Type of Investors/Traders
There are many types of investors/traders, which type are you?
- Index investor
- Growth investor
- Dividend investor
- Bond investor
- Traders – options, momentum,
- and so on
The lists are very long. But before we start putting any capital investing, we should know what is your risk profile and what kind of investments would make you sleep well at night? This sleep test is one of the most powerful methods. If after buying any investment, you can’t sleep well after the price drop 50%, better don’t buy. If you still buy, you are sure to lose money, cut loss, and make the legendary mistake of buy high sell low.
Identify your cash for investment
After knowing what type of investors, you are, please plan your budget well.
Keep 6 to 12 months of emergency funds (for me I keep 3 years) at least where you can put in Fixed Deposit, Money Market Fund, short term bonds etc, then keep a daily fund that can cover your monthly cashflow for around 1-2 months. You can see my post on portfolio update to see how I allocate.
The rest of the funds you can put into a fund call “cash for investment”. Within this cash investment fund, you have to decide on your allocation. How much warchest/standby cash that you would keep buying when the market crash, how much do you want to invest etc.
Strategies
Once we know our own risk profile, how much we have for investment. We need to set our rules/strategies for investing. In this article, I will cover what is close to many people heart…
If I am a dividend investor, this is what I would do…
I would set the following 5 rules and abide to it:
1. No Dividend No Buy and only buy those that I am willing to keep long term of at least 10 years. Must pass sleep test.
Most people although calling themselves dividend investors, but they don’t really behave like a dividend investor. They buy/sell, buy/sell trade the dividend stocks/Reits instead of keeping for dividend. If the price crash, they would sell and cut loss.
You can see from the recent crash of the US Reits such Manulife US Reit, Keppel Pacific Oak US Reit, Prime US Reit – initially the investors sound so confidence, freehold assets, US assets etc., good rental income etc.. But see what happened now? Many of them cut loss after the price drop 50% or more.
If you have bought MIT at $2.80 instead of Manulife US Reit at $0.70, likely you won’t cut loss for MIT but will cut loss for Manulife, especially if you have put in an amount larger that you are comfortable with (see Rule 3 below).
Hence this first rule is very important. Please only buy reits/stocks that you are willing to keep at least 10 years, no speculation, no FOMO (Fear or Missing Out). Don’t listen to others. Have independent mind. Must pass sleep test.
Take for example, Development Bank of Singapore (DBS), Singapore Exchange (SGX), Mapletree Industrial Reit (MIT), Mapletree Logistic Reit (Mlog), Capitaland Ascendas Reit (Areit), Frasers Centre Point Trust (Trust), NikkoAM-STC Asia Reit (CFA) etc. No people will cut loss buying these, they will simply add more. Yes, the yield is low, but on long term basis, it is a 99% sure win. Remember Tortoise and Hare Story, Tortoise wins. Many people are enticed by high yield instead of the fundamental behind the companies which in the end lose their hard-earned money and cut loss when the shares drip in prices.
Just keep buy and collect dividend and reinvest for good stocks/reits. You will get this picture below.
2. GUTS (buy big) and PATIENCE (wait crash/dip) and dare to HOLD LONG LONG, think long term (10 years at least)
Most people are looking at short term. They should look at long term (10 years at least). If they did their shares selection well as per rule 1 above, the next step is to have patience and wait. When the time come, example 2020 March Covid Crash, Reits dip due to interest rates etc, they should be brave and buy! However, many don’t have the guts to buy when come. If even they have, they don’t dare to buy big. even if they dare to buy big, they don’t dare to hold. Additionally, people keep want to wait for lower price and then missed!
Are you behaving the same way as I have described above? I believe most are. Let me share a few rules that I have learnt:
- Buy only dividend growth companies that I know Fundamental well so that I will not cut loss. Example, companies with yield >5% with net cash, low payout ratio, sustainable business. Or simply buy those big names that could rarely goes wrong in my rule 1 above.
- Be patience. Do research while waiting.
- Red buy, green sell. Similar to buy discounted groceries in supermarket.
- Focus cashflow and certainty.
- Few cents don’t matter. Can’t always buy at bottom price or sell at top price. Good price just dca buy and keep.
- Better to put big sum (e.g. 100k) in good companies like MIT MLOG FLCT AREIT PLIFE DBS SGX etc for 10% than 10k in less strong stock for 10% gain.
3. Position size Important and no leverage
Position size important and possibility no leverage if you are not sure what you are doing. You can set for example 5% per counter, then you will have 20 counters. Chances of 20 good shares (if you have followed Rule 1 above) dying at the same time, not paying dividend at the same time is very very low.
This is especially true when portfolio get large, example 1 million and above. One should take less risk and do capital preservation. Why? 1 million at 6% already give you $5k per month (not difficult to get 6% yield with 2% cap gain every year). $5k per month is already a very good salary for most people.
However, people want haste and earn more. In the end, they lose more by putting too much in something which can’t let them sleep well. In the end they cut loss and lose money. Hence, only put the amount that you are comfortable with; that would enable you to sleep well.
4. No earn no sell especially for dividend stock. Keep long term, no stop loss policy because point 1 is followed.
This rule is contrary to what most people would do. No cut loss policy.
If you didn’t do any leverage/plan allocation well (Rule 3) and only buy good stocks that let you sleep well (Rule 1), there is no need for you to cut loss.
Price drop, just hold and collect dividends as Panadols. Throughout the years, treat the dividend (or simply use the Trading around Core Strategy – Rule 5 below) to reduce the average cost of your shares. The worst case is stock goes to zero or in most case, your average cost will be reduced over time.
See my real-life examples of 4 shares that I am holding now. Average price is the price that I have bought. Compared it to Average price – after Divy and Trade around Core. My average cost is reducing every year using dividend or even every few weeks using trading around core.
5. Trading around Core with only Good FA Dividend Reit/Stock
Of course, it is very hard to curb itchy hands. People feel that it is very hard to do nothing. You have to keep buy sell buy sell, especially if you keep seeing the shares of the companies that you are holding are going up and down every day. Hence what can we do? We can use Trading around Core Strategy.
This simply means that you allocate for example 100k to buy Share XXX for 5% yield. One can simply keep DCA down to keep and collect dividend (price goes down, dividend yield goes up). As long as the total amount of share XXX that you are holding doesn’t exceed your allocation (in this case 100k), you can do a trade buy/sell buy/sell 1-2 cents for profits to reduce your average cost.
For example, you plan to allocate 100k to Mapletree Logistics Trust (Mlog). Currently you are holding only 50k worth of Mlog. You can strategise and buy 10000 shares of Mlog at $1.58 and sell at $1.61. Every trade will win you few hundred dollars which you can treat it as lowering your average holding cost of the share. In the worst case, if the price drops below $1.58, it doesn’t matter too, you can just keep it and collect dividend. Do note that this only work if you follow Rule 3 (allocation) and Rule 1 – only applicable to those that you are willing to hold long term and passed your sleep test.
Conclusion
The above are the 5 rules that I would adopt and strictly follow if I am a dividend investor. What are your rules, please feel free to share in the comments below.
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