Building the Kids Education Funds with Unit Trust

For my children's Education Funds for tertiary education, I have been injecting monthly contributions and their annual Ang Pows (Chinese New Year red packets) into their respective portfolios using Unit Trusts. Both portfolios are similar. So I shall use one of them for illustration.

Broadly, the portfolio is evenly diversified across (a) Asian small-caps, (b) Global Emerging Markets (GEM), (c) Asia Pacific, (d) Europe, (e) US, (f) Singapore, (g) Short-term bond, and (h) Cash.

This has been going on for about 10 years. Guess how have the various Unit Trusts performed over the years? The specific funds are as shown below, with annualised returns over 1, 2, 3, 5 and 10-year horizon.

Fund Name	1 YR	2 YR	3 YR	5 YR	10 YR
Aberdeen Asian Smaller Cos	-5.74%	-0.23%	6.34%	6.26%	-
Aberdeen Global Emerging Markets	-5.73%	0.37%	1.34%	2.36%	6.50%
Aberdeen Pacific Equity	-3.45%	1.05%	4.41%	4.61%	6.55%
Cash Fund	0.37%	0.24%	0.19%	0.18%	-
Deutsche Singapore Eqty Fd	-6.60%	-1.57%	2.58%	3.46%	5.79%
Infinity European Stock Index	9.74%	9.15%	14.46%	7.85%	1.98%
Infinity US 500 Stock Index	20.63%	17.14%	19.19%	15.26%	4.26%
Nikko AM Shenton ShortTerm Bond(S$)	1.78%	2.11%	2.27%	2.50%	2.39%

[Source: Fundsupermart.com]

Taking a 1-year view, US and Europe are the top performers at 20.63% and 9.74%. Singapore, Asian small-caps and GEM are the worst performing and are in fact in the red.

Stretching out to a 10-year horizon, Asia Pacific and GEM are actually the top performing at above 6% each. Whereas, Europe and Bonds were the weakest. Even then, they still turned in returns of 1.98% to 2.39%. As the Asian Small-Cap and Cash Fund have less than 10 years of history, their 10-year annualised returns are not available.

What can we observe from the above? While by no means definitive, it does illustrate some points that are often talked about:

1. Markets will have their ups and downs. Diversification across markets make sense as they tend to perform differently from each other, except where there is a massive global crisis. No single fund is going to be the best performer forever. There is no magic bullet.

2. Equities will usually outperform Bonds in the long run but will be more volatile. From above, we see that Bonds and Cash Funds (money market funds) remained positive throughout, but do not vary much over time. Higher risk, higher returns (you can go into the red). Lower risk, lower returns.

3. Over a 10-year horizon, it is unlikely to make losses. Despite the events of the Global Financial Crisis (2008), European crisis (2011) and the recent China meltdown (2014), equities still turned in respectable 1.98% to 6.55% over the 10-year horizon. Unlikely does not mean never though! Time in the market matters.

4. Investing (but know what you are doing!), even with the expenses involved for Unit Trusts, will do better than leaving money in the bank. The banks have been offering less than 2% interest for the last decade (risk free of course, especially the first $50,000).

It is now only a few years away from needing the money for the kids' tertiary education. Time to apply the brakes and exercise caution. There is no longer room for "time in the market". In the years ahead, I will be shifting more of the equities into cash funds, towards a 20:80 ratio. There is no need to adopt a high-risk, high-return profile anymore. To be precise, can't afford to.

Related:
Kids education revisited - back to the future
Endowment plans for child education
Misadventure of the education savings funds

24 Tales in the Journey to Wealth

RETIREMENT

"Financial Independence, Retire Early" (FIRE) - that seems like a wonderful catch phrase to set the flames going. What does it take to achieve this burning desire? I think it boils down to a magic number.
[1. http://lizardorealm.blogspot.sg/2015/05/light-fire-can-i-retire-now.html]

STOCKS

To achieve this outcome, I invest in the market, diversified across market regions, namely Asia Pacific (except Japan), global emerging markets, the US, Europe and Japan. 

Unit Trust.

I use funds from the Supplementary Retirement Scheme (SRS) and CPF OA and SA funds to invest into Unit Trust on the Fundsupermart platform. Since each year I can contribute up to to $12,750 into SRS, that is the capital injection that goes into this portfolio. This unit trust portfolio is further complemented by ETFs. Fees in Unit Trusts are relatively higher compared to ETFs, but the latter tends to be less liquid.

