Is Passive Investing the Only Way Forward? – Ow Tai Zhi from AutoWealth

In episode #11 of Chills w TFC, we bring on the founder of one of leading Robo-advisors in the B2B space, AutoWealth. He believes that passive investing with low fees is the way forward for many. While there are many ways to invest today, he is staying old-school by buying assets to generate cashflow. To him, there’s a science and logic behind it all.

Join me as I chill with Ow Tai Zhi from AutoWealth to discuss about what is going on in the market, from rising bond yield, to inflation risk, stock market fluctuation and bitcoin taking the centre stage. How should we view all these things while managing our investment portfolios? Will the rise of all things digital change the way we invest? How should we embrace all these dynamism out there? Tune to to find out!

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podcast Transcript

Reggie: Recently, many things are happening in the markets. Rising bond yields, the sound of inflation risk, stock market fluctuations, Bitcoin taking center stage and the media cycle… so, so many things to talk about. So how should we view all these things while managing our investment portfolios? Will the rise of all things digital change the way we invest? How should we embrace all these dynamism out there? We will be covering a lot today while we just took a break last week. So welcome home. 

Welcome to another Chills with TFC session. And this series, we want to bring on interesting, relevant people to help us learn better from various perspectives. Life is not always about learning from people that you already agree with. Perspectives shape a rounder thinker in our pursuit of the life we love while managing our finances. Well, our guest for today is a seasoned investor that’s staying firm that passive investing with low fees is the way forward for many years. Interesting takes on the many things that’s going on in the market, but that does not drastically change his investment strategy, believing in winning the war rather than focusing on the many small battles.

While there are many ways to invest today, he’s taking old-school buying assets to generate cashflow to him. There is a science and it’s logical. We have with us today, founder of one of the leading global advisors in the B2B space today. Welcome Tai Zhi from AutoWealth.

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You know, you guys are doing the whole very macro… macro-driven kind of thematic way of investing. Could you just kind of share with us a little bit more? What is your strategy to do that?

Tai Zhi: Yeah. So we want to make sure that our investment strategy is simple and easy to understand, because at the end of the day, these are your hard-earned savings, right? You want to make sure you know what’s going on. Then that gives you more comfort, more confidence during your investment journey. So that’s what we are trying to do. And in simple English, what we are…

Reggie: [laughter] 

Tai Zhi: …what is our investment strategy? 

Reggie: Yes yes. 

Tai Zhi: Today we are trying to track the global stock index. In this case, the MSEI All-Country World Index. So whatever the index hosts, you actually host the same. So if you throw a stone and you hit a listed company, that’s a 85% chance that you actually own a piece of it. 

Reggie: So in that sense, why go for that broadly diversified strategy? Because recently there’s been a little bit of discussion online, you know, about how do you even beat the market in that sense?

Tai Zhi: Yeah. So for us, we focus a lot on asset allocation to derive returns. We focus less on market timing and we do not do anything about stock selection. Yeah. So asset allocation means basically if you want to set aside a certain percentage of your capital investing into US stocks, how much is that percentage? So that allocation percentage is what we mean by asset allocation. Yeah. So what we are trying to do here is to focus on the big picture. If certain regions do well, your portfolio does well. There’s no need for you to agonize over sometimes why DBS is going up but why not UOB, which is the one you’re holding.

Reggie: [laughter] 

Tai Zhi: And why, you know, in certain timing, Tesla keeps going up, but the moment you start investing, it starts crashing down on you. Yeah. So we want to avoid that kind of agony. So we focus on the big picture by just diversifying across the whole world.

Reggie: Hmm. Okay. So the very big, slow game in that sense? 

Tai Zhi: Well, if you come to think of it from our investment track record, we have been delivering a good 8, 9% for people belonging to the highest risk group. So I don’t really think that’s very slow. You know, if you compare to your fixed deposits, your bank savings, you will never get there.

Reggie: Yeah, for sure. And in that sense about the way you guys are doing it, it’s very macro driven, very broad-based. So then are you very concerned about the endless money supply that’s coming into the picture? You know, like countries are just printing and spending. Of course, it’s a lot more complex than what people think. You know, like all the trillion dollar stimulus is not as simplistic as really just throwing money out there. But I want to hear your thoughts about, like, are you concerned about that kind of stimulus numbers?

