Value Cost Averaging

Recently, I came across a news article talking about value cost averaging. Basically, value cost averaging is a improved version of dollar cost averaging which requires some active monitoring to managing of your investment account.

Value cost averaging takes into consideration the performance of your funds before investing the appropriate monthly cash sum into the funds while dollar cost averaging would just invest the fixed amount of monthly cash sum into the funds. An example would be that a DCA strategy to invest a monthly sum of $200 into a US equity fund, but for VCA, if the funds underperformed like 1% as compared to last month, you would have to put in $200 + the additional 1% loss that you incurred. However, if the fund grow by 1% as compared to the previous month, you just need to put in $200 - additional 1% gain. Hence, this strategy buys low and sells high, and adjust accordingly to the performance of the fund.

I had created a simple spreadsheet should you require help in starting up a new VCA investment plan for yourself.

Value Cost Averaging Plan

Hence, value cost averaging is in fact looking at the targetted fund amount rather than the fund cost. The consideration is to reach the targetted value of the fund rather than having a targetted investment sum that you wish to put into a fund.

Stagnant markets

Recently, all major markets had been sluggish and most had dropped significantly. Some examples are STI from 3300 to about 3000 (10% drop), Brazil from 74000 to 67000 and Hang Seng had dropped till 24000. I had previously sold my Brazil fund at about 73000 for a profit of 20% as it is one of the couple of funds that is still in the black and that I think it is edging too fast up.

For the past few days, most markets are flat without signs of improving. The Brazil index is showing quite a large fluctuations (1%-2%) and just yesterday, it had pushed up to 68000 mark. However, it is still too early to determine if the Brazil index would drop after a day of gains till 65000. As for the rest of the market, investors might wish to put in some capital but note that recovery might not take place that fast even though I think it is already bottoming out.

A safer way to invest

A bad start to the year 2008 with uncertainties being certain. There are basically 3 things which I am concerned about. Firstly, recessionary pressure on the US economy which with the rest of the world having not decoupled from the US markets will cause growth in emerging markets to tamper down. Secondly, rising fuel prices. This means that production costs would increase resulting in a lower profit margins or in fact, this simply means that growth will be strifled. Thirdly, runaway inflation in growing economies which can be seen in China where food prices especially meat had risen much too fast due to affluence.

In actual fact, all these would slow growth in 2008 and the impact remains yet to be seen. However, I am still optimistic in the long run but neutral in the short term. My strategy is now changing due to unpredictability in the markets by adopting the DCA (Dollar Cost Averaging) approach. I had set up a regular savings plan to invest a few hundred monthly in a BRIC fund which I still have faith would be the growth engine of the world.

This approach enables me to average the up and down swings of the market that is too unpredictable but would enable me to reap a profit a few years down the road once market stablises and is on the upswing. In this way, I would be able to stay invested and yet adopt a passive approach. In the meantime, there would still be capital accumulation using savings from monthly salary for lump sum cash injections if required.

I believed currently this strategy is safer to spread out risks and yet taking a wait and see approach in the short term.

Market Recovery In Progress

Hi folks, I'm back from HK!

Tis the Christmas season, and so the retailers are having a great time. If you had managed to heed my advice and bought some UT last week, you should be making some money by now to spend on Christmas presents. As of last week, you would be able to see a positive mood on the stock indices. The momentum of the gains of last week had somewhat slowed down this week, however, it is still a recovery in progress till the end of the month.

However, we would need to take note of the macro-economic conditions and the pull out of investments seen in unit trust. For macro-economic conditions, economic data especially the job data had indicate that the US economy is not too bad. US would probably not go into any recession but might face slower growth. For asian markets, most of asia should be going into 2008 with strong growth but GDP growth might be curbed to prevent inflation from getting out of hand. China had declared a tighter monetary policy to curb inflation and the impact on the stock market would be negative in the short run but in the long run, Chinese stocks are still expected to post strong returns. For Korea, talks had continued on the FTA and things are looking up.

The pull out of investments in mutual funds is somewhat of a concern, as it shows that many investors are cashing out during this period. Using micro-economic terms to explain, this pull-out might drive down demand causing price of stocks to drop which in turn would be reflected on the price of the unit trust. However, it seems that the stock markets are still holding up well even with the cash out.

My advice would be to enter the market now as you had not done so last week as recovery would continue for some time with emphasis on Latin American, China, SEA economies. Even European funds look interesting for those looking at diversification.

Market Analysis

Last week, I talked about the duration of the correction. There are basically two factors affecting markets for this week. First is China's move to increase the reserve ratio to lower liquidity and secondly is the effect of the subprime crisis with highlights on Citibank and other European banks.

