Hi, wondering if there's any asset allocation thread. Complete investment newbie here, would like to hear how you implemented your "lazy portfolios".

Cheers,

John L

http://dividendsrichwarrior.blogspot.com/

refer to this warrior..

Thanks man

Urm... Looks like this guy invests a lot in stocks and REITS. I was wondering if anyone owns ETFs or index funds?

This post has been edited by JohnL77: May 27 2013, 01:34 PM

There is no pure index fund in Malaysia.

Even the self proclaimed index fund i.e. OSK KL Tracker charges a 1.63% annual Management expenses.

Xuzen

you could try this
https://www.fundsupermart.com.my/main/inves...ntportfolio.tpl?

We have CIMB FTSE ETF, traded on Bursa exchange

Xuzen: I heard that you can buy Vanguard Index Funds with an online broker. Or just buy ETFs. What do you think?

yklooi: Is fundsupermart the best way to buy financial assets? Are there ways to buy without incurring sales charge? Btw, nice link man.

Pink Spider: Does this ETF have a good bid/ask spread? I read in an earlier thread that local ETFs have low volume.

Btw guys, what do you think of Private Retirement Schemes in Malaysia? Are they any good? Do we have tax-deferred accounts like 401(k) in the US? Why tax deduction for EPF+Life Insurance capped at RM6000 and PRS capped at RM3000? Don't you think we're being screwed over a bit even though we can save 23% of our income with EPF scheme?

Is FSM the best way?... i am NOT sure,..but it is good enough for me at this moment, lower SC (compared to banks or Investment mgmt house), easier to monitor my portfolio, vast info on the website,..etc
without incurring SC? i think there are some that dun't charge entrance fees, but only on exit.he-he.
some bonds funds are without SC...(i think bonds are considered as financial asset too)
there are certain condition surrounding the PRS...
read
http://www.ppa.my/index.php/how-prs-works/faqs-on-prs/
especially Q13

i think the caps are to prevent those with some surplus $$ to "avoid" being taxed more....govt needs taxes to operate.

This post has been edited by yklooi: May 28 2013, 05:21 PM

Hey, I need to suspend this thread till next week. Need to study for exams.

But, what about online brokers?

What's your opinion on foreign currency exposure? I think the ringgit might strengthen against the dollar in the long-term, like 30 years. How ar?

About that bond fund, how to calculate the costs? I saw management fee - 1%, expense ratio - 1.05%. That means the total expenses is 1.05%? The average return is 4-5%. Minus expenses you get - 3-4%. If inflation is 2 percent, you only get half. And the price is about RM1.2? How to calculate the yield?

Yeah, of course govt wants to tax more. But in the US you have like a cap on how much you can put into your tax-deferred 401(k). Hmm.. I guess it adds up to the same.

This post has been edited by yklooi: May 28 2013, 07:06 PM

Ok, thanks. Just stumbled on that thread too, haha.

I am not sure if you can buy it directly over here in Malaysia wrt Vanguard Index Fund. If can, I will be the first to enter it.

However, investor may approach Licensed Financial Planner to buy them through Hansard Inc (a wholesale platform for off-shore fund that work somewhat like FSM but only for foreign funds only). Hansard is only available through Licensed Financial Planner, but at this moment I think the charge is quite unattractive.

PRS in my humble opinion is one of the best development for investors' benefit in recent time. Think about it; you are essentially able to buy into unit trust scheme (rebranded as Private Retirement Scheme) with zero sales charge, with benefit of tax exempted income distribution and RM 3,000.00 tax relief. I believe this is the cheapest method to get into unit trust at this moment in time. BTW some PRS also have exposure to foreign equities.

The best performing PRS operator at this moment is Hwang in terms of YTD nett return. I was hoping that this zero sales charge PRS thingy will force other unit trust operator to follow en-masse. But I was wrong, only a couple do it.

Wrt to tax relief cap, sorry kid, gomen cannot give more because our gomen need money to buy cincin, submarines. Birkin Bags ... errr I mean Nation building.

Xuzen

This guy claims he invests in Vanguard - http://www.saigoheiki.com/blog/the-month-o...1/#comment-9312. I have a comment below, he hasn't replied. Thing is, minimum investment in a Vanguard Fund is $3000. I'll give you full details about what I want to achieve after my exams next week. Study time.

Oh, and Vanguard has a branch in Singapore. Wonder if we can invest through Singapore?

This post has been edited by JohnL77: May 28 2013, 07:53 PM

Hi people,

To reply the thread starter here is my take on Modern Portfolio Theory (MPT) and Asset Allocation (AA).

Part I:

MPT & AA started off from Prof Harry Markowitz in the fifties. So it is quite an old theory still very relevant to this day. It has proven by many academians that MPT and properly done AA will give you above market return over a long time. It is boring, it is not sexy and it is as comely as a matron of a mental asylum or a unmarried public librarian. But darn, given it time, it will do its job wonderfully.

Let me start off by saying that putting your money in different asset class or same asset class of different geographical region can reduce your risk by not compromising your return. (ok, not much of a brainer b'coz most of us knows this already) further more the statistical relationship between two asset class is linked by their Correlation Coefficient.

