Archives for category: Personal Finance

We’re halfway through the year! Time really flies, doesn’t it?

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The Fecundity of Endowments (Northwood Family Office)

A paper on safe withdrawal rates for long-horizon portfolios. The paper proposes a safe, simple, and dynamic approach to the safe withdrawal rate. Totally makes sense and I can’t imagine why no one thought of this before. (h/tip to Investment Moats for this)

Go read the entire paper. It’s only 8 pages long and not very technical.

Georgetown study: ‘To succeed in America, it’s better to be born rich than smart’ (CNBC)

I can’t say that I’m surprised at this finding.

I wonder if we’ll find similar results in Singapore or will we find that our much-vaunted education system is really a social leveller?

Some Good News For Retirement Savers For Once (A Wealth of Common Sense)

Ben Carlson breaks down the findings from a Vanguard paper and notes how stark the difference is between voluntary enrolment and automatic enrolment in 401(K) plans.

Ladies and Gentlemen, this is why CPF is forced upon you.

Unfortunately, along the way, the usefulness of CPF gets diminished by letting people use it for (overpriced) housing. Those who need CPF for retirement will have spent it on housing and those don’t…well, CPF is a drag on compounding wealth.

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Take their analysis with a huge pinch of salt and follow their advice at your own risk.

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I’ve lamented about the sad state of financial literacy in Singapore (here, here, and here for example.) and it irks me even more that there are certain websites in Singapore that have wide appeal to retail investors even when they aren’t doing a good job of educating the wider public about financial literacy.

In fact, given some of the poor analysis that is out there on these sites, some retail investors end up with the curse of thinking that they know a lot when they actually know very little.

Much of the analysis on these sites is at best simplistic and at worst, plain wrong and misleading.

Exhibit A (Actually, the only exhibit I have)

Recently, one of these sites published a quick analysis on the results of CapitaMall Trust (CMT) and I took a quick look because I have vested interests in the REIT.

Somewhere further down the article, I came across this horrible section that attempts to value the REIT.

Naming and shaming them but not giving them the benefit of creating a backlink to their article

Problems with Exhibit A’s valuation

The first problem with the valuation presented above is that you cannot compare CMT’s yield to the average of 40 other REITs because not all the other REITs are retail REITs.

It’s like comparing how spicy one stew is to another. Stews can be as diverse as a tomato-based beef stew to a curry, and these can range in spice level from 1 to 10.

Western-style stews such as a chicken or beef stew will always be at the lower end of the spiciness scale (i.e. 1-3) while curries will be at the top end (8-10). So, saying a beef stew is less spicy than the average stew is kind of meaningless because you wouldn’t compare a beef stew with a curry in order to determine how spicy it is.

This is exactly the sort of cardinal sin presented in Exhibit A.

If you’ve compared retails REITs with commercial, industrial or healthcare REITs, you’ll realise that on average, their yields are vastly different as they face very different economic conditions.

It’s pretty well known that Retail REITs tend to trade at lower yields than other types of REITs so naturally, if you compare CMT with a whole basket of REITs, it’ll be perpetually undervalued as compared to the basket.

Ditto for the P/B ratio.

The other problem is that by just focusing on relative valuations, it doesn’t help if the whole REIT sector is overvalued or undervalued. In fact, a valuation should be based on the cashflows or assets held by the REIT and not just based on it’s value relative to other REITs.

Conclusion

I’m not sure what the solution should be when it comes to getting the wider public better educated on financial literacy. Some of the providers out there have vested interests while some of them think they are providing a service when they actually suck.

Maybe there is a role for someone to call out the bullshit that some of the services that these companies are selling.

All the Benjamins (or Yusof Ishaks if you’re Singaporean) in the world wouldn’t be any good unless you’re the only one with it

Lately, I’ve been doing some research on property investment and as a result, my Facebook and instagram feed has been flooded with sponsored ads which promise to teach you how to get rich through property investment with little to no money down.

Obviously, such ads are targeted at the mass-market investor because a common feature of such ads is how a couple with less than average household income in Singapore can afford a second property. A variant would be how “average Singaporeans” can own multiple properties with little to no cash down.

Personally, I’ve not attended any of these workshops but from what I’ve heard, the thing that they’re selling is co-owning multiple properties with numerous other owners or by leveraging up to your eyeballs (within the legal limits, of course) to afford the second mortgage.

Goodhart’s Law explains why the workshops are stupid

If you grew up in Singapore during the 90s, a popular idea at that time was that success meant having the 5Cs – Cash, Credit Card, Condo, Car, and Country Club membership.

