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

Published in: Economy & Finance, Business

System Investment Strategy Through Market Turbulence

  1. 1. Systematic Investment Strategy Through Market Turbulence By : Peter Lim CFP, RFP, CFA Level 2 Candidate
  2. 2. Topic Contents: <ul><li>Learning about History </li></ul><ul><li>Quiz : Guessing the market’s direction </li></ul><ul><li>What we can learn from the past? </li></ul><ul><li>Systematic Investment Strategy: </li></ul><ul><ul><li>Why we should invest systematically? </li></ul></ul><ul><ul><li>Dollar Cost Averaging (DCA) </li></ul></ul><ul><ul><li>Value Averaging (VA) </li></ul></ul><ul><ul><li>Dynamic Asset Allocation (DAA) </li></ul></ul><ul><ul><li>Exercise, Advantages and Disadvantages of various methods. </li></ul></ul><ul><li>Conclusion </li></ul>
  3. 3. Source: Frank Armstrong’s 21 st Century Investments
  4. 4. Source: Frank Armstrong’s 21 st Century Investments
  5. 5. Equity Fund : Historical Charts Source: Quarter 4, 2007 Quarterly Fund Review of Public Mutual
  6. 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
  8. 9. Source: Frank Armstrong’s 21 st Century Investments
  9. 10. Source: Frank Armstrong’s 21 st Century Investments
  10. 11. Quiz : Guess the market <ul><li>There’s 10 KLCI charts, all ranges from 1 st Jan to 31 st Dec on the same year. </li></ul><ul><li>There’s 5 Years which is higher, and 5 which is lower. </li></ul><ul><li>Given is the 1 st half of the year. </li></ul><ul><li>Guess the following half of the year (whether 31 st Dec is higher or lower than 30 th June) </li></ul>
  11. 12. Question 1 Question 1 : Will Market be higher 46.7% ?
  12. 13. Question 2 Question 2 : Will Market be higher -14.91% ?
  13. 14. Question 3 Question 3 : Will Market be higher -0.79% ?
  14. 15. Question 4 Question 4 : Will Market be higher 24.67% ?
  15. 16. Question 5 Question 5 : Will Market be higher 2.23% ?
  16. 17. Question 6 Question 6 : Will Market be higher 13.96% ?
  17. 18. Question 7 Question 7 : Will Market be higher -12.45% ?
  18. 19. Question 8 Question 8 : Will Market be higher -20.34% ?
  19. 20. Question 9 Question 9 : Will Market be higher -0.06% ?
  20. 21. Question 10 Question 10 : Will Market be higher -11.05% ?
  21. 22. Question 1 : 1981, Lower to 3.39%
  22. 23. Question 2 : 1984, Lower to -25.77%
  23. 24. Question 3 : 1986, Higher to 14.87%
  24. 25. Question 4 : 1989, Higher to 57.33%
  25. 26. Question 5 : 1990, Lower to -11.53%
  26. 27. Question 6 : 1993, Higher to 101.53%
  27. 28. Question 7 : 1997, Lower to -51.69%
  28. 29. Question 8 : 1998, Higher to 2.48%
  29. 30. Question 9 : 2000, Lower to -18.5%
  30. 31. Question 10 : 2001, Higher to 4.42%
  31. 32. Quotes from Warren Buffett <ul><li>” We make no attempt to predict how security markets will behave” </li></ul><ul><li>“ Successfully forecasting short term stock market stock price movement is something we think neither we nor anyone else can do” </li></ul>
  32. 33. Quotes from Warren Buffett <ul><li>“ 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.” </li></ul>
  33. 34. Quotes from Warren Buffett <ul><li>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.” </li></ul>
  34. 35. <ul><li>Forecasting short term price movement is no difference with gambling. </li></ul><ul><li>Investing doesn’t have to be that way. </li></ul>
  35. 36. Imagine you own a casino table: <ul><li>Odds for Casino Owner (in a round) : 52% </li></ul><ul><li>Odds for Gambler (in a round) : 48% </li></ul><ul><li>In Short term, either the Owner or Gambler might win (by a lot, too) </li></ul><ul><li>In Long term, it’s the odds that counts. </li></ul>
  36. 37. <ul><li>The best way to win in Casino, is to own it. </li></ul><ul><li>Better, own it for long term (so that odds is on your side). </li></ul><ul><li>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. </li></ul><ul><li>Instead of looking for one night stand, I prefer to look for life long partner. </li></ul>
  37. 38. What can we learn from the past? <ul><li>Money flows into most funds after good performance, and goes out when bad performance follows. </li></ul><ul><li>Humans Are EMOTIONAL ! </li></ul>
  38. 39. Systematic Investment Strategy <ul><li>What is needed (for most people), is a systematic way of investing, which remove “Emotions” out of investing. </li></ul><ul><li>A good “system” is the one that “force” investors to buy (more) when prices are low. </li></ul><ul><li>DCA , VA and DAA are examples of systematic Investment Strategy. </li></ul>
  39. 40. Dollar Cost Averaging (DCA) <ul><li>An easy to implement strategy that combines </li></ul><ul><ul><li>a fixed regular investment amount, with </li></ul></ul><ul><ul><li>a lower cost acquisition of units than constant units strategy. </li></ul></ul>
