Monday, May 05, 2008

Thoughts about STI

While trying to find out more about the compounded returns of investing in STI ETF today, I managed to crunch some numbers for the adjusted close of STI since inception on 28th Dec, 1987 till now. The data that I used comes from Yahoo! finance. Below is the chart (linear y-axis) of STI from inception till last close, on 2nd May 2008.

We can see from the STI chart that there are notable periods of time that it dropped sharply. In 1990, 1998, 2003 and 2007, we can see a visual drop in STI. But I think a more appropriate chart to use is a logarithmic y-axis, so that we can better appreciate the change in % of STI.

It's interesting to take note that while the 1990s and 1998 crashes are very severe, the 2007 subprime crisis which is acting out now is a mere blip on the chart. In fact, the subprime crisis is nothing compared to 1998 where the market crashed below inception level. That must be the dot com crisis that plagued US and possibly spilled over to Singapore shores. (I made a mistake, it's not the dot-com, it's the asian financial crisis of 1997-1998)

It's actually very encouraging to see such charts because it gives hopes to investors that while all seems lost, time itself will right the wrong and correct the excesses, hence there is no need to worry about the current crisis if one's holding power is there. But some may argue that STI ultimately is a collection of a number of big caps ranked in market capitalization, so while STI may rise, retail investors investing in smaller pennies might suffer much more than suggested otherwise. There is also the added complication of survivorship bias where those who didn't survive are taken out of STI, hence STI isn't such a good beacon of hope. Well, that's true.

I further compiled a table that shows the compounded annual growth rate for STI taken at different periods of time : 1 yr, 3 yr, 5, 7, 10 to 20 yrs, just to see what sort of returns one might get from holding STI.

One will surely notice that the further one holds, the lesser the chances of having negative returns. The break even year is actually 14-yrs holding period - which means to say a person holding STI for 14 yrs will not have a single year of losses. But of course this comes at a price; holding longer period will ensure less returns but it's safer than say, holding over 1 year period.

Holding STI over a period of 20 years will reward the patient investor with a very safe and compounded returns of around 7%, beating long term SG bonds hands down (SG bonds give only around 4% long term). With the CPF rate pegged to long term SG bond rate, I wonder why investors would not consider a passive and low cost fund like ETF, it's certainly not exciting but it beats most investment out there without the holder needing anything but patience.

Not exactly my kind of returns though :P


Anonymous said...

97-98 was the infamous Asian Economic Crisis. Dot com was 2000.

la papillion said...

Ah...I see, thks anonymous! I wasn't even into the market yet at that time, still schooling, haha!

Market Uncle said...

Hi la papillion,
I share similar sentiments regarding STI. Since only the supposedly 'best' or

representative blue chips make it to the STI components, so long as the economy does well in

the long run, STI doing well comes as no surprise. This theory should also apply to any

other broadbased country indexes.

As you have put it well, "...certainly not exciting but it beats most investment out there

without the holder needing anything but patience.", it takes too much patience and faith to

stay vested for long years to see the benefits. We are talking of decades, not even years.

(By the way, get rich quick implies days,weeks kind of expectation. Months are 'long term'
to these investors.)

Depending on individual cost of capital and risk appetite, STI ETF may or maybe not be

suitable. For me, if I'm using cash, my cost of capital is obviously higher, since I can

take greater risk.

Using CPF, it already give a risk free rate of 2.5% or 3.5% for the first 20K. My cost of

capital is hence greatly reduced, and all I ask for it for my choice of investment vehicle

is to beat the 3.5% + inflation. Hence I choose STI ETF.

By the way, I like your analysis on the STI returns.

la papillion said...

Hi market uncle,

Thks for visiting :)

I agree with you regarding using cash/cpf in investing sti etf. For me, i'll be using cash hence the rate will be quite unacceptable to me, though it's very okay for another person investing through cpf.

The main point in my article is that an individual needs to hold a very long term view for sti etf. Otherwise, the returns can be very spectacularly high or low, depending on entry point (or entry year). But from history, once the person holds over 14 years, chances are in his/her favour that it'll not be negative.

I guess besides deciding whether one is investing using cash/cpf, the other impt consideration is whether one can ride out all the noises and really sit on the sti etf for 14 years and above. Not an easy task at all.

Cathy said...

Actually there isn't a need to hold tight to ride out the waves. As you can see, STI goes through periods of peaks and bottoms. Because ETFs are made up of a variety of shares, it evens out all the noises and what you get is pretty predictable using TA.

Just buy and sell or short accordingly.

la papillion said...

Hi cathy,

Thks for your feedback.

Yea, I'm talking more about investing kind of mentality. Buy and forget. STI etf is one thing one can buy and forget, can't say for sure about other individual companies.

Possible to short sti? Using what instruments? warrants? futures? cfd?