Questions from Newbie to investing

Hi all,

I'm currently reading the Newbie guide to investing and the intelligent investor. Also reading a lot of little links here and there, learning curve very steep man!

Recently set up my CDP and Vickers account as well. Bought a few lots of OUE Reit, just to test test and see what happens.

A few things I'm trying to clarify from my readings:

1. I've read A LOT about asset allocation, portfolio diversification. Like Graham suggests at least 25% bonds to a max of 75% equity. The question is: I'm still learning how to navigate SGX and the Vickers platform. How exactly do I buy bonds and what is the minimum amount I'll need to start buying bonds? 10k? I also understand that there are different grades of bonds, how do I find out if they are AAA or not?

2. Also regarding asset allocation. If currently, I have about 20k to invest, is it too little? Should I start diversification now, or as my savings grow, buy other equities/bonds to diversify along the way?

Thanks!

(29-08-2013, 10:09 PM)Ferns Wrote: Hi all,

I'm currently reading the Newbie guide to investing and the intelligent investor. Also reading a lot of little links here and there, learning curve very steep man!

Recently set up my CDP and Vickers account as well. Bought a few lots of OUE Reit, just to test test and see what happens.

A few things I'm trying to clarify from my readings:

1. I've read A LOT about asset allocation, portfolio diversification. Like Graham suggests at least 25% bonds to a max of 75% equity. The question is: I'm still learning how to navigate SGX and the Vickers platform. How exactly do I buy bonds and what is the minimum amount I'll need to start buying bonds? 10k? I also understand that there are different grades of bonds, how do I find out if they are AAA or not?

2. Also regarding asset allocation. If currently, I have about 20k to invest, is it too little? Should I start diversification now, or as my savings grow, buy other equities/bonds to diversify along the way?

Thanks!

min size for most of bonds is 250K USD, they are not for retail investors. but u may consider bond ETFs, which has a very similar return profile with a bond. anyway, i don't find bond investment is attractive at this moment.

for institutional investors, bonds are generally classified into investment grade and junk bonds. BBB and above are IG bonds, while others are junk bonds. bond rating is not of much value for retail investor as we don't have any constraints in our position. for institutions, its a different story, some funds may only be allowed to hold A- or above bonds.

it's always good to start small, now everything in the market is expensive. if interest rate goes up, current price level is not sustainable. again, asset allocation is not meant for small size

Thanks Quantcall. If I understand you correctly, it means, given my small capital, I don't need to think about bonds or asset allocation. If I want to think about diversification, then I can consider bonds ETF and STI ETF (I'm sticking to singapore market for now, until I learn more)

About buying bonds ETF, can it be done through trading platform or do I have to go through a bank?

(29-08-2013, 11:11 PM)Ferns Wrote: Thanks Quantcall. If I understand you correctly, it means, given my small capital, I don't need to think about bonds or asset allocation. If I want to think about diversification, then I can consider bonds ETF and STI ETF (I'm sticking to singapore market for now, until I learn more)

About buying bonds ETF, can it be done through trading platform or do I have to go through a bank?

For Singapore sovereign bonds:

https://secure.fundsupermart.com/main/sgs/SGShome.tpl

All Singapore sovereign bonds are AAA quality by main 3 assessors.


For Bonds unit trust/ bond funds
Click Tools -> Funds selector - play around with it

https://secure.fundsupermart.com/main/home/index.svdo


If you want to learn more about stocks and selection, you may refer to the books section of this forum. My opinion is many of them are pretty good.

My question now is, can you swallow the decreasing price of bonds as the interest rate slowly creep up?

(29-08-2013, 10:09 PM)Ferns Wrote: A few things I'm trying to clarify from my readings:

1. I've read A LOT about asset allocation, portfolio diversification. Like Graham suggests at least 25% bonds to a max of 75% equity. The question is: I'm still learning how to navigate SGX and the Vickers platform. How exactly do I buy bonds and what is the minimum amount I'll need to start buying bonds? 10k? I also understand that there are different grades of bonds, how do I find out if they are AAA or not?