Tai Zhi: The central banks are doing a lot of monetary easing, meaning printing money, increasing money supply. And what they are trying to achieve here is to prop up inflation and to prop up economic growth. So the intent is well-taught of and we don’t think inflation is necessarily a bad thing. If we have, for example, close to but below 2% inflation, that’s the best in economics terms.  

Reggie: Why is that the best? 

Tai Zhi: Because you want to make sure that the corporates that produces that goods and services, they can increase their prices year on year, but increase it at a moderate pace. Because the moment they can increase their prices, they make more profits, they can employ more people, more people earn more income, and then you continue to spend again. So that’s a very positive reinforcing economic cycle. Yeah. 

But whereas if you have deflation, which means year on year, the goods gets cheaper and cheaper, what people are going to do is to delay their purchases. This is what’s happening in Japan right? For example, if you want to buy Japanese electronics, if you choose to delay by one year, you get it cheaper. So many people keep delaying their purchases and the economy can never get back on track. 

Reggie: Mmm, can you help us elaborate a little bit more about what’s happened in Japan? Because over the past 30 years, there is a whole deflation cycle in Japan right? So I want to hear your viewpoint on this.  

Tai Zhi: Yeah. So this has been the case for a couple of decades and it has kind of edged into people’s mindset and mindset are very difficult to change. So everybody knows that Japan is in a deflation cycle and everybody refuse to spend that much. The Japanese likes to save a lot, a lot of money. So it is actually a professional business to just take in old goods, take in your karung guni stuff that people throw away. And you will often find that if you cut up a mattresses, if you cut up a pillows, sometimes the Japanese old people, they bury their cash inside the pillows and forget about it…

Reggie: [laughter] 

Tai Zhi: …and they pass on. So it’s actually a very lucrative business, taking in all this trash and for all you know, you’re finding gold within the trash. 

Reggie: Mmm mmm. 

Tai Zhi: Yeah. So that’s really the mindset of Japanese people today. 

Reggie: So are you trying to tell us that the Japanese economy is shrinking?

Tai Zhi: Uh, well, in a way? The rest of the world is moving far ahead and we are growing each year. Japan, on the other hand, is not growing as fast as they want and as fast as their potential can be because of the situation on the ground. 

Reggie: And why do you think they have potential to grow? 

Tai Zhi: Well, if you look at many of our technologies today, Japan is still one of the leading technology players. For example, if you like gaming, Sony PlayStation is developed by Japan. 

Reggie: Woohoo Nintendo! [laughter] 

Tai Zhi: Yeah, Nintendo as well. So there are many different areas where the Japanese are very strong at? So I don’t think that’s going to change. However, if you look at the overall economy, there are many other sectors that… they are dropping back from the global competition. 

Reggie: And in that sense, within the Asia space, right? If Japan is not growing as fast, and the rival… okay maybe not rival lah but the other guy… the neighbour right? China is growing… 

Tai Zhi: Ah China, yes. 

Reggie: …neighbour [laughter] China… China is going like crazy, like on fire, or at least that’s what people see on the surface? The GDP is growing and growing and growing, and it’s like the 2021 hot take kind of thing right? Will China become the next big thing? Actually it has been around for a long time… this question of “will China become the next big thing?” So what is your take on that? Because it does not really reflect on, you know, at least from my homework, with your portfolios, it doesn’t really reflect the kind of like, “oh, we’re very aggressive on China”. You know, you guys are just… it doesn’t feel that way. So I want to hear your perspective. 

Tai Zhi: Yes. Uh, we really love China and we really love the Chinese economy and companies…

Reggie: [laughter] woo China! 

Tai Zhi: Yeah however, as an investment asset class, we are not allocating a huge chunk of our capital towards China. There are multiple reasons why this is so. Today, if you look at the Chinese stock exchange, there’s the A-shares and the B-shares which most people, most foreigners won’t be able to invest in. There’s only eight shares that’s listed on the Hong Kong Stock Exchange whereby it’s freely tradable, so it is a very restricted market in China. And they restrict this for good reason. The Chinese government doesn’t want foreigners to take control of their key industries at a too premature stage. They want to make sure they grow to a giant status before they gradually open up their economy. So it’s very controlled and the same way how the Chinese government likes to control every single thing in their economy right? You know, when Ant Financial grows too big, they have to reign you back. When Tencent grows too big, again, they got to pull you back a little bit. Yeah.  

Reggie: So how does that then discount into your investment strategy? 

