The Bedokian Portfolio

Passive Income Through Dividend and

Index Investing

THE BEDOKIAN
Copyright © 2016 by The Bedokian.
All rights reserved. No part of this publication may be reproduced, stored in a re-
trieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning or otherwise, without the prior permission of
the author and publisher.
Disclaimer:
While every reasonable care is taken to ensure the accuracy of information
printed, no responsibility can be accepted for any loss or inconvenience caused by
any error or omission. The ideas, suggestions, general principles, examples and
other information presented here are for reference and educational purposes only.
This book is not in anyway intended to give investment advice or recommenda-
tions of investments or securities of any kind. The author and publisher shall have
no liability for any loss or expense whatsoever relating to investment decisions
made by the reader from the use and application of ideas, strategies or techniques
in this book.
Any perceived slights of specific people or organisations are unintentional.
Any links that lead to an opt in page may or may not be secure. Please read the
terms and conditions of use for those pages to safeguard your own privacy.

First Edition - July 2016

Cover image by Gerd Altmann/Pixabay.com

i
Dedicated to my family, for whom this book is originally written for, and my friends who have contrib-
uted useful opinions, comments and feedback.

ii
 Contents
INTRODUCTION vii

CHAPTER 1 - PORTFOLIO 101 9

The Financial Market 9
Modern Portfolio Theory 10
Asset Classes 11
Diversification 11
Types of Asset Classes 13

CHAPTER 2 - THE WORKINGS 16

Investment Vehicles 16
Brokerages 17
Custody of Shares, Bonds and ETFs 18
The Trading Platform 19
Transaction Costs 20

CHAPTER 3 - EQUITIES 22
What are Equities? 22
The Importance of Equities 23
Dividends 24
Compounding 25
Equity Risks 26
How to Own Equities? 27

CHAPTER 4 - BONDS 29
What are Bonds? 29
The Importance of Bonds 30
Types of Bonds 31
Credit Ratings 31
Preference Shares 32
Perpetual Bonds 33
Bond Risks 33
How to Own Bonds? 34

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CHAPTER 5 - COMMODITIES 36
What are Commodities? 36
The Importance of Commodities 37
Introducing Futures 37
Gold 39
Silver 41
Oil 42
Commodities Risks 43

CHAPTER 6 - REITs 45
What are REITs? 45
The Importance of REITs 46
Types of REITs 46
Gearing 47
REIT Risks 48
How to Own REITs? 48

CHAPTER 7 - CASH 50
What is Cash? 50
The Importance of Cash 51
Foreign Exchange 51
Cash Risks 52
How to Own Cash? 53

CHAPTER 8 - ETFs 56
What are ETFs? 56
Importance of ETFs 57
How an ETF Works? 57
Asset Classes and ETFs 58
Total Expense Ratio 58
Index Investing 59
Physical vs. Synthetic ETFs 60
Other ETF Comparisons 61
Exchange Traded Notes 62
How to Own ETFs? 62

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CHAPTER 9 - PORTFOLIO BUILDING 64
Emergency Fund 64
Portfolio Objective 65
Portfolio Makeup 67
Age 68
Risk Appetite 68
Balanced Bedokian Portfolio 69
Bedokian Portfolio Variations 72
Amount to Start 72

CHAPTER 10 - PORTFOLIO MAINTENANCE 76

Rebalancing and Transaction Costs 76
Implementing Dividend Investing 77
Periodic Rebalancing 101 79

CHAPTER 11 - FUNDAMENTAL ANALYSIS 84

What is Fundamental Analysis? 84
The Importance of Fundamental Analysis 84
Financial Statements 86
Environmental Factors 88
Economic Conditions 89

CHAPTER 12 - SELECTION AND SELLING 93

Active Management and Rebalancing 93
Shortlisting 94
T-Analysis 95
Selection Guidelines 96
Equity Selection 96
REIT Selection 98
Bond Selection 100
Selling Triggers 101
Balancing Active Rebalancing 103

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CHAPTER 13 - FOREIGN FINANCIAL MARKETS 106
Going Foreign 106
Foreign Financial Market Classifications 107
United States 107
EAFE 109
Foreign Proportion 109
How to Invest in Foreign Financial Markets? 110
Local Companies/REITs with Foreign Exposure 111

CHAPTER 14 - MIND OF THE INVESTOR 113

The Power of the Mind 113
Market Sentiment 114
The Rational Investor 115
Behavioural Economics 116

CHAPTER 15 - TIPS AND STRATEGIES 118

Initial Public Offerings 118
10-30 Rule 119
Yield Is Not Everything 120
Index Investing Continued 121
“Core and Satellite” Bedokian Portfolio 122

CHAPTER 16 - PORTFOLIO DRAWDOWN 125

Determining Drawdown 125
The Drawdown Process 126
Drawdown Variations 129
Drawdown Administration 130

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Introduction

I originally wrote this book as a manual for my family members, a form of transfer-
ring my investment knowledge to them. As time goes by, I felt it would be better to
share this knowledge with everyone with an interest in investing, especially in deriv-
ing passive income from it.
Having passive income is the dream of many; the impression of an alternative
and almost effortless income stream is tempting. Although it is a dream, it is an
achievable dream, and it can be done in a simple and disciplined way. In this
book, I will guide you how to get passive income through the financial markets,
from the world of equities, REITs, bonds, commodities and cash.
This book is designed for the layperson with no financial or economics back-
ground to understand the basics of investing, which means it is as plain as it gets.
There is also no overwhelming and difficult mathematical concepts and equations
as seen in some other investment books; just simple English in explaining the
whole works, though I have to show some number workings to prove certain
points.
The first eight chapters of the book will introduce you to the idea of the invest-
ment portfolio, the workings of the financial markets and the introduction of the
various asset classes and investment vehicles. In Chapters 9 to 12, I will touch on
the building and maintenance of The Bedokian Portfolio, some fundamental
analysis basics, and the guidelines and “triggers” of selecting and selling of finan-
cial instruments respectively. For the last four chapters, I will mention about the for-
eign financial markets, the psyche of the investor, some tips and strategies, and fi-
nally, how to drawdown from your Bedokian Portfolio.
I chose to call this portfolio The Bedokian Portfolio for two reasons; the first rea-
son is to give this portfolio, which is based in Singapore, a localised name; and the
second reason is to dedicate this portfolio to my hometown, Bedok. There are

vii
many investment books out there, but there are only a few written with a Singa-
pore bias, and I hope this book will fill in some of that gap.
The aim of The Bedokian Portfolio is not to beat the market or any other port-
folios and methodologies, but rather it is meant to give you a healthy stream of pas-
sive income through dividend and index investing. It is a long term investment
process, with a time horizon of at least ten years, so patience and diligence on
your part is key as well.
I hope you will enjoy reading this book and I wish you all the best in the world
of investing.

The Bedokian
July 2016

Visit https://bedokianportfolio.blogspot.com for more articles by The Bedokian.

viii
 CHAPTER 1

Portfolio 101

The aim of The Bedokian Portfolio is to have passive income through dividend
and index investing.
So what is a portfolio?
Using the “eggs in one basket” analogy, a portfolio is like having eggs in differ-
ent baskets, with the “eggs” being your investment money. When a basket got
dropped or stolen, you would still have eggs left in the other baskets.
So, if “eggs” are investment money, then what are “baskets”?
In the next few pages I will explain gradually just what the “baskets” are, but
first, let me introduce you to the world of financial markets.

The Financial Market

A market is a place where sellers sell their wares and buyers buy their wares.
There are many terms that can be called a market, such as a shopping mall and a
grocery store. Your foodstuff, clothes, etc., were bought from these markets.
In a financial market, instead of wares, foodstuffs and clothes, financial
goods or financial instruments such as shares, bonds, commodities, etc., are
traded between buyers and sellers. Such markets in the old days were location
based, but with the advent of the internet, you could buy and/or sell shares,
bonds, commodities, etc., from the comfort of your own home using a computer
or mobile device.

9
 You cannot go into the financial market on your own to buy or sell the financial
goods. You would need the services of a brokerage firm (or brokerage) to help
you with all the buying and selling (called transactions) for a small fee (called
commissions). In Singapore there are a number of brokerages to choose from,
and most would be able to grant access to not just the local financial market, but
to other financial markets in the major economic countries as well.
The financial goods are the ones we need to look at carefully, for they are the
very basic items in the make-up of The Bedokian Portfolio. There are many types
of financial goods, called asset classes, in the financial market. The asset classes
are the “baskets” I mentioned earlier.

Modern Portfolio Theory

At this stage you may be wondering, “Why do we need so many asset classes to
build a portfolio? Couldn’t we just stick to one asset class?”.
Enter the Modern Portfolio Theory, or MPT.
Here is the definition of MPT:
“Modern portfolio theory (MPT) is a theory on how risk-averse investors can construct portfo-
lios to optimize or maximize expected return based on a given level of market risk, emphasizing
that risk is an inherent part of higher reward.”1
In simple English, MPT is a theory on how investors could maximise their re-
turns at an assumed level of risk, knowing that higher risk provides higher returns.
With this, we could look at one of the important characteristics of MPT, the con-
cept of asset allocation. Asset allocation is defined as:
“Asset allocation is an investment strategy that aims to balance risk and reward by apportion-
ing a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.”2
The meaning of “assets” here is the asset classes. Given these definitions, the
ideal portfolio is consisted of the best mix of asset classes that delivers the maxi-

10
mum returns with the minimum risk. Though it sounds good in theory, in reality
the ideal portfolio has always been the holy grail for all investors.
The ideal portfolio may be hard to achieve, but it could be partially realised
with a proper mix of asset classes. After all, MPT advocated a mix of asset classes
to reduce the portfolio risk to maximise returns. A mix of asset classes could diver-
sify the risk in a portfolio, because different asset classes behave differently during
different economic conditions. This is why you cannot just stick to one asset class.

Asset Classes
So what are the asset classes? Asset classes are the different types of financial
goods available for investment in the financial market. Each asset class is different
from one another in terms of their characteristics, which is why they behave differ-
ently from one another in different economic conditions. In theory and in most
practical situations, at a given economic condition some asset classes perform bet-
ter than others.

Diversification
I will elaborate further on diversification, a key trait in MPT. Diversification,
back to our “eggs” and “baskets” story, is simply “do not put all your eggs into one
basket”. The main aim of diversification is to reduce the amount of risk. There
are many types of risks that I will explain in the later chapters, but here I would
touch on which level do you do diversification.
There are many views on diversification, but true diversification, for the Be-
dokian Portfolio, comes in having different asset classes, because different asset
classes behave differently with one another.
Let us look at the various definitions of diversification heard from many inves-
tors and over the internet.

11
 Some said getting all the major players within an industry is diversification,
such as acquiring the shares of the three major telecommunications companies in
Singapore. The thinking behind this reasoning is since these three are competitors,
and in the world of a zero-sum market share, one’s loss would result in the others’
gain, thus there is a form of hedge created. However, these three belong to the tele-
communications sector, and if there is any major impact in the sector it would re-
sult in a massive loss, regardless of which telecommunications company share you
hold.
Some said investing across different sectors is diversification, having shares
across companies in the telecommunications, financial and transportation sectors.
They reckoned that some sectors perform well in different economic conditions,
such as recession, where companies in the basic consumer sectors such as super-
market chains would thrive. However, company shares belong to an asset class
called equities. In 2008-2009, during the Global Financial Crisis (GFC), most eq-
uities across all sectors suffered a major blow, even those sound ones which thrive
in recession periods.
There is also diversification across countries, as some argued that not the whole
world had suffered from the GFC (Australia3 is one of the few countries spared).
The Bedokian Portfolio espouses diversification between local and foreign finan-
cial markets and economies, provided that these are done under the general um-
brella of asset classes, which brings us to the final point of diversification across dif-
ferent asset classes.
So why diversification is best done at the asset class level? If you look at the ear-
lier examples of investing in different companies of the same sector, across differ-
ent sectors and across countries, there is always a level higher in which one could
diversify. Upon reaching the asset class level, it is considered the ultimate as there
is no higher degree, thus making it the first consideration in diversification. I stress
again, asset classes behave differently when under different economic conditions,
which means different asset classes have different correlation with one another.
Different correlation means when the value of an asset class goes up, the other
would come down or remain stable, and vice versa. This lies in the answer of why

12
we need different asset classes in a portfolio as stipulated in MPT. Carry out diver-
sification at the asset class level first, then country and sector.

Types of Asset Classes

I would explain the different types of asset classes in brief. Further elaboration
on some of the asset classes would be done in the later chapters.
Equities - These are the shares (or stocks in American terms) of a company,
which forms up its capital. The price of a share, multiply by the number of shares
it has issued, will be the worth of the company. If the worth goes up, the share
price goes up, and vice versa.
 Bonds - Bonds are IOUs; debt instruments, used by companies and govern-
ments to borrow money. When you buy a bond issued by the company or govern-
ment, you become their creditor, in return for interest (coupon in bond speak) pay-
ments. There are many ways on how the coupon is paid out, but usually it will be
on a half yearly basis.
 Property - Property is generally referred to as immovable property, such as
land, houses, apartments and buildings. The most common type of income from
properties would be rental. We would not be covering property in The Bedokian
Portfolio since the initial outlay to purchase one is huge.
 Commodities - Commodities are the so-called "basic ingredients" of any in-
dustry and society. Gold, silver, wheat, coffee, oil, etc., are commodities. Any
changes to the amount of commodities available will shake the markets world-
wide, e.g. drop of oil output, over-harvesting of wheat, etc., will cause ripples
across most sectors of the economy.
 Cash - Cash is, well, cash. Traditionally cash as an asset class meant it is earn-
ing some sort of returns while maintaining liquidity at a moment's notice. One
good example of cash as an asset class is the cash that you have in your savings ac-
counts, fixed deposits and for the more sophisticated, money market funds.

13
   REITs - REITs, or Real Estate Investment Trusts, are an equity/property hy-
brid asset class and they are very common throughout the world, especially in Sin-
gapore. REITs own buildings and rent out the shops/offices/apartments within
the buildings to tenants for rental income. In local jurisdiction REITs have to pay
90% of its taxable income to shareholders (or unit holders in REITs lingo). Why
REITs are an equity/property hybrid is due to its nature - a collective group of
property "owners" akin to shareholders collecting rent from a group of properties.
Like equities, REITs work like a company with a set number of shares and trad-
able on the financial market, and like property they collect rent.
 CPF - Known as Central Provident Fund, is a local version of the pension sys-
tem, and I classify them as a cash/bond hybrid, as it acts like cash (for payment of
properties and medical bills) and its yield is almost bond-like (2.5% to 4% depend-
ing on which account). However, due to its regulatory nature, I would place CPF
outside of The Bedokian Portfolio and therefore would not be writing on it.
 There is another asset class called forex, or foreign exchange. Basically it is the
buying and selling of foreign currencies. I would put forex as a subset of cash,
since the distinct difference is between countries, which are lower than asset class
in my order of diversification.

Summary
• The aim of The Bedokian Portfolio is to have passive income through dividend
and index investing.
• Modern Portfolio Theory states that risk is to be minimised to achieve maximum
returns, through the use of various asset classes.
• Diversification is done to reduce risk and ideally it should be on the asset class
level, due to the difference of correlation amongst the various asset classes. Diver-
sification at country level is also recommended.
• Types of asset classes include equities, bonds, property, commodities, cash, prefer-
ence shares, REITs and CPF. Forex is considered as a subset of cash.

14
References
1 - Investopedia. What is ‘Modern Portfolio Theory - MPT’.
http://www.investopedia.com/terms/m/modernportfoliotheory.asp (accessed 11 May 2016)
2- Investopedia. What is ‘Asset Allocation’.
http://www.investopedia.com/terms/a/assetallocation.asp (accessed 11 May 2016)
3 - Zappone, Chris. Australia dodges recession. The Sydney Morning Herald. 3 June 2009.
http://www.smh.com.au/business/australia-dodges-recession-20090603-buyq.html (accessed
11 May 2016)

15
 CHAPTER 2

The Workings

In Chapter 1 I have introduced the financial market briefly, the importance of hav-
ing a portfolio and diversification, and the types of asset classes. In this chapter, I
shall introduce the various investment vehicles available in investing in the vari-
ous asset classes and how to go about building The Bedokian Portfolio using bro-
kerages.

Investment Vehicles
Investment vehicles are the methods in owning the asset classes, and sometimes
it gets confusing knowing what are asset classes and what are investment vehicles.
Here is a way to tell them apart; asset classes are the “what” and investment vehi-
cles are the “how”.
Here is a brief explanation on each of the investment vehicles.
Direct Ownership - The most direct and straightforward method in owning
an asset class. The cash in your bank account, the company shares that you own,
the gold bullion that is sitting in your safe, etc. The Bedokian Portfolio advocates
direct ownership as much as possible.
Unit Trusts - Unit trusts, or mutual funds in American lingo, are investment
funds being handled by fund managers. Each unit trust has an investment objec-
tive, similar to that of The Bedokian Portfolio’s. You select a unit trust that you
want and the fund manager will invest for you. Unit trusts have a variety of fees
and charges, such as initial sales charge (the amount that you pay when you buy

16
the unit trust), the redemption fee (the amount that you pay when you sell the unit
trust) and the annual management fee (the amount that the fund manager deducts
from your investment). Also, you could only sell the unit trust at the end of the
trading day. Due to all these charges and fees, unit trusts are not recommended for
The Bedokian Portfolio.
Exchange Traded Funds - Exchange traded funds, or ETFs, are like unit
trusts but can be bought or sold in the financial market at any time of the day
when the market opens. The charges in owning ETFs are just the commission to
be paid to brokerages in buying and selling them, and an annual management fee
which is far lower than unit trust’s. There are many ETFs available, in Singapore
and overseas. Due to ETFs’ ability in tracking the indexes and other asset classes,
they are part of the investment objectives for The Bedokian Portfolio. I will discuss
more on ETFs in Chapter 8.
Derivatives - Derivatives are a category of investment vehicles that derive (the
root word) their value from an underlying asset. In other words, you do not really
own the asset class using derivatives, but rather they sort of mimic the asset class
itself by following the value. Derivatives are used more for trading than investing (I
admit it is a bit of a misnomer to call them “investment vehicles”, but for terminol-
ogy’s sake, I have to include them in), therefore it is not a very useful investment
tool. Most derivatives lose their value over a certain time, such as within the next
few days, weeks or months, and it may cost more if you keep them for too long,
thus it is not in line with The Bedokian Portfolio’s strategy. Also, it will take a steep
learning curve to understand how these derivatives work. Some examples of de-
rivatives are futures, options, contracts for difference (CFDs) and warrants. How-
ever, using ETFs to own futures is all right and I shall explain this in Chapter 5 on
Commodities.

Brokerages
As stated in Chapter 1, a brokerage is a firm that helps ordinary people like you
and me gain access to financial markets to buy and sell financial goods, for a small

17
fee or commission. Though not all asset classes require the use of a brokerage, but
at least 90% do require it. There are many brokerages available in Singapore, and
some of them are tied to banks. All of them allow you to access the financial mar-
kets through their respective online internet portals and mobile applications, and
almost all will have online help to guide you through the buying and selling proc-
esses.
For simplicity, I shall address all the parties that act as the agent between you
and the financial markets as brokerages.

Custody of Shares, Bonds and ETFs

In the good old days, when you buy shares or bonds, the company or the bond
issuer will send you a nice looking certificate that looks like a university degree, in-
dicating the company name or bond title, the number of shares or bonds held,
and your full name printed on it. In the age of electronic and internet trading,
however, such certificates are rendered useless with new technology (though you
could still ask for such certificates to be issued to you, at a price).
Even though things have gone electronic, there is a mechanism in determining
who owns what. For equities, most of the time the companies themselves will main-
tain a record of their shareholders. In the local financial market known as the Sin-
gapore Exchange (SGX), the ownership of your shares, bonds and ETFs is
made known to The Central Depository Pte Ltd (CDP), a subsidiary of
SGX, or the brokerages.
Therefore, there are two main methods on how financial instruments bought
from the SGX are kept, either with CDP, or with the respective brokerages that
you bought them through, known as custodians. Most brokerages allow you to
deposit your financial instruments in CDP, but they do have custodian services, i.e.
they will keep the financial instruments for you instead of putting them into CDP.
To provide an analogy, CDP is like a big warehouse where your “goods” (finan-
cial instruments) are kept and you can authorise “someone” (brokerages) who has
access to the warehouse to do the buying and selling for you. You can have many

18
different “some ones”, as long as they have access to the warehouse and your
goods are in it. For custodian, it is like a smaller warehouse where your “goods”
are stored but only the “someone” who is administering the warehouse (the broker-
age that manages the custodian) can go in and do the buying and selling for you.
It is important to know where your financial instruments are being kept, else
there may be a chance of you doing a short-sell. Short-selling means selling fi-
nancial instruments that you do not own in the first place. Though it is allowable,
but if not careful it could invite additional hassles and a possible fine from SGX it-
self.
If you are buying financial instruments from overseas financial markets, it will
be in the custodian account of the brokerage that you bought them with, therefore
to sell them, you have to use the same brokerage.

