Here’s How You Can Limit Mistakes In The Stock Market [Chills 56 with Kenny Loh]

“No matter how, we will definitely – I say, definitely – make mistakes in the stock market, in the investing world.” This is what our guest Kenny asserts in this week’s Chills with TFC. Do you agree with him? As an independent financial advisor and REITs specialist, Kenny (https://fa.com.sg/kennyloh/) has many great investing insights to share with us.

Retail investors are in for a treat as Chills 56 covers a wide range of investing-related topics, from the 3 stages of losing money in the stock market to steps to build diversified portfolios for different age groups. We even include a special segment on Kenny’s expert analysis on REITs in 2022, so listen out for that!

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podcast Transcript

Andrew: In today’s Chills with TFC, my guest is going to start off by sharing how he lost money in investing and trading. I know we’re not here to learn how to lose money but there are important lessons to learn to help us avoid it. My guest even divided into stages of losing money so let’s find out how to overcome those stages so that we can move on to growing our wealth.

We’re going to cover different asset classes, including a REITs (Real Estate Investment Trusts) outlook for 2022. What should your strategy be at different ages and different stages in life? Let’s find out if your portfolio is suitable for your current situation.

Expand Full Transcript

Hello, my name is Andrew and welcome to another Chills with TFC episode. In this series, we talk to interesting people with relevant experience and insights to help us learn from their perspectives so that we can create the life we love and manage our finances well. The last time my guest was on the show, he was sharing with us about REITs and he has some solid insights because he’s a practitioner himself. Apart from being a REITs specialist, he’s also a financial advisor who’s helped his clients with retirement planning solutions. Once again, let’s welcome Kenny Loh! 

3 different stages of losing money! What do you mean? 

Kenny: Correct. Because when I first started, it’s basically ignorant… that is the first stage. Ignorant…. basically just listen to stock tips. You don’t know why you’re doing, don’t even know how to do the work. You just listen to colleagues. Maybe you invest in this stock… they will explain to you why they invest in this stock then you just follow. 

But after investing, they never tell you that if a fundamental weaken or they want to take profit or they want to sell off, they never tell you. That’s why you are just holding the money, losing the kind of stock. Then after that, you just lose money, don’t know what’s going on. 

So that’s the first stage – the ignorant… basically without any proper investing knowledge and basically just listen to stock tips. Quite a number of the retail investors out there, they are in this stage. Because I’m giving tuition, I’m also giving a webinar… it’s quite a difficult question. From the question they ask, I know that they really know nothing much about investing. They just ask which one good to invest. That’s it. 

Andrew: Sounds familiar. That’s how I started. I read some blog, I read about this company and then I invest in it and not knowing what to do. 

Kenny: Yeah, exactly.

Andrew: Ignorance. 

Kenny: Yeah. So after that, I found that this is something not good because no matter how, I really need to understand how to do the valuation of the stock itself. That’s why I go attend some of the courses to understand about the fundamental analysis, technical analysis. That’s how I get started.

But normally, when you attend this kind of courses, the trainer itself, they are rah-rah. They make the whole thing so simple and it’s very easy to make money and that will really boost our ego and also our urge to go and trade. Beginner’s luck in the investing world, it’s really true. When I first started investing or trading after attending a course, actually the first month itself, I made $4,000 just within one month. I’m so proud, so excited, I told my mother “I think I can quit my job and become a full-time trader.” Yes, exactly. 

Then of course, because when you are in the very good winning start… first started, you tend to increase your bet. So second month onwards, I increased my position sizing and end up second month, my total portfolio, I have a net negative $4,000, which means that in one month, I lose $8,000.

And then from there onwards, I start to trim down all my investing or trading. I think something is not right. I summarize in that stage… second stage of how we lose money is basically: we know a little bit but we are not experienced enough. We don’t have enough time [to] hone our skill because normally if you want to become an expert, you take many years. It’s not going to… after you attend a course, first year, second year you become expert. No. So my conclusion is: minimum… we need to hone our skills for minimum three years to really understand the market, understand ourselves and understand our behaviour. So that is the second stage, how I lose money. 

Andrew: So first stage you call ignorance. Second stage, what do you call it? “Know a little bit”? 

Kenny: Inexperienced. It’s the experience that count. 

Andrew: Third stage?

Kenny: Third stage is basically: you have experience… all right, interesting, you also know all the fundamental analysis, technical analysis and also macro analysis. Everything you can do it nicely: come out (with) a chart, check all the financial ratios, everything all stars align. You invest. 

