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