Eighty-twenty Investment Timing System



Eighty-twenty Investment Timing System by

Siew Onn, Wan

January 2004

“It is hard to earn money, it is even harder to keep it”

Introduction 2

Objective 2

Potential Practitioners 2

What it is not 2

Suggested Usage 2

Eighty-twenty Investment Timing System 2

Investment Principles and Strategies 2

Assumptions 4

Critical Success Factors 4

Trading Criteria 5

Buying 5

Selling 6

Risk Management 7

Current Suggested Portfolios 7

Singapore 7

Asset Classes 10

References 11

Screening Tools 11

Technical Charts 11

Investment Ideas/News 12

Conclusions 12

FAQ 12

Disclaimer: The author is not an authorized financial planner or investment professional in any countries. Use the system as reference only.

Introduction

Objective

The objective of the system is to get maximum return using as little effort as possible and with minimum risk. Specifically the system is trying to get at least 15% return year-over-year with no more than 5% loss per annum and using no more than 10 hours of practitioner’s time every week.

Potential Practitioners

• Those who do not have the time or interest in investing. However they cannot ignore the markets for various reasons, e.g. inflation will reduce value of their idle savings, desire for financial freedom.

• Specific suggestions are for those who have access to Singapore and/or US market (to be covered in the next release).

What it is not

• It is not a quick-rich or guaranteed scheme. You must consider the impacts of losing all your investments.

• This is a generic timing system. No consideration for your financial situation, cash flow and risk appetite. If you have special or complicated needs, consult your financial planner or private banker.

Suggested Usage

• Use the system for paper trade first. This is very important for those who are just started in investment.

• Use the system as starting point and learn as much as possible from the references used in this system.

• Form a group to share information. A person may miss a big move in an asset class due to various reasons, e.g. time constraint, blind spots.

Eighty-twenty Investment Timing System

Investment Principles and Strategies

|Principle |Reasons and Strategies |

|Protection of |Reasons: |

|capital |You need capital to earn more money. Consider this, 10% of $1000 and $10,000 is $100 and $1,000 respectively. |

| |Obviously the larger the capital, the more you gain for the same performance. |

| |If you lose 10% of your capital, you need return of 11.11% to recover the loss. Sometimes it is tough to make|

| |10%, 11.11% will be harder and you have a smaller capital. |

| |Strategies: |

| |Dollar cost averaging (). Even after doing your homework,|

| |it is still possible to loss your investment because you place the bet before occurrence of the expected |

| |event(s). For example you invest in a retail shop because the traffic in front of the shop is heavy. The |

| |investment could turn sour due to various reasons, e.g. the heavier traffic is due to one-off promotion, |

| |natural disasters. Therefore it makes sense to invest in stages. |

| |Diversification (). Nobody knows for certain the |

| |investment will work out. It is wise not to put all your eggs in one basket. |

| |Hedging (). If you are making a speculative investment or large |

| |investment, make sure you know the potential risks (scenario analysis) and hedge the investment accordingly. |

|All/Consistent |Definition: |

|return |Return of the portfolio is positive usually (even in down market) with little fluctuation. |

| |Reasons: |

| |Most of us would like to sleep soundly at night without worrying too much about the investments. We would like|

| |to be masters of investments. |

| |Protection of capital. |

| |Strategies: |

| |Market neutral (). At any point in time, there are bull |

| |markets and bear markets. Therefore using bull market and bear market strategy is more profitable. Taking |

| |advantage of bear market is a more advanced strategy, e.g. short |

| |(). Use it with extreme caution. Avoiding the market is the most |

| |simple bear market strategy. |

| |Asset allocation (). Asset allocation is related to |

| |diversification. Diversification is akin to putting eggs in different baskets. Whereas asset allocation is |

| |analogous to putting eggs in various baskets in different proportions. By continuously reducing investment in |

| |asset classes undergoing correction and increasing investment in well-performing asset classes, we increase the|

| |chance of maintaining positive return. Of course we are mindful of excessive trading which will increase our |

| |expenses. We also cannot abandon certain poor-performing asset classes because they may turnaround quickly |

