President Trump : Make America ( STI Index ) Great Again !









Not All Index Are Created Equal

I think most of us are using Index as bench-marking against our portfolio’s performance and from time to time, we often hear about buying index as kind of passive investment. Some financial advisors are even proposing “DCA” or dollar cost averaging for Index with “buy and hold” strategy.

“The average annualized total return for the S&P 500 index over the past 90 years is 9.8 %.”

Guess this is the most “eye-catching” phrase that often mentioned in the news which is also the most powerful words to attract investors pouring billions of dollars into Index ETFs under the so called “passive investment” strategy.

But remember that not all Index are created equal, if the index are added with many “toxic stocks”, such index will sure underperform than other world indexes.



<source:InvestingNote.com>




Look at the chart , If you are a fresh graduate who have invested $10K into STI Index fund 5 years ago, locking it with “buy and hold “ strategy, guess what ,your returns will be quite pathetic with negative returns of -5.28% (excluding dividend). With dividend added , you returns may increase to about 2.5%+/- p.a.

If we compared such returns with 10 Bond yield , it only gave us 0.5%+/- over Market (Equity)  Risk Premium “ on average for the past 5 years, which I think is very low as to take higher risk by investing in Equity vs Bond.

What is “Market Risk Premium”? < source : Investopedia.com>



Below are two very good and well written articles on investing in STI Index as passive investment.


3 Reasons Why Singapore’s STI (‘Super Terrible Index’) is a Bad Passive Investment Strategy <source:singsaver.com.sg>



Obviously , the Banks (with much higher weightage due to larger market cap ) and REITs in STI Index which performed well in the past few years had assisted to deter the index from ending up in much lower level as of today.

Index investing is about diversification and of course is good to have index which diversify across different industries and stocks in order to manage risk ( unsystematic risk) and reduce volatility.

The Big 3 Banks (especially DBS) which contributed almost 38% (DBS-15.9% / OCBC-11.3%, UOB-10.6%) of market cap weightage are holding the index well due to good performance and strong recovery from GFC, else, just look at how badly the other stocks listed in STI Index perform from below charts.





It’s not surprising that so many people like the idea of “passive investing” in Index as you can imagine that having portfolio that making money for you while you are sleeping , “ buy and hold” without much worry about market volatility and keep it for long term.

Well, 5 years may be too short to see the result as we invest for long term, how about stretch our investment horizon to much longer period?




We will also need to take note that past 30 years and next 30 years returns will be much different as Singapore’s economy structure had changed, we experienced high GDP growth in early 70/80s , but look at the economy growth for the past 5 years , is rather low or stagnant. Diminishing returns for STI will continue in line with GDP growth unless we include more company with international exposure into STI Index.

With current STI skewed towards Big 3 banks with as much as 38% weightage, imagine if banks stock collapse, do you think others can come to rescue?

This is the predicament of current STI Index. May be we should ask President Trump on how to 


 "Make STI Index Great Again”   



Cheers !  :D






Check this out !!

5 years Returns ( period in Red arrow line) for few selected STI Index Component Stocks.

PS: StarHub and SIA Eng were both being removed from STI Index in Sep 2018.

















How about the share price of 2 major property developers ?








Comments

  1. Buy, right and hold or else sell and then try again for buy, right and hold. Repeat until you have enough

    ReplyDelete
    Replies
    1. Yah, trail and error , only time will tell if we are right or wrong ...that's call "long term" investment ... hahaha :D
      Cheers !!

      Delete
  2. STI Index is not timely managed. Though they have quarterly review, the component change is not fast enough.

    ReplyDelete
    Replies
    1. Hi Cory,

      Yes , indeed , they may need an " overhaul" rather than juts a periodic review... hahaha.
      Cheers ! :D

      Delete
  3. Hi PL/Yeo/Lee/Chin/Law Et al,

    Thanks for reading my blog and interest of knowing how to plot the "regression chart".
    I have forwarded the sample file with some brief explanation ...hope is useful and please do
    let me know if you need further clarification.

    Cheers ! :D

    For those would like to have the file, please do email to below address :

    "stesg50@gmail.com"

    ReplyDelete

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