Archives for category: Personal Finance

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Cynical Investor shares an article from The Star which talks about how Malaysians who have withdrawn their EPF ran out of money within 3-5 years.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.

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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.

Financial literacy (FinLit) in Singapore is going to be a thing. After all, sometime late last year, it was announced that all Polytechnic and ITE students would be made to undergo some FinLit module.

I really hope that this programme pays off because there are too many old folks who are quite clueless about basic finance concepts and there are too many wannabe financial bloggers out there who offer shitty advice and they really don’t know any better.

Old Folks Getting Scammed

I read this in the news the other day about how an elderly petrol station attendant got conned of almost $130,000 over a period of 10 years. Now, this elderly man may be an extreme example because of how he fell for such an obviously fake story but how many folks do you know of that trust every single word their financial advisor tells them?

I find that among older folks, it’s only those that have been running their own businesses for some time that are more savvy of when the professional advice they get is dodgy. So, for the majority of folks that fall in the average, they wouldn’t question the advice from a financial advisor regarding what kind of financial products are suitable for them, and which are not.

The oft-used analogy is that if you’re sick, you would get professional advice from a doctor. Similarly, if you have problems with your finances, you should get advice from a financial advisor. To a certain extent, this is true. However, also consider the fact that the barriers to becoming a financial advisor in Singapore are much lower than that for doctors. Even more importantly, is the fact that most of them work for commissions. In other words, the more money you put into their products, the more they earn. To me, that’s why you can’t compare financial advisors to doctors.

And it’s not just older folks

Maybe it’s just me. Or maybe Google’s algorithm is getting too good. But lately, I’ve noticed a proliferation of blogs (and this is just Singapore-based ones!) that start off as personal finance blogs but have now ventured into the space of giving advice on stock-picking.

Now, it’s one thing to give advice on how to save money but when you give advice to people on investing, that’s a whole different ball game. There are some basic principles to investing but giving advice on whether to buy or sell a certain counter is treading into a murky swamp that even professionals fail to do very well.

Take the following for example:

Not going to put a link to this and forgive my amateur attempt to mask their identities. You can go search for the post if you want to but I suggest you spare yourself the agony.

I saw this featured on my feed that Google’s curated and it looks like this blog’s trying to sell some course that teaches you how to invest so that you can spend your time travelling and experiencing the fun stuff in life.

But I read the post and realise that it’s as vapid as the title.

There is NO SUCH THING as a safe return. Dividends can get cut, Bond prices can go down and assuming you get 6% in one year, then what? What are your chances of finding another “safe” 6% yield for another year and another and another?

The worst part about this blog is that they were even featured in a local newspaper which goes to show how FinLit inept our local journos are as well.

In Short

I really do hope that people out there beginning to take an interest in investing find the right sources to start with. In the Singapore Financial Blogger Universe, there are way too many bad sources and few good ones.

In the vein of supporting FinLit, I suggest starting with the following places:

Personal Finance/ Investing with a Singaporean flavour
Investment Moats
Financial Horse
Dr Wealth
The Fifth Person

US-based
Anyone from the Riholtz Team (Ben Carlson, Michael Batnick, Josh Brown, Barry Ritholtz)
Early Retirement Now
Mr Money Moustache

There are definitely other good ones out there but this list is not a bad place to start to or even get by with.

Photo by Pixabay on Pexels.com

In a previous post, I commented on how the fall of the Vanderbilt dynasty is instructive that even with all the money in the world, people can still be enormously unhappy.

In this post, I want to comment more on the reflections regarding personal finance and dynasty wealth after reading “Fortune’s Children: The Fall of the House of Vanderbilt“.

Given that the book is a fantastic account of the characters that inherited insane amounts of wealth and how they blew it all in a generation or two, I learned some things and here are my thoughts on holding on to wealth, should you choose to do so.

1. Don’t Marry an Idiot and Don’t be One

Too many of the Vanderbilt children married spouses that were only interested in their wealth. Commodore Vanderbilt’s sons were only too happy to let their wives try and outspend each other by building mansions and ridiculous summer homes at costs that were astronomical.

The cost of building these mansions was not just the problem. The costs of running the mansions were astronomical because of the number of staff needed to for such a huge place.

Sadly, even those that recognised that their would-be spouse was merely after their money wasn’t spared. Consuelo Vanderbilt, daughter of Alva Vanderbilt, was married to some nobility in England because her Alva had illusions of grandeur about her descendants becoming royalty. The irony is that the noble family that Consuelo married into were running out of funds to maintain their estates in England and needed Vanderbilt money.

The funny thing is that there are similar stories across the Vanderbilt family so I can safely conclude that it doesn’t matter if you have all the money in the world, people who don’t understand money will find some way to spend it all.

2. Dynastic wealth is made from market power and requires diversification

Commodore Vanderbilt made his money largely by being one of the few operators in the market – first in the ferry industry in New York and then in the railroad business.

If you want to amass great wealth in a lifetime, it’s necessary that you own assets that have some sort of dominant market power. It was the same for Bill Gates and in case, you want to use Warren Buffett as an example of someone who’s been in a competitive business all his life, I like to point out that while insurance and managing funds is a fairly competitive business, he’s always stressed the importance of owning businesses that have a moat. If that’s not market power, then what is?

The thing about businesses with market power is that they don’t last. In the Vanderbilt case, the law quickly caught up to busting monopolies with the Sherman Anti-Trust Act and the Great Depression quickly made sure that asset values and incomes fell. Those who were still spending freely quickly found that they had to make deep, deep cuts. Revenues from the passenger service also fell as motorcars started becoming more affordable.

