S3 INVESTMENTS

EDUCATION, RESOURCES AND ESSENTIAL CALCULATORS

Investing is still seen as complex and therefore inaccessible for many. Many among those who do invest are inundated with investment choices and often make bad investment decisions and are unable to grow their investment portfolio, let along serve as a means for cashflow and retirement. Still, investing is essential for our financial health and well-being.

Similarly, the human body and our minds are complex, however, our physical and mental health are essential for our well-being. We therefore try to exercise and maintain a good diet and sleep, besides having access to medical professionals who can help in this regard. However, the same cannot be said about our finances and investments.

Complexity goes away once we understand something. This applies to investing too, once we start from the bottom up. We cannot cover everything that is there on this topic in a few paragraphs below, however, we have shared some key terms, and books that will help in this regard.

KEY TERMS AND CONCEPTS

Asset classes | Returns and Annualised Returns | Volatility | Risk | Reward/Risk | Countries/Markets Exposure | Sectors | Currencies | Currency Hedging | US With-holding tax and estate tax | Domicile | Distribution Type | Expense Ratio/Management fees | Inception Date | Index Fund | SEDOL/ISIN | Issuer | Leveraged Fund | Net Assets | Primary Benchmark | Primary Exchange | Short Fund | Socially Responsible Fund | Synthetic | Tracking Difference

Asset classes

Besides cash in bank deposits, there are primarily two asset classes, equities for growth and fixed-income bonds for capital preservation and coupon income. Also, there are alternatives like REITs which are mostly equities and a substitute for physical real estate. There are also private equity firms like KKR, Blackstone, Goldman Sachs, Apollo Global Management and so on. Then, there are BDC (Business Development Company) firms like Ares Capital private credit. There are cryptocurrencies about which there is significant debate whether it is an asset class or not. Alternatives also include assets like fine wine, art and other collectibles. One’s assets include cash, equity in physical real estate (current price outstanding mortgage loan), equity in one’s businesses, insurance, funds in state and private pension schemes and finally investments in equities, bonds and alternatives.

Returns and Annualised Returns (CAGR/Geometric Mean)

Returns refer to how one’s investments have grown over a period of time. One can look at 1 year, 3 years, 5 years or 10 years of returns to compare two investments. One can also look at cumulative returns over a certain period. However, the most important is annualised returns (or CAGR – Compound Annual Growth Rate) which refers to equivalent rate of return per year calculated over a certain number of years. E.g. The historical average annual return of the S&P 500 is 12.68% over the last 10 years, as of the end of February 2024. One should look at investing in assets that have strong historical performance, for a period of at least 10 years.

Volatility

When we look at how the price of any asset changes over time, we notice it going up and down every now and then, though it goes up in the long run. Otherwise, we will not be investing in that asset (one can also benefit from an asset’s price going down by shorting it or through options, however that requires timing the market, something one should entertain only once they have a foundation portfolio to see them through their retirement and only with funds that one is ok to lose). This up and down movement implies that the asset price is volatile, and the more up and the more down it goes, the more volatile and therefore, more risky that asset is. Generally, equities are more volatile than bonds.

Risk

Standard deviation measures risk by measuring how the price swings around its mean value and therefore, provides a measurement of an investment’s volatility. Variance is the square of standard deviation. Sharpe Ratio is also used to measure risk by dividing the risk-adjusted return (return of an asset minus the rate of risk free return e.g. US government bonds) for an asset by the standard deviation of that asset. Sortino ratio goes one step further by ignoring the ups in the price of the asset and only using the downs to calculate the risk, since upside risk is positive for an investor.

Reward/Risk

The is measured by Sharpe Ratio and Sortino Ratio as explained above. The goal is for this to as high as possible, however if the risk goes too low e.g. by investing too much in safe government bonds, generally speaking returns will go down too. So the objective is to have the right balance between higher risk and lower risk assets. That is where the 60-40 portfolio allocation (60% in equities and 40% in bonds) idea comes from, though we use a 70-30 allocation.

Countries/Markets Exposure

US is the market leader and has been for decades, not just for equities but also for US government bonds, owing to its stability and the reliance of the global economy on the US dollar. Equity markets in all countries are generally correlated with US equities.

Sectors

There are 11 sectors for equities, Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities.

Currencies

There are many currencies involved when investing in global markets. One cannot just invest in local or national markets owing to one’s home bias, when other markets like the US are performing much better. There is the currency of the equity or the bond itself. Then, there is the currency in which it is available for investments. E.g. An ETF tracking S&P 500 can be available in multiple currencies such as USD, GBP, JPY, EUR and so on, even though the underlying securities are in USD. Finally, there is the currency of your country, where one resides most of the time and earns and spends money in. Still, the biggest factor determining which currency one invests in is the investing platform one is using and which of the ETF’s listings are available to invest in on that platform.

Currency hedging

Since one’s local currency can be different from the currency of a listing which can be different from the currency exposure of the equities, there is always some level of currency risk. However, for long-term investors, it is too much of a hassle to bother with hedging risks, since investing in hedged ETFs will lead to reduced returns.

