30 December 2010

An excursion on SRS, deferred taxation

Over the past few years, ever since I got to know about the Supplementary Retirement Scheme (SRS) and its benefit of deferred taxation, I've always assumed that it would make sense to do so only when one is on a higher tax bracket.  Should I have started SRS once I had a taxable income, or should I have waited till I hit a higher tax bracket, like 17%?  My instincts told me it shoud be the later.  So, I decided to work out a spreadsheet to analyse further if indeed this was correct. 

Scenario 1(a) - It's good to start early

I made several assumptions for the analysis.  I assumed that one starts contributing to SRS from the age of 25, with an annual taxable income (pre-SRS) of $30,400, with income increasing at 10% per year [decreasing to 5% after age 45, 3% after age 50, and 0% after age 55; excellent performer who is well rewarded initially!], contributing 10% of that income each year into SRS (but never exceeding the limit of $11,475).  The SRS contribution is then invested, generating a return of 6.5% annualised.  At age 60, the SRS investment is adjusted to a more conservative profile at 4% annualised.  Based on these, at age 65 (retirement age), the SRS investment portfolio would have grown to $1.34 million.  Not bad at all!  But that wasn't the point of this study. 

The total tax avoided as a result amounted to $59,800.  Presuming the $1.34 million SRS portfolio is then drawn down at 1/10th a year, the amount of tax paid over the 10 years would be ~$92,750.  This is far higher than the $30,400 of tax avoided in the years of contribution.  So indeed, it would seem that it isn't worth starting on SRS when the tax brackets in initial years are low as one would end up paying more tax than that avoided.

Scenario 1(b) - Start early, save every cent, invest every cent

However, what if the savings from tax avoidance is invested in a cash-based portfolio at the same rate of return of 6.5% annualised?  It turns out that this cash portfolio would be $175,000 by age 65 (and tax free)!  That certainly outweighs the tax to be paid during SRS draw down.

Scenario 2 - Accumulation begins at 40

I reworked the same scenario.  This time, SRS contribution begins only at age 40, contributing the full $11,475 annually.  The total tax avoided works out to $50,000.  Given the lower contributions, the SRS portfolio grows only to $680,000. 

In comparison, the tax to be paid during the 10-year draw down upon retirement works out to $29,100.  This is less than the amount of tax avoided.

If the tax avoidance savings was invested, the cash portfolio works out to $111,000, positively widening even further the benefit from contributing to SRS.


So, it seems my initial assumption was correct (Scenario 2).  However, if one were to start early, and consistently take the savings from tax avoidance to invest (Scenario 1(b)), it turns out to be an equally rewarding approach as well.

Disclaimer: There are of course many permutations that could be explored since there are so many parameters involved.  I didn't get round to testing out the various possibilities, so there could be other outcomes depending on the parameters/assumptions used.

See also:
SRS: A Brief Analysis (from "A Singaporean Stockmarket Investor" website)

24 December 2010

Merry X'mas 2010

It's the eve of X'mas, and a time for reflection.  Has this been a worthwhile year, and the giving done?  It's a wonderful time to celebrate the decisions and the outcomes. 

If only we had a place and weather like winter in Nami Island (Korea).

But we face the deck of cards we are dealt with, and remain happy to achieve what we can accomplish within those boundaries.

In any case, it's the last week to contribute to SRS and to top up your spouse's CPF!  I'm done.  Have you?

Merry X'mas all!  May your year been a fruitful one.  *burp*

22 December 2010

Ultimate bubble in Singapore

All these talk about bubbles, and we have one ultimate one right here in Singapore.  And it's just a piece of paper!  Imagine, would you pay $72,000 for a piece of paper?  It seems many people are doing that right now to secure the Certificate of Entitlement (COE) for the right to buy a car.  *sheesh*  That's the price I paid to buy make car, COE included, just over a year ago!

This craze has reached a point where of the Top 3 selling cars in Singapores, two of them are luxury cars.

I think that money is better spent investing for better returns.  Meanwhile, go take public transport and live with it.  Wait for this bubble to burst.  If only there was a way to "short" this market. 

I suppose this is one bubble the 'gahmen would have little motivation to prick.

15 December 2010

A tour and a view on Korea

I've just concluded a whirlwind tour, holidaying in Korea, traversing across Incheon, Seoul, Cheju and Daegu.  It was not without trepidation given the situation at the border. But it would seem that Koreans were generally nonplussed about the whole affair.  The view was one of "don't care, leave them alone".

With the threat of North Korea always on their mind, defence spending will continue to be a constant burden and a drain on government coffers.  Interestingly, South Korea has switched from giving rice to giving barley to North Korea, and there is an interesting logic to this.  Rice can be stored, but barley cannot.  Therefore, doing so is to force the North Koreans to distribute the barley to its people, rather than to store it to support the military.  There is much logic amidst the madness.

In so far as unification is concerned, it is most definitely not on the cards under present circumstances. One school of thought is that only if the North develops its economy and becomes more prosperous, will unification possibility become more realistic.  The thinking is that if the people of the North starts to enjoy a life of wealth, will it still ever want to go to war?  Therefore, the best bet is for the North to be influenced by China as the later becomes increasingly affluent.

Having experienced early winter in North Korea, I must attest that it is really unbearable to be out in the open.  Even with four layers of cloth on, headgear, glove and scarf, I was still freezing cold.  With temperature swinging from 0 degrees celsius on one day, and -10 the next, the extremeties are really severe.  Let alone going to war under such drastic conditions. Not anybody can operate in such conditions. The North-South situation today is very different from that of the Korean War, when South Korea had nothing but 50,000 troops then.

The welfare system in Korea seems to be one that takes care of the ageing populance. But government spending on education is probably low, consequently, the cost of education burden on the typical family is high.  That explains why many Koreas choose to study overseas. Afterall, if studying at home is just marginally cheaper than studying overseas, why not consider studying overseas and pick up Mandarin or English? 

