Wealth management is a complex process

Should you invest in ETF?

Wealth management is a complex process of defining the client’s needs and designing a portfolio that is rightly exposed to meet the client’s requirements over a very long time. Most may confuse the definitive of wealth management and wrongly consider wealth management as stock selection. The latter has a scope too narrow and can be dangerous.

There is a huge ecosystem of professionals support the wealth management industry. Wealth managers are a critical person in the process. They determine the investment objectives and finalize the weighting targets for the individual portfolio’s targets. This process of finding the right instrument is carefully led by the pre-determined investor’s IPS — investment policy statement.

Determining the IPS is the first and most important step. A good IPS will mitigate the risk of the portfolio. Imagine the IPS as the parameter of your house. You draw clear parameters to ensure your family members do not cross over the line and be exposed to danger. A fund manager may have multiple interesting investment opportunities, some of them may possess unique risks that cannot be easily diversified in the context of your portfolio. A group of random collections, all promising high returns spell danger and volatility.

Investors have unique characteristics and different IPS. A retirement fund may have a time horizon of 20 years and prefer income to capital gains. A growth portfolio may have a longer time horizon of 50 years to fund the young executive’s savings. The growth portfolio will require a mix of high risk products. The same investment prospect cannot be equally considered for two different portfolios.
Given the complexity, the first goal of the investor is to select a highly skilled and persistent wealth manager. This is not a straight forward task. More than 80% of managers do not beat the market. An investor that prefers the cheapest investment strategy that outperforms most fund managers will be automatically attracted to the index fund investing. Index funds replicate the performance of benchmarks and do not make an attempt to outperform. Given the non-discretionary decision to replicate the market, professionals label this strategy as passive management. The benefits of passive are clear. Firstly, this strategy is simple and does not require complex selection of managers and determining of IPS. Secondly, the simplicity implies cheap fees since managers are not paid exorbitant incentives to outperform he market.

Investors need to make an informed choice between two options.

1. Adopt a more active process to select managers and to determine the investor policy statement and 

2. Invest in a non-discretionary equity index fund.

Annuities and Retirement Planning — Longevity Risk

A closer look at annuities and retirement planning in the context of Singapore

Annuities get very little respect because they are portrayed as expensive and loaded with sales fees. However, a rapidly aging demographic and declining real wages has jeopardised the current projections for government led pension plans. It is not easy to supplement retirement with private wealth management plans because the state cannot mandate how much citizens save beyond the scope of pension policy.

Life annuities are crucial because they hedge against longevity risks and medical expense risk. In fact, annuity payments should be inflation indexed. Life annuities have monthly payouts. The stream of cash flows can be replicated by a mix of bond payments. It does seem like bond yields may no longer be able to match up with the required annuity yield. To meet the annuity payouts over a longer time, annuity managers may need to introduce risky products like equity index funds into the portfolio. But it is unclear if citizens are open to endure the high risk.

In Singapore’s context, I am less sure if Singaporeans are preparing for longevity risks. Should they expect to systematically live longer, to say, 90 year old, the consumption save must reduce tremendously. Practically, a young professional who expects to live till 100 will need to start investing in equities as soon as he starts work.

It is incorrect to think that life annuities are expensive products if we assume Singapore is a competitive market for annuities. In a competitive market, we can assume that longevity risks and recent demographic trends are priced into these financial products.

There are ways to reduce premiums for annuities. The larger the insured pool, the lower the premiums. For one, the fixed costs will be reduced. The pooled risks approach a normal probability curve. This implies that Singapore government’s mandatory annuity policy is in the right direction from a policy point of view. But the policy makers should introduce the annuity programme with a softer approach. Perhaps annuities need not be made mandatory right at the start. In fact, the government can communicate the benefits of annuities and highlight the financial risks of not subscribing to an annuity.

Risks of the ETF in the near future

There are fears that ETFs will be the key contributor to the next financial crisis. ETFs now take up a huge percentage of retail and pension investments. Some suspect that the ETFs will lead the market instead of mirroring it. Lack of liquidity within ETFs may cause rapid selling of ETF units, destabilizing the general stock market.

Another concern is how over-levered some ETFs are. There are also complex ETFs that are leveraged, synthetic and inversed. It is not clear yet that the impact of these instruments on the overall markets when prices become unstable. For far too long, ETFs have been the cool kid on the street. Investors have ignored the voices of some who share the adverse side effects of ETFs. It is well known that the ETF structure is unique, requiring units of ETFs to be created and to be tracked according to the market. The creation and marking to market of the ETF is a constant arbitrage exercise. Not every ETF is liquid and simple. Some ETFs mirror complex markets like junk bonds, loans and less familiar municipal indexes.

Finally, ETFs when leading the market is a representation of herdish behaviour. Afterall, every ETF investor invests in the same market within the same ETF product. For some, they have preferred index funds over ETFs precisely for fear of the ETF structure.

Little known truths about the investing community

Net return received by investors is net of cost. There are many types of costs. Some are clear, some are hidden. Our financial system is complex. There are too many middlemen, the leftover returns for the common man can be too little to sustain savings. Investors (you) becomes the bottom of the priority list.

