Investing

How I Invested My First $19K

Mr Life CEO - How I Invested My First $19K

$19,332.57 to be exact.

Theoretically speaking, it wasn’t my first $19k, because I had lost money prior to seriously wanting to grow this pot of gold. Previously, it was all about hoping to strike the jackpot — speculating in penny stocks.

After getting burnt, I decided to take it slow and steady back in 2015, guided by Warren Buffet’s first rule of investing:

Never lose money.

Warren Buffet: First rule of investing

When I was convinced that the permanent portfolio would be able to adhere to rule number 1, I took the plunge.

Starting my Permanent Portfolio

Enemy of rule number 1: trading fees.

To purchase stocks, a brokerage account is one of the first things you will need, right after you have opened a CDP account. A CDP account is where your stocks, bonds and REITs are credited once you have purchased them using your brokerage account. Most brokerages can help you open a CDP account if you do not have one, but doing so on your own can make opening an account online with your brokerage much easier.

Brokerage accounts were typically the same back then, since all of them were charging a minimum fee of $25 per trade. Fees are one of the major factors working against rule number 1, so it was in my best interest to reduce that as much as possible by finding the cheapest brokerage or minimizing the number of trades.

So when Standard Chartered offered a zero-fee trading brokerage, I immediately opened an account with them, which was used to subsequently add to my paper asset allocations in the subsequent years. The caveat was that instead of crediting to your CDP, they were the custodians of your shares. This added unnecessary counterparty risks which wasn’t worth it after they started charging fees. When they started charging $10 per trade, I stopped trading with them and eventually closed my account and paid a small sum to transfer ownership of the shares to my CDP.

Today, I am using DBS Vickers because they give rebates on trades, so it amounts to less trading fees each time I add to my allocation.

25% in Stocks

To achieve a diversified 25% stock allocation, I bought 1,400 shares of the SPDR Straits Times Index Exchange Traded Fund (STI ETF) (Counter: ES3) at $3.40 per share — for a total cost of $4,759.14.

ETFs are a low cost and passive way to diversify into the stock market, without the nonsense of front-loading fees and the ridiculous annual fees that Unit Trusts come with. All of which are meant to feed the sales agents and fund managers of these actively managed products that statistically do not beat the returns generated by ETFs.

There is another counter that is also an STI fund, offered by Nikko Asset Management (Counter: G3B). However I chose ES3 because it had lower expense and turnover ratios compared to G3B, which is still the case today.

High expense ratios eat into your dividends as the fund will extract their fees from there before crediting you the balance.

Turnover ratios means how often the fund trades to mirror the index. As mentioned earlier, trades incur costs, which adds up to your fund’s overall expenses.

Trading and fund fees are enemies of rule #1, which I strive to minimise.

25% in Bonds

The permanent portfolio advised for a 25% bond allocation, preferably in government issued bonds with a 30-year maturity. ETFs comprising of multiple AAA government long-term bonds will also do. The long maturity of these bonds is supposed to generate volatility to counter volatility from the stock and gold allocations — while at the same time, generate some decent coupon returns.

So I tried to purchase some 30-year Singapore Government Bonds (Counter: PH1S) and realized that it was extremely difficult. Why? Because nobody was selling it!

The “Ask” queue was literally empty for days on end.

There were of course some low-ballers trying their luck in the “Bid” queue, lining up to buy at a 10% discount from its par, even when the last trade was at a 10% premium perhaps a couple of days before. I can imagine that even if I had some PH1S on hand, it may be difficult to sell it at the right price.

As the days passed, I just couldn’t get my hands on any PH1S and had to settle for an alternative, otherwise my incomplete portfolio would be left exposed.

I ended up buying 4,100 units of ABF Singapore Bond Index Funds (Counter: A35), also by Nikko Asset Management, at $1.15 per unit for a total of $4,742.14.

A35 is an ETF consisting of AAA bonds issued by the Singapore government, quasi-Singapore government entities or bonds guaranteed by other Asian governments1These bonds consists of those issued by the likes of HDB, Temasek, LTA, the Singapore government, Korea Development Bank etc.

The maturity periods of the bond holdings in the ETF range from 1 to 40 years and price had been relatively stable since inception.

That’s the problem.

It didn’t seem to be volatile enough as the price just seems to be swinging along a narrow channel throughout the years. Furthermore, since it is an index ETF, there are expense ratios and other associated fees, which puts the coupon yields pretty low during some years. While PH1S pays 2.75% semi-annually, A35 annual coupons range from 0.88% to 2.69%.

2 weeks after I’ve bought A35, an opportunity came and finally there were some sellers for PH1S. I sold all of my A35 at the same price of $1.15, making a loss from trading fees and bought 50 units of PH1S at $98.81. A total investment of $4,940.30.

I broke rule #1 right off the bat within the first month.

But hey, either I waited for PH1S to become available before starting the portfolio and risk losing out on stock gains, or I moved in and risk a reverse stock movement without bonds for cover — I happened to choose the former.

25% in Gold

Back in 2015, I had no idea where to get physical bullion, much less where to sell them… or would anyone even buy them if I had some.

Since I had already bought into my stock and bond allocations, there wasn’t much time for further research, for fear of leaving my incomplete portfolio exposed.

