Monday, January 25, 2010

Stay above the fray while investing


Mon, Jan 25, 2010
The Business Times


By Chris Firth
CEO of DollarDex.com




DEAR readers, I am offering six tips on investing in 2010 to help you navigate the world of finance as a smarter investor.

1. Some investments will look too good to miss
This is the oldest trap in the book. We think you'll find at least one 'too good to miss' investment in 2010. Perhaps you will be enticed with, say, 30 per cent returns, or the argument that 'everyone is doing it'.
Of course, there is usually a catch. The returns may be over-optimistic, or have unexplained risks that may not surface till years later. High returns are not impossible and can be obtained through leveraging - but the downside risks are also leveraged.

Property is a classic example of the effect of gearing. For example, you could buy a condo for $1 million and borrow $0.8 million. If the property gains 10 per cent, then your gain on your $200,000 investment could work out to close to 50 per cent after borrowing costs. But you must not overlook that your risk on your investment is not straightforward property market volatility, it is at a greatly amplified level due to leveraging.

Being wary is a good tactic. Salient points of an investment could be exaggerated, selectively presented or misunderstood by sellers. Mouth-watering past returns could be the result of selection bias - meaning you only get shown the good results, and the bad results are conveniently dropped. Any investment that sounds too good to be true, probably is.


2. Average house prices will gain
However, on the flip side (there always is), we are quietly confident that the average house price will improve in 2010. Why? The stellar performance of the stock market in 2009, rising consumer confidence, an improving labour market and the increasing positive impact of the integrated resorts on the Singapore economy and tourism sector.

While unanticipated events could put a damper on the gains, such as large rises in mortgage rates, or global economic setbacks, we expect property to put in a strong performance in 2010.


3. Most analysts' predictions will be wrong

It's an easy prediction that no one can forecast the future accurately and consistently, nor can anyone create a reliable model of the world economy. Arguably, the past is not a good guide to the future. Famous fund manager Peter Lynch once sarcastically commented: 'Charts are great for predicting the past.' In a similar vein, Warren Buffett reportedly said: 'If past history was all there was to the game, the richest people would be librarians.'

Even if we accept that prices of stocks (or oil, or gold) eventually tend towards fair values, large and persistent market bubbles and slumps occur regularly. Over the short run (for example, the 12 months of 2010), there is a huge random element affecting the outcome of complex systems such as an economy. Whatever the mechanisms, there is no foolproof way to explain (let alone predict) market movements.

So take all the 2010 market and economic forecasts you read with a heap of salt - most of them will be wrong in some way, and the ones that are spot on will probably be due to luck.


4. Bank deposits pale against money market funds
A typical 12-month fixed deposit (FD) promises you around 0.45 per cent at the moment. Although FD rates may gradually move up as global monetary tightening pressures are felt, they still look paltry. When money market funds are averaging around 1.4 per cent (LionGlobal SGD Money Market) and one per cent (Phillip Money Market), it's a fairly reliable forecast to say that such funds will be better places for your cash in 2010.


5. CPF Special Account rate to stay attractive
The CPF Board announced recently that members will continue to receive at least 4 per cent interest on a portion of their savings until the end of 2010. In terms of risk and reward, it's hard to beat anything (in SGD) that offers 4 per cent with no volatility. So we predict that this will be the best risk-adjusted return in 2010.


6. Watch out for overconfidence
If 2010 turns out to be a great year for stock markets, then it's safe to say that there will be a wave of overconfidence building up. Shares or commodities always look great during a bull run, but it's easy to forget that the downside risks are still high - and arguably get higher as markets reach new peaks.
Trends are very hard to predict ahead of time and most investors don't spot a profitable trend until it has already happened and is on the verge of collapse.

This article was first published in The Business Times.

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