Today, the aspirational quality of the credit card and country club membership has fallen by the wayside simple because it’s no longer difficult to obtain one.

I can’t say exactly when this happened but it has become a whole lot easier to get a credit card issued by a bank in Singapore. Although the credit limit wasn’t high, I remember getting two cards in the mail from my bank upon graduating from University. I didn’t even need to fill in an application or have a job. Ditto for the country clubs when NTUC and SAFRA* decided to get in the business and lower the barriers to entry for a membership.

These days, no one talks about getting credit cards or a country club membership because basically everyone has one. If we apply our imagination to cars, we can also conclude that once everyone has a car, it stops becoming an aspiration. After all, if everyone has a car, we would just end up with worse traffic and the rich would have then progressed to helicopters. Jakarta’s a perfect example of this.

In a twisted way, this is a version of Goodhart’s Law where the measure becomes useless when the measure itself becomes the target.

If having a car is a sign that one is rich, we would all work towards having a car to signal that we’re rich. However, that would eventually make having a car a terrible measure of wealth.

So, back to the property workshops that cater to the masses. The same logic means that if the masses could get rich through investing in property, they’ll quickly find themselves back in the middle if most people are able to invest in private property as well.

How to get ahead

Now, I have nothing about attaining material goods or getting wealthy. However, what most people need to recognise is that really wealthy people don’t buy stuff if it’s going to strain them financially.

A rich person wouldn’t own 39 properties on the maximum loan tenure in his/her own name with the solvency dependent on the rental income. If they can’t get tenants, they would still be able to pay off the mortgage and put food on the table.

Similarly, if you drive a fancy car but you have to hustle 14-16 hours a day and take on side gigs just to pay off the car loan and petrol, then owning a car isn’t exactly a sign of wealth.

So getting ahead shouldn’t be measured by something determined by others. You shouldn’t be getting a fancy car or apartment just because others think that’s what it takes to be a successful person.

Your success needs to defined by you.
On your own terms.
At your own pace.

So please, don’t be stupid.

Notes:
*NTUC is the co-operative that is the de-factor labour union in Singapore while SAFRA is basically the leisure and lifestyle arm of the Singapore Armed Forces. In short, these two organisations are about as mass-market as it gets because they represent the workers and the armed forces service staff.

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How Hard is it to Become a 401(k) Millionaire? (A Wealth of Common Sense)

Basically, the point of the article is that saving more at an earlier age gets you there much more easily. There’s also a guy in Singapore who’s an advocate for tapping your CPF to become a millionaire and I kind of pointed out that while I don’t disagree with the possibility of the feat, his explanation for getting there is a little ‘off’.

The 3 Levels of Wealth (A Wealth of Common Sense)

L1: I’m not stressed by debt.
L2: I don’t care what stuff costs in restaurants.
L3: I don’t care what a vacation costs.

Ben Carlson quotes Slack Founder, Stewart Butterfield on a simple heuristic to determine how wealthy you are. I think it’s a terribly useful rule-of-thumb to follow.

At this point in time, I’m definitely a L1 person. I’m not sure if I’ll ever progress to L2 because I keep telling myself how overpriced certain things are on the menu at some restaurants.

The Problem With Most Financial Advice (Of Dollars and Data)

A really good read about how some popular financial advice doesn’t apply to a wider population at large. I must admit that I’ll probably be guilty of this too because my experience probably doesn’t apply for the average Singaporean.

How to Wreck a Pension Plan in 3 Easy Steps (A Wealth of Common Sense)

No, not about CPF. This is about how the Omaha Public Schools’ (OPS) pension fund screwed up badly by going into “diversifying” into alternative investments.

The irony is that, rather than being diversified, they concentrated their assets into alternative assets in order not to be subject to the fluctuations that come with the stock markets.

If I were them, I might have just asked their Omaha native, Warren Buffett what to do with the money. But speaking about CPF…

CPFLife: PAP govt cares for u, really they do (Thoughts of a Cynical Investor)

Cynical Investor shares an article from The Star which talks about how Malaysians who have withdrawn their EPF ran out of money within 3-5 years. A fair amount who withdrew 70% of their monies spent it all within 30 days.

People just suck at managing their finances.

One Big Thing (Of Dollars and Data)

Various stories about how being able to identify the one variable that matters will get you most of the results you need. Nothing new in terms of insight but a good reminder that if you want to meet your goals, you have to identify the one thing that will help you get most of the way there. Once you have that, the rest of the journey is merely a series of tweaks to optimise the journey.

