When I first started investing my Supplementary Retirement Scheme (SRS) funds 7 years ago, I wondered how should I invest the money. Should I invest in the same way as my cash account, i.e. adopting market timing and buying individual stocks, or should I keep it as a cash reserve to be used during severe market crashes like my CPF funds? If I invest like my cash account, I wondered what if my investment strategy had been wrong all this while? Would I then still have sufficient funds to retire? Since the SRS account is small compared to my cash account, I decided to invest it in a different way from my cash account, as a form of hedging in case my investment strategy turns out to be wrong. It also serves as a test lab to try out different investment strategies. After 7 years of experimenting, I think it is time to conclude some of the lessons learnt from these investment experiments.
Active Investing vs Passive Investing
The first major difference between my cash and SRS accounts is that the former adopts active investing while the latter adopts passive investing. In active investing, you have to do everything by yourself, from setting up a valuation model, analysing hundreds of stocks based on the model, updating the data in the model based on the latest financial statements, deciding what stocks to buy and when to buy them, monitoring the stocks in your portfolio and deciding whether to buy some more or to sell them off. A lot of time is required in this approach. In passive investing, things are a lot simpler. You just need to decide which stocks or unit trusts you believe will appreciate in the long term. Once you have decided that, you just need to invest a constant amount of money in that particular stocks or unit trusts on a regular basis, regardless of whether the markets are going up or down. Of course, you do need to review these stocks and units trusts occasionally, to make sure that they do not stray off-course from your investment objectives and criteria. However, the time spent in passive investing is a lot less compared to active investing.
From personal experience, both active and passive investing can be profitable. Passive investing has achieved an annualised return ranging from 3.11% to 7.04%, depending on the unit trusts bought. Coincidently and very importantly, this is also the annualised return for one market cycle (peak-to-peak), as the unit trust prices have roughly returned to where they originally were 7 years ago. You may wish to read Review of My SRS Investments for more info. Active investing, on the other hand, has achieved a few more percentage points in returns compared to passive investing, based on rough calculations. It should be highlighted that it is difficult to determine the exact investment returns for my cash account as the investing and non-investing cashflows are not segregated, similar to my CPF account which has monthly contributions coming in and housing loan repayments going out in addition to investing cashflows.
From personal experience, both active and passive investing can be profitable. Passive investing has achieved an annualised return ranging from 3.11% to 7.04%, depending on the unit trusts bought. Coincidently and very importantly, this is also the annualised return for one market cycle (peak-to-peak), as the unit trust prices have roughly returned to where they originally were 7 years ago. You may wish to read Review of My SRS Investments for more info. Active investing, on the other hand, has achieved a few more percentage points in returns compared to passive investing, based on rough calculations. It should be highlighted that it is difficult to determine the exact investment returns for my cash account as the investing and non-investing cashflows are not segregated, similar to my CPF account which has monthly contributions coming in and housing loan repayments going out in addition to investing cashflows.
Is the extra few percentage points in returns worth the huge amount of time spent in analysing stocks? From a time-value of money perspective, the extra few percentage points will translate to fairly large differences in wealth when compounded over many years. However, from a lifestyle perspective, time spent on analysing stocks means that you have less time for other things in life. Furthermore, do you really need the extra wealth from the few percentage points in returns to retire or to pass down to the next generation? I guess the choice between active and passive investing boils down to personal preference, whether you like the bolts-and-nuts of investing like a personal hobby or you prefer to spend the time on other more important things in life.
Individual Stocks vs Indices
Individual Stocks vs Indices
For the cash account, individual stocks are bought and sold. Some stocks can turn out to be multi-baggers that multiply your investment many times over while others can turn out to be salted fishes that wipe out your investment. You can refer to How to Get a Multi-Bagger? and The Salted Fishes for the list of multi-baggers and salted fishes that I have accumulated in the past 16 years of investing with my own money. Generally, a lot of emotions are involved with individual stocks, with joy for multi-baggers and despair for salted fishes. Even when your stock is a multi-bagger, you are constantly in a struggle over whether to continue holding on to it or sell it off before it declines. With unit trusts, however, the emotions are a lot less as unit trusts are less volatile than stocks. The emotions involved can have an impact on whether you can be a long-term investor and consequently, whether you can achieve the returns stocks can potentially provide in the long run. You may wish to read Different Mentality in Stock and Unit Trust Investing for more info.
Because the price of individual stocks can go down to zero, I usually have a limit on the amount of investment in each individual stock. Furthermore, due to privatisation over the past few years, there are not many stocks on the Singapore Exchange that meet my investment criteria. This has resulted in a limit on the amount of money that could be invested in stocks. In contrast, the price of index funds do not go down to zero and hence, there is no limit on the amount of investment. Even though index funds could lose half their value in a severe market crash, historical evidence shows that they usually recover, so there is nothing much to worry about for long-term investors.
Because the price of individual stocks can go down to zero, I usually have a limit on the amount of investment in each individual stock. Furthermore, due to privatisation over the past few years, there are not many stocks on the Singapore Exchange that meet my investment criteria. This has resulted in a limit on the amount of money that could be invested in stocks. In contrast, the price of index funds do not go down to zero and hence, there is no limit on the amount of investment. Even though index funds could lose half their value in a severe market crash, historical evidence shows that they usually recover, so there is nothing much to worry about for long-term investors.
Index Funds vs Lifecycle Funds
Within the SRS account, I also split the funds into 2 and invested in equal portion in an index fund and a lifecycle fund. The benefit of a lifecycle fund is that the asset allocation will gradually change from aggressive to conservative over time. This saves an investor the need to regularly and consciously adjust his asset allocation as he ages and is less able to take risk. However, my experience with lifecycle funds is that the asset allocation may not fit the investment objectives of all investors who invest in the same fund. Furthermore, the asset allocation may change from the initial asset allocation model in unexpected ways over time. You may wish to read Experience with Lifecycle Unit Trusts for more info.
Conclusion
When I started the investment experiments with my SRS account 7 years ago, I never expected to learn so much from it. These lessons have come in useful even for my cash account. Also, you do not always need to choose between active and passive investing, or between individual stocks and indices. They can be complementary to each other. For Singapore stocks, I will continue to adopt active investing, but for overseas stocks, I will be adopting passive investing to save the time required to analyse overseas stocks. Similarly, I will invest in index funds whenever there are limited opportunities in individual stocks to maintain an optimal exposure to stocks. I will continue to experiment with investment strategies using my SRS funds. The next experiment will be to compare between a global stock index and a US stock index.
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