Father of index funds

JOHN Bogle may not rank among the Buffetts and the Soros in the investment world today but he is well respected around the world for being the father of index funds and founder of one of the two largest mutual fund organisations in the world. He started the Vanguard Group in 1974.
He has since retired from the company but is still active in the financial world as the president of Vanguard's Bogle Financial Markets Research Center where he continues to write and lecture about investment issues. While at the helm of Vanguard, he started the world's first index fund, Vanguard 500 Index Fund in 1975, and oversaw more than 100 mutual funds with current assets totalling over US$550 billion.
Born in Montclair, New Jersey in 1929, Mr Bogle studied the mechanics of mutual funds in college and laid the foundation of index mutual funds in his thesis report. Being the pioneer of no-load mutual fund and a champion of low cost index investing, he sees himself as an advocate for the retail investors. Bogle is always seen putting the interest of the investors first and constructively criticising the mutual fund industry - the very industry that he created.
He feels that mutual funds today are overly profit-motivated and charging investors too hefty a fee. And today, he is still seen championing the cause for individual investors by setting forth to tackle the rampant mutual fund marketing problem of excessively promoting performance and charging.
Below we'll take a look at some of the main rules of Bogle's investing philosophy.
INDEX FUNDS ARE THE WAY TO BEAT THE PROS
Mr Bogle has always been a strong advocate of index funds, the financial instrument that he himself created and therefore understands so well. An index fund is, as he explains, 'simply a basket (portfolio) that holds many, many eggs (stocks) designed to mimic the overall performance of any financial market or market sector.' That is to say, the effective returns of the investor will be equivalent to that of the market return less a relatively low fee of 0.1-0.3 per cent.
He believes that the low cost and low turnover nature of index funds will allow investors to earn better returns as compared to allowing investment professionals out there manage their money in an actively managed fund. Such professionals charge substantially high commission fees of between one and three per cent.
Simply put, Mr Bogle believes that in the long run, the passively managed index fund investment will outperform the actively managed fund, taking into account the fee most active managers charge in aggregate.
Looking at the 36-year period from 1970-2006, he found that only three out of 355 funds beat the index consistently, a clear indication that the investor with a multi-decade horizon should choose the index fund.
Mr Bogle also recommends putting nearly all of the US portion of an investor's stock portfolio into the S&P 500 as it is considered as the quintessential index to track the performance of companies in the US.
His style of buying the haystack rather than trying to find the needle (in the market) strikes a chord with investing great Warren Buffett who commented that the know nothing investor can actually outperform most investment professionals by investing in an index fund. Thus it seems that such an investing style will provide a perfect way for new investors to get started investing in the market and yet outperform professionally managed funds.
TIME IS YOUR FRIEND, IMPULSE YOUR ENEMY
Mr Bogle's style encompasses a long term horizon for all his investments. He discourages investors from letting transitory changes in stock prices alter their investment programmes. He once said: 'There is a lot of noise in the daily volatility of the stock market, which too often is 'a tale told by an idiot, full of sound and fury, but signifying nothing'.'
Stocks can remain overvalued or undervalued over the years. But with time on the investor's side, he should exercise patience and enter into these stocks at the right time (when they are undervalued) and wait for them to realise their true value over the years.
Time is indeed an investor's friend if he is able to utilise this time to his advantage by doing his own research into his watchlist of stocks and waiting for the most opportune time to get invested in some of them when they are undervalued. When the investor is able to do that, he will almost definitely be getting a bargain for his buck and also effectively decreasing his risk-reward ratio.
Mr Bogle also once said that the greatest sin of investing is 'to be captured by the siren song of the market, luring one into buying stocks when they are soaring and selling when they are plunging.' Impulse, therefore, is an investor's worst enemy because emotions will come into play leading to irrational decisions. Moreover, it is simply impossible to time the market, especially during a period of market volatility.
PURSUE THE RIGHT FORM OF RETURNS - EAT THE BAGEL NOT THE DOUGHNUT
Mr Bogle also has a sense of humour when it comes to dealing with serious stuff like investing. He uses two different kinds of baked goods - bagel and doughnuts - to symbolise two distinctively different elements of stock market returns.
Investment return - dividend yields and earnings growth - is the bagel of the stock market: nutritious, crusty and hard-boiled. By the same token, speculative return - the change in prices that investors are willing to pay for each dollar of earnings - is the doughnut of the market: reflecting changing public opinion about stock valuations, from the soft sweetness of optimism to the acid sourness of pessimism. He urged investors to enjoy the bagel's healthy nutrients but don't count on the doughnuts' sweetness. Investors should have realistic expectations of the returns that they will gain and avoid relentlessly speculating in the market to gain extraordinary returns.
Owning the entire stock market through an index fund might be a winning philosophy for some investors mainly due to an index fund's cost efficiency, tax-efficiency and assurance of earning for them the market's return. But only if one follows one of the most important rules for successful investing: Stay the course and do not be deterred by investment losses. In the long run, the true investor will eventually win given that he has time on his side, is well-researched in identifying undervalued stocks and is not tempted to eat the sweet tasting doughnuts!

