Archives for category: Personal Finance

There’s a mystery in my current organisation that I’ve been trying to solve.

Currently, my organisation offers employees who reach the official retirement age of 62 years a one-year contract for the next three years. There is even an option to have that extended to 67. Of course, the employee has to meet certain performance requirements before these options are offered.

Some additional context

My organisation doesn’t offer a pension upon retirement. Singapore has a compulsory savings scheme called the Central Provident Fund (CPF) where workers have a certain portion of their monthly salary socked away until they hit a certain age.

Also, the colleagues in question are not low or even average-pay workers. They would easily be considered middle to upper-middle class folk for the last 20 or 30 years of their careers.

The mystery and my theories

The mystery for me is not what my organisation offers but why would my colleagues want to take that offer up in the first place. I have a few theories but none seem to be wholly satisfactory.

Theory #1: They need the money

One possible reason could be that some colleagues who work until 62 and beyond do so because they need to. In other words, if they retired at 62, they would have problems funding their retirement.

I’m not very satisfied with this theory because I’m pretty sure most of my colleagues have enough put away for the rest of their lives. Furthermore, most of their liabilities such as housing loan(s) and children’s education (yes, in this part of the world, parents usually pay for their education if they can afford to do so) would have already been settled.

Also, if you can’t afford to retire at 62 years old, then is another three to five years going to matter? It might also have been that many moons ago, these colleagues planned their retirement up till 65 or 67 and therefore, they are near the end but not quite. In that case, isn’t that level of planning a little suspect? What person plans to the exact year without having a buffer of some sort?

Theory #2: Retirement is boring

I can understand this sentiment. If you look around, there are many people who say that once their professional lives are over, their minds degenerate quickly because there is nothing to keep them engaged. This is a particular statement many elderly businesspeople make.

The flip side for my older colleagues is that interests can be cultivated or expanded. In fact, most of us have other interests outside of our professional lives. Wouldn’t retirement free up a lot of time to pursue those other interests in a bigger way?

Many older colleagues also tend to be grandparents and I’m sure their children would appreciate their help in taking care of the grandkids. Or maybe it’s finally time for my older colleagues to go out and see the world.

Theory #3: They love the job

Truth be told, there are some colleagues who fall into this category. They love the interaction with their students so much so that they don’t want to step away from it. However, the job isn’t all fun and games. There are many mundane administrative aspects to the job as well as the boring and utilitarian committee work that we’re all forced to be a part of. If they really love the job, they could always become a freelancer. This would allow them to focus on the teaching without having to be a huge part of all the administrative machinery.

If they love the administrative machinations, then that’s a whole other story but which begs the question- why not be part of an administration somewhere else instead? Other administrations would probably pay better.

Also, teaching doesn’t have to be confined to the classroom or the school. Sharing knowledge and guiding others happens digitally and in other venues such as religious organisations as well.

Conclusion

Those are my theories and none of them seems particularly satisfactory. From the viewpoint of a 30-something year old who’s been here for about five years, I can’t imagine why anyone would want to stay until 62. The only sane thing is that they really can’t bear to leave this place because of the joy of work. Therefore, my money is on theory #2 or #3 although there are some holes in that argument.

Having said that, if I could, I would go when I’m ready. After all, age really is just a number. If I was financially free, I would be doing what interests me or what is meaningful regardless of the amount of money it brings me.

Well, we’ve already hit June so it’s a little bit late to be talking about this but there’s a common adage in the market that tells people to sell their positions in May and ‘go away’ or stay out of the markets until October or November.

The question is, should you believe it?

There seems to be a compelling case as demonstrated by some academics from the University of Miami as highlighted in this CNBC article.

Fuerst, along with fellow University of Miami professors Sandro Andrade and Vidhi Chhaochharia, reported in a 2012 paper that stock returns were 10 percent higher in the November-to-April half of the year than in the May-to-October period.

 Importantly, this result isn’t solely based on historical American stock returns. In that case, the academics could be making the all-too-common mistake of “proving” an adage by using the same evidence that was used to bring about that line of thinking.
Rather, they examined returns across 37 markets within a 14-year time period that was not tested in a prior paper that also found support for the sell in May effect.
The problem with the paper is that it doesn’t consider any other alternative. After all, the alternative to “sell in may and go away” isn’t just to hold equities from October/November to May. Another more common alternative is to just hold your positions through it all.

Buy and Hold vs Sell in May

Another study found that while “sell in May” may beat “holding from May to Nov”, what’s beats “Sell in May” by a mile is Buy and Hold.

 

SellMayFig11.jpg

Just don’t go away.

Obviously, with all studies, there are assumptions made and whether actual investors could get the exact returns calculated is another question but I think with this, there’s no doubt that certain myths can be quite costly.

I can’t seem to find it but I distinctly remember a thread on Valuebuddies.com (or one of its earlier incarnations) talking about this exact same thing and it was another forummer who pointed out the problem with studies like the earlier one mentioned. What I also thought I remember is someone posting the calculations of Buy-and-Hold vs. Sell-in-May for the Singapore markets and the results were similar to the one above.