But in the stock market itself, basically whatever information we learn from the Internet, hear from people, read the report from an analyst, they’re all lagging data. The listed company, they will show you what they want to show you. They will not show you what they do not want to show you. 

Third stage is a fraud case, because at that time I went through all the S-Chip, China stock in Singapore itself… basically after you analyze all the financial ratio, it looked perfect. It’s a very good stock to invest. Then from there on, of course, after you identify a good stock, that means you increase all your investment capital there.

Then after a while, there is some audit happening, then the auditor report come and say that whatever cash statement shown in the financial report, physically they are not there in China. So after the news come up, the whole stock price plunged and also suspended. I have to write off my whole investment.

So the third stage was very painful, I lost close to $100,000 of all the stock, no matter how well I have done my homework. So third stage we can call it more on the risk management: no matter how good our analysis, the stock market is always right.

Andrew: What’s the fundamental difference between the third stage and the second stage?

Kenny: The second stage is more on inexperience: I have some basic knowledge but I don’t really understand the behaviour of myself and also [the] market or the instruments I trade. 

For example, if I’m trading crude oil… they are sensitive to certain information, certain news and certain monetary policy and also Forex. They have a lot of co-relationships. Trading crude oil is not just purely based on oil price itself. There are many many factors that affect the crude oil price so from that angle, I need to understand the whole ecosystem, how they interlink to each other. 

So the third part, no matter how much information you know, definitely we don’t know what we don’t know. That’s why no matter how much we have done our homework on the third stage, if you miss out something, that something can be very crucial and make us lose money. So what is that thing? We don’t know. In order to avoid that, it’s important for us to diversify. 

That’s how my diversification comes in. No matter how, we will definitely – I say, definitely – make mistakes in the stock market, in the investing world. The key thing here is when we are wrong, we have to limit our exposure. We will definitely get it wrong. 

Andrew: The conclusion you came to was diversification. Very important, because we’re talking about this three stages of losing money… still losing money. You have to go through all these three stages before you go to the making money part.

Kenny: Right. The risk management come in… once I went through all these three stages, after that, I start to focus on all different asset classes and also see how I can diversify into some of the non-market correlated so that they don’t correlate to each other. Then from there onward, my investment portfolio will start to grow.

Andrew: Okay, so that’s how you approach your own investing and how you actually help your clients with their personal investing as well? 

Kenny: Yes. That’s why the behavioural coaching is very important. When I’m helping my client, I have to keep telling them that diversification, diversification, diversification and they don’t believe it. Because… two days ago, I just explained to one client that… For them, they find it too much homework, because I told them “when I help you to build a portfolio, I will build a portfolio consisting of about 20 REITs.” 

They say “Wow, 20 REITs? How am I going to monitor? I just want to… you just tell me one or two REITs then I’m done.” I tell them “No. If you want me to help you to manage, I can never buy you one or two REITs. If you just want to focus on one or two REITs, sorry, I can’t do it for you.” Because I totally understand if something goes wrong, it will go wrong… Murphy’s law. 

Andrew: You mention behavioural coaching. Is that part of your work? How do you do that anyway? How do you coach someone on their behaviour? 

Kenny: Yeah, because for example, when the market is very bullish… not typically during this period, because REITs is not doing well… not saying not doing well, it has been moving sideways for more than one year, one and a half years. That’s why some of the investors, they’re losing patience.

Then they forget about what is the primary objective they want to invest in REITs. The primary objective investing in REITs is for the dividends. The capital gain can never come into the picture. It’s a plus point. But when they see that some other stock, for example S&P 500, that keep going up, they want to switch. It’s a typical behaviour.

Then I told them that “Now S&P 500 is going at a close to the historical high but as the retail investor, you want to chase that one. Why don’t you just wait for the REITs? Eventually, REITs will continue to go up, there’ll be a rotation.” Because when something becomes more and more expensive, too highly valued, there’ll be a switching from the highly-valued stock to maybe under-valued stock so there’ll be a rotation… come back. We just need to be patient.

Andrew: Because US growth stocks and REITs, they serve different functions in our portfolio and that’s why you need to be diversified. In your opinion, what makes a diversified portfolio? 

Kenny: Diversification… okay, basically, I start from an asset class. In the investment place, most of the retail investor, they only know about stocks but we have a bond market, we have the alternative investment market. REIT is considered alternative investment, and we also have private equity and also some of the debt fund, cryptocurrency and digital fund. There are many asset classses over there. You can have some commodities, some futures. There are many there. 