Investors commit money and get exposed to risk. If the market moves in your direction, the hedge fund manager takes a large chunk of your wins. If the market moves against your direction, the manager is insulated from losses. He still takes a fee from you.

Benjamin Graham said that anyone can design a strong portfolio with just stocks and bonds that are representative of the market.

A do nothing policy is always better than an active strategy. As long as you make a decision to move money, someone charges a fee. If I may summarize, always invest with the lowest cost instrument - index funds.

Disruption is necessary in businesses

We must disrupt ourselves in businesses. Otherwise, others will disrupt us. The process of disrupting ourselves will be painful. Sometimes, new process will threaten our cash flows. But this learning process helps to “boost” our “immune system” to catastrophic changes.

O2 in the UK launched GiffGaff. They provided cheap prepaid data plans. There will be some cannibalization effect on postpaid plans. But this was necessary given the technology developments.

Banks should also relook at their fee heavy businesses. Can traditional banks build virtual banks without physical touchpoints to lower costs? Will they do that by themselves before others take away their businesses?

I think we should explore technologies, disrupt ourselves. This should happen concurrently as we exploit existing technologies.

Disruption to Service Industry

On the 1st September 2015, Eatsa, a high tech fast food restaurant opened near San Francisco’s Embarcadero. Eatsa revolutionaries the dining experience with full automation of all processes besides cooking and eating. With the exception of a few kitchen staff, there is not a human in sight. The restaurant has received good reviews. This marks a new era — technology has begun disrupting the low skilled service industries.

Technologies have always disrupted industries. And disruptions are not always friendly. When personal computers became affordable, many processes were made more efficient. Less workers were required. The same happened within manufacturing over the last few decades. Today, the number of workers required in an automobile factory is a fraction of the number required 30 years ago.

But why is this development unsettling for Singapore and our region? Eatsa marks a tipping point because entrepreneurs have finally commercialized this automated solution. It no longer remains in the scientific repositories of institutes.

Our service industries provide a lot of low skilled jobs that were harder for machines to replace. Unlike the jobs of welders and technicians, it was harder to replace the work of waitresses. Within the next decade, this technology will become cheaper. Owners of F&B outlets can access this technology. Needless to know, low skilled Singaporeans must brace themselves for change.

Policy makers cannot shield Singaporeans from these changes. It will be worse for Singapore or any country to regulate such technologies. In fact, it makes more sense to adapt to such changes quickly.

Rough economic seas call for leaders with proven track records

Singapore has 5.5 million people, a tiny if not negligible domestic market. Other economies are significantly bigger: China has 1.36 billion people; Indonesia has 253 million.

Some argue that our purchasing power is higher. But it is mathematically impossible, in dollar terms, to consume as much as China or most of the rapidly growing nations in the region.

We will never be the natural top choice of operations for top firms, no matter how rich we become.

Some of us think the Association of Southeast Asian Nations (ASEAN) will be Singaporeans’ hope. They believe ASEAN countries can form a common market as the European Union did. Unfortunately, ASEAN nations have very different characteristics and political interests.

While I believe ASEAN nations will be more cohesive with the ASEAN Economic Community 2015, Singapore will not be the Frankfurt equivalent in the EU. In fact, in the long run, it may be more palatable for each member to bypass ASEAN’s complex interests and deal with larger economies such as China and the United States individually.

This means Singapore has no alternative but to open our financial markets to the international community. We must also be the trading hub for this part of the world for as long as we are relevant.

Today, we are integrated with the world. Based on World Trade Organization data, our trade to gross domestic product ratio from 2011 to 2013 was 366.2. To put it simply, our economy will always be volatile and linked to global markets.

Notably, we were among the first to enter a recession in 2008 and among the first to enjoy great growth rates in later years.

Our interconnectedness requires us to select the smartest leaders of the lot to govern Singapore and help us survive on the rough economic seas. Many believe that the global economy will become more cyclical.

This implies that changes will happen quickly. In future, more Singaporeans will lose their jobs overnight. Industries may be wiped out by disruptive technologies.

We need ministers with the uncompromising courage to identify and make policy changes. Singapore has no buffer against failure. If we were Malaysians, we could fail and return home from Kuala Lumpur. We would still own some land and go on with life.

If Singapore fails, investors would exit; they are not beholden to Singaporeans. And we have no hinterland. Some argue that we should focus largely on supporting local firms, but we do not innovate as Israeli entrepreneurs do.

Our local firms complain about the tighter quota on lower wage foreign workers, who have lower wage bills, but Singaporean employees want higher wages. These are tough questions. It is no wonder that almost 70 per cent of the electorate voted for the proven party with an economic track record.

Relationships that drain your life

Most relationships are a waste of time. Some friends like to exaggerate, lie and show off. Others are negative and dull. These friends occupy your time and they affect your mental health.

Do not form relationships out of convenience. Do not fear rejecting friends or loved ones. Keep relationships light. Keep friends who share wisdom and can offer alternative views.

This does not mean you cannot be friendly and smile at co-workers. It just means being superficial and guarding your heart. Some older relationships are no longer useful. Let them go.