The Trading Platform

The brokerages’ online internet portals and mobile applications that allow you
to access the financial markets are known as trading platforms. Most of the
trading platforms let you see the price and the accompanying market information
of the financial goods, news feeds, analyst reports and account management tools.
To the uninitiated, the trading platform interface could be quite intimidating, but
fortunately most of them would have tutorials and demonstration videos to guide
you along.
I will only highlight the important attributes that you need when buying and/or
selling your financial goods.
Buy - The buy price of the financial good. Also known as Bid.
Sell - The sell price of the financial good. Also known as Ask.
Buy Volume - The number of financial goods that are waiting to be bought at
the Buy price.
Sell Volume - The number of financial goods that are waiting to be sold at the
Sell price.
19
 Volume - The number of financial goods that are being transacted (bought
and sold).
These attributes, when viewed from the trading platforms and online sources
such as Google Finance, Yahoo Finance, Bloomberg, etc., are occurring on the
day itself and usually in real time (i.e. live). It is like watching a live sports game
where the scores are constantly changing throughout. When the financial markets
close for the day, you will see the overall summary of the day’s activity of the finan-
cial good, like the display of the final score after the game had ended. The next
day, these attributes would then be “resetted” and the numbers come pouring in
again.
By now you may have wondered why financial goods have two prices, Buy and
Sell, instead of the usual one price that you see in supermarkets or shops. This is
because, unlike the goods at those places where the seller dictates the price, in fi-
nancial markets both the buyer and seller can dictate the price of a financial good.
The buyer may feel this financial good is worth this much, but the seller may feel
otherwise. It is in the incentive that the buyer would want to buy the financial
good at a lower price, and the seller would want to sell it at a higher price. A trans-
action is done when a buyer buys at the price that the seller sells at, and this trans-
action would be added to the Volume attribute.
The term spread denotes the difference between the Buy and Sell price of a
financial good. Using the local Singapore Dollar (S$) currency to illustrate, if the
Buy/Sell price of a financial instrument is say, S$1.00/ S$1.05, it means the
spread is narrow, and if it is S$1.00/S$1.20, means the spread is wide.
So if the spread of a financial instrument is at S$1.00/S$1.10, to buy it immedi-
ately, you would have to buy it at S$1.10, whereas if you want to sell it immedi-
ately, you would have to sell it at S$1.00.

Transaction Costs
Brokerage commission charges, market exchange fees and taxes are the addi-
tional amounts that you pay on top of acquiring the financial instruments. These

20
costs need to be factored in whenever you conduct a transaction of your financial
instruments. Depending on the financial market and brokerage, these costs could
be as low as a few dollars, to probably tens or even hundreds of dollars. These
costs are directly proportional to the amount of financial instruments that you buy
or sell, and are called transaction costs.
With these transaction costs in mind, it is important that they are kept to a mini-
mum, without compromising the very aim of the Bedokian Portfolio - passive in-
come. If transactions were done constantly, these costs would slowly erode away
the real returns of passive income, which is a bit of a waste.
Therefore, in the later chapters, to reduce these transaction costs, I will share
with you on when to buy and/or sell the financial instruments, and the concept of
portfolio rebalancing.

Summary
• There are different types of investment vehicles such as direct ownership, unit
trusts, ETFs and derivatives.
• Brokerages allow you to gain access to financial markets.
• The financial instruments that you own are held either with the CDP (for local
ones) or with the brokerages as custodian (both local and overseas financial instru-
ments).
• Knowing the trading platform and the terms buy/bid, sell/ask, buy volume, sell
volume, volume and spread.
• Understand transaction costs and their impact.

21
 CHAPTER 3

Equities

Having much said on the basics, I will now delve into the various asset classes in
detail. First to start off will be equities, or shares and stocks in investment lingo.
This asset class is the biggest in the world, with trillions of dollars’ worth of it.

What are Equities?

When a company (a common type of business organisation) is formed, an
amount of money, or capital, is needed to fund it. Sometimes different individu-
als could fund the company, and their ownership could be split equally among the
number of individuals as shares (or stocks), which you now see how these terms
are derived. Collectively these shares and stocks are called equities. For the indi-
viduals holding the equities, they are called shareholders or stockholders.
Imagine five individuals who want to start a company with equal contributions.
If the capital is S$100, then each share’s price would be S$100 divided by 5,
which is S$20. Thus, the number of shares of this company is 5 and the share
price is S$20 each.
So, if a company’s start up capital is S$1,000,000, and there are initially 1,000
people having an equal contribution, then the share price is S$1,000,000 / 1,000
= S$1,000. This means the number of shares of this company is 1,000 and each
share is worth S$1,000.
Most of the time, the number of people contributing to it does not dictate the
number of shares. A company starting up can have 100,000 shares, and each is

22
priced at S$1, providing a capital of S$100,000. If two persons start this company
and their shares are at 70%/30%, one would have 70,000 shares while the other
30,000 shares. It is not necessary to have shares priced at S$1.00 at the beginning.
You could have companies having 500,000 shares at S$0.50 each, or 200,000
shares at S$1.20 each.
Owning equity of a company is akin to owning part of the company, and you
need not necessarily be the founding member of a company to own equity. Most
equities could be bought and sold, whether privately (called private equity) or from
the financial markets. Unless you have businesspersons as friends, or using hedge
funds, private equity is not easily available to the ordinary individual like you and
me. Equity in the financial markets are much easier to access, because these com-
panies are considered public listed, which means their shares are made available
for the general public to buy and sell, using the trading platforms as mentioned in
Chapter 2.

The Importance of Equities

Equities form a very major and important part in every investment portfolio,
including The Bedokian Portfolio. They are seen as the main engine of growth,
generating returns with capital gains (increase in the price of shares/stocks) and
more importantly for the objective of The Bedokian Portfolio, dividends, which
I will delve into it later.
Equities have seen a tremendous rise over the years, and with it, the gains from
them can be described as “leaps and bounds”. You could say that over the long
term, equities will go up eventually. Looking at our local stock market, using the
Straits Times Index (STI) as a gauge, it grew from 908.90 points on 1 January
1988 to 2882.73 points in December 20151, some 3.2 times. Taking another exam-
ple of the Dow Jones Industrial Average (DJIA) index, which is one of the
main equity indices used in the United States, it grew from 1958.22 points on 1
January 1988 to 17,425.03 points on 31 December 20152, meaning it grew 8.9
times.

23
 Imagine your equities increased by this much for a period of 28 years (1988 -
2015). Using a simplistic example, if you had invested S$100 each in the STI and
DJIA back in 1988, you would have gotten back S$320 and S$890 now respec-
tively, assume all things equal. From all these, I have not included dividends in the
calculations, and if I do, the gains would be outrageously more.

Dividends
At the end of the financial year, companies would take stock of their accounts
to see whether they had made any profit or loss. If profit is gained, the companies
could either keep this money for next year’s use (called retained earnings), or
distribute them all to shareholders as dividends, or do both. For public listed com-
panies, dividends are mostly distributed either quarterly or half-yearly.
An attribute to look would be the dividend yield or yield, which is the ratio
of the dividends paid out over the prevalent share price, expressed in percentage,
over a period of one year. Here is an example: the yearly dividend declared for
ABC company is S$1.00 per share, and the share price of ABC company at that
point of time is S$20.00. The dividend yield is S$1.00/S$20.00 x 100% = 5%.
For dividends that are done quarterly or half-yearly, it is a bit tricky as there are
a few ways to calculate dividend yield; you could either use past dividend payouts,
or assume the same payout for future quarters or half-year, or both. You need not
fret over these details as there are simple financial websites such as Google Fi-
nance, Yahoo Finance, Bloomberg, etc., that could provide the dividend yield fig-
ures at a glance.
Dividends (and coupons and interests, which will be covered later on) are an im-
portant factor in the overall strategy for The Bedokian Portfolio, for its aim is to
have passive income through dividend and index investing. Dividends are where
your passive income comes from, and used for the idea of dividend investing.

24
Compounding
Although this chapter is about equities and I had touched on dividends, I guess
it is appropriate for me to introduce compounding. Compounding is a very pow-
erful concept in the financial world, yet it is simple enough for a layperson to un-
derstand. The precept for compounding is this: you have S$100 in the bank and
the bank pays you an interest of 5% every year. If you decide not to withdraw the
money and let it earn the interest for 30 years, you will end up with S$432.19, 4.3
times of the amount that you had initially put in (see Fig. 3.1 below).
Year Amount (S$) Year Amount (S$)
1 105.00 16 218.29
2 110.25 17 229.20
3 115.76 18 240.66
4 121.55 19 252.70
5 127.63 20 265.33
6 134.01 21 278.60
7 140.71 22 292.53
8 147.75 23 307.15
9 155.13 24 322.51
10 162.89 25 338.64
11 171.03 26 355.57
12 179.59 27 373.35
13 188.56 28 392.01
14 197.99 29 411.61
15 207.89 30 432.19

Fig. 3.1 - Compounding of S$100 with 5% interest for 30 years.

Now you may be thinking, how is this possible? It is simple mathematics, really.
S$100.00 is your initial deposit and at the end of the first year, you will get 5% of
it, which is S$5.00, bringing it to a total of S$105.00. If you do not withdraw any
amount, by the end of the second year, you will be given 5% of the S$105.00,
therefore this comes out to be S$5.25 and you will have S$110.25 in total. By the
end of the third year, your interest is 5% of S$110.25, which is S$5.51, and I
guess by now you know the rest of the story.

25
 With this compounding effect, you will now see the advantages of dividend
investing. Dividends can be ploughed back into your portfolio and with the com-
pounding effect, you can see it grow over a long period.

Equity Risks
Now that I had shared about the advantages of equities, it is fair for me to let
you know about the risks involved in investing in them. If you are worried by now,
rest assured, for risks are part and parcel of life in the financial markets, and I have
mentioned the term “risk” when I introduced the Modern Portfolio Theory in
Chapter 1. Even the act of keeping cold hard cash in biscuit tins under your bed is
subjected to risks (theft, fire and inflation).
The following are risks typical of equities. In the later chapters I will present
the risks of the other asset classes in a similar fashion. No matter what is men-
tioned, the golden rule to reduce risks is to diversify.
Capital Risk - Basically what this means is if the company you invested in
suddenly went bust, there is a very likely tendency that your equity investment in
that company will be wiped out. Shareholders of a company, though sounds im-
pressive, are actually one of the last few in the order of payouts should the com-
pany in question goes bankrupt, and by the time they reach the front of the queue,
not much is left.
Volatility Risk - Equity prices go up and down like a roller coaster. For shares
you can get tremendous gains, but have tremendous losses as well. If you look at
any share price charts, you could see they resemble a roller coaster ride. Most of
the time such volatility are beyond our control, like when the economy is going
boom or bust, or when the company you invested in suddenly has a huge profit or
loss. Sometimes one bad news or a bad report on the company will send the price
of the shares tumbling down.
Region, Country and Sector Risks - Risks could also occur at regional
level (such as the Asian Financial Crisis in 1997 and the Eurozone Crisis in 2011),

26
country level (e.g. the Argentina Financial Crisis of 1998 to 2002) and the sector
level (the dot com bubble in 2000 affected the entire technology sector).
Forex Risk - This is applicable if you have overseas investments. Forex risk de-
fines the gain or loss of a foreign financial good due to foreign exchange rate.
Here is an example of forex risk: If you bought shares of an American company
at 50 United States Dollars (US$50), with the exchange rate of US$1.00 to S$1.50
(50 x 1.50 = S$75.00), and a few months later the share price remained the same
but the exchange rate is US$1.00 to S$1.40 (50 x 1.40 = S$70.00), you would have
made a loss of S$5.00.

How to Own Equities?

For the purpose of The Bedokian Portfolio, there are two ways to own equities,
and that is through direct ownership and ETFs. Direct ownership, as the name im-
plies, means you have a stake in the company. No matter how many shares you
own, you have the right to attend their Annual General Meetings (AGMs)
and could bring up questions during these AGMs or through their investor rela-
tions (IR) channel. If your equities are owned through a custodian service (i.e.
not through CDP for local equities), technically you are still the rightful owner,
though there are certain limitations especially on the attendance of AGMs.
ETFs are another way to own equities, though not directly. You could refer to
Chapter 8 where I will write more on ETFs.
I wish to touch a bit on initial public offerings (IPOs). When a company
is going to be public listed, it will offer their equities for subscription, thus giving
an opportunity for the public to own its shares. IPOs can be subscribed either
through the banks’ teller machines or internet banking portals, or through a bro-
kerage. I will cover more on IPOs in Chapter 15.

27
Summary
• Equities are ownership of companies through shares or stocks.
• Equities tend to rise over the long term, and are the main engines of growth.
• Equities provide dividends, which are important in the objective of The Be-
dokian Portfolio for passive income and dividend investing.
• The compounding effect is a very simple but powerful concept to watch your in-
vestments and portfolio grow over a long period.
• There are risks involved in investing in equities, with capital risk, volatility risk,
region, country and sector risks, and forex risk.
• There are two ways to own equities for the purpose of The Bedokian Portfolio;
direct ownership and through ETFs.

References
1 - Yahoo Finance. STI Index. https://sg.finance.yahoo.com/ (accessed 12 May 2016)
2 - Yahoo Finance. Dow Jones Industrial Average. https://sg.finance.yahoo.com/ (accessed 12
May 2016)

28
 CHAPTER 4

Bonds

Next up are bonds. Bonds are the second largest asset class in the world after equi-
ties, with trillions of dollars of worth as well.

What are Bonds?

Bonds are debt instruments, or IOUs in layperson speak. For individuals, debts
are usually bad, but in financial markets most debts are good. Debts are used by
organisations to expand their business operations or to fund a costly project. When
an organisation wants to borrow money, the three main ways are: to issue more
shares, borrow from banks, or issue bonds. If the bond option is chosen, the or-
ganisation would issue bonds to the public through the financial markets, where
one could buy them. Organisations that issue bonds are mainly companies and
governments.
A typical bond is consisted of three basic components; the bond principal,
the coupon rate and the bond maturity date. The organisation that issues the
bond is called the bond issuer, and investor who buys the bond is called the
bond holder. Bond principal is the base amount of the bond, mostly in amounts
of S$1,000 each. The coupon rate is the interest to be paid by the bond issuer to
the bond holder, with payment frequency varies from once a year to once per
month, depending on the payout schedule. The bond maturity date is the time
where the bond issuer will end the bond (or recall the bond) and pay the princi-
pal amount back to the bond holders.

29
 Using an example, XYZ Company issues S$1,000,000 worth of bonds (or
1,000 bonds of S$1,000 each) to the financial markets, with a coupon rate of 3%
(payable yearly) and the maturity date is 5 years from the date of the issue. An indi-
vidual buys S$5,000 worth of bonds (5 bonds of S$1,000 each) and if he keeps
holding it, he would get S$150 (3% x 5 bonds x S$1,000) per year. By the maturity
date 5 years later and if he still holds the bonds, the bonds are recalled by XYZ
company and he gets back the initial S$5,000. This means in total, he will have
S$5,000 principal plus S$30 x 5 bonds x 5 years = S$750 worth of coupons.

The Importance of Bonds

Like equities, bonds form a major part in every investment portfolio. In fact,
most simple portfolios are just made up of a mix of equities and bonds, the two
main asset classes in the world. This equity-bond combination is often used due to
the different correlation between the two asset classes.
I have mentioned back in Chapter 3 that equities are the main engines of
growth of a portfolio, but they are subjected to market volatility and it may go up
and down. Bonds, with their lower but constant yield, prove to be a good shelter in
times of market turmoil. In basic economics theories, when equities perform well,
bonds would head south, and vice versa, thus this different correlation acts as a bal-
ance with each other, resulting in a not-so-painful loss and also a not-so-insane-
but-healthy gain.
There is another major advantage of bonds over equities, though I may sound
a bit pessimistic here. In the event of a company’s bankruptcy, the company’s
bond holders ranked higher than its equity holders in the hierarchy of debtors. In
other words, liquidators (normally independent accountants in charge of disposing
a company’s assets to pay off its debts) would, among other things, pay off bond
holders first before equity holders.
Coupons, like dividends mentioned in Chapter 3, are important to The Be-
dokian Portfolio, where they are used for passive income and dividend investing
(and not forgetting the compounding effect). Their steady stream of fixed payout

30
over a fixed period gives you the assurance of “I know I am getting S$x amount
for the next y years.”

Types of Bonds
There are many types of bonds being issued around the world, but they could
be categorized into two main types, and they are corporate bonds and govern-
ment bonds. Both of them are available in the financial markets.
Generally, corporate bonds tend to have a higher yield than government bonds.
This is because companies are viewed to be more risky than governments, there-
fore the higher coupon rate is a form of “compensation” for you to take up the
risk. However, there are government bonds whose coupon rates are higher than a
normal corporate bond, for example the Greek government 10-year bond’s cou-
pon rate is around 7.5% as at the time of writing1, which is considered higher
than a usual corporate bond issued locally (around 3% to 5%).

Credit Ratings
Bonds are subjected to credit ratings, which measures their amount of credit
worthiness. Companies that do these credit ratings are called credit rating agen-
cies, which grade the bonds from time to time. The way these credit rating agen-
cies rate the bonds are like a teacher giving out test grades to students, using the
letters A, B and C, and sometimes adding in numbers and/or ‘+’ and ‘-’ signs.
Naturally, bonds with the best ratings have a lot of As, while those with not-so-
good ratings would be getting Cs or maybe lower.
These credit ratings tell you a few things about the bonds. The most important
thing would be the ability to pay the coupons (and even the bond principal itself)
to the bond holders. The default of a coupon payment and/or bond principal will
send strong negative signals to bond holders, especially on the bond issuer’s finan-
cial health. The financial health of the bond issuer, along with market conditions
and political situations, will affect credit ratings. Although buying bonds with a

31
strong credit rating is recommended, but on rare occasions the credit ratings them-
selves could be in the wrong, as demonstrated by Lehman Brothers’ bonds where
they were rated in the “A” region just before their collapse during the 2008-2009
financial crisis2.
You may have heard of the term “junk bonds”, but they are not really “junk”
as in rubbish. Junk bonds are corporate bonds that are not in the high end of
credit ratings. They are called junk bonds because of their high risk of default, as
compared to investment grade bonds, but along with it come a higher coupon
rate.

Preference Shares
You may be wondering why the term “shares”, which are equities, suddenly
popped up in the chapter for bonds. Preference shares are a kind of hybrid be-
tween shares and bonds, and because they behave a lot more like bonds, I shall
mention about it here.
Preference shares, or stocks, are similar to bonds in a way that they have a fixed
dividend payout and in the event of a company’s bankruptcy, preference share-
holders will get the proceeds before equity holders, but after bond holders. How-
ever, preference shareholders are not entitled to vote at AGMs, a right given to eq-
uity holders. Depending on the terms of the preference shares, some of them
could be converted to equity shares as an option, though most of the time this is a
one-off conversion and a reversal is not allowed.
Payout of dividends for preference shares comes in two forms: cumulative
and non-cumulative. Cumulative means if the company missed a dividend pay-
ment due to whatever reason, it is obliged to pay the missed payment in the next
payout date(s). For non-cumulative preference shares, the company is not obliged
to compensate the missed payout.
For The Bedokian Portfolio, it is all right to hold some preference shares, but
due diligence must be made regarding the issuer as well as the prevailing eco-
nomic conditions, especially on inflation and interest rates.

32
Perpetual Bonds
Perpetual bonds, or perps for short, are bonds without a definite maturity date.
Some perpetual bonds do have a callable option, i.e. the bond issuer could just
stop the perpetual condition and pay the bond principal back to the bond holders.
Although the idea of perpetuals sounds good, with a guaranteed payout for life,
at least in theory, there are still some risks to consider, which is covered in the next
section. Like preference shares, it is good to hold some perpetuals, but due consid-
eration is required. Some investors view perpetuals as equity, since they have no
maturity dates and their prices are subject to volatility.

Bond Risks
Like equities, investing in bonds carry some risks as well. Here are the risks that
are associated with bonds.
Default Risk - The risk of the bond issuer not paying the coupon, or worse,
not able to pay back the principal at all. This is the greatest risk for bond invest-
ment, which is why credit ratings play an important role on your selection of
bonds.
Volatility Risk - Like equities, bond prices are subjected to volatility, though
not as much. I shall introduce some terms on bond prices here; if a S$1,000 bond
is still priced at S$1,000 in the financial market, then it is trading at par value. If
it goes above S$1,000, it is trading at a premium, and if it goes below S$1,000, it
is trading at a discount.
Rate Risks - Due to the nature of fixed coupon rates, bonds are susceptible to
rates risks such as interest and inflation rates. If these rates are higher than the cou-
pon rate, then it is not worthwhile to hold onto the bond.

33
 Recall Risk - If there is an early recall of the bond by the bond issuer, the
bond holder would suddenly lose the opportunity cost of earning the remaining
coupons.
Reinvestment Risk - When a bond is recalled early or at the end of the ten-
ure, there is a risk where the new bond may be of a lower coupon rate.

How to Own Bonds?

Like equities, you can own bonds either directly or through ETFs via the finan-
cial market. For direct ownership, there is also the CDP or the custodian option.
Also like equities, corporate bonds that are going public can be obtained through
IPOs. Government bonds, on the other hand, are initially obtained through auc-
tions, and these can be done through the banks.

Summary
• Bonds are debt instruments issued by governments and companies.
• Bonds typically have a different correlation with equities, which is why it is com-
mon to have equity-bond portfolios.
• Bonds provide coupons, which are important in the objective of The Bedokian
Portfolio for passive income and dividend investing.
• There are usually two types of bonds: corporate and government bonds.
• Credit rating agencies issue credit ratings on bonds to denote their credit worthi-
ness.
• Preference shares are like a bond with a fixed dividend payout, either cumulative
or non-cumulative. Some types of preference shares can be converted to equities.
• Perpetual bonds, or perps, have no tenure, but some of them do have a callable
option by the bond issuer.

34
• There are risks involved in investing in bonds, with default risk, volatility risk,
rates risks, recall risk and reinvestment risk.
• There are two ways to own bonds for the purpose of The Bedokian Portfolio; di-
rect ownership and through ETFs.

References
1 - Financial Times. Bonds & Rates - Ten year government bond spreads.
http://markets.ft.com/Research/Markets/Government-Bond-Spreads (accessed 12 May 2016)
2 - Frydman, Roman & Goldberg, Michael D. Lehman Brothers collapse: was capitalism to
blame? The Guardian. 13 September 2013.
https://www.theguardian.com/business/2013/sep/13/lehman-brothers-was-capitalism-to-bl
ame (accessed 12 May 2016)

35
 CHAPTER 5

Commodities

Commodities are what I term the “basic ingredients” of industry and society, as
stated in Chapter 1. There are a lot of commodities that can be traded in the fi-
nancial markets, such as gold, silver, oil, wheat and, yes, orange juice.

What are Commodities?