So when the stock market is going higher and higher, the retail investors, they start to lose their patience because they find that “okay, if I don’t invest now, FOMO (Fear of Missing Out). If I don’t invest now, I will lose out.” But they always forget about it… there are some other asset classes, undervalued, they are not moving, actually you can park your money there first because eventually, the rotation will come back at one day. 

Diversification to the different asset classes is very important and don’t put all the investment to pure stock market, hundred percent equity, because when the market crash, no matter what happens, the whole thing will crash. 

This happened to most of the investors. They find that they always treat the stock market as homogenous. When it’s going up, it has to be one directional but if you look at it based on the different geographical diversification… at the present moment, US is getting higher and higher, all time high but you look at China. They are more or less a rock bottom.

So eventually the funds… the money will be rotated from the developed market into the emerging market. Because you look at the valuation itself… because fund managers, they are not stupid. They can see that China is very cheap at the present moment and the business still intact. For example Alibaba, Tencent, we cannot live without them but at the present moment, of course, the sentiment is very bad there. 

As the investor, maybe especially professional investors, we always have a very long term horizon. As long as business continue to do well, the business is intact, that is a demand… there’s a demand on the services and there is a strong GDP growth, you don’t really need to worry too much. Just park your money there. After that, just need to manage the portfolio’s volatility and let the time to do the wonder. 

Andrew: Of course, you need to factor in political risk in that case. Could you give us more examples of how does a rotation play out? You gave us an example of US versus China companies. Across different asset classes, how does this rotation play out? 

Kenny: Okay. Basically, there are two things to move the stock market. The first thing is the monetary policy, the interest rate, because interest rate… basically it’s like you press your accelerator or you jam brake to prevent the economy from overheating or you want to add some fuel into the economy yourself. When the interest rate going up or coming down, basically there’ll be a reallocation of funds because for example, when the economy is overheating, basically all the growth stocks will probably start to correct when they start to increase the interest rate. 

Andrew: Cost of money is getting higher.

Kenny: It’s getting higher because growth stock… normally, they just borrow cheap money to expand aggressively so they’ll slow down the growth stock. When the growth stock start to… the growth starts to slow down, some of the fund managers, they’ll start to rotate the money into those dividend stock, those value stocks. Because value stock, basically, you don’t grow too aggressively but at the same time, they still give you very good dividends so the monetary policy will play a part in this rotation. And also, when interest rate goes up, your bond price will come down. In order to prevent you lose money in the bond space, the money will flow out from bonds to move to maybe some equity or move to some short duration bond. 

There will be some movement definitely but all these things will happen before the actual thing happens. That’s why you call it “priced in”: when there’s a news, when there’s a prediction, the funds will start to move around. That is the number one: interest rate monetary policy.

The second thing will be due to the business profit, the growth and also the earning per share or the cashflow generation for the company itself. As long as the company continues to do well, they are able to generate cashflow, generate profit, the stock price will be going up due to the cheap valuation eventually.

So these are the only two things. So if you look at all the business, they’re always looking for opportunity. The fund managers always look for the opportunity there: those stock which are fundamentally strong but undervalued. They go in to park their money there. We call it in the investment world… we call it smart money.

Andrew: Tell us more about the smart money. Why is it called smart money in this case? 

Kenny: Okay. Smart money… they are not like the retail investor. Smart money, basically they don’t look too much on the technical analysis because you don’t trade based on momentum. Basically, they just look at whichever sector which have the highest growth potential, maybe in the next one year, two year, three year, five year… there tends to be a much longer time horizon and they just park money there and just waiting for opportunity and wait for it to grow.

Andrew: Okay, so that’s at the institution level, right? What does the retail investor do? Because hearing what you just said in having this knowledge, I know I need to diversify but like you mentioned, there’s so many asset classes. If I divide… if I really diversify, each of them maybe less than 5% and there are different schools of thought. One is you don’t need to diversify and the other one is that… okay, you got to have high conviction and that’s where you get the most growth. How did we reconcile all of this as a retail investor where my funds are limited? 

Kenny: Yeah. It really depends on the risk profile, because retail investor, typically there are two types. The first type will be momentum. They just continue to chase. They read the news. When there is any stock goes up, they start to chase. That’s one group, but it’s quite siong (tough) because you have to monitor the market and you have to look at the news and a little bit gambling over there because you never know. By the time the news come up, most of the time it’s a bit late to retail investors. Just be aware that there’s news manipulation out there. 