The first factor might be good in the long run to cool current fast rise of the index in both Shanghai and Hongkong although it might come as a shock to most speculators as the rate of fall is sharp. However, I do feel that somehow, China is going to push to allow their investors into Hongkong soon as previously, prices are much too high due to speculation of China's fund entry. Now, it should be priced at a relatively discounted rate of approximately 15%-20% which should be a good entry price for Chinese investors. Barring any unfortunate news, we might see an uprising trend either next week and in the last week of Nov which might push up global indexes.

For the 2nd factor, it's time to tally up losses so as to clear up the situation of how US and European banks current stand in terms of losses. Huge losses by Citibank is ringing alarm bells and this would prompt US/European banks to further anaylse the impact of the sub prime crisis and take measures to moderate these losses. However, we are also able to see stronger profits for retail stores and consumer electronics and this might be the silver lining. Nevertheless, it is still not worthwhile to put your bet in US markets although I suspect that with the strong growth of the global economy, US most likely would not go into a recession.

My advice for this week would be to start taking positions maybe next week when an uptrend starts forming.

Market Correction

Seems like today, the market correction is upon us. For high risk unit trusts especially China fund, today's price might cause your capital to drop by as much as 7%. Based on current trend, tomorrow might show a rebound but the ride might be tough ahead.

As an investor, this correction might be long overdue as hang seng had been hitting new heights almost every other day and it's time for a breather. In addition, big brother USA is not doing that well as seen by Citibank's problems. However, barring some very bad news, recovery might take place after 1-2 weeks.

If major asian indexes does not recoup its losses and in fact drop further on wednesday, you might want to wait a while before buying in more as the downtrend might continue. I do not advise buying in at the moment though even if you take a long term approach to investing and do not want to time the market. I do note that it's quite impossible to predict the lowest point of the market but it is still possible to buy when the market shows sign of recovery to ride on the tide up.

Fed Meeting on 31 Oct

This week can be considered the gambling week with the Fed meeting on the 31 Oct 2007. Many people might invest on Wednesday should they think that the Fed might lower interest rate again on 31 Oct, conversely, many people might also sell their investments should they feel that the Fed would not take any actions.

However, this is what I feel might happen. The Fed would most likely not lower their interest rates and this would enable US$ to rise. Although this might be contrary to expectations that US interest rate would be lowered, the Fed chairman would reassure the public that they would monitor the situation and take immediate action to lower interest rate if neccessary like previously. Thus, stock index might not neccessarily drop with such encouraging comments and even if it drops, the magnitude of the drop might not be that great as Fed has indicated that they are going to cut rate in future rather than now.

I would still remain with my stance of adopting a wait and see attitude as I'm advocating the viewpoint of an investor rather than being a speculator to time market movements. Note that after the Fed meeting, sentiments and market trend would be clearer for the investors to analyse where to put their money in.

Recently, the Chinese funds are currently stagnating with regards to their performance 3 months ago. For these past few weeks, the best performer should be the korean funds. The korean market (Usually the KOSPI) is tracking the Japanese market (NIKKEI) and recently with major Japanese firms releasing good financial results, this would have positive impact on the Korean market as they basically follow the trend of the Japanese market. The Latin America economies are tracking the US market which is currently mired in uncertainty, so their performance are also not that great for these past few weeks.

Markets Update

Seems like global markets are weak for this week and last week. It would probably be weak till the situation becomes clearer after the Fed meeting on 31 Oct. There's a high possibility that Fed would not cut rate so fast prompting a further drop in market indices in the world. Currently, I expect most investors to cut their holdings or adopt a wait and see approach.

For those planning to buy in funds or increase their holdings, I would suggest to hold your horses and wait for the uncertainty to clear up first as fund prices are different from stocks in that they appreciate or depreciate gradually compared to stock prices, thus, even if you would not get the price at rock bottom price, you will still manage to ride the upward wave up.

Funds Market Analysis (Oct 15 - Oct 19)

Some market updates here.

On the horizon, I expect a short term correction during these 2 weeks for the Chinese markets or at least in the near future. HSI had been breaking records every so often and I guess some profit taking is bound to take place. In addition, there is pressure from rising oil prices that would cause profits to suffer. Thirdly, although the Chinese government is optimistic about economic growth in general, they had to implement some highly unpopular policies to cool down their overheated economy to prevent prices from spiralling out of control.

Technology funds are worth looking at as growth and earnings are strong. In addition, as most people are still traumatised by the tech bubble burst, this sector is often neglected. Currently, one of the drivers of the US economy is the technology stocks after being hit by the sub-prime crisis. Overall, the US economy still looks ok but their stock market is still badly shaken. As discussed previously, many analysts are still predicting further Fed cuts before the end of the year if they didn't already done so on 31 Oct 2007. I however look unfavourably on further rate cuts as a sign of weakness of the US market which requires intervention to bail out speculators that place their bet on the wrong horse. Thus, I still view US as a region where I would not go into.