Commodity trading has been around since ancient times, even before equities
and modern bonds appear.
Commodities are important in every aspect of society and industry. They are
considered “real” assets since they could be seen, held and used. Food such as
wheat, rice, lean hogs and cattle are used to feed people. Metals such as copper,
aluminium and silver are required for industrial applications. Energy sources such
as oil, natural gas and coal are utilised for power generation.
Commodities can be classified into two types: soft commodities and hard com-
modities. Wheat, rice, cattle, sugar and orange juice are soft commodities, whereas
copper, gold, oil and coal are hard commodities. A rule of thumb on determining
whether a commodity is “soft” or “hard” is how they are derived. Soft commodi-
ties are agricultural and livestock in nature, and hard commodities are mined or
extracted.
For The Bedokian Portfolio, we are looking at three types of commodities:
gold, silver and oil.

36
The Importance of Commodities
First and foremost, I have to say that investing in commodities does not bring
any form of dividends, coupons or interests. Being the most basic asset class, there
is no mechanism for generating yield, unlike the others. So you may be wondering,
why invest in commodities if it does not generate any periodic yield, which contra-
dicts the objective of The Bedokian Portfolio?
The answer, as stated back in Chapter 1, is diversification. To reduce overall
portfolio risk, diversification is important, as (I state again) different asset classes
have different correlation with one another. Traditionally, commodities work well
during periods of inflation, when the purchasing power of cash is reduced. For ex-
ample, a one-ounce (1 oz.) gold bar will remain just that, but over the years the
cost of that bar has ranged from around US$444.74 to about US$1160.06 from
2005 to 20151, rising 2.6 times. Factoring in the exchange rate to our currency, it
grew from S$740 to S$1,640 around the same time2, some 2.2 times. Comparing
it with inflation, between 2005 and 2015, the average inflation rate of Singapore is
about 2.4% per year3, which means the worth of S$740 in 2005 would be S$960
in 2015, or only 1.3 times.
Therefore having commodities is a form of insurance against the volatility of
the financial markets. For commodities, you have to sell off your holdings to make
a gain. As to when to sell them off, there will be a discussion on portfolio rebalanc-
ing later on (Chapter 10).

Introducing Futures
Before I delve into the types of commodities for The Bedokian Portfolio, I will
touch a bit on futures. Futures are contracts that bind a buyer and seller to trans-
act a particular quantity of financial good for a price at a certain date in the fu-
ture. Futures has been around since the agricultural times of human civilization,
and it was no surprise that the first modern futures markets were meant for farm-
ers selling their harvests.

37
 Why futures derive is due to one simple thing: unpredictability. Buyers and sell-
ers of a financial good may want to protect themselves from the unpredictability
of the commodity markets. Using an example, a rice farmer is now selling a sack
of rice for S$10. As he began his growing cycle for the next harvest in a year’s
time, he wants to make sure that he could still get S$10 for a sack of rice at that
point. Therefore he comes out with a contract, stating he will sell S$10 for a sack
of rice one year from now.
A food stall owner who relies on rice for his business wants to secure a fixed
price for it. He had previously bought from this farmer for S$10 per sack and he
agrees to enter the deal with him, thus forming the contract. Now we have a fu-
tures contract where the buyer (the food stall owner) agrees to buy S$10 per sack
of rice from the seller (the farmer) in a year’s time.
The magic of this contract is going to happen in a year’s time. Let us look at
three scenarios.
Price of rice remains the same - So for this scenario, the farmer sells to
the food stall owner at S$10 for a sack of rice. No change here.
Price of rice dropped to S$8 per sack - For some reason, there is an over-
abundance of rice being harvested, and drives the price of rice down to S$8 per
sack. Due to the contract, the food stall owner has to buy from the farmer at S$10
per sack. The farmer earns an extra S$2 per sack while the food stall owner over-
pays S$2 more.
Price of rice rose to S$12 per sack - A drought had happened and the sup-
ply of rice rose to S$12 per sack. Again, due to the contract, the farmer has to sell
the rice to the food stall owner at S$10. Farmer loses some and the food stall
owner got a bargain.
In modern times, these contracts can be bought and sold in the financial mar-
kets, and it has become more standardised (i.e. a contract represents a fixed quan-
tity of commodities). Before the year is up, the farmer can sell it to another farmer,
while the food stall owner can sell his to another. Therefore a futures contract does
not bind you all the way to the end. In fact, there are a lot of non-farmers and

38
non-food stall owners buying and selling rice futures (called rough rice futures) in
the financial markets.
Futures are the norm for dealing in commodities, and futures are a form of de-
rivative, where you do not really own the underlying asset itself. After having said a
lot about futures, the conclusion is that The Bedokian Portfolio discourages the use
of it. However, for oil, futures are the way to go, but I will highlight more under
the oil section.
To end off this part, there is an anecdotal story of a trader (who is not a farmer
nor a food stall owner) who did not sell away his rice futures contract by the due
date, ended up having sacks of rice delivered to his home.

Gold
The glittering yellowish metal that has fascinated humans for thousands of
years, and until recently in the second half of the last century, gold was still used
as a standard for some currencies in the world. Gold is often looked as an insur-
ance against inflation, where I had made an example in my earlier section in this
chapter.
Besides being a hedge against inflation, gold is also looked upon in times of cri-
sis. You may have read some novels or seen some movies about getting gold during
times of war or societal collapse. Being considered as “real” money, gold is recog-
nised everywhere, unlike paper currencies that are only recognised by the govern-
ment that prints them.
However, I suggest that one should not go heads over heels over this “dooms-
day scenario”. Having some gold is good but do not bet everything on it (remem-
ber diversification).
Gold is usually priced in US$, so there is an added foreign exchange fluctua-
tion when converting between US$ and S$.
Now here are some ways of owning gold as approved for The Bedokian Portfo-
lio.

39
 Buy Gold Direct - The most direct way would be to own the metal itself.
Bars and coins are preferred, not jewellery, as the latter is not considered invest-
ment grade (and invite the GST, or goods and services tax). Bullion bars
and coins are the ones to go for. I will cover this further in this section.
Buy Gold ETFs - Another way is to go is to buy the gold ETF. Go for those
that have physical gold as its underlying assets. I will cover a bit more of this in
Chapter 8.
Gold Savings Account - Yes, there are savings accounts denominated in gold
and there are banks providing this service.
When buying gold direct, be sure to look for reputable banks and dealers. With
the recent development of the local physical gold and silver market, including ex-
emption of the GST from such products, there have been a number of physical
gold and silver dealers springing up.
Gold prices, like all financial goods, have a buy/sell spread. For physical gold,
there is a spread above the buy/sell spread. Assuming the gold spot price (price
as determined by the financial markets) for 1 oz. is US$1,000.00 / US$1,002.00,
and the exchange rate between US$ and S$ is 1.40, meaning the gold price spread
in Singapore Dollars is S$1,400.00 / S$1,402.80. If you go to any physical gold
dealer at that point of the spread, they would not sell you the gold at S$1,402.80.
Instead they would probably sell you at a markup, say S$1,480.00, and if you were
selling them 1 oz. of gold, they would take in at maybe S$1,320.00, not
S$1,400.00. The reasoning behind this “spread within the spread” is because, for
physical gold, additional charges such as minting costs and storage fees are in-
curred, and these dealers are running a business and make profits, therefore it is
fair that they pass these charges to the investors.
I have mentioned that getting bullion bars and coins is the way to own gold.
Such bars and coins are the cheapest to produce, abundant and easily recogniz-
able, hence their spread above the gold spot price is not so high. There are collecti-
ble coins (called semi-numismatics and numismatics) and bars, some of which
come with limited mintage and/or with intricate designs. These are priced way be-

40
yond the perceived investment value and therefore should not be included in The
Bedokian Portfolio.
There are a few reputable mints producing the physical gold and are likely
members of the London Bullion Market Association (LBMA). So, when
buying physical gold, get it from a reputable dealer who gets them from reputable
mints.
To keep gold, you could keep it in your own home by investing in a fireproof
safe, use banks’ safe deposit boxes or use the storage facilities provided by some
dealers, but the latter two will incur regular fees and charges.

Silver
Often quoted as “the poor man’s gold”, silver, like gold, is also effective as a
hedge against inflation. Interest in investing in physical silver is on the rise recently,
with many dealers setting up shop selling silver (and gold) locally.
Though both gold and silver are seen as precious metals and their spot price
patterns move in tandem with each other, there are subtle differences between the
two. Silver is used more in industrial applications than gold, such as solar panels,
electrical appliances and for medical use. For gold, though there are some indus-
trial uses for it, is mostly used for jewellery and for investment purposes.
The ways of owning silver for The Bedokian Portfolio is the same as owning
gold.
Buy Silver Direct - The most direct way would be to own the metal itself.
Like gold, bars and coins are preferred, not jewellery, as the latter is not consid-
ered investment grade (and invite the GST, or goods and services tax). Bullion bars
and coins are the ones to go for, with the same reasoning that I had explained in
the previous section on gold.
Buy Silver ETFs - Go for those that have physical silver as its underlying as-
sets. I will cover a bit more of this in Chapter 8.

41
 Silver Savings Account - There are savings accounts denominated in silver
available from banks, though not all that provide the gold ones will have this serv-
ice.
The rationale and characteristics in buying physical silver are the same as buy-
ing physical gold, such as the “spread within the spread”, going for bullion bars
and coins, mints that are members of the LBMA, reputable dealers, and storage
options.

Oil
Dubbed as “black gold”, oil, or crude oil, powers virtually every industrialized
nation in the world, providing energy to power plants and to fuel cars. Crude oil is
also a raw material for the production of plastics, which are in use almost every-
where.
Crude oil is priced in US$ and it is quoted as “US$xx.xx per barrel”. Not all
crude oil are the same and there are many types of it around the world, but the
two major ones quoted in the financial markets are Brent Crude and West
Texas Intermediate (WTI). Brent crude oil is extracted from the North Sea
somewhere between the British Isles and Norway, while the WTI crude oil is ex-
tracted from the United States. These two are often used as the underlying com-
modity for crude oil futures contracts. The prices quoted in the financial markets
for Brent and WTI are different, with probably a few US Dollars difference. Brent
or WTI, no difference, you could choose either or both.
To own and invest in crude oil, there are only two ways; either you buy barrels
of crude oil and find a place to store them (not recommended), or you go through
the futures way (not recommended either). I had said earlier in the chapter that fu-
tures are the way to go for crude oil, yet I am not recommending futures. Confus-
ing, isn’t it?
The main reason for not recommending futures is because they are highly
speculative, means it is more suitable for trading and not for long term keeps. So
how to invest in oil then?

42
 Enter ETFs (again) and I shall jump the gun here explaining to you rather than
asking you to go to Chapter 8, for crude oil at least. There are several ETFs avail-
able that deal with crude oil, and all of them are based on futures (for now). So,
rather than “enjoying” the steep learning curve of futures and the execution of it,
get an ETF that will do all the futures trading for you.

Commodities Risks
Commodities carry some risk as an asset class, too. Here are the major risks to
take note.
Volatility Risk - By now you would have known volatility risk is present is al-
most every asset class. Commodities are no exception either. Prices of commodi-
ties do go up and down and sometimes drastically. Crude oil prices were in the
US$100 range in 2013 before plunging down to US$40+ by the second half of
2015.
Deflation Risk - Commodities work well in an inflation situation, where the
price increases for the same amount of financial goods. But in deflation, it is the
opposite, and the commodities that you bought earlier become “cheaper” in terms
of the price.
Non-Yielding Risk - Remember that commodities do not generate yield,
and capital gains (or losses) are realized only at the point of disposal.

Summary
• Commodities are important in every aspect of society and industry.
• Commodities do not generate yield, but it is important to include them for diver-
sification. They are good hedges against inflation, too.
• Futures are used for trading in commodities, and for The Bedokian Portfolio it is
not recommended to use them.

43
• For gold and silver, the three ways to own them are; getting physical bullion (bars
and coins), own gold/silver ETFs and open a gold/silver savings account.
• For crude oil, the only practical way to own it would be buying of crude oil
ETFs with futures as the underlying asset.
• There are risks involved in investing in commodities, with volatility risk, deflation
risk and non-yielding risk.

References
1 - Kitco. Historical Gold Charts and Data - London Fix.
http://www.kitco.com/charts/historicalgold.html (accessed 12 May 2016)
2 - Monetary Authority of Singapore. MAS Exchange Rates.
https://secure.mas.gov.sg/msb/ExchangeRates.aspx (accessed 12 May 2016)
3 - World Bank. Inflation, consumer prices (annual %), http://data.worldbank.org/ (accessed
12 May 2016)

44
 CHAPTER 6

REITs

Next up in this chapter I want to talk about is REITs, or Real Estate Investment
Trusts.

What are REITs?

REITs are a hybrid of two major asset classes, property and equity. Like prop-
erty, a REIT owns a group of properties, and it earns its income by leasing out the
sub-properties to tenants. Like equity, a REIT is consisted of shares called units,
and a shareholder of a REIT is called a unitholder. REITs are usually treated as
equities for investment purposes, but in fact they are called trusts (hence the T in
REIT) or trust funds.
 The REITs idea was incepted from the United States in the 1960s, and from
then several other countries are having them or are on the way of incorporating
them. Since the first REIT appeared in 2002 in Singapore, there have been 20
plus REITs available for the investor. REITs are a good alternative to owning
rental property outright, as there is no hassle like sourcing for tenants, collecting
rent, mindful of property taxes and touching up the place.
 REITs also now enjoy specific tax breaks, and for Singapore REITs (called S-
REITs) the regulations stated that at least 90% of its taxable income must be dis-
tributed to unitholders.

45
The Importance of REITs
Remember The Bedokian Portfolio's objective? That’s right, passive income
through dividend and index investing. Since S-REITs have to distribute at least
90% of its taxable income to their unitholders, the dividend payout regime suits
the objective.
REITs are closely correlated to property, another distinct asset class, especially
on the rental market. For a shop or apartment unit, the amount of rent to be
charged is determined by many factors, including comparing the rents of the
neighbouring units and location of it. If the rental market is booming, rental in-
come increases and for REITs, this means their income increase as well.
For volatility wise, REITs are not as susceptible to huge fluctuations in prices
like other equities, because their makeup is consisted of actual properties; things
that you can see and go to, and of course fairly valued.

Types of REITs
Not all REITs are created equal. There are many types of REITs depending
on their profile and make-up. Here are the common types.
Retail REIT - A retail REIT’s portfolio is made up shopping and retail malls,
hence the name.
Office REIT - Office REITs are office buildings, though they may have some
retail shops in it.
Hospitality REIT - Hotels and serviced apartments typically fill the property
make-up of such REITs.
Industrial REIT - Industrial REITs are made up of factories and manufac-
turing facilities and plants.
Logistical REIT - Logistical REITs are made up of warehouses and storage
spaces, although sometimes they may mix in with some industrial buildings.

46
 Healthcare REIT - Hospitals and healthcare centres are under this type of
REIT.
Residential REIT - Residential REITs are made up of residential houses and
apartments for long term stay.
Mixed REIT - Although not named as such, but some REITs have a mixture
of properties in its portfolio, such as retail and office (called commercial REITs),
industrial and logistics, etc.
There are other types of REITs overseas, including one called a mortgage
REIT, which earns money not from rental income, but from interests earned from
mortgage loans.
Besides the types above, REITs can also be classified by geographical exposure,
which they could be holding local properties only, overseas properties only, or
both.

Gearing
Gearing is the amount of debt a company holds with respect to its sharehold-
ers’ equity. So if a company is having S$50 of loans and debt, and its total share-
holders’ equity is S$100, it is said to have 50/100 = 0.5 gearing ratio = 50% gear-
ing. Gearing is a very important issue in the world of REITs. For S-REITs, regula-
tions stipulated that a REIT’s debt is limited to 45%1.
So what is really the problem here?
Remember that S-REITs pay out 90% of its taxable income to unitholders?
Unlike a company, where they could keep the profits as retained earnings and use
it for further development, REITs have to distribute almost all of its profits as divi-
dends. This means a REIT has to borrow the money from somewhere if it decides
to add a new property or do some enhancements on its current properties. Borrow-
ing money means increasing the gearing.
There are a few ways REITs can get the additional money. They can borrow
from banks, or issue bonds (remember Chapter 4?), but these methods will in-
47
crease the gearing, as they are considered debt or loan. Issuing of more equity is
another way. A rights issue, where shareholders/unitholders can get additional
shares at a discount, is a good way of getting additional money without affecting
the gearing. In this way, with the equity portion increased and the debt/loan por-
tion remained constant, the gearing would be reduced. However, issuance of new
shares may bring dilution (price of shares reduced due to increased number of
shares) at the expense of the shareholders/unitholders.

REIT Risks
REITs do have risks as well. Here are some of the risks that are associated with
them.
Volatility Risk - Again, this term is present in this chapter. REITs are not as
volatile as other equities but the fact is such risk is still present. Examples such as a
drop in tourist numbers will affect the hospitality REITs here; a generic manufac-
turing slowdown will drag the industrial and logistics REITs down, etc.
Interest Rate Risk - This risk has a dual effect on REITs. The first effect is a
rise in interest rates will make loans and borrowings more expensive, thus affecting
the bottom line of REIT income. The second effect is that the interest rate will
rise until a point where the yield from holding cash (in a bank that generates inter-
ests) surpasses the yield given by REITs, during which investors will dump the lat-
ter.

How to Own REITs?

One good thing is that the Singapore financial market has 20+ REITs, so hav-
ing direct ownership of them is easy. Like companies, being a unitholder entitles
you to attend their AGMs. As at the time of the writing of this book, there could
be a possibility for a S-REIT ETF to be launched2. In overseas financial markets
there are REIT ETFs available.

48
Summary
• REITs are a hybrid between equity and property asset classes.
• S-REITs have to distribute at least 90% of its taxable income as dividends, thus
making it an important source of dividends for The Bedokian Portfolio’s objec-
tive.
• There are many types of REITs, some go by their make-up and profile, and
some by their geographical exposure.
• Gearing is the ratio of a company’s or REIT’s liabilities to its equity.
• There are a few ways a company and REIT raise money, either by bank loans,
issuing of bonds and/or issuing of additional shares or rights.
• REITs can be owned directly and through ETFs.
• There are risks involved in investing in REITs, namely volatility risk and interest
rate risk.

References
1 - Monetary Authority of Singapore. MAS Responses to Consultation Feedback on Strengthen-
ing the REITs Market. 2 July 2015.
http://www.mas.gov.sg/news-and-publications/media-releases/2015/mas-responses-to-consult
ation-feedback-on-strengthening-the-reits-market.aspx (accessed 12 May 2016)
2 - Wong, Wei Han. Singapore Exchange releases first lot of in-house indexes. Straits Times. 2
December 2015.
http://www.straitstimes.com/business/companies-markets/singapore-exchange-releases-first-lot-
of-in-house-indexes. (accessed 12 May 2016)

49
 CHAPTER 7

Cash

This is the last asset class that I will go into. Cash is often overlooked, yet it is im-
portant enough to justify its place in The Bedokian Portfolio.

What is Cash?
Cash is just it, cold hard liquid cash (I emphasise on liquid here), which you
could use it to buy just about anything. Liquidity means the ability of a financial
good or asset to be bought or sold without compromising the price of it. Cash is
considered the most liquid of all asset classes in which it could be quickly bought
and/or sold for other financial good/asset classes with ease. If an item is S$1.00
each and you bought 10 from a seller, you pay S$10.00 in cash. Assuming all
things equal, you could sell the 10 items back to the seller to get back the S$10.00.
 Putting it in an investment context, as a retail investor you cannot easily
change Company A's shares for Company B's, nor change bonds for gold. You
have to go through the cash phase, i.e. you have to sell away Company A's shares
to get cash, then from there use the said cash to buy Company B's shares. Simi-
larly you have to sell bonds to get cash, then use the same cash to buy gold.
 I would like to state that for the cash here, it is referring to the cash allocated
in The Bedokian Portfolio. Please do not include the cash in your own emergency
funds or savings (which I will touch a bit in Chapter 9).

50
The Importance of Cash
The liquidity of cash makes it an interesting asset class in a portfolio. Cash is
the starting point, as well as the end point, in portfolio management. To put it in a
dramatic way, in the beginning of time (of a portfolio), there was nothing but cash.
Then cash was used to accumulate other asset classes. When dividends/coupons/
interests were added in, it would go back in the form of cash. With the aim of The
Bedokian Portfolio (passive income through dividend and index investing), as it
eventually matures, the passive income comes in the form of cash.
 On a more short term note, cash acts as the reserves to purchase more asset
classes when rebalancing comes or when opportunity knocks. The time taken is
much faster than selling off the asset class and/or sub-asset class to get the cash
and buy up another.
 In the economic situation of things, cash is most useful where the economy is
not doing well. The term "cash is king" is very apt in this situation, when most peo-
ple are tied up in illiquid (i.e. not so liquid) asset classes and thus cannot exchange
them for others, you could just get them with readily available cash in your hands.

Foreign Exchange
Earlier in Chapter 1 on asset classes, I mentioned that foreign exchange, or
forex, is considered as cash. There are forex traders who may disagree with me on
this, but I am specifically not talking about forex trading. From The Bedokian Port-
folio’s point of view, it is the holding of foreign currencies as cash or in bank ac-
counts.
Foreign currencies are subjected to fluctuating exchange rates, with reference to
your own home currency (Singapore Dollars in this case). Back in the 1980s,
US$1.00 was about S$2.20. As of the writing of this book, the exchange rate is
about US$1.00 to S$1.35.
For holding of local currency, you have only inflation to consider, but for keep-
ing foreign currencies, you have to be concerned about inflation and the changing

51
exchange rate, with reference to the local currency. The ideal scenario would be
that the exchange rate rises faster than the local inflation rate, which means keep-
ing that particular foreign currency is good. However, if it goes the other way, hold-
ing foreign currencies might not be such a good idea.
Despite all these, it is still feasible to hold onto foreign currencies (and foreign
asset classes, which I will deal with it in Chapter 13), just not too much.