Second group of investors, basically they are so-called value investors. They do all the homework. They find that this stock is undervalued, fundamental is strong and they are used to trading in the kind of PE (Price-to-earnings) ratio or price to book ratio. (They have) done that before but at the present moment, due to whatever reason, maybe due to political reason, or maybe due to sentiment issue or due to suddenly that there’s maybe the Omicron or COVID-19, those are the one time event. Those are some noises so this is not detrimental to the business and it’s not causing damage to the business model. It’s only noises.

If the retail investor is able to differentiate what is a fact and what is a noise, they should be able to identify an opportunity. Then they just need to allocate some of their funds there and just wait for it to recover. Of course, you are not going to deploy 100%. Maybe you just deploy maybe 25% first, then wait for a while to see whether it recover or not. If (it’s) not recovered, you can deploy another 25%. We call it dollar cost averaging to enter in different phases because you also don’t want to get all your money stuck down there because the timing is very important. You don’t want to deploy your money 100% then wait for two or three years. At the same time, you lose out a lot of opportunities. It’s an opportunity cost of parking your money there. 

Andrew: Are you talking about deploying 25% in equities as an example? 

Kenny: For example, if you have identified a certain equity which is undervalued and the business model is strong, is good, so you have… from total portfolio design, you decide to maybe allocate maybe $10,000 into this share but you do not know when this one can recover. You can deploy $2,500. Park it there first. Maybe three months later, you look at the whole situation again. You park another $2,500. After that, you also can look at the chart itself, when the stock price start to go up, you deploy the remaining.

Andrew: Okay. Is there a strategy for these kinds of investments?

Kenny: That’s the strategy. 

Andrew: But is there a name for it? It’s not really dollar cost averaging… with like one lump sum and you divide it in three tranches. 

Kenny: It’s my strategy. 

Andrew: Divide into three tranches, depending on the market.

Kenny: Yeah. It’s my strategy and also how I manage my client’s money to balance the opportunity cost of waiting and at the same time, I will also want to capture the maximum return. When the stock price is at the bottom, you’ll give it the maximum return. The problem is you don’t know when it’s going to start to rally, but I do not want to miss out the opportunity because for me personally… last time, I tended to wait for the whole confirmation, technical analysis, confirmation uptrend before I can deploy. Then you miss out on opportunities because for those undervalued stock and also stock with very strong fundamentals. When the funds come in… retail investor cannot move the market. When the fund come in, that means a big institution comes in, suddenly you have a spike in the share price. You’re going to miss out opportunities. 

Andrew: The GameStop people would disagree but yeah. I get what you mean.

Kenny: So these are the lessons learned. After that, I don’t want to make that kind of mistake but I also don’t want to get all my money stuck down there, so I split into a few tranches. 

Andrew: Okay, beacuse you cannot time the market and if you wait at the sidelines, patiently waiting, you will miss out. You might miss out and so you put in one tranche first. You observe the market. It either goes sideways, up or down. And then after that, you put in your second tranche and then your third tranche. 

Kenny: Yeah, and also, that one gives me the flexibility to adjust if the market changes. For example, if it goes up, then it’s okay, I can deploy the rest of my funds. What if the market continues to go down? At least I still have a bullet to buy something at a cheaper price. 

Andrew: Buy the dip! Buy the dip, right? 

Kenny: Yeah. Because sometimes we really don’t know… because for example, recently, Alibaba. The downtrend has stopped, after that moving sideways. Then suddenly, some of the news… nothing to do with Alibaba, it’s like Didi. They said delist then Alibaba was affected and come down again.

Andrew: So there’s this meme, which is “they asked me to buy the dip but the dip keeps dipping”. 

Kenny: Correct. 

Andrew: That’s a possible scenario, but of course if you believe… in this case, you believe in the long-term fundamentals of Alibaba then you don’t mind buying at a cheaper price, so to speak. 

Kenny: Exactly. 

Andrew: Okay. Okay. So you just described investors in 2 types. One is momentum, one is value. Let’s dig a little deeper because I’m sure there are different angles to look for. For example, your age. Which life stage are you at? Let’s get a little bit more nuance. How do I diversify my portfolio? Let’s stick to the theme. How do I diversify… and it depends. I’m sure there’s no one size fits all but let’s go into the details of it. 

Kenny: Yeah. For those who has a longer runway… for example, fresh grad: just graduated, young, you don’t have a lot of money. You don’t have one lump sum of $100,000.

Andrew: Early twenties. 

Kenny: Maybe you have $20,000 and every month, you have free cash about $1,000, $2,000.