US With-holding tax and estate tax

For non-US investors, there is 30% withholding tax on dividends from US securities. There is also estate tax on amounts over USD 60,000. To avoid dealing with US tax, it is best to invest in UCITS ETFs.

Domicile

The country where the ETF is registered. Most UCITS ETFs are domiciled in Ireland or Luxembourg.

Distribution Type

Funds can provide dividends as an income (Distributing) or use the dividends to purchase more units of the fund (Accumulating). Same applies to coupon income from bonds. It is best to invest in Accumulating ETFs until one has entered a phase in life when one requires the income.

Expense Ratio and Management Fees

These refer to percentage fees charged by the fund provider e.g. iShares (BlackRock) or Vanguard.

Inception Date

The date the fund was launched.

Index Fund

This tells whether the fund is following an index such as S&P 500 or Nasdaq 100.

SEDOLs and ISINs

These are identifiers used by exchanges for an individual listing of a security.

Issuer

An issuer is an organisation that registers and sells securities. E.g. BlackRock, Vanguard, and Invesco.

Leveraged Fund

Leveraged fund is one that uses margin or leverage through derivatives or debt to amplify the returns. However, doing so also amplifies the risk and the losses. Generally speaking, as a long-term investor, one should not invest in leveraged funds.

Net Assets (USD)

This shows how big the fund is and how much has been invested in the fund.

Primary Benchmark

This refers to a particular index which the fund measures itself against.

Primary Exchange

The exchange on which the fund can be bought and sold.

Short Fund

As a long-term investor, one should not invest in funds that rely on shorting i.e. expecting the underlying equity or equities to go down in price.

Socially Responsible Fund

There are similarities and overlaps between terms like ESG (Environmental, Social, and Governance) and Socially Responsible Funds and a lot of debate due to practices such as green-washing where firms are trying to appear greener than they are.

Synthetic

Synthetic funds invest money in derivatives rather than in physical stock shares.

Tracking Difference

Any difference between the fund’s performance against its benchmark index.

BOOKS

1. The missing billionaires : a guide to better financial decisions, James White and Victor Haghani
2. Guide to financial markets : why they exist and how they work, Marc Levinson
3. Smart portfolios : a practical guide to building and maintaining intelligent investment portfolios, Robert Carver
4. Free lunch : easily digestible economics, David Smith
5. High yield debt : an insider’s guide to the marketplace, Rajay Bagaria
6. The Financial Times guide to bond and money markets, Glen Arnold
7. The strategic dividend investor, Daniel Peris
8. 100 baggers : stocks that return 100-to-1 and how to find them, Christopher W. Mayer
9. Value investing : from Graham to Buffett and beyond, Bruce C. Greenwald
10. Market masters : proven investing strategies you can apply : interviews with Canada’s top investors, Robin R. Speziale
11. Market wizards : interviews with top traders, Jack D. Schwager
12. Unknown market wizards : the best traders you’ve never heard of, Jack D. Schwager.
13. The rule : how I beat the odds in the markets and in life–and how you can too, Larry Hite
14. Dow theory for the 21st century : technical indicators for improving your investment results, Jack Schannep
15. Your complete guide to factor-based investing : the way smart money invests today, Andrew L Berkin, Larry E Swedroe

TYPICAL QUESTIONS

You would have many questions such as below, and while some of you would not have no clue, others would have strong opinions and positions on the same question. We have not answered them here, but will provide our views and position on LinkedIn, Twitter/X and via our blog progressively in order to interact with you. What is certain though is that everyone needs to invest (investing is for our finances, what exercise is for our body) and everyone needs to have a solid foundation portfolio which will grow and provide income to free us from constraints, and there are only few ways one can achieve that. We have designed a foundation investment portfolio to do just and any other means to achieve this goal of financial well-being would only be minor variations of this portfolio. So please continue to read, learn, think and more importantly, act by building and investing in an essential foundation investment portfolio for yourself.

We look forward to hearing from you.

Have I saved enough? At what age can I retire? Can I leave the rat race already? When can I start pursuing my hobbies?

Am I spending too much? What should my optimal spending be? How much do I need for retirement?

Should I invest in US equities only? Or my home country where I live? Or Japan? Or China? Or India?

Should I start my business that I always dreamt about?

Should I buy bonds too? Which ones, government, municipal, or corporate bonds? Why not junk bonds for higher returns? How about BDCs and MLPs?

I heard debt or leverage is bad. So are bonds bad do? But governments bonds are guaranteed? I am confused.

What is difference between a trader and an investor? Which one am I? Should I buy and hold like Warren Buffet or buy and sell like George Soros?

Should I invest in income generating or return enhancing assets classes? How much should I allocate to both?

Should I buy crypto? If yes, how much? How about options and futures? And LEAPs? And deep in/out of the money puts and calls?

Which asset classes are correlated with equities? What is correlation again? What is my Sharpe ratio? How about my Sortino ratio?

Can I invest in hedge funds? How about private equity? How about alternatives? Private debt/credit and loans? REITs? Fund or ETFs? Closed end or open end funds?

How about alternatives? Fine art?

How much is my equity risk premium? What is my risk adjusted return? What are they?