2014 has been an eventful year to say the least.

Globally, it was the year of terrible air disasters (for this region, at least) where one Malaysian Airlines flight went missing (MH370) and another was allegedly shot down (MH17). As I write this, an AirAsia flight from Indonesia to Singapore has gone missing (QZ8501). These are terrible events and only hopes that the family and friends of those on board find comfort and peace soon.

As terrible as these events may seem, one cannot forget that there were many more affected by typhoons (Philippines), floods (Malaysia) and famine (in parts of Africa). Some others are adversely affected by the tyranny of a few- think North Korea, wars in the Middle East, shootings in the USA, the  people in the Sydney cafe that was held hostage by a lone madman or the crazy guy that went on a shooting spree in Ottawa.

Bad things happen every year and news channels have a duty to report it. That’s their raison d’être. But just in case anyone thinks that their year has been shitty, maybe a look at my year will make you think twice and take stock of the good things in your life.

Wealth

It’s been another great year as far as wealth building goes.

The STI did ok this year. It started at 3167.43 and closed at 3365.15 for a gain of 6.24%. Coupled with a dividend yield of 2.5% (I’m making a rough guess here but if the distribution yield on the STI ETF is anything to go by, this is a reasonable long term approximation.), you have a 8.74% gain. Not mind-blowing but nothing to scoff at either. In fact, it’s pretty much at or in fact, just above the long term compounded annual growth rates that one would expect from constantly being in the market.*

My own portfolio saw a 13% return if I count pure investing returns (capital gains + dividends reinvested). I’ll take it. But I won’t expect the same kind of returns year after year on a consistent basis. Including savings added to the portfolio, the portfolio actually grew by 26%.

For those unsure about what the two numbers mean, the pure investing returns (13%) are calculated using a NAV calculation which eliminate the effect of adding more cash to the portfolio. This is a better reflection of the contribution of skill and luck towards returns. The total growth (26%) includes savings which also reflects the added dimension of discipline because I have to forgo current consumption.

So, which number is more important?

That depends a great deal on what answer you seek. If I want an accurate assessment of my investment luck and skill, then I should look at the first number and traditionally, this is the number when evaluating any investment. This is also the number I keep records of every month.

The second number, for me, helps in two ways. First, it helps me track how close I am to my investment goal. A portfolio of a certain size will give me enough scale to go into investing full-time and this is the number I need to meet. Second, it helps illustrate the importance of savings. This is especially true when you have a small portfolio. Even for a portfolio like mine (in the six figure range), it contributed to about half of my portfolio’s growth for the year. However, this number will definitely get smaller as the portfolio grows bigger as salaries don’t tend to go up by much so unless I save larger and larger proportions of my income, the contribution due to savings must become a smaller and smaller part of returns. But for the young investor and those who have just begun working, I hope it illustrates that savings are important! It will be the “ballast” you need to keep your investing ship going and gets you to your target much much quicker.**

I hope I don’t send the wrong message by posting my returns here because in case anyone thinks I’m the next Warren Buffett (I’m far from where he is), just remember that although I did better than the STI, the S&P500 went up 12.55% on capital gains alone. Throw in a dividend yield of somewhere between 1.5-2.0% and the appreciation of the USD against the SGD, my 13% returns has not beaten a passive strategy of just buying the S&P500 ETF. Even if I was on par, the passive strategy would have required a lot less effort.

The past five years have been very kind to my portfolio (well, accept 2011 where the only gain to my portfolio came from savings). I hope the next five will be kind too.

I’m a big believer in the CAPE ratio (it has its critics) and if you used the CAPE ratio as I did, the best 3 months to have bought Singapore stocks in 2014 were (in order from best to third best): February, March and October.

While I don’t buy the STI directly, this gives a good indicator of the current sentiment in the market. When sentiment is as bad as it was, it’s time to look for bargains. Of course, if you don’t know how to value a stock, then please just buy the STI ETF. As it is now, I won’t be looking to buy stocks unless the markets come down a little or there are bargains too good to ignore.