Andrew: Monthly income.

Kenny: Yeah, then it’s better to use the monthly saving plan. That means you invest regularly every month. Consistently… $1,000, $1,000, $1,000 and you can choose those stock or unit trusts or ETF… tends to be more aggressive, right? Of course, you need to choose the right stock. You don’t want to choose something that over the long term, the business model is no longer valid and the share price would go to zero. You try to avoid that from happening. 

So invest consistently. Go for aggressive growth portfolio over the long term using dollar cost averaging strategy. Basically, your weighted average purchase price will be lower. You definitely need to gain the long-term acquisition on the stock market itself. 

Andrew: Okay. 

Kenny: So can go aggressive for the younger… 

Andrew: For this profile: younger, more runway, more time, right? It can be more aggressive so roughly, as in to get a sense of how to diversify the portfolio… how much? What’s the percentage? 

Kenny: Okay. If you have $1,000 every month, buying the individual stock cannot give you any diversification. For example, you buy a REIT… because minimum, in order to buy a REIT, you need a hundred shares so in order to do that and also have a very diversified portfolio, it’s better to use unit trusts. Because unit trusts… the minimum investment amount for some of the fund price…. for example, China themed. You just need $250 per month. You can have a China exposure. It can be a 50 or 100 stocks there and maybe another 250, you can diversify into using the technology fund. Then you can have access to Apple, Microsoft and those things. 

You don’t need to fork out the full amount. Another thing is coming very hot, moving forward will be all the ESG: Environmental, Social and Governance. This is a regulatory requirement. It’s going to happen and I can see that this will be a good theme moving forward, especially the younger generation. They are more environmental conscious. 

You just allocate another $500 to this kind of ESG fund. Do good to the society. Do good to the Earth itself. Basically, three funds. You’ll definitely… you have more than 100 stocks underlying there already instead of just focusing on Singapore stock, one stock.

Andrew: Okay, okay. So moving on to the thirties. That’s where most of our listeners are at. Well, the thirties is interesting. You are relatively young but you might be getting married, might need to buy a house. You might have children, young children. How do you diversify? 

Kenny: Okay. Actually… have to be more defensive a little bit. 

Andrew: Defensive, okay. 

Kenny: Because… yeah, a little bit more defensive because at any one time, you do not want your investment to be locked up and also you need to prepare the liquidity. When you need money, you can liquidate, you can sell. 

Andrew: You need to pay your mortgage, for example. 

Kenny: So it’s important. Don’t get your investment locked up. For example, using the insurance ILP (Investment-Linked Plan) to invest may not be a good idea if you need the liquidity. Timing of the market is important. You don’t want to sell when there’s a bear market so it’s better to have some of our portfolio… tends to be more volatile, underlying more volatile, but they’ll give you the maximum growth. 

Some of the portfolio tends to be less volatile. For example, you can allocate into some of the bond fund or maybe REITs tend to be less volatile. At the same time, they also can give you some dividend. Not fantastic… 3%, 4%, 5% is also good enough. It’s still better than parking your money in the bank. The interest rate in the bank at the present moment, 0.5% or lower. I saw the latest inflation number: 3.2%… annual inflation rate in Singapore. It’s pretty scary. So if we park the money in the bank doing nothing, definitely our purchasing power will be eroded.

Andrew: Okay. How about forties and fifties? Is that where more REITs come in? Because that’s the topic when you last came on the show. 

Kenny: Yeah. So 40 and 50, we are getting closer to the retirement. Definitely, we do not have a long runway and at 40 itself, so basically we have… entering into midlife crisis. It’s quite easy to lose our job. When we lose our job itself, if we need the money, basically we have to get our money from somewhere. Maybe we need to liquidate our investment portfolio so it’s better to be more, slightly more defensive, more dividend stocks as the cushion.

If one day we lose our job, we are still able to rely on our dividend as a passive income to feed our family, to feed our monthly expenses so dividend stock should be the bulk of it. Of course, 40 years old still quite young, right? If they’re able to take a little bit risk, maybe 20% or 30% allocate into growth stock because if you do not have enough for your retirement, you will definitely need to make full use of growth stock to help you to grow your portfolio when you are entering the retirement. 

Andrew: Okay. 

Kenny: When you go to… As a retiree… because I saw some of the retirees, I do not know why they are still spending so much time go and trade all those penny stock. Maybe for entertainment, but if they trade it for retirement, this is something not so right to me.

