Novice investor - also confused about the math of returns

[YQHeng93]

Hello all. I've not started investing yet, but I'm keen to learn. After reading a few threads here and did my own googling, I've got a few questions in mind and I'd like to hear your opinion.

So I heard that if the stock market falls 50%, the value of your investments will also fall by 50%.

1) How do they see that the stock market has fallen by 50%? When people say the 'stock market' do they mean DJIA, S&P500, NASDAQ or a particular index? Or really, the stock market as a whole? How do they gauge the health of the overall stock market then?

2) Suppose they do use an index to gauge how much the stock market has fallen. If I go Yahoo Finance and look up the STI, and it charts the STI to have risen by 20% over the last 5 years, does it mean that if 5 years ago I bought STI ETF, today the value of my investments is 20% higher?

Other questions:

3) Since the stock market in Singapore is so limited... and the STI generally gives an average return of 7% to 8% every year, how do you try to beat the market? Do you look for individual companies? But then putting a chunk (10% to 20%) of your portfolio in that one or two companies seems very risky.

4) What I understand from investing in US market is that there is no capital gains tax but there is a 30% dividend withholding tax. Does it mean if there are dividends, I will only get 70%? And, if the US stock price moves up, I will receive the FULL benefit of the gains. Assuming currency rates unchanged just to illustrate the effect of taxes.

5) Which overseas markets are generally better performing than the local market? I am looking to start investing and the first place I'm starting with is ETFs. Although I will stick with the local STI ETF for now, I'm curious... which overseas ETFs are generally better performing than STI ETF?

6) As a passive investor, what do you do on a day-to-day basis with regards to your stocks? How do you track your stocks? When STI closes lower at the end of the day for a full week, do you consider selling your stocks?

 

[YQHeng93]

P.S. oops, I realised this should be in the Stocks, Shares and Indices sub-forum.

 

[Perisher]

Hello all. I've not started investing yet, but I'm keen to learn. After reading a few threads here and did my own googling, I've got a few questions in mind and I'd like to hear your opinion.

So I heard that if the stock market falls 50%, the value of your investments will also fall by 50%.

1) How do they see that the stock market has fallen by 50%? When people say the 'stock market' do they mean DJIA, S&P500, NASDAQ or a particular index? Or really, the stock market as a whole? How do they gauge the health of the overall stock market then?

By the index, generally in the US, it refers to those 3. In singapore it's STI.

2) Suppose they do use an index to gauge how much the stock market has fallen. If I go Yahoo Finance and look up the STI, and it charts the STI to have risen by 20% over the last 5 years, does it mean that if 5 years ago I bought STI ETF, today the value of my investments is 20% higher?

Yup, excluding compounding dividends and no additional purchase in those 5 years.

Other questions:

3) Since the stock market in Singapore is so limited... and the STI generally gives an average return of 7% to 8% every year, how do you try to beat the market? Do you look for individual companies? But then putting a chunk (10% to 20%) of your portfolio in that one or two companies seems very risky.

There are many ways, some suggest using the MA as a guide, some suggest to time the market, some buy individual stocks which are stronger than the market, e.g. RMG. All that requires skills and luck. Over the long term though, most people are better off getting the market returns.

4) What I understand from investing in US market is that there is no capital gains tax but there is a 30% dividend withholding tax. Does it mean if there are dividends, I will only get 70%? And, if the US stock price moves up, I will receive the FULL benefit of the gains. Assuming currency rates unchanged just to illustrate the effect of taxes.

Yes, only 70% of the dividends. Yes, full price gain minus trading fees for buy/sell.

5) Which overseas markets are generally better performing than the local market? I am looking to start investing and the first place I'm starting with is ETFs. Although I will stick with the local STI ETF for now, I'm curious... which overseas ETFs are generally better performing than STI ETF?

I won't say generally better performing, but US has a much bigger and more matured market. Taking FX risk into account though, I think most market won't perform any better than SG. I invest in US market because of the depth and breadth of it.

6) As a passive investor, what do you do on a day-to-day basis with regards to your stocks? How do you track your stocks? When STI closes lower at the end of the day for a full week, do you consider selling your stocks?

I read and read and read. News, analysis, blogs and forums. Do note to separate between facts, figures and analysis from noise and nonsense.
I track by using excel.
I hardly sell anything. Over the long term, I held 90% of my stock for at least a year. Mostly 3 years and still counting.
Seeking Alpha is a great place for you to learn about other investors, but it's mainly only about the US market.

