Random thoughts about things

I'm home early to pack my bags to get ready for tmr's in-camp training. Also to blog in some reflections about all that had happened. It'll be quite some time before I can blog again.

I had read many books talking about whose vested interest it is to hold stocks and never let go. The rationale is usually that if you hold for long periods of time, the trend will ride out all the volatility and short term price flunctuations, giving you a returns of worthy of keeping it long term. The earliest STI data I can find is from 1st April, 1985, with STI close at 627 pts. The close on 28th Sept, 2007 is 3706. If anyone bought STI from 1st April and held till now, the investment would represent an increase of 490% over a span of 22 years. A simplified calculation yields a return of 22% per year (not including compounding).

Is that a great deal? Definitely, considering that banks give a interest of around 2.5% for fixed deposit? CPF gives 6% max? (my figures could be way off, I'm sorry!)

But seriously, the picture isn't as rosy as this. There is survivorship bias for STI component stocks. Those company that went bust or taken out of STI index components are not listed anymore, hence STI only reflects those companies that are still surviving, hence 'survivorship bias'. Secondly, this result for investing in stock market index is used to extend to holding unit trust/funds/stocks, which is totally wrong. Stocks can go from hero to zero, and if you're not careful and invested in such stocks, the results would have turned out entirely different from investing in index.

I think the key point here is to hold fundamentally sound stocks - stocks that had survived for long and will survive for long, regardless of the general market condition. Hence the need to understand how to do a fundamental analysis of a company. I'm technically rather than fundamentally inclined, and that is something that I have to change. Find a balance between FA and TA for myself.

Another thing that comes to my mind is when to start investing. It's never to young to get exposed and invest. However, one must take care of other needs before committing to the long business of investing. I suggest following the points below:

1. Start earning first

2. Start saving. Adjust your lifestyle so that there will be a percentage left after taking out necessary expenses like food, transport, etc. I aim to save 30 to 40% of my income.

3. Transfer medical risk to 3rd parties by buying insurance. Term or life or investment link policy, well that is the question. Depends on individual and investing 'savviness' I think.

4. Invest the remainder after setting aside a certain multiple of your monthly expenses to cover uncertainly over your earning power. I think being self-employed, setting aside 6 to 8 times my monthly expenses and putting it in an emergency fund with high liquidity works for me. Fixed deposit with short tenure and savings account will work out just fine. For me, I put it in POEMS money fund which gives me around 0.17 % per month (as opposed to 0.25% per year for savings account)

I believe it's not good to skip any of the points because I meant it in that exact order as I've listed. I know people who have the earnings, but spends a lot, hence there is no accumulation of wealth. I know others who do not earn enough yet buy a lot of insurance to cover themselves (I believe it's wise to secure the present first before worrying about the future). Maybe it's time to rethink one's priorities?

It's a pity that our education system do not teach people to do this, instead relying on CPF to take care of one's future needs. Over reliance on government? I think so. Can CPF able to sustain the high interest rate that it gave to members in the past? I think not, perhaps that's why the rates will be pegged onto long term bond rates. But is it fair to people who do not have a choice on where to put their savings to? Wouldn't it be fair to give these people more interest simply because they had no choice? Question with no ready answers at hand.

A lot of people still do not understand that putting money in the bank is not a viable option anymore, because banks cannot give higher interest than the rate of inflation as it's not sustainable. This kind of thinking is for older generations who see POSB as an icon - where it really pays to save (interest is SO much higher in the past). Nowadays, it pays to invest because saving is no longer adequate.

Haha, enough rattling for now :P

A few interesting websites:
1. http://tankinlian.blogspot.com/
2. http://www.askdrmoney.com/