Andrew: Just a story. My friend’s dad is (a) retiree and the same thing… sign up for some trading course. My friend is so angry because from her opinion, the course is obviously out to cheat money. That’s her opinion about the course. Not all courses are out to cheat money, of course. But the thing is yeah, maybe you need… you just need to do something at that age, to have something to look forward to.

Kenny: Yeah. They can do something but first thing first as a financial advisor, I always recommend and advise this group of retiree. First thing first, you can trade penny stock, trade all the meme stock, whatever stock, you take high risk. Go ahead because that’s an entertainment because when you are retired, you got nothing to do already. You cannot possibly go out everyday, go and play golf, and not many people also like to play golf. 

Andrew: It may not be fully entertainment. For my friend’s father’s case, although there’s some base level of wealth to draw from, but the idea that no income is coming in… assuming you are retired. Already no income. Knowing when no income is coming in, you might not be used to it. It might feel a little bit scary at that age. 

Kenny: Yeah. I tried to become a full-time trader before. It’s quite scary. You set target every day. “I need to make $500 from the stock market.” That target will kill you because you end up overtrading. If you’re making money, if you’re making money… just look at a few scenarios.

If you’re making money on a day itself, you find that “wah, today is my day. I’m so invinciible.” After I make the $500, I think that “today 很顺 (very smooth), let’s go bigger.” Maybe you end up losing.

Now, the other scenario. If today is not your day… you’re losing money but you need to make $500 off the stock market. Otherwise, how to feed your whole day? Then end up… tends to go and overtrade again, then you lose even more money. 

The third scenario: the whole stock market itself, there are no signal for you to trade. It’s very boring because sometimes, no signal means no signal. You cannot force yourself to do a trade. 

Andrew: They have to do something. 

Kenny: Correct, and you have the $500 target to meet then you end up no trade, you also force a trade. Psychologically, it’s really go haywire when you become a full-time trader but in order to solve that problem… now we change it to another scenario.

Let’s say you already have the passive income portfolio which are able to really fit your monthly expense, give you $4,000 passive income then you do become a full-time trader. Your psychology is totally different. 

Andrew: Yeah. 

Kenny: No opportunity to trade, doesn’t matter because I have $4,000 coming in for my passive income portfolio, the dividend portfolio. So for the retiree, they should… first thing first, focus on building a passive income portfolio, then the remaining money go and do everything you want. You can take risks because you can afford to lose. 

Andrew: Yeah, that makes sense because as an investor, you really have to overcome some form of psychological biases that you have. As a full-time trader, it’s even harder, but of course some people’s temperament suits that. Some people like it. But like you said, it’s really overcoming your psychology.

Kenny: Yeah, yeah but to tell you the truth, the successful full-time trader, they always have a passive income portfolio with them, always. Nobody go and put the whole retirement portfolio just 100% to trading. No one, because it’s the reward versus risk kind of calculation.

Andrew: If you have to pay your monthly expenses purely by your trading income, that’s going to screw up your psychology a lot.

Kenny: Right, right, right. 

Andrew: You’re forced to do a lot of things that you might not normally do. 

Kenny: Yeah. For those full time trader, maybe they just first started off with very limited capital that do not have a passive income portfolio, it’s very common for them… Whatever money they make from a trading portfolio, they will take out some portion and go and build a dividend portfolio. It’s a very common practice to safeguard what you have, at the same time to give you a passive income so that you less rely on your trading portfolio. 

Trading is a full-time job, right? You have to sit in front of the computer unless you use the robot to help you trade, the algorithm to help you trade. It’s not free. You have to pay for all the subscription. You have to pay for someone to help you write… those scripts is not free. So those are really professional trader and how many of us can make it as professional trader? It’s not easy. I’ve tried before, I try about one week, I give up.

Andrew: Did you get burned or was it just too tiring, too taxing?

Kenny: It’s too taxing because there are certain markets we can trade, certain markets cannot trade. I just go through with you what happened to me… try to become a full-time trader for one week. One week, I gave up. Every morning, you have to be very disciplined. For example, the morning session… SGX forget about it. SGX, you can’t trade so forget about the SGX market. 

The only market you can treat in the morning 9:00 AM is either Hang Seng or Japan. That would be between 9.30 – 10.30am, that kind of time frame because after a while, you go to lunch time, it’s very boring, not moving anywhere because trader like volatility. You want big swing up and down. This is how you make the money but before 9.30am, the market open for Hang Seng itself, you had to do a lot of homework. After you finish preparing a homework, you’ll trade during that period. If you don’t have trading signals, basically you are just doing nothing. That’s the first period. 

