Thursday, January 21, 2010

Do not jump into the investment foray too fast !

Although come 2010 some investments will look too good to miss but be wary of the economic mood and watch carefully how the "green shoots" have grown out of the soil and whether the "green leaves and branches" have developed solidly as we started off the year 2010 ........

You may think you'll find at least one 'too good to miss' investment in 2010. Perhaps you will be enticed maximising your invested returns, or the argument that 'everyone is doing it', so with the singaporean "kiasu" mentality, let's all jump into the boat and hope it is stable and not capsize .

We may imgaine that returns could be over-optimistic, or have unexplained risks that may not surface till years later. High returns are not impossible and can be obtained through leveraging - but the downside risks are also leveraged.

Singapore property sector ( private side ) is a classic example of the effect of gearing. For example, you could buy a condo for $1 million ( very small square foot area and likely just a studio apartment )  and borrow $0.8 million. If the property gains 10 per cent, then your gain on your $200,000 investment could work out to close to 50 per cent after borrowing costs. But you must not overlook that your risk on your investment is not straightforward property market volatility, it is at a greatly amplified level due to leveraging.

Let us all be alert and wary of the property market sentiment. Salient points of an investment could be exaggerated, selectively presented or misunderstood by sellers. Mouth-watering past returns could be the result of selection bias - meaning you only get shown the good results by agents who are trying all means to talk you into signing on the paper, and the hidden bad results are always conveniently dropped if you do not ask. Any investment that sounds too good to be true, probably is not going to happen to what you expect.  Note that this is long term commitment and long term loan repayment and if anything happen to you physically, make sure you are covered by insurance and your next of kin are not burdened by the future loan payment.

Average private house prices will gain ??

However, on the flip side (there always is), we are quietly confident that the average house price will improve in 2010. The unexpected good performance of the stock market in 2009, rising consumer confidence, an improving labour market and the increasing positive impact of the integrated resorts on the Singapore economy and tourism sector all seem to be heading for the "right investment mood" for everyone.

Most analysts' predictions could well be turn out not in your favour ! !

It's an easy prediction that no one can forecast the future accurately and consistently, nor can anyone create a reliable model of the world economy. Arguably, the past is not a good guide to the future. Famous fund commented: 'Charts are great for predicting the past.'  Warren Buffett reportedly said: 'If past history was all there was to the game, the richest people would be librarians.'

Even if we accept that prices of stocks (or oil, or gold) eventually tend towards fair values, large and persistent market bubbles and slumps occur regularly. Over the short run (for example, the 12 months of 2010), there is a huge random element affecting the outcome of complex systems such as an economy. Whatever the mechanisms, there is no foolproof way to explain (let alone predict) market movements.

So take all the 2010 market and economic forecasts you read with a big chunk of salt - most of them will likely be wrong if happen to be wrong, and the ones that are spot on will probably be due to luck. Remember, just like gambling, 99.9% depends on luck and almost zero percent depend on your gambling skill, provided if there is such school that teaches skill !

Bank deposits pale against money market funds

A typical 12-month fixed deposit (FD) promises you around 0.45 per cent at the moment. Although FD rates may gradually move up as global monetary tightening pressures are felt, they still look paltry. When money market funds are averaging around 1.4 per cent (LionGlobal SGD Money Market) and one per cent (Phillip Money Market), it's a fairly reliable forecast to say that such funds will be better places for your cash in 2010.

CPF Special Account rate to stay attractive

The CPF Board announced recently that members will continue to receive at least 4 per cent interest on a portion of their savings until the end of 2010. In terms of risk and reward, it's hard to beat anything (in SGD) that offers 4 per cent with no volatility. 

Watch out for overconfidence

If 2010 turns out to be a great year for stock markets, then it's safe to say that there will be a wave of overconfidence building up. Shares or commodities always look great during a bull run, but it's easy to forget that the downside risks are still high - and arguably get higher as markets reach new peaks.  [ Watch out for cars COE as well, it likely will follow the mood and with dropping quotas, it seem COE is having a bull run as well, Jan2010 has seen the price above $20K for a piece of paper ! ]

Trends are very hard to predict ahead of time and most investors don't spot a profitable trend until it has already happened and is on the verge of collapse.

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