Permanent Portfolio is a self-directed long-term passive investment strategy, introduced in 1981 by Harry Browne and Terry Coxon and simplified into 4 asset class in 1987. It aims to provide consistent market returns and protections in different economic cycles of growth, inflation, recession and deflation. The strategy does not rely on market timing, and requires yearly management and minimal monitoring. This site is to provides educational information for learning about my research and implementation of Singapore version of Permanent Portfolio. Readers can also use the Permanent Portfolio knowledge to diversify their stock heavy portfolio into long term government bonds and gold for better portfolio protections in recession, deflation and inflation. Disclaimer: Use of information on this site represents acceptance of the disclaimer at bottom of this page and Disclaimer page.

Wednesday, 24 October 2012

STI Review 2012 Oct and Guide 1 to Investing Plan A and Plan B

Singapore STI Review 2012 Oct and Guide 1 to Investing Plan A and Plan B

Here is my view on current Singapore Straits Times Index. First see the current STI chart:

STI is making newer one year price high this year. Is now a good time to start your new stock portfolio or buy new units to ensure you get into action for a possible next leg up in stock market? There are a few warning signs against doing so now:

1. The STI is way above 200 days moving average now. When the price is way above 200 MA, in my opinion this is a gauge that the price is definitely not cheap to buy.

2. There is a price divergence between the higher high in price and the lower high in MACD indicator, see the orange lines. This usually points to 2 things:

a. The uptrend momentum of STI has weakened and a possible reversal downwards of price may be coming.

b. The uptrend momentum is still strong and price will keep making newer high and MACD will keep making lower high.
c. Price is consolidating and ranging horizontally, before price keeps making newer high and MACD will keep making lower high.

Looking at price movement, there is no way I can say the uptrend is quite strong; at most what I see is a weak uptrend. So without strong price uptrend, possibility b. seems less probable. We are left with possibility a. which means uptrend momentum has really weakened and we are in for a possible downturn in STI. A market downturn can come silently without warning, and by the time investor is convinced market is in downturn, they can already be faced with losses and some may be clueless what to do. Market downturn can also be a good thing for investors who are prepared to pick up cheaper stock later when market is near the bottom. We are also left with possibility c. which is not so bad as price may be consolidating to go higher. If price is consolidating now, in my opinion there is no need to hurry to buy yet, just wait for price to be at the 200MA before entering, to reduce risk.

Currently I also hear people talking about how the market is not cheap right now, if so there will eventually be fewer buyers than sellers and the market may have to take a break and reverse downwards, in a so called technical market correction. Also, I keep hearing people talking about how profitable Singapore Reits are and also how not cheap it is now. Some people even start suggesting to just jump into buying S-Reits without needing to think - I disagree. Let's look at a quote from 'An investor's guide to famous last words":

"You can't afford not to own this stock." - As close as it gets to ringing a warning bell at the top of a bubble. So start be alert for people who are saying these 'last words', so called because this will be the last thing we will hear them say before the market turns down and prove them very wrong.

Are we at a turning point in STI soon? Fundamentally there is not much growth engines in the global economy to support good growth in Singapore economy, and just recently, we were lucky to have been told we avoided a technical recession. The U.S fiscal cliff is approaching, so current uncertainties faced by U.S. businesses is not good for business growth. Think of how uncertain the market was during the episode last year when U.S. politicians were haggling over raising the debt ceiling, and how the stock market rapidly dropped during that period from August 2011 onwards. Now after the U.S. election on Nov 6 2012, the market may also make a correction. Another thing is the market may act strange also when Dec 21 2012, the end of Mayan calendar, is approaching... maybe this is a myth, well, like the Y2K event, we will have to see whether this particular period will be a non-event or not.

With the not so cheery view above, what can I conclude? First, I am not claiming to be a financial guru and I am not claiming to make prediction that the STI is going to reverse. I just sharing my views on the warning signs and offering few personal viewpoints here regarding what to do or what not to do now. I see 3 broad action plans now:

1. Wait for lower price to enter into stock market.
2. Enter a 'not cheap' market now with a diversified portfolio.
3. What to do with existing stock portfolio now if market is really 'not cheap'?

Here are the broad action plans.

1. Plan A: Wait for lower price to enter into stock market.

For new stock investor, now is 'not cheap' to start buying into stock market. Price moving above the red 200MA lines means there was a good run behind the current price, so when you buy into stock market now, people may be already selling for profits. A better entry point may be when the STI turns back down and touch the 200MA line, which means there has been profit taking and price has become average. Another good entry point will be when price is below the 200MA line for some time, when stocks have become relatively cheaper and maybe undervalued. For good entry point at or below 200MA, new investor will have to figure out for themselves.
All I am saying is, if you start buying into stock market now, there is little headroom left to support much price appreciation. Then if price eventually turns down and you are caught with negative profits in your portfolio, what are you going to do? Average down and hope to breakeven someday... while worrying how much more is the drop?
Investing is about planning, not about hoping. It seems a better way to just wait for market corrections, which will probably happen once or twice a year at least. Then when market corrections happens, pinch your nose and buy cheaper stocks at 200MA and if price drop further below 200MA, be contrarian and average down - pick somewhere after market bottom up then pinch your nose again and buy into stocks again when people are avoiding stocks as if they were smelly tofu. When you buy stocks cheap, you are actually lowering your risk a lot since there is already lesser room for the stock price to fall compared to if you buy stocks at the top above 200 days MA.
Waiting for a lower better entry price to buy cheap is better than potentially watching your stocks plunge from high and averaging down. I have been down this road before, buying pure equity portfolio at 'not cheap' level when price was way above 200MA, price drop and I average down, price drop and I have no more money to average down. Price drop till I cannot tolerate it, cut loss and conclude I did not have a good strategy. I was not a good market timer back then and knew much less about how market works than now. Now my investment strategy does not require market timing, and through learning about the Permanent Portfolio, I also learn more about how the stock and other asset market works.

Continue to read Part 2 using below link.
Go to:
Part 2 of Article - Guide 2 to Investing Plan A and Plan B
Part 3 of Article - Guide 3 to Investing Plan A and Plan B

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