Sunday, February 03, 2013

The investor's dilemma

A dilemma is a problem that offers (usually) two choices, neither of which is particularly attractive. And this is precisely what I, as an investor, feel faced with at this time.

On the one hand, we are continuing to experience inflation. Even at around 3% pa (+/- a bit depending on where you live), the real value of money is deteriorating. With central banks continuing to print money and, in at least some places, private sector credit creation either still in, or returning to, positive territory, it would be a very brave investor who would bet against continuing inflation over the longer term. Holding cash or most of the bonds that are available to retail investors more or less guarantees that the real value (purchasing power) of my investments will shrink. I don't like the idea of holding assets that I expect to lose money on.

On the other hand (and, I am starting to sound like an economist), the price of risk assets does not generally represent good value. While the Hang Seng index is far from expensive, neither is it cheap. The same can be said for most of the other major markets. It is of come concern that there appears to be a wave of new found optimism infecting the markets. Words like "momentum" and "rotation" and references to retail investors returning to the market are popping up all over the place. I'm generally happier when the the bad news pundits are dominating the headlines. I don't like the idea of buying into a market which doesn't offer Buffet's "margin of safety" either.

Since I am feeling particularly indecisive, but recognise that with retirement only a matter of months away it is better to err on the conservative side (whatever that may be), the only things I have decided to do are (i) not to chase the market and (ii) aim to allow my cash/near cash holding to end up higher by the time I retire than it is currently. At the moment, I hold 42 months of expenses in cash/near cash. By retirement, I am now aiming for at least 50 months. This does not actually require me to sell anything - just invest a little less than the sum of the cash coming in from various sources between now and then.


bean counter said...

I'm having similar thoughts at the moment. I've set up a small monthly investment in the hk index just to keep things ticking over, but i'm holding off on any major new portfolio additions for now.

One option to consider (if savings rates are less than mortgage rates) may be to pay down some mortgage debt ahead of retirement?

traineeinvestor said...

@ bean counter

Thanks for dropping by.

Paying down the mortgage is cetrainly a possibility but they are only costing me around 1% pa on average - and even that is tax deductable, so 0.85%. That's a pretty low cost for keeping my powder dry. Of course, I could repay some mortgage debt and then reborrow when I felt it was time to buy again but (i) I'm about to retire so will have no earned income and the banks may be reluctant to lend to me even with security and (ii) the cost will be higher (around 2% at the moment?) and (iii) the interest will not be tax deductable.

If I think I will be leaving cash on the sidelines for a long time (2-3 years or more), it probably makes sense to repay - 0.85% is better than 0.01%. If for a shorter time, I think I am better off keeping cash and waiting for the next buying opportunity.


J-D said...

The current P/E of the HSI is 11.32 (04/02/3 close). I think the historial value is 12.8. I think it's probably ok to add slightly as we go (like Bean Counter).

Anonymous said...

Hi J-D

I agree that the HSI is trading at a discount to historical PE (and other multiple) data and, at 11.3 x, is not at all expensive.

However, it's worth remembering that the HSI has a reasonable weighting to property companies and the results of those companies includes gains on revaluation of properties. When the properties stop going up in value or start going down, it will have at least some effect on the earnings of the HSI as a whole. I don't know how much?


J-D said...

I agree, but these days property co dont weight much anymore(SHK, CK, Swire, Wharf, HLP, Henderson, new world + Sino Land are ~ 10% of HSI only...) and some of this isn't even pure property (eg CK, Swire)

Super Saver said...

As Yogi Berra once said,"It's hard to make predictions, especially about the future." :-) Whatever decision you make will be a good one because you've thought through the options and risk, and chosen what you believe is best.

Good luck on your retirement journey.

Anonymous said...

@ J-D

Thanks for the informations. That would suggest that if revaluations go to zero, a 4-6% fall in HSI aggregate earnings. Not a big deal.

@ Super Saver

I wish it were that easy!

Thanks - I am looking forward to leaving the work force. Just have to make sure I keep myself busy.