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Sunday, February 3, 2013

EPF Member's Investment Scheme. WHAT, WHY, HOW..SURE OR NOT? (Part 5)

This is the last installment for the series. If you miss the others, here's the links:
EPF Member's Investment Scheme. WHAT, WHY, HOW..SURE OR NOT? (Part 1 - Intro)
EPF Member's Investment Scheme. WHAT, WHY, HOW..SURE OR NOT? (Part 2 - Bonds)
EPF Member's Investment Scheme. WHAT, WHY, HOW..SURE OR NOT? (Part 3 - Equities)
EPF Member's Investment Scheme. WHAT, WHY, HOW..SURE OR NOT? (Part 4 - Mixed Asset Class)


Putting on Your Monitoring Googles

The good news is you don’t have to this everyday unless you want to be in hardcore mode.  A year would suffice because you can use that newly computed 1 year return to perform Step 1 to Step 3. This will determine if the fund you are holding is performing on par or has declined relative to its peers. This is the reason I do this every December and so happens I have the chance to write it down in article this time. It only takes a cup of coffee and a good Saturday afternoon ONCE A YEAR!
The second method here can be used for an existing fund to solely gauge its historical performance. Some mutual fund ads quote their amazingly high one-year rates of return. Your first thought is "wow, that mutual fund did great!" Well, yes it did great last year, but then you look at the three-year performance, which is lower, and the five year, which is yet even lower. What the duck is going on? Yes just replace the d. Go to http://www.trustnetoffshore.com, key in your fund name, go to FE Performance tab and scroll down till you see Annualized Performance. Let's look at a real example of the performance from one of the biggest unit trust fund in Malaysia:

Last year, the fund had excellent performance at 13.01%. But, in the past three years, the average annual return was 7.32%. What did it do in years 1 and 2 to bring the average return down to 7.32%? Some simple math shows us that the fund made an average return of 4.48% over those first two years: 7.32% = (13% + 4.48% + 4.48%)/3. Because that is only an average, it is very possible that the fund lost money in one of those years.
It gets worse when we look at the five-year performance. We know that in the last year the fund returned 13.01% and in years 2 and 3 we are guessing it returned around 4.48%. So what happened in years 4 and 5 to bring the average return down to 5.49%? Again, by doing some simple calculations we find that the fund just barely made money, an average of 2.73% each year of those two years: 5.49% = (13% + 4.5% + 4.5% + 2.73% + 2.73%)/5. Now the fund's performance doesn't look so good! To further confirm your doubts, take a look at the graph. Public savings’ performance is very volatile. Your fund agent might ask you buy low sell high AS USUAL LA it’s their rice bowl but are you willing to bet that this will work all the time?? And do you have the guts to sell or the wits to buy when emotions run high during bad economic periods?

In a Nutshell

The best bond funds will net you at least 8%, with equities funds 15% is not impossible and if you chicken a little bit try mixed asset funds which will give you a middle ground of 10%. Either way they are all better than just stashing your cash away into the EPF. Even if the funds are not on the appointed list, you can very well use your own savings to invest. You can use the same method to hunt for insurance linked funds. The key concept here is The Power of Compounding! And to get the most of out of this power is to Maximize Your Returns!
This concept is so SIMPLE that most engineers and university graduates CANNOT understand it because most professionals can only understand COMPLICATED things but not simple things. They know how to calculate e = mc2 but tell you 1 + 1 = 3. They can measure the speed of light and the number of electrons in a piece of silicon plus the amount of laser required to cut your eye without blinding you but they cannot grasp this simple concept. I’ve tried to explain this to a lot of people for years and most of it is one ear in and one ear out.  Some even feel so sleepy that they open their mouth as BIG as the mouth of a hippopotamus so I decided to blog everything out once and save my saliva.
I’ve shared my knowledge here, I don’t make a single cent from it and I don’t have the responsibility to make you rich. It took me more than 8 hours to finish up this installment of 5 parts. I could have watch movies OR sleep OR pak thor OR walk my dog OR lepak at mamak stall for those 8 hours. I have nearly 4 years of investing experience (which includes going through the most recent financial crisis) and have read several books on investing and this is the essence I have for you. Plus many more in this blog and more to come. Whether you want to make use of this knowledge is totally up to you =) Happy Chinese New Year!! It's not time to Snake, looking forward for another year of great returns in 2013 because the world did not end ma, aiyo did u believe it would? Problem laaa like that…
When it is not raining :)

Disclaimer: The reports, analysis and recommendations in this article are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.

2 comments:

Kris said...

Good posts!! People tend to get very excited when they see double digit returns in a 1 year period. But most important thing as what you mentioned is to look at the 5-10 years period so that the average investors don't get shell-shocked on the short term market turbulence.

As for compounding interest, i believe most people understand it, but just that in this world, everyone gets blinded by greed and wants to get rich fast!!

jeremiah81 said...

You might want to check this technical analysis program: http://www.cognitum-research.com/en/wave-explorer

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