| |Using fundamental analysis () and technical analysis|

| |(). No single method can predict the outcome of an |

| |investment. Using both analysis tools will increase chance of success. The system advocates using fundamental|

| |analysis to identify major trends. Technical analysis tools are used as guidance for buying or selling an |

| |asset. |

| |GARP (). Valuation is one of the |

| |most controversial subjects. It is not easy to determine whether an asset is expensive by referring to price |

| |or any one indicator. The system relies on the collective judgment of the experts in the asset class, e.g. |

| |analysts, investment newsletter editors. Generally the system recommends less expensive asset if other facts |

| |are equal. |

| |Rebalance portfolio regularly (). This strategy is related |

| |to valuation. For example, if you start the portfolio with three asset classes, one of them outperforms the |

| |rest. It is prudent to sell some of the outperforming asset to rebalance the portfolio. You may reinvest the |

| |return in under-performing assets if you believe these assets are making a turnaround. Otherwise stay in |

| |liquid assets if there is no asset class fulfilling fundamental and technical criteria. Balancing frequency |

| |is depending on market volatility. |

|Low cost |Reasons: |

| |It is easier to meet other investment principles if the system is a low cost solution. |

| |Strategies: |

| |Reduce trading. This is the main strategy. Try to avoid a new position (long or short) if you are unsure of |

| |the outcome of the new position. Another way to reduce trading is to avoid reacting to all events. |

| |Use low cost execution providers or instruments, e.g. discount brokers, exchange traded funds. |

| |Use low cost research, e.g. Internet free research websites |

Assumptions

- Only spare cash is used in the system. That means you will not overly affected by any lost in investment.

Critical Success Factors

- Time

Time is the most important factor. As long as your investment did not become worthless, you are guaranteed to make money at some point in future.

- Diversification/Asset Allocation

Nobody can be certain about any investment. If you have a diversified portfolio, probability of positive is higher especially time is added as insurance.

- Availability of excellent mutual funds

Because of the time constraint, it is not possible to screen all candidates in all asset classes. The system is concentrated on identifying major trends. After a trend is identified, we will find the best instrument to exploit this trend, usually a mutual fund or exchange-traded fund. This is similar to fund of funds concept (). The concept is a tradeoff between control and time requirement (Note: your portfolio is the mother fund and you are the manager of the mother fund).

Trading Criteria

Armed with investment principles and strategies, it is time for execution, e.g. when to get in and out of a position

Buying

Step 1 : Fundamental analysis

The system uses sites in “Investment Ideas/News” to identify major trends, e.g. major supply shortfall and/or major demand upsurge (demand and supply principle), turnaround stories (value strategy).

Step 2 : Screening

After identification of a major trend, the system uses sites in “Screening Tools” to look for instruments that can exploit the trend. Preference is given to those instruments that have outperformed the index in the past, e.g. 3 years. The system also uses screening tools to identify short-term buy signals.

Step 3 : Technical analysis

Simple technical analysis (see sites in “Technical Charts”) is used to identify entry points. The entry points must satisfy more than one of these criteria

o MACD () value must be positive, on the rising trend and is still below last highest level. The system will avoid instrument in negative MACD territory because we are not sure the instrument can overcome waves of selling. The system also avoid instrument in a level near the last highest point.

o RSI () must not be in overbought region, e.g. RSI < 70.

o If the price of the instrument is on upward trend and just cross 200-day-moving average (), this is an important buy signal

For an example of technical indicators, refer to the chart below.

[pic]

There is no technical charting site for Singapore unit trusts. Therefore the system uses one or more country indices as proxy for the fund. For example, if the fund is a single country fund, the system will use the country index. For regional fund, uses a few indices that represent at least 60% of the fund portfolio.

Please note that for technical analysis, the study is done on past data. There is a cliché in investment, “past performance is no guarantee for future performance”. The system uses past data as a guidance on past performance and/or behavior. The system uses fundamental analysis for forward-looking speculation/forecast. In short fundamental analysis is for identifying major trend and technical analysis is guidance for entry and exit of a position.