Cash Risks
Although cash is high in liquidity, there are some risks related to it. The follow-
ing are risks on holding cash.
Physical Risk - One of the biggest risks involving cash is physical risk, which
includes things like loss, theft, fire, deterioration, etc. This is very true especially if
you are keeping cash yourself. Unlike other asset classes where there are records of
your ownership, once cash is compromised there is no way to recover them. If you
really want to keep cash, invest in a fireproof safe.
Inflation Risk - The next big risk of keeping cash is inflation. The purchas-
ing power of cash will be dwindled as time goes by, therefore with the same
amount of cash, chances are that you would be buying lesser things in the future
as compared to now. You cannot escape from inflation; a constant and steady infla-
tion is good for the economy.
Bank Failure Risk - Though chances are very, very low, but bank failures are
common in other countries, regardless of how strong or weak their economy is. Lo-
cally, the accounts are insured by SDIC (see later), but up to a certain quantum.
Foreign Exchange Risk - As described in the earlier section, you have to con-
tend with foreign exchange fluctuations if you decide to keep foreign currency.
Interest Rate Risk - For REITs, having a higher interest rate is no good, but
for cash, having a lower interest rate is no good. The lower the interest rate, the
lesser yield you are getting from the interest.

52
How to Own Cash?
Though this may sound like a stupid question, there are really many ways out
there to store your cash. The cash-in-a-biscuit-tin-under-your-bed is a definite no-
no; the risks of theft, fire, getting eaten up by termites (literally) and inflation (figu-
ratively) are there. Cash, unlike commodities, can generate returns called interest
if you know where to put it, even though it is not as much as equities or bonds.
Banks top the list of places to store cash and are safe in many aspects; physically as
they have security guards and strong vaults to store your cash, legally (most banks
here) as your deposits are insured up to a certain amount (S$50,000 for now) by
the local Singapore Deposit Insurance Corporation (SDIC)1, and conven-
iently as you could use their facilities to facilitate transactions of your financial
goods.
 Banks offer many types of services to manage your cash, but the key thing to
consider is speed, meaning which the cash must be at your disposal within short
notice. Two types of accounts in a bank would suit this purpose, and they are sav-
ings accounts and fixed deposits. A savings account is your typical everyday bank
account, where your pay is deposited into, and where you withdraw from to meet
your daily expenses. A fixed deposit is a bit like a bond, where you lock in your
cash within a period of time to get a certain amount of interest. In terms of time
to get the cash, a savings account is the fastest, followed by fixed deposit, but both
are suitable to store cash. Depending on your preference, you could have dedi-
cated savings accounts and fixed deposits for the purpose of The Bedokian Portfo-
lio, or you could mix it in your own daily working bank accounts. If you are doing
the latter, make sure you appropriate the cash between the personal and invest-
ment proportions, and divide the interest earned according to each. The savings
accounts and fixed deposits must be as plain as vanilla, with no added features
such as personal insurance or mixed with investments (e.g. structured deposits).  
You could also deposit your cash with your respective brokerages, though not
all have interest returns. For those which offer interest returns, some are because
of their affiliation with banks, while others invest the cash holdings into money
market funds. An advantage of putting the cash with them is ultra convenience,

53
for any financial instrument bought would be deducted directly and quickly. The
disadvantage is that they may not have the SDIC protection2.
 Lastly there is this recently launched Singapore Savings Bond (SSB) by
the Singapore government, which I consider it to be a hybrid of bonds and cash.
How it works is that, unlike getting a constant yield as per normal bonds, the SSB
gives you step-up coupon rates as each year goes by, meaning the coupon rate will
get higher each passing year. The aim of the SSB is, if kept for the full tenure of
ten years, to give an average yield of a normal 10-year Singapore Government
bond. Fig. 7.1 shows the SSB Nov 2015 issue3.

Average return per year,

Year from issue date Interest, %
%*
1 1.18 1.18
2 1.2 1.19
3 2.06 1.48
4 3.1 1.87
5 3.4 2.16
6 3.4 2.35
7 3.4 2.49
8 3.4 2.59
9 3.44 2.68
10 3.83 2.78

* At the end of each year, on a compounded basis

Fig. 7.1 - Interest rates for SSB issued on 2 Nov 2015.
Looking at the above issue, if the SSB is kept for one to three years, it is equiva-
lent to getting yield from a fixed deposit account, thus acting like cash. If keeping
the SSB for four years or more, it qualifies as a typical government bond. Though
the SSB’s speed of withdrawal is not as fast as savings accounts or fixed deposits, it
is still worth considering.
For foreign currencies, there are savings accounts and fixed deposits from banks
that are catered for them, but they are not covered under the SDIC4.

54
Summary
• Cash is the most liquid among the asset classes.
• Cash is the beginning and the end product of a portfolio. Short term wise, cash
is useful if transaction of asset classes is to be done quickly.
• Foreign exchange is considered as cash. It is feasible to have some but be mindful
of exchange rate changes and inflation.
• The risk involved in holding cash includes physical risk, inflation risk, bank fail-
ure risk, foreign exchange risk and interest rate risk.
• Some ways of keeping cash include putting in banks, brokerages and for short
term, the Singapore Savings Bonds. To keep cash physically, invest in a fireproof
safe.

References
1,2,4 - Singapore Deposit Insurance Corporation Limited. Scope of DI Coverage.
https://www.sdic.org.sg/di_scope_of_coverage.php (accessed 12 May 2016)
3 - Singapore Government Securities. Public notice: SSB issued on 2 Nov 2015 (SBNOV15
GX15110T). 1 October 2015.
http://www.sgs.gov.sg/~/media/SGS/SGS%20Announcements%20pdf/SSB%20PDF/An
nouncement%20GX15110T.pdf. (accessed 12 May 2016)

55
 CHAPTER 8

ETFs

In recent years, Exchange Traded Funds, or ETFs, are gaining recognition among
investors. All asset classes that are mentioned in the previous chapters can be ob-
tained using ETFs. ETFs are instrumental in the overall strategy of The Bedokian
Portfolio.

What are ETFs?

ETFs are a cross breed between equities and unit trusts. Like equities, they can
be traded in the financial markets or exchanges, and like unit trusts, they are con-
sisted of a portfolio of shares, bonds, commodities and/or cash. This hybrid over-
comes the disadvantages and difficulties of equities and unit trusts; instead of buy-
ing 30 companies’ equities, you could buy one ETF representing the 30 compa-
nies; and ETFs can be transacted anytime of the day when the financial market is
open, unlike unit trusts where you could only transact at the end of the day.
Structurally ETFs are classified as funds, and they can be grouped into many
types, depending on their underlying assets, fund structures and objectives. Most
ETFs are transparent in their holdings, meaning it is not a secret as to what their
underlying assets are. Such transparency and ease of transaction in the financial
markets led to their growing popularity.

56
Importance of ETFs
I said that ETFs are important in the overall scheme of things for The Be-
dokian Portfolio, where they allow you to engage in index investing. Index invest-
ing is one of the aims of The Bedokian Portfolio. Not only index investing, but
also virtually every other asset class can be obtained using ETFs. The gist is what-
ever that cannot be invested easily (such as crude oil in Chapter 5), ETF is there to
the rescue.

How an ETF Works?

Like all funds, ETFs have an objective, such as tracking an index, following the
price of a commodity, etc. An ETF provider, usually a financial institution (e.g.
banks) or a fund house, will create an ETF. Let us take an example of an ETF cre-
ated to track an index that is made up of 10 companies of equal weightage (mean-
ing, each of the 10 companies have an equal “score” contributing to the index).
The ETF provider then turns to authorised participants, or APs, to do the
creation and redemption of ETF shares. Like ETF providers, APs are also fi-
nancial institutions.
In the creation process, an AP will buy up shares of the 10 companies accord-
ing to their weightage in the index, generally in the tens of thousands, and then de-
liver them to the ETF provider. The ETF provider then exchanges them, in equal
value, with ETF shares to the AP. In turn, the AP will sell these ETF shares in the
financial market to investors like you and me.
In the redemption process, the AP will exchange the ETF shares with the ETF
provider to get back the 10 companies’ shares at equal value. As you can see here,
redemption is the opposite of creation.
These creation and redemption processes, though they look complicated, are a
self-balancing way of keeping the ETF as close to the value of the index it is track-
ing. Assuming there is a sudden demand for the ETF, causing its price to rise.
When the AP sees this, it will quickly do the creation process and sell the ETF

57
shares to meet the demand, which in turn will drive the price down back to its fair
value (and make a profit for the AP). Similarly, when there is an oversupply of the
ETF shares, the price will go down. Again the AP, seeing the “cheap” ETF price,
will buy them up to do the redemption process for the companies’ shares, thus
bringing the price back up to normal (moreover make a profit for themselves, too).
The ETF provider, with all these goings-on, will maintain the objective of tracking
the index, as what the ETF is supposed to do.

Asset Classes and ETFs

The explanations in the earlier sections are geared towards equity ETFs. The
beauty of ETFs is that you can own every asset class with them. Equities, bonds,
commodities, REITs, cash, forex, etc., can be transacted using ETFs, and whole
portfolios can be consisted of nothing but ETFs.
Most ETFs are backed by real assets, like the actual equities, bonds, etc. The
gold and silver ETFs, which I mentioned back in Chapter 5, have actual gold and
silver stored by the ETF providers in some vaults. Other ETFs are futures-based,
like crude oil in Chapter 5, as well as other commodities like wheat, copper, etc.
There are some ETFs based on paper contracts (see later section at Physical vs.
Synthetic ETFs).
Such are the versatility and variety of ETFs, which makes it an important in-
vestment vehicle for The Bedokian Portfolio.

Total Expense Ratio

Like unit trusts, there are fees charged by the ETF provider in running the
ETF. This is called the total expense ratio (TER). TERs are expressed in
terms of percentages, so you will know how much they are charging for managing
the ETF.

58
 Good news is you do not need to send an annual payment for the TER to the
ETF provider of the ETF you are holding. The TER is deducted from the fund it-
self. Still, it is wise to choose an ETF that has a low TER.
Typically ETFs that track the indices have a low TER, averaging around
0.39%1. On the other hand, unit trusts tracking the same index are in the average
of 0.73%2. Amplify these percentages for 10, 20 or 30 years (typical timeline for
long term investments) and you will see the ETF charges 3.9%, 7.8% and 11.7%
in total respectively as compared to the mutual fund/unit trust’s 7.3%, 14.6% and
21.9%. The differences of 3.4%, 6.8% and 10.2% are considered opportunity
costs where these amounts could be put to better use than paying off expenses.
Therefore when choosing ETFs, TER is a factor to consider.

Index Investing
I have been talking about index (or indexes/indices in plural), but what are
they?
An index is like an overall scorecard and it is used to track the performance of
a certain group or sector of the financial market. Indices are created by news and
information companies, financial institutions and companies, and credit rating
agencies.
There are many indices around the world and they track different things. A
few examples would be the MSCI World (tracking big companies’ equities from 23
developed countries), the S&P GSCI (tracking of commodities) and the NASDAQ
Computer (tracking the computer companies in the United States). Whenever
there is an index, high chances are there is an ETF tracking it.
The importance of index investing in The Bedokian Portfolio stems from one
important fact: the unpredictability of the financial markets. True, there are trad-
ers and investors who thought they could beat the markets, but most, and I stress
most, could not over the long term, based on several studies done. With the odds
of beating the market are almost slim in the long term, the question I asked my-

59
self is, why beat the market, when you can be with the market? This allows me to
“go with the flow”.
Index investing also allows you to practice a type of dollar cost averaging
or DCA. By most conventions, DCA is the practice of periodic buying of finan-
cial goods with a fixed amount of money, regardless of the price. For example, I
set aside S$100 a month to buy an index ETF. Disregarding commission costs and
fees, if the price of the ETF is S$1, I will have 100 shares of ETF. Come next
month, the price of the ETF is S$1.25, and with my S$100 I will get 80 ETF
shares. Supporters of DCA says this method is less risky than going in one shot, be-
cause it is difficult to know whether the financial market is at the top, bottom, still
going up or still going down.
I would prefer another type of DCA; instead of buying S$100 worth of ETF
shares per month, I go for a fixed number of ETF shares, like 100 shares per
month. There are several reasons why I would go for this, which I would elaborate
more in Chapter 15.

Physical vs. Synthetic ETFs

When ETFs are first created back in the early 90s, they are physical in nature,
meaning inside the ETFs there are actual assets (such as the earlier example of
shares of the 10 companies) being held by the ETF provider. Then, in the begin-
ning of the 21st century, the Europeans began to have a new structure of ETFs
called synthetic ETFs.
In synthetic ETFs, the ETF provider enters a swap contract with a financial
institution, normally a bank, to provide the value of the index the ETFs are track-
ing. In other words, instead of providing actual shares of the companies to the
ETF provider, the other side of the swap contract, known as a counterparty, pro-
vides the promise of the value of the said shares.
The good thing about synthetic ETFs is that they track the index much closer
than physical ones and are cheaper. Their lower tracking error, or deviation, of
the index is due to the straightforward swap contracts between the ETF provider

60
and the counterparty. Physical ETFs, because of the perceived longer way of trans-
acting the actual shares, may have a larger tracking error and higher costs due to
the constant buying and selling.
However, if there is a collapse of the counterparty, the synthetic ETF provider
would have no way of compensating, as there is no underlying shares as assets to
begin with. With this counterparty risk in mind, The Bedokian Portfolio recom-
mends physical ETFs.

Other ETF Comparisons

Just like cars, which you can compare them using size (big vs. small) or gear
transmission (manual vs. automatic), there are other comparisons among ETFs be-
sides physical versus synthetic. Although the compared ETFs below are currently
not available in the Singapore financial market, they are common in the United
States. Let us take a look at the common comparisons.
Passive vs. Active ETFs - At first ETFs track indices. Tracking, or following
in another sense, is considered a passive action, and that is why these ETFs are la-
belled as such. As time goes by, there is a genre of ETFs that, instead of tracking
indices, is trying to beat them instead, therefore active in nature. Although active
ETFs are not as boring as passive ones, their lack of or no conformity to an index
makes them unpredictable. At least we know what equities an ETF holds if it is fol-
lowing a particular index, but sometimes it is better to go with the flow. Besides, ac-
tive ETFs carry a higher TER, akin to unit trusts. Passive is the way for The Be-
dokian Portfolio.
Non-Leveraged vs. Leveraged ETFs - Leveraged ETFs work on the princi-
ple of multiples, where a rise in the underlying assets will increase the price of the
ETFs by two or three times, or in other words magnifying the returns. However, if
the underlying assets fall, the ETFs will fall by two or three times. Such volatility,
coupled with the typical high TER of such ETFs, meant that they are more for
trading than keeping long term.

61
 Non-Inverse vs. Inverse ETFs - There are also inverse ETFs, where if the
indices go down, their prices go up, and vice versa. To make them more fanciful,
there are leveraged-inverse ETFs as well. Like leveraged ETFs, inverse ETFs are
speculative in nature, carry a high TER and not meant for keeping long term.

Exchange Traded Notes

Along your readings and research of ETFs, you may come across another in-
vestment vehicle called exchange traded notes, or ETNs. Though they
sounded similar (with only one word difference), they are vastly different from
each other.
ETNs are debt securities issued by banks, and like bonds, they also have a ten-
ure. But ETNs are considered unsecured debt securities, and they are not backed
by any asset, only the credit worthiness of the issuer, so there is a counterparty risk
in holding them.
You may read further on ETNs, but for The Bedokian Portfolio, they will not
be considered.

How to Own ETFs?

ETFs can be bought off the financial markets and exchanges.

Summary
• ETFs are a cross breed between equities and unit trusts. They are consisted of a
portfolio of shares, bonds, commodities and/or cash. Most ETFs are backed by
the underlying assets that they represent.
• ETFs work on the basis of creation and redemption, between ETF providers and
authorized participants.

62
• ETFs are suitable for index investing, which is instrumental in The Bedokian
Portfolio. Due to the unpredictable nature of the financial markets, index invest-
ing allows investors to “go with the flow”.
• Index investing also allows dollar cost averaging (DCA) style of investment.
• There are a few comparisons between ETFs, like physical vs. synthetic, passive
vs. active, non-leveraged vs. leveraged and non-inverse vs. inverse.
• Do consider the total expense ratios (TER) when selecting ETFs, for over the
long term it will incur an opportunity cost of investable amount to expenses.
• Exchange traded notes (ETNs) are not ETFs, and it is not recommended for The
Bedokian Portfolio due to counterparty risk.
• ETFs can be transacted from the financial markets and exchanges.

References
1,2 - Bioy, Hortense and Garcia-Zarate, Jose. Morningstar. Every Little Helps: Comparing the
Costs of Investing in ETPs versus Index Funds, p5. September 2013.
http://media.morningstar.com/uk/Research/Morningstar_Report_Every_Little_Helps_Compa
ring_the_Cost_of_Investing_in_ETPs_versus_Index_Funds_September_2013.pdf. (accessed
12 May 2016)

63
 CHAPTER 9

Portfolio Building

I have introduced the various asset classes in the preceding chapters, and now it is
time to build up The Bedokian Portfolio.
 

Emergency Fund
 Before doing any investment proper, it is best that you leave some cash as an
emergency fund. This fund is for you to tide over unexpected situations in life,
such as sickness, unemployment or just about anything that will eat into your
money. The main thing is to keep The Bedokian Portfolio chugging along and do-
ing its job of reaching its objective without much external interference.
 There is no fixed rule on how much one's emergency fund should be, but ball-
park figures floating around is about 3/6/9/12 months of your income/expense,
or by a certain quantum like S$5,000/S$10,000/S$20,000, etc. So it is up to you
how comfortable you wish to set aside for this emergency fund.
 The emergency fund, as well as your money for your daily expenses, should
NOT be under The Bedokian Portfolio, not even at the cash portion. You really
have to separate which is for investments, and which is for your savings and daily
needs. Personally I like to compartmentalise things and issues, so keeping this
mindset is crucial to prevent yourself from liquidating your investment assets for
something not related to investments. This is precisely why it is better to set up a
bank account for holding the cash portion, separate from your daily expense ac-
count. If not possible or feasible to have separate accounts, note it down some-

64
where as to which amount in the account is for investments and which is for every-
day use.
 Build up this emergency fund first, before implementing The Bedokian Portfo-
lio.
 

 Portfolio Objective
 When building a portfolio, we have to think what it is being built for. Having
an objective, or aim, would make things easier because at least the destination is
known. Right now we need to build a road to it.
Remember, the objective of The Bedokian Portfolio is to have passive income
through dividend and index investing. In the previous chapters I have touched on
dividends, coupons and interests, the compounding effect and index investing.
Now I will let you know the mechanics behind this objective.
The passive income component does not come in until the start of retirement.
Retirement is subjective; some choose to retire at 65, while some prefer to do it at
age 40, or even younger at 30. In the meantime, the building of The Bedokian
Portfolio should start as early as possible to maximise the compounding effect.
Revisiting the compounding effect, let us look at it and compare them by a start-
ing point using age. We look at two individuals, using a base amount of
S$10,000.00 and a constant 5% yield per year; individual A started doing the com-
pounding effect at age 21, contributed S$5,000 for the next 10 years, and individ-
ual B started at age 40, and contributed S$5,000 for the next 20 years (see Fig.
9.1).

65
 Contribution Amount (start at Amount (start at 40
Age Contribution (S$)
(S$) 21 years old) (S$) years old) (S$)
21 10,000.00
22 5,000.00 15,750.00
23 5,000.00 21,787.50
24 5,000.00 28,126.88
25 5,000.00 34,783.22
26 5,000.00 41,772.38
27 5,000.00 49,111.00
28 5,000.00 56,816.55
29 5,000.00 64,907.38
30 5,000.00 73,402.74
31 5,000.00 82,322.88
32 0.00 86,439.03
33 0.00 90,760.98
34 0.00 95,299.03
35 0.00 100,063.98
36 0.00 105,067.18
37 0.00 110,320.54
38 0.00 115,836.56
39 0.00 121,628.39
40 0.00 127,709.81 10,000.00
41 0.00 134,095.30 5,000.00 15,750.00
42 0.00 140,800.07 5,000.00 21,787.50
43 0.00 147,840.07 5,000.00 28,126.88
44 0.00 155,232.07 5,000.00 34,783.22
45 0.00 162,993.68 5,000.00 41,772.38
46 0.00 171,143.36 5,000.00 49,111.00
47 0.00 179,700.53 5,000.00 56,816.55
48 0.00 188,685.55 5,000.00 64,907.38
49 0.00 198,119.83 5,000.00 73,402.74
50 0.00 208,025.82 5,000.00 82,322.88
51 0.00 218,427.11 5,000.00 91,689.03
52 0.00 229,348.47 5,000.00 101,523.48
53 0.00 240,815.89 5,000.00 111,849.65
54 0.00 252,856.69 5,000.00 122,692.13
55 0.00 265,499.52 5,000.00 134,076.74
56 0.00 278,774.50 5,000.00 146,030.58
57 0.00 292,713.22 5,000.00 158,582.11
58 0.00 307,348.88 5,000.00 171,761.21
59 0.00 322,716.33 5,000.00 185,599.27
60 0.00 338,852.15 5,000.00 200,129.24

Fig. 9.1 - Comparison of compounding effect at different age starting point, with S$10,000
base, S$5,000 contribution and 5% yield per year.

66
 At age 60, Individual A would have S$338,852.15, while Individual B only has
S$200,129.24, despite the latter having contributed more (Individual B’s
S$100,000 vs. Individual A’s S$50,000). The reason is compounding works best
with a longer time horizon, so it pays off when you invest at a younger age.
With an earlier start in investment, and letting the compounding effect roll, you
could generate the passive income and/or a higher yield from The Bedokian Port-
folio sooner. Set a target for your passive income, like a certain amount per month
or year, work towards it and from there you could probably set a retirement age
for yourself.

Portfolio Makeup
Here is the makeup of The Bedokian Portfolio by value:
• Equities, 20% - 40%
• REITs, 20% - 40%
• Bonds, 10% - 40%
• Commodities, 5% - 10%
• Cash, 5% - 10%
The range of percentages of each asset class gives you the flexibility of con-
structing your ideal Bedokian Portfolio, depending on two factors: your age and
your risk appetite.
Financial markets are volatile. No one investor or trader in their lifetime can
predict 100% accurately on how they move, but one thing we do know is they
move along in what we call an economic cycle. The economy moves up and
down, and up again, on a global scale. There is no real accepted timeline for each
cycle, but generally it is about seven to ten years. Different asset classes react differ-
ently to the different phases of an economic cycle, therefore I emphasise again on
the diversification part. With this in mind, the two factors of your customized Be-
dokian Portfolio makeup comes into play next.