Tai Zhi: So the global index provider… the most well-established one is MSEI. MSEI, because of these restrictions on the trading of A-shares and B-shares, their allocation to China within the MSEI All-Country World Index is pretty small. So it reflects the kind of restriction that China have, it’s a reflection of reality. So while they are slowly opening up, you can see that the Chinese weightage is slowly increasing… now I think close to 4%. Yeah. But it’s still not a reflection of the second largest economy in the world, but we are gradually getting there as the Chinese government continues to open up. So from our investment perspective, we also take pace with what is developing in China, you know, these gradual opening up.  

Reggie: Which means that you guys are not trying to jump the gun. You’re not trying to like be overweight, you know, like own more of China. 

Tai Zhi: Yes. Because even if we try to do so, we can only do so through the H-shares. 

Reggie: Mmm. 

Tai Zhi: And the H-shares doesn’t represent the entire economy in China. It’s not a realistic representation. So if you want your Chinese Internet companies, not everybody has a H-share traded. 

Reggie: And if we bring that back into the future of the world right, where economy is very digital and things go like… everything is online, right? So then if we’re talking about China opening up in this process, and there’s this whole discuss about the digital Yuan. What is your take on this? How will this change the global financial space? 

Tai Zhi: Yeah, so China is growing in influence. So that’s something which we are very sure of. But from an investment perspective, we do not only focus on regions. We also focus a lot about the industries that are emerging. For example, today you have FinTech, you have e-commerce and the likes of that, and these industries could be expressed in our investment views. Recently, we have a new offering called AutoWealth Plus+, where for example, we have one portfolio called The Future of Digital Economy where we focus a lot of the allocation on FinTech, Internet companies, e-commerce and the emerging markets that does all these few industries. We also have, for example, the Future 2050 Portfolio that focus on technology, which reinvents itself from time to time. In the past, it used to be Dell, it used to be HP. 

Reggie: [laughter]

Tai Zhi: These were the tech giants. Today, nobody remembers about those companies right?

Reggie: Who still use Dell? Who still use HP? 

Tai Zhi & Reggie: [laughter] 

Tai Zhi: Yes… yah today, it’s like Apple. And we are no longer that much focus about hardware. We are looking a lot about software as a service. You have many companies like… Salesforce is coming up and displacing the old incumbents. So these are some of those industries that we like, as well as healthcare, because aging population is a global macro trend across both the developed economy as well as the emerging markets. Whether be it Japan, which we all know is a greying population, or Singapore, which is already happening. We also see that China is also facing the same issue. So healthcare is going to benefit a lot from this global macro trend. Yeah. Another perspective I want to share is to focus on the emerging industries, because if you get those right, you get a lot, a lot of returns. 

Reggie: Erm what are some of these emerging industries?

Tai Zhi: Yeah, so I have shared FinTech, I’ve shared Internet companies, e-commerce. I also like the future of computing. 

Reggie: Like cloud?

Tai Zhi: Yes. Cloud as a service, as well as robotics, you know, the future of industries. 

Reggie: Mmm but a lot of these theme funds, a lot of these thematic ideas, right… They tend to fall into this hype cycle, where by the time the ETF is out right, and that the underlying equity has already been bidded up like crazy. It takes about six months for a theme…  for an ETF to get out of the gate after inception, after ideation. “Okay, I’m going to do this”. Six months down, then they will come out of the gate. By then, it’s already been bidded up, you know, a lot of the underlying asset class. Are you concerned about that kind of reality?

Tai Zhi: Yes. So you are absolutely right.  If we look at FinTech as an industry… 

Reggie: Woohoo! 

Tai Zhi: FinTech has really started way long back. 10 years ago, we have the first robo-advisor in the US and if you look at payments… e-payments that took place in China, way, way long back. 

Reggie: Mmm. 

Tai Zhi: However, if you look at the investment instruments where we can invest in these emerging industries, the ETFs like ARK Invest that are developed by ARK Invest, they only came out in the last few years.

Reggie: Yeah. 

Tai Zhi: And they only gathered pace in the last one year or so. 

Reggie: Yeah. 

Tai Zhi: Yeah. So it’s a little bit lagging in nature. And you will see a lot of overhype from time to time. To rectify or to resolve such hypes, we need to focus on the long run. We need to make sure that whichever industries that we have identified, they are industries that can continue growing at a very fast pace for at least 5, 10 years kind of timeframe, so that as long as they continue growing, the hype will eventually become reality and then we will continue growing healthily again. 

