Friday, December 15, 2023

Portfolio Strategies to Build Wealth

This article was first posted on

There is an interesting book published in 2020 called the Psychology of Money written by Morgan Housel who was a financial analyst and fund manager. He wrote about simple strategies and how wealth is best compounded over time. There is no need to complicate things and most importantly, we need to just save up and invest simply - like buying the S&P500. Then time will take care of everything else.

"Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he's been a phenomenal investor for three quarters of a century. $81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday. His skill is investing, but his secret is time." 

- from the Psychology of Money by Morgan Housel

Successful investing may not be about stock picking, or following market news and trends, or all the complicated stuff the investment world likes to do. It is time and discipline, it is not making investment mistakes over that long period of time.

The following is a good quick review for the Psychology of Money:

While we already know all this, reading the book made me think very hard about how what we have been doing so far can be even more useful. We have analyzed more than 10 ideas, mostly stocks of companies, some mid caps, covered by analysts. Some Singapore names with little coverage, which could useful to investors in our Little Red Dot. Some really large cap, like Google / Alphabet. A lot of people have written about Google. This infosite won’t be the last to analyze Google. So, how do we make the impact most useful to our defined audience.

For some of us, like Taylor Swift, things can grow so big and the audience becomes everyone. For this infosite though, the target audience could be young to middle age adults looking to build wealth. Analyzing stocks would play only a small part. As such, we need to better redefine how to help young adult build wealth effectively.

We need simple and yet effective investment strategies.

The market is efficient. 80% of professional fund managers cannot beat indices like the S&P500 or the MSCI indices i.e. the generate less returns than market returns. Warren Buffett once said that the CEO of Vanguard, John Bogle who popularized index funds and then ETFs did more than he could ever do for investors. So investing in ETFs should be an integral part of every investor’s portfolio, especially young families’ investment portfolios.

The traditional investment portfolio starts with 60% into stocks and 40% into fixed income instruments. This utilizes diversification and has generated stable long term returns for institutional investors such as endowment funds, insurers and mutual funds. As individuals, we could also benefit from this simple strategy.

Fixed income returns are very attractive today (think short term US Treasury Bills generating 5% and Singapore 6 month Treasury Bills generating 3.8% risk free), therefore, for me, the right starting mix could be: 

  • 40% fixed income with Singapore 6-month Treasury Bill as the base and then building up from here 
  • 40% stocks with S&P500 ETF as the base and build from here
  • 20% risk taking activities including single stocks (such as those we discussed on this infosite) and other investments

We can tweak each category to suit our own needs. If you are more conservative, you can do 50% fixed income. For some, risk taking could be 30%. To each his or her own. Let’s dive into each of these categories.

1. Fixed Income

We have spoken so much about T bills. This is just the simplest no-brainer investment today that everyone should do. In Singapore, this instrument is yielding 3.8% risk free. Simple desktop research on Google shows that the famed 60/40 investment portfolio returned c.9-10% annually over the last 25-50 years. However, it is predicted that future returns could be much lower at c.4% based on the article below.

If so, at 3.8% per annum, Singapore T-bills can generate the bulk of the c.4% return! While I personally really like T bills (because it is risk free), there is a whole fixed income universe out there. DBS, Singapore’s largest bank, recently issued bonds at >5% and we have a slew of USD-denominated corporate bonds. But my experience with bonds had been terrible, so for now, I would simply advocated putting most, if not all, of the 40% in Singapore T bills.

2. Stock ETFs

It has been shown time and again that it is very difficult to beat the stock market. The S&P500 has returned 10%pa for more than a century. The rise of index funds and subsequently ETFs came precisely because active management wasn’t able to even just match the returns of the indices Since the first ETFs launched in the 1990s, we now have thousands of ETFs listed on various exchanges.

The largest ETFs have AUMs in the hundreds of billions of dollars and can cater for any investment need one can think of. The following shows the list of the largest and most popular ETFs and as mentioned, we have many, many more to choose from.

The following would be a list of ETFs that our team had followed and is worth doing more work on:  

  • NOBL - Dividend Aristocrat 
  • EMQQ - Emerging Market Tech 
  • HACK - Cybersecurity 
  • SOXX - Semiconductor 
  • GLUX - Luxury goods

Interestingly there is little in-depth analysis on ETFs online perhaps because it entails too much effort. But this author believes more could be done. It is tedious work though. We need to run through numbers for each and every company in the ETF to come up with the valuation, free cashflow, growth profile etc. As such, our proprietary database will be available only to paid subscribers.

3. Risk Taking Activities

Hitherto our newsletter has focused on this final 20% of the portfolio. Deep analysis is at the foundation of what we do and we shall continue to publish our work on interesting companies and ideas. We hope our skills can also be put into good use by providing value added services on valuation of private companies and businesses. We will also put all the ideas into a portfolio and see how we compare against the S&P500 over time. Similarly, proprietary analysis and portfolio returns will be available for paid subscribers.

4. To sum it up

Time is of essence (albeit in a different way) and if we invest correctly based on the above, we would be compounding wealth at c.8%. Based on the table below, we can expect to slightly double our money in 10 years, more than quadruple it in 20 years and grow it 10x in 30 years. That’s unrefutable math on paper.

In reality it’s a journey. We must remember to smell the roses, spend some of it (there is no point compounding money for afterlife ;) and importantly never risk losing so much that it can bring down the house. And this is a good segue to give sneak preview on the next discussion: property. 

Huat Ah!

This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.

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