67
Age
Age is the first consideration. When you are young, you could afford to ride out
several economic cycles, enjoying the fruits of your labour and riding the storm.
However, when you are older, stability is more important than “riding it out”,
therefore your portfolio must change to suit your age situation.
The oft-quoted “100 minus your age in equities/stocks” was considered the
main standard in portfolio diversification, meaning the amount of equities to hold
would be reduced as one ages. A 40 year-old investor would have 100 - 40 = 60%
of his/her portfolio in equities, whereas a 60 year-old investor would have 100 - 60
= 40% in equities. However, with a longer life expectancy, such allocation may be
viewed as outdated, and new ones using 120 and 110 instead of 100 have begun
to take root in some investment allocation circles. The reasoning is that as you live
longer, the so-called “end time” of your portfolio is extended, therefore you need
to hold on to that portfolio for a while longer.

Risk Appetite
I had highlighted the different risks involved in different asset classes in the pre-
vious chapters, so risk appetite is about how much of those risks you are willing to
bear to meet your investment aims.
It is an understood fact that the higher the returns, the more risk you have to
bear, and vice versa. The return from equities can be good and in some instances
astronomical, but the value of a share can be brought down instantaneously as
well. On the other hand, government bonds pay a fixed sum throughout its tenure,
and some may view it as boring, but at least the bond coupon payouts and the re-
turn of the bond principal are highly guaranteed.
Risk appetite can be applied to different levels, from the asset class level at the
top, down to country level next, then sector and lastly individual companies and
organisations. For example, an investor could have a huge risk appetite in investing

68
in very high yield junk bonds, but he/she could have a low one when it comes to
REITs. There can be many different combinations depending on the psyche and
mentality of the individual investor, but in general when an investor has a higher
risk appetite, he/she would be applying this level throughout his/her investments
and decisions.

Balanced Bedokian Portfolio

I consider this balanced portfolio as the “root” of The Bedokian Portfolio,
where it is suitable for all ages and across the different risk appetites of investors. It
is made up of:
• 35% Equities
• 35% REITs
• 20% Bonds
• 5% Commodities
• 5% Cash
Refer to Fig. 9.2 for a pictorial view.

5%5%
35%
20%

35%

Equities REITs Bonds

Commodities Cash

Fig. 9.2 - Balanced Bedokian Portfolio

69
 The equities and REITs asset classes in the balanced Bedokian Portfolio are
considered the heavy engines for yield generation, with bonds being the medium
engine and cash the light one. Commodities, though it is a non-yielding asset class,
provide the necessary softening of the overall portfolio from volatility.
We shall now put the balanced Bedokian Portfolio to the test, using statistics
and parameters from actual financial instruments and other investment vehicles.
• Equities - SPDR STI ETF1,2
• REITs - Average S-REITs yield3
• Bonds - ABF Singapore Bond ETF4,5
• Commodities - SPDR GLD ETF6
• Cash - 1-year fixed bank deposit interest rate7
The period of comparison is from 2006 to 2013. The reasoning for this is be-
cause the ABF Singapore Bond ETF, which forms the bond component for our ex-
ample, started back in the second half of 2005, thus 2006 provides a true full year
yield. Even so, I felt this would be a good period to compare as the years 2006 to
2013 constitutes one economic cycle, with financial markets at a high in the begin-
ning, followed by the GFC in the middle (plus another hiccup in Europe in 2011),
and the subsequent rise in the later years.

Asset Class Average Annual Yield Weightage Weighted Yield

Equities 3.23% 35% 1.13%
REITs 6.39% 35% 2.24%
Bonds 1.13% 20% 0.23%
Commodities 0% 5% 0%
Cash 0.54% 5% 0.03%
Total 3.62%

Fig. 9.3 - Average dividend yield of the balanced Bedokian Portfolio, 2006 - 2013.

70
 We shall look at the average annual dividend yield of the balanced Bedokian
Portfolio from 2006 to 2013 (Fig. 9.3). On average between 2006 and 2013 the
dividend yield is about 3.62% per year, which on the surface you may be wonder-
ing is it a bit on the low side. Since this number is an average, depending on your
mix of equities, REITs, bonds and type of cash deposits, it could be higher or
lower than this figure.
Here comes the interesting part; as the portfolio grows, the amount that you
are getting from that same yield increases. A 3.62% yield of a S$1,000 portfolio is
S$36.20, and a 3.62% yield of S$5,000 portfolio is S$181.00. Same yield percent-
age, but different portfolio amount and hence, different amount of yield. The
growth of The Bedokian Portfolio comes from three sources, your own contribu-
tions, the yield generated (which I will cover the former two in Chapter 10) and
the economy.
Let us relook at the sample financial instruments used in Fig. 9.3, and using
their factsheets dated 31 March 20168 as reference and cut-off period. The STI
ETF, since its inception in 2002, is having an annualised, or averaged out, re-
turn or yield of 6.73%, including dividends. The ABF Singapore Bond ETF is hav-
ing an annualised return of 2.87% from 20059, and even SPDR GLD ETF is hav-
ing a 9.04% annualised return since 200410. All these increases are due to the econ-
omy, and the trend on a long-term basis is that it would generally go up, barring
any catastrophic event.
Of course, being a sample, you could mix and match your Bedokian Portfolio.
Using a house as an analogy, you could view the asset classes as different rooms,
and the sub-types of each asset class as furniture for a particular room. Just make
sure you do your due diligence while choosing the furniture (to be covered under
Chapter 12).

71
Bedokian Portfolio Variations
You could vary your Bedokian Portfolio to suit your needs. Using the portfolio
makeup percentage ranges and the balanced Bedokian Portfolio shown earlier, I
will classify the variations using age/risk profile.
• Young investor aged 21-35/Aggressive (40% Equities, 40% REITs, 10%
Bonds, 5% Commodities, 5% Cash) - This is an aggressive yet high risk Be-
dokian Portfolio combination. As a young investor, he/she could afford to ride
out the economic cycles and capitalizing on having the compounding effect early
in life. As an aggressive investor, he/she could gain a lot of yield for passive in-
come and/or reinvestment. Based on the figures in Fig. 9.3, the yield is about
3.99%.
• Middle-age investor aged 36-55/Moderate (35% Equities, 35% REITs, 20%
Bonds, 5% Commodities, 5% Cash) - This is the balanced Bedokian Portfolio,
with a 3.62% yield. Being balanced, it is suitable for investors with a moderate
risk profile.
• Retiree investor aged 56 and above/Conservative (20% Equities, 20% REITs,
40% Bonds, 10% Commodities, 10% Cash) - For the retiree and conservative in-
vestor, stability is key and therefore a higher allocation to bonds would be suit-
able. The yield would be around 2.43%. Bear in mind that by this stage, the port-
folio would have been of substantial size and drawing of that yield would prove
comfortable as passive income.
Do note that the above variations serve as guidelines and not absolute. Every
individual is different and therefore the Bedokian Portfolio of each person is
unique.

Amount to Start
Once you have determined your Bedokian Portfolio variation, the next step
would be to work out the starting amount. An easy way would be to use the small-
est non-cash asset class in your portfolio and extrapolate from there, which of

72
course obviously this means the commodity asset class. As an example, let us use
the SPDR GLD ETF mentioned earlier as a proxy for commodities.
If you have decided to allocate 5% to commodities, take the prevailing SPDR
GLD ETF price (using 24 June 201611 price as sample) and the exchange rate for
that day (US$1.00 to S$1.343812), the amount would be US$125.28 x 1.3438 x 10
= S$1,683.51. Then use this number and multiply by 20 (5% x 20 = 100%), giv-
ing you a figure of around S$33,670.20 to start, not including transaction costs.
The “x 10” in the above working is due to the reason that, in the local financial
markets, the minimum number of SPDR GLD ETF shares transacted is 10.
If you feel this starting amount is too high, rest assured, for you could get just
one (instead of 10) of the same SPDR GLD ETF share from foreign financial mar-
kets (to be discussed further in Chapter 13). Meaning, you could start off your Be-
dokian Portfolio with just US$125.28 x 1.3438 x 20 = S$3,367.03. To give more
buffer, S$5,000 would be a better minimum starting figure.
The next question would be, should you go all in one shot or spread out the
purchases over a period to start the portfolio? My recommendation is to start in
one shot, as this would give you a clear snapshot of your portfolio at the begin-
ning, and to capture the current characteristics of the asset classes as at a particu-
lar economic situation.
The last question would be, what to buy to start your Bedokian Portfolio? If
your starting amount is substantial enough to afford a purchase of a few diversi-
fied individual equities, REITs, bonds and commodities, make sure you do read up
the guidelines in Chapter 12 on the selection, especially on equities, REITs and
bonds. If not, or you are still unsure of which individual financial instruments to
get, start off with ETFs (again, the magic of ETFs comes into play here), as they
would cover the asset classes in general. No matter what is the course of action to
take, do not forget the importance of diversification.

73
Summary
• Always set aside an emergency fund before starting on The Bedokian Portfolio.
• With an earlier start in investment, and letting the compounding effect roll, gen-
erating the passive income and/or a higher yield from The Bedokian Portfolio
would be sooner.
• The Bedokian Portfolio’s make-up is dependent on a person’s age and risk appe-
tite. Variations include young investor/aggressive, middle age investor/moderate
and retiree investor/conservative.
• The balanced Bedokian Portfolio is consisted of 35% equities, 35% REITs, 20%
bonds, 5% commodities and 5% cash.
• The variations of The Bedokian Portfolio serve as guidelines and can be differ-
ent due to the uniqueness of individuals.
• The Bedokian Portfolio could be started with as little as S$5,000.
• It is advisable to start The Bedokian Portfolio in one shot as this gives a clear
snapshot of the portfolio in the beginning.
• If the starting amount is substantial enough to purchase the asset classes individu-
ally, do refer to the selection guidelines in Chapter 12. If not or unsure, use ETFs
to start off. Either way, do not forget diversification.

References
1 - State Street Global Advisors SPDR. SPDR Straits Times Index ETF (ES3).
http://www.spdrs.com.sg/etf/fund/fund_detail_STTF.html (accessed 16 May 2016)
2 - Dividends.sg. STI ETF (ES3). https://www.dividends.sg/view/ES3 (accessed 16 May
2016). Author’s note - adjustments have been made to correct the source’s dividend yield figures
since it has not taken into consideration the STI ETF’s 10-to-1 split in January 2008.
3 - Tan, Derek. Song, Mervin. Tan & Rachael. DBS Group Research. Singapore Industry Fo-
cus - Singapore REITs, p4. 28 August 2014.

74
http://www.dbs.com.sg/sme/aics/GenericArticle.page?dcrPath=templatedata/article/generic/d
ata/en/GR/092014/140828_insights_singapore_reits_looking_fairly_valued.xml# (accessed
16 May 2016)
4 - Nikko AM. ABF Singapore Bond Index Fund. http://www.nikkoam.com.sg/etf/abf (ac-
cessed 16 May 2016)
5 - Dividends.sg. ABF Spore Bond Index Fund ETF (A35).
https://www.dividends.sg/view/A35 (accessed 16 May 2016)
6 - State Street Global Advisors. SPDR Gold Shares (O87).
http://www.spdrs.com.sg/etf/fund/fund_detail_GLD.html (accessed 16 May 2016)
7 - Monetary Authority of Singapore. Interest Rates of Banks and Finance Companies - Banks
Fixed Deposits 12 Months.
https://secure.mas.gov.sg/msb/InterestRatesOfBanksAndFinanceCompanies.aspx (accessed 16
May 2016)
8 - State Street Global Advisors. SPDR Straits Times Index ETF. 31 March 2016.
http://www.spdrs.com.sg/etf/fund/ref_doc/Fact_Sheet_STTF.pdf (accessed 16 May 2016)
9 - Nikko AM. ABF Singapore Bond Index Fund. 31 March 2016.
http://www.nikkoam.com.sg/files/documents/funds/fact_sheet/abf2_fs.pdf (accessed 16 May
2016)
10 - State Street Global Advisors. SPDR Gold Shares. 31 March 2016.
http://www.spdrs.com.sg/etf/fund/ref_doc/Fact_Sheet_GLD.pdf (accessed 16 May 2016)
11 - Singapore Exchange. 24 June 2016. http://www.sgx.com/ (accessed 26 June 2016)
12 - Exchange-Rates.org. US Dollars (USD) to Singapore Dollars (SGD) exchange rate for
June 24, 2016. 24 June 2016.
http://www.exchange-rates.org/Rate/USD/SGD/06-24-2015 (accessed 26 June 2016)

75
 C H A P T E R 10

Portfolio Maintenance

Congratulations, by now you would have built up your Bedokian Portfolio or on

the way doing so. Next up I will be talking about maintaining your portfolio.
 

 Rebalancing and Transaction Costs

As time goes by and with economic and market forces, your portfolio's asset
class proportions will not remain the same as it started. Remember that different
asset classes react differently in different economic conditions, so it is not surpris-
ing that your portfolio pie chart appears different if you relook at it in a few weeks,
months or one year later.
It is such times that the act of rebalancing comes into play. Rebalancing allows
your portfolio to go back to where it is supposed to be, so as to make your tailored
Bedokian Portfolio perform at its desired optimum level. For the Bedokian Portfo-
lio, rebalancing is done two ways: periodically and opportunistically.
Periodically means there is a designated day in your calendar that you would
"bring balance" to your portfolio. It could be quarterly, half-yearly or annually, but
ballpark wise half yearly and annually are preferred as you could save up on trans-
action costs. Later in the chapter I will talk about “Periodic Rebalancing 101” to
cover this in detail.
If you are more active in managing your Bedokian Portfolio, you could incorpo-
rate the opportunistic rebalancing along with the periodic one. Doing it opportu-
nistically means you get to buy the asset classes when "the price is right", i.e. mar-

76
ket timing. Although this construes to a bit of a trading mindset, it is not and it
does not hurt when you transact your financial instruments when they are at a
high, low or just nice. In the later chapters I will describe more about selection of
financial instruments.
Whether periodic, opportunistic or both, you have to be mindful of transaction
costs. I had said in Chapter 2 that brokerages charge commissions and fees on top
of the financial instrument price that you are buying or selling, so do not unneces-
sarily transact your financial instruments without a proper reason. The transaction
costs, though low at first glance, will become substantial and eat into your yield
returns/passive income if you do it too often (akin to the ETF TER which I ex-
plained in Chapter 8).
 

Implementing Dividend Investing

In Chapters 3 and 9 I had demonstrated on the power of the compounding ef-
fect. Now we will look at the practical aspect of dividend investing.
There are two main ways to go about dividend investing. One is through a divi-
dend reinvesting program or plan (called DRP or DRIP), where a company
would purchase shares for you from your dividends. In Singapore, the term for
DRP is called the scrip dividend scheme. Though this sounds good, but in my
opinion there is a main disadvantage to DRP.
This aforementioned disadvantage is the odd number of shares that you will be
getting, which you may find it difficult if you wish to sell off that particular com-
pany’s shares in the future. Let us use a hypothetical example; imagine you own
1000 ABC Company shares and you decided to take part in their DRP. During
the dividend period, ABC Company then announced a dividend of S$0.10 per
share, and the DRP would be based on the average price set within so-and-so
dates, which for example is at S$1.20.
With the above information, from this DRP exercise you will get 83.33 shares
(1000 shares x S$0.10 dividend per share = S$100, and S$100/S$1.20 = 83.33
shares), bringing you number of shares for ABC Company to 1083.33 shares.

77
Looks weird? Even if you drop the “0.33” away somehow, you will still see 1083
shares.
Especially in Singapore, where shares are bought by lots of 100, you could see
the potential headache that you may be getting when during rebalancing you try
selling away 1083 ABC Company’s shares, even though there are avenues to do it.
So therefore, for the Bedokian Portfolio, it is better to see your number of shares
(and REITs and bonds) in a good-to-look number to facilitate ease of transaction.
The second way to go about dividend investing (and including coupon and in-
terest investing, as well as profits from sales proceeds) is DIY, i.e. do-it-yourself. Al-
ways opt for cash when you receive your dividends, and this cash in turn will be
parked under the cash asset class. Remember what I had said back in Chapter 7
on cash? Cash is the starting point, as well as the end point, in portfolio manage-
ment. With dividend investing, you could clearly see this cycle in action, dubbed as
the “Circle of Reinvestment” (see Fig. 10.1).

Buy shares,
bonds, ETFs and
Cash other investment
vehicles

Proceeds from
dividends, coupons,
interests and profits
from selling

Fig. 10.1 - The “Circle of Reinvestment”

You may have realized by now that this is a bit off from the compounding ef-
fect that I have been espousing from the beginning of this book. If you have not
realized it, here is the thing; compounding effect works best if the yield is gained
and automatically added back to the amount, but in this case, the yield is being
kept as cash first before being redeployed, therefore there is opportunity cost of us-
ing it to gain more. Although DRP is the closest to the compounding effect, its diffi-

78
culties mentioned above require a compromise on the method of reinvesting the
yield.

Periodic Rebalancing 101

Rebalancing is very important if you wish to let The Bedokian Portfolio per-
form at optimum according to your age and/or risk appetite. If you are a passive
Bedokian Portfolio investor, this is a section for you.
Let us use the balanced Bedokian Portfolio as an example (see Fig. 10.2). At the
start of implementation, you have 35% equities, 35% REITs, 20% bonds, 5%
commodities and 5% cash, by value.

5%5%
35%
20%

35%

Equities REITs Bonds

Commodities Cash

Fig.10.2 - Balanced Bedokian Portfolio at start of implementation.

When you relook at your portfolio one year later, the values of the various asset
classes might have changed. Take for example in between the year there is some
changes in the economic situation, where equities went on a huge rise, bonds took
a beating and REITs remain somewhat stagnant. Fig. 10.3 shows what eventually
happened to The Bedokian Portfolio a year later.

79
 5%5%
10%
45%

35%

Equities REITs Bonds

Commodities Cash

Fig. 10.3 - Balanced Bedokian Portfolio one year later.

Unless you are happy and satisfied with the new portfolio make-up, that is fine.
However, there is a pitfall in going about on this thought. Supposed you leave it as
it is, and in another year your equity portion goes up to 55%. Suddenly right after
that there is a financial market crash, and your equities plunged down to 25%.
Yes, ouch.
Rebalancing has its advantages; firstly, it forces you to keep your Bedokian Port-
folio back to its original asset class allocation. This is healthy as there is diversifica-
tion at play. In the above scenario, the equity portion became too big and there-
fore too concentrated, bringing high risk to the portfolio. Diversification helps to
reduce the amount of risk in The Bedokian Portfolio.
Secondly, rebalancing makes you sell away the good performing asset classes
and buy in the not-so-good performing ones. You may wonder why this is so, since
the good performing ones are on the rise and you would want to capitalize on it.
One thing to note is that each asset class has its boom and bust periods, and there
is no such thing that it will be booming all the time. Remember that different asset
classes behave differently in different economic conditions, and rebalancing helps
80
to reinforce that characteristic of the financial markets. So, in a nutshell, rebalanc-
ing and diversification goes hand in hand.
The time to rebalance is also a good time to introduce additional funds into
The Bedokian Portfolio, and this is how your portfolio will grow over time. These
funds could be from your additional savings or bonuses.
Let us use Fig. 10.3 again, this time with numbers, assuming the total portfolio
value is S$10,000.00 after one year.

Asset Class Amount (S$) Percentage

Equities 4,500.00 45%
REITs 3,500.00 35%
Bonds 1,000.00 10%
Commodities 500.00 5%
Cash 500.00 5%
Total 10,000.00 100%

Fig. 10.4 - Balanced Bedokian Portfolio after one year, using Fig. 10.3 as basis.
At this rebalancing point, you decided to add S$2,000.00 to The Bedokian Port-
folio. As a simple guide, all fund injections are to go towards the Cash portion (Fig.
10.5).
Asset Class Amount (S$) Percentage Change (S$)
Equities 4,500.00 37.5% 0
REITs 3,500.00 29.2% 0
Bonds 1,000.00 8.3% 0
Commodities 500.00 4.2% 0
Cash 2,500.00 20.8% +2,000.00
Total 12,000.00 100%

Fig.10.5 - From Fig.10.4, after fund injection of S$2,000.00 to the Cash portion.
From here, we need to bring all the asset classes back to the balanced Bedokian
Portfolio allocation of 35% equities, 35% REITs, 20% bonds, 5% commodities
and 5% cash. At first glance, you could tell you would need to do some selling of
equities, reduction of cash, and buying up of more REITs, bonds and commodi-
ties. See Fig. 10.6 for the rebalanced Bedokian Portfolio.

81
 Asset Class Amount (S$) Percentage Change (S$)
Equities 4,200.00 35% -300.00
REITs 4,200.00 35% +700.00
Bonds 2,400.00 20% +1,400.00
Commodities 600.00 5% +100.00
Cash 600.00 5% -1,900.00
Total 12,000.00 100%

Fig. 10.6 - Rebalanced Bedokian Portfolio from Fig. 10.4. The amount does not take into ac-
count transaction costs.
From here, you could just sit back, relax, collect your yield, and wait for next
year to do the rebalance again.
There are times where after rebalancing, you cannot get back the perfect
makeup, like probably the equities will be around 36%, or REITs could be at
34.5%. This is perfectly fine, as it is not possible in the practical world to have that
round figure. As a rule of thumb, for asset classes that require 5%-10% allocation,
a deviation of 2.5% is acceptable. For asset classes that are 10% and above, a 5%
deviation is all right.

Summary
• There are two methods of rebalancing for The Bedokian Portfolio: periodic re-
balancing and opportunistic rebalancing.
• During rebalancing, do be mindful of the transaction costs.
• All yields from dividends, coupons, interests and sales proceeds are to be put into
the Cash portion of The Bedokian Portfolio.
• DRP is not preferred due to the odd number of shares.
• Rebalancing is important as it is a way to diversify the asset classes properly as
well as to manage the risks of the portfolio.

82
• For periodic rebalancing, during the rebalancing moment, funds could be in-
jected into The Bedokian Portfolio.
• It is acceptable to have some deviation in the asset class allocation due to the
practical aspects of transacting in the financial markets.