Reggie: Okay. Help us understand a little bit, like what is considered a fast pace? 20%? 30%? What is the overall market growth that is considered fast? 

Tai Zhi: Yeah. So I will share with you this company, which today I think a lot of people will be well aware of, is this company called Tencent. 

Reggie: Okay. 

Tai Zhi: So Tencent runs WeChat… 

Reggie: Mmm QQ. 

Tai Zhi: And… yes QQ, and their core business is actually in gaming. So long time back, I started investing in Tencent. The ticker of Tencent is listed on the Hong Kong Stock Exchange. The ticker is 700HK. At the first time, when I first invested in Tencent, they were trading at like hundred over dollars, Hong Kong dollars. And I started making 30% profits year on year. In terms of their earnings, it is also very fast, growing at a pace of 30% year on year and persistently for a number of years. So at many points in time, I questioned myself, “can this be sustainable?” They are growing, they have doubled, can they continue doubling?

So you know, as a personal investor, I’ve exited those positions quite early, almost… uh I think just below 200 Hong Kong dollars and look at where Tencent is today. I’ve missed out the subsequent growth. So it’s unimaginable how these industries can continue to grow as they gather pace, because you must remember that China, as a market, is extremely, extremely huge. You are talking about more than 1 billion people and more than 1 billion people consuming your goods and services. So when they started off in a particular region or province in China, and they continue to grow to other province, you know it’s going to take time. So this growth is going to be multi-year, sometimes even multi decades. 

Reggie: Nice. Nice. And then in that sense of the pursuit of growth, can you just kind of help us paint a picture of how do you see these companies keep growing and keep innovating? Because a lot of people are saying “Oh, we’re going to grow.” But honestly, 30% growth is quite crazy. That does not happen all the time. 5 years, 10 years is already quite nuts. But how did these companies, how did these sectors keep on, you know, keeping up with something like that? 

Tai Zhi: Yeah. So it’s very difficult to identify a company that can persistently grow like Tencent. You know, there’s only that few names, right? 

Reggie: Yeah [laughter] 

Tai Zhi: And to that end, it’s today that we have perfect hindsight. 

Reggie: Yes.

Tai Zhi: We see Tencent and we see Alibaba. 

Reggie: Yes, that’s why. Everybody keeps saying Amazon, Microsoft. I was like, dude, that already happened [laughter] 

Tai Zhi: Yes. 

Reggie: Tell me how to pick the next guy. 

Tai Zhi: Yes, so our strategy has always been um… don’t do your stock picking. There’s no point in trying to fight all these small battles. All you need to do is to focus on the big picture and win the war. 

Reggie: Mmm. 

Tai Zhi: Yeah. So when we invest in such emerging industries, we tend to buy ETFs that covers the entire industry so that even if you pick 8 correct and you have 2 wrong, overall you are making good returns on it. 

Reggie: And in that sense of being broad-based and going out there and picking ETFs rather than companies itself, how do you then select your ETFs then? Because um… just to put it very bluntly right, every fund house, every ETF house is creating very similar ETFs, right? Other than the very niche themes out there, many people are very similar. How do you know who to choose?

Tai Zhi: Just to give you an idea of how many ETFs there are today…

Reggie: [laughter] 

Tai Zhi: …traded and listed. Across all the global exchanges, there’s more than 10,000 ETFs and they are growing day by day. 

Reggie: Mmm. 

Tai Zhi: So it is quite impossible for a human to look through that 10,000 over and an increasing number of ETFs. So we use advanced software to analyze them using computer systems and we look at many different factors, including how much diversification effect they have. So that’s one. We also look at the reputation of the ETF provider. Is this one of the top five ETF providers, or is this a ETF provider which, maybe not everyone had heard about? We also look at the ETF fund size as a representation of their stability. 

Reggie: So what is an okay fund size? 

Tai Zhi: Um, more than $1 billion?

Reggie: Okay. So it’s a liquidity kind of thing. 

Tai Zhi: Yes. So the other thing we look at is also the daily liquidity, because we want to make sure that in unforeseen circumstances where markets are shaky and for some reason you need to cash out,  you can get out at a good price because it’s liquid. And we also look at the bid-ask spread to make sure that you can get out at a reasonable bid-ask spread, as well as expense ratio. 

Reggie: So help me understand what’s a bid-ask spread. 

Tai Zhi: So every day, when you look at the exchange… 

Reggie: Learning new things every day, yes!