The Proper Geoarbitrage Strategy: First Your City, Then Your Country, Then The World (Financial Samurai)

The idea isn’t something new. I must have heard of this at least 2-3 years ago from those people who call themselves “Digital Nomads”. Basically, the idea is to take advantage of the fact that some jobs can be done remotely and that some places are far cheaper to live in than others.

What many of these people end up doing is living in a place like Chiang Mai while doing remote, freelance digital skills-based jobs that allow them to charge US dollars for.

In short, arbitrage by earning USD and having expenses in THB. I like Financial Samurai, Sam Dogen’s idea of doing the same arbitrage in your own city.

I certainly think this is doable in Singapore, certain neighbourhoods are much cheaper to live in than others. Housing is much cheaper in estates like Woodlands and food costs tend to be cheaper in older estates with a large proportion of older folks.

Unfortunately, Singaporeans are a snobbish bunch. They sneer when they hear you live in Yishun. Also, some think the sky of going to brand-name primary schools and therefore try to live within 1km of those schools to gain priority for entry.

If Self-Discipline Feels Difficult, Then You’re Doing It Wrong (Mark Manson)

Totally agree with this. I used to think that people who achieved great feats must have great self-discipline to put in the practice. Then I read James Clears’ Atomic Habits and I learned that it’s far easier to go on auto-pilot.

Simple vs. Complex (A Wealth of Common Sense)

Not posting this for the gist of the post but because of some points made in the post. One, money managers also fall for the Fallacy of Composition and Two, yeah, I totally agree that some portfolios ought to be 90/10 (equity/bond). Having an infinitely long time horizon means that you should not have to worry about drawdowns so much.

The Idea that EC Condo Sure Makes Money. We Explore a Case Study (Investment Moats)

I saw the original rant too and wanted to give my take on it but I think Kyith’s post suffices. Just wanted to add that the property market also moves in cycles and this fella (even though he was buying an EC) was buying at the top of a particularly exuberant cycle.

So, what did he expect?

Her World, a local women’s magazine, ran a story about a couple that earns $30,000 per month and yet, is in debt. You can go and read the story (here) but the gist of it is that the writer and her husband works in sales. More specifically, they sell services and products to high net-worth clients and therefore, in the course of their work, end up spending tons of money to entertain clients as well as keep up an appearance of success. In doing so, the couple has taken on debt and have no savings to speak of.

I’m highly skeptical of the stories that appear in women’s magazines but I’m pretty sure that there’s some truth to this one or at least, it’s not an impossible scenario and there are some lessons to be learned from this.

Why I (kind of) believe that this story is true

I believe this story because, in the course of my life, I’ve seen how jealousy can get the better of people. I’ve witnessed relatives buy bigger houses because they believe that a bigger house represents success when the truth is that the house was not (solely) paid for by their own efforts or results. It was a product of sponging off the hard work of others.

The other category of people who buy houses that they can’t afford is a little more sinister. They only manage to do so thanks to a mortgage that runs for 25-30 years as well as the ability to draw down from their forced retirement savings (i.e. their CPF Ordinary Accounts). Of course, this is at the expense of their future selves.

I’ve also seen friends buy bigger (read, more luxurious) cars because they can afford to. I’ve actually had a friend trade up to a Merc because a potential client once remarked that he went to see the client in a car of Korean make.

Car prices in Singapore are the most expensive in the world thanks to our tax policies on private transportation but yet it’s not unusual to spot a Mercedes, BMW, or Porsche on the road. The reason, particularly for the salaried class that owns a Merc or BMW, is that taking a loan to buy cars is fairly common in Singapore. Therefore, a $150,000 Merc can be bought by someone who can afford the downpayment (which is probably between $15,000-20,000) and the servicing of the loan.

Once again, the issue for those who take on loans to buy cars they can’t afford is that they do so at the expense of their future selves.

You have a choice

I sincerely believe that for all those complaining about the high cost of living in Singapore, maybe half of them have a genuine case of not being able to afford the basics.

The other half is bitching about how it’s expensive to live the high life in Singapore. Which is most interesting to me because if you cannot afford to live like a millionaire, then it’s perhaps because you need to be one first before you start living like one.

Make your choice.