83
 C H A P T E R 11

Fundamental Analysis

In this chapter, I will be discussing about fundamental analysis. There are books
written solely on this topic, but I will summarise it to within just one chapter. Fur-
ther reading on this is recommended of you want to know more. In the next chap-
ter I will be applying fundamental analysis into equities, REITs and bonds.

What is Fundamental Analysis?

Fundamental analysis is the analysis of a company’s financial statements, the
said company’s environment (including strengths and competitors) and the whole
economy in general. It is a useful tool in finding good equities, REITs and to a cer-
tain extent, bonds, to invest in.

The Importance of Fundamental Analysis

For active investors of The Bedokian Portfolio, like myself, we are always in a
constant search for good company equities, REITs and bonds to invest in so that
they would be able to provide a good yield in accordance to The Bedokian Portfo-
lio’s objective. Fundamental analysis, or FA for short, is the main method of look-
ing for such “deals”. From FA, a type of investing known as value investing
emerges, which is the buying of equities and REITs that are undervalued in the fi-
nancial market with reference to their financial status.

84
 While filling up the asset class “rooms” with “furniture”, it is important to get
the “furniture” at the right price and value that would give you the maximum
yield. Price and value are different concepts. For example, a share that is priced at
S$1.00 in the financial market is only worth S$0.80 from FA has lesser value than
a share that is priced at S$0.80 but from FA it is worth S$1.00. Prices fluctuate due
to economic conditions, but value rarely does. With FA, you could get equities and
REITs that are “more bang for the buck”.
There are two ways to do FA: the bottom up approach and the top down ap-
proach. The bottom up approach is the analysis from the company/REIT level
(i.e. financial statements) right up to the general economy level, while the top
down approach is the reverse of the former. To have a pictorial sense, refer to Fig.
11.1. Nevertheless, both methods are used in The Bedokian Portfolio. In the follow-
ing sections, I am writing it from the perspective of a bottom up approach.

Fig. 11.1 - Fundamental analysis levels and approaches.

85
Financial Statements
A company is legally required to submit their financial statements every year to
the relevant authorities, which include the tax office and the registrar of compa-
nies. For public listed companies (and REITs), on top of those that are mentioned
earlier, they are also required to submit them to the relevant market exchange
authorities and the public.
Public listed companies and REITs typically come out with annual reports,
which contain the financial statements, messages from the head of the company
(CEO, chairperson, etc.) and board of directors, plus any plans that they might
have in the future. These annual reports are mostly well-designed, and are publicly
available on the company’s/REIT’s and in the market exchange websites.
In addition, public listed companies and REITs report their earnings on a quar-
terly or half-yearly basis, on top of the annual ones. It is during these times that
dividends are announced, depending on the dividend paying policy of the
company/REIT.
Financial statements are made up of three parts; the profit and loss (or in-
come) statement, the balance sheet and the cash flow statement.
The profit and loss statement details the profit gained or loss incurred for a par-
ticular year. It includes items such as revenue, expenses and depreciation. The bal-
ance sheet contains information on a company’s assets, liabilities and shareholders’
equity (including shares). The cash flow statement is a report of the movement of
cash and it obtains this information from both the profit and loss statement, and
the balance sheet.
From all the numbers in the financial statements and using simple mathemat-
ics, financial ratios are derived. These financial ratios would be used to deter-
mine the health of the company and in turn, whether to consider it for addition
into The Bedokian Portfolio.
There are many financial ratios around, but The Bedokian Portfolio would
highlight the following as the more important ones (abbreviations, if any, and for-
mulae indicated in brackets respectively).

86
 • Earnings Per Share (EPS, Net Earnings/Number of Shares) - As the ratio
goes, EPS is the net profit divided by the number of shares of the company. It in-
dicates how much profit is gained per share.
• Price to Earnings Ratio (P/E Ratio, Share Price/EPS) - The P/E ratio is
often used as a parameter to gauge the “buyability” of a company’s share. A
higher P/E ratio indicates that the earnings of the company may be subject to
strong growth, and a lower P/E ratio indicates that the earnings may be subject
to decline. The common “magic number” for P/E ratio is 15, but it is not an ab-
solute figure.
• Price to Book Ratio (P/B Ratio, Share Price/[Assets-Liabilities]) - The P/
B ratio is the most important ratio in assessing the price and value of a company
share, in which the “book” part denotes the true value of a company from the fi-
nancial statements. A ratio of above 1 denotes the price exceeds the value, and a
ratio below 1 means the value exceeds the price, and therefore a good bargain.
• Net Asset Value (NAV, [Assets-Liabilities]/Number of Shares) - Similar to
the P/B ratio, the NAV shows the true value of the company’s share, in its exact
figure. The NAV is used for a quick glance for comparing with the current com-
pany share price.
• Debt to Equity Ratio (D/E Ratio, Liabilities/Shareholders’ Equity) - Also
known as gearing ratio, which I had covered in the Chapter 6 on REITs, it is the
total liabilities of a company over the total amount of shareholders’ equity. This
ratio is useful of the amount of debt a company is taking on, or gearing.
• Current Ratio (Current Assets/Current Liabilities) - Current ratio is the
ability of the company to settle debts within the next 12 months, using its liquid
assets such as cash. This ratio tests the short-term liquidity of the company.
• Dividend Yield (Dividend/Current Share Price) - The Bedokian Portfolio’s
all time favourite, it is the measurement of the dividend yield over its current
share price.
All these ratios could be calculated or sourced from financial websites (Google
Finance, Yahoo Finance, Bloomberg, etc.).

87
Environmental Factors
Environmental factors are issues and parameters that exist outside of the com-
pany’s financial statements. Things such as the condition of the sector or industry
that the company is in, regulations covering the sector or industry, and the market
competition (e.g. the company’s exposure, its competitors, etc.), are to be consid-
ered.
If you are doing FA on a company whose sector or industry that you are famil-
iar with or working in, then it would be advantageous as you would know more of
the goings-on. However, not many of us have the luxury of being in the industry,
and also buying too much into that industry would be risky as there is no diversifi-
cation. In this case, it pays to read broadly on topics and subjects that cover a par-
ticular sector, so that you would be better informed.
The major considerations on environmental factors are as follows:
• Sector/Industry - This is the “playing field” of the company, where it does
its business and derives its revenues. It is important to know what the company is
doing, and which sector/industry it belongs to. There are certain events and
situations where a sector/industry could be affected, for better or for worse. Iden-
tification and knowledge of these occasions and events are important in knowing
the general direction of the sector/industry.
• Market Share - Market share is the size of the “slice” a company has in the
sector/industry “pie”. Usually expressed in percentages in financial news and
publications, it gives you a picture of where the company stands in the “playing
field”.
• Competitors - As the name goes, competitors are the “opponents” in the
“playing field”, i.e. other companies that are in the same sector/industry that
compete with your company in question. Knowing their strengths and weak-
nesses, as well as their market shares, gives a better picture of how they stand in
the sector/industry.

88
 All the above information could be obtained by personal observation (e.g. how
many publicly listed telco operators in Singapore); financial websites, news sites
and publications; and financial news television channels. Do note due diligence is
to be taken if you are gathering information from such sources, as sometimes there
could be inaccuracies, differing opinions that could confuse you and most impor-
tantly, the danger of “information overload”.

Economic Conditions
On a bigger scale would be the economic conditions as a whole. The general
conditions such as growth, recession, inflation and deflation meant different things
to different people, as well as to different asset classes.
A general rule of thumb to gauge the economic conditions would be to look at
the economic indicators, which are numbers and figures that indicate the past,
present and implied future heading of the economy.
There are many economic indicators at hand, but I list out the important ones
and explain what it is in brief:
• Gross Domestic Product (GDP) - GDP is the sum of all goods and serv-
ices produced and consumed within an economy of a country. GDP is typically
reported on a quarterly basis, so you can hear 4 GDP numbers within a year. If
the GDP is a positive value (e.g. +0.5%), it means good times are here, and vice
versa if the GDP is in negative values (e.g. -0.5%). GDP is used by economists
and governments as one of the major indicators of whether the economy is at
growth or in recession. To some economists and investors, when GDP is in the
negative region for two consecutive quarters or more, the economy is deemed to
be in recession.
• Unemployment Rate - Unemployment rate is the measurement in percent-
age the proportion of a population of a country that is not working and actively
looking for jobs. A rise in unemployment rate indicates that the economy is not
doing well, and vice versa. In most cases unemployment rate and GDP are used
together to give a clearer picture on the state of the economy.

89
 • Inflation Rate - I had defined what was inflation in the previous chapters in
general. To put it in strict economic sense, inflation rate is the rate (in percent-
age) of the rising prices of goods and services with reference to the purchasing
power of money compared annually. For example, with a 2% inflation rate
across 2 years, an item that cost S$10.00 last year would cost S$10.20 this year.
Inflation is healthy for the economy if it is growing at a steady rate. Too much in-
flation will result in hyperinflation where you will need huge amounts of mone-
tary value to buy the same item (just like what happened in Zimbabwe back in
the early 21st century1). The reverse of inflation, called deflation, will cause the
price reduction of goods and services, which meant the prices of assets and in-
vestments would go down.
• Interest Rate - Interest rates set by a country’s central bank have an impact
on the overall economy. Economic theory dictates that a rising interest rate is
used as a tool by governments to rein in an economy that is growing too fast for
its own good (dubbed as an overheating economy). A low interest rate meant
“cheap credit” since the returns from investment would surpass the cost of loan.
An increase in interest rates meant the cost of borrowing would become higher,
thus investments by using loan money would be reduced.
Besides economic indicators, the holistic view of the various sectors/industries
is counted as an economic condition as well. A sector/industry could have a direct
or indirect impact, proportional or inverse relationships with other sectors/
industries. A good example would be the rise of e-commerce; it brought growth to
the information technology (IT) and logistics sectors/industries, but spelt a little bit
of bad news for physical shops and retailers (think retail REITs).
Finally, though these are not really considered as economic conditions, but
socio-political and natural events such as war, terrorism, drought, etc., could bring
an impact in your FA.
In conclusion, doing FA is akin to doing a SWOT analysis in business terms.
SWOT stands for Strengths, Weaknesses, Opportunities and Threats.
Strengths and Weaknesses are from the company’s viewpoint and standpoint, de-
noting its advantages and disadvantages within itself, respectively. Opportunities

90
and Threats are the economic conditions and environmental factors in the sector/
industry that is advantageous and disadvantageous to the economy and sector/
industry, most of the time it is beyond the control of the company.

Summary
• Fundamental analysis, or FA, is the analysis of the company’s financial state-
ments, its environment in a business sense and the economy in general.
• FA brings about a type of investing called value investing, which it sought to look
for undervalued companies whose share prices do not reflect their true financial
value.
• FA could be done from a bottom-up or a top-down approach.
• A company, especially a public listed one, is required to produce financial state-
ments periodically. These financial statements could tell a company’s financial
health and status by using financial ratios.
• There are various financial ratios, but the important ones are Earnings Per Share
(EPS), Price to Earnings Ratio (P/E Ratio), Price to Book Ratio (P/B Ratio), Net
Asset Value (NAV), Debt to Equity Ratio (D/E Ratio, or Gearing), Current Ra-
tio and Dividend Yield.
• Environment factors consider the sector/industry the company is in, its market
share within the sector/industry and its competitors in the same sector/industry.
• For economic conditions, economic indicators such as GDP, unemployment rate,
inflation rate and interest rate are to be looked at. All the sectors/industries have
to be viewed holistically, since they have a direct/indirect impact and
proportional/inverse relationships with one another. Socio-political and natural
events are to be treated as economic conditions.
• Doing FA is akin to doing a SWOT analysis; Strengths; Weaknesses; Opportuni-
ties and Threats.

91
References
1 - Hanke, Steve H. & Kwok, Alex K F. Cato Journal. On the measurement of Zimbabwe’s
hyperinflation. 2009.
http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2009/5/cj29n2-8.pdf
(accessed 17 May 2016)

92
 C H A P T E R 12

Selection and Selling

This is a follow-up to the previous chapter on FA, where I will go into the practical
aspects of selecting company shares, REITs and bonds, to buy and to sell.

Active Management and Rebalancing

In Chapter 10, I had shared on passive rebalancing on The Bedokian Portfolio,
where it is done in an orderly and periodic fashion. There is nothing wrong being
in the passive investment side of things, for the objective of The Bedokian Portfo-
lio of getting passive income through dividend and index investing is still met.
However, if you feel that you are up to the challenge of moving to active and/or
you want to have better returns than the passive mode, this is the chapter.
Being in the active camp, you have to be constantly “on your toes”. Unlike pas-
sive, you need to be connected more often to the world of financial markets in the
form of information, conduct analysis, and make inferences and deductions before
you make the decision to hit the “buy” or “sell” button on your trading platform.
The mechanics of rebalancing for an active Bedokian Portfolio is similar to
that of the passive one, with the starting point being the cash portion. Fresh fund
injections and proceeds from the sale of other asset classes are put in the cash part
as well. The main difference is the act of rebalancing is done more often than the
passive one.
I mentioned earlier that The Bedokian Portfolio must maintain the allocation
that you prefer and with active rebalancing there is a chance that the cash part will

93
be reduced to 0%. To prevent this, we have to go beyond the portfolio and look at
your emergency fund or savings level. If the amount of money in your emergency
funds or savings is above the threshold set by you, then it is all right to deploy this
excess to the cash part of The Bedokian Portfolio. If not, do not ever compromise
on your emergency funds and savings, even if the price of the financial instrument
is tempting. This is a form of “check and balance” system that you put in place to
ensure your emergency fund/savings and The Bedokian Portfolio works separately
and smoothly.
In addition, you have to constantly remember your preferred make up of The
Bedokian Portfolio (e.g. 35% equities, 35% REITs, 20% bonds, 5% commodities
and 5% cash) and stick to it. Never fall into the temptation of getting a lot of un-
dervalued company shares, only to find out later that the shares become 80% of
your overall portfolio. Diversification of asset classes is still paramount in The Be-
dokian Portfolio.

Shortlisting
The first step you need to do when you are actively managing your Bedokian
Portfolio is to make a shortlist of financial instruments and investment vehicles.
This is to become your “wishlist” common in online shopping platforms. The
shortlist could contain individual companies, REITs, bonds, ETFs and even bank
interest rates to store your cash. It may sound a bit daunting and tedious, but fol-
lowing the FA as learnt in the previous chapter, it is not so difficult at all.
If you are doing FA from a top-down approach, the first thing to see is what is
the current economic condition and/or what would it be trending towards. To get
this feel, it pays to read up on current affairs and goings-on from the media. From
here, you could go down to the various sectors/industries and identify those who
are directly or indirectly involved in the trend. Also, you could analyse the environ-
ment of those sectors/industries themselves, and finally, for companies and REITs,
do a first-look financial ratio check on them.

94
 If you happened to come across a publicly listed company or REIT and want
to find out more, then it would be better to do FA from a bottom-up approach.
You could research the company or REIT further and see whether it is a potential
for your shortlist. If it is, you could go up a level higher and study the sector/
industry, and then move on to the economic condition level for analysis.
Make sure to record your findings somewhere, either on hardcopy (in a trusty
notebook) or softcopy (on a spreadsheet in your computer). Depending on your
depth of general, financial and economic knowledge, shortlisting of a financial in-
strument and investment vehicle could be done within one hour. After all, I believe
you still have a day job and other family and social time to enjoy.
Shortlisting should be done on a cursory basis. However, if the financial instru-
ment you are shortlisting is screaming “buy me!” at the first instance, you could
continue on with a more detailed FA, and if that financial instrument passes your
analysis and requirements (using the selection guidelines covered later), you could
just go ahead with the purchase.

T-Analysis
It has always been a perennial question asked by a few investors about FA, and
that is “how much FA is to be done?”. To deconstruct that question, I would view
it as two separate questions, and they are to be asked as “how wide is the analy-
sis?” and “how deep is the analysis?”.
Enter the “T-analysis”. The horizontal part of the “T” denotes the width of
the analysis, and the vertical part stands for the depth of the analysis. Width is the
amount of factors that you wish to consider, and depth is the amount of analysis
for each factor. The key thing here is to have your “T” looking like a “T”, i.e.
equal weightage is given to the number of factors and the depth of each factor’s
analysis. A “T” with a long horizontal line but a short vertical line indicates a wide
glancing check, while a “T” with a short horizontal line and a long vertical line de-
notes an overkill of analysis on just a few factors.

95
 Regardless of the number of factors and the amount of analysis done on each
of them, the decision that you make based on the information that you have and
analysed is always considered “the best you could have”. After all, no one could
predict how the financial markets behave in the future, but at least FA could pro-
vide an educated and better guess, and it is better than a guess that is based on
nothing.

Selection Guidelines
Firstly I would like to state that the following selection guidelines do not con-
sider the environmental factors and economic conditions. The main reasons being
are that there are too many combinations of environmental factors and economic
conditions to describe, and different combinations spelt different inferences and re-
sults for different sectors/industries and even companies/REITs/bonds. Instead, I
would use financial ratios and other parameters. They are objective, quantitative,
transparent and easily available. Nevertheless, a full FA is to be carried out in con-
junction with the selection guidelines.
Note that there is no selection guideline for commodities, cash and ETFs here,
as I had covered them in their respective chapters (Chapters 5, 7 and 8).
The selection guidelines that I am using is for the conservative Bedokian Portfo-
lio investor.

Equity Selection
I shall now start off with equities:
• P/B Ratio of 1 and below (or priced at NAV and below);
• D/E Ratio of 0.5 and below (or 50% and below gearing);
• Current Ratio of 1.5 to 3;

96
 • P/E Ratio being the 25% lowest amongst other companies within the same
sector/industry, and;
• Dividend Yield higher than the 10-year average inflation rate (based on past
three years).
Here are the reasons for each guideline:
• P/B Ratio of 1 and below - This is foremost the first guideline to look out for
using financial ratios. It is common sense and practical to buy equity at a price
which is at its worth based on the financial statements, or better yet at a discount.
• D/E Ratio of 0.5 and below - The number for this ratio is dependent on the
risk appetite of the individual investor, but for The Bedokian Portfolio, you
should try to look for equity that has 50% or less gearing to provide a wider mar-
gin of safety.
• Current Ratio of 1.5 to 3 - This is the standard range accepted by most inves-
tors when they check on this ratio. For the low range, “1.5” is preferred over “1”
as the “0.5” provided a margin of safety. And for the high range, “3” is the maxi-
mum you could accept; a high current ratio (above “3”) signifies that the com-
pany in question may not be deploying its assets efficiently.
• P/E Ratio being the 25% lowest amongst other companies within the same
sector/industry - Firstly, using P/E ratio as a financial ratio guideline is a bit
tricky, as different sectors/industries have a different average P/E ratio. Though
the norm is between 10 and 20, it is better to compare with the P/E ratios of the
other companies within the same sector/industry. For The Bedokian Portfolio,
finding the lowest 25% of P/E ratio would cover those companies that are in the
undervalued to fair value range.
• Dividend Yield higher than the 10-year average inflation rate - One of the
common objectives of investing is to have returns that beat the inflation rate, and
for The Bedokian Portfolio the passive income should rise in tandem with infla-
tion. A ten-year period is used as most investment horizons are minimally set at
that duration. The three-year track record of dividend yield is used as an affirma-
tion of consistency.

97
 Besides dividend yield, I would only look at the current information for the
other financial ratios in the guidelines. However, if you are more conservative, it is
all right to look back three years to get average readings. You could also apply this
to REITs, which I will touch on in the next section.
There are times when I shortlisted a number of equities, none of them fit the
guidelines stipulated above. This is true especially in times of economic boom,
where a lot of equities are priced way above their P/B ratio or NAV, and/or their
P/E ratio is at a high range for some sectors/industries, assume all things equal.
Although it is recommended to follow the guidelines with the reasons above, it is
okay to deviate a bit, but this deviation would increase the risk of not getting the
equities at their true value. If deviation is necessary, then I would say a maximum
of 50% total deviation for the guidelines, meaning the total sum of deviations for
the five financial ratios must not exceed 50%.
Using the guidelines as an example, you could buy an equity whose P/B ratio is
1.5 (50% above the recommended “1”) with the rest followed the guidelines; or get-
ting an equity whose P/B ratio is 1.25 (25% above the recommended “1”) and a
D/E ratio of 0.625 (25% above the recommended “0.5”), with the rest followed
the guidelines.
However, if for example you have spotted an equity that is selling at P/B ratio
of 0.8 (20% below the recommended “1”), it does not mean you could have a
higher deviation of 50% + 20% = 70%. This would inadvertently increase your
risk, and this risk is an unnecessary one to bear.
If you are a moderate investor, you can set the deviation to 100%. For the ag-
gressive investor, a 200% deviation is the maximum. The risk tolerance of equities
could be set higher due to the effect of market sentiment (see Chapter 14).

REIT Selection
Next up would be REITs. Since it is a hybrid asset class, you will see some of
the financial ratios used are from equities, but I will also include a feature called
Weighted Average Lease to Expiry, or WALE that is unique to REITs.

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 WALE is the average number of all of one REIT tenants’ lease duration, and
it is measured in years. A tenant is a person or organisation that rents properties
from a landlord or building owner, in this case REITs. The rent is usually fixed for
a few years, called lease duration. Rents are a REIT’s main income source, and a
longer lease duration is seen as more stable income flow.
Here are the selection guidelines for REITs:
• P/B Ratio of 1 and below (or priced at NAV and below);
• D/E Ratio of 0.45 and below (or 45% and below gearing);
• Dividend Yield of 5% and above (based on past three years), and;
• WALE being the top 25% amongst other REITs of the same type.
Here is the rationale for each guideline:
• P/B Ratio of 1 and below - Like equities, I emphasise on getting REITs at
their value or at a discount.
• D/E Ratio of 0.45 and below - The D/E ratio of 0.45, or 45% gearing, fol-
lows the leverage limit set by the Monetary Authority of Singapore sometime in
mid-2015.
• Dividend Yield of 5% and above - REITs are obliged to pay off at least 90%
of its profit to unitholders as dividends, thus with that payout their dividend yield
is typically higher than that of most equities. The 5% figure is instrumental for
The Bedokian Portfolio to provide the necessary returns to fulfill its objectives.
Similar to equities, dividend yield for the past three years are looked at for consis-
tency.
• WALE being the top 25% amongst other REITs of the same type - Different
types of REITs have different ballpark WALE values. Comparing WALE be-
tween industrial and retail REITs is like comparing apples and oranges, therefore
it is obvious to compare WALE of REITs of the same type. A longer WALE, as I
mentioned earlier, meant a more stable income for the REIT and hence, a more
stable flow of dividends. Selecting the top 25% in terms of WALE gives a safer
range for stable REIT income.