I've often heard that Koreans send their girls for complete plastic makeovers when they graduate from high school, and apparently this is not a fable.  In fact, it is apparently common coffeeshop talk among Korean girls to talk about the latest plastic surgery that they have done.  They are so advanced in this respect that FaceShop even offers a wrinkle removal cream containing botox substance.  Wrinkle-free guaranteed, for a given duration.  No more painful botox injections on a six-monthly basis. Simply apply the cream whenever needed!  It seems like there's much worth thinking about from an investment viewpoint on beauty care companies in Korea.

With the social belief that "man in front, woman follow behind", it seems that for the same fresh graduate seeking a job, given the same academic background and results, the man gets twice the salary expected from that of the woman.  The reason for this dichotomy lies in the belief that woman will get married, give birth and stop working.  Therefore, there is little reason to invest in their training and career development therefore.  Korea appears to suffer from the same problem as Singapore, being perpectually short of workers.  With the social expectations creating an unbalanced environment for its women, I think this is going to be a challenge and impediment to their development.  Their birth rate also compares similarly poorly as Singapore, at 1.2x birth per family, and is probably going to result in an increasingly aged population and the social burden in healthcare and social needs.

On our very first day in Incheon-Seoul, we were greeted by snowfall. What a wonderful experience!  They should invite their Northern neighbours to visit Nami Island for a sojourn during winter. I've never watched "Winter Sonata", which was filmed here. But, if you've been there, you'll realise how beautiful it really is.  Peace and bliss.

I am remaining vested in LionGlobal Korea, an equity unit trust fund, and I remain positive about the future of Korea, despite its many challenges that it has yet to overcome, and the ever present threat of conflict with its Northern brothers.

Disclaimer: This is not a sales pitch. It is merely my own views and is not based on any economic, fundamental or technical analysis.

23 November 2010

Stock down, more buyers than sellers

Ok, so there're several key events these few days.  Incident in Korea.  China imposing further controls.  Ireland forced into securing a bail-out. Thanksgiving holidays on Thursday.  US floods the market by printing more bills.  My cable box reboots itself again.

Is there enough to cause the overall drop in the market?

Mysteriously, I noticed many SGX stocks went down today, yet the Buy volume exceeded the Sell volume.  What does this bodes?

DBS Bank 4.7% NCPS - The Aftermath

So, the IPO outcome is out.  And the way DBS did it, everybody who applied got something.  I guess that's one way to secure 100% good feelings from all parties?  DBS has certainly lived up to the intent to make this available to retail investors.

There are naysayers who argued that it's bad idea to go for this though. Their argument stems from a sense of conviction that they are good stockpickers and can secure a better rate of return from their investment.

I belong to those who would readily admit at not being able to see the future, and would rather hedge my bet.  At $10,000 capital and $470 of annual returns, that gives a steady stream with fairly good assurance for the next 10 years.  Something I can sleep easy with.  [One is reminded of course of Lehman Brothers.]

Good enough for a trip to Bangkok annually for one?  Or a day out to Universal Studios Singapore annually?  Or 20 meals at Burger King for the family?

It's all about cashflow.

17 November 2010

A weekend at Resort World Singapore and investment cheese

It was a most hectic, satisfying and yet tiring weekend as my wife and I (and the liabilities known as kids) celebrated our wedding anniversary at Resort World Sentosa (RWS), including a day out at Universal Studios Singapore (USS) and a night stay at the Hard Rock Hotel.  It was a pretty expensive but most worthwhile affair.

While queuing up for a ride at USS, my son told me why when he was much younger, he had this perverse fear of entering rides that involved 'scary' tunnels.  He said that he used to see people on the rides going into the tunnels and then when they reappeared, the rides came out empty.  He thought that something bad had happened to those people. He thought they had died and had been whisked away somewhere!  No wonder we had to drag him screaming into those rides in the past. Revelations!  Now, he's the one who want to go for those rides, and I'm the one being dragged screaming into them.  *giddy spells*

Cheesy Lesson: It's the same fear when most people think about investment, that it's so high risk they do not dare to get into it.  It's simply the fear of the unknown and the lack of financial education.

The Waterworld show was the same act we had seen before at other Universal Studios.  The pre-show 'entertainment' served its purpose well in rousing the crowd.  Consistent with the theme of waterworld, water was a-plenty.  Kids just love to get wet, so they were all game for the front row seats which were guaranteed to be wet affairs.  Following the show at noon, you could imagine where the big flow out crowd would head to - lunch!  And so, the restaurant just outside the show venue was full and overflowing.  We took a longer walk to the next zone and came to another restaurant where there was still substantial capacity.  I'm sure if we were to walk further, the restaurants would be even emptier.

Cheesy Lesson: When money flows out from one market, it just goes to another.  As the US market sinks with its monetary policies that investors find unattractive, the money flows to another market.  Like the number of people in the park, and at the show, the nett numbers remain the same.  Demand has to be satisfied.  And if one were prepared to look hard enough, there will be something somewhere to satisfy the demand.  Look further afield.

On the way, we walked past "Revenge of the Mummy", the sign at the front said "05 min queue".  We had lunch at a restaurant serving Middle-eastern and Indian food.  So it was wraps, humus and such.  Done with lunch, we backtracked past the "Revenge of the Mummy" ride but decided to skip it for later.  The sign said "30 min queue".  We figured it would be a bit too much to take this ride immediately after lunch.  Probably there would be a family of merlions had we done that.  We queued up for a tamer ride to let lunch 'settle down'.  It was a lengthy queue though.  I think the ride was called "Treasure Hunter".  But we didn't find any treasure.  Following that, we finally proceeded to "Revenge of the Mummy".   Strangely, there was no apparent queue.  As we walked closer, we found the reason why: "Ride temporarily closed due to a technical problem."  Duh.

Cheesy Lesson A: When the price is low, nobody goes. When the price goes up, everybody wants. But by then, it may be the wrong time to do so.  It may already be a dead beat.

Cheesy Lesson B: If you missed an investment opportunity (like a wonderful IPO), there will be a sense of regret, or missed opportunities. But, move on.  There is no point standing around waiting for it, the ride has moved on.

We checked in to Hard Rock Hotel and took turns to shower.  With 4 persons, that took awhile.  In the midst of this, there was a knock on the door.  Wo and behold, we were served a chocolate cake, compliments of the hotel, in view that it was our wedding anniversary.  Impressed we were.  The cake was exquisite!  Yum.