How much of a drop would get me out of hibernation? The STI has to come down by at least 60 points before I’ll even think about it. For me to start nibbling, it has to come down by at least 160 points.

Personal

While I experienced the loss of my paternal grandmother, there was also some relief as she had been suffering for some time. She was pretty much immobile after a bad fall a year or two ago- while she could walk with the aid of a walker, that also meant that most times, she had to be pushed around on a wheelchair or walking was only confined to short distances. With the reduction in mobility, she also stopped cooking which I think was one of the few things that she enjoyed doing.

She was also on a long list of medication which had some side effects such as a lack of appetite and it was the fact that she needed to be on some medication that eventually led to the complications when her kidneys started to weaken.

My grandmother was a practical person. She never hankered after a life of luxury and she hardly bought anything for herself. Her passing was peaceful and being the practical person she was, she wouldn’t have wanted her passing to be any trouble to us. I really think she’s in a better place and just as she would have wanted, we’re not grieving over our loss.

On a happier note, the wife and I have finally moved into our own place. Doing housework took some getting used to but thanks to my wife who had the best of upbringings, we’ve settled into a routine that is manageable.

Our interior designer/contractor really did a fantastic job. The design exceeded our (or more of my wife’s  because mine are low) expectations and while their work didn’t come cheap, they weren’t exorbitant either. They kept to the budget and the quality of work is good. What more could we ask for?

Financially, this is one of the best decisions I’ve ever made. Private housing is painfully expensive in Singapore but Public Housing is another story. My place has a total floor area of 1184 square feet. While that isn’t much in other countries, in cities like Singapore, that is a considerable amount.

The more amazing part is how much we paid for it. Just 289 Singapore dollars per square foot. You’ll never find a per square foot price like that in the private housing market here where 700-800+ dollars per square foot is considered cheap. Most apartments I know are smaller and go for anywhere near 1000 dollars per square foot.

What this means for us is that it is extremely unlikely for us to experience a loss on this place if we ever have to sell it. The other cool thing (which I wrote about before) is that because the place cost us so little, we managed to take a floating rate loan that caps the interest we pay at the interest rate that our CPF ordinary account*** pays us. The tenure is for eight years which means that the total interest on the loan is small and with current interest rates at such low levels (currently, we only pay about 1.9% per year), we are effectively getting paid to take the loan. Furthermore, there’s a cap on the interest rates we pay, so there’s only upside and no downside to this loan. (For those who still can’t see it, CPF pays us 2.5% interest while we pay the bank 1.9%. Since we’re getting more than what we pay, the loan is effectively interest free.) The icing on the cake is that we DON’T pay anything out of our pockets for the mortgage i.e. there’s no impact on our monthly cashflow since payment for the mortgage comes from our CPF accounts.

Having said that, we wouldn’t have been able to do this if (a) we didn’t already have a substantial sum already in our CPF accounts, (b) we didn’t both have jobs that pay us slightly above the median (you can check where you stand here) and (c) were willing to wait two whole years for the place to be built. Big thanks to my wife for willing to put up in just one room while we had to wait and my parents for letting stay rent-free for two whole years.

This post has gotten way too long so I’m ending it here. Here’s to hoping that 2015 will be even better than 2014!

*Please don’t expect returns like this by investing in the STI ETF. The State Street one seems to be more heavily traded but the spreads are still wide enough that you won’t get the returns as calculated by the STI. On top of that, you still have to pay State Street for managing the ETF. It’s a reasonable approximation to the STI but don’t expect the EXACT return as calculated using the STI.

**Using the rule of 72, a return of 13% per annum doubles you portfolio every 5.5 years. With a 26% return, your portfolio doubles every 2.8 years. Of course, we can’t expect to see these kind of returns every year and as the portfolio gets larger, the contributions from savings will become less important if one remains an average salaried worker.

***The CPF is Singapore’s idea of a pension scheme where it is compulsory for workers to contribute a portion of their monthly salary towards the fund. The fund has been tweaked to allow for a range of uses, one of which is towards the payment of one’s mortgage.

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