System Investment Strategy Through Market Turbulence

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Peter as the speaker for the Public Mutual Workshop: System Investment Strategy Through Market Turbulence - 24 July 2008

Peter as the speaker for the Public Mutual Workshop: System Investment Strategy Through Market Turbulence - 24 July 2008

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  • 1. Systematic Investment Strategy Through Market Turbulence By : Peter Lim CFP, RFP, CFA Level 2 Candidate
  • 2. Topic Contents:
    • Learning about History
    • Quiz : Guessing the market’s direction
    • What we can learn from the past?
    • Systematic Investment Strategy:
      • Why we should invest systematically?
      • Dollar Cost Averaging (DCA)
      • Value Averaging (VA)
      • Dynamic Asset Allocation (DAA)
      • Exercise, Advantages and Disadvantages of various methods.
    • Conclusion
  • 3. Source: Frank Armstrong’s 21 st Century Investments
  • 4. Source: Frank Armstrong’s 21 st Century Investments
  • 5. Equity Fund : Historical Charts Source: Quarter 4, 2007 Quarterly Fund Review of Public Mutual
  • 6. Equity Fund : Historical Returns Source: Quarter 4, 2007 Quarterly Fund Review of Public Mutual
  • 7.  
  • 8. Source: Frank Armstrong’s 21 st Century Investments
  • 9. Source: Frank Armstrong’s 21 st Century Investments
  • 10. Source: Frank Armstrong’s 21 st Century Investments
  • 11. Quiz : Guess the market
    • There’s 10 KLCI charts, all ranges from 1 st Jan to 31 st Dec on the same year.
    • There’s 5 Years which is higher, and 5 which is lower.
    • Given is the 1 st half of the year.
    • Guess the following half of the year (whether 31 st Dec is higher or lower than 30 th June)
  • 12. Question 1 Question 1 : Will Market be higher 46.7% ?
  • 13. Question 2 Question 2 : Will Market be higher -14.91% ?
  • 14. Question 3 Question 3 : Will Market be higher -0.79% ?
  • 15. Question 4 Question 4 : Will Market be higher 24.67% ?
  • 16. Question 5 Question 5 : Will Market be higher 2.23% ?
  • 17. Question 6 Question 6 : Will Market be higher 13.96% ?
  • 18. Question 7 Question 7 : Will Market be higher -12.45% ?
  • 19. Question 8 Question 8 : Will Market be higher -20.34% ?
  • 20. Question 9 Question 9 : Will Market be higher -0.06% ?
  • 21. Question 10 Question 10 : Will Market be higher -11.05% ?
  • 22. Question 1 : 1981, Lower to 3.39%
  • 23. Question 2 : 1984, Lower to -25.77%
  • 24. Question 3 : 1986, Higher to 14.87%
  • 25. Question 4 : 1989, Higher to 57.33%
  • 26. Question 5 : 1990, Lower to -11.53%
  • 27. Question 6 : 1993, Higher to 101.53%
  • 28. Question 7 : 1997, Lower to -51.69%
  • 29. Question 8 : 1998, Higher to 2.48%
  • 30. Question 9 : 2000, Lower to -18.5%
  • 31. Question 10 : 2001, Higher to 4.42%
  • 32. Quotes from Warren Buffett
    • ” We make no attempt to predict how security markets will behave”
    • “ Successfully forecasting short term stock market stock price movement is something we think neither we nor anyone else can do”
  • 33. Quotes from Warren Buffett
    • “ We believe that short term forecasts of stock or bond prices are useless . The forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
  • 34. Quotes from Warren Buffett
    • Even Now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
  • 35.
    • Forecasting short term price movement is no difference with gambling.
    • Investing doesn’t have to be that way.
  • 36. Imagine you own a casino table:
    • Odds for Casino Owner (in a round) : 52%
    • Odds for Gambler (in a round) : 48%
    • In Short term, either the Owner or Gambler might win (by a lot, too)
    • In Long term, it’s the odds that counts.
  • 37.
    • The best way to win in Casino, is to own it.
    • Better, own it for long term (so that odds is on your side).
    • Forecasting the short term direction of the market is a gambler’s game. It’s much better to own the casino (and banks, utilities, food companies… etc) instead.
    • Instead of looking for one night stand, I prefer to look for life long partner.
  • 38. What can we learn from the past?
    • Money flows into most funds after good performance, and goes out when bad performance follows.
    • Humans Are EMOTIONAL !
  • 39. Systematic Investment Strategy
    • What is needed (for most people), is a systematic way of investing, which remove “Emotions” out of investing.
    • A good “system” is the one that “force” investors to buy (more) when prices are low.
    • DCA , VA and DAA are examples of systematic Investment Strategy.
  • 40. Dollar Cost Averaging (DCA)
    • An easy to implement strategy that combines
      • a fixed regular investment amount, with
      • a lower cost acquisition of units than constant units strategy.
  • 41. Average ? 1. What is the Average Cost Per Unit ? (during the 2 months). ? $ 0.50 $ 1.00 Unit Price $ 100 2 Average $ 100 1 Invested Amount Month
  • 42. Average Cost < Average Price Average Price = $ 0.75 per unit, Average Cost = $ 0.67 per unit only ! $ 0.50 $ 1.00 Unit Price 200 $ 100 2 300 $ 200 Total 100 $ 100 1 Units Bought Invested Amount Month