Then the second period, it’ll probably our dinner time when the European market open, maybe between 5 – 7 o’clock. The third period, it’ll be the US market. It’ll be 11 – 12 am or 1 am. But just look at your own timing. Your own time all screwed up.

Andrew: Yeah, day and night is opposite now.

Kenny: You don’t live a normal life and also, you just look at these three different markets. These three different markets got three different behaviours. How do you want to trade? It’s not easy. There’s so many things for you to trade and so many ticker symbols. You have to do analysis and also, there are certain timing… for example, when there is an FOMC meeting. FOMC meeting, normally it’s 2 am. They release the results. 

Andrew: FOMC? Could you help us define that?

Kenny: Federal Open (Market) Committee. Basically, it’s a committee in US that organise I think six meeting per year that talk about the monetary policy, whether they want to increase interest rate or decrease interest rate. Normally, they make an announcement in 2 am, Singapore time. Before they make an announcement, you don’t want to trade because it can be very volatile. It can go anywhere and those volatility is not caused by human. It’s caused by the computer. How the computer do the trading? Basically, they just read the script, read all the wording and start their…

Andrew: Algorithms. 

Kenny: … algorithms and start to issue buy and call… buy and sell. Buy and sell signals. 

Andrew: Based on keywords. 

Kenny: That’s why if you have time to really… you monitor before when there’s an announcement itself, you can see that the stock market tend to be very volatile and if you’re a trader, you will set profit target, you will set stop loss. This how you get all the stop loss all…

Andrew: Going back to our theme of building a diversified portfolio, you mentioned mainly asset classes but tell us a bit more about country? Sectors? Different ways of diversifying?

Kenny: Okay. For the retail investor in Singapore, probably they only know about Singapore Stock Exchange, right? That’s why, if they’re one growth, they always complain about Singapore stock market no growth at all. Singapore is only suitable for the dividend stocks. Okay, that is true.

If they want growth, they have to look somewhere. The growth is in Hong Kong because we have a lot of China tech stocks there. The growth stock market is in US. If they are not able to or don’t know the instrument, how to diversify to those market, they’ll lose out on the growth opportunity. That’s one thing.

It’s important… especially in Singapore itself, now basically when we are in Singapore, we are able to trade any place in the world. We can invest any place in the world through ETF, through the unit trust itself. Diversification to different countries is important because you do not want to put everything into one basket. 

For example, if you are a strong China supporter, if you put all your portfolio, all your stock allocation into China, then you will get hit this year. For example, next year, if US is going through the big correction, all the US stocks will be hit so it’s important to really allocate to different country, to US, to Japan, to Asia-Pac, to China because at the end of the day, the money in this world will flow from one country to another country because it’s so easily moved from one asset class to an asset class.

That’s why, for example, when there is a big correction in the stock market itself, the money will tend to move the bond market or maybe move to the gold market to hedge a position. They would definitely move to somehere because the fund managers, after they take profit or cut loss in certain portfolio, they cannot keep the money into cash position because they have to deliver the return to the investor so they are moved to somewhere safe, but at the same time to give you some dividend, some coupons. 

So diversification to different country is important to really… basically you don’t react after the market reacts. You plan for it first. If this thing happens, which market will benefit? This is how I plan my portfolio. 

Andrew: You look at asset classes, countries. How about sectors? 

Kenny: The sector is… especially this year and next year, probably the investor can see a lot of thematic portfolio coming up. Technology disruption is one of the themes. We are already seeing how technology changed the world, changed the way we work, how to make us more productive and now even you can buy a virtual property, right? Amazing. 

Andrew: Crypto, virtual world…

Kenny: You have your crypto. 

Andrew: Metaverse and all that. 

Kenny: So thematic is important. Another thematic will be the ESG play, sustainability play. China definitely is one of the thematic… we cannot run away from China, the growth story but it may not happen… maybe this year or next year, but long-term, if you have the investment horizon of five-year 10 years, definitely China will be here. And also, due to a supply chain disruption and also the inflation, the commodity space will be doing well in this one or two years. So just allocate some of the fund into this kind of thematic pocket here and there. Just ride on the capital appreciation, but of course you cannot just after allocation, you just close your eyes because it’s thematic. Thematic is short term. It’s more a tactical play during this period. 

Andrew: Okay, all right. So today, we talk about diversifying a portfolio. It really depends on your age and life stage and what are your goals and then you look at country, you look at sectors, you look at different asset classes to build a diversified portfolio because you want to avoid the mistake of… the first three stages of losing money.