With weakness of the US market, other regions like Brazil and Mexico that are of close proximity to the US market are also hit. The performance of Dow and Nasdaq seems to impact how the Brazillian and Mexican stock market perform, but growth for Latin American markets are still favourable in the long term. For short term investors that has an investment horizon of less than 3 months, probably you should take a look at Asian economies that are offering better returns.

I would look more closely at Korea for this quarter as first of all, the growth of the economy is going to be better than expected. Secondly, I'm optimistic that Korea would most likely conclude the FTA with Europe by end of the year even though talks are still ongoing and the representatives are saying that it might not be concluded by end 2007. For funds dealing in Korea, market volatility is not as great compared to China, India and Latin America but still returns a modest growth of 20% a year. Korean funds are expected to do generally well till first quarter of 2008.

However in general, the global economy still looks good from now till 1st quarter of 2008 with minor dips along the way.

Funds Market Analysis

Currently, we are in a period of growth globally and the main focus of this growth is mainly in Asia. Emerging markets like China and India are getting a lot of attention as their domestic market base is big, they are also resource-rich and have plenty of room to expand. The following are my views on some sectors that I would pay attention to.

Bonds (Risk rating:3-4)

Bonds are normally a safe haven in market corrections or in a recession as they often guaranteed returns over a long period of time. Recently, bond funds had performed admirably against a backdrop of sub-prime issues as investors suddenly cut on equities and flocked to bonds which pushed up the price. However, this relatively safe haven might still edge upwards in future.

Reason : Expectations that US will further lower their interest rates will push this baby upwards.

Actions to take: For cautious investors who wish to hedge against uncertainties in the market or even for those who wish to include bonds in their portfolio, you might wish to consider putting more weightage on bonds. However, traditionally, bonds are not really a great money earner.

Asia Ex Japan (Risk rating:7-8)

Asia accounts for much of the growth in the global economy excluding Japan. It is expected that this region would continue to drive growth for the global economy.

Reason : Strong GDP growth for many countries in Asia. Growing domestic markets especially in China and India that fuels growing demand for consumer goods and raw materials. Implementation of the QDII initiative in China would inject excess liquidity from China into Asian markets that have chinese-linked shares.

Actions to take: I personally would increase my portfolio in this region as overall, growth in Asia would outpace other regions of the world if I require a region based fund.

China or Greater China(Risk rating:8-9)

Most of the funds dealing with China have little or negligble weights in the 'A' shares. These funds are mostly dealing with shares linked to mainland corporations listed in Hang Seng also known as 'H' shares. It is predicted that China would continue to grow for many years ahead.

Reason : Strong double digit GDP growth in China. Large domestic market. Host of the 2008 Olympics.

Actions to take: For aggressive investors, you would like to put part of your portfolio in a China equity fund. It has consistently generated returns of >40% annually. I expect some corrections along the way from now till end of the year but overall, sentiments on the ground is quite upbeat about China and there is this underlying faith in the Chinese government to ensure that everything would proceed smoothly till the Olympics is over.

Latin America(Risk rating:9)

For Latin America funds, most of the growth comes from Brazil so you can expect funds to allocate about 50% of their resources to the Brazillian market while a greater part of the rest goes to Mexico. Latin America is generally not in the media limelight compared to other emerging markets like China and India, however, they are still attractive having offered high returns for the past 3 years. This sector is driven most by the US consumer markets, being geographically close. However, it must be noted that the US sub-prime issues had affected it quite badly but it is starting to recover from the worst of it.

Reason : Being an emerging market relatively close to the US, its' market is tied closely to the US. The demands of the US consumption market will continue to fuel the growth of the Latin American markets especially when US is recovering from sub prime issues.

Actions to take: For aggressive investors, you would like to put part of your portfolio in a Latin America fund as part of your diverified portfolio. Note that more and more people are turning their focus to other emerging markets as they regard China and India to be getting more and more expensive, and one of the attractive markets to look at would be Latin America.

Other markets like Europe and US are still bogged down by sub-prime issues even though they had weathered the worst of it but somehow, the uncertainty of the magnitude of the subprime issue is still present. News that UBS, europe largest bank, is having losses of millions of francs in the 3rd quarter is certainly not reassuring to investors. In US, it is still unsure if the subprime "death" toll will increase further and with the US market pressuring Fed for more rate cuts to bail out the market does not really raise the confidence of the investors.Thus, I would avoid this 2 markets for now unless you wish to diversify your portfolio and currently do not have any funds in the these sectors.