Mutual Funds 3 - Entry Point & Buy Criterias (examples)

With the above options, I usually go for lump sum (if small amount say $10K or via EPF) or a combination of Dollar Cost Averaging + Value Cost Averaging (Combo). No timing of market

If I get a windfall of say $50K or more, I'd rather break it into monthly investments using Combo approach.
Reason: I do not want to be unlucky and buy totally in, then having the whole market crash on me. By breaking up the lump sum of, say $150K, and doing monthly Combo approach within 2 to 3 years, I ensure probability is on my side that I won't be too unlucky.

Most of us have heard SALES agents say out Dollar Cost Averaging (DCA) whenever they can't get their paws on our lump $um. DCA is espoused by many to be a better way than lump sum - I agree. However, there's a better way than DCA - called Value Cost Averaging (VCA). The table above shows the concept of a controlled VCA - controlled by limited monthly resources available for investment - $1,000.

There's an even better approach - a combination of DCA + VCA. I got the idea from a book by Mr. Lichello, called TwinVest and reduced it into a spreadsheet. Just input the monthly amount you can put aside for this particular investment and every month / quarter /period, enter the sales price or NAV price (must be consistent). The spreadsheet will advise how much value to purchase.

All these - DCA vs. VCA vs. TwinVest has been randomly tested against each other and also backtested with Public Index Fund's data.

90%+ of the tests, using randomly generated prices and fixed amount available per month, shows that TwinVest gets more profits or lose less than DCA or VCA.
6%+ of the tests showed VCA beating TwinVest and DCA.
Never once did DCA beat VCA or TwinVest
The randomly generated test was simulated for a period of 10 years, investing every month.

Why aren't these SALES agents advising you to use TwinVest or even VCA? Simple - it takes slightly more effort on their part to calculate OR they don't even know of these two approaches. Most would rather get all your $ (lump sum) so that they don't "lose" you to another agent (meaning losing their commission opportunity) OR put you in auto-mode of DCA via standing instructions from a bank to pay to the Fund House.

Now you know more than most SALES agents - use the knowledge well ;P.

For SALES agents reading this - add value for your prospects and customers, they WILL stay with you and appreciate your efforts. Track and give them reports "per transaction" invested with returns/loss per annum, not simple GROSS returns and AVERAGE yearly returns - give compounded per annum returns - make it simple for your customers to compare against other investments. We know not all investments make $ and that even for those that make good $ there will be ups & downs - be transparent about performance ya ;P

Mutual Funds 2 - Funds Selection (examples)

For every type of investment, there should be:
- Selection
- Approach / Management (some call it Entry & Exit plans)
It's the same with mutual funds.

Selection Methods
There are basically 2 approaches to selection that I've encountered with many minor variations:

1. Performance only
The above example is for this selection method. How to execute? Simple

a. Get Lipper's, MorningStar's and Normandy's ratings from The Edge (weekly), Personal Money (monthly) or websites

b. Filter off for your requirements
eg. I only accept ratings
Lippers:
Total Returns & Consistent Returns of 5/Leader
Preservation of >= 3
AND Morningstar rating of >= 4
AND Normandy's Sharpe Ratio >= 0.75 if possible, else the top quartile
(Sharpe or Information Ratio shows the amount of returns over the amount of risks - a higher number is better)

c. For those who have more time to kill, check each filtered fund's returns for 3, 1 & 5 years (please tweak these to your needs).
eg I'd weight 3 year's returns highest (3), 1 year's returns next (1.6) & 5 years returns last (1.5)
Why those years?
3 yrs - my expected minimum time horizon
1 yr - to keep my selection skewed to the more current performance
5 yrs - in anticipation that I'll be keeping my investment invested 5 years and more
If it's via EPF investment, I'll of course filter for EPF approved mutual funds.