Jason Low
Mon, Jul 30, 2007The Business Times

The pitfall of performance chasing

SOME people liken investing to gambling - you pick a game (market) you like, calculate the risks involved, put a bet (investment), and with a combination of luck and odds, you hope to walk away with a gain.
The truth is, investing is actually a lot more complex, and perhaps why it's not called gambling is that, while factors such as economic circumstances and local/global events (ie, what some call 'luck') play a part, these risks can be managed, or at least mitigated.
That said, investing really is all about odds. It's about figuring out how likely a stock, bond or other investment will yield returns, by how much, and by when.
And despite claims to the contrary by some individuals, we do not have the benefit of a crystal ball to gaze at to reveal the future. So instead, we have to look at current - and past indicators - to help us predict the future.
Last week, we talked about financial ratios, and how they could help us determine the health of a company. This week, we expound on one of the most important principles when investing: that the past performance of a company or investment is no guarantee of future results.
Many investors brush this statement off without realising how often they break this particular principle. In fact, there's an industry term that is used to describe such behaviour - performance chasing.
Some investors jump on the band wagon whenever brokers or industry watchers start touting a hot new asset class or sector.
They dump huge amounts into this new-found love affair, only to come away disappointed with the returns, which can sometimes even be in negative territory.
Worse still, some investors pull out current investments in order to help finance these new ones, and thus incur frictional expenses like commissions and fees, thus compounding the situation.
For instance, the latest high-end property boom has seen some people making amazing sums of money by buying and 'flipping' their units.
However, don't be fooled - there are also plenty of stories of those who assumed that there was quick money to be made, but ended up instead being unable to flip the million-dollar apartments which they had no intention of keeping in the first place.
In fact, history has often showed that in many cases, the best time to invest in a particular sector is after it's suffered some horrible industry trends.
So before you jump into that new investment you might want to ask yourself some questions:
Has this particular sector, industry, or stock experienced a sudden increase in price recently, and does this still make the investment attractive?
Have the prospects for better earnings already been priced in?
What makes you think the returns from this investment will be materially higher in the future than they are at the present time?
Another very important question you have to ask yourself is, how well do you know the investment, sector or business you intend to invest in? As a general rule of thumb, you should only go into businesses you understand.
For example, if you are thinking of buying into the stock of a property company, then you should understand the economics of the property sector. Based on your understanding of the sector, how far ahead can you forecast how profitable the company will be? How certain are you of that prediction?
So it really isn't a good idea to just jump into a sector or investment because you're afraid that you're going to miss out if you don't.
A more recent - and painful example, for some - was the Internet boom, which saw thousands of investors rushing head first to grab a piece of the pie.
As an intern at The Business Times then, I remember attending countless launches of new companies which had hit on the 'next big Internet technology that would revolutionise the world'.
And at every turn, gleefully heady angel and seed investors regaled me with tales of how the Internet would change the way we live our lives, and make plenty of companies rich, to boot. Well, it has - but today, less than a handful of the dozens of companies I interviewed are still around, and many investors have lost staggering sums of money.
The corollary to that is that there were also some stunning successes, and some very rich - and probably very retired - investors. So, there are risks, and there are rewards, but don't be silly and jump into an investment just because everyone else is.
As my grandma always said: 'If everybody decides to jump off a building, you also want to jump?'