Tai Zhi: There’s a pair of prices. You have the guys who wants to buy it, so that will be the bid price. And then you have the guys who want to sell it, that’s the ask price. So typically, the bid-ask spread for a very liquid stock will be one bid one tick. Okay so… 

Reggie: So 0.01, is it? 

Tai Zhi: Yes. 0.01 for anything that’s traded more than $1, it should be about 0.01. Yeah. So you want to make sure that the bid and the ask is only separated by 0.01 and not 0.03 because there are some stocks where the liquidity is very thin, then you will see very wide bid-ask spread. So you got to force yourself. If you want to sell it right away and you need the cash right away, you can’t afford to wait. Then you have to sell it at a bid price and you lose 3 ticks, 0.03 in the process. Yeah. So that’s not good. 

Reggie: So there’s bid-ask spread, right? For you guys out there listening, that’s cool stuff. And then, since we were talking so much about ETFs, right? I have this one very interesting question. You know, to date right, I cannot really factor this thing because in an ETF, it’s a basket of companies or a basket of… you know, um, whatever it is right? It’s a compounded product in that sense. But then how is that ETF priced? Are we looking at a market mechanism, where the market then decides, “okay, this ETF is worth this price”, or is there some sort of correlation with the underlying asset basket?

Tai Zhi: Yes, naturally it needs to be anchored to the NAV. NAV stands for net asset value of the ETF itself. Take, for example, if this ETF host Facebook, host some other tech stocks, then the value of the ETF would be the total market value of the holdings that it holds in Facebook and other tech stocks. Yeah. So that must be the anchor value. And while there may be a little bit of deviation from the NAV, by and large, when a deviation gets too huge, people will arbitrage on it. 

Reggie: Mmm. 

Tai Zhi: Yeah. So for example, if the value of the NAV is $100 but the exchange is trading at $90, $99, then I will arbitrage and buy it off the exchange something that’s worth $100 for $99. So I make a $1 gain. 

Reggie: Okay. So the market is so efficient that you don’t really see that kind of price difference. 

Tai Zhi: Yes.

Reggie: Okay, that’s interesting. That’s good stuff. So in that grand scheme of being broadly diversified and pursuing the whole ETF macro strategy, what is your take on things like crypto, things like  the whole disruptive space? 

Tai Zhi: Yeah. I studied a lot of economics, especially monetary economics. So I know a lot of people like to speculate in cryptocurrencies… 

Reggie: [laughter] 

Tai Zhi: Bitcoin, Litecoin… I don’t know, so many…

Reggie: Simi coin? [laughter] 

Tai Zhi: Yeah… any names that you can think of. 

Reggie: You can start a coin tomorrow also if you want [laughter] 

Tai Zhi: Yes. So, the long story short, for any form of money, it has to satisfy a few characteristics. First of all, the value of the money must be relatively stable. Just imagine, this Bitcoin where the value keeps changing day from day. Today, if you use one Bitcoin, maybe you can buy 10 apples. Tomorrow you might buy 15 apples and the following day, you might only buy 5 apples using the same Bitcoin. Is this the kind of money that we want? That’s not going to be very feasible, right? You know, in our context. 

Reggie: Maybe too exciting buying a cup of kopi, like “wah auntie, wah very expensive.” 

Tai Zhi: Yeah, you thought you could, you could have bought that coffee right? And then the next moment, while the auntie is making that coffee… 

Reggie: Making the change with you [laughter] 

Tai Zhi: Oh, too bad. Bitcoin have already moved, I can’t serve you that coffee, man. I can only serve you half the cup. 

Reggie: Yeah yeah. 

Tai Zhi: So that’s yeah… that’s not good as a form of money and as a store value, it is also not good because it keeps fluctuating, right? You don’t want to… you don’t want your wealth to fluctuate like that, because there’s no science behind it. Today, it could be worth $100. Tomorrow, it could be worth $50. And if you’re on the wrong timing, it can be very disastrous. Yeah. Then the… 

Reggie: Yeah because that is the other side of the discussion, right, where you’re not, people are not, some people are saying, “Oh, maybe crypto is not a form of money. It is a form of asset. It’s like gold, right? Like, Bitcoin is like digital gold, right? So your take is it’s too volatile to be gold in that sense?