All relationships drain us. Cut off those who plays victim. They are a pain to be with. They keep us from feeling fulfilled. Keep sceptical people, they help to diversify your views.

You should simplify relationships at all costs and minimize burdensome relationships. Shallow relationships lasts longer because they are not draining.

Singapore Elections Experience

It all starts with filling in the nomination form correctly. You will need to find a commissioner of oaths and a couple of ascentors. Ascentors must live in the estate you are competing in.

Once the administrative matters are done, you should start campaigning. You will need to print your manifesto for the estate and voting cards that help nudge voters the right way. Be mindful that the messages must be written in 4 national languages. Tamil is really tough.

You will also need posters on wooden boards. You must be able to find volunteers to distribute the brochures and voting cards. Some volunteers should also help you put up the flags. Your election agent must make sure all these collateral are licensed and approved by the elections department.

You will also need help to put up at least 500 posters for one SMC or part of a GRC. Getting volunteers is a tough exercise because you may not be able to afford to pay them. As a candidate, you probably have used up most of your money on the deposit (more than 10k SGD) and on the collateral.

If you belong to a small party, your party may not be featured on the political broadcast. You will also have less opportunity to speak at rallies. You will also have to pay for the stage during your rally. The sound system will not come cheap too. Beyond payment, you will also have to find good and credible speakers to help you win votes.

Before the polling day, you will need to find dozen of polling agents who will station themselves at the polling centre. You will need to appoint an EA (this happens right at the start) to help brief them on relevant procedures. You will need some counting agents to help monitor the counting process. Both polling and counting agents need to be sworn in by a commissioner of oaths. This can cost up to $20 per person.

Things get messy on the polling day. You and your election agent should make sure your polling agents and counting agents have sufficient food. The polling hours can be very long.

No matter the outcome, you will need to speak to the media that day, to concede or to thank supporters for the victory.

Strategy: summary of Michael Porter’s work

Constant improvement is necessary but not sufficient. Best practices diffuses quickly. Competitors can quickly imitate management techniques, new technologies etc

Strategic position is not sustainable unless there are trade-offs with other positions. Trade-offs occur when activities are incompatible.

Positioning trade-offs are pervasive in competition and essential to strategy. They create the need for choice and purposefully limit what a company offers.

While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about combining activities.

Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities.

I prefer simplicity for my social media tools

Sometime ago, I left Facebook. My Facebook friends were posting rubbish and I was, unfortunately, addicted to consuming rubbish. I no longer saw the need to connect to acquaintances through Facebook.

I focused on Twitter and reduced my followers from more than 2000 to less than 100 active users. I also started posting my thoughts in a concise manner. Twitter forces everyone to produce short content. There are many users who simply tweet useless sentences, so I actively unfollow them. I see Twitter as a way to broadcast my thoughts. Sadly, it is true that content on Twitter is seldom curated and the number of users seem to be falling.

I also questioned the use of social media. Social media is like a weak network of relationships that is used for gossip and showing off. To catch up with my friends in real life, I go back to simple tools like sms and Whatsapp. I love Whatsapp for its simplicity. It does nothing except facilitate exchange of information. Where anonymity is important, I use Telegram because I can initiate secured conversation: messages are deleted automatically.

I also love to read the views of strangers. Medium serves as the perfect platform where writers take blogging more seriously compared to their counterparts on Tumblr and Blogger. Most blogs are rather inactive. Some still swear by Wordpress. But Wordpress is too complicated. Ownership of your own URL is no longer necessary. We live in a world of systems within systems. Rather than owning their URL, grow your presence in Medium.

The need for curated content

Everyday, we read content from social media platforms. The quality on social media content is low because there are no editors to check for the accuracy of the content and for the correctness of the language. This is akin to consuming junk food. Junk food keeps us happy and we get addicted to junk food.

It’s time to use your time wisely. Focus on highly rated essays on Medium as a start. Subscribe to a good news service provider like Financial Times or the Economist. You can be surer about the content and the information is more trustworthy. Enhance your productivity this way.

Your life, the Toyota Way

Minimalism is trending. But the concepts are embedded in the Toyota system.

First, avoid overproduction. Do not overwork. Do not do or speak more than necessary.

Second, do not accumulate waste at home. Throw what you don’t need away and clean up your workspace.

Third, do not procrastinate. Take rest as often as you need. Lie in bed, clear your mind or meditate as you wish. But do not procrastinate.

Fourth, place everything in the right order. If you need to exercise, place your treadmill in the most visible area.

Fifth, think before you move. Where would you like to go? What would you like to accomplish? Plan ahead.

Sixth, do everything perfect the first time. Rework is waste.

Seventh, meet standards. Meet requirements. If you need a 30sqm home, do not buy something larger. If your client requested for a 5 course meal, deliver the perfect 5 course meal.

We can also use the 3M model. Muri: avoid overburdening your machines, workers and yourself. Muda: reduce waste as we have explained above. Mura: prefer consistency to uneven operations.

If we apply these principles to our lives, we would have achieved minimalism.