2. Also regarding asset allocation. If currently, I have about 20k to invest, is it too little? Should I start diversification now, or as my savings grow, buy other equities/bonds to diversify along the way?

Thanks!

Bonds
===
Given the current low-interest rate environment, buying bonds causes 2 problems:

1. For investment grade bonds, the return is not much better than cash, so it's hardly worth the bother unless you have millions of dollars; and

2. Interest rates are starting to rise. As bond prices move in opposition to interest rates, if you need to sell before maturity you will suffer a capital loss on your bonds.

Additionally, as others have pointed out, most bonds in Singapore trade in lots of $250k. The exceptions include those traded directly on SGX e.g. the SIA and Capitamalls Asia bonds.

For now it would be perfectly acceptable to use cash as a substitute for the bond allocation.

Portfolio Size and Asset Allocation
===
You can get instant diversification with funds, whether unit trusts or ETFs. Or you can diversify as you go along, buying a different stock each time. I myself started with only $500. I bought different stocks each time until I had several stocks in the portfolio, thus I was very concentrated initially (albeit with $500) and diversified as I went along.

I would strongly discourage any investment into bond funds at the moment because the bond funds will suffer capital losses when interest rates rise. Unlike investing into individual bonds where you can hold to maturity and thus avoid capital losses, a bond fund is always buying and selling bonds in order to maintain an average maturity, as a result it will realize capital gains when interest rates are falling, and capital losses when rates are rising. Rates are very likely to rise in the medium term, making bond funds a very bad combination of both low current returns and negative future returns.

(30-08-2013, 01:52 AM)d.o.g. Wrote:

(29-08-2013, 10:09 PM)Ferns Wrote: A few things I'm trying to clarify from my readings:

1. I've read A LOT about asset allocation, portfolio diversification. Like Graham suggests at least 25% bonds to a max of 75% equity. The question is: I'm still learning how to navigate SGX and the Vickers platform. How exactly do I buy bonds and what is the minimum amount I'll need to start buying bonds? 10k? I also understand that there are different grades of bonds, how do I find out if they are AAA or not?

2. Also regarding asset allocation. If currently, I have about 20k to invest, is it too little? Should I start diversification now, or as my savings grow, buy other equities/bonds to diversify along the way?

Thanks!

Bonds
===
Given the current low-interest rate environment, buying bonds causes 2 problems:

1. For investment grade bonds, the return is not much better than cash, so it's hardly worth the bother unless you have millions of dollars; and

2. Interest rates are starting to rise. As bond prices move in opposition to interest rates, if you need to sell before maturity you will suffer a capital loss on your bonds.

Additionally, as others have pointed out, most bonds in Singapore trade in lots of $250k. The exceptions include those traded directly on SGX e.g. the SIA and Capitamalls Asia bonds.

For now it would be perfectly acceptable to use cash as a substitute for the bond allocation.

Portfolio Size and Asset Allocation
===
You can get instant diversification with funds, whether unit trusts or ETFs. Or you can diversify as you go along, buying a different stock each time. I myself started with only $500. I bought different stocks each time until I had several stocks in the portfolio, thus I was very concentrated initially (albeit with $500) and diversified as I went along.

I would strongly discourage any investment into bond funds at the moment because the bond funds will suffer capital losses when interest rates rise. Unlike investing into individual bonds where you can hold to maturity and thus avoid capital losses, a bond fund is always buying and selling bonds in order to maintain an average maturity, as a result it will realize capital gains when interest rates are falling, and capital losses when rates are rising. Rates are very likely to rise in the medium term, making bond funds a very bad combination of both low current returns and negative future returns.

Another quality advice from Mr. d.o.g, Thank you.

In general, investing in bond now seems unwise, base on impending market trend.