Tai Zhi: Yes. And of course the other thing about investment asset class, those that can be fundamentally valued are the ones with some form of cash flows. For example, if you look at stocks, these companies, these listed companies, they make profits and they distribute this profits as dividends. So because of these cash flows, you can reasonably value a stock. Take for example, if AutoWealth were to be listed… 

Reggie: Mmm… is that, is that like a signal? Are you dropping a signal? 

Tai Zhi & Reggie: [laughter] 

Reggie: Oh, we will get there some day. Okay. 

Tai Zhi: So take for example, if AutoWealth distributes $1 dividend per year, reasonably speaking, you wouldn’t want to buy AutoWealth shares when it’s trading at $100, because it will take you 100 years to get back the investment that you’ve made by investing $100 onto the share price. But if I were to say that the AutoWealth share price is about $20, you will feel that it’s somewhat reasonable because within 20 years, you recover back your investment and anything beyond 20 years, each year you’re making pure profits on it. Yeah. So there’s some form of logic behind how a share price can be fundamentally derived.

The same goes for bonds. You know, there’s a bond coupon or in simple English, interest that you receive by holding that bond. Because of these cash flows, you know how much you are willing to pay for the bond

Reggie: Mmm. 

Tai Zhi: Yeah. Because if the interest is too low, you will say “no, it’s not interesting to me at all. I don’t want to invest.” Then naturally there’s not enough buyers, the bond price will go down because of demand and supply, and the yield will start increasing until a value where it’s reasonably appealing, then people start buying it again. 

Reggie: Mmm. 

Tai Zhi: Yeah. So bonds and stocks, they tend to have fundamental value because of these cash flows. If you look at things like commodities, gold, it doesn’t give you anything other than the glittering yellow when you look at it, you feel psychologically shiok about it. 

Reggie: Mmm. 

Tai Zhi: But else not, it doesn’t give you any monetary value at all. And we can argue until the cows come home, what gold should be valued at 1000 US dollars, 2000 US dollars or 10,000 US dollars. And everybody can make a 3-page long pitch about…

Reggie: Mmm. 

Tai Zhi: What kind of price it should be, and the same way goes for Bitcoin right? Because these are all pure speculation. I mean, I would rather go to a casino and derive some excitement. Yeah. 

Reggie: Okay, fair. So essentially you are classifying assets where they are all like cash flow generation. So there’s some sort of cash flow calculation that you can underpin to it, like bonds, stocks, property, you know, those kind of stuff. 

Tai Zhi: Yes. It has to be scientific. 

Reggie: Yeah. Okay. So there must be some sort of underlying scientific cash flow calculation in that sense. And then there are all these other things, like gold, Bitcoin, art pieces [laughter] like NFTs, right. 

Tai Zhi: Tulips. Tulips used to buy condos. 

Reggie: The Dutch Tulips crisis, right? And okay… so those things are to you, you will not touch them at all? 

Tai Zhi: Yes, that’s our philosophy. 

Reggie: Okay, okay. So then when you talk about cash flow and bonds and all those kinds of stuff… I think there is a recent topic about bond use rising or there’s this general fear. So people kind of tie it up, right? Like inflation, bond yield, then stock market movements, it’s like as though it’s a very clean thing? But I want to hear from your perspective, what is going on with all these kind of movements in the market?  

Tai Zhi: For the layman out there, when we say “rising use”, you know, it sounds positive right? Rising use… 

Reggie: Yeah yeah yeah it sounds very positive, like make more money, right? 

Tai Zhi: Yes but in actual fact, right, how did it happen? It happens when people sell bonds, when the prices of bonds goes down, the yield goes up. 

Reggie: Mmm. 

Tai Zhi: Yeah. So the reason why people are concerned is because of this overselling of bonds, pushing the bond price down. And this happens because the markets are seeing that our economic recovery is on solid footing, and this is by and large truly factual. 

Reggie: Mmm. 

Tai Zhi: For example, look at the unemployment situation. If you look at the increase in wages, if you look at the overall economic growth, corporate earnings growth. We all know that the economic recovery is getting on very solid footing. One statistics that a lot of people don’t know is that if we look at 4th quarter 2020 corporate earnings of the S & P 500 largest companies, they are almost 4% higher than the year before, which means 4th quarter of 2019. 

Reggie: Mmm. 

Tai Zhi: What this means is that corporate earnings have went way above what it used to be pre-COVID. 

Reggie: Market cap weighted? Is this market cap weighted? 