Cheesy Lesson: It's good to invest in a good stock (hotel). And it feels good to get a bit of surprise along the way, like a good dividend payout (free cake).

Dinner was a lovely affair at Starz Restaurant, which was located within Hard Rock Hotel as well.  So it was convenient.  The seats were comfortable, the service attentive and friendly, the food was ... just ok lah.  I probably wouldn't pay that kind of price for a buffet dinner for this kind of spread.  There are probably better choices elsewhere.  But, what the heck, the location, the occasion, satisfaction.

Cheesy Lesson: The jury's out on this one. If a stock looks good, seems good, but the price is high, is it worth a buy?  I'm not sure.  If it is indeed a 'good' stock, it could well be.  On the other hand, if it turns out to be a dud, it's all downhill.

Discarding the Casino, since I derive no joy from paying $100 for entry and so didn't bother, RWS and USS provide enough for a worthwhile vacation weekend. Joy.

As to who moved the cheese, go ask my son. He's busy moving the cheese in "Mousehunt".  Gen Y.

10 November 2010

DBS Bank 4.7% Non-Convertible Preference Shares

DBS has announced its new NCPS at 4.7%. Application is open to retail investors from 11 Nov, 0900H, and closes on 18 Nov, 1200H.  The 4.7% perpetual payout would be distributed on 22 May and 22 Nov annually each year, and is callable in 2020.  Minimum application is at a value of $10,000.  At $100 per share, that means 100 shares.  More details at DBS Announcement on 4.7% NCPS.

At 4.7%, that is lower than its current NCPS at 6%.  It makes sense that they will call their existing 6% NCPS which is callable from 15 May 2011.  Even then, 4.7% is still far, far higher than the current rates from equivalent SGS Bonds. 

At $10,000, that works out to $470 per year for at least the next 10 years (till 2020).  Seems like a good deal.  This is probably going to be heavily over-subscribed.  Hopefully it will encourage more such bonds being made available to retail investors. 

And at higher rates?  One can so dream.

See previous post on this subject: Non-Convertible Preference Shares.

05 November 2010

Pulses and the dearth of a heartbeat

It would appear that the monthly PULSES magazine (see on its origins: SGX to Outsource Pulses to The Business Times), published by SPH, and well helmed by Teh Hooi Ling will be closing shop after Dec 2010.  It's a pity that such a good quality magazine is closing down.  I suppose it is tough for a magazine on investment to survive in today's Internet with its myraid of information that are freely available, and the time lag in the relevance of the information offered given the fast moving investment market.

I typically enjoy reading the analysis and interviews with the companies, which offered deeper insights and understanding of what these companies do.  Fortuntely, The Edge is still going well and remains my regular reading.

I don't know if it is some rule that is perculiar in Singapore, or is it just the quality and style of journalism here.  But, I generally find that the local articles do not provide the readability and story-telling that one tends to get with US journals of a similar nature.  Magazines like Fortune and The Economist tell a lot more compelling stories, exploring far deeper into the historical background and thinking of the leaders of the companies, and how their business was actually evolving or remaining relevant (strategy) given the fast changing world around them (macro trends).

Is there an option out there that I've missed?  Pulses mark the third investment magazine that I've subscribed to, only to be informed that they would be discontinued.  Pity.

From timeshare to wine investment - A tale

A single lady I know of once bought a timeshare.  It was all the craze at one stage, and perhaps still is.  Heck, even I bought one.  The difference was that I've a family of four, and given that I do travel for holidays, timeshare does offer a lot of interesting opportunities, and potentially 'savings'.  I did a guesstimate and figured that a couple would not likely breakeven in most cases.  What more a single?

A couple of years after paying annual maintenance fees, which had been escalating year on year, the lady realised that it was beginning to be a financial drain, and sought to minimise the pain.  So she went back to the timeshare company and had it downgraded to an alternate year ownership (i.e. own a week on alternate year).  That reduced her maintenance fees by half.

Along the way, she was solicited by some other companies that offered to help her sell off her timeshare.  However, in order to do so, she would have to pay $500 for an administrative fee to advertise and market her timeshare for sale.  You can pretty much figured out what happened.  More money went the way of the void of infinite emptiness.  She was still stuck with the timeshare, and $500 poorer.

Alas, this coming from a lady who actually asked if an e-mail she received from UK could be true?  The e-mail said that she had won a million pounds and asked her to deposit a fee so that her winnings could be sent to her.  *sigh*

Soon after, she was invited to a free talk on wine investment.  Free food, no commitments and all that. So why not? After all, she was a lonely single who had nothing better to do on her weekends anyway.  Interestingly, it turned out that the wine investment company was prepared to offer her a most attractive package.  She could convert her timeshare ownership into a wine investment package!  Wow wee!  What a joy.  Get rid of a money sucking thing and turn it into a money making opportunity that offered wonderful returns.  Even Robert Kiyosaki ("Rich Dad, Poor Dad") might have been proud. 

But, and a big one at that, the lady doesn't know anything about wine!  She doesn't even drink, let alone trying to understand how wine investment would actually reap any returns. 

We can probably guess how this went.  The wine investment company disappeared one day (it was in the press), along with the tens of thousands that she had paid for her timeshare ownership previously, which she had turned over to them. 

So, from timeshare, to 'half-share', to wine investment, and finally to nothing to share.  Now that's what I call a zero return investment with zero capital protection.  Or, as Buzz Lightyear said, "To infinity, and beyond!"

The morale of this story?  There are plenty that comes to mind from the above.  I leave it as an exercise and an open invitation for readers to post comments here on this.  8)

04 November 2010

Structured Deposits and 1.5% annual returns

Of late, we are starting to see offers of Structured Deposits and such once again.  It's so pathetic.  At 1.5% return a year, wouldn't one be better off just keeping to Money Mkt Funds, SGS Bonds, or any of the Preference Shares that offer near-equivalent or higher yields, without the additional hard to understand risks?

Then there are those foreign currency deposits.  The unbeknownst looking for a better interest rate than parking in our local banks would find them attractive.  But, if the currency swings by a similar percentage against S$, any yield would be offset by currency rates.  In the worst case, even the capital would be eroded - i.e. no protection whatsoever (not capital guaranteed).