The issue with dominant players is that the market will always find a way to reduce prices either through the use of new technology or new competition. It’s hard to fight against these forces and therefore, the Vanderbilts should have been working hard at gathering a diversity of assets rather than spending freely.

3. Accumulate Assets, Not Junk

While the Vanderbilts were huge collectors of art, prized horses, and other things, the problem is that when you have all the money in the world, you tend to bid too high for these “assets”.

That makes them junk.

The Vanderbilts didn’t accumulate all these things based on a reasonable analysis of the store of value or appreciation in the value of these assets. Neither did these assets throw off any income. They just did it for the “appreciation of art” or to show who had more money or “better tastes”.

This meant that when it was time to sell these assets in order to either pay off debts or to maintain their lavish spending, these “assets” were sold for cheap. Even the mansions sold for much less than they were built. The only thing upside was that the land the mansions were built on were sold for much more than they were purchased because the land was situated in a prime area.

Is Dynastic Wealth even necessary?

At the end of the day, perhaps a better question is whether passing hundreds of millions or billions of dollars down to people who haven’t earned it a good thing?

I’m beginning to think that perhaps Buffett was right in saying, and I paraphrase, that he would leave enough for his children to do something but not so much that they would have nothing to do.

After all, look at the lives of various monarchs and emperors around the world. The royal families in England or Thailand have so much money that their descendants do nothing unless they choose to. Their lives are pretty much a PR exercise to make sure that the public in their respective countries still support them.

But the main thing is that dynastic wealth robs them of simple human activity. Japanese princesses have to give up their royal status if they marry a commoner and guess what, they then have to be taught how to do stuff like go grocery shopping.

I really think I’m leaning with Buffett on this one. Enough money to do something but not so much that I don’t have to do anything.

This is a culmination of thoughts after reading a few things.

First, to set some of the context, there’s this article on Daniel Kahneman’s take that most of us don’t want to maximise happiness. Instead, sometimes we choose to pursue unhappy actions that provide satisfaction.


Kahneman argues that satisfaction is based mostly on comparisons. “Life satisfaction is connected to a large degree to social yardsticks–achieving goals, meeting expectations.” He notes that money has a significant influence on life satisfaction, whereas happiness is affected by money only when funds are lacking. Poverty creates suffering, but above a certain level of income that satisfies our basic needs, wealth doesn’t increase happiness. “The graph is surprisingly flat,” the psychologist says.


Money only has so much utility

And then, I read that Mr. Money Mustache is no longer married. The godfather of the FIRE movement who longer has any financial worries is now separated from his wife. To his credit, it seems to be an amicable split because most breakups usually don’t end up well since breaking up is an emotional subject.

It’s not my business that he’s longer married and of course, financial difficulties probably lead to a higher chance of divorce. But it just goes to show that marriage is more than just about money.

Relationships need work. Money is just another constraint to work with

I love this reflection from Kate at Minimalist in the City. It’s pure, honest and a wonderful reminder that everyone has good and bad days. Being able to recognise and appreciate both the good and bad is probably the first step to appreciate the fact that we’re alive in this world.

I need to work harder on being present. Thinking too much about what could be or what may be is a useful and satisfying distraction but that means that I’ll miss what’s going right now in my life.

Further proof that money isn’t everything

Last but certainly not least, I’ve just finished reading “Fortune’s Children: The Fall of the House of Vanderbilt“. It’s a fascinating insight into the Gilded Age where families controlled obscene amounts of wealth relative to the rest of society. And the Vanderbilt family was the richest of the rich thanks to the fortune amassed by Cornelius Vanderbilt.

The family spent it all within 3 or 4 generations no thanks to crazy spending by his descendants as well as the spouses they married. And from the account written (by a Vanderbilt, no less), it seems that they were deeply unhappy people despite (or maybe, because of?) spending all that money.

I’m pretty convinced by now that money is just the medium or the tool. The question I keep asking myself is: what will I be remembered for?

It’s December! Christmas is right around the corner and soon, no one’s going to be in the mood to do any work.

Just kidding. My students have tests in a couple of weeks. They should be doing lots of reading and practice right now.

Here are some reads to start your week.

 

books on bookshelves

Photo by Mikes Photos on Pexels.com

How to Retire Forever on a Fixed Chunk of Money (Mr. Money Moustache)

If there’s anyone interested in FIRE, then you need to read everything MMM writes. This is a good overview of the strategy that anyone who retires early will have to follow. The article covers some other points like why MMM only holds stocks, should you worry about a bear market etc. You may not agree with all the points but nonetheless, those are points to consider.

 

The Biggest Myth in Retirement Savings (A Wealth of Common Sense)

A look at the U.S. experience with 401(K)s and the early incarnation that is defined benefits plans. While we gripe about CPF, the alternative may not be that great either. Note that Ben Carlson says this in a footnote:

1Here’s the Ben Carlson dream retirement system: Everyone who is employed is automatically enrolled in the government’s Thrift Savings Plan. The maximum contribution is $50k/year and this one account can be used as a 401(k), IRA, and 529.

Practically CPF.

 

Patient Capital: The Key To Long-Term Wealth Creation (Financial Samurai)

A particular important read in trying times.

With all the fluctuations in the stock market, it can be jarring to see your wealth rise and fall drastically from month to month. But remember, what’s important is not your wealth tomorrow but your wealth in 10 or more years time.

If you have the right strategy, patience and work ethic, you should find yourself much, much better off than you were 10 years ago. If you have, then continue doing what you’re doing and 10 years later, you’ll find yourself much better off than today.