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 As with equities, a deviation can be used on the guidelines. However, since the
guidelines for REITs are lesser and more stringent, 10%, 20% and 30% deviations
are used instead for the conservative, moderate and aggressive investors, respec-
tively.

Bond Selection
The selection guideline for bonds is different from equities and REITs; after all,
bonds are a different asset class. Here are the guidelines:
• Bond is priced at par or discount;
• If the bond is at premium, the premium must not be more than 50% of the
coupon rate;
• Credit Rating of “investment grade”, and;
• At least five years to the bond maturity date.
Let us take a look at the selection guidelines in detail:
• Bond priced at par or discount - In Chapter 4, I had briefly described bonds
priced at par, premium and discount. If you could get bonds at par or discount,
meaning you are getting it at what is worth or cheaper (like the P/B ratio for eq-
uities and REITs).
• If the bond is at premium, the premium must not be more than 50% of the
coupon rate - If you wish to get a bond that is trading above its premium, make
sure to get it when the premium is 50% of the coupon rate. For example, if the
bond is priced at S$1.01 and the coupon rate is 3%, then it is good to purchase
it; but if the bond is priced at S$1.02 and the coupon rate is 3%, then it is a no-
go. A half-year’s opportunity cost in coupon is the most you would pay for a
bond, excluding the accompanying transaction costs.
• Credit rating of “investment grade” - As the term stated and also briefly men-
tioned in Chapter 4, investment grade bonds are recommended for, well, invest-
ment. This is due to the credit rating agencies’ ranking of the bond after careful

100
 consideration of the bond issuer’s financial credibility. Using the major credit rat-
ings agencies’ ratings, the lowest ratings given for investment grade bonds are
“Baa”, “BBB” and “BBB” by Moody’s, S&P and Fitch1, respectively. Junk bonds
tend to behave more like equities, so you really would not want too many equi-
ties or equity-like asset classes in your Bedokian Portfolio.
• At least five years to the bond maturity date - The five year ballpark figure was
thought up by myself, since I have to incorporate both government bonds, which
a majority have longer bond maturity dates, and corporate bonds, which mostly
have shorter bond maturity dates, for the selection guidelines. So in a way the
five-year duration works as an average between the two types of bonds. Five
years is also apt for generating enough coupon returns to make the bond invest-
ment worthwhile. Do note that as bonds approach their maturity date, their
prices would go very close to par.
The same goes for the other two asset classes, a deviation can be applied on
bonds. Given the stable and conservative nature of bonds, I would recommend a
20% deviation across all types of investors. For credit rating, a level of it would be
a score of 10% deviation.

Selling Triggers
The Bedokian Portfolio’s main characteristic is that it adopts a “net buyer” in-
vestment approach, meaning cash is injected to purchase more financial instru-
ments and thus increasing the portfolio size. There are times, however, that rebal-
ancing needs to be done by selling some of the financial instruments. The key
thing of rebalancing is, similar to passive rebalancing, that you will be selling away
the over-performers and buy in the under-performers, or selling the high risk finan-
cial instruments and buying in the low risk ones.
Instead of guidelines, I would use the term “trigger” in initiating selling. Unlike
the selection guidelines in the previous sections, where there is a form of checklist,
selling triggers work on a more impromptu and situational call, therefore discre-
tion is advised on what I will be sharing later.

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 Here are the straightforward triggers using financial ratios and parameters.
Note that you could activate the selling of the financial instrument with using one,
some or all of the triggers combined, on top of analysis and considerations done
on environmental factors and economic conditions:
• P/B Ratio of 1.5 or more (or priced at 50% above the NAV), and/or;
• D/E Ratio increasing for the past three years, and/or;
• Current Ratio decreasing down to below 1 for the past three years, and/or;
• P/E Ratio is increasing to the top 25% or falling below 10% amongst the com-
panies of the sector/industry, and/or;
• WALE is decreasing over the past three years (for REITs only), and/or;
• Credit rating goes down to two ratings over the past three years (for bonds
only), and/or;
• Dividend Yield is reducing over the past three years, and/or;
• Equity/REIT price has increased by at least the dividend yield as at the time
of purchase (e.g. if an equity price was at S$1.00 with a 4% dividend yield at pur-
chase, the selling trigger would be activated once it reaches S$1.04).
At this moment the numerous triggers may surprise you, but some of them pro-
vide a form of alert on the financial instrument concerned. They are indicators
that the company/REIT/bond may not be doing well. You may incur some losses
depending on the nature of the trigger(s). If you are more aggressive, you could ad-
just the triggers with a higher threshold (like changing the trigger of P/B ratio
from 1.5 to 2, etc.).
For a sudden drop of a financial instrument price, further analysis is required to
find out the reason for the drop. If it is due to the deteriorating financial condition
of the financial instrument, then it is prudent to exit it as soon as possible. If the
financial instrument is still financially healthy and the drop is due to environ-
mental factors and economic conditions, then you could bear with it and weather
the storm.

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 In the case of the equity/REIT price increased by at least the amount of the
dividend yield, this is not a bad thing, as this is a sign of a booming financial mar-
ket. Fundamentally wise, however, the price of the equity/REIT may have gone
above its value, so it is prudent to lock in the capital gains and deploy the cash ob-
tained to another financial instrument in your Bedokian Portfolio, or keep it as
cash first. You could place this particular equity/REIT back in your shortlist and
buy it again should it fall back to its value on a good manner.

Balancing Active Rebalancing

The last word that I want to add here for this chapter is to maintain a balance
for your active rebalancing. There is a thin fine line between active rebalancing
and trading. Remember the objective of The Bedokian Portfolio is to have passive
income through dividend and index investing, not having trading gains. The main
focus is on the yield obtained through dividends, coupons and interests. Also, con-
stant transactions will incur unnecessary transaction costs, which will erode your
yield, as stated in Chapter 10.

Summary
• Active rebalancing of The Bedokian Portfolio requires you to be constantly on
the lookout and be informed of the goings-on that could affect your portfolio.
• Use your emergency fund and/or savings surplus to fund the active rebalancing
through the cash portion. Diversification of asset classes and maintenance of the
make up of The Bedokian Portfolio must be fulfilled.
• You could shortlist the financial instruments that you are interested in either
through a top down or bottom up approach. Record down somewhere the
shortlist. Do not hesitate to purchase the financial instrument during the shortlist-
ing stage if it meets your FA.

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• Use the T-Analysis is determining the width and depth of FA. Remember to give
equal coverage to the width and depth of analysis (i.e. making the “T” look like a
“T”).
• Selection guidelines for equities: P/B Ratio of 1 and below (or priced at NAV
and below); D/E Ratio of 0.5 and below (or 50% and below gearing); Current
Ratio of 1.5 to 3; P/E Ratio being the 25% lowest amongst other companies
within the same sector/industry, and; Dividend Yield higher than the 10-year av-
erage inflation rate (based on past three years).
• Selection guidelines for REITs: P/B Ratio of 1 and below (or priced at NAV and
below); D/E Ratio of 0.45 and below (or 45% and below gearing); Dividend
Yield of 5% and above (based on past three years), and; WALE being the top
25% amongst other REITs of the same type.
• Selection guidelines for bonds: Bond is priced at par or discount; If the bond is
at premium, the premium must not be more than 50% of the coupon rate;
Credit Rating of “investment grade”, and; At least five years to the bond matur-
ity date.
• Deviations to the guidelines are allowed, but subject to more risk.
• Selling triggers include: P/B Ratio of 1.5 or more (or priced at 50% above the
NAV), and/or; D/E Ratio increasing for the past three years, and/or; Current
Ratio decreasing down to below 1 for the past three years, and/or; P/E Ratio is
increasing to the top 25% or falling below 10% amongst the companies of the
sector/industry, and/or; WALE is decreasing over the past three years (for
REITs only), and/or; Credit rating goes down to junk bond status (for bonds
only), and/or; Dividend Yield is reducing over the past three years, and/or;
Equity/REIT price has increased by at least the dividend yield as at the time of
purchase.
• Some of the trigger points indicate alerts on a financial instrument’s financial
health and status.
• You could adjust some of the selling trigger parameters depending on your ag-
gressiveness.

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• It is prudent to sell the financial instrument if there is a fall in price due to its fi-
nancial health. If the fall in price is only due to environmental factors and eco-
nomic conditions, then bear with it and weather the storm.
• If the equity/REIT price has increased by at least the dividend yield, this is a
good sign of the financial market although the price has gone above its funda-
mental value. Lock in the capital gains and place it back on your shortlist should
it fall back to its fundamental value.
• There is a fine balance between active rebalancing and trading. Remember the
objective of The Bedokian Portfolio is to gain yield and not trading gains. Also it
is not recommended to transact only when necessary to prevent the erosion of re-
turns from transaction costs.

References
1 - Heakal, Reem. Investopedia. What is a Corporate Credit Rating?
http://www.investopedia.com/articles/03/102203.asp (accessed 17 May 2016)

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 C H A P T E R 13

Foreign Financial
Markets
Most of the previous chapters were written with a bias on the Singapore financial
market. In this chapter I will touch on expanding The Bedokian Portfolio with as-
set classes from foreign financial markets. Trust me, it is a whole new world out
there.

Going Foreign
As far back as Chapter 1, I had supported diversification between local and for-
eign financial markets, provided that they are under the asset class umbrella.
Hence, shares bought in a foreign financial market will still be classified as equities,
and so on.
The main aim of going foreign is to seek diversification across different regions
and countries. While some countries may be in recession, others are not. Even in
the face of the GFC, we still see some countries’ economies chugging along (e.g.
Australia). Going further back, the Asian Financial Crisis of 1997 brought reces-
sion to some Asian countries, but in the United States it was business as usual1.
Underneath this diversification, you could take advantage of the differing
growth and forex rates of the different regions and countries. It does not matter if
the foreign financial markets are in growth or recession, and/or the forex rates are
strengthening or weakening against the Singapore Dollar, for rebalancing is done
at the asset class level. The doctrine of “selling the over-performers and buying the
under-performers” during rebalancing would systematically bring your Bedokian
Portfolio back to your desired portfolio make up.

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Foreign Financial Market Classifications
There are a few ways to classify the foreign financial markets. First up is by as-
set classes (international equities, international bonds, etc.), then there is sector/
industry (international technology sector, international health sector, etc.), by re-
gional (North America, Europe, Far East, etc.) and by individual country. There is
also another classification that goes by the development stage of the various finan-
cial markets and economies of the world, such as developed markets, emerging
markets and frontier markets.
For The Bedokian Portfolio, the order of diversification into foreign financial
markets would go according to the following order: world, regional, country and
sector/industry. This is in line with the diversification principles explained in Chap-
ter 1. So this means you buy the “world” first, and as time goes by and you are get-
ting more familiar, you will settle for the different regions, then countries, and so
on.
And since passive income is the main prerogative for The Bedokian Portfolio, it
is advisable to go for financial markets that are developed. A developed financial
market means the economy is matured and stable, and along with it comes a
steady stream of dividends from established companies. Emerging and frontier fi-
nancial markets are more for growth than dividends.
In the following sections, I will touch on two foreign financial markets that are
familiar with most investors; the United States and the region classification called
Europe-Australasia-Far East, or EAFE.

United States
The United States (US) is one of the largest economies in the world, taking up
16% of the world’s GDP2. A lot of its public listed companies have presence all
over the world, and you would have used a product and/or service from at least
one of them in your lifetime. The US economy is what I called a “complete econ-

107
omy”, which means it has almost everything for everyone. Being a huge country, it
has a lot of natural resources, such as agricultural crops, crude oil, minerals, etc. It
also has a huge manufacturing base as well as a strong retail consumer market. Fur-
thermore, the US is in the forefront of technological innovation and advances, es-
pecially in the information technology and pharmaceutical fields.
With so many opportunities abound, the US is always the first stop for local in-
vestors to venture abroad. The US financial markets are matured and stable, espe-
cially with their strong government and legal structure. The US government
bonds, known as Treasury Bonds, are bought not only by individuals and or-
ganisations inside and outside of the US, but by other countries’ governments as
well. The United States Dollar is used as one of the world’s reserve currency,
which means it is used by governments around the world as a backing for their
own currencies3.
Most brokerages allow you to invest in the US. If you are not a US citizen,
your brokerage will issue you a form known as a “W-8BEN Form”. This form is
for the purpose of withholding tax under the US tax laws, which means divi-
dends and coupons paid out from US financial instruments are subjected to tax.
When a dividend or coupon is paid to you, the amount received is after the tax de-
duction, the rest being “withheld” (hence the term withholding tax) for payment
to the US tax authorities.
Unlike local financial instruments where you have to buy in lots of 100 or
1000, the minimum number of US financial instruments (most of them) you can
buy is one. In the example I mentioned in Chapter 9, to buy the SPDR GLD ETF
from the local financial market, you need to get minimally 10 shares, but you
could get just one share of the same ETF from the US.
There are many equity indices in the US. To name a few, there is the Dow
Jones Industrial Average (DJIA) that I used as an example in Chapter 3, the S&P
500, the Nasdaq Composite, etc. Along with these indices, there are many US-
based ETFs that follow them. If you are new to the US and not sure which com-
pany to go for, just start off with index investing, and the S&P 500 index is recom-
mended for The Bedokian Portfolio. The S&P 500 is chosen because it contains

108
500 large companies from a myriad of sectors, thus giving a good representation
of the US equities as a whole.

EAFE
EAFE comprises of the regions of Europe, Australia, Asia and the Far East (or
eastern Asia). At first glance these regions meant almost the rest of the world be-
sides the US, but in investment circles EAFE meant the developed financial mar-
kets within these regions4. Narrowing down further, the main countries that made
up the EAFE are Japan, Australia, developed countries in Europe (especially west-
ern and central Europe, like United Kingdom, Germany, France, Switzerland,
etc.), South Korea and to a certain extent Hong Kong and Singapore.
These regions and countries are well-developed economies that are comparable
to the US’s in terms of the “complete economy”. Japan has manufacturing capa-
bilities and sports a large retail consumer market, while Australia has an abun-
dance of raw materials. A large number of the currencies used by the regions and
countries in the EAFE index are also reserve currencies, such as the Japanese Yen,
the British Sterling Pound and the Euro5.
The EAFE index would be ideal for Bedokian Portfolio investors to start off if
there is no specific region/country/company in mind, and to provide coverage of
the developed financial markets outside of the US.

Foreign Proportion
Since the aim of The Bedokian Portfolio is to generate passive income, the in-
come has to be on local terms, which means a major portion would still be based
on local asset classes. This reduces the forex risk, and the income obtained would
“go with the flow” of the local economic conditions (e.g. inflation).
However, there is no harm in investing in foreign financial instruments for diver-
sification in other regions and countries. There is no hard and fast rule for deter-
mining the foreign proportion in The Bedokian Portfolio, but the ideal number
109
would be between 10% and 30%. This percentage is across all asset classes, be it
equities, bonds, REITs and/or forex, meaning if you had set your foreign portion
at 20%, and if foreign equities took up 10%, the remaining 10% would be set
aside for foreign bonds/REITs/forex.
Do note that commodities are not to be included in the foreign proportion,
even if they are priced in foreign currencies. This is because commodities are con-
sidered region/country neutral, so despite the forex changes, the real price of the
underlying commodity remains the same. Furthermore, during the rebalancing
stage, it would still be done on local currency terms (in this case, Singapore Dol-
lars).

How to Invest in Foreign Financial Markets?

Most brokerages give you access to the major foreign financial markets, though
you have to take note of the relevant transaction costs. As foreign financial instru-
ments are kept in custodian by the respective brokerages (CDP is not applicable
for foreign financial instruments), take note of any additional costs incurred in
keeping them, known as custodial fees. These fees are charged on an ongoing
basis and could erode your returns in the long term, although some brokerages
would waive them if you transact with them a number of times within a given ti-
meframe.
If you are unsure of where to begin, start off with the US and EAFE by buying
their ETFs. There are many ETFs available locally in SGX as well as in the for-
eign financial markets, though you have to take note of withholding tax issues for
the latter. As time goes by and if you are getting familiar with the foreign financial
markets, you could proceed to buy the individual companies and bonds. Bear in
mind that the proper selection and selling guidelines highlighted in Chapter 12
must be adhered to.

110
Local Companies/REITs with Foreign Exposure
It is common for local public listed companies to have a sizable foreign invest-
ment component. Also, there are foreign companies listed in the local SGX. The
next question would be, what would be the treatment of such equities and how to
divide them between local and foreign components for The Bedokian Portfolio?
I have devised a two-question checklist to answer that in a simple way.
• Is it listed in Singapore Dollars?
• Are at least 50% of its assets or revenue come from the local economy?
If both answers are “yes”, then treat it as local. If either one is a “no”, then
take it as foreign.
The above checklist applies to REITs as well.

Summary
• The main aim of going foreign is to seek diversification across different regions
and countries. It is also to take advantage of their different growth and forex
rates.
• There are many foreign financial market classifications, which includes by asset
classes, sectors, regions, countries and development stages of the financial mar-
kets.
• Since the prerogative of The Bedokian Portfolio is passive income, it is advisable
to go for developed financial markets that is matured and stable, which gives a
stream of dividends.
• The United States financial markets are the first stop for most investors going
overseas. Being a “complete economy”, it has natural resources, large manufac-
turing base and retail consumer market.
• The Europe-Australasia-Far East region contains developed financial markets,
which covers almost the rest of the world besides the US.

111
• The ideal foreign component in The Bedokian Portfolio is between 10% and
30%, across all asset classes. Commodities are not included as it is region/
country neutral and the real price of the underlying commodities, even if it is
priced with foreign currency.
• Most brokerages allow access to foreign financial markets. Do note of transac-
tion costs and custodial fees, if any.
• For locally listed companies and REITs with foreign investments to be treated as
local asset classes, it has to be denominated in Singapore Dollars and at least
50% of the assets or revenue come from the local economy.

References
1 - World Bank. GDP growth (annual %), http://data.worldbank.org/ (accessed 17 May
2016)
2 - Economy Watch. GDP Share of World Total (PPP) Data for All Countries. 2014. 17
March 2015.
http://www.economywatch.com/economic-statistics/economic-indicators/GDP_Share_of_Worl
d_Total_PPP/ (accessed 17 May 2016)
3, 5 - International Monetary Fund. Special Drawing Right (SDR). 6 April 2016.
http://www.imf.org/external/np/exr/facts/sdr.htm (accessed 17 May 2016)
4 - Investopedia. Europe, Australasia, Far East - EAFE.
http://www.investopedia.com/terms/e/eafe.asp (accessed 17 May 2016)

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 C H A P T E R 14

Mind of the Investor

I have summed up the financial market basics and the approaches to implement
The Bedokian Portfolio in the preceding chapters. For this one, I will talk more
about the mind, or the "human software", behind everything. Though this topic is
more on psychology, it is still an important aspect in carrying out The Bedokian
Portfolio. I can say this is one of the easiest chapters to read, but will be one of the
most difficult to follow.

The Power of the Mind

The mind is the most powerful tool a human has. It gives you the ability to
think, reason and provides the driving force to execute certain tasks and decisions.
The challenging thing is not all human minds are alike; each one of us is a unique
individual, which is why we all have different characters and personalities.
Since there are different characters and personalities, there will be different
viewpoints and opinions from individuals. Rationality, or common sense, is not ab-
solute as there are different opinions on what is "common". What is rational to
you may not be rational to me.
The funny thing about the mind is, even though it is unique, there is a ten-
dency where "groupthink" occurs, in which somehow the minds of a group of peo-
ple begin to think alike. With groupthink comes the herd mentality, where the
group would just go one direction as a whole, most of time irrationally.

113
 The financial markets are made up of people, and financial institutions that ob-
viously made up of people as well. And yes, herd mentality exists among them.
The herd mentality must never be underestimated, for the two most common emo-
tions of the financial markets, namely greed and fear, are a result of this group-
think.

Market Sentiment
In a financial market in a perfect world, the price of a financial instrument in a
financial market is dictated by its demand and supply, according to basic economic
principles. However, in reality, you could look around and see that this is not the
case. For example, and assuming all things equal, financial instruments whose
prices are way above their NAV are still sought after, but those which are below
their NAV are not even considered by many. There are many factors at work here
on why the perfect financial market is not working, but to sum it up I would say
the investor rationality/irrationality, the groupthink, fear and greed are involved,
and these factors I would use a term to sum it all up; market sentiment.
 So, in the real world, the price of a financial instrument would be determined
by demand, supply AND market sentiment.
 Not only the price of a financial instrument, but the happenings and issues in
the financial markets could be explained by market sentiment. Generally, when
there is a perceived recession looming or some negative news, some investors
would want to exit the financial markets, and their actions will spark a chain reac-
tion among other investors. Likewise when times are getting better, there will be a
euphoria of buying, and soon many others will follow suit.
 There are a few examples where market sentiment plays a role in the historical
milestones of the financial markets. The dot-com bubble in the late 1990s and
early 2000s is one of them, where the rise of the Internet caused the prices of
anything-related-to-the-Internet equities to soar beyond anyone's imagination, and
literally common sense. Another example closer to home and recently happened
would be the great penny stock crash back in 2013.

114
 While I understand it is difficult not to mix emotions and sentiments into invest-
ment, since after all we are all human. In the next section I will bring up some
pointers on how to be a rational investor.

