Ho, Ho, Ho, it is the time of the year to be merry and spend to reward yourself for working a long, hard year and also buy gifts to pamper yourself and your loved ones. At least, that is what retailers and marketing ads want us to do.

Pause a little, are we spending and enjoying too much for the present moment, and neglect to save for our future? Do we still remember the benefits of delayed gratification and a dollar saved is a dollar earned?

Well, instead of Christmas and year end shopping for clothes, electronics, etc. Why not consider year end Christmas shopping for Unit Trusts (UTs) especially if you have made your Supplementary Retirement Scheme (SRS) contribution for this year. Instead of buying expensive toys for your child, consider saving some money into UT for your child’s future needs. Instead of paying thousands of dollars for expensive overseas tours, consider other tourists have spent thousands visiting our country and our attractions especially our Botanic gardens that has won the UNESCO World Heritage Award. Why not save the thousands of dollars and bring them for a unique SG islandwide tour?

If you agree with some of the points earlier, I will also share more reasons of why people buy UTs in Singapore. This article is extracted from my bestselling book Huat Ah! Building wealth in Singapore with Unit Trusts, now available at all good bookstores in Singapore.  I will share 6 out of the 11 points found in the book, first 3 points in part 1 and the last 3 points in the next post.

A. Lack of time and knowledge

As all investment decisions (what, when, at what price and how much to buy and sell) are all made by a professional unit trust (UT) fund manager with analysts’ inputs; all the investor needs to do is to select a UT with an investment objective that he or she understands and is confident will appreciate in the near future. Many working adults cite this as one of their top reasons for investing in UTs.

To address the lack of time and knowledge, some investors chose to buy UT via a representative, like myself. The investor will have fewer choices to make as the licensed professional representative would have shortlisted, filtered out and made recommendations on suitable UTs after a round of fact-finding to better understand the investor’s objectives, risk appetite, investment time horizon and current portfolio, etc.

To overcome a lack of knowledge, investors can read investment books, download free research articles, and attend free educational seminars and talks from online UT platforms. Investors will then be poised to make more informed decisions once they have greater knowledge of current affairs and economic news, as well as an understanding of a UT’s investment philosophy, top holdings and geographical regions.

B. Diversification

Many investors prefer UT over stocks for its diversification benefits for the same amount of capital invested. A typical regional equity UT can have exposure to equities in more than eight countries. Country diversification is important as there may be country specific risks like political crisis, interest rate risk, currency risks, economic risks due to natural disaster, etc.

Hence by investing in a UT with exposure to several countries, specific country risks are greatly reduced. Regional- and country-specific UTs also enjoy sector diversification benefits: they can have exposure to over six different sectors of the economy. The usual heavyweight sectors in most UTs are financials, consumer discretionary, IT, healthcare, etc.

When the investor invests in a UT, he/she trusts the fund manager to be up-to-date on the news affecting the different sectors of the economy in the country and act to grow the value of the UT and consequently the UT’s NAV per unit. The benefits of good sector diversification are important as different sectors of the economy perform better during different market phases. All these diversification benefits from only $1,000/fund to get started. Unbelievable!

 C. Clear and independent structure

UTs that are marketed for sale in Singapore are established by a trust deed, which sets out the roles and parties in the UT structure. With the trustee and auditors independent of the fund managers keeping close tabs on where, what, why and how the fund manager manages the monies and complies within the fund mandate and investment objectives, investors can sleep better knowing that checks and controls are in place.

The setup of the roles and parties in the UT structure gives it an edge over individual company securities. Consider the regularity with which the public hears about frauds, rigging, accounting scandals, etc. taking place, even in big listed organisations. It is less likely with UTs. Even if one of the security within the UT is investigated for suspected fraud or mis-managements, and comprise a substantial percentage (assuming 8% of the total UT assets which is already very rare, unless it is an emerging market single country UT), the UT’s NAV may just drop slightly as they still have 92% of the UT’s AUM in other securities. The only exception is an industry-wide or sector-wide fraud. In such a case the UT’s NAV obviously will take more of a beating.

Selling UTs in Singapore is a highly regulated activity by the Monetary Authority of Singapore (MAS) as representatives of Financial Advisors have to pass exams and be of good financial standing and good moral integrity. Sellers of other types of investments, like land banking, wine investments and other forms of multi-level marketing products are definitely much lesser regulated.

—-Stay tuned for Part 2. Merry Christmas to you and your loved ones. 🙂

1. without knowing your objectives clearly before you buy them or if you do not understand the fund’s objectives

The key to a good start and a happy investment experience is to understand your investment goals crystal clear (is this investment for retirement, or your child’s education, or for the downpayment of a car, etc.), its required time frame, and your risk tolerance for that goal. A rule of thumb is if you are older or you have a shorter time frame from now until the goal, should go for something with lower risks.

You should also understand a UT’s investment objectives and risks, and ensure that they are in line with your personal investment objectives along with understanding the UT’s fees and charges. You can read up on the fund manager’s background and track record, especially his/her funds’ performance during different market cycles comparing them with other peer UTs managed by other fund managers of similar objectives whenever possible. Although past performance is not indicative of future performance, it does not hurt to see the consistency of the fund manager’s track record during his/her tenure managing the UT. If the UT has a track record of over ten years, look at how it performed during periods of crisis (the post Sept 2001 terror attack, the SARs period in Mar 2003, the 2008 global financial meltdown and the latest 2012 Eurozone Austerity crisis).

