What to do with your asset allocation?

With the latest property cooling measures, another avenue for investing one's money is reduced. With the negative perception of Gold Investing (Genneva, Gold Guarantee e.t.c), less money will flow into those avenues. There is a possibility that equities could do well given that  it's one of the few remaining avenues where money could flow into, especially given the monthly money printing by the United States and the ultra low interest rates. As our name implies and having always given a consistent message since the inception of this blog, dividend yielding stocks is still the right way to go. As usual,if in doubt, keep a 50% cash and 50% Equity of dividend yielding stocks. How about Gold and non-dividend yielding stocks with a high beta that could see capital appreciation? I feel that investing is to buy into something that gives a return immediately and not based on the whims and fancy of the dynamic market which is so darn difficult to read and easily manipulated by some big fish, even if one is an excellent technical analyst. Buying Gold and non-dividend yielding stocks is more of gambling instead of investing in my dictionary.

A friend asked me what she should do with the money.

If one is putting funds aside for retirement:
A possible avenue to 'invest' could be dumping some cash into SRS to enjoy  an immediate risk-free guaranteed gain of a reduction in taxes based on one's income bracket and waiting for any Equity correction to use the SRS funds to snap up some dividend yielding stocks. But one can only dump about 12Kyearly due to the cap. Optimum age group to do this are for those above the age of 45 years old whose income bracket is generally higher, shorter lock-in period and the 12K yearly deposit from 45 years old could possibly attract no taxes at all when one is to stretch out their yearly withdrawal. Anyway, if you are 45 years old and above, you are probably greatly affected by the new property rules.

If one is putting funds aside for property investment while waiting for a major correction(happy waiting....):
A possible avenue to 'invest' could be dumping some cash into CPF OA to enjoy a risk-free 2.5% which can be used to pay for a property investment or possibly even snapping up some dividend-yielding stocks if a major correction should occur.

The above 2 options faces some restrictions so if one wants maximum flexibility, put in bank!

Options options options. Thats the beauty of life!

How interest rate affects perpertuals- Genting

A reader commented that interest rates were at the historical low and that the only way is up. That i totally agree. What i am unsure of is just when. When interest rate increases, price of bonds will go down, especially so for bonds without maturity, a..k.a perpertuals like Genting. Looking at the 12 month Sibor from 1987 - 2012, the highest it has reached is 7.75% and the lowest it ever reached is right now, 0.59%.

Genting perpetual was offered at $1 par value with 5.125% coupon at the time when the 12 month Sibor was about 0.59%. This implies that the market is willing to take on the risk of holding the perpetual with an additional interest rate spread of 4.535% ( 5.125%-0.59%) over the 12 month sibor.

Assuming the market expects this spread of 4.535% forever and we keep it as constant. ( Please note that this spread changes based on the market perception of Genting's risk. Obviously, MAS is causing some negative perception!) Below is the worst case price one can expect given the different 12 month sibor rates.

Yield = 4.535% + 12-month Sibor
Genting Perpetual Price = 5.125% divided by Yield

The questions now are:

When do you think interest rates will rise?

What other investment classes available to retail investors will not be affected by changes in interest rate?

Do you think property (which is leveraged by the way) will also be affected by interest rates or not?

How about equities(Shares)? Will it be affected by interest rate too?

If a severe market crash like Lehman occurs again, which will fall more, Genting Perp or shares in general?

I feel that investing is not only about the possbilities, but also the probabilities. Given the severity of the recession in Europe and the US, how high are the probability of them raising interest rates? Read the news and realise that many countries surrounding us have also been cutting interest rates, like Australia, India, Brazil,Morocco e.t.c. Sure inflation is a concern, but which is a bigger evil, unemployment or inflation?

I for one am preparing ( and hoping) for a Lehman-like crash. If it occurs, i am pretty sure that my Genting Perps will still fall but definitely not as much as shares.

Having said the above, a sharp rise in interest rates to 7.75% is still possible. Thats why keep it as a small percentage of your portfolio.

BTW, the issue i have with MAS is that there are many much more risky ,complicated and non-transparent investments out there compared with perpetuals! Regulate those first before regulating perpetuals! Come on!