I just don't buy it.  Pun intended.

28 October 2010

Innotek - 28 Oct 2010

Innotek remains a low PTB stock and sitting on wads of cash. Article from NextInsight.com.

Stock: Raffles Education

28 Oct 2010 - A view on Raffles Education with the breakdown over Oriental Century and its associated delisting.  Can Raffles Education go any lower?  This growth stock has been going downhill for many months.

Stock: Hock Lian Seng

2 Nov 2010 - A technical analysis of Hock Lian Seng from ASSI.  Positive views on Hock Lian Seng- on NextInsight.Com in view of opportunities on Downtown Line projects.

21 October 2010

IPO - Mapletree Industrial Trust (MIT) & Global Logistics Properties (GLP)

Thus far, both IPOs have turned out to be winners on initial listing on SGX.  Glad to have managed to secure the minimum lots despite the oversubscription in both cases.  The backing of Temasek Holdings and GIC in respective cases probably lent a lot of weight.  It would seem to suggest that there is a lot of room for IPOs of such pedigree.  Perhaps there will be more?

Wonder how the American Depository Receipt (ADR) listing for the China shares are going to fare?  I would hazard a guess that it will create the next interesting stir on SGX.

Credit History

If you ever want to check your credit history, you could actually "buy" it online from Credit Bureau (Singapore)They charge $5 for a report.

See also:
"Know your credit history" - from Five-Cents-Ten-Cents blog

11 October 2010

Property - An Asset, Liability or Cashflow?

Conventional wisdom has it that we compute our Net Worth by deducting "Assets" from "Liabilities".  Robert Kiyosaki in his seminal "Rich Dad, Poor Dad", came up with the notion of "Cashflow" as being key.

Is a property therefore an asset or a liability?  Suppose the property cost $500,000, for which a loan of 80% was taken.  It would therefore be an Asset worth $500,000, and at the same time a Liability of $400,000; the Net Worth is therefore only $100,000.  What is the Cashflow then?  If you're living in the property (i.e. home), then the Cashflow is $0 since it earns no income. 

On the other hand, if it was rented out and generating a revenue of $20,000 a year (4% yield - i.e. 4% of $500,000 = $20,000), then it gives a Cashflow of $20,000.  If the monthly rental income is equal to the monthly loan instalment, then we could imagine that the rentee is paying for you to own the property!  How nice.

In truth, there are further costs involved that would have reduced Cashflow generated.  A property that is not the residence incurs a 10% property tax, rather than 4%.  There are also other fees due to maintenance, tax on the revenue, and other upkeeping/maintenance costs involved.  This would be offset by some deductibles against the taxable income of course; deductibles that are associated with rental properties.

In Singapore, rental yields are typically in the 3-6% range.  Given this, I am doubtful if a positive Cashflow could be achieved, unless the upfront payment for the property was very high in the first place.  Certainly 20% down isn't likely to cut it.

There is a counter argument about the property as a home.  That is, to consider the opportunity cost; which would have meant renting a property for a home.  I believe, that in the long run, paying for a home would always beat the notion of renting a property to live in.  At the end of paying all the instalments, one gets to own a property.  But a rental remains a rental - there is nothing owned at the end of the day.  Given this, the solution appears apparent - own a property.  The problem is of course the lengthy lock-in of a sizeable portion of one's wealth.

I recall somebody told me that wealth is generated in 3 ways:
- Work for your money;
- Make your money work for you; or
- Get other's money to work for you.

So, we could work to pay for a property.  Or, we could do so and rent it out, and get others to pay for your property!  The recourse therefore: buy a property, collect rent, stay with thy parents!  Be Cashflow positive!

27 September 2010

The Path to Retirement

Where lies the path to nirvana and bliss?  The options are varied and numerous.

Wong Sui Jau (Fundsupermart) advocates asset allocation and diversification using Unit Trust investing.

In "Rich Dad, Poor Dad", Robert Kiyosaki offered a model about generating positive cashflow. 
http://www.richdad.com/  [You may want to give the online game a go!]

Here's one local investor who has apparently built-up quite a decent portfolio of SGX stocks using a Value Investing approach.  He is certainly a student of Benjamin Graham.

One blogger has an interesting perspective:

24 September 2010

Rule of 72 and Rue of 72

So many years learning maths, but never once do I recall being taught the "Rule of 72".  But exploring the realm of investment, and the Rule of 72 would soon pop up on one's horizon. 

What is the Rule of 72?  It basically says that if you divide 72 by the rate of return (%), that would be approximately how long it takes to double.  Therefore, if one had $100,000 invested at a rate of return of 7.2%, then in 10 years, the $100,000 would have doubled to $200,000.  Sometimes, the Rule of 72 is referred to as the Law of Compounding.

Taking this idea and working it against my earlier posits, we would then arrive at the following:

Bank Savings Account.  Assumed 1% return.  Takes 72 years to double.  Dead by that time.
Fixed Deposits.  Assumed 2%.  Takes 36 years.  Halfway there.
CPF.  2.5% for OA, 29 years.  4% for SA/MA/RA, 18 years.  Not too bad.
SGS Bonds for 10-20 year tenure.  2-4%, 36-18 years.
Unit Trust - Money Market Fund.  2-3%, 36-24 years.
Unit Trust - Equities.  6-10%.  12 to 7.2 years.  Looks far more exciting.
Unit Trust - Bonds.  2-4%.  36-18 years.
Unit Trust - Balanced.  4-8%.  18-9 years.  Not bad.
Equities.  8-12%.  9-6 years.  Even more so.

Suppose then that you inherited $50,000 at the age of 15, and you kept it invested in some instruments that offered a return of 7.2% each year, then every 10 years, it would have doubled.  So:
   Age 25, $100,000
   Age 35, $200,000
   Age 45, $400,000
   Age 55, $800,000
   Age 65, $1,600,000
Sounds like an interesting deal?

Using the same 'rule', if one was taking a housing loan of $200,000 at an interest of 3%, then in 24 years, the total amount we would have had to pay would be $400,000!

