Sunday 22 February 2015

All I Want Is To Invest Wisely

I work in the engineering industry. Many of my colleagues and friends know that I blog. However, not many actually read my blog. It was only recently that some of them feedback to me that my blog is a little too difficult to comprehend. If I could distil what they probably want to read, it would be this: "All I want is to invest profitably". However, since nobody can guarantee that investing would be profitable, the next best thing would be "All I want is to invest wisely". To understand how you could invest wisely, first of all, let me share an analogy with you.

Being an emperor is both easy and difficult. The difficult part is to select a loyal and competent prime minister to run the affairs of the state. But once you have done this, the rest is actually easy. All you have to do is to let the chosen prime minister do his job without any interference.

Investing is likewise both easy and difficult. The difficult part is to select a loyal and competent "prime minister", which could be a fund manager if you invest in unit trusts, or an investment strategy if you invest in equities directly, or both. Fortunately for most people, even this difficult part has already been done. Numerous literature has shown that index funds (i.e. funds that invest in component stocks of an index) outperform most of the active fund managers. To further leverage your advantage, you could employ the investment strategy of either Dollar Cost Averaging (DCA), which means investing a fixed sum of money regularly, or portfolio rebalancing, which involves re-allocating money invested in different asset classes on a regular basis or when the allocation has hit certain thresholds. That is all you really need to do.

There is however, something to guard against. As mentioned previously, you need to let the chosen "prime minister" do his job without any interference. Even with the best fund manager and/or investment strategy, there will be times when your portfolio loses money. As human, it is tempting to fix it when it is broken and replace the "prime minister" with another one who might look more promising. As the Chinese saying goes, "用人不疑, 疑人不用", which translates to "trust the man you use, if you do not trust him, then do not use him". Index investing + DCA or portfolio rebalancing is probably the best "prime minister" you could find in this world with minimal costs. This "prime minister" has survived numerous market crises before. If you do not trust him to pull you out of a market crisis, who else could you trust?

Although I invest in equities directly, I have also entrusted some of my funds to this "prime minister". My Supplementary Retirement Scheme (SRS) account is invested using index funds + DCA, while around 10% of my cash account is invested using index funds + portfolio rebalancing. The SRS account (index fund portion) has returned 7.0% on an annualised basis, measured from the last market peak to the latest market peak, even after going through heavy losses during the Global Financial Crisis in 2008. You can read more about it at Review of My SRS Investments. As for my cash account (index fund portion), it is about a year old, so the results are not representative of the returns you can get through one full market cycle. You can read more about this account at The Passive Portfolio.

Finally, you might think that you need to be good in investing to be rich. Actually, that is not really true. You can read more about it at You Don't Need To Be Good In Investing To Be Rich.

Wishing all readers a Happy and Prosperous Chinese New Year! 祝大家新年快乐, 万事如意! 

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  1. holy shit. thats what my peers say about my blog as well!

    1. I guess this is a common problem faced by investment bloggers who don't work in the financial industry.

      I would like to let you know that I appreciate your work, even though I seldom leave a comment in your blog. Thanks :)

    2. I like your analogy of emperor and prime minister. I guess I hired a bad prime minister in the past and have decided to become a despot.

      This post is very relatable so I don't think anyone can say this entry is too chim! ;) Keep up the good work.

    3. Thanks for your encouragement, RetailTrader :)

  2. Hi Chin Wai,

    I am from the Engineering industry too and I can understand the need to explain clearly with all the financial jargon. I appreciate your time and effort spent into writing and I believe many readers also value your articles just that they prefer to remain anonymous.

    To both Kyith and you, keep up the good work. :)

    1. Thanks, Derek. You have also done a wonderful job aggregating all the investment blogs :)

  3. Hi Chin Wai,

    7% annualized returns using index-investing and DCA and rebalancing is really good.

    Again, simplicity do work well.

    With active stock picking (minus the intangible fun and Interest in researching) I am just hoping for a 6% return annualized over the longer term.

    My problem is 2 folds.

    1) I am not a emperor yet, still trying to snatch my turf.

    2) I have not found my generals and advisors. My war with Mr market is guerrilla tactics at best and perhaps just a civil nusiamce in eye of Mr market.

    1. Hi Sillyinvestor,

      Don't be shy. If you have the funds to invest, then you're an "emperor". Just that you prefer to be a hardworking "emperor" who does everything so that you don't have to depend on having a competent and reliable "prime minister".

  4. Hi Chin Wai

    Agree there on SI comments.

    Sometimes, simplicity works best but we just want to have more challenge out of nowhere. Human...

    1. Hi B,

      Yes, understand that. For some of us, investing is not solely about making money, but also a personal challenge to beat the market.