Analysis - Portfolio Overhaul

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So TLDR, I sold off StashAway, United Global & TA Global Technology and put them all into Vanguard Total World Stock Index Fund ETF (VT). I also decreased the weightage on United ASEAN, Manulife REIT & Principal Greater China to just 10% each. Read on if you'd like to know more about my thought process.

   A few factors triggered this major portfolio reshuffle. It first started from my strong desire to exit StashAway. After grossly underperforming the S&P500 AND charging a fee of 0.8% p.a. AND constantly re-optimizing their ETF holdings, I realised it has broken every adage of ETF investing i.e. buy and hold for long term, keep fees low and get market returns. The way forward was clear but prior to withdrawing my StashAway funds, I had to decide on which ETF to buy and hold.

   To help with my ETF decision, I also had to consider where to allocate my new 'base camp' fund seeing that United Global Quality Equity Fund has been closed. Problem is, there was no other mutual fund on FSM which broadly invests in global stocks like the United Global. So I looked into a suitable ETF instead. The Vanguard Total World Stock Index Fund ETF (VT) seemed to check all my needs for a globally diversified fund and its returns were even a little better compared to United Global. I even went one step further and transferred all my United Global Funds into VT in order to simplify my portfolio. The StashAway funds were also transferred into VT.

   It did not stop there! Next, I looked into the viability of holding onto a sector focused fund i.e. TA Global Tech. Yes, tech has done well for the past decade, but like print, mining, tobacco, etc; who knows when tech would one day fade out and be replaced with another disruptive sector. Instead of trying to time that inevitable day, I decided to just transfer all my TA Global Tech funds into VT as well.

   Seeing that VT already has Emerging Markets in the holdings, I could theoretically just move all my funds from United ASEAN, Principal Greater China & Manulife APAC REIT into VT (i.e. 100% of investment portfolio into VT). However, I do believe that the Emerging Market is still rather inefficient and would benefit from some active management by a mutual fund. I did however, reduce the weightage of each fund to just 10% each. Onwards to better days!

Analysis - StashAway Reoptimization (July 2021)

StashAway Malaysia has decided to conduct another round of portfolio re-optimization amidst the changing environment. You can read their original article here but to sum it up, they believe that while the U.S. indices are skyrocketing right now, it does seem that inflation in the U.S. is starting to speed up from its current figure of 5.4% p.a. in June 2021.

   To paraphrase a page from the "Intelligent Investor by Benjamin Graham", when inflation shot above 6%, stocks stank. The stock market lost money in 8 of the 14 years in which inflation exceeded 6%; the average real return for those 14 years was a measly 2.6%. While mild inflation allows companies to pass the increased costs of their own raw materials on to customers, high inflation wreaks havoc - forcing customers to slash their purchases and depressing activity throughout the economy.

   So StashAway Malaysia has decided to re-optimise the aggressive 36% portfolio as follows:

• Consumer Staples (XLP), Energy (XLE), REITS (VNQ & VNQI), Precious Metals (GLD) & US High Grade Bonds (AGG): These stock types have historically proven to perform very well (vs the stock market) in times of high inflation. You will notice they are commodity or 'basic necessity' type of stocks.
• Australia (EWA): What better way to capture commodity returns than investing in a commodity-exporting country?
• Small Cap (IJR): This is more to do with capturing the momentum rather than the inflation returns. Value stocks have been in the shadows of growth stocks for a few years. Now that value stock is back in the spotlight again, they foresee this to trend for quite a while to make up for lost times (vs growth stocks).
• China Tech (KWEB): This is more to do with capturing the potential rather than the inflation returns. With a population of 1.4 billion, rapidly growing economy and laser focus on becoming a technology superpower, it only makes sense to keep invested in this ETF.

As for my opinion, I don't actually have one. I mean, I am pretty glad that they did not give up on KWEB despite their horrible run in year 2021. KWEB is a high risk, high reward ETF which I don't mind holding on for a while. As for the overall strategy, it does makes sense but only if their prediction that the inflation will continue to rise to uncontrollable levels comes true.

Analysis - Using Personal Loan to Invest

The calls from my bank to push for personal loan is getting a bit out of hand these days. 

I guess with the record low lending rates nowadays, banks need more volume of retail loans to make up for the dip in profit. The sales pitch would go something like the following, "Get a personal loan right now at record low rates (5% p.a.), invest it all into stocks which are right now averaging more than 5% p.a., and PROFIT. Best of all, you are locked in at the record low rate for the rest of the repayment period!"

As a bored engineer with nothing better to do, I thought it will be a good idea to put that thought into excel. So in this first scenario, I am going to take up a RM 100,000 loan at a fixed rate of 5% p.a. for a 10 year (120 month) tenure. This RM 100,000 will then be placed lump sum into a bond fund that returns me 6% p.a. Theoretically, that should give me a net earning of RM 1,000 (1% of RM 100,000) at month 120. But is that the case though?

From the projection above, we see that at the end of the 120th month, this portfolio would end up at a negative RM 20,000. So what is the problem here? The issue stems from the RM1,250 fixed monthly repayment that has to be made on the loan! With normal investments, the interest compounds on top of the principal. 

However, in this 'scheme', the principal is continuously reduced from the monthly repayment of the loan. The interest is not given a chance to properly compound. So the next question would be, what is the required return of investment to have it break even (return zero) by end of the 120th month? The answer is 8.57% p.a. See below:

That is right. To break even on a 5% p.a. personal loan, we will need the investment to return 8.57%! This figure is multiplicative as well, i.e. to break even on a 10% p.a. personal loan, we will need the investment to return 15.8% p.a.

I guess what I learned from this analysis is that if I ever think of borrowing money to invest, I better be damn sure the investment makes a much larger return than the loan rate.