2. Funds strategy in-line with Investor's strategy / risk appetite
eg.
a. If I'm an aggressive long-term investor, I'd filter out a fund house's "aggressive" or equity heavy and/or theme-based (eg sector rotation) funds.

b. Then, I'll review it's prospectus on how the funds will be invested and the fund's strategy

c. If I think it's in-line with my expectations, then I'll compare it with the rest of the funds which made the cut and make a decision


You may want to filter for fund houses first before the above. Personally, I'd only invest in funds from Fund Houses that:
- have enough variety of equity & bond funds (I hardly touch capital protected or balanced funds)
- who's funds are mostly performing above average against peers & benchmark for a 3 years period

Reasons: I usually switch from one asset class to another upon a returns per annum trigger. Switching can only be done between funds from the same Fund House.
Switching is a method to "sell" a fund & "buy" another without incurring commission / frontload costs of 3% to 8%.


Ok ok - those who are too blur or time-tied (ahem ahem) to research, I'm holding Prudential and Public Mutual funds. I've been with SBB (now called CIMB), Pacific Mutuals & BHLB - my experiences with these fund houses' funds weren't too great on average.

For those who are interested in capital protected funds - my opinion is that ING's are one of the better ones available.

Mutual Funds 1 - Before we begin

Ok here we go - $ make $.

Keep in mind, any $ put into any investments should be treated as "gone" / "untouchable" for at least 3 years. This doesn't mean that you can't sell down and reallocate to another asset / investment, ya ;P

I'll start off with mutual funds as most people think of stock investments as "high risk". By the time we're done, I hope you'll think of risk as managed risk, not just plain vanilla "high risk" "low risk". Just an aside - is driving "high risk"? Yes it is - if a blind untrained monkey is driving! If Michael whatshisname is driving, can you consider it low / managed risk? It all depends on the experience, knowledge and skills ya.

Mutual funds - what are they?
"Mutual", a simple view
- you, me + some others (well, a lot of others) collectively put our investment $ together, appoint a manager or managers to buy/sell stocks, bonds, money market, derivitives on our behalf. The manager(s) have to follow certain guidelines and will be audited/checked on by a third party.

A mutual fund has 3 parties involved:
- Investors (you, me + others invested in the fund)
- The Fund Management Company that buys/sells / asset allocate stocks, bonds, money market, derivitives for Investors
- The Trustee that checks and audits the Fund Management to ensure they comply with the Fund's directives / policies (each fund have their own policies /directives as part of their investment strategies)

Strengths of Mutual Funds:
+ Easy Diversification
+ IF Balance Fund (a fund that allocates 60% into Equities, 40% into Fixed Income instruments) used, do not need to actively asset re-allocate
+ Available asset classes are Equities & Bonds
+ Auto-cruise, plonk $ in and forget

Weaknesses of Mutual Funds:
- Relatively high cost of investment if cash is used for equity funds. Ranges between 5% to 8%! This means every $1 I put in, I get only $0.92 to $0.95 value at the start compared to stocks bought at EOQ (Economic Order Quantity - where the amount hits a low based on the brokerage cost) which is approximately 0.6% one way, thus two ways (buy/sell) approximately 1.2%+
- No direct control over what is invested in

I personally leverage mostly on my EPF a/c1 to invest in mutual funds as the charges are only 3% and since I can't touch my EPF $ until 55, leveraging on mutual funds is a near sure bet to beat EPF's 4.9% average returns pa. (since 2000 to 2007) .

Cash-wise, I use a Dollar Cost Averaging + Value Cost Averaging approach and only invest in foreign focussed mutual funds as EPF currently (mid 2007 onwards)disallow investments into foreign related mutual funds.

In whatever investments, huge lump sum investments should not be done. eg. if I inherited $200,000, I'll aim to invest the whole sum within 2 to 3 years, each month a specific amount put aside and invested using Dollar Cost Averaging + Value Averaging for Mutual Funds and Fundamental + Technical approach with Cash & Risk Management for Stocks.

Why 2 to 3 years? That's how long (statistically) a country falls and crawls out (Break Even, ie. no win, no lose) of a recession/depression. Longest I read was about 3 years in USA.

My investment approach is statistical and probability based. Like casinos - the long run game will get you $ even if the probability of winning is only 55% or 60%. Long run! That's why casinos make the $ and gamblers often lose in the long run.