So, if you were to stupidly owe a credit bill of $1,000 at an annual interest rate of 24%, then in every 3 years, it doubles!  In 12 years (doubling for 4 cycles), that $1,000 would have become $16,000!!

Consider, a car loan of $80,000 at an effective interest rate of 10%, in 7 years, it would be $160,000.  Hopefully, car loans will never reach that level.

Have fun with the Law of Compounding - a.k.a. the Rule of 72.

23 September 2010

How long shall thou be bonded?

Interesting that SGX appears to have moved quickly to bring Corporate Bonds to the retail market.  I am certainly looking forward to seeing more of such bonds being made available.  However, presuming the yield for SIA is 2.15% for a 5-year term, it wouldn't be very attractive to many. 

Perhaps, if one were comparing against the sub-0.5% of bank savings, there could still be a case to be made. 

Will there be one in the near future at above 4% yield?  Now that would be really exciting.

Discussion: SIA Bond discussion

20 September 2010

Mine your money or mind your money

These Mind Your Money series organised by MoneySENSE are pretty good introduction on various issues on financial planning, investments and such.

Worth listening: Mind Your Money 3

17 September 2010

Expectations of returns on investment

Once, an ignoramus went to a distant island (Guam), and patronised a diner for a meal. Though he could not understand a word of english on the menu, he proceeded to call out his order, "I dun wan beef.  I wan cow."  I guess for many, investing is also somewhat similar.  Oft heard is this comment, "I want high returns, but I don't want any risks."  This is simply incompatible.  The corollary is probably, "There are no free meals" or "if it's too good to be true, it probably isn't".

My gauge on the the risk-reward of each investment instruments are as follows:

Bank Savings Account.  Now at <1%.  Only as risky as the bank's viability.  Liquidity is very high.

Fixed Deposits.  <2%.  Locked in until mature, but capital is safe.

CPF.  ~2.5% for OA, ~4% for SA, MA, RA.  As good as risk-free.  Stuck till age 55 for sums above minimum sum, and the rest upon retirement age.

SGS Bonds for 10-20 year tenure.  2-4%.  Yield would fluctuate over time, but the face value is always guaranteed.  In many ways, NCPS are very similar.

Unit Trust - Money Market Fund (MMF).  1-3%.  Generally very low risk.  Liquidity is high.  I tend to treat this as similar to a Bank Savings Account, except that withdrawals may take a week or so.

Unit Trust - Equities.  6-10%.  Volatility is high.  Liquidity is high.

Unit Trust - Bonds.  2-4%.  Volality is mild.  Liquidity is high.

Unit Trust - Balanced (mix of Equities and Bonds).  4-8%.  Volatility is medium.  Liquidity is high.

Equities (shares).  8-12%.  Liquidity varies, generally much better for the big caps, and low for the small/micro caps.

Exchange Traded Funds (ETF).  Similar to corresponding Unit Trusts, but possibly +1% better returns.  Liquidity is high, but subjected to bid-ask spread.

14 September 2010

Where lies the portal to wealth?

Having figured out the investment target, where then are the investment avenues?  Here are some suggested/useful sites:

SRS  (Supplementary Retirement Scheme)
Reduces tax burden, deferring it into the future. Meantime, the SRS funds should be invested.  Else, the interest returns would be a pittance.

CPF  (CPF Online
If you fancy topping up your own CPF or your spouse/parents, so as to reduce taxation. Meanwhile, the contributions would be earning risk-free returns from CPF.

Unit Trust  (Fundsupermart, DollarDex, POEMS
Online portals for unit trust investments.  The front load fees are usually far lower than what you would end up paying if you were to do so from Banks or Insurance companies (e.g. Insurance Linked Policies (ILP)).

SGS Bonds  (SGS Bonds at Fundsupermart
Buying and selling of SGS bonds from the secondary markets.

Insurance  (NTUC Income, AIA, Prudential
Details of your insurance policies. Most would generate the estimated returns (guaranteed, non-guaranteed).

CDP  (Central Depository)
If you're going to trade shares on the Singapore Stock Exchange (SGX), you would need to open up a CDP account.  This account holds the records of your shareholdings (scripless).

Shares  (POEMS, ...)
There are many online brokerage for trading in shares, Non-Convertible Preferences Shares, Exchange Traded Funds (ETF), warrants, and numerous exotic derivatives.  POEMS is just one of many such online portals.

13 September 2010

Financial planning for the absolutely idle

There are several ways of looking at the title of this post. But let me take "idle" to refer to mean a simplistic way of determining what is needed for retirement - i.e. the investment target amount?  Suppose you have determined that you need $5,000 per month (today's currency) and you intend to retire in 20 years time.  The going rate of inflation is estimated at 3% annually. Then one formula would be to compute as such:

$5,000/month * 12 months * 100%/4% * (100% + 3% inflation)^20 years

That works out to $2.7 million in this instance.  In fact, the annual expenses so computed would suggest that $108,367 would be needed per year.

Let's break this down a bit.

How does one arrive at how much is needed a month ($5,000 in the example)?  I would suggest adding up all the expenses that one expect to incur during retirement (each month) - e.g. taxes (personal income tax if still relevant, property tax, MDA radio/tv license), insurance (medical, property, car), handphone/phone/Internet, cableTV, power/gas/water, transportation (car maintenance, petrol, bus, taxi fares), medical, meals/food/grocery, newspapers/magazines, barber/hairdresser, sports, donation, and a generous dose of miscellaneous (e.g. holidays!).  You could do so by conscientiously tracking all these details based on your spending habits today, over 3 months or more, to get a good gauge (for the relevant expense items). 

Multiplying this by 12 months gives us the annual expense.

"100%/4%" gives us 25.  This assumes that one expects to reap a 4% return annually from the capital.  4% is probably a reasonably conservative investment target.  4% is the same as the current interest rate for CPF-SA/RA/MA accounts.  It is close to the coupon rate of SGS Bonds (presently weak at <3% for 10-20 year bonds).  Other alternatives that could offer 'similar' (with some trepidation) yields would be NCPS, or high dividend yielding SGX stocks.