Selling

A position will be closed if all the criteria below are met.

- Fundamental analysis

Fundamental reasons for bullishness of the asset class are not valid anymore.

- Poor performance. The instrument underperforms related index for more than 10% for at least 6 months. If we lost more than 20% in a position, then we will close the position disregarding other criteria. This tactics is related to capital preservation and maintaining stable return.

- Technical analysis

o MACD () is at or near last historical high. The system may delay the selling if the subsequent correction is mild and fundamentals are still strong. Most likely the system will trim the position (“a bull can make money and a bear can make money but a pig can not”)

o RSI () is in overbought region, e.g. RSI > 70.

- Better opportunity elsewhere and there is insufficient cash to take advantage of the new opportunity.

Risk Management

Definition of risk management can be found in this URL . The reason is simple. Nobody can be certain about the outcome of an investment. Besides return, we need to pay attention to the probability of investment disaster. Remember the story of Long-Term Capital Management (). Below is some of the tactics

- Diversification. This is an effective and simple strategy. By putting eggs in different baskets, the system can avoid total disaster, e.g. loss of 70% and more. Preferably the various baskets have low correlation, e.g. equities and bonds.

- Before initiating a position, check the status of factors that influence the instrument (“look before your jump”). For example check US early markets () before buying Asia stocks. If the US markets are up, then there is a chance Asia markets will be up on the next day (free insurance policy). Another example is if USD is hammered again, buy gold mutual fund during Asia trading hours (Note: gold price has inverse relationship with USD).

- Exploit market inefficiencies. Buying Asia gold mutual fund if USD is hammered during Asia trading hours is an example. In this example, the system takes advantage of delay pricing of some part of portfolio of mutual fund that are not traded during Asia trading hours. Another example is accumulating gold using SGD if Japan central bank is selling yen. SGD is a trade-weighted currency. That means if yen is down against USD, SGD will be down against USD but in different proportion. By accumulating gold, the value of SGD can be protected because gold is quoted in USD.

Current Suggested Portfolios

|Singapore |

|Asset class|Instrument |Instrument |Percentage |Remarks |

| | |Type[1] | | |

|Asia ex | | | | |

|Japan(40%) | | | | |

| |HSBC Chinese Growth |UT/Active/Growt|10% |Best and consistent performer in China related funds. |

| |( | |China stock market will perform reasonable in the next |

| |dex.cfm?current=investUT/fundOv| | |few years because China is the world manufacturer and a |

| |erview&p=%23%23P3%2D%0A) | | |major growth engine in future. |

| |HSBC India Growth |UT/Active/Growt|10% |Best and consistent performer in India related funds. |

| |( | |This market will perform reasonable in the next few years|

| |dex.cfm?current=investUT/fundOv| | |due to outsourcing and generic drug trend. |

| |erview&p=%23%23P3%2C%0A) | | | |

| |Aberdeen Thailand |UT/Active/Value|10% |This fund performance is similar to performance of OCBC |

| |( | |Savers Thailand since 2002. Currently there is a bull |

| |dex.cfm?current=investUT/fundOv| | |run in Thailand market. However it is chosen because |

| |erview&p=%23%22%40%3F%2B%0A) | | |Aberdeen is a value shop |

| |DBS Asia Knowledge |UT/Active/Growt|5% |This fund closely follows NASDAQ. This is a safer bet |

| |( | |than using technology funds which are investing in US$ |

| |dex.cfm?current=investUT/fundOv| | |stocks (US currency risk). It is also a turnaround play |

| |erview&p=%23%220%3F%2E%0A) | | |for technology exporting countries, e.g. South Korea, |

| | | | |Taiwan and Singapore and laggard market, e.g. Malaysia |

| |OCBC Savers Korea |UT/Active/Growt|5% |This is the most risky investment. Make sure you check |

| |( | |the technical indicators before initiating the position. |

| |ain/fundinfo/viewFund.tpl?sedol| | | |

| |number=370123) | | | |

|Gold (20%) |UOB Gold and General |UT/Active/Growt|15% |Gold is in bull market. This is the only fund of this |