  40. 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
  41. 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
  42. 43. More vs Less Fund A -ggresive Fund B-oring <ul><li>Both Funds are invested RM 100 Monthly </li></ul><ul><li>Both Funds have the same average price per unit (RM 0.75) </li></ul><ul><li>Fund A is more “Aggressive”, and Fund B is more “Stable” </li></ul>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
  43. 44. DCA - Application <ul><li>Best applied over 3 years or more to take advantage of the market’s fluctuation. </li></ul><ul><li>Use Funds that fluctuates a lot for maximum advantage </li></ul><ul><ul><li>PEF, PFES, PITTIKAL, PFEDF, PDSF </li></ul></ul>
  44. 45. DCA - Summary <ul><li>It is simple to implement as the amount to invest every month is fixed. </li></ul><ul><li>Encourage a person to save regularly. </li></ul><ul><li>However, it does not have an “exit” point to sell. </li></ul>
  45. 46. Start as soon as possible
  46. 47. Value Averaging (VA) <ul><li>Value Averaging is a formula strategy that </li></ul><ul><ul><li>is more flexible and </li></ul></ul><ul><ul><li>has a lower average per-unit purchase price (and usually a higher rate of return) than dollar cost averaging. </li></ul></ul>
  47. 48. Value Averaging (VA) cont. <ul><li>Instead of a “fixed dollar” rule as with DCA, the rule under VA is to </li></ul><ul><li>make the value of each of your unit holdings </li></ul><ul><li>go up by $ 100 (or some other amount) each month. </li></ul>
  48. 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
  49. 50. VA Summary <ul><li>By focusing on predetermined value goal that increases over time, you take the DCA philosophy of “buy more cheap units” a step further. </li></ul><ul><li>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). </li></ul><ul><li>Features of VA makes it more complicated, and tedious to monitor. </li></ul>
  50. 51. Dynamic Asset Allocation (DAA) <ul><li>An investment strategy, allocating our investments into various asset classes. Personally, I use Equity Fund and Bond Fund. </li></ul><ul><li>Allocation to Equity Fund will be more when market is “undervalued”, with the balanced into Bond Fund, and vice versa. </li></ul><ul><li>Switching is done periodically. </li></ul>
  51. 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
  52. 53. Benefits of DAA <ul><li>It’s to cater for “big” Lump Sum investment. </li></ul><ul><li>Instead of switching funds, we can also “re-allocate” funds by doing topup to the Asset Class that the portfolio recommends. </li></ul><ul><li>Sell Winners, Buy losers </li></ul><ul><ul><li>(In other words, you’re selling High and, buying Low) </li></ul></ul><ul><li>Lower Risk, Higher Return </li></ul>
  53. 54. Application of DAA <ul><li>3 months ago (market is </li></ul><ul><li>fairly valued) </li></ul>Today (market is slightly overvalued)
  54. 55. Exercise <ul><li>Fill up the blanks on various Systematic methods of Investing. </li></ul><ul><li>While doing it, try to think of the advantages/ disadvantages of each methods. </li></ul>
  55. 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    
  56. 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    
  57. 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    
  58. 59. Thoughts and consideration before applying DCA, VA and DAA <ul><li>Choosing the right vehicle (Unit Trust instead of individual stocks) </li></ul><ul><li>Choosing the right Unit Trust (choose an equity fund that reflects the benchmark that we wanted) </li></ul><ul><li>Switching Fee </li></ul><ul><li>Investment Time Horizon </li></ul><ul><li>Time involved vs. income earned to monitor and switch funds </li></ul>
  59. 60. What would Benjamin Graham thought about it <ul><li>“ The majority of investors should be satisfied with the reasonably good return obtainable from a defensive portfolio” </li></ul><ul><li>“ To achieve satisfactory investment results is easier than most people realize” </li></ul>
  60. 61. Lessons Learned <ul><li>Lesson No 1: Start Invest Early </li></ul><ul><li>Lesson No. 2: Plan for a Reasonable Rate of Return </li></ul><ul><li>Lesson No. 3: Use a system (DCA, VA or DAA), and not “guessing” the market’s direction. </li></ul><ul><li>Lesson No. 4: Force Yourself </li></ul>
  61. 62. <ul><li>“ The Greatest Enemy of a good plan, is the dream of a perfect plan” </li></ul><ul><li>Carl von Clausewitz </li></ul>
  62. 63. <ul><li>Questions </li></ul><ul><li>& </li></ul><ul><li>Answers </li></ul>

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