 

[IronMac]

3) Since the stock market in Singapore is so limited... and the STI generally gives an average return of 7% to 8% every year, how do you try to beat the market?

7-8% is actually the norm for the North American market over the long term. Some people will do better, some will do worse.

 

[YQHeng93]

Thanks guys! Also, as a beginner venturing into the world of investment, what are the steps I should take to begin my financial planning?

I hear that investors should 'plan their investment horizon'. But what does that mean?

As an investor, shouldn't you seek to maximise returns for a given level of risk you're willing to take? So that means that you can't really control the rate of return you get. And if I can't control the rate of return you get, it means that I should just continue to invest until I get an amount of money I am satisfied.

In other news...

I've just picked up The Intelligent Investor by Benjamin Graham. I've finished the first three chapters and it is loaded with history and I can't really follow the discussion since it is so much history and he talks about ratios and stuff. All I can understand from the first three chapters is "the stock market is never certain". Am I doing this wrong?

 

[limster]

In other news...

I've just picked up The Intelligent Investor by Benjamin Graham. I've finished the first three chapters and it is loaded with history and I can't really follow the discussion since it is so much history and he talks about ratios and stuff. All I can understand from the first three chapters is "the stock market is never certain". Am I doing this wrong?

Congratulations. You are way ahead of many other people in this forum who don't bother to read anything and expect people to spoonfeed them answers on what share to buy.

Some of us believe that Random Walk Down Wall Street is the 'correct' first book for a beginning investor and not Intelligent Investor. I feel that Intelligent Investor is too complicated to be a 'first book'. It is a 'must read', but not the first book....

So put down Intelligent Investor, borrow Random Walk from library, read a little bit, then continue with intelligent Investor...

 

[peterchan75]

Thanks guys! Also, as a beginner venturing into the world of investment, what are the steps I should take to begin my financial planning?

I hear that investors should 'plan their investment horizon'. But what does that mean?

As an investor, shouldn't you seek to maximise returns for a given level of risk you're willing to take? So that means that you can't really control the rate of return you get. And if I can't control the rate of return you get, it means that I should just continue to invest until I get an amount of money I am satisfied.

In other news...

I've just picked up The Intelligent Investor by Benjamin Graham. I've finished the first three chapters and it is loaded with history and I can't really follow the discussion since it is so much history and he talks about ratios and stuff. All I can understand from the first three chapters is "the stock market is never certain". Am I doing this wrong?

I wish someone would have told me to read these books when I started.
Investing for Dummies by Eric Tyson
Stock Investing for Dummies by Paul Mladjenovic
Fundamental Analysis for Dummies by Matt Krantz
Technical Analysis for Dummies by Barbara Rockefeller

then... you should be up to speed with the pro here.
All books are good. I especially like those classic investment books written in 1900's. Check them out at archive.org. It's free. What have you got to lose ?

 

[dowzkeh]

I would say rich dad poor dad too, although i know a lot of forummers don't really like Robert Kiyosaki's books.

 

[w1rbelw1nd]

Thanks guys! Also, as a beginner venturing into the world of investment, what are the steps I should take to begin my financial planning?

I hear that investors should 'plan their investment horizon'. But what does that mean?

As an investor, shouldn't you seek to maximise returns for a given level of risk you're willing to take? So that means that you can't really control the rate of return you get. And if I can't control the rate of return you get, it means that I should just continue to invest until I get an amount of money I am satisfied.

In other news...

I've just picked up The Intelligent Investor by Benjamin Graham. I've finished the first three chapters and it is loaded with history and I can't really follow the discussion since it is so much history and he talks about ratios and stuff. All I can understand from the first three chapters is "the stock market is never certain". Am I doing this wrong?

For financial planning, please make sure you take care of not only investment, but also insurance and budgeting.

When talking about investment horizon, I think what is generally meant is the investment length before you cash out of your investment. You could be investing for your wedding needs, your children university education or your retirement. The longer the investment period, the more risk you should take.

About not being able to control the returns.... The type of investment you get into will broadly give you a range of returns/ volatility. There is a huge difference between investing in penny stocks vs government t-bills. Beyond your expected returns, you should also take into account volatility and correlation between asset classes in your portfolio.

I have read the intellgent investor as well, from my perspective (I am a major in finance), one cannot be very sure that one is buying into an undervalued share. I tried and didn't do well. If you want to spend little time "monitoring the market" then what you should do is to read "the permanent portfolio" instead.