[http://lizardorealm.blogspot.sg/2015/01/the-performance-of-unit-trusts-in-2014.html]

Singapore Stocks.

A value investment approach in dividend paying stocks can be most rewarding. I diversify across the Singapore stock market by buying a dozen stocks (or two!) to spread the risks. The wonderful part of this is that I can happily collect dividends to reinvest while waiting as well. Of late, the dividends can run into an average of $1,000 a month. This will be the means by which I intend to generate the eventual passive income for retirement. The dividends would have been more, except that I typically take up the script offer (i.e. collect more units of stocks in lieu of cash), so as to continue to build up my portfolio, and at a discount from the market value.

[2. http://lizardorealm.blogspot.sg/2015/04/my-singapore-team-of-dividend-stocks.html]

US Stocks.

Likewise, for US stocks. I invest through POEMS which hold the US stocks as a custodian account. US stocks (if you pick carefully!) have a practice of steady dividend growth. So even if you do nothing, the dividends tend to hold stead or growth with each passing year. The only problem is the 30% withholding tax on the dividends. The custodian fee that POEMS charge is quite minimal really, so that I can live with.

[3. http://lizardorealm.blogspot.sg/2015/06/my-us-team-of-dividend-stocks-2015.]

Exchange Traded Funds (ETF).
Since I already hold diversified portfolios of Singapore and US stocks, the rest of the market regions are held via ETF, which complements the Unit Trust portfolio mentioned earlier. I prefer to hold ETFs that pay out dividends - or what I refer to as an Income ETF Portfolio.

[4. http://lizardorealm.blogspot.sg/2015/01/2-portfolios-of-etfs-growth-vs-income.html]

BONDS

The stock portfolios are complemented by bonds and cash. While my plan was to maintain only 10% in bonds and cash (or bond-like instruments), it has typically reached 20%. In addition, I maintain 6 to 9 months worth of expenses in cash instruments.

Preference Shares and Retail Bonds. 

These can be bought off the SGX. The coupon payments, usually half-yearly, provides yet another income stream.

[5. http://lizardorealm.blogspot.sg/2015/01/non-convertible-preference-shares.]

Bondsupermart.
More recently, a wider spread of bonds can also be bought through Fundsupermart. Aside from the few retail bonds, the majority will require hefty $250,000+ investments. Something beyond my reach and need for now, so it's something to keep in view as a future option. As an income stream, perpetual bonds can be quite attractive.

[6. http://lizardorealm.blogspot.sg/2015/05/bondsupermart.html]

Singapore Savings Bond.
This offering from the Singapore Government will be available to retail investor soon. While not a inflation-linked bond, it has some semblance of it. I will most certainly park some of my cash components here. That will serve as an emergency buffer that can be cashed out if needed.
[7. http://lizardorealm.blogspot.sg/2015/04/singapore-savings-bond-as-safe-as-it.html]

Central Provident Fund (CPF).
The compulsory savings into CPF actually is another bond component, offering steady and fairly risk-free growth. The only problem is the lock-in. The lock-in becomes less of a worry for someone like me who is reaching the half-century mark. CPF funds has serveed many useful purposes thus far, especially to fund housing (used), support the kids' education (an option not yet used), or invested into stock or unit trust funds if I prefer to take more risks.
[8. http://lizardorealm.blogspot.sg/2015/02/a-great-retirement-offer-from-cpf.html]

Bank Savings Accounts.
Even the traditional banks can offer interesting saving accounts with higher interest rates. But a bit of acrobatics need to be done. This is the other component of my cash funds.
[9. http://lizardorealm.blogspot.sg/2015/06/how-can-we-stretch-interest-on-our-bank.html]

MAXIMISING SAVINGS, REDUCING EXPENSES

Even as the investment portfolios are being built up, it is also worthwhile to examine options to reduce 'leakages'.