The exception is may be for those on distressed bond (or debt), but for qualified expert(s) only

Thanks Arthur and d.o.g.!

Let me see if I get my connections right.

During high interest rate env, REITs will suffer, so it might be good to switch funds from REITs to bonds? Because during that time, bonds will be discounted too?

(31-08-2013, 12:10 AM)Ferns Wrote: During high interest rate env, REITs will suffer, so it might be good to switch funds from REITs to bonds? Because during that time, bonds will be discounted too?

In a high interest rate environment, medium- and long-term bonds should sell at a discount. REITs behave like junior long-term bonds and should also be selling at a discount. So selling REITs to buy bonds isn't going to get you anywhere, you are selling cheap to buy cheap.

The time to sell REITs and bonds is when interest rates are low and the REITs and bonds are trading at low yields. This was precisely the situation over the last 2-3 years. Of course, REITs still had a good run last year, so if you had perfect timing you'd have sold only in the first quarter of this year.

As to how high interest rates have to go before they stabilize, that is anybody's guess. But note that Singapore has experienced high interest rates before, when bank deposits earned 8% and housing loans cost 15%. So never say never. Calling a bottom (or top) too quickly can be hazardous to your wealth.

is it worth the look at non-investment grade bonds which presently are a deep discount to the par?

(31-08-2013, 07:43 AM)pianist Wrote: is it worth the look at non-investment grade bonds which presently are a deep discount to the par?

"Non-investment grade" is the polite term for junk bonds. They are called junk for a reason - there is no reasonable level of confidence that the bonds will actually be paid at par, or indeed at all.

Junk bond investing lies firmly in the realm of professionals because it actually takes MORE work to research the junk bonds than the equity of the specific issuer.

In a way, shares are all alike - you are entitled to vote, to receive dividends, to participate in rights issues etc. But every bond is different, and even different bonds from the same issuer are different. Coupon and maturity are the simple bits. Seniority, collateral quality, jurisdiction, enforceability, covenants and willingness to repay (not just ability) all have to be considered.

It is not a simple matter of thinking "a 10% bond trading at 75 is a good value". That is a simpleton's recipe for disaster and heavy capital loss.

Those who bought the bonds recently issued by Eratat, for example, have learnt nothing from the S-chip convertible bond (CB) debacle of a few years ago when Celestial Nutrifoods, China Milk, China Sun Bio-Tech, and Sino-Environment all defaulted on their CBs with zero recovery for bondholders. Why did these bondholders lose 100% of their principal? Because they ignored clear warning signs:

1. Jurisdiction mismatch - the assets (cash) were held in the Chinese subsidiaries, but the liabilities (bonds) were owed by the listed company in Bermuda/Cayman/BVI/Singapore.

2. Collateral - the bonds were unsecured so there was no collateral to seize.

3. Covenants - there were no restrictions on where/how to use the cash or to maintain certain debt servicing ratios.

4. Enforceability - bondholders would have to sue offshore, then get it enforced onshore. Very troublesome process with no guarantee the local courts would recognize foreign judgments.

5. Cost of Default - lack of extradition treaty for commercial crimes meant there was no risk of arrest, let alone fine or jail, for stealing the cash.

So the company executives had hundreds of millions of reasons to steal the money. Lots of upside, no downside. What would any rational (and amoral) person do in such a situation? Shown enough money, many otherwise good people will cross the line, often rationalizing to themselves along the way that these are willing buyer-willing seller deals, the stock market is a casino anyway, it's small change to these big investors, the kids/mistresses/extended family/local officials really need the money, it's revenge against foreign devils for humiliating China in the past etc.

If you have read this far and understood it all, it should be clear that if you are not willing to put in as much work as a professional investor, you should steer clear of junk bonds, lest you end up taking on more risk than you can tolerate. And if you didn't understand what was discussed above, all the more you should stay far, far away from junk bonds.

As usual, YMMV.