Well, over the last couple of days, I was doing intensive research on the various preference shares, corporate bonds and sg bonds. I decided that I'll just put those funds in fixed income instead of equities so that things are a lot more predictable. I'll have predictability in cash flow and more stability in portfolio value. I'm always thinking that I'm the one who's guaranteeing the money, so I better play it safer. It's always a compromise between yield and risk of loss of capital, so I'll have to balance it to seek the returns that I want.
First of all, after doing a table of all the instruments that I'm looking at, I did a spreadsheet to see how different portfolio allocation can affect the overall yield, the actual cash flow and also the possible gains/losses if there's early redemption (this is really just for preference shares, and most, if not all, are trading above par values). After playing around with the numbers, I have a few sets of portfolio allocations. I initially wanted to settle for one at 5% portfolio yield, but decided not to, because a big part of it will be put in a rather high risk bond (Olam's, if you must know). Before I typed out this article, I really had the intention to follow this portfolio's plan. But I guess I chickened out in the end, so I settled for a more modest portfolio yield of 4%. Still, the 4% per year is still way higher than the 2% that I guaranteed for my parents, so I'll be covered. No point coveting an extra 1%, which is just $500 per year!
Secondly, I have to think about how much to give to my parents. The terms of LP bonds are listed here, and I'll have to hit at least 2%. It'll be good to have a bonus of 0.5% to 1% given to them too. Even giving them 1% more per year, I should have a healthy buffer of cash to pay out in case shit hits the fan on my portfolio. Being able to earn 4% yet guaranteeing only 2% will be my safety margin, but this must not be achieved on potentially higher risk instruments.
Thirdly, I have to stress test the portfolio. I made an important assumption that all the underlying of the bonds, sg bonds or preference shares are not going-concern. If they are, then I won't be able to save it anymore. Therefore, to make this assumption true, I must be rather vigilant at looking at the underlying company for the instrument concerned. 80% of it is to be invested in banks/sg bonds, so I think it should be a pretty good assumption. I'll share more about my portfolio allocation when I'm ready to reveal. I make a 10%, 15% and 20% drop in prices and see if my remaining cash flow that I didn't pay out (after paying out 2% min) is enough to hold it afloat. I figured that I should be able to take a hit of around 10 to 15% losses if suddenly my parents want to liquidate the portfolio and withdraw their principal when the market is not doing well.
With that said and done, I'll just have to wait for the funds to flow into my trading account. After the initial fishing for the best price in the market, I'll just sit and wait for the cash flow. I really don't want to worry too much about this portfolio, nor do too much work for this as it's supposed to be a low fuss portfolio.
14 comments :
Guess it might be a good idea to diversify as widely as possible. So that any loss will not wipe out say more than 5% of total invested capital.
Is really interested to say what u have got. :)
Just curious, u do not have any hyflux preference shares ba? The cover ratio is horrible, and the underlying business cash burning.
My mum-in-law did ask me what to buy when her 5.1 % preferences shares for Ocbc is redeemed. I did some research, and when I give some advices, she is not interested anymore... Haha. No need for stress and a vote of no- confidence .. Haha
Hi sillyinvestor,
Haha, you caught me :) The 20% that I said I'll risk it is actually on Hyflux bond. I'll take a closer look at that since you mentioned it. That's the only one that I'm uncomfortable with, after I took out the Olam one from my initial portfolio allocation.
Thanks :)
Given that you have the money to look at Olam, which iirc, needs at least 250K...( wow.. you staking your own capital too?)
There should be quite a number of options, like united engineers that is flush with cash due to their reit exercise, and of course CMA bonds..etc...
Just kaybo... hope you dun mind
I was looking at bonds at a period of time, I was wondering if my stocking picking can beat 4% return minimal over a bull-bear cycle (7-15 yrs?). If not, maybe I will also allocate 80% of my money to bonds and preference shares too. and 20% to equity for sustaining my hobby of doing business research.
