Saturday, September 5, 2020

The Risk Of Passive Investing In ETF

I suppose I will get a lot of backlash for writing on this topic. But I felt really important that I must address this - The risk of investing in ETF.

So if you have been in my Fundamental Scorecard Telegram Group or my Facebook Page, you may have seem what I wrote.

The first conversation was someone asking if I will sell my OCBC shares. As I quote and edited some of my words from the Telegram Group:

"No. This is a bit different when I sold all my starhill reits.

REITs business, in my opinion, is only 1 way. Thru Rental. So at that time when lockdown happens, I think for very long, then I decided to sell.

For a bank, bad times and good times, there are ways to earn. Is only how much. Plus provision is expected.

Maybe another point is core competencies. I work in Financial institution all my life. So I do know how they work.

Another point is at that time, I was wondering if the opportunity cost for holding starhill is high. You see in the lockdown if I deploy funds to US, I will make more gains. So that was a thought.

But now for opportunity cost, I don't see that there is much opportunity cost in putting my funds elsewhere. In fact, if I see OCBC, I may just buy STI ETF. Because I don't see much value now in the market.

When I say value, it mean in terms of new position other than adding to those I held.

So overall, I thought about it yesterday and I am intending on adding OCBC into the future."

Before I continue, I like to address the following:

1) Yes I sold all my Starhill Reits (The only REIT I had at that time) in March at the lowest price it had and I deployed to the US.

2) I do have 1 REIT holding in my portfolio. Its the one that is undergoing a potential merger.

3) Yes - I did bought more OCBC and it contributes about 15% (I estimated) of my portfolio.

Moving on...

So someone commented that I should choose STI ETF over OCBC. This was when I let loses a bit due to some of the conversation I had with him (If you are reading this, I apologize if I sounded harsh). 

It was also basically due to a conversation we had on the group chat prior to the first OCBC question where the same member asked why is the Telegram Group so chill despite the US market drop on Thursday.

My combined edited comments are as follows:

 "If you know the company well, you can ignore daily drop. And it gives you opportunity to add.

If you invest in ETF, you will be like WTF.. Because you are in no control. Do note that systematic risk apply to all no matter how clever u r. You don't know what happen because u don't know how the ETF will allocate the figure.

But I don't disagree to investing in ETF. U just have to suck it in and take the risk.

Do you know what comprises in the STI ETF? They are Banks, REITs, Keppel, Jardine BIG Group, and Singtel and also SIA... and somemore.

If I want REITs, I might as well go for REITs.

At the end of the day, I am not in control of the ETF allocation and risk management. Furthermore I may not like some companies in the ETF. So that is why I seldom go for ETF. If i want to diversify, I DIY. 😊"

Sooooo.... the purpose of this conversation made me realize the pointers below in Passive Investing:

1. If you buy ETF because everyone is talking about just buying ETF, WITHOUT KNOWING WHAT IT COMPROMISES OR AT LEAST REPRESENT - It is as good as buying into a company that the Uncle in the Kopitiam tells you.

2. Even if you know what it does, like STI ETF tracks the performance of the top 30 companies listed on the Singapore Exchange. It is not good enough. You have to know which are the companies.

3. Even if you know the companies, you have to know the allocation!

At the end of the day, buying into a ETF is similar to buying into a company. You have to dig into the ETF to understand what it represent, who it represent and which companies have the most allocation.

If not, the risk will be, if a market correction happens (Yes - Market Correction will happen to a ETF), you will not know what happened and may just sell everything irrationally.

With that, I like to say that all investment requires one to do homework. There is no free lunch in the world. If you are really really interested in Investing, please feel free to join our Fundamental Scorecard Telegram Group.

We talk about US, SG and sometimes HK companies and market. I will also answer all questions in the chatgroup if no one answered them. Oh... and there are many Gurus in this chatgroup, so don't worry if you think we are just another Telegram Group.

4 comments:

  1. ETF is not really passive investing. It is more of outsourcing of portfolio mgmt to fund mgrs.

    ReplyDelete
    Replies
    1. Hi,

      Noted. Actually what I am writing is the risk of not knowing enough and just blindly investing.

      Regard,
      TUBinvesting

      Delete
  2. Arguing over ETFs, stocks, individual bonds, options, futures, crypto etc is like arguing over M16, SAR21, AK47, AK74, GPMG, Armbrust, RPG16, Milan, Javelin etc.

    If you over-estimate your risk appetite & your skills, all of them will kill you.

    For some, it is really better to hide in a hole (CPF & FD), than to grab gun/rocket/grenade & chiong sua.

    ReplyDelete
    Replies
    1. Hi,

      I agree with what you said.

      Actually what I am writing is the risk of not knowing enough and just blindly investing.

      Regard,
      TUBinvesting

      Delete