Supplementary Retirement Scheme (SRS).
Taxation is such a killer, especially at higher incomes. One sure way to reduce the tax burden is to contribute to the SRS (and invest the money sitting in SRS!).
[10. http://lizardorealm.blogspot.sg/2015/02/one-way-to-avoid-paying-more-tax-srs.html]

Donations.
And if you have a charitable heart, donation is another way of reducing the tax burden while doing some good deeds.
[11. http://lizardorealm.blogspot.sg/2015/02/another-way-to-avoid-paying-more-tax.html]

Credit Cards.
Some people view credit cards as an evil thing. But used wisely, it can actually help reduce our expenses.
[12. http://lizardorealm.blogspot.sg/2015/06/4-credit-cards-with-great-cashbacks-and.html]

EXOTICS & ALTERNATIVES

There are many exotic options and alternatives to grow that investment pie. But be very careful! Perhaps, it suffices to keep things simple.

Crowdfunding.
A recent trend has been the growth of crowd-funding platforms. These have arrived on our shores, offering the lure of 12% returns or more. In reality, they are even more risky than junk bonds. I am keeping this in view for now.
[13. http://lizardorealm.blogspot.sg/2015/02/moolahsense-embarks-on-new-fundraising.html]

Starting a Business.
This requires more careful considerations. I'm not quite ready for that leap.
[14. http://lizardorealm.blogspot.sg/2015/01/running-cafes-as-business-owner.html]

Inheritance.
One could wait for an inheritance, if there is any to be had! But I wouldn't bet on this.
[15. http://lizardorealm.blogspot.sg/2014/12/20-years-and-200000-mothers-savings.html]

Exciting Bank Offers.
This is an oxymoron. With the exception of the aforementioned special savings accounts, what can they offer that can do better than all the self-help options mentioned earlier given their exorbitant charges?
[16. http://lizardorealm.blogspot.sg/2015/05/a-fantastic-investment-deal-at-bank-or.html]

STAY HEALTHY

Be Healthy.
Most importantly, is to stay healthy. What's the point of an early retirement, if one is in bade health? Or worse, expired early!
[17. http://lizardorealm.blogspot.sg/2014/07/investing-and-dieting-wealth-and-health.html]

Medical Insurance.
But we can never be certain of good health. So medical insurance is a must in my view. Without this, all the savings and investments can be easily wiped out in no time. Sometimes, we really have to spend money to save money.
[18. http://lizardorealm.blogspot.sg/2015/04/thank-goodness-we-had-medical-insurance.html]

Staying Healthy on Cruise.
One can still enjoy life, even while on a food binge on a cruise. It's not that difficulty to stay healthy, really.
[19. http://lizardorealm.blogspot.sg/2015/04/not-too-difficult-to-stay-healthy-on.html]

ANTHOLOGY OF DISASTERS

Con Jobs.
These are just plentiful and are happening everyday. Always worth repeating the mantra, "if it sounds too good to be true, it probably is too good to be true". Greed is our greatest enemy. And the enemy is that person in the mirror.
[20. http://lizardorealm.blogspot.sg/2015/05/rags-to-riches-riches-to-rags.html]
[21. http://lizardorealm.blogspot.sg/2015/02/the-allure-of-gold-treachery-of-glitter.html]

Job Loss.
This can really be painful and disastrous. A family unit that has multiple wage earner helps diversify the risk. But for the single-income family, there really isn't any room. Best to move on and deal with the realities.
[22. http://lizardorealm.blogspot.sg/2015/05/what-do-you-do-if-you-get-laid-off.html]

Extravagance.
A lifestyle of living beyond one's means is a sure road to disaster. Live within your means. What you can't save isn't yours.
[23. http://lizardorealm.blogspot.sg/2015/05/a-millionaire-and-yet-completely-broke.html]

Careless Decisions.
Sometimes, we will make bad decisions and lose money. Hopefully, this doesn't happen too often and too painfully.
[24. http://lizardorealm.blogspot.sg/2015/06/sumiko-tans-money-no-enough.html]

--
"Good health, great wealth!"
Or should it be, "Good wealth, great health!"

Light the FIRE! Can I Retire Now?

This was the first time I came across the term: FIRE (by Googirl). Or to elaborate, that's Financial Independence, Retire Early.

Quite a catchy tag line. Achieving the left gives the option to exercise the right.

I view Financial Independence as the situation when my passive income can support a desired lifestyle.

For me, it works out to be an investment portfolio of $2.5m if before age 65, or $1.8m if at statutory retirement age of 65. The reason for that difference is the additional payout from CPF Life payout by then, and because parts of my current investments are using CPF funds and Supplementary Retirement Scheme (SRS) that are locked up till age 55 (the excess beyond the minimum sum from CPF Retirement Account can be withdrawn) and statutory retirement age respectively.