"(100% + 3%)^20 years" is to calculate the compounding effect of inflation (estimated at 3%) from today's value of money into the future (20 years later).

There are many parameters to play with here, depending on our assumptions.  How would the target number look like for you?  This isn't the only way to work out what is needed.  There are other models that would arrive at significantly different results. 

One of the key benefit of this approach is that the "capital" is never touched during retirement.  You would only be living off the generated returns from the capital.  Consequently, the capital becomes the "estate" that you could bequeath to your loved ones, or donate to your favourite charities!

Conversely, this model requires a very high capital (investment target) to be achieved.  If one is prepared to whittle down the capital to near $0 upon one's demise, a much lower target would actually suffice.  The catch though, is how does one know when "the end" might be?

There are some additional precautionary measures that would be needed to complement this, in order to manage other risks.  But let's leave that for some other time.

10 September 2010

Non-Convertible Preference Shares (NCPS) I

Traded on the SGX, NCPS are traded like shares (which means the bid-ask price fluctuates), but gives out dividend/coupon payments like bonds.  There aren't that many such NCPS, and they're most likely from the 3 big banks in Singapore. So long as the issuers don't call back their NCPS, they will continue to pay out the dividends at the stated rate.  However, some of these have 'maturity' dates where the coupon rate reverts to a floating rate thereafter.  Prior to the maturity date, the bank cannot call back the NCPS.

The risk of failure stems from the issuing company going down under (you lose your pants!), or when it fails to pay out any dividends for their standard shares resulting in no dividend payout for their NCPS as well. However, the likelihood of these negative events appear slim given the strong historical performance of these Singapore banks.  But then again, we've seen also big banks in the US going down under in recent history!

If one is not worried about the fluctuations of the "capital", and is happy with the dividend/coupon payout, NCPS may not be a bad option for building a "cashflow" stream.  So long as the issuer doesn't recall the NCPS, you will get the annual payout (usually half-yearly or quarterly) perpetually.

Below are the respective NCPS.  Read as such:
[Date of maturity] @ [Rate] ([Dividend/Coupon payout date])

DBS 6.0%
- 15 May 2011 @ 6% (15 May, 15 Nov)
- Thereafter @ 3-mth SOR + 2.28% (15 Feb, 15 May, 15 Aug, 15 Nov)

UOB 5.05%
- 15 Sep 2013 @ 5.05% (15 Mar, 15 Sep)
- 15 Sep 2018 @ as above [2nd maturity date]

OCC 5.1%
- 20 Sep 2018 @ 5.1% (20 Mar, 20 Sep)
- Thereafter @ 3-mth SOR + 2.5% (20 Mar, 20 Jun, 20 Sep, 20 Dec)

OCC 3.93%
- 20 Mar 2015 @ 3.93% (20 Mar, 20 Sep)
- Thereafter @ 3-mth SOR + 1.85% (20 Mar, 20 Jun, 20 Sep, 20 Dec)

OCBC 5.1%
- 29 Mar 2013 @ 5.1% (20 Jun, 20 Dec)

OCBC 4.5%
- 28 Jan 2013 @ 4.5% (20 Jun, 20 Dec)

OCBC 4.2%
- 14 Jan 2013 @ 4.2% (20 Jun, 20 Dec)

SOR refers to the Swap Offer Rate.

If any of the above are not correct, I welcome your updates (via "Comments").

See DBS to launch preference shares for retail investors

30 August 2010

Bonds and bond laddering

Singapore Government Securities (SGS) bonds are available for the retail investor like you and I.  I'm not sure how one can go about buying them, but for sure it can be done at Fundsupermart.  How does it work?

SGS bonds gives out coupon payments twice a year, based on the coupon rate of the particular bond series.  The family of SGS bonds have varying maturity date up till 20 years.  If kept to maturity, a SGS bond of $1,000 face value (a.k.a. par value) would return in cash the face value.  So long as it is kept in your holdings, you will continue to receive the coupon pay outs.  That means that SGS bonds is a good way to receive a regular payment stream. 

One approach to keep bonds over the long term is to hold bonds with different maturities.  Each time one matures, reinvest to the longest dated bond.  This is not dissimilar to the notion of Regular Savings Plans (RSP).  In this way, we spread the risk over the price at which a bond is bought by simply buying different years for different maturities.

The bonds are bought and sold on what is referred to as a secondary market.  While the face value may be $1,000, the price being bought or sold at would vary.  As a result, the real "yield" achieved from the annual payout would differ from the coupon rate.  So we would be looking at the yield to determine the rate of return, rather than the coupon rate.  However, if you were studying cash flow, you would be looking at the coupon rate instead.

The yields have not been great of late, having depressed to below 3%.  At the peak of the market panic a year or more ago, the longer dated bonds were at yields of 4% at one point.

One obvious flip side of SGS bonds is the liquidity. If you had to liquidate the bond by selling on the secondary market, you may not necessarily be able to do so at a price better than when you bought it.  That would depend on the market condition.  Even then, it is unlikely to vary that much.  Over the last two years, I've seen fluctuations by +/- 10%.

Taking an extreme example, suppose one held $1,000,000 worth (face value) of bonds, and the bonds had coupon rates averaging 3.6%, that means one would receive $36,000 each year, guaranteed.  That's $3,000 per month.  Perhaps not a bad retirement strategy.  That's of course, if you're happy enough with 3.6%.

24 August 2010

Owning a car

Well if we figure that taking care of a child till they're of age to earn their own income is going to cost $1 million, what about owning a car?  Some people blindly refer to their car as an asset.  It almost certainly is not.  Have you ever heard of anyone making money from buying and selling their cars?  Since it does not, it cannot be an asset, nevermind whatever the accountant friend of yours may say.

Let's exercise this further by enumerating the cost items involved:

- Purchase price of car, inclusive COE
- Interest on car loan
- Annual road tax
- Annual car insurance
- Fuel
- Routine preventive maintenance
- Car wash
(and less the eventual scrap value)

And finally, how long would you actually use that car before you get itchy for an upgrade?  3 years?  5 years? 10 years till scrap?