Sometimes that’s what happens when you decide to really take massive action. No time to carefully plan your steps, but no time to use that as an excuse as well. You just improvise and learn.

I did the next best thing I could with the tools I had — I bought into the SPDR Gold ETF (Counter: O87). 30 shares at SG$152.01 per share after conversion, for a total investment of SG$4.560.24. O87 is traded in USD, but it so happened that POEMS managed the conversion seamlessly, making a small killing from the conversion along the way.

I haven’t bought O87 since then, because I managed to find a reliable and trustworthy outlet to purchase physical bullion. Honestly, the first time I came across BullionStar’s website, I got my first assurance. Their website indicated the price of the bullion they are willing to buy it back for. Although the book gave a thousand reasons to own physical gold, knowing that someone will buy my bullion in Singapore was what I needed to get started with my first gold coin.

BullionStar’s buyback system is clear as day, you put in a sell order on the website according to the price indicated for the product, and you bring in the goods, or mail it to them within one business day. The buyback price on the website doesn’t seem attractive as it is usually below spot, but I guess that’s to protect them against items that are in a less-than-proper condition or sudden market fluctuations. You can also walk in and have your bullion valued (for free) before selling. Perhaps it might yield a better price? Maybe at least at spot? I’ve not tried it yet, but I’ll put up something once I do.

Another reason why I stopped getting O87 was also due to the fact I never could figure out how the currency conversion for the Standard Chartered trading platform or DBS Vickers worked. I’m still holding onto those 30 shares though, they might come in handy should there be a need to rebalance.

I must admit, gold is the only allocation where I’m more comfortable with a higher spread just to hold physical bullion, compared to its paper version. Although O87 has a lower spread, being an ETF, it does come with its own expense ratio, which I believe they will deduct from the sales proceeds — so I’m expecting to get some surprises if I were to sell of those shares someday. I’ve got a feeling paper gold is not that profitable to hold for the long run. Since I store my own physical bullion, those cost me no fees to hold and Singapore is really safe from natural disasters and crime anyway.

There is another concern about O87 and other precious metal ETFs. The question of whether the funds actually have the physical bullion to back the shares. There are some independent investigations that suggests they don’t. One more reason, among many others, to be able to touch my gold.

25% in Cash

Back in 2015, it was quite a challenge looking for a bank account that gave decent interests. I had to rely on POEMS’s Money Management Account to generate some returns on this component.

Today, there’s the CIMB FastSavers account for no fuss 1% interest deposit. Then if you draw a salary, there’re accounts that give up till 3.88% interest if you jump through all the hoops. There’s the OCBC 360 account (3.4%), UOB One account (3.88%) and DBS Multiplier account (3.5%). However, most are just marketing and are not really effective interest rates, so I just pick the DBS Multiplier I can get the most interests with the least spending requirements. There’s an article by another Singaporean blogger on how to maximize the DBS Multiplier for couples with joint accounts and using Singapore Savings Bonds (SSBs).

Speaking of SSBs, I also hold some of them as part of my cash holdings. Most banks allow you to purchase them from their online banking portal. Since they are considered relatively cash-like, with a low transaction costs with just a one-month transaction time-frame2When you buy or sell an SSB, you pay a $2 admin fee per transaction and the transaction will take effect the following month.

When I first started, I always thought this portion of the portfolio was so under-utilized, second to gold, which has zero-yield — but I eventually found a use for it as my own personal bank where I borrow and pay back with interest to increase its yield, a concept quite similar to CPF OA used for housing. More on that in another post.

Adding Funds to my Permanent Portfolio

And that’s how I invested my first $19K. Of course, over the years, I’ve added to my portfolio every month.

The book went into great depths about what to allocate and why, as well as how and when to rebalance, but it gave me the impression that one starts off with a large capital and never adds new funds to it.

As I’m building my wealth with the intention to preserve it, I spent a good part of the first year trying to figure out the best way of adding funds to the permanent portfolio — to not much avail.

In the end, I figured to just put my monthly contributions into cash and perform the standard rebalancing once the cash portion exceeds 35% or any other portion falls below 15%. I’ve never had to sell any of my assets, with the exception of the A35 sale at the beginning of my portfolio creation, but none ever since.

Another exception to the rebalancing rule was for stocks. For a good part of 2015 all the way into 2017, I was able to leverage on the zero-fee trading offered by Standard Chartered, and accumulated small ES3 positions with fresh funds every month, without having to wait for the threshold to trigger. Since it was zero cost to trade, I didn’t have to worry about fees eating into my capital, and was able to capture a good number of ES3 shares below $3.

That was an awesome period.

Because of that, and my self loan program, I was able to maximize the returns on my Permanent Portfolio. Below is a chart of the returns over time.

Returns of My Permanent Portfolio over Time

To be honest, I’ve been a bit biased with assigning bank interest as my Permanent Portfolio gains. Other than that, the portfolio has kind of lived up to its name by not falling below 0 for returns… with the exception of 2015, while I’m fumbling about.

Do you have a Permanent Portfolio? How was your experience with it?

Footnotes   [ + ]

1. These bonds consists of those issued by the likes of HDB, Temasek, LTA, the Singapore government, Korea Development Bank etc
2. When you buy or sell an SSB, you pay a $2 admin fee per transaction and the transaction will take effect the following month.

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