Alternatively, if I strip away these, I could likewise retire on a portfolio of $1.8m anytime if they were all using fluid cash based investments. Why $1.8m? Because at a 4% dividend/coupon payout or withdrawal rate, a $1.8m portfolio would give me $72,000 per year. That's $6,000 a month. I think it's enough for my wife and I.

Howzabout $1.8m in bonds from Bonds@FSM (see Bondsupermart)? That's like 6 blocks of bonds at about $250,000 each. A bit too much for me to stomach for now. I prefer wider diversification at this accumulation stage. But it is certainly one way.

If I were nearer retirement age, it might still prove to be attractive. A yield-to-maturity of about 4% seems achievable based on the various Singapore corporate bonds presently available.

A search on Bonds@FSM based on a yield-to-maturity above 4% with a time span of above 10 years threw up 17 options. Most are familiar names from the Singapore Stock Exchange. Many of these had yield-to-maturity in the region of 5% to 7%. Obviously, there are higher risks for the higher yield end of the scale (e.g. Olam and Hyflux). And interestingly, all are "perpetuals".

Another way of thinking about above is that every $300,000 worth of bonds at 4% yield would generate $1,000 of income per month.

What's your magic number?

Related:
The Good News About Retirement

Bondsupermart

From Fundsupermart comes a new offering: Bondsupermart (or Bonds@FSM). Now we have another avenue to buy government and corporate bonds directly without having to go to the banks.

I like FSM's application interface. They tend to spot pretty clean and intuitive user interfaces.

I was initially pretty excited as I thought they were offering these bonds within reach of retail investors. Alas, not quite. They still require that the bonds be purchased in lots of at least 250,000 units (~$250K) per bond (typically).

So it is available to retail, but would require hefty investments to buy into. Nonetheless, it is an option. Need to understand their sales charges. These are documented on the website.

Saliva drip drip. For an investment of $250,000 at 4% (assuming yield to maturity of 4%), that's $10,000 per year. There are several perpetuals from blue chip companies.

Wish there was some way that those bonds can be retailed in lots of 10,000 units instead. I would definitely want it for my 10-20% bond component of my investment portfolio. But at $250,000 or more per pop, it's a bit over my head for now.

Related:
Singapore Savings Bond

Singapore Savings Bond - As safe as it can be [updated]

Plenty has been said about the Singapore Savings Bond (SSB), so enough said on the general idea. We will have to wait till the second half of the year however to understand better how do we, as lay peons, go about investing into it, and if there are limits for each investor. Is this yet another Singapore-only innovation?

Interestingly, it was in fact announced during the week of the most momentous event in Singapore's history. But it probably went low key because of it. The blogging community largely also respectfully abstained from publishing during that week.

It looks like this is a manifestation of the idea previously mooted about an inflation-linked bond. Though not quite the same, it does offer semblances of it. With its pegging against the prevailing Singapore Government Securities (SGS) Bond, the current rates range from the low end of 1% to 3%. These rates would of course vary over time depending on how SGS Bonds fair. The prevailing sentiments is that bond rates are likely to go up over time as interest rates rise.

[This is not to be confused with bond "yield" which has an inverse relationship.]

While it doesn't yet hit the above 4% that I was looking for, nor was it the mechanics that I thought would materialise, still, it's a positive move forward. There is hope.

From casual chats with relatives and friends, many still do not understand. Some think it's a one-off affair, like the sale of the special series of Singtel shares when it was first publicly listed. Others, who belong to the the-government-is-out-to-con-me-no-matter-what-they-do camp viewed it as yet another scam that will take away their money. One simply asked, which bank is this?

Personally, I have yet to understand how SSB works from the government point of view. How is it self-sustainable and implemented to support the system? I would vaguely guess that it rides on the underlying SGS Bond as an implementation.

What can I use such a scheme for? Some personal views:

• The 6-month salary worth of cash reserves to deal with unexpected emergencies, assuming liquidation is straightforward and fast enough.
• Part of the 10% component of my investment portfolio that I want to keep - i.e. with a lower risk profile.
• Kids education fund as it runs into the final 5-10 years, depending on how risk adverse I am.
• A safe fund being built-up for some mid-term but uncertain intentions (e.g. buy house, car, etc), for which plans may not unfold over a 5-10 year horizon.