Tai Zhi: Um, no we are just looking… 

Reggie: Just get all the companies added… 

Tai Zhi: Yes. 

Reggie: …together. Okay, okay. 

Tai Zhi: It’s not market cap weighted. 

Reggie: Okay. 

Tai Zhi: Yeah. So what this tells us is that by and large, the overall industries and economy has already grown way above what we used to be pre-COVID. So we are growing quite well today. 

Reggie: Mmm. 

Tai Zhi: Yeah, and that truly reflects why bond prices starts coming off because people are going risk on… 

Reggie: Okay. 

Tai Zhi: Because on solid economic footing, you want to take risks. 

Reggie: Okay.  

Tai Zhi: However… 

Reggie: Yeah, that’s the thing, right? Like why is the market coming down? 

Tai Zhi & Reggie: [laughter] 

Tai Zhi: Yes… so now people are concerned about bonds being sold and the use driving up, and concern about inflation. So I’ve addressed it, I’ve addressed inflation earlier on. While we see that inflation will eventually come on stream, but it’s going to be slow and steady. It’s not going to be a situation of runaway inflation. So, I think the fears are overblown. Yeah. 

Reggie: Why the confidence though? Why there is no risk of runaway inflation? 

Tai Zhi: Because the central bankers, they have the best statistics and they have the best people to analyze the economic indicators. So they know when to tighten and when to loosen it. 

Reggie: Mmm. 

Tai Zhi: Yeah. So I trust that they will do what is good and markets would not go into a tailspin. We will not see runaway inflation. 

Reggie: So you believe that we have already learnt from our past lessons? 

Tai Zhi: That’s right. 

Reggie: Okay. So things will not repeat itself in that sense. 

Tai Zhi: That’s right. 

Reggie: Okay okay. 

Tai Zhi: And for all this hooha about rising bond use, right? When we look at our portfolios, which also have government bonds, after you see so much of gloomy headlines, the actual impact is only a -3% on our government bonds. It is insignificant at all. 

Reggie: Mmm. 

Tai Zhi: Yeah. So I really don’t see a reason why people need to be overly concerned about it. 

Reggie: So then how does that translate to the market shock then? Like, you know, the S & P for 2 weeks was like going a little bit… volatility went up a little bit and prices were moving and the headlines were tying to increased bond yield and risk of inflation. So why did the market shake like that then? 

Tai Zhi: The true reason is that, statistically, each year we will see about 3-4 market corrections. 

Reggie: Mmm. 

Tai Zhi: This is normal. It’s just like our weather, right? When you have very good weather for a persistent period of time, you are just waiting for the next storm to come. 

Reggie: Mmm.  

Tai Zhi: And it is only natural. Our nature looks like that. When you have good days, you will have some rainy days, you know? So it’s a natural cycle. For the stock market, it’s about 3-4 corrections in a year. The last time we have a market correction, that was the middle of October last year. 

Reggie: Mmm. 

Tai Zhi: So if you count the calendar months, we are actually due for the next correction, which is why that correction took place in late February. 

Reggie: Mmm, okay. So indirectly, what you’re trying to tell me is don’t need to string everything together. They… 

Tai Zhi: Yes. 

Reggie: They operate independently. 

Tai Zhi: Yes. 

Reggie: [laughter] 

Tai Zhi: And often, when you have a market correction, then the news agencies and analysts starts searching conveniently for a reason why it happens. 

Reggie: Yes, my god so irritating [laughter] Yeah, it happens so often and it’s just trying to get eyeballs, right, in that sense? 

Tai Zhi: Yes.  

Reggie: How does that then affect your investment strategies? Do you actively adjust your portfolio with this kind of yield changes or market corrections? How should people look at it? Because I think a lot of people, when they tune in, they are trying to learn from the pros, right? So I want to hear from you guys. Given that bond yields are changing, given that market corrects from every quarter to quarter or on average, 3-4 times a year, how do you guys look at that and adjust your portfolio, or do you even do that?

Tai Zhi: Yeah, so we don’t actively and discretionarily adjust the allocations. However, portfolio rebalancing is part of our investment strategy. 

Reggie: Mmm. 

Tai Zhi: So portfolio rebalancing means that when a asset class goes up too much, we will cut a little bit and shift those funds into the asset classes that didn’t do so well. So it’s a reversion of mean theory. Take, for example, you have the US-China trade war at the last quarter of 2018. During that period, stocks went into a tailspin. No matter which region you invested in, it declined about close to, uh I think 20, 30%. Whereas government bonds, being backed by the government, they kind of held their value quite well. So as a proportion of the portfolio, the bonds became slightly larger than what was the original target weights. 