Daniel Buenas
Mon, May 21, 2007
The Business Times

When money divides brothers and sisters

IT IS often said that blood is thicker than water. However, when money is involved, relationships between siblings can turn ugly.
The potential flashpoints include real estate, bank accounts, wills and so on. Whatever comes to mind, brothers and sisters have fought over it.
Chief executive of Grandtag Financial Consultancy (Singapore) Ben Fok said: 'There are many scenarios in which money can break down the bonds between siblings.
'For example, when a joint account is shared by a parent and only one child, it can trigger inheritance battles. When a parent dies, it is not uncommon for difficulties to arise over the disposition of personal effects. Another minefield is lending money to a family member.'
Sibling disputes
THE Sunday Times has compiled an X-File of legal disputes that show the legal and financial minefield that could lie under any family tree.
Case 1: Dispute over sale proceeds of an HDB flat
MR HARRY Lim (not his real name) bought an HDB flat in his and his mother's name.
He paid for it and allowed his mother and his three siblings to live there.
Mr Lim was later allotted another HDB flat.
As the rules clearly stated that he cannot own two flats simultaneously, he moved to his new one and had HDB transfer his share in the first flat to his mother by way of a gift, putting it in her name.
Mr Lim understood that the arrangement was for the mother to occupy the flat in her lifetime. He continued to allow his three siblings to stay there while he paid all the expenses and the mortgage instalments.
But when his mother died without a will, the three siblings asked the court to declare that they were beneficially entitled to the flat.
They claimed it belonged to the mother and should be distributed according to intestacy laws, which meant they would have a share in any property or its sale.
'This is a curious case whereby the outcome would have been very different depending on whether it was a private property or an HDB flat.
'Had it been a private property, the court would have found that the mother held the flat in trust for Mr Lim solely,' said Ms Lie Chin Chin, managing director of law firm Characterist.
Unfortunately for Mr Lim, HDB flats are subject to different laws which do not allow a flat to be held in trust unless the Housing Board has approved the arrangement first.
Mr Lim did not have this approval.
Even though the court noted his generosity to his mother and siblings in contrast to the siblings' own lack of contribution to buying the flat, it found the property to belong to the deceased mother and ordered that the sale proceeds be shared equally among the four children.
Case 2: Dispute over the inheritance of a bungalow
EVERYONE in the family had expected the father to leave the 36,000 sq ft prime district bungalow to his favourite son even though his daughter lived there and looked after her dad.
After the father made a will, the son told his sister that he was concerned for her as he would likely inherit the bungalow while she would be left out in the cold and was not entitled to public housing.
He proposed an agreement: If one of them were to wholly inherit the bungalow, it would be shared equally between them.
After the father died, it was found that he had left the bungalow to the daughter solely and not the favourite son.
The daughter then sought to rescind the agreement with her brother.
It was found that her brother had in fact secretly read the will and had realised that the bungalow was bequeathed to his sister solely.
He then fraudulently induced his sister to sign the agreement on the pretext that it was to her benefit since it was likely that he would be the beneficiary of the bungalow.
The court set aside the agreement, ruling that the sister had signed it due to her brother's fraudulent misrepresentation.
Case 3: Dispute involving a deceased mother's $3m estate
IT WAS an eventful two years.
Madam Irene Lee (not her real name) made a will appointing her son Aloysius Lim (not his real name) as the sole executor.
Shortly after, she transferred her business to him and sold her property - she also passed the sale proceeds to her son.
Madam Lee then amended her will, giving everything to her son.
After she died, Mr Lim's siblings alleged that the transactions - the business transfer, the property sale and the amended will - were invalid as their mother did not have the mental capacity to carry out the decisions.
Doctors testified and the court found that the mother either did not have the mental capacity or if she did, was under undue influence from her son.
The court ordered Mr Lim to refund the sale proceeds of the property to the mother's estate. He was also told to account for the assets - worth about $3 million - that belonged to the estate.
The estate was to be distributed according to intestacy laws as if she had not made a will.
Other common disputesMaintenance of parents
Mr Stephen Teo, Alpha Financial Advisers' business director, observed that conflicts do not usually arise from the different cash allowances parents get from their working children.
It is the unexpected costs that cause problems.
'Conflicts usually arise from additional out-of-pocket expenses that are unexpected, such as medical expenses, funeral expenses, probate costs or long-term care expenses for the parents.
'The conflict can be more intense when the parents do not have any savings to absorb these costs,' he said.
One way to avoid such unpleasantness is through the pooling of monies from all siblings or as part of the allowances to parents, to purchase a hospitalisation and surgical insurance plan, added Mr Teo.
Loans to siblings
It can be tricky to say the least if a sibling asks for a loan.
They are hardly strangers so saying no can be difficult. However, if they are likely to be unreliable, no one likes throwing good money after bad.
So what should you do?
Mr Goh Yang Chye, the managing director of GYC Financial Advisory suggests that you should do so only if:
You can afford to;
You are not feeding a bad habit;
You are willing to give selflessly based on personal values;
You are willing to forgo the amount;
Your spouse pre-approves the loan; and
Your personal relationship can survive any business problems.
Guarantor to a debt
However, when a sibling serves as guarantor to another sibling's debt to the bank or other institutions, the issue becomes more complex.
Mr Goh said that many people may not be aware that when they sign on the hospital's consent form giving permission to provide treatment for your sibling (or anyone), you also accept legal responsibility for the medical fees and other responsibilities that come with it.
You become liable for your sibling's financial obligations so a bank, hospital or appointed collection agency will have the right to demand payments from you and bring you to court for defaulting on payments.

Lorna Tan
Sun, Dec 30, 2007The Straits Times