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