Go figure.  I've guesstimated that a car is an expense that's beyond $1,000 per month.  Would it therefore be cheaper to just take a cab?  25 days of taxi rides at a cost of $40 per day would work out to $1,000.  Looks like a break even point.

20 August 2010

Unit Trust

For a beginner in Unit Trust investment, it's such a mystical and confusing world.  Well, not really.  There are tons of books on the subject.  In other countries, it is better known as Mutual Funds.

Unit Trusts (UT) are much touted as providing diversification within its given mandate.  For instance, an equity UT with a mandate of Singapore stocks is likely to be holding 20-50 different stocks from SGX.  But with so many choices out there, what should one pick to buy?

After much trial and error, I have reached the conclusion that it is best to keep things simple.  More importantly, is to further diversify by investing into different regions. This thinking is shaped by my earlier experiences from ILPs.  My ILP invested solely in Tech and Biotech had fallen off the cliff horribly in the aftermath of the dot.com era. In contrast, an ILP which was invested into Singapore Equity had performed stoutly and robustly.  Historically, markets go up, markets go down.  Who knows where the wind will blow in the future?

Often, one hears that while markets go up and down, in the longer term, it ALWAYS go up.  While this appears to be generally true, one would have to note that the Japanese markets had behaved quite differently for many years.  Sometimes referred to as being "L"-shaped hence.

A simple portfolio would therefore be to distribute equally amongst the following:

- US equity - e.g. Infinity US 500 Stock Index [underlying fund is a Vanguard indexed fund]
- European equity - e.g. Infinity European Stock Index [underlying fund is a Vanguard indexed fund]
- Asia Pacific ex-Japan equity - e.g. Aberdeen Pacific Equity
- Global Emerging Market equity - e.g. Aberdeen Global Emerging Market
- Singapore equity - e.g. Aberdeen Singapore Equity

And to then top up a regular sum at fixed intervals, be it monthly, quarterly, or whatever it may be.  Each time, topping up across the funds so as to bring them to an equal keel as far as possible. 

And once each year, in a fixed month, rebalance by selling that which has grown significantly, and buy in to that which is underperforming.  This approach is essentially betting on the market to generally revert-to-mean in the long run.

19 August 2010

ILP and the journey to Unit Trust investments

Insurance-Linked Policies (ILP) gets a lot of bad press.  And if I had to offer my 5 cents, I guess I will also say the same.  But, one has to put things into perspective.  As an ignoramus who certainly wanted to build up a retirement fund, but being totally clueless about the stock markets and such, ILP can be extremely attractive.  Certainly beats the comparatively far lower returns of 3-5% projected on endowment policies.

Following the Asian Financial Crisis, my insurance agent suggested buying several of these policies (in 1997/98) and topping them up along the way (2003).  I didn't think much about what I had put in to these ILPs until several years later when I was consolidating my finances to buy a new house.  Upon checking with my insurance agent, I discovered to my pleasant surprise that the ILPs had doubled in value!  Although, one particular ILP was pretty much dead as it was invested into tech and biotech.  Figures.

Withdrawing the "capital", the "profit" was left behind to continue to grow.  From a psychological point of view, it was like free money working for you.  The year: 2007.  Luck was apparently on my side.

That piqued my interest.  Even more so when I came across an article on the Sunday Times "Invest" section talking about investing in Unit Trust via the Internet. 

18 August 2010


What does a 19 year old know about insurance?  Nil, is my conclusion.  To ask a young 19-year old guy who is still serving National Service (military conscription) to buy a Term Insurance, that will return nothing if nothing happens to him, is like asking him to flush his money down the toilet bowl.  It is utterly unfathomable.  Yet, a Term Insurance for the purpose of protection is the right answer.  There in lies the dilemma of a young

Pose the same question to a 40 year old, who has a much higher income and hence spending power, and he would probably have a far better appreciation and ability to accept and tolerate the scheme of things.  But alas, he could be fraught with all kinds of pre-existing medical conditions which makes him uninsurable!  Once again, darned!

The answer appears to be somewhere in between. 

My journey towards a sane investment started off precisely with the expectation of returns on any investment, while offering some protection.  My first policy was an insurance with $50,000 protection.  On hindsight, I now realise what folly!  What was my need for that $50,000 protection?

Many years later, with a protection level now at $750,000, and many many insurance policies later, I realised that my real need to protect my dependents (1 wife (definitely!) and 2 kids) should have been much higher, but alas, precisely, no longer insurable.

On hindsight, perhaps the right things to do would have been to start off with Term Insurance of $100,000 the moment one starts work, and to add another $100,000 every year thereafter, continuing to do so as protection needs increases over time, until an end target is reached.  The life events that would drive the increasing need for protection would be marriage, and the birth of each child.  On the flipside, decreasing needs would be death of spouse (*touch wood*), child started earning his own income, investment portfolio having outstripped protection needs.  The level of protection is to make up for shortfall in the investment/retirement portfolio while it is being built up. 

Are there other reasons?

17 August 2010

The babies, the maid, and the car

For a typical working couple living on their own, what are the difficult choices that have to be made to raise a family?  Someone estimated that it would cost $1 million in a couple's lifetime.  That sounds like quite a disincentive. 

When our first baby came our way, the immediate question was how to look after the baby given that both of us were working?  We decided then that we could tolerate having an outsider living in our home, and so a maid it was.  Aside from the obvious costs of hiring a maid (and the associated levies), it would seem that expenses build up very quickly.  For example, water and electrical consumption jump quite significantly.  Food/meals was another.  It all adds up.  I would estimate that it actually cost about $1000 a month as a result.

Then there were the risks of a stranger in the home.  How much trust can we emplace on this person whom we know nothing about except the few pages of resume?  It's all blind faith and hope for the best! 

By the time our second kid came along, the problem had significantly compounded.  How would we move around in a family of five without a car?  Our maid had already long gone, having decided to return to her homeland.  But raising two kids without the maid was not viable.  Plan A, wife stops work and become a housewife.  We decided that was no go, and Plan B was needed.

Taxi would no longer be a viable option (back then, there were no 5-seaters).  This quickly drove us to the conclusion that a car had become a necessity. 

