference, between 10-year sovereign bond yields and the yield earned on real estate investment trusts, or REITs.
REIT and Bond Yield Spreads
A REIT is a publicly traded company that owns a collection of properties that produce rental income. Most of this rental income is then paid out to REIT shareholders in the form of a dividend. You can buy and sell REITs like a stock, paying just the brokerage transaction fees.
The income earned on a basket of investment properties – as reflected in the Hang Seng REIT Index – yields 4.9 percentage points more than a 10-year Hong Kong government bond. For Singapore, it’s a difference of 3.9 percentage points.
Lower for longer
Thanks to Brexit, interest rates will probably stay low for longer than many investors anticipated. The U.S. Federal Reserve, America’s central bank, will likely delay its next interest rate hike in part because of the economic uncertainty that came with the Brexit vote.
Because Hong Kong’s dollar is pegged to the U.S. dollar, Hong Kong’s interest rate policy follows what the U.S. does. That will keep lending rates down, real interest rates negative, and property prices high.
The Singapore dollar is not pegged to the U.S. dollar, and its central bank doesn’t adjust interest rates as part of its monetary policy. But, rates in Singapore generally mirror what’s happening in the U.S. So, as long as U.S. rates stay low, Singapore rates will stay low as well.
The REIT way to buy real estate
REITs are a low-priced and convenient way to buy real estate, and earn a far higher yield than government bonds, or many other yield-generating assets. But a REIT carries a lot more risk than owning a government bond. U.S. Treasuries, or government bonds, are viewed as “risk-free” – there’s virtually no chance of default.
REITs, though, trade like a stock and their prices fluctuate – and they could cut their dividends. And any increase in interest rates could hurt the dividend – and share price.
There are a number of REITs listed in Singapore and Hong Kong, but no good way to buy a basket of them. Besides the FTSE Straits Times REIT Index (noted in table above), the Singapore Stock Exchange (SGX) has a REIT index. It tracks 34 REITs that own everything from shopping malls to office buildings to residential properties. It has a yield of 5.8 percent, but is not available as an ETF. (The full list of the REITs that make up the index can be found on the SGX website.)
The Hong Kong Exchange has 11 listed REITs, 5 of which deal exclusively with mainland China property. The full list of Hong Kong-listed REITs can be found on the Hong Kong Exchange website.
If you would rather own a basket of REITs, instead of just picking one or two to invest in, you can try a U.S. REIT ETF. The yields on U.S. REITs are a little lower, but it will still give you some exposure to the real estate sector – and a higher yield than government bonds. One of the most popular is the iShares U.S. Real Estate ETF (New York Stock Exchange; ticker: IYR). It currently yields 3.6 percent and tracks a basket of U.S. REITs.
Sovereign wealth funds (SWF) are like a country’s savings account. They’re money a country doesn’t need right now that’s saved for a future rainy day. And although SWFs control trillions of dollars, individual investors can still learn a lot about portfolio management from them.
As of December 2015, there were 79 SWFs around the world, managing US$7.2 trillion, according to the Sovereign Wealth Fund Institute. That’s more than all the world’s hedge funds and private equity funds combined. And it’s more than double the US$3.4 trillion controlled by SWFs at the beginning of 2008.
Out of these 79 SWFs, 45 of them, or 57 percent, are funded by oil money. Four of the five largest SWFs (worth about US$2.5 trillion) belong to smaller countries with huge oil reserves – Norway, Saudi Arabia, Abu Dhabi and Kuwait. When the price of oil was a lot higher than it is now, their SWFs got bigger and bigger. They put aside some of the revenue from the sale of oil to use when the cycle turned, or for when their oil might eventually run out.
Lesson: The basic idea behind a SWF is to save when times are good, so money is there when times are bad. Investors – and everyone, in fact – should do the same. Savings equal wealth, and when those savings are invested properly they will grow over time.
With oil dropping to around US$30 per barrel, many of these SWFs are shrinking. In 2015, the value of all SWFs declined for the first time since 2007. SWFs in countries that rely heavily on oil saw their values drop by US$34 billion in 2015.
Their assets fell for two reasons. First, the poor performance of markets and asset classes around the world – in which SWFs are invested – has hurt their performance. Second, with less oil money, but the same expenses, some countries have started withdrawing from their SWFs to cover the shortfall. And it hasn’t helped that with lower oil prices, inflows into SWFs have fallen.
For example, the Saudi Arabian Monetary Agency Foreign Holdings, the world’s fourth largest SWF (valued at US$628 billion in November 2015), had to withdraw US$70 billion from its fund over the past year – some say the real number is more like US$100 billion – to help cover the government’s budget deficits.
Norway has the world’s largest SWF, thanks to the country’s massive North Sea oil deposits. It was valued at US$900 billion at the end of 2014, but as of this month, it has dropped 11 percent to US$794 billion. In October 2015, Norway said it would have to dip into its SWF for the first time to make up for lower oil revenues.
Lesson: SWFs use their savings when they need them. If it makes more sense to use up cash than to take on debt – say, if the money earned on investments is less than the interest paid on debt – they’ll use it instead of going into debt.
For individual investors, it’s OK to spend money when needed. If you have some money saved, it makes more sense to spend it than to use credit cards or high-interest debt to pay the bills.
Another lesson: SWFs may need some cash right now, but they’re very long-term investors. They plan for generations down the road, not just a few months or a few years. Their long-term plans haven’t changed.
Investors also need a long-term plan that shouldn’t change when the markets fall. Don’t get distracted by all the market noise and make bad short-term decisions.
About 81 percent of SWFs invest in the stock market. The 39 biggest SWFs own about US$2.5 trillion in shares, or about 45 percent of their assets.
SWFs are also big bond market investors. Around 86 percent of SWFs own bonds (as of 2014). And for the same 39 biggest SWFs, bonds account for 29 percent of their portfolios – that’s more than US$1.5 trillion invested in bond markets.
Because of their size, what SWFs do with their investments can affect markets all over the world. In fact, some say the current market turmoil is partly due to SWFs being forced to sell stocks to free up cash they may need to withdraw as they adjust to lower oil prices.
Lesson: SWFs are well diversified. As the chart shows, most SWFs invest in stocks, bonds, infrastructure and real estate. They don’t just own property or hold cash and gold. For example, Norway’s SWF owns shares in around 9,000 companies in 75 countries, and is a major real estate investor around the world.
Individual investors should do the same. Don’t just invest in one type of asset. Diversify to have a mix of stocks, bonds and real estate. There are even some funds you can buy that focus on infrastructure, just like a SWF. And real estate investment trusts (REITs) are an easy way to gain more exposure to the real estate market.
Sovereign wealth funds operate on a scale way beyond what most people can comprehend. But the way they handle their portfolios has good lessons for investors.
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