Only Investing in Things You Can Control

http://By Frank Vincentz (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h19m  / day (59 day average)

I mentioned in “Start Small” that “I (will) regularly invest in a commission free index fund with leftovers from my monthly salary after deducting living expenses and taxes (until I have 1.5 years of expenses in cash)”, which is what I’ve been doing by investing into the Tracker Fund of Hong Kong (HKEx: 2800, tracks Hang Seng Index) through a zero commission stock monthly investment plan.

And it’s something I’m comfortable with because the Hang Seng Index is by many measures under-valued, even though I consider many stocks in the Hang Seng Index to hold narrow moats rather than wide moats. But the fact that most stocks in the Hang Seng Index are narrow moat stocks means that I’m more than willing to sell my ETF shares once it hits fair value.

With the US Stock Market tumbling for the past few days though, I’m presented with a dilemma. Should I inject lump sums of money periodically into the Hang Seng Index as it tumbles with the global equity selloff? Or should it go into US ETFs to diversify away geographical risk? Or should it go directly into US Wide Moat stocks that I’ve been tracking all this time?

The following are the pros and cons of each option:

  • (Hang Seng Index Pros) Hang Seng Index is under-valued in terms of absolute and relative value, which is something I can measure in terms of acceptable buying price and the selling price. This allows me to avoid over-paying.
  • (Hang Seng Index ConsIf I inject lump sums into Hang Seng Index, I’m essentially tripling down on the prospects of the Hong Kong economy since I work in Hong Kong, I’ve got periodic monthly salary leftovers going into Hang Seng Index and the lump sums would be going into Hang Seng Index as well. If Hong Kong’s economy doesn’t survive, I’ll be completely wiped out.
  • (US ETFs Pros) If I inject lump sums into US ETFs, I definitely diversify away geographical risk. I am also exposed to much more wide moat stocks than is available in terms of proportion or absolute number in the Hang Seng Index
  • (US ETFs Cons) Most US ETFs I’m looking at (VOO, SCHD, NOBL, MOAT, GURU, PKW, CSD) are over-valued in terms of absolute value. Even if this stock price tumbling continues, it may take a long while before valuations drop to levels that are acceptable for me in terms of absolute value. Or I could go ahead and invest but run the risk that the over-paying won’t work out in terms of returns.
  • (US Wide Moat Stocks Pros) I can ensure each purchase is under-valued in terms of absolute value, so I can avoid over-paying. I can also ensure every stock purchase is a wide moat stock.
  • (US Wide Moat Stocks Cons) I don’t have enough capital to have great diversification for a formulaic based investing, so I will be bearing diversification risk.

I think after weighing the pros and cons, I’m going with buying US Wide Moat Stocks with my lump sums of money. I can control the valuation and quality of the company stocks I buy, which can offset the diversification risk.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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4 comments

  1. Stefan, you are a smart young man! This is what i suggest:

    25% into 3140 Vanguard S&P 500
    25% into 3101 Vanguard Dev Euro

    50% into top 20 individual stocks of MSCI Hong Kong Index, ‘buy and hold’ forever. All ‘equal weight’.

    I like MSCI Hong Kong Index better than Hang Seng Index. The only stock i would add is Tencent which is not part of the MSCI Hong Kong Index.

    You have 50% of porfolio diversified into US and UK-Europe and remaining 50% into HK and China.

    that is good enough 🙂

    Like

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