 

[Ch3tah_39]

I would say rich dad poor dad too, although i know a lot of forummers don't really like Robert Kiyosaki's books.

Rich dad poor dad, my take away is build on asset to cover the expenses. But most of it is talking about buying property.. So got abit lost how?

 

[Shiny Things]

Hello all. I've not started investing yet, but I'm keen to learn. After reading a few threads here and did my own googling, I've got a few questions in mind and I'd like to hear your opinion.

Mate, this is absolutely excellent stuff. Welcome to the forums; we could use more curious people like you who don't mind doing some of their own research. Let's see if we can't help you out.

So I heard that if the stock market falls 50%, the value of your investments will also fall by 50%.

1) How do they see that the stock market has fallen by 50%? When people say the 'stock market' do they mean DJIA, S&P500, NASDAQ or a particular index? Or really, the stock market as a whole? How do they gauge the health of the overall stock market then?

You pretty much have to use some sort of stockmarket index to measure the market's performance, yep. So when people say "the stockmarket fell by 1% today", they're talking about the most common local market index - the STI for Singapore, the Dow or S&P 500 for the US, the Nikkei 225 for Japan, etc etc.

2) Suppose they do use an index to gauge how much the stock market has fallen. If I go Yahoo Finance and look up the STI, and it charts the STI to have risen by 20% over the last 5 years, does it mean that if 5 years ago I bought STI ETF, today the value of my investments is 20% higher?

Nope - it'll be slightly more than 20%, because indexes generally don't include dividends (Germany's DAX index is an exception). The STI pays about 2.5% a year in divs, so over five years you'll get an extra 13.1% or so tailwind from dividends (and a slight headwind from transaction costs, but hopefully you'll have kept those costs low).

3) Since the stock market in Singapore is so limited... and the STI generally gives an average return of 7% to 8% every year, how do you try to beat the market? Do you look for individual companies? But then putting a chunk (10% to 20%) of your portfolio in that one or two companies seems very risky.

I just don't bother. I've got better things to do with my time than try to beat the market.

People whose job it is to beat the market will use a couple of methods. They'll either overweight certain stocks and sectors that they think will outperform the index, or they'll go outside the index entirely and start dabbling in wacky-ass small-cap stocks. This is fine if investing is your full-time job, but if it's not, it's probably a waste of time and you'll most likely be stockpicking at random.

4) What I understand from investing in US market is that there is no capital gains tax but there is a 30% dividend withholding tax. Does it mean if there are dividends, I will only get 70%? And, if the US stock price moves up, I will receive the FULL benefit of the gains. Assuming currency rates unchanged just to illustrate the effect of taxes.

Correct, and correct.

5) Which overseas markets are generally better performing than the local market? I am looking to start investing and the first place I'm starting with is ETFs. Although I will stick with the local STI ETF for now, I'm curious... which overseas ETFs are generally better performing than STI ETF?

The problem is that you can't really tell which ones are going to perform better in the future. You can certainly say "this one's performed better in the past", but just because something performed well in the past doesn't mean it'll perform well in the future - in fact, it's more likely that stocks or sectors or countries that did well in the past will underperform in the future.

Despite that, the "past performance = future results" fallacy underpins pretty much the entire funds management industry. You'll see lots of funds advertising how well they did over the last year, or the last three years, or whatever. Usually that means they were lucky, not that they were good.

6) As a passive investor, what do you do on a day-to-day basis with regards to your stocks? How do you track your stocks?

I get bored at work; I check my stocks; I go back to work. 99% of the time, the only actual trading I do is when I get my biweekly paycheck and plow some more money into the market.

When STI closes lower at the end of the day for a full week, do you consider selling your stocks?

Nope - if anything I'd consider buying more. Think of it this way: you've got the same great stocks, but now they're 3% cheaper or 5% cheaper than they were a week ago.

People think about stocks in a really weird way. If your local supermarket put up a "50% off everything" sign, they'd have queues out the door and around the block. But in 1998 and 2008, when the SGX basically had a "50% off everything" sign, people were desperate to sell their stocks and never get involved in the market again. If you see stuff on sale, you should be buying, not selling - and that goes for stock markets as well.

I hear that investors should 'plan their investment horizon'. But what does that mean?

That just means "how long will it be before I need this money?". I like to break it down into three buckets: "less than three years"; "three to five years"; and "more than five years".