Other than studying the fund manager’s background and the UT’s record, it’s important to also look at the fund house, as it is the organisation the fund manager and their team of analysts are working for. More established fund houses have an impressive track record of generating decades upon decades of stellar performances from the systems and human experience they have built up during numerous market cycles. It’s good that you do your due diligence and check these points before purchasing any UT.

2. to follow the herd

Remember the old Wall Street investment adage: “No trees grow to the sky”. Another reason investments sour is because some investors follow published information and chase after past top performers in the form of single country or single sector UTs that have performed very well in the past. No matter its past performance, no investment offers a guarantee of replicating its performance infinitely. Since economies are cyclical in nature and go through phases, any sector/country that had already performed well in the last few quarters and years may be on the verge of becoming a laggard. Conversely, a laggard sector or country UT may be on the verge of a turnaround after restructuring its economy or after certain political changes or technology advances.

When investors buy stocks, many like to look at the Price/Earnings per share ratio (P/E) for the price other investors in the market are willing to pay for the company’s share for each dollar of earnings. A high P/E ratio indicates the stock is overpriced assuming ceteris paribus. It must be noted at this point to compare P/E ratio of companies within the same industry as each industry represents different growth prospects (e.g., financial companies should not be compared against utilities companies). Usually equities that were the flavors of the year or top returns last year will have very high P/E ratio, inviting questions as to whether the company can still generate earnings growth in line with its share price growth. Likewise, for equity UTs, because it is made up of a portfolio of companies often in different sectors in their holdings, P/E ratios cannot be used in the same way. Instead I suggest you to look at the current NAV of the UT they have shortlisted and compare against the 1 year, 3 years and all-time high and low NAV to get a good indication whether the UT’s current NAV is overpriced.

You should then be forward looking and ask at which stage is the global economy now and where are the next growth countries/regions or sectors to invest in them instead of past flavours of the year. For example, you are optimistic on single country Korean equities growth, believing that as USA economy recovers it will likely demand more electronics and cars (Samsung and Hyundai) and you only wish to invest in SGD currency. You can use the search/filter tool to sift out UTs invested predominantly in Korean equities: (Franklin Templeton Korea fund, HGIF Korean Equity and LionGlobal Korea fund), so just like comparing P/E ratios within industry, you should compare 1-year, 3-year and all-time high NAV vs current NAV among similar UTs.

Timing the market is another classic form of herd mentality investing. Many people think that by studying charts and trends or by following the investments of their friends or colleagues who attended technical analysis courses, they will be able to successfully time and beat the market. In reality, no one has either successfully timed the market ten out of ten times or predicted when exactly markets will peak and trough. Not even the legendary investor Mr Buffett, who famously said, “People that think they can predict the short-term movement of the stock market, or listen to other people who talk about timing the market, they are making a big mistake.”

Therefore what is more achievable than timing the market is to diversify across different asset classes, geography and sectors; investing in regular intervals; and regular portfolio review with rebalancing.

3. with an excessive risky or excessive conservative mentality

Neither of these two opposing approaches toward investing will make you very successful over time. Excessive conservatism is displayed by people who never want to invest and save all their money in the bank; but with current low interest rates banks offer for deposits, coupled with high inflation rates, the saver will find it hard to attain real growth of wealth in 20–30 years.

Excessive risk taking should also be discouraged, even if it is on a hot tip recommended by friends or the broker. When given a hot tip, you should remember the first rule of investing: only invest with monies that you can afford to lose. If it is a volatile investment above the usual acceptable risk tolerance and it keeps you up at night, it is considered as excessive risk. Using leverage to achieve greater gains but with risks above one’s level of comfort is another form of excessive risk taking that must be avoided. Even Buffett famously said he would not sacrifice his sleep for the chance of extra profits through leverage.

Instead of becoming overly fearful or overly greedy, you must develop both financial reasoning (the science of investing), as well as be guided by intuition, risk-taking and inventiveness (the art of investing). Analyse the top 10 holdings of the UT individually, find out more about the geographical allocation of the UT, and ask yourself if you see future growth in that economy. If the investment currency of the UT is not in SGD, analyse other currencies too. For example, one could study USD/SGD or EUR/SGD historical charts for exchange rates or read some currency’s analyst outlook. Use the analyst reports as a reference and importantly, consider if it is sensible and accurate.

4. and do not monitor your investments or have a trusted Financial Advisor Rep (FAR) to work with you.

Some investors neglect to review their portfolio or perform at least one annual rebalancing; if markets are turbulent, the review and rebalance should be done more frequently. Although buy and hold strategy still has its place in the 21^st century, a portion of the investor’s monies can be placed in an actively managed and constantly rebalanced account, overseen by a FAR. This account can contain the more volatile regional equities, single country and single sector UTs that requires closer and constant monitoring.

Many analysts and experts have said that market cycles have become increasingly shorter with more wild swings. This is due to technological advances and super computers executing hundreds of trade in a second, which was unheard of prior to the nineties. Information is now everywhere, and fund managers and big investors react to financial news in an instant. Not monitoring your investments regularly is costly and you do not want to be left holding that UT after 50% or more of other investors have sold their investments and the music had stopped.

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The writer Derek Gue, is a financial strategist and can be contacted at bwutbook@gmail.com to give personalised advice on your UT portfolio. The above article is extracted from his bestselling book Huat Ah! Building wealth in Singapore with Unit Trusts, now available at all good bookstores in Singapore.