Analysis - A Case Against Real Estate Investing

Below is an analysis of two different people with two different investment philosophies. Ricky Renter believes in real estate investing and Steve Stock believes in putting his money into mutual funds (stock market) instead.

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Yr	Ref	Milestone	Ricky Renter	Steve Stock
0	A	Initial Capital	Home sale price is RM500k. A 10% DP of RM50k is required. Ricky starts off with a total Fixed Equity of RM500k (Home Value) – RM450k (Mortgage) = RM50k	Steve invests the RM50k into his stock portfolio.
0 - 35	B	Appreciation	Ricky's home appreciates at a rate of 1% p.a. against his initial home value of RM500k.	Steve's stock portfolio has a return rate of 5% p.a. against his 50k initial investment.
	C	Mortgage Repayment	Home loan interest rate is about 4%. For a RM450k loan to be repaid in 35 yrs, it works out to be a flat RM2k/month. Luckily for Ricky, inflation & home value increase has no affect on the repayment amount.	Steve has no mortgage repayment obligations.
	D	Maintenance & Repair	The home will require a yearly repair cost of about 1% of the home value. So for the RM500k home, the yearly maintenance cost is about RM5,000. The 1% p.a. increase will take inflation into account.	Steve has no home repair obligations.
	E	Property Occupied (10m/yr)	Ricky gets to collect monthly rental. We also gave Ricky the benefit of yearly rising rental rate (1% p.a.). During occupied periods, the tenant is essentially paying for Ricky’s mortgage. However, to be realistic, we assume tenancy of 10 out of 12 months only.	Steve has no rental income.
	F	Net Cash Flow	Ricky’s net cash flow sums up (C) + (D) + (E). Although Ricky gets an increasing rental rate every year (1% p.a.) and his mortgage repayment is fixed, the net cash flow is still negative due to (1) Maintenance cost also increasing 1% p.a. and (2) During vacant periods, Ricky has to directly service his mortgage loan. When Ricky derives a negative cash flow, he needs to withdraw that amount from his savings.	For a fair comparison, Steve gets to withdraw the same amount from his savings. But instead of paying off the maintenance and outstanding mortgage (which he does not have), Steve contributes it into his stock portfolio.
35	G	Mortgage Paid Off	Ricky’s property would have appreciated to RM708k. At the same time however, Ricky would have withdrawn a total of RM217k for maintenance and servicing his mortgage loan during vacant periods. His total equity comes up to RM491k.	Steve initially started off with RM50k in his stock portfolio and makes a yearly contribution of Ricky’s net cash flow (F). His portfolio returns a rate of 5%. His total equity (i.e. his stock portfolio), sums to be RM956k.
35 - 50	H	Ricky Reaps the Rewards?	Ricky no longer has outstanding mortgage loan. All the rental income now goes into Ricky’s pocket minus the maintenance cost. He is now at a net positive cash flow every year. The additional income will go to stock investment (5% p.a). The home continues to appreciate at 1% p.a.	On paper, Steve no longer has the upper hand here. Unlike Ricky, Steve does not have any rental income. And since Ricky no longer needs to withdraw cash from his savings to fund the negative cash flow, Steve will also stop his yearly contribution to his stock portfolio. Steve will rely solely on the 5% p.a. return rate on his portfolio for equity increase.
50	I	Ricky Wins! Not.	Ricky now has a home value of RM822k and stock portfolio value of RM486k BUT we must not forget the RM217k accumulated expense from point (G). That sums up to RM1,091k.	Steve’s stock portfolio that started off at RM956k at year 35, grew 5% p.a. with zero cash in. How did he do? His portfolio grew to a whopping RM1,989k at year 50!

Steve Stock comes up way on top. There are several other scenarios where Ricky Renter could possibly win this one instead:

• Stock Market rate of return goes down to 3.4% p.a. However, any decent mutual fund portfolio could return 5% p.a. or more.
• The occupancy rate goes up to 11 months per year (92%). This would take mix of a good property agent, a good location and a bit more spent on maintenance & renovation.
• Maintenance rate reduced to less than 0.4% of home value per year. Be warned that skimping on home repairs may reduce the rentability of your property (i.e. reduce your occupancy rate).

Analysis - Moratorium, Opt In or Out?

So as the economy downturn starts to take its toll on us financially, Bank Negara has decided to throw us a bone by offering a 6 month break from monthly repayments of our home loans. The fancy term for this temporary repayment break is 'moratorium'. 

However, this repayment isn't exactly a full on repayment holiday. If we ceased the mortgage repayment during this 6 month break, we will still be hit with the monthly interest during the holiday. This is where a lot of us get confused because we tend to think that if we took this 6 month repayment holiday, our loan will simply be extended by 6 months. That is unfortunately, not the case.

Say I took a RM100,000 mortgage at 3.75% interest rate and to be repaid in 30 years (360 months). Based on a quick calculation, the repayment rate is about RM 463/month. Now, if I took the moratorium and not pay anything for 6 months, the monthly interest will be added onto my RM100,000 mortgage and total up to RM101,867 by the end of 6 months. From month 7 onwards, if I maintained my repayment at RM463/month, my last payment would have to be extended to 378 months. That is an 18 month period increase, not 6 months! Putting text into table, see below:

Month	No Moratorium Continue payment RM463/month	With Moratorium 6 month break RM463/month
	Mortgage Value	Mortgage Value
0	100,000	100,000
6	99,089	101,867
360	0	8,101
378	0	0

However, one wonders, would the power of compound interest work for me if I took the moratorium on my home loan and invested all that 6 month cash into an aggressive portfolio? Below is an analysis on my actual home mortgage (RM595,700 at 296 months of payments left):

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It's clear that I will take the 6m moratorium break and invest all that extra cash into an aggressive fund.