As an investor, shouldn't you seek to maximise returns for a given level of risk you're willing to take? So that means that you can't really control the rate of return you get.

Yes, you've got the right idea - the thing is that the amount of risk you can take is constrained by your investment horizon.

• If you need the money in three years or less, then you can't afford to take much risk - so you basically have to stick the money in the bank;
• If you need the money in three to five years, you can afford to take a bit more risk, so you can look at bonds as well as bank deposits;
• If you don't need the money for at least five years, then you've got enough time to ride out the swings and roundabouts of the stock market, even if something bad happens in the meantime. So for money with a >5 year horizon, you can put it in a mix of cash, bonds, and stocks without worrying too much about the money not being there when you need it.

The last point is what caused problems for a lot of near-retirees in 2008. They had too much money in stocks, because stocks had done so well over the previous few years - so when stocks tanked 50%, a huge chunk of their retirement money got wiped out just before they were due to finish up and head for the Riviera or wherever. The point is that if you're close to retirement, the money should be in less risky stuff so that you don't get poleaxed by a sudden market decline.

I've just picked up The Intelligent Investor by Benjamin Graham. I've finished the first three chapters and it is loaded with history and I can't really follow the discussion since it is so much history and he talks about ratios and stuff. All I can understand from the first three chapters is "the stock market is never certain". Am I doing this wrong?

No, you're pretty much doing it right. Graham-style value investing is HARD. For that matter, any sort of active investing is hard - there is no magic bullet that'll make you a zillionaire.

That's why you'll see me around the forums banging on about "pick a few ETFs, buy and hold, and head for the pub". Most people have better things to do with their time than digging deep into companies' financials to try to find some tiny little underappreciated gem, or writing lots of code to pick out momentum stocks that they can trade. Most people have real jobs. And for those people, your best bet is to just buy a nice diversified ETF portfolio and get on with your life. You won't beat the average, but you won't do worse than the average either - and over thirty or forty years, the average is pretty damn good.

 

[dowzkeh]

Rich dad poor dad, my take away is build on asset to cover the expenses. But most of it is talking about buying property.. So got abit lost how?

For me, the key take away from Rich Dad Poor Dad is the idea of financial freedom. Properties is just a tool he use (or MLM etc)... there are many tools, and it is up to us to learn and utilize the various tools to reach financial freedom.

And to achieve FF, is to build up enough passive cash flow. Properties / business is how he does it. A lot of Singaporean bloggers did it via dividends from equities/reits.

Different tools i guess.

 

[YQHeng93]

Wow thanks for the input guys!

I won't be entering the market anytime soon as I don't have income (I'm currently a 22yo uni student entering my second year). However, I'm thinking that once I start doing my internships next April I could have enough funds to start investing.

But the funds would still be seriously limited. As such, is it advisable for me to start off a DBS Vickers account where 1 lot = 100 shares?

Since shares can only be bought in lots right, 1 lot of Nikkei AM STI ETF is about $350+? And then I'd probably do dollar cost averaging, 1 lot per mth for 3 to 5 months (length of time depending on how much money I can channel into investment) and then let that principal grow until I get a proper paycheck.

And then once I am able to properly start DCA'ing $1000/month, I'll diversify into bonds with a bond ETF, and then at some point switch over to SCB account (then 1 lot of STI ETF is like $3000+?). Seems like a long time before I can build a proper portfolio.

 

[Perisher]

All sg minimum shares for every stocks are 100 shares. No longer 1000.

 

[YQHeng93]

Ah, as I reread my previous post, it just struck me: if dollar cost averaging is spending a fixed amount of dollars every month, how do I do so if shares are sold in lots?

All sg minimum shares for every stocks are 100 shares. No longer 1000.

So with this minimum number, I can actually buy like 125 shares, rather than in strict bundles such as 1 lot, 2 lots, etc? So lots is just a collective term to make it easier to say how many shares you are buying?

 

[ston12345]

Ah, as I reread my previous post, it just struck me: if dollar cost averaging is spending a fixed amount of dollars every month, how do I do so if shares are sold in lots?


So with this minimum number, I can actually buy like 125 shares, rather than in strict bundles such as 1 lot, 2 lots, etc? So lots is just a collective term to make it easier to say how many shares you are buying?

Unfortunately in Singapore, the minimum number of shares you can get any time is in multiples of 100s (ie 1 lot = 100 shares) regardless of broker, less special cases and the odd-lot market.