  • 43. More vs Less Fund A -ggresive Fund B-oring
    • Both Funds are invested RM 100 Monthly
    • Both Funds have the same average price per unit (RM 0.75)
    • Fund A is more “Aggressive”, and Fund B is more “Stable”
    200 $ 0.50 2 300 Total 100 $ 1.00 1 Units Bought Unit Price Month 143 $ 0.70 2 268 Total 125 $ 0.80 1 Units Bought Unit Price Month
  • 44. DCA - Application
    • Best applied over 3 years or more to take advantage of the market’s fluctuation.
    • Use Funds that fluctuates a lot for maximum advantage
      • PEF, PFES, PITTIKAL, PFEDF, PDSF
  • 45. DCA - Summary
    • It is simple to implement as the amount to invest every month is fixed.
    • Encourage a person to save regularly.
    • However, it does not have an “exit” point to sell.
  • 46. Start as soon as possible
  • 47. Value Averaging (VA)
    • Value Averaging is a formula strategy that
      • is more flexible and
      • has a lower average per-unit purchase price (and usually a higher rate of return) than dollar cost averaging.
  • 48. Value Averaging (VA) cont.
    • Instead of a “fixed dollar” rule as with DCA, the rule under VA is to
    • make the value of each of your unit holdings
    • go up by $ 100 (or some other amount) each month.
  • 49. VA Average Cost < DCA Average Cost DCA Average Cost = $ 0.67 per unit, VA Average Cost = $ 0.625 per unit only ! 400 400 100 # Units To Own 300 100 Units Obtained $ 200 $ 100 Total Value $ 150 $ 0.50 2 $ 250 Total $ 100 $ 1.00 1 Amount Invested Unit Price Month
  • 50. VA Summary
    • By focusing on predetermined value goal that increases over time, you take the DCA philosophy of “buy more cheap units” a step further.
    • Returns are generally higher, and risk are generally lower (because you’re buying more when prices are low, and possibly sell when prices are high).
    • Features of VA makes it more complicated, and tedious to monitor.
  • 51. Dynamic Asset Allocation (DAA)
    • An investment strategy, allocating our investments into various asset classes. Personally, I use Equity Fund and Bond Fund.
    • Allocation to Equity Fund will be more when market is “undervalued”, with the balanced into Bond Fund, and vice versa.
    • Switching is done periodically.
  • 52. Ideas behind DAA 0% 100% Under Valued 25% 75% Slightly undervalued 50% 50% Fairly Valued 75% 25% Slightly overvalued 100% 0% Over Valued Bond Fund Equity Fund Market’s Valuation
  • 53. Benefits of DAA
    • It’s to cater for “big” Lump Sum investment.
    • Instead of switching funds, we can also “re-allocate” funds by doing topup to the Asset Class that the portfolio recommends.
    • Sell Winners, Buy losers
      • (In other words, you’re selling High and, buying Low)
    • Lower Risk, Higher Return
  • 54. Application of DAA
    • 3 months ago (market is
    • fairly valued)
    Today (market is slightly overvalued)
  • 55. Exercise
    • Fill up the blanks on various Systematic methods of Investing.
    • While doing it, try to think of the advantages/ disadvantages of each methods.
  • 56. Constant Unit Purchase (Fixed # of Units Obtained)     RM 1.0000   Average cost per unit         3000 RM 3,000.00 Total 1000 RM 1,400.00 RM 1.40 3 1000 RM 600.00 RM 0.60 2 1000 RM 1,000.00 RM 1.00 1 Units Obtained Amount Invested Unit Price Month Constant Unit Purchase    
  • 57. Dollar Cost Averaging (Fixed Amount Invested)     RM 0.8873   Average cost per unit         3380.96 RM 3,000.00 Total 714.29 RM 1,000.00 RM 1.40 3 1666.67 RM 1,000.00 RM 0.60 2 1000.00 RM 1,000.00 RM 1.00 1 Units Obtained Amount Invested Unit Price Month Dollar Cost Averaging    
  • 58. Value Averaging (Increase the Value by a fixed Amount)             RM 0.3422         Average cost per unit             733.33   2142.86       Total (1,666.67) -1190.48   2142.86 3,000.00 1.40 3 1,400.00 2333.33   3333.33 2,000.00 0.60 2 1,000.00 1000.00   1000.00 1,000.00 1.00 1 Amount Invested (RM) Units Obtained   # of Units to Own Total Value (RM) Unit Price Month Value Averaging    
  • 59. Thoughts and consideration before applying DCA, VA and DAA
    • Choosing the right vehicle (Unit Trust instead of individual stocks)
    • Choosing the right Unit Trust (choose an equity fund that reflects the benchmark that we wanted)
    • Switching Fee
    • Investment Time Horizon
    • Time involved vs. income earned to monitor and switch funds
  • 60. What would Benjamin Graham thought about it
    • “ The majority of investors should be satisfied with the reasonably good return obtainable from a defensive portfolio”
    • “ To achieve satisfactory investment results is easier than most people realize”
  • 61. Lessons Learned
    • Lesson No 1: Start Invest Early
    • Lesson No. 2: Plan for a Reasonable Rate of Return
    • Lesson No. 3: Use a system (DCA, VA or DAA), and not “guessing” the market’s direction.
    • Lesson No. 4: Force Yourself
  • 62.
    • “ The Greatest Enemy of a good plan, is the dream of a perfect plan”
    • Carl von Clausewitz
  • 63.
    • Questions
    • &
    • Answers