Fortunately, with the older one already two years old, he was old enough to attend the full-day day-care centre.  The younger one, was left with the in-laws who were most helpful in helping to look after her on weekdays, and we brought her home only on weekends.  It was a compromise.  A compromise that was viable only because of facility and family support.

One side note though, the cost of having an extra person in the house (i.e. maid) was traded off against the ownership of a car, and childcare charges.  The later being discounted due to a government incentive for working mothers.

16 August 2010

A property, a home

Thinking back, the Yishun 5-room HDB wasn't too bad.  There were some hits, and some misses.

The Hits

1.  Access to public transport. Yishun MRT was just 7-8 mins away.  There was also a feeder bus by the next block.

2.  Food.  Coffee shop was at the next block.  A short walk away was the Chong Pang Market and more coffee shops.

3.  Market.  For a wet market, there was the Chong Pang Market, and for supermarket, Cold Storage at Northpoint Shopping Centre.

4.  Sunlight.  Cloth line was facing a generally east-west direction.

5.  Minimum renovation.  Did not need much renovation.

6.  Schools.  There was a primary, secondary school and a Junior College nearby.  Near, but not too near that the noise carried across.  There were also several child care centres within short walking distances.

7.  The Air Force.  Nearby was a military airbase.  So it was quite a thrill each year seeing the helicopters doing their practice runs for National Day.

The Misses

1.  Old.  The unit was more than 10 years old.  After some time, started to suffer from electrical breaks whenever there was a thunderstorm.  This posed a big problem for my refrigerator when we travelled overseas!

2.  Wildlife.  Being a topmost unit, lizards and cockroaches appeared to be the norm.

3.  The Air Force.  Noisy as hell whenever they were flying.  But we did get used to it after awhile.  Possibly this was the cause for dustiness too.

4.  Aircon.  As with most old aircon units, they were in need of some major retrofitting.  They were probably operating at low efficiency.  On some days, we needed the fan to complement the aircon.

15 August 2010

Misadventure of the education savings funds

An article in the Sunday papers today mentioned about using an Endowment Insurance to fund an education fund, providing the benefit of both a $100,000 protection, as well as contributing to the education fund.  This may well be the second worst option.  It is certainly a reasonable option if one was not prepared to put aside the time to manage such a fund.  So I'm not saying it's no good.  It's just that there are better ways to do so.

For one, why bother with that $100,000 protection when the child has no dependencies?  Unless of course, the parents are close to retirement and their retirement plan assumed that the child would be supporting them with $4,000 a year.  [Consider: $100,000 @ 4% returns.]  Even then, that need could be better met by a Term Insurance, which would probably be far cheaper.

But what is the worst option?  That, was precisely what we did, saving a monthly sum into a Savings Account, for years and years.  We had opened Savings Accounts for each of my kids, contributing $100 each month.  On top of that, was a further $500 annually from their "Ang Pows" that they receive during Chinese New Year.  After several years, I discovered that all we had accomplished was a paltry sum of $7,000 in each account, a far cry from the $80,000 that I had estimated to be needed, with less than 10 years to go! 

In my parents' age, it probably made sense when savings account were giving 5% interest.  But with interests down to the doldrum of zero, that assumption of good returns from keeping money in the bank no longer works.

I've since switched to a different approach, through investing in unit trust funds.  After closing the Savings Accounts, the $7,000 were used to buy into a spread of unit trust funds - i.e. an index fund for US equity, index fund for Europe equity, Global Emerging Mkt equity, Asia-Pacific ex-Japan equity, Singapore equity, and a global bond fund, and topping up $500 monthly.  Now, with 8 more years to go, the respective funds are at $20,000 and seem on track.  I hope.

As a sensitivity analysis, even if the investment portfolio end up with nil returns, it would still be:
$20,000 + ($500 x 12 months + $500 ang pows) x 8 years =  $72,000   (i.e. 90% of target)

Of course, there is no insurance against a repeat of the 2008 global financial crisis. To mitigate the risk,  I would have to remember in 3 years time (i.e. 5 years before the need), to start switching increasingly to a more conservative portfolio profile, either holding in Money Market funds, or in SGS Bonds that would mature before each of the 8th, 9th, 10th and 11th year.

14 August 2010

The first property - housing loan, parents and CPF

[Continuation of Misadventures of a 27 year old ...]

And that, was how I ended up with my first piece of property.  But being a 27 year old with barely 3 years on the job, it was a difficult challenge.  We found a 5-room HDB on the resale market going for $230,000 at Yishun.  While an 80% loan could be taken, the fact was, we still needed the 20% down-payment.  We didn't have enough in our CPF-OA accounts to fully fund it and had to top up with substantive cash to make up the shortfall.  That decision had to be backed by a further loan of $30,000 from my parents. 

The monthly installment payment for the 80% part of the loan from HDB was manageable.  We could foot that, deducting from our combined CPF-OA account.  Our combined salaries then were in the region of ~$4,000. 

But the loan from the parents was a long journey to pay off.  My parents only expected me to repay without interest.  At $500 a month, it took me 5 years to do so.  This was on top of a monthly allowance which I had pegged to 10% of my take-home pay.

Actually, it took longer!  If you recall, buying the house was an excuse for getting married?  We were of course dead broke after buying the house, let alone doing the renovation, equipping the house to a livable condition, holding a wedding, and funding a honeymoon (no delayed gratification here!).  That involved a further loan from my wonderful parents, on top of the $30,000 that I had already borrowed.

Eventually, I took almost 8 years to fully pay back my parents.  But it was such a joy when I eventually did.  Finally, debt free.  Almost.

My Retirement Planning Project - My Retirement Home [LadyYouCanBeFree]

12 August 2010

Misadventures of a 27 year old - a marriage proposal and a home

At the age of 26, being the typical Singaporean that I am, I felt that it was time to pop the question of marriage with my then girlfriend of 10 years.  It was none too subtle though, and so I asked, "Shall we register to buy a HDB flat?"  I presumed, when she agreed to fill in the forms, she was saying, "Yes!"

As luck would have it, after 7 quarters of balloting, and then at the age of 27, we came to realise that we were completely luckless.  So it was with frustration that we jumped into buying a resale HDB flat in readiness for our wedding.  The year: 1994.