| |( | |asset class for Singapore investors, which has performed |

| |dfact/p_goldgeneral.pdf) | | |reasonable (comparing with US counterparts). Most of the|

| | | | |stocks in this fund are mature mining stocks[2] (less |

| | | | |volatile). Gold is also used as a hedge against falling |

| | | | |equity prices. If the fund is corrected for more than |

| | | | |20% during 1Q 2004, the allocation will be increased by |

| | | | |10 % (from other asset classes, e.g. Asia equity funds) |

| |UOB Gold Saving |N.A |5% |Even though gold stocks perform better than physical gold|

| |( | |in bull market, the system still recommend a small |

| |in.jsp?mc=personal&sc=investmen| | |allocation to this asset class because sometimes gold |

| |ts&cc=preciousmetals) | | |stocks and gold did not move in tandem. Gold saving |

| | | | |account is the cheapest way to invest in physical gold. |

| | | | |For the paranoid, you can buy physical gold, e.g. gold |

| | | | |jewelry, gold coin, gold bar. |

|Bond (10%) |ABN AMRO Star Europe Bond | |10% |This is a way to play appreciation of Euro[3]. The |

| |( | |insurance is Europe Central Bank may keep interest rate |

| |dex.cfm?current=investUT/fundOv| | |stable. |

| |erview&p=%23%22%40%23%2C%0A) | | | |

|US (3%) |Infinity US 500 Stock Index | |3% |US equity market is the most expensive market comparing |

| |( | |to Europe and Japan equity market. In addition USD/SGD |

| |ain/fundinfo/viewFund.tpl?sedol| | |will be weakened further in the next few quarters. For |

| |number=370283) | | |sake of diversification, the system will recommend a |

| | | | |small allocation to this class. There is no good US fund|

| | | | |in Singapore. Therefore S&P index fund is used. |

|Europe |United European Small Cap | |10% |Even Europe market is less expensive, however there are |

|(10%) |( | |structural problems which will not go away in the next |

| |dfact/p_europeansmallcap.pdf) | | |few years, e.g. rigid employment market, aging |

| | | | |population. For sake of diversification, the system will|

| | | | |recommend a small allocation to this class. Europe is |

| | | | |over weighted against Japan because Europe Central Bank |

| | | | |intervenes less in foreign exchange market. |

|Japan (7%) |OCBC Saves Japan | |7% |Between July and September 2003, Nikkei 225 has |

| |( | |outperformed S&P 500. However the volatility is so high,|

| |ain/fundinfo/viewFund.tpl?sedol| | |the system will pass this market. Other problems are |

| |number=370156 | | |absence of internal demands, dependence on export |

| | | | |markets, banking system in poor shape and interventions |

| | | | |in free markets. For sake of diversification, the system|

| | | | |will recommend a small allocation to this class. |

|Cash (10%) | | |10% |Most equity markets have gone up substantially. |

| | | | |Therefore it pays to wait for correction. |

Legends

UT = unit trust or mutual fund

Active = actively managed instrument

Passive = the instrument mirrors the index or it is the index

Growth = instrument favors growth assets

Value = instrument favors value assets

Note: The author owns all the instruments above.

Asset Classes

These are the major asset classes

- Equities

- Bonds

- Hard assets

- Liquid assets

Within equity class, it can be sliced in different ways

- Investment style, e.g. value, growth

- Geographical regions, e.g. North America, South America, Western Europe, Eastern Europe, Africa, Asia, Australasia

- Capitalization, e.g. big cap, mid cap, small cap, micro cap

- Sectors, e.g. technology, communications, real estate, natural resources, financial, health, utilities

Within bond class, it can be sliced in different ways

- Duration, e.g. long term, intermediate term, short term

- Issuer, e.g. government, corporate

Within hard asset class, it can be sliced in different ways

- Real estate, e.g. commercial, residential

- Metals, e.g. gold, silver, copper, nickel

- Agriculture, e.g. soy bean, pork

- Energy, e.g. oil, natural gas, coal

Within liquid asset class, it can be sliced in different ways

- Cash

- Time deposit

- Money Market fund

References

Screening Tools

- Finatiq Find-A-Fund (). Use this tool to find the Singapore funds that invest in certain market, to compare performance of funds.

