Residential Real Estate 101

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Above is an article from S&P/Cash-Shiller web site at http://us.spindices.com/index-family/real-estate/sp-case-shiller.

The article makes an interesting read.  It proves statistically once and for all the following points that a lot of people intuitive know about residential real estate:

1. Residential real estate as an asset class produces lower long-term returns than stocks.
2. Residential real estate has lower volatility compared to stocks.
3. Residential real estate has low correlations with other asset classes such as bonds, stocks and commodities.  This makes it a great addition to a portfolio as it lowers volatility at the portfolio level.

Do read it!

US Stock Market Valuation

I do not invest in the US market right now, but I do look at the fundamentals of US as a value investor.  One of the parameters I often refer to is the P/E ratio.

The P/E ratio for the trailing 12-month earnings right now is 19.86.  If we take the historical average of 15 as being fairly valued, the US market is 32% overvalued over its historical norm.

If we look at Shiller P/E ratio which takes 10-year average earnings, the figure is 26.5.  The historical average of Shiller P/E is about 16.  That would mean by that standard, the market is now 66% overvalued.

While the P/E ratios have considerable forward-looking predictive value, markets are also pretty noisy in nature.  It’s unknown when the current bull market in US stocks will end.

A bit of a financial history, the dot-com bubble peaked in 2000, the real-estate bubble peaked in 2007.  So peak-to-peak it lasted 7 years.  7 years have lapsed since the previous peak in 2007.  The question is – is the US market at a peak right now?  Only God knows.

As a counter argument against the above, yields on bonds right now are also at record lows.  Since bonds compete against stocks for capital, that will mean that stock prices are not as unattractive as they look.  Given the lack of alternative outlets, stocks should rightfully trade at a premium to historical prices.  As to how much of a premium it should justifiably trade, let us evaluate.  At a P/E ratio of 19.86, that would mean an earning yield of 1/19.86 = 5.0% for stock.  The 30-year treasury bond now yields 3.1%.  Is that earning delta reasonable?  You’ll have to be the judge.  Of course, if bond yields revert to its historical average (which is higher), it’ll exert downward pressure on the stock prices.

Do tread carefully in this field.

SPDR STI ETF

According to the latest SPDR report I received in my mail, “The SPDR Straits Times Index ETF, Singapore’s first locally created exchange traded fund, is designed to track the performance of the Straits Times Index.”

Its inception date is 17th April 2002 and it has been around for about 12 years.  The price is approximately 1/1000th of STI and it’s available for purchase using the CPF investment scheme in the ordinary account for amount over $20 thousand under the current MAS policy.

The assets under management for this ETF is over $400 million, so the chances of this fund getting liquidated over the long term are pretty slim.  Like most diversified ETF’s, it’s a good medium as a long-term investment, and trading for the short-term is not recommended.

For an investor who invests in this fund since its inception till the month end as of 28 Feb 2014, the return is 8.20% inclusive of transaction cost and dividends in SGD.  This return is splendid, especially considering that over this period, the SGD has appreciated much over the USD.  The return figure quoted in a global financial currency such as USD will probably be much higher.  At that rate of past return, it beats inflation in a meaningful way and provides the investor a real appreciation of his funds.

Over the same period of time, the return for HDB flats in general, without taking into account of upkeep cost and rental, is around 6.5%.  It would mean that the SPDR STI ETF provided a similar rate of return without the requirements of a huge outlay of capital, at a lower cost, with better diversification and liquidity and with the ability of subdivision of your holdings into smaller lots to be purchased and sold over time.

As with all stocks, the SPDR STI ETF is pretty volatile over the short term of a few years.  Witness the drop of the STI index from the high of 3800 level to less than 3100 level during the recent financial crisis and the fall from 2500 level to the 1250 level during the dot com bubble burst.  Stock market panics and blooms are common and cannot be avoided and furthermore is the very reason why stocks long-term returns are higher than staid investments such as bonds.  The stock market is the manifest of the mantra of high-risks high-returns and no-pain no-gain.  What the investor can deal with the situation is to take a long term view of the stock market and invest for the long term – let the ebbs and flows of the price cycles cancel out each other over the long term and achieve meaningful returns over periods of decades of investment.

It’s important for the investor not to place short-term funds designated to fund items such as near-term house purchases or college funding to a volatile asset class such as stock ETF.  It’ll not be optimal to purchase the STI ETF at a temporary high price and encounter a bear market thereafter.  The investor will then be faced with a financial straitjacket of having to lock into capital losses if he/she needs to en-cash the funds to meet his/her needs.  The ideal investment for STI ETF will be for your retirement, college funding for your infant, or as a bequest which allow capitalism to do its magic over decades down the road.

The STI ETF is well diversified with a slight tilt towards banks.  The first, third and fourth by holdings are DBS, OCBC and UOB.  This perhaps reflects the fact that Singapore is a major financial hub.  The index also contains some companies based overseas in countries/regions such as Hong Kong; examples of such companies are Hong Kong Land and Jardine Matheson.  All in all, even though the index is based on stocks traded in SGX, it’s globally diversified as even companies based in Singapore such as Singtel and DBS have a large presence overseas.

The STI ETF is one such ETF that is physically replicated instead of others listed in SGX that are mostly synthetically replicated.  This would mean that the STI ETF will not have counter-party risks.  Its focus in large-caps, well-established companies is particularly assuring to the concerned investors.  The fact that this is an index fund with a low annual cost of 0.3% is an icing on the cake.

Personally, I’m dollar cost averaging into this ETF via my CPF OA.  At its current PE ratio of 13 to 14, it’s probably undervalued compared to S&P500.  If the future of Singapore and the region goes well, this should be a good investment.

Stock Trading Is Hazardous to Your Wealth

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Trading Is Hazardous to Your Wealth

This is a research paper entitled “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” by the renowned academician Brad M. Barber and Terrance Odean.

The next time you click on the trade button on your broker’s website, remember that every trade is detrimental to your financial well being.  Trade only when you’ve a good reason to do so.