Selectively Cheap (A Wealth of Common Sense)

A great read on how to budget for lazy people and also, in my opinion, how one should think about spending money. I’m still in the camp that believes that money is important and useful but only up to a certain extent. After all, ask someone who lacks money for the basic stuff like food, shelter, medicine, water, electricity and they’ll let you know how important money is. On the other hand, beyond a certain level of comfort, money doesn’t bring much more utility. If you need a good example of diminishing marginal utility, money is it.

Looking back at our 2018 finances (Minimalist in the City)

Always nice to look at how much other people spend on different areas of life. I’m rooting for this family to hit their FI goals.

Return of the Ever-Wrongs (The Big Picture)

It’s amazing how some people can be so wrong and yet so blind to being wrong. I know all about the Dunning-Kruger effect but still, for some people to be so blatantly wrong and yet not realise it, boggles me.

I have no idea why some old idea* from more than a year ago showed up on my Google news feed but it turns out that there’s this guy, Loo Cheng Chuan, who’s a big fan of CPF and has accumulated a combined $1m in both his and his wife’s CPF accounts by the age of 45.

I’m sure that accumulating $1m across two CPF accounts by the age of 45 is a big deal for most people but the reason why I’m writing this is because, I want to address a point that all the articles featuring this guy have failed to do.

The magic behind his $1m in CPF by 45

I googled his name and all the articles that feature his idea of accumulating $1m in his CPF accounts seem to emphasise Mr. Loo’s idea that transferring money to the SA to earn an extra 1.5+ % is the magic solution.

That’s nonsense.

The big reason why this guy has $1m across two CPF accounts is because he saved a lot of money in the first place.

Financial Calculator Magic

Using my trusty Financial Calculator, a starting amount of $100,000 with annual contributions of $37,740 (the annual limit on contributions to your CPF) will get your CPF account to $500,000 in 8.27 years at an interest rate of 4%.

At 2.5%, which is the lower interest rate earned in the Ordinary Account (OA)? A mere 8.99 years will get you there. That’s barely a difference in terms of how quick you get to $1m.

In other words, the reason why Mr. Loo and spouse hit a combined $1m by the age of 45 is not because he transferred cash to the SA to earn that extra 1.5 or so percentage points.

It’s because he maxed out his contributions.

When does the extra interest rate make a difference?

I have to admit that there may be two reasons why putting more money in the SA makes sense.

(1) Over a longer timeframe
(2) To commit yourself from making stupid decisions

Over a longer timeframe, the extra percentage points of interest add up thanks to compounding. Using the same interest rates of 2.5% and 4% but over a time period of 35 years, the future sum comes out to $2,310,311.07 and $3,174,24.87 respectively.**

From a behavioural economics point of view, it may make sense that you transfer money to your SA to prevent yourself from doing something stupid like buying a bigger house*** since you can’t take money out of your SA to spending on housing or your children’s education.

Notes:
*Ok, turns out it was because some website ran this 2 days ago.

**Note that these numbers are nominal. In other words, being a $2m or $3m-aire 35 years later may not as wonderful as you think it may be.

***Bigger house doesn’t always mean better. In fact, you may end up accumulating more junk and there’s more cleaning to do.

Yes…technically it hasn’t but isn’t that what the intent of the default payout age is signalling?

Recently, there’s been some hoo-ha about when CPF starts paying out one’s retirement money. Apparently, it started when someone posted a picture of a letter from CPF informing an account holder that if they wished to have their payout start at 65 (the earliest possible age), they need to inform the CPF Board of this. Otherwise, the default payout age would be 70.

This naturally led to some people saying that the CPF payout age had been raised to 70 from 65 and this led to the CPF Board issuing a statement to debunk this “myth”.

Can you blame the people?

I mean, if CPF had set the default payout age to 65 instead of 70, there wouldn’t be this issue in the first place. And if the default is set at age 70, then we can assume that the intent of the CPF board is to have people draw down monies from their Retirement Account only starting from age 70.

It’s been quite well established in the behavioural economics community that defaults are a way of nudging people into certain behaviour. The best and most often cited example is how an opt-out programme results in a higher proportion of people donating their organs after death as compared to an opt-in programme. In other words, default options matter because as humans we are lazy and tend to stick with the default.

What I think the CPF Board should do

Instead of coming out and saying the technical and legally accurate thing, the CPF Board should have come out and explained why the default payout age is set to 70. Their argument will probably be a combination of extra years of compounding (5 years) which is result in an extra X number of dollars paid out each year.

People may or may not agree with the CPF Board’s argument on having a default at 70 but at it least it would be a reasonable explanation of their choice of default payout age.

Right now, it just seems like they are nitpicking on the facts but skirting around the issue of their intent.