Investment Diary #12: Investing, there are more potholes than you think
Sharing with you what I have learnt recently, mainly talking about investment funds, bonds, diversified investment ideas, fund selection.
Most of the people can say that 99% of the people choose individual stocks by following the crowd or blindly. It’s very hard to get returns that outperform the index with individual stock choices.
In fact the statistics listed in several books I have read, most of the masters and even active funds, are survivor biased, just because they may win in the short term, doesn’t mean they will win all the time, we can’t tell which master or which active fund.
The average person has to judge the best-in-class companies that are priced below their intrinsic value, and basically can’t do it and doesn’t have that kind of time. So the method that applies to the average person is to invest in an index.
Therefore, buying an index is the best choice. Perhaps you may ask: Is it that simple? No, it’s actually not that simple.
I studied for a period of time, the conclusion is: not only buy the index, but also need a combination of stocks and bonds, but also diversified asset allocation, dynamic balance.
It looks like a lot of trouble, but it’s actually relatively simple.
Let’s start with the why.
When buying stocks, you need to decide whether the price is cheap, usually valuation, and then compared with the risk-free rate of return of bonds, if the price can offset the risk, the probability that the future value can return. To be able to face volatility, you need to be able to value.
So bonds are the investment counterpart. In addition, and the stock is the opposite, if the stock is up, the bond may be down, the bond is down, the stock may go up. So the two are hedges.
In the long run, stock returns are much greater than bonds, but when the whole stock market is bad (this time may be decades), you need to buy bonds to hedge, and even when inflation, the U.S. market you need to buy inflation-tracking bonds to hedge the risk.
So what is the general rule for the ratio of the two? According to your age, for example if you are 30 years old, you can follow a 2/8 ratio, 2 being bonds, which should increase as you get older. That is, the ratio of asset allocation is not definite and is based on the individual’s risk taking capacity.
What is the purpose of balancing through dynamics? Operate once a year at the end of the year or in the middle of the year, for example, if the overall value of bonds is less than 20% and stocks have risen sharply, sell the stock portion of the portfolio and buy bonds. Returning the ratio to what it was originally set can result in higher returns by buying low and selling high.
Here we mainly talk about the index (of course the index can also be replaced by part of the stock, provided you have this ability to judge, of course this ratio is best based on my previous allocation, the large part of the split to the U.S. equities>developed>emerging markets, because according to the statistics in the books, U.S. equities returns are greater).
Assuming the average person just buys the index. What to buy.
When buying individual stocks, we need to pay commissions, and if we are going for dividends, you may not be aware that buying on the share registration date and then selling after the dividend is deducting a portion of the dividend. Holding time within one month (including one month), 20% of the amount of dividends; holding time more than one month, within one year (including one year) 10% of the amount of dividends; holding time more than one year, tax-free.
There are more pits in buying funds.
Now there are many types of funds, what LOF, ETF, joint, etc., anyway, many names, even a fund type, index funds, there are several fund companies. For example, Southern CSI 300, CSI 300 ETF, here again there are OTC and OTC.
Choosing a fund, we determined that index funds are the cheapest, reliable, and in the long run can outperform all other active funds, including the masters, through low turnover and low fees.
On-market trading is basically less expensive than off-market trading.
I compared the South CSI 300, CSI 300 ETF these two, the field is the transaction costs (brokerage commission), and custodian fees and management fees are the same, the field to see what type you buy, such as the South CSI 300 A, where the A is that is to say is the purchase of the time to be charged (front-end to be charged)
For example, I buy and sell ETF index funds in the market commission is 0.015% (10,500), that is, I buy 100,000 yuan of funds, the cost is only 15 yuan. When I sell it again, it also costs $15. Whereas an OTC investment of the same amount would require a minimum subscription fee of 100. Overall, you can save over 70% on OTC funds over OTC fees.
For example, I looked at the Huaxia Asian Bond Index A fees for Snowball and Flush funds:
Comparing to Alipay, there is also a customer maintenance fee, I don’t know what it is for. Of course sometimes Alipay may also do activities, discount. Of course there are daily funds, no time to see. So OTC must see clearly whether there is a redemption fee or even sales management fee. Then I looked at the official fund website and the fees are even higher! So the channel is important.
That fee difference could cost you hundreds of thousands of dollars in lost earnings.
Let’s talk more about U.S. stock purchases. I used Fortress Bull, which has a trading commission of $0.0049 per share with a minimum trading commission of $1. In addition to the trading commissions, Futura Bulls also charges a clearing fee. Clearing fees are fees charged by exchanges and clearing houses to settle trades and secure trades. For U.S. stock trades on Futura Bulls, the clearing fee is $0.0000221 per trade.
There is also a tax issue. You see a lot of financial books emphasise tax-free accounts. I researched the inside of the Futura trading, you look for the account, there will be a w-8be form, this thing needs to be signed every few years, used for tax-free, if not signed, the purchase of shares tax rate is oddly high!
Investors in the U.S. stock account, if you do not fill out the W-8BEN form, it may be against the income from the United States need to deduct 30% of the tax, and this tax rate is much higher than other tax agreements with the United States and the United States has a tax agreement with the residents of the country’s tax rate. Therefore, when investors open a U.S. stock account, they will need to file a W-8BEN form to prove that they are not U.S. citizens and are exempt from U.S. taxes.
After talking about the importance of fees, the last focus on diversification, that is, the choice of index. I’ve been reading a few books and looking through various sources.
China market options: CSI 300 ETF, Huaxia Asian Bond China Index.
Both are index funds with low fees. Huaxia Asian Bond China Index A (F001021) Established more than 10 years ago, 10-year annualised 3.75%, return in the median, moderate, tracking the index is the CSI Treasury and Policy Financial Bond Index.
US market picks: TIP (inflation bond index), BND (total bond market), VTI (overall stock market index)
And of course VT (global stock market index), VT volatility may be even higher than VTI, because it is global, so for VT and VTI I choose VTI. both are vanguard funds or IShares with very low rates.
If you follow a lazy portfolio, a bond index and stock market index allocated proportionally and dynamically balanced from year to year is a winning investment for an individual! If you are better, you can allocate proportionally to each market (developed, emerging markets, US, and real estate proportionally to your investments).
As a person, the four most important things: health, finances, relationships, emotions and meaning in life. Finances are essential. One’s ability to balance, to balance assets and output. If there is too much output, assets are depleted and too little output, assets are wasted.
Your perceptions determine your actions and your actions determine your results. Take action, do the responsible thing and move towards a happy and fulfilling life.
Source of Information:
- Extraordinary Success - A Winning Approach to Personal Investing
- The Road to Financial Freedom
- The Road to Financial Freedom “Getting Paid to Work - How You Can Make $6 Million in Your Thirties”.
- Snowball
- ChatGPT