This makes DCA a little bit harder cause you tend to end up with stray dollars depending on the amount you're DCA-ing. What you can do is buy bi-monthly/quarterly so that you minimise your stray dollars.

As for brokerage choice, you should probably try to open an account with SCB. DBS has a .28%, min 25 commission, making your minimum breakeven contract size to be about $9000 per trade.

 

[Perisher]

So with this minimum number, I can actually buy like 125 shares, rather than in strict bundles such as 1 lot, 2 lots, etc? So lots is just a collective term to make it easier to say how many shares you are buying?

As the post above stated and mine before, you can't buy anything that's not in 100s of shares, i.e. you can't buy 125, 387 or 456 number of shares, you can only buy 100, 200, 300, 400 or 500 shares. In mutiples of 100.

So now if you buy STI using ES3/G3B, it will cost $338/$342 per 100 shares.

 

[YQHeng93]

A lot has been said about the power of compounding in investing, but since gains or losses in stocks are only realised when sold, where does the compounding come into play?

What I understand is that, for example, if STI rose 20% over 5 years, you profited by 20% (excluding dividends). But this profit is only realised when you sell your stocks at this point. This is also when people convert the 20% over 5yrs to an annualised rate of return, right?

On this note, can I clarify that the investment process is actually a cycle? Do people DCA as they enter the market, and when they think the market is about to hit the top of a bear market, they sell to realise the profit, and then they restart the whole process by DCA'ing into the market again?

Sent from Nokia 3310 using GAGT

 

[zeroX26]

A lot has been said about the power of compounding in investing, but since gains or losses in stocks are only realised when sold, where does the compounding come into play?

What I understand is that, for example, if STI rose 20% over 5 years, you profited by 20% (excluding dividends). But this profit is only realised when you sell your stocks at this point. This is also when people convert the 20% over 5yrs to an annualised rate of return, right?

On this note, can I clarify that the investment process is actually a cycle? Do people DCA as they enter the market, and when they think the market is about to hit the top of a bear market, they sell to realise the profit, and then they restart the whole process by DCA'ing into the market again?

Sent from Nokia 3310 using GAGT

Sighzz... lots of folks here are really friendly and nice to share lots of information but honestly, did you even really bother to google for answers before firing off here for replies? Since you can quote "a lot has been said about the power of compounding in investing...", so what's been revealed to you so far then?

1. The magic of compounding is essentially re-investing the interest earned from your investment. In the case of equities: dividends. Hence, assuming you own $1000 of Stock A which has an annual dividend yield of 5%, at the end of the year you will get $50. Instead of using that $50 on makan, booze, call chicken as what the citizens of EDMW will do, you use it to buy more of Stock A. Hence, now you have $1050 worth of the stock. Assuming the dividend yield remains the same at 5% for the following year, you now get $52.50 instead of $50. Repeat the same process over & over again and the absolute dividend $$$ received will grow bigger & bigger.

2. You can see investment as a cycle (Buy - Hold for a period - Sell) or as a flat endless horizon (Buy & hold till you song song gao Jurong as what Buffett likes to advocate). DCA as a cycle requires you to have some basic technical knowledge of charts & trends to identify what's a good price to enter to buy to average down / price to exit to sell while DCA on a flat horizon, in the most simplistic way will be to buy $X of Y stock every month regardless of price.

Please don't ask how to time the market for best time to buy / sell. You want to do that, go read Market Timing for Dummies.

 

[ston12345]

A lot has been said about the power of compounding in investing, but since gains or losses in stocks are only realised when sold, where does the compounding come into play?

On this note, can I clarify that the investment process is actually a cycle? Do people DCA as they enter the market, and when they think the market is about to hit the top of a bear market, they sell to realise the profit, and then they restart the whole process by DCA'ing into the market again?

An unrealised gain is still a gain, unless you're in some horribly illiquid investment. And yes, ZeroX26 has broken down the magic behind compounding, essentially reinvesting your dividends.

I think the part of the equation you're missing out is that of rebalancing your portfolio. Readjusting your equities-bond allocation every year so that you sell the good performers at highs and buy the underperformers at lows.

I'm not really sure what you mean by top of a bear market - selling at the top of the bear market would mean selling at all time lows?

Lets say you're at the bottom of a bear market - essentially the percentage equities would be under the allocated value (ie. 50%). Thats when you rebalance to adjust those percentages, selling bonds and buying equities back to your original 70-30 or whatever ratio that you might have.

Read the Shiny Things thread, from the top. You'll gain a lot. Trust me.