Reggie: Mmm. 

Tai Zhi: If you start off with a 60 stocks, 40 bonds portfolio, it could have become a 55-45 portfolio. 

Reggie: Mmm. 

Tai Zhi: So all we need to do is to cut that extra wait in bonds and then shift those money to buy stocks while they are now precisely cheap. Yeah. 

Reggie: Okay. 

Tai Zhi: So when the recovery eventually takes place, you have more stocks to enjoy this recovery, and then you reverse. 

Reggie: Mmm mmm. 

Tai Zhi: Yeah. So this is being done to make sure that the risk profile is kept consistent. If the user wants a 60-40 portfolio, we try to maintain it 60-40, because this is the risk profile of the user. But of course, by us selling high and buying low from time to time, we are locking in extra returns. Yeah. So the same case for the COVID pandemic, we have done the same and because the COVID pandemic was more volatile. Through this portfolio rebalancing, we managed to make about 4% extra returns. 

Reggie: Compared to the usual, expected 8-9.

Tai Zhi: Yes. 

Reggie: Okay. That’s pretty cool. That’s a 50% higher than expected returns. 

Tai Zhi: Exactly. 

Reggie: Right. That’s cool. And so last question. After you share all these different things, and all the… from the macro to the ETF to reverse to mean and all these kind of ideas, under what scenario will you adjust your composition?

Tai Zhi: Our portfolio strategies are designed to last over many market cycles over decades. So from a design perspective right at the start, it is intended to withstand any change in market environment. So it works most of the time. There will only be limited windows where it doesn’t work that well. But by and large, over a long period of time, you average it out, you will make decent profits. Yeah. So I don’t think there will be ever a need for us to adjust our investment strategy as long as stocks and bonds remain the two largest asset class in the world. It has been the case for the last century. I believe it will be the same for the next century.

Reggie: Cool. Thank you. Thanks for sharing. I appreciate your time. 

Tai Zhi: Thank you.

Reggie: Hey, I hope you learnt something useful today and truly appreciate that you took the time off to better your life with The Financial Coconut. Knowledge, it’s that much more powerful and interesting when shared, debated, and discussed. Join our community Telegram group, follow us on our socials, sign up for our weekly newsletter. Everything is in the description below. And if you love us, want to help us grow, definitely share the podcast with your friends and on your socials. Also, if you have some interesting thoughts to share or know someone that you want to hear more from, reach out to us through hello@thefinancialcoconut.com. With that, have a great day ahead. Stay tuned next week, and always remember, personal finance can be chill, clear and sustainable for all.

Okay, I got some questions for you and some things that we ask every single guest. So the very first question is: what is a core life principle that you hold closely to? 

Tai Zhi: One of those philosophies or principles that I hold closely, is this Chinese saying. In Chinese language is called 尽人事听天命.

Reggie: Mmm. 

Tai Zhi: So in everything we do, we want to make sure we do the best we can. But once you have done that, sometimes in reality things don’t work out the way you want it to be. 

Reggie: [laughter] Mmm. 

Tai Zhi: So we need to live happily, right? Let’s not agonize over how the reality will be. As long as you have tried your best, be mentally prepared that things do not turn out that well and just move on.

Reggie: Nice, thanks. Next question. What is a personal finance advice that you feel needs to be further propagated? 

Tai Zhi: It’s really to focus on the big picture, means winning the war and focus less on nitty gritty which is like the small little battlefields out there. All we need to do is to know which are the techniques that can more or less guarantee us that big success and forget about those stock picking, market timing, unless you are Warren Buffett, or George Soros. 

Reggie: Cool. George Soros. And number three, last question is: which part of your life are you giving extra focus on now? 

Tai Zhi: I think right now we are focusing a lot about giving back to the society. For example, AutoWealth… three years, or I think two years ago, we started a bursary called the AutoWealth… 

Reggie: So cute! 

Tai Zhi: … Bursary Fund. Yeah. So every year we support a financially needy student at the NUS Business School where both me and my co-founder Noel Lee came from. So we will support a needy student with S$6000 each academic year. 

Reggie: Nice, nice. I should go back to school. I dropped out of NUS, but okay. Anyway, good stuff. Thanks for coming. Thanks for sharing. Awesome.

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