Here is the maths part:

Lets take two assets class: A unit trust that invest 100% in Malaysia stocks (e.g. Public Islamic Select Enterprise Fund, PISEF) and 12mths FD rate of Maybank. I choose PISEF because it has the highest Sharpe Ratio amongst Public Mutual Funds and I choose Public Mutual simply because most of the data I possess comes from this unit trust company.

To evaluate any risky investment products, we need to look at three parameters namely: ROI, Risk and Time. I need to elaborate a little bit about Risk. To most lay-people, risk is a concept and they usually are clueless on how to quantify it. However, to a finance trained person, RISK is quantified as Standard Deviation (Std-Dev). The higher the Std-Dev, the more risky the investment.

Let's come back to a portfolio comprising a mixture of 50% PISEF and 50% FD. The portfolio return is straight forward i.e. (Percentage of PISEF x ROI of PISEF) + (Percentage in FD x ROI of FD) = (50/100 x 14%) + (50/100 x 3.1%) = 8.55%

To calculate the Std-Dev aka Risk of the portfolio = SqRoot[(percentage of PISEF x Std-Dev of PISEF) + (Percentage of FD x Std-Dev of FD)]^2. The formula is standard formula given in most finance textbook and it is not my scope to explain how the formula is derived. The equation is basically the same as y = (a+b)^2 and after expanding it, it becomes y = a^2 + b^2 + 2ab. The formula would be most familiar with most people as most of you would have encounter this in the SPM Add-Maths subject.

y = portfolio std-dev
a^2 = risk contributed from PISEF
b^2 = risk contributed from FD
2ab = the correlation coefficient

Now, we know that for FD. the capital and interest is guaranteed by the bank and PIDM, therefore we can assume it to be risk free return aka Std-Dev = zero and we also know that no matter stock market goes up or down, FD rate will remain the same, hence we can say that the coefficient correlation between PISEF and FD is zero.

End of Part 1
To be continued...=========================================================

Part II:

Going back to the formula again:


The portfolio risk
= SqRoot[(50/100 x 9.9) + (50/100 x 0)^2
= SqRoot[50/100 x 9.9]^2
= 50/100 x 9.9
= 4.45%

NB: The ROI and Std-Dev of PISEF is obtain from Pub-Mut website.

What does the above all mean?

It means, if put 100% of your money into PISEF fund, your return is 14% +/- 9.9% i.e., it may swing between 14 + 9.9 = 23.9% best case scenario or 14 - 9.9 = 3.9% worse case scenario.

What if you put 50% into PISEF and 50% into FD?
Now it means that your ROI is 8.55% +/- 4.55% i.e., it may swing between 8.55 + 4.55 = 13.1% (best case scenario) or 8.55 - 4.55 = 4% (worse case scenario)

Which portfolio is more optimal?

i) ROI/Std-Dev for 100% in PISEF = 14/9.9 = 1.4
ii) ROI/Std-Dev for 50% PISEF & 50% FD = 8.55/4.55 = 1.88

For those who appreciate that investment must also take into account of RISK, clearly the two assets portfolio is more optimal when it comes to risk adjusted return.

The conclusion is that adding additional asset that have zero correlation coefficient with each other will reduce the risk but not compromise on the return. And that is what Modern Portfolio Theory is all about. Prof Harry Markowitz is the first person to actually quantify the hypothesis into scientific fact.

End of part 2

To be continue...========================================================

Xuzen

This post has been edited by xuzen: Jun 12 2013, 11:05 PM

Hi, really good writeup. I've actually read William Bernstein's The Intelligent Asset Allocator. Almost finishing his Four Pillars of Investing right now. I didn't know you could calculate ROI/Std-Dev, thanks for sharing.

But... the funds you used in your example are actively managed right? Not that historical data of stocks means we can expect the same return and standard deviation in the future, but it's harder to compare the performance of fund managers, right? Their decisions might change from time to time and what's more, fund managers change.

Have you heard of commission free ETFs? I found out that in the US some brokers are offering these.

*EDIT: I just got a reply from TD Ameritrade, they said yes foreigners can buy ETFs commission free from them!

*EDIT: And no need for account balances either!

I think in part 3 you should explain to Lowyat citizens that chasing the "efficient frontier" is pointless.

Oh, and please teach me how to calculate the Sharpe Ratio! Your explanations are very clear and concise.

This post has been edited by JohnL77: Jun 13 2013, 02:10 AM

i think you can check this website for info about sharpe ratio and volatility

http://invest-made-easy.blogspot.com/2013/...and-sharpe.html

Thank you

*Lowyat reply notification not working so well. Hope you're reading this, admins.

This post has been edited by JohnL77: Jun 13 2013, 03:13 PM

-deleted-

This post has been edited by creativ: Dec 21 2013, 04:04 PM

The world greatest investor got use MPT? Really who uses MPT?

https://forum.lowyat.net/topic/2843370

JohnL77,

Vanguard fund is only available for US resident. For non-US resident, you need minimum of USD 300K before you can even open an Vanguard A/C. But, all is not lost, you can invest via Vanguard ETF instead and no minimum.

See above thread for discussion.

Dreamer