Kenny: Yeah.

Andrew: And this is how you defend yourself against that. 

Kenny: Right.

Andrew: All right. So stay tuned to the end of this episode because I’m going to ask Kenny about an overview of REIT in 2022. 

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So Kenny, give us an overview of REITs in 2022. What are your views? Your analysis? What are you looking out for? 

Kenny: Okay. Basically, 2022 is the reopening play for REIT because now, all the VTL (Vaccinated Travel Lanes) have been established. The border start to open. That will really get our business back to normal. When our business get to normal, people can start to travel. The business will start to recover.

For REIT itself, definitely they will be benefiting from this kind of increase on the traffic, increase of business activity. When the business is in the full recovery mode, basically the rental collected will increase compared to 2021. Basically, you have a lot of business shut down, all the lockdown and those things, right? 

Your dividend definitely will be impacted for the past one or two years so in 2022, the return of dividend, it will definitely increase the share price because people want dividend. At the end of the day, dividend is very crucial for those retirees. 

At the present moment, this month, the latest number, the average dividend yield for the REIT sector in Singapore is 6%. 6% is pretty high so in terms of valuation itself, it just add a fair value. So at the present moment, it is pretty attractive, the way I look at it. But of course… different sector, we have a different performance moving forward.

We start with the hospitality sector first because that comprises of the hotel, serviced residential. Next year, hospitality sector… I have the most bullish will on the hospitality sector because of the increase in tourism and also, we have been locked down for two years. That’s why immediately, I want to go out of Singapore and travel. 

Andrew: I mean if I play devil’s advocate… what if more variants come? But then of course, we’re looking at it being two years already and with more VTL openings, there will be some forms of reopening. 

Kenny: Right, there’ll be some form of reopening and also, if you look at all those country and all those working adults, I think basically they can’t afford another round of lockdown. They can’t afford because before the virus kills us, we will be killed by the economy first. We have to feed ourselves so I think that no matter how, unlikely you go back to the full lockdown. Of course, there’ll be a lot of inconvenience, a lot of control. There are a lot of testing along the way but I don’t think we’ll go back to the full lockdown, so unlikely. 

This is also another very common question that the investor ask me: will we go back to another market crash or not? Quite firmly, I will say no. I will say no. We will not go back to March 2020, the whole market crashed because now, we know the virus much more better. We have a vaccine, we have a test kit and we are able to really do the isolation, segregation and treatment much more faster so things is much more better compared to last time. 

So hospitality is a good reopening play and the retail sector is the second one. It’s also good for reopening play, especially for example if you look at Orchard Road, now you can start to see Orchard… all the light come on again. 

Andrew: You mean the Christmas lights?

Kenny: The Christmas lights. 

Andrew: Our tourists need to come in.

Kenny: Yeah, I think they will come back but at least they can say that finally… 

Andrew: Some form of life.

Kenny: Some form of life… so those retail mall will tend to do well if more and more tourists coming back. Retail is a second bullish play because at the present moment, if you look at historical price of book itself, it’s still undervalued. Besides the 5% annual dividend, you still have probably 20% upside potential compared to pre-COVID. Look at the chart, look at the price to book, more or less you’ll know that what is the future upside potential already. 

When you come to data centre, don’t need to mention about data centre. The digitalization of the economy, the rolling out of the 5G system, you definitely need a lot of data. E-commerce also need a lot of data. Data centre is here to stay so that’s why you can see that the recent IPO of a digital REIT itself is so hot. It’s so hot, right? Data centre definitely is a growing asset. I can see that there’ll be more and more REIT… will include the data centre into the portfolio. 

And e-commerce logistics. That’s why you also can see that the Daiwa House Logistics Trust, they are listed. They have pumped in, I think 12 logistic from Japan into this REIT IPO itself so it has been doing well also. Logistics REITs is a growth play, the new economy play moving forward. 

The only thing that may not have a very good growth prospect will be probably commercial office because work from home trend. Basically, now with the digitalization of the economy, we can work anywhere we want. We also can work any time we want. We don’t really need to go back to the office so my view that… probably the performance for the commercial office will be muted, so-so but definitely will not be worse than last year. 

Andrew: Okay. For reference sake, this is recorded in December 2021. So let’s hope that in 2022, life goes back to some form of normal. We’re all healthy and we all make good money. 

Kenny: Yeah. 

Andrew: Okay. Thank you, Kenny. 

Kenny: Thank you, Andrew.

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