The Rational Investor

The rational Bedokian Portfolio investor has the following characteristics:
• Stick to the plan - Sticking to the plan means you have to follow through
the Bedokian Portfolio investment approach throughout, adhere to your pre-
ferred portfolio mix and stick to the active or passive rebalancing methodologies.
If you constantly alter plans throughout your investment journey, like changing
from one investment approach to the other, or change your portfolio mix from
100% equities to 100% bonds and vice versa, within a short time frame, not only
you would be confusing yourself, but the changes could also be detrimental to
your overall returns.
• View from different angles - Most inexperienced investors tend to view a
one-sided picture of the financial markets. For example, when it is boom time,
everything is well, but when the financial market is heading down, pessimism will
naturally kick in. Opportunities will arise if you see things from different angles.
When the economy is down, it is not only doom and gloom, but it also means
that some financial instruments are at a great discount or value. Also, when the
financial markets are going up, it is time to view other asset classes that do not
perform well in such periods, and thus it is a good time to buy-in.
• Keep an open mind - When you are conducting FA, do keep an open
mind and take in other opinions and views as well. Although you would be bom-
barded by information from different sources giving you different viewpoints, ac-
cept them into your analysis. Sometimes they could provide something that you
may have overlooked or did not pay attention to during your FA.
• Do not be emotional - Do not be affected by emotions, which includes the
keeping of your favourite financial instrument even if it is at the brink of col-
lapse, or giving in to the greed and fear sentiments of the crowd. The financial

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 market is a business environment, and therefore it should be treated as such.
Keep your emotions for your loved ones and hobbies instead.
Adhering to the above would reduce the chances of having emotions getting
the better of you in your investment journey and decisions.

Behavioural Economics
Before I end this chapter, I will touch a bit on behavioural economics,
which is a study of the economic decisions done by individuals and organisations,
and their results and consequences on the financial markets.
Behavioural economics attempt to explain why certain people make certain de-
cisions, even if the particular decision is not rational to begin with. In past eco-
nomic theories, all parties, whether individuals or organisations, are viewed as ra-
tional, therefore all decisions made are based on logical reasons. One of the areas
covered by behavioural economics is the prospect theory1. The prospect theory
states that, if given two choices of the same nature but one is worded positively
with gains while the other is worded negatively with losses, a person would likely
choose the former, due to the general preference of gains over losses.
Another area of concern in behavioural economics would be the effect of time
on decision making. According to time-discounting2 theories, current events
and happenings are viewed with more importance than future ones.
With these attributes, it is interesting to see that the financial markets are filled
with non-rational elements, even if they perceived themselves to be rational.

Summary
• The mind is a very powerful tool and it is unique to different individuals.
• Rationality/irrationality, groupthink, fear and greed make up the market senti-
ment factor in determining the price of a financial instrument.

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• The rational Bedokian Portfolio investor has the characteristics of sticking to the
plan, view from different angles, keep an open mind and do not be emotional.
• Behavioural economics is a study of economic decisions and their impact on the
financial markets.

References
1 - Investopedia. What is the ‘Prospect Theory’.
http://www.investopedia.com/terms/p/prospecttheory.asp (accessed 19 May 2016)
2 - NotoriousLTP. I want it now! - Temporal discounting in the primate brain. 16 July 2008.
http://scienceblogs.com/purepedantry/2008/07/16/i-want-it-now-temporal-discoun/ (ac-
cessed 19 May 2016)

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 C H A P T E R 15

Tips and Strategies

Great! By now you would have known the importance of passive income, the ba-
sics of investing, and starting and maintaining The Bedokian Portfolio. In this
chapter, I will share with you some of the tips and strategies that I find do not be-
long to any of the previous chapters, but worth mentioning nonetheless.

Initial Public Offerings

I had mentioned about initial public offerings, or IPOs, way back in Chapter 3.
I will touch on more details here. If you remember, IPO is a way for a company to
go from privately held to public listed, thus making its shares available for the pub-
lic to transact. IPO is not just limited to equities, but to bonds and ETFs as well.
For bonds, the bond issuer uses the IPO way to raise the bond principal. For
ETFs, it is for the raising of capital to get the funds started and going.
When there is an IPO coming, it would be covered in the financial news media.
There would also be a prospectus (sometimes called offer document), a docu-
ment issued by the company/bond issuer/ETF provider detailing the aims of the
IPO. For companies, they will provide their past financial statements, future plans
and most importantly, what they are going to do with the equity capital obtained
from the public. It will also indicate the starting price. When the public subscribes
to the IPO, it would pay at that starting price, if they were allotted the financial in-
struments.
Traditionally, IPOs are used for stagging, or flipping, in which the IPO fi-
nancial instruments, especially equity shares, are sold off within the first day or
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two. The notion of this flipping is that usually (I stress usually here) the price of an
IPO would go higher than its starting price during the first two days of listing, and
people who had been allocated them would earn the difference as profits if they
sold them off.
For The Bedokian Portfolio, however, flipping is not recommended as it is more
of a trading than investing approach. Instead, we use fundamental analysis to ana-
lyse IPOs. The prospectus could be used to study the financial statements and, to
an extent, the environmental factors and economic conditions. There may still be
hearsays and rumours on how a certain IPO may perform, but as long as your FA
is done proper and good to go on your decision, then by all means go ahead and
subscribe to the IPO.

10-30 Rule
If you are an active Bedokian Portfolio investor, you may want to look at this
“10-30 Rule” as an option for active rebalancing.
In summary, the 10-30 Rule stipulates that, for every 10% downturn of the fi-
nancial markets, you would employ 30% of the Cash portion of your Bedokian
Portfolio to buy equities.
I will highlight further in detail the basis for this 10-30 Rule. Firstly, when the
economy is down, equities are hit the hardest, being the asset class that is most
positively correlated to growth and recession. In a downturn, due to market senti-
ments, some company shares that looked healthy also took the plunge due to fear.
This would make equities go below their NAV, thus it is like a discount sale happen-
ing. If you had done the shortlist of your equities as highlighted in Chapter 12,
you could start to relook at them and decide which one to get.
The next step is to determine a reference point from which to determine the
percentage fall. For this, I would use the most prevailing index of a region/country
as reference. For the local market, I would take the Straits Times Index, and for
the US market, it would be the S&P 500 Index. To get the starting index number,
you add up the lowest and highest numbers of the index’s 52-week range, and di-

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vide the sum by two. You could find out the 52-week high/low index numbers
from Google Finance or Yahoo Finance websites. With this number, you could
now find out when will be the “trigger point” in initiating the next active rebalanc-
ing moment. The trigger point will be 90% of the number. For example, if the ref-
erence point index number is 3,000 points, and after three months, it fell to 2,700
points (90% of 3,000, down 10%), then this trigger point is reached for active re-
balancing. This reference point could be used for at most one year.
At any given index number reference point, meaning within the timeframe of
one year, three times is the maximum number you could use the 10-30 Rule. This
means your Cash portion would be reduced to just 10% (before topping up from
your savings/emergency funds and/or dividend payouts), having spent 90% (30%
x 3) of it. Even if the index number goes down to 40%, 50% or even 60% within
the year, hold your horses and do not commit further.
Although this is a bit of a “doom and gloom” news, but let me share with you
one interesting fact. Using the S&P 500 Index as basis, between the years 1926
and 2014, the whole of 89 years, the number of years that had a decline of more
than 30% are just three (1931, 1937 and 2008)1, so in a way the chance of doing
the 10-30 Rule three times in a given reference point or in a year is very slim.

Yield Is Not Everything

You may find it ironic that given The Bedokian Portfolio’s objective of “passive
income through dividend and index investing”, yet in this section I had stated
“yield is not everything”. The statement is true to a certain extent, especially in the
context of chasing yield.
Financial instruments that have a high dividend/coupon/interest yield is high
for a reason; In the financial markets, it is a generic belief that low yield is associ-
ated with low risk financial instruments, and high yield goes hand-in-hand with
high risk. There could be exceptions to this belief but in most cases, it is tried and
tested.

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 A clear example would be junk bonds, which are bonds below investment
grade. Normally junk bonds have a higher yield than investment grade bonds, but
in return for that high yield come with the higher risk of default by the junk bond
issuers.
During the Eurozone crisis of 2011, the coupon rate of the Greek government
10-year bonds went up as high as almost 40 percent2. Good yield, yes, but during
that time the Greek government was facing a huge risk of non-payment of their
debt.
For equities, there could be periods where a company issues a higher than usual
dividend yield. Again, you have to look through the financial statements on why
this is so. When a company divests, or sell off, some of its assets, the manage-
ment might distribute the proceeds as dividends. This, together with the regular
dividends from profits, results in a higher yield. Do note that such divestments do
not take place every year, and a high dividend yield this year may not mean the
same for the next year.
So now you know why yield is not everything.

Index Investing Continued

Back in Chapter 8, I had advocated index investing due to the unpredictability
of the markets and “going with the flow”. To add further, index investing is a good
way of approaching the financial markets from the diversification and macro
points of view. Why is this so? Imagine that you are thinking of investing in the
US financial markets, but are unfamiliar with the various sectors and companies
within it. In this situation, “buying in” the financial market would make more
sense as you would be diversified on a country scale, and a very good way to do
this would be through ETFs.
This may sound a bit contradicting as index investors would only buy index
ETFs and not buy individual shares and bonds, but The Bedokian Portfolio inves-
tor buys both. Sometimes I would buy into the individual company shares that are
themselves featured in the index that I am invested in. Although there is some du-

121
plication, I am buying these two for separate reasons; the index is to capture the
whole market’s returns and its exposure, while for individual companies I am in-
vesting for their own merits and yields. Having said that, here is another piece of
advice; do not buy all the companies in an index AND the said index ETF itself.
There is no point in doing it.
Another good thing about ETFs is that in times of rebalancing, whether active
or passive, ETFs would be able to cover if your current shortlist of financial instru-
ments is not “ripe” for the picking. For example, if you are underweight on equi-
ties, and there is no suitable equity at the moment, one good way would be to buy
into an equity ETF.
Again back in Chapter 8 I am practising what is called a form of DCA in
which I buy a fixed number of ETF shares per month, regardless of the price.
The main advantage is that you are in touch with the financial markets regardless
of the economic conditions. With the small investable amount, it is negligible
enough to affect the portfolio allocation, while still “in the financial market”.

“Core and Satellite” Bedokian Portfolio

You may have heard of the term “core and satellite” from other investment ma-
terial and sources. If not, basically what this means is that the investment portfolio
is being split into two categories; a central group of financial instruments (typically
index ETFs and unit trusts) that forms the main basis of the portfolio (the core)
and an outlying group consisting of other financial instruments (individual equities
or bonds) which could be used to enhance the portfolio further (the satellite). The
main aim of this core and satellite approach is to enhance the yield by mixing
some individual financial instruments as opposed to having an all-passive ETF
portfolio.
This core and satellite strategy could also be implemented onto The Bedokian
Portfolio itself, and it is just a matter of redefinition. Using the “rooms” and “furni-
ture” analogy from Chapter 11, the “furniture” (financial instruments) are still
placed in their appropriate “rooms” (asset classes), but the more important “furni-

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ture” such as beds and tables (ETFs) are considered core, whereas the satellite “fur-
niture” such as individual equities and bonds are like the bedside tables and lamps,
which could be changed easily. In other words, during rebalancing, the satellite fi-
nancial instruments could be in the first line of being transacted to maintain the
percentages of the asset classes in The Bedokian Portfolio. This way could also fa-
cilitate the issue of selecting which financial instrument to sell based on the guide-
lines in Chapter 12.
For commodities, if you are holding physical gold and/or silver, these physical
assets are deemed as core, while the gold/silver/oil ETFs are satellite. The reason-
ing behind this is that commodity ETFs are much more liquid and have a lower
bid/ask spread than physicals, so for rebalancing the first to be transacted would
be the ETFs.
Therefore, modifying the Balanced Bedokian Portfolio in Chapter 9, the core
and satellite could be implemented in this way:
• 35% Equities (18% in equity index ETF, 17% in individual equities)
• 35% REITs (18% in REIT index ETF, 17% in individual REITs)
• 20% Bonds (10% in bond ETF, 10% in individual bonds)
• 5% Commodities (2.5% in physical, 2.5% in ETFs, if physical forms part of
this asset class)
• 5% Cash
Noticed that the allocation between core and satellite for each asset class is al-
most half-half. This is to ensure a balance of risk and returns between having pas-
sive core financial instruments and active satellite financial instruments. Remem-
ber this allocation is a guideline and you could make variations to these percent-
ages depending on your preference.

123
References
1 - Pape, Frank. Helping Advisors Blog. 2014: The year stock “ons” were “off ”. 3 February
2015. https://blog.helpingadvisors.com/2015/02/03/2014-year-on-stocks-were-off/ (ac-
cessed 19 May 2016)
2 - Trading Economics. Greece Government Bond 10Y.
http://www.tradingeconomics.com/greece/government-bond-yield (accessed 19 May 2016)

124
 C H A P T E R 16

Portfolio Drawdown

There will always come a time when you have to start converting cash from your
investment portfolio, and such actions are called drawdowns. In this last chapter, I
will be providing some pointers on how to go about drawing down or liquidating
your Bedokian Portfolio.

Determining Drawdown
For a period of time in your life, you would have enjoyed your passive income
stream either fully or partially from your Bedokian Portfolio. As you advance in
age, you would probably feel that it is time to realize the full value of The Be-
dokian Portfolio. The next question would be, when is the right time to do it?
This is not an easy question to answer, and there are many answers to this.
Some may say immediately after retirement (again, at which age is retirement is an-
other complex question), or some said after a certain age (maybe 55, 60 or 65). To
put it a bit morbidly, some say around 20 years before the life expectancy.
Regardless of when to start, the first consideration you would need is whether
you wish to drawdown your Bedokian Portfolio entirely, or to leave all or some for
your beneficiaries. The next consideration is how much to withdraw and at what
interval from your allocated drawdown amount. These two issues have to be ad-
dressed before embarking on The Bedokian Portfolio drawdown plan.
With the two considerations in mind, the following show the four choices of
drawdowns:

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 • Choice #1: Continue with the yield - This means you are getting what
The Bedokian Portfolio is giving you as passive income, as per status quo, and
with the intention of leaving all of it to your beneficiaries.
• Choice #2: Taking pro-rata yield - For this one, your Bedokian Portfolio
is essentially split into two; one “frozen” portion is kept for your beneficiaries
while living off the yield from the other “unfrozen” portion. Basically you are tak-
ing only a part of your passive income that you used to have, hence the term
“pro-rata”. This would also mean that the yield generated from the “frozen” por-
tion would be used to compound itself.
• Choice #3: Partial portfolio drawdown - Same as Choice #2, except
that you would be drawing down the “unfrozen” part of your Bedokian Portfo-
lio, rather than getting its yield only.
• Choice #4: Full portfolio drawdown - This would be the full drawdown
of your entire Bedokian Portfolio.
Choices #1 and #2 are fairly simple and straightforward, as they involve pre-
serving or altering slightly the status quo of getting only the yield. If you decide on
choices #3 and #4, read on to the next section.

The Drawdown Process

The oft-quoted strategy for drawing down would be the famous “4% rule”1,
which is to start withdrawing 4% of your original Bedokian Portfolio amount
every year, adjusting with the inflation rate in the following years. Assuming a con-
stant inflation rate of 3% and a S$1,000,000 Bedokian Portfolio, the 4% would be
S$40,000. For the first year, you would withdraw S$40,000; in the second year, you
would be withdrawing S$41,200 (S$40,000 plus 3% inflation), and; in the third
year, you would be withdrawing S$42,436 (S$41,200 plus 3% inflation), and so on.
So if this continues, by year 19 The Bedokian Portfolio would have been com-
pletely drained out (see Fig. 16.1).

126
 Drawdown
Year Portfolio Balance (S$)
Amount (S$)
0 0.00 1,000,000.00
1 40,000.00 960,000.00
2 41,200.00 918,800.00
3 42,436.00 876,364.00
4 43,709.08 832,654.92
5 45,020.35 787,634.57
6 46,370.96 741,263.60
7 47,762.09 693,501.51
8 49,194.95 644,306.56
9 50,670.80 593,635.75
10 52,190.93 541,444.83
11 53,756.66 487,688.17
12 55,369.35 432,318.82
13 57,030.44 375,288.38
14 58,741.35 316,547.03
15 60,503.59 256,043.44
16 62,318.70 193,724.75
17 64,188.26 129,536.49
18 66,113.91 63,422.59
19 63,422.59 0.00

Fig 16.1 - Drawdown of S$1,000,000 Bedokian Portfolio, using the “4% rule” with 3% in-
flation rate.
The above table is based on the assumption that no more further yield is gener-
ated. Truth is, even as you begin the drawdown process, the financial instruments
that are still in your portfolio are generating returns. Therefore, using the
conservative/retiree investor Bedokian Portfolio which generates a modest return
of 2.43% annualized as seen in Chapter 9, The Bedokian Portfolio would only be
emptied out by year 24 or so (see Fig. 16.2).

127
 Drawdown
Year Portfolio Balance (S$)
Amount (S$)
0 0.00 1,000,000.00
1 40,000.00 984,300.00
2 41,200.00 967,018.49
3 42,436.00 948,081.04
4 43,709.08 927,410.33
5 45,020.35 904,926.05
6 46,370.96 880,544.79
7 47,762.09 854,179.93
8 49,194.95 825,741.55
9 50,670.80 795,136.27
10 52,190.93 762,267.15
11 53,756.66 727,033.59
12 55,369.35 689,331.15
13 57,030.44 649,051.46
14 58,741.35 606,082.06
15 60,503.59 560,306.27
16 62,318.70 511,603.01
17 64,188.26 459,846.71
18 66,113.91 404,907.08
19 68,097.32 346,649.00
20 70,140.24 284,932.33
21 72,244.45 219,611.73
22 74,411.78 150,536.52
23 76,644.14 77,550.42
24 78,943.46 491.43

Fig. 16.2 - Drawdown of S$1,000,000 Bedokian Portfolio, using the “4% rule” with 3%
inflation rate and 2.43% yield.
Figs. 16.1 and 16.2 serves as a guide to the drawdown process. However, in real
life, things are unpredictable, and so are the parameters being assumed here. The
averaged 2.43% yield may not stay as such, and inflation may not always be at a
steady 3% every year. With the variations in the percentages, and coupled with the
prevailing economic conditions, the portfolio balance may reflect higher or lower
than what was presented in Figs. 16.1 and 16.2.
From here, we could see now that there could be two ways in drawing down ac-
cording to the “4% rule”:

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 • Maintain fixed drawdown as planned - This is assuming that you
would be withdrawing the amount based on the numbers in Figs. 16.1 or 16.2,
regardless of how much the portfolio balance will be. There are two advantages
to this approach, the first one being the stability and expectancy of cashflow,
while the second is that the portfolio balance may be more in certain economic
conditions. However, the second advantage may become a disadvantage if the
portfolio balance dips below the benchmark numbers in other economic condi-
tions, causing you to probably drain the portfolio out faster.
• Fixed variable drawdown - This may sound as an oxymoron but what it
means is that the drawdown is done at a fixed percentage (4% in this instance) of
the prevailing portfolio balance. For this to work, you would have to look at your
portfolio balance at a specific time and drawdown 4% of it (you may also want
to include whatever inflation rate figures as provided by credible sources). The ad-
vantage of this would be your portfolio balance could be preserved longer, but
the disadvantage is that your cashflow would be unpredictable.
No matter what is your choice, the guidelines and discipline that are used to
build and maintain your Bedokian Portfolio (as described in Chapters 9 to 12, and
Chapter 14) must also be followed in the “dismantling” of it, especially on the part
of sticking to your asset class percentages and selling guidelines. If these are fol-
lowed, the volatility as described earlier in this section would be reduced and your
drawdown could become more manageable.

Drawdown Variations
There have been a lot of questions pertaining to the “4% rule”. Although it is a
mainstream drawdown “magic number”, depending on your preferences, you
need not follow it. You could drawdown lesser at 2%, or more at 5%, but one
thing you must remember is that the higher the drawdown percentage is, the faster
your portfolio balance is completely drawn down.
Another strategy is a shift of asset class allocation while the drawdown is in pro-
gress. This means in a given drawdown, one asset class is liquidated more than the

129
other asset classes, so as to decrease one asset class’s percentage over the others in
The Bedokian Portfolio. This may sound contradicting to what I had said in the
previous section of maintaining the portfolio in its allocated form, but as long as
diversification of asset classes is observed, it is all right.

Drawdown Administration
In this section I would state how the drawdown is to be administered. The first
question would be the frequency of the drawdown. Figs. 16.1 and 16.2 showed the
drawdown is done annually, and I recommend that this is the best method. The
reasons for this would be to save on transaction costs and to free yourself of the
hassle of choosing which financial instrument to liquidate weekly/monthly/
quarterly/half-yearly.
If going by annual, fix a date on the calendar to determine the portfolio bal-
ance, then sell off the designated financial instruments on the same day to get the
cash. Never mind the administrative delay (normally a few days) of getting the
cash from the brokerages, for you would already have locked in the amount.
When your financial instruments are liquidated, the cash proceeds are to be
completely removed from The Bedokian Portfolio and placed into your savings or
emergency funds account. This is to prevent distortion of the asset class percent-
age to your Bedokian Portfolio. Once this drawdown amount is in your bank ac-
count, follow strictly on how you would want to withdraw it, maybe on a monthly
basis like a salary.

Summary
• Regardless of when to start the drawdown, the first consideration would be
whether you wish to drawdown your Bedokian Portfolio entirely, or to leave all or
some for your beneficiaries. The second consideration is how much to withdraw
and at what interval from your allocated drawdown amount.

130
• With the two considerations, four choices are available; continue with the yield,
take pro-rata yield, partial portfolio drawdown and full portfolio drawdown.
• For drawing down, two additional methods are available; maintain fixed draw-
down as planned, and fixed variable drawdown.
• The building and maintenance guidelines and discipline for The Bedokian Port-
folio must be adhered to in the drawdown as well.
• There are drawdown variations such as using other percentages of drawdown
other than the “4% rule”, and to shift the asset class percentages while in the
midst of the drawdown process.
• It is advisable to do the drawdown on an annual basis to save transaction costs.
• The cash from the drawdown has to be removed from The Bedokian Portfolio
and placed in the savings/emergency funds account for withdrawal.

References
1 - Investopedia. Definition of Drawdown Percentage.
http://www.investopedia.com/terms/d/drawdown-percentage.asp (accessed 19 May 2016)

131