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.