No point zuo wu zuo bo and do worse than bonds return rite??
But that will be perhaps a decade away before I know the answer.
Hi sillyinvestor,
No lah! I where got 250k to play? haha! It's this Olam6.75%b180129US$, code R9JZ that I'm talking about here :) The board lot is 1000 and the last close is 0.993/0.995, so we're talking about thousands instead of a quarter million!
I'll likely reduce my allocation of hyflux from 20% to 10%, then put the other 10% in preference shares of banks (my fav type of pref shares btw). This 10% will be my 'play' money for the portfolio. Maybe I'll do some active trading with it too, depending on situation. Got to risk some to get a bit more bonus for my parents :)
You know what, I'm thinking of putting a bulk in pref shares/bonds too, then leaving a bit for trading/stock picking. I've held a pref share from HSBC for a few years (below par some more) and it's just collecting money without me caring a hoot about the trading price.
For a good bond/pref shares, you never want the party to end.
It's always the uncertainty future that we are all worried about...it's only in the future that we'll know if we did something right in the past, which by then, will be too late. Alas, that's life :)
LP, I am suggesting you to skip Olam retail bond as much as possible.
For me personally. I will not invest in a stock that I don't understand in its underlying business. Unless you say you totally understand what Olam is doing then confident then I say go ahead. Without Mr Temasek strong support, Olam probably is not around anymore during the muddy water incident.
Since its your parents monies, I say go for the least risky bonds, CMA is a good example and underlying biz is easy to understand, just look at the retail malls around. Local Bank preference shares are nice as well, you can also look at Genting perpetual since Olam is in your watch list as well. At least I know Genting biz is easier to understand than Olam in specific.
My 2 cents.
Hi sgft,
I'm not considering olam's retail bond at all now :) Initially I was attracted by the high yield but I thought I was putting too much at risk (wanted to put in 25% lol!). I've 90% allocated to banks pref shares and sg bonds, so I'm left with the 10% that I'm thinking where to risk a little more to push up the yield. Initially wanted hyflux's bond, but after what sillyinvestor had mentioned about the cashflow and those posts in valuebuddies, I had second thoughts.
I'll look up cma. That's highly visible and easy to see indeed :)
Maybe consider a permanent portfolio where 25% is in cash, 25% is in bonds, 25% is in hard commodity, 25% is in equity.
Review the performance quarterly, and Balance it once a year.
Hi numbers,
It'll do that if I've a bigger portfolio. But I think with 50k, that's not big enough to diversify into so many asset classes. 25% of 50k is 12.5k, of which I'll have to diversify within the same asset class too. What do you think?
Can you top up your mother's RA account to earn 4% p.a?
Hi bro8888,
I can, but it's not wise. She won't have the minimum sum inside and she might also prefer the liquidty. No point earning 4% ghost money (ghost - can see cannot touch) and yet can't enjoy the money!
LP,
Actually, 50k is big enough.
eg, for bonds simply go for decent yield within the govt bonds.
for equity, you can go eg STI ETF as a choice.
Similarly, for hard commodity, you can go for a up trending one based on market cycle. SO it is gold, silver, platinum etc, whichever is on the up trending cycle.
And the last 25% is the buffer to be use when needed.
This permanent portfolio is very robust against loss since it is itself considered diversified.
Hi Numbers,
Thanks for your invaluable input. I think I'll spend more time reading up on portfolio allocation in order to be a better fund manager for myself and for my parents. Thanks for exposing me to the different possibilities :)
Hi LP,
I'm going to be upfront. I'm going to "leach" from you. I hope you don't mind and don't worry, I will be responsible for my own loss.
Waiting eagerly for you to reveal your portfolio or drop me a PM ya.
Cheers!
Derek
Hi Derek,
Haha, okay, I will reveal it, but it's not sexy at all, so don't get your hopes up high lol
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