Some of my relatives are so risk adverse, they will never ever ever want to invest in shares and such. For them, the SSB is definitely a better solution than leaving their cash collecting flakes of particles (otherwise known as "dust") in a bank savings account and in fixed deposits.

By the way, a Central Depository (CDP) account is needed. Do you have one yet?

On a separate note, SGS Bonds (not to be confused with SSB!) can also be bought directly by retail investors through the local banks, but require $250,000 at par ($1 per unit). Alternatively, they can also be bought off the secondary markets via Fundsupermart or from the Singapore Stock Exchange in lots of 1000 units at the traded price.

p/s: We really love our Three Letter Abbreviations (TLA).

Start of 2015 - Time for Some Tax Avoidance

Welcome to 2015! It's 1 Jan 2015. Time to be reminded to put that cheque of $12,750 into the Supplementary Retirement Scheme (SRS) account for the tax deductible benefits.

An Excursion on SRS, Deferred Taxation
Maximising Returns with Minimal Risks - for the ultra conservative investor

Each year, I put this sum into my Fundsupermart account under a money market fund. Then each month, I take $1,000 worth to buy into an equity fund to "rebalance" my diversified portfolio across the various market regions.

Journey through the ages - is 20% good?

It has been a fascinating, and at times exciting, journey. Initially, I had only invested in insurance-based schemes. Be it whole-life endowment plans or investment-linked policies (ILP). Work, work, work was otherwise all I focused on. Making ends meet from the salary I earned and saving money into the bank were pretty much the game plan otherwise. Marriage, housing, post-graduate studies and kids pretty much took up everything else I had.

Had it not been for the early years buying into the various ILPs, I wouldn't have much of an investment to speak of. Interestingly, I had the fortune of having taken up ILPs in the era post Asian Financial Crisis and it had generated quite a tidy sum. It came in handy when I needed the money to complement my CPF to buy my first home.

Then I discovered Fundsupermart. A small sum in its cash fund gave me confidence to take the next step - i.e. to invest into various unit trusts funds. As I read more and gained a better understanding of the concept of diversification, stocks and bonds, the unit trust funds I invested into became more systematically managed.
Then I discovered the tax benefits of the Supplementary Retirement Scheme (SRS). Voila! Max'ed out my SRS, minimise the tax I have to pay, and invest the SRS into unit trust funds at Fundsupermart. It's all too easy!

At the depth of the Global Financial meltdown, I saw my unit trust funds sink miserably. And I mean miserably. But I stayed faithful to the diversification plan with the confidence that the market will generally recover in the long run.  It has not disappointed.

In 2009, I assessed that there were many opportunities to pick up stocks. I must say I had a confirmation bias when I saw a video interview with Warren Buffet where he suggested that he was on the look out for things to buy. So started my stock picking journey.

After 5 years investing into the stock market, I did an analysis recently to see how I've faired. Turned out, not bad. Not bad at all. Using Excel's XIRR function, the internal rate of return showed 20.6% over the 5 year period investing in stocks. The stock portfolio, both from valuation uptick and from cash additions to the investment fund, has grown in leaps and bounds, from zero to hundreds of thousands in that 5 years.

Significantly, as I analysed the individual stock's performance, it is also clear that the dividends have been significant. Soon, the dividends alone would generate $1,000 per month of income. Of late, as companies try to preserve their capital, several have started offering Scrip Dividends (also known as Dividend Reinvestment) options which I have opted to subscribe to, and thereby increasing the number of shares that I owned of those companies.  I'm doing so with the assessment that these stocks are not going the way of the dodo bird over the next 5-10 years.

In many cases, the dividend yields have gone way beyond 4% compared to the original cost of the shares as many of these companies have consistently raised their dividends year on year. It sure feels *shiok* to see a stock that cost $1,000 generating an annual dividend of $100 per year and growing. Must say though, that there aren't as many SGX companies that behave like that compared to US stocks on the NYSE. The later have many more companies with a long history and consistent track records. Unfortunately, that also comes along with the 30% withholding tax.

Happy investing!

Related:
Where Lies the Portal to Wealth?
Pattern of Behaviour - A review of 2013