- Morningstar (). Use this site to find the US funds that invest in certain market.

- StockCharts Summary Carpet (). Use this tool to screen instruments that meet technical buy signals.

- Barchart Sectors screening ()

Technical Charts

- BigCharts (). This is popular among US brokerage sites.

- StockCharts (). Besides US stocks and mutual funds, this site supports charting for a number of currencies, e.g. USD, EUR, YEN. It also supports ratio charting, e.g. $GOLD:$XEU (gold price in Euro)

- Barchart (). The special feature of this site is it gives you its readings on the technical indications for the instrument selected (“Opinion” section). You can use this site to get second opinion on technical analysis.

- Yahoo! Finance (). This site supports charting for non-US indices.

- DailyFX (). This site support technical analysis for major currency pairs, e.g. USD/JPY, EUR/USD, EUR/JPY. The system uses currency movement as insurance to fall in equity price, e.g. appreciation of EUR against JPY can be used to cushion the potential fall of European equities (in SGD).

Investment Ideas/News

- Financial Sense ()

- ()

- CBS MarketWatch ()

- Dr. Ed Yardeni's Economics Network ((YardeniHome)?OpenAgent)

- BCA Research ()

- Morgan Stanley Global Economic Forum ()

- DBS Bank Research ()

- UOB Bank Economic & Market Strategies ()

Conclusions

In short the system is simple to follow. The success of the system is depending on

- Diversification

- Asset Allocation

- Availability of excellent funds

- Risk Management

Obviously the system should be adapted for your situation and will never be completed. It is a reference only.

FAQ

- What if I do not have any time for the system?

Use dollar-cost average strategy and invest in index funds and rebalance the portfolio every quarter. Asset allocation is depending on a variety of factors. For example, an aggressive practitioner could make such allocation: 70% equities, 10% bonds, 10% hard assets, 10% liquid assets.

- Is the system tested?

In one example, 2003 return for Singapore portfolio and US portfolio in local currencies is 20++% and 30++% respectively. US portfolio outperforms Singapore portfolio because of the following reasons:

o There are some excellent mutual funds in US.

o US portfolio is riding on depreciation of USD.

o Size of US portfolio is one-quarter of the size of Singapore portfolio.

- Will I be millionaire if I use the system?

If you start using the system with 100k capital and manage to get 15% return on average, you will have a million in 16.474 years. If you add fresh capital into portfolio regularly, the time required to cross the first million dollars will be shorter. On the other hand, your 100k will be worth less due to inflation, if you do not do anything.

- What if I do not have sufficient capital to follow any portfolio?

The portfolios are for guidance only. You can adjust the allocation and instruments to suite your needs and situation. If you cannot afford to invest in all suggested instruments, you may invest in only one instrument in those asset classes that you have most confidence in. Remember to keep your portfolio diversified. For those who have a little spare cash, your first priority is to enlarge your spare cash pool. This is a topic for another time. In the meantime try to find ways to keep your total expenses at most half of your gross income.

- What should I do if I do not have access to the markets mentioned?

Just use the principles and adapt the system to your accessible markets.

- Is short-term trading bad?

No. If you use short-term trading as your main strategy, it is likely you have to concentrate on a few asset classes. The implication is during bear market for these asset classes, your return for that year will suffer. Therefore the system is willing to give up potential extreme return for all/consistent return and relatively low risk.

- Investment is hard and there is no guarantee. What should I do?

Yes, investment requires time and effort. There is no free lunch. The system is designed to increase the chance of success and at the same time, reduces the potential risks.

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[1] Some of the instruments may be available for cash account only. However the timing system views cash and retirement portfolio as one portfolio.

[2] Stocks of the companies that are producing now rather than in exploration stage.

[3] Even though Yen is also appreciated against SGD, however it is avoided due to constant intervention of Bank of Japan in foreign exchange market. SGD is a trade-weighted currency.

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