Riding the Highs and the Lows

IT was a wild ride in 2007. The stock market hit its low of 3,000 on 8 Jan. After that, shares marched steadily higher, hitting a peak of 3,865 on 9 Oct.
That's a 29 per cent rise from trough to peak.
Then we hit the November downdraft. Yet today, the Straits Times Index (STI) closes out the year with a respectable 15 per cent gain.
It is a remarkable fifth straight year of double-digit increases. Shares rose 27, 14, 17 and 31 per cent in the past four years.
And it isn't just Singapore. The stock market boom has been worldwide.
The biggest gainer for the year is China. Its share prices nearly doubled, rising an incredible 97 per cent in 2007. That is on top of a 125 per cent gain last year.
The second biggest winner is India. It rose 53 per cent this year. Last year, it was a 40 per cent increase.
In third place is Singapore's small cap index. It rose 46 per cent in 2007, following a 63 per cent rise in 2006.
What lies ahead?
Will the rally continue for a sixth straight year? Should you jump in and buy shares now?
It is hard to say. A great irony is that it is easier to predict long-run than short-run stock returns.
Long-run data - since 1800 - is available from the US. It shows the average return for shares is 12 per cent per year.
To that, you should add another 3 per cent because of our fast growth economy and its focus on technology. It boosts our expected yearly returns to 15 per cent which, by coincidence, is also this year's gain for the STI.
The problem is, it's not a steady 15 per cent. The market bounces from minus 30 to plus 50 per cent per year. It makes for a nerve-racking ride to prosperity.
You can be sure of earning 15 per cent only if you hold for the long run.
How long is that? Ten years is a good start. Since 1980, there has never been a 10-year period when the STI has finished lower than it started.
In the US, there has never been a 17-year period when stocks have earned less than 6 per cent per year.
As for the 15 per cent average return, you need to hold 30 years to get that.
At that rate, your money doubles every five years - an investment of $15,000 will grow to just under $1 million in 30 years.
How much to invest?
Before investing, take care of your basic needs like food, transportation, education and insurance.
If you have spare cash after that, I recommend investing it in this order:
First: A home.
Because you hold it for a long time, it gives high returns with low risk.
Even if you sell to buy another home, this is a like-for-like transfer and doesn't change the long-run nature of your investment.
Another advantage is a home requires regular savings. Many of us would fritter away the money if we weren't forced to pay our monthly mortgage.
Finally, a home is the only investment that includes a place to live. This unique benefit is called "imputed monthly rent".
If your mortgage payments are less than the imputed rent, your home is actually free. Think about it.
Second: Central Provident Fund.
The new CPF rules state that from 1 Apr 2008, you cannot place the first $20,000 of your ordinary and $20,000 of your special account savings into investments.
That's okay since the CPF's returns are excellent, considering that they come with no risk.
From tomorrow, you will earn 3.5 per cent on the first $20,000 in your ordinary account and 5 per cent on up to $40,000 in your special, Medisave and retirement accounts.
Third: Shares.
If you still have cash left over, consider shares, unit trusts and exchange traded funds.
How much to invest depends largely on your age.
Most of us prefer safer investments as we grow older. That's because it gets harder to earn back the money if risky investments go bad.
A good rule of thumb is to set the proportion of safe assets equal to your age.
At age 30, you would keep 30 per cent of your money in CPF accounts and fixed deposits (safe), and 70 per cent in stocks (risky).
At age 50, the investment mix would be 50/50.

By:Larry Haverkamp
Mon, Dec 31, 2007The New Paper

He invests for challenge, chance to learn

ASK financial expert Mr Michael Mauboussin, 43, for investing tips and he humbly replies that he has no advice that is 'out of the ordinary'.
Based in the United States, the chief investment strategist at financial firm Legg Mason Capital Management told The Sunday Times in an e-mail interview that investors should try to match their strategies with their objectives.
'If you're saving for the distant future, it's all about the long term. You should think about risk and reward, and carefully assess your own risk tolerance - which can change over time.
'Also, be mindful that when an asset value rises sharply, the investment opportunity has often slipped away. For investors who play the markets for fun, make sure you deploy only money that you can afford to lose,' he said.
For his own finances, he believes in contrarian investing, which means buying into what other investors avoid and avoiding what's hot.
Recently, he wrote a guide to investing wisely, More Than You Know: Finding Financial Wisdom In Unconventional Places - Updated And Expanded. It was named the best business book by BusinessWeek and best economics book by Strategy+Business.
Before joining Legg Mason, Mr Mauboussin was managing director and chief US investment strategist at Swiss banking giant Credit Suisse.
He has been an adjunct professor of finance at the Columbia Business School since 1993. In 2001, BusinessWeek's guide to the best business schools highlighted Mr Mauboussin as one of the school's outstanding faculty members, a distinction only seven professors earned that year.
Mr Mauboussin is married and has five children aged between five and 14.

Q What kind of an investor are you?
A I'm a boring, long-term investor. There is virtually no activity in my account. I tend to buy and hold.
Most of my liquid net worth is invested in our funds, so I am side-by-side with our fund holders.

Q What's your investment philosophy?
A My goal is to make good financial decisions consistently. Knowing markets are subject to probability, I realise not all of the decisions will work out. But the key is good process. For me, that translates into buying and putting away what other people are worried about and avoiding what's hot.
As Roman philosopher Horace said in Ars Poetica, his classic treatise on poetics: 'Many shall be restored that now are fallen and many shall fall that now are in honour.' But following this mantra is easier said than done.
Q How did you get interested in investing?
A My first exposure to markets was in a high school class. Shortly into my first job on Wall Street, I realised that investing specifically and markets in general present a perpetual challenge as well as a learning opportunity.
What I have also learnt over the years is that temperament - not just smarts - is one of the keys to long-term success.
Q What has been a bad investment?
A In the throes of the dot.com era, I invested in an Internet start-up. I knew the probability of success was not high and I certainly did not invest any money that was essential to my financial future.
However, I lost virtually all of my money, which did not feel good. I knew going in that a total loss was a reasonable probability. Still, in retrospect, it looks like a lottery ticket investment.

Q Your best investment to date?
A One individual stock that has served me well for years is that of Berkshire Hathaway.
I'm a big fan of its owner Warren Buffett and have been enriched by both his teachings and the stock of the company.
I have also been a long-term shareholder in Legg Mason Value Trust which, despite some challenging results recently, has been a terrific investment.

Q What's your retirement plan?
A I can't imagine ever retiring. I love what I do too much, and the investing world has more than enough intellectual intrigue to keep me busy.
My role model is investment industry legend Peter Bernstein, who's still going strong in his late 80s. He wrote five books after he turned 70.

Q Do you believe in giving back to society and how do you do it?

A There are two parts to this answer. First, I have been an adjunct professor at Columbia Business School since 1993, in part as a way to try to give back to the investment community. I believe I have gained more from my teaching than I have given, but I have been gratified over the years by students who have told me the course was useful.
Second, my wife and I offer financial support to a number of institutions, most of them related to education. For example, I have donated all of the royalties for my book, More Than You Know, to the Santa Fe Institute, a leading centre for multi-disciplinary research in complex systems theory.
Lorna Tan
Sun, Jan 13, 2008The Sunday Times