Some anecdotal evidence

I have a colleague who happened, for a personal reason, to sell his entire equities position almost two years ago in May and that saved him from experiencing quite a bit of the downswing in 2015. The problem is that he never really got back in the market and that meant that he’s missed the entire run-up in the market since then plus the dividends distributed.

As for myself, although my portfolio took quite a beating in 2015 all the way up to 3rd quarter 2016, sticking to an investment strategy, the opportunity to deploy more funds into equities as well as collecting dividends along the way meant that my portfolio is actually larger than ever.

Valuations Matter

However, I’m not saying that you should always be fully invested in the market. What’s important is to be able to identify when valuations are getting expensive. During such periods of time, you want to either allocate more of your portfolio towards cash or fixed income.

After all, it’s just mathematics that a 50% fall in your portfolio means that you’ll need a 100% increase in the market in order to break even. Even Warren Buffett closed his partnership in the late 60s when he couldn’t find any more compelling investments. He was also ridiculed in the late 90s/early 2000 for not understanding the dot-com boom. All that were just some signs that the markets were getting too rich.

In short, don’t believe strict rules which make no sense such as “Sell in May and go away”. What you want to do is get a good understanding of how to tell if markets are overvalued or not.

 

Yes. That’s the exact clickbait-y (which obviously works) title of an article I saw on a site sanctioned by our Central Providend Fund (CPF)* and their answer is:

As an ideal, the correct amount to have saved up – at any age – is six months of your income. Any amount beyond this should be redirected into a retirement fund. This is because savings are just to deal with emergencies, whereas investments are for the long-term.

So if you have an income of S$5,000 a month, your savings are good if they are at least S$30,000. Note that your CPF doesn’t count, as it’s not savings you can immediately access.

That’s actually pretty sound advice.

At first pass, I nearly thought they were recommending you have savings of $30,000, period. I was thinking that it’s a pretty low number but after reading it properly, I realise that the article meant that if you earn $5,000, you should have about $30,000 in cash or equivalents.

What I think is more important is that people take heed of the second part of the first paragraph which tells people to invest any amounts above this buffer of 6 months’ income. Where and how you invest should be determined by the amount of financial knowledge and fortitude you have. If in doubt, consult a financial advisor you can trust. (Buffett’s pearl of wisdom about never asking a barber if you need a haircut comes to mind.)

The later part of the article is quite sad though.

Everyone’s financial situation is different. You may have responsibilities that others don’t. For example, some people have parents or siblings with medical conditions, who need more expensive healthcare. Some people have an income lower than the median, which makes it hard to save. There’s also one element that many people in their 30s have in common.

Your 30s are typically the age in which you’re saddled with your first major financial costs. It is probably the first time you buy a flat or car, and you might be settling down with your first child. It’s quite possible that you did save diligently from your 20s, but your wedding has wiped out those funds.

Seriously, if you find yourself agreeing with that part of the article, you have a serious spending problem. If you have an income so low that it makes it impossible to save any meaningful amount, then you really need to be prepared to work really, really hard.

I was looking through my records and it shows that my 30s (so far) have been the greatest period of my wealth accumulation and to be honest, without a proper savings game plan, it wouldn’t have turned out so well.

Don’t be surprised but there are plenty of 30+ year-olds out there holding very ordinary jobs who easily have six-figure bank accounts or stock portfolios. These are the people that you just never read about.

*The CPF is the name of the organisation that handles the compulsory pension savings account every Singaporean resident has.

The Sunday edition of the Straits Times has the Invest section which was the only real reason that I read anything in the Straits Times. I use the word ‘was’ because I haven’t gone through the paper in a very long time. The main reason is that I had access to copies of the Straits Times get a little more restricted and to be honest, the content in the Invest section seems to have gotten a little less useful.

Take the latest exhibit, The real cost of avocado toast. The article is obviously riding on the trend of bashing the guy who advised millennials to cut back on avocado toast in order to save for a downpayment on a house. The article does rightly point out that cutting back on certain habits every day and letting that extra savings compound will help you get quite a bit richer.

The problem with such advice is not that it’s wrong but that it doesn’t really provide you with a solution for getting it to work. It’s like telling an overweight person to eat less otherwise the chances of dying early gets higher. It’s good advice but the more important thing is how is the person supposed to use the advice to get results?

Since the article rightly points out that people need to cut back on certain habits, we must also acknowledge the fact that habits are hard to break. It takes a lot of willpower or an insanely good strategy to avoid going back onto the wrong path.

This is where I’ve found that it’s much easier to focus on how much you want to save each month and set up a standing instruction with your bank that automatically transfers that sum to an account that is relatively less liquid. i.e. You don’t normally use that account for daily spending.

Any monies that are left in the account after the automatic transfer to the ‘savings’ account is then left for spending. It’s that simple. People often think that this is not doable but I am willing to bet that it’s possible for the average person. After all, in Singapore, 23% of your monthly income gets put in your Central Providend Fund (CPF)* account and we’ve pretty much learned to live with that ‘savings rate’ of 23%.

So, try it. Start with transferring 10% of your monthly income to an account that you won’t touch unless you absolutely have to and have as much avocado toast you want with what’s left.

 

 

“The chains of habit are too light to be felt until they are too heavy to be broken.”

I don’t know who to attribute the above quote to because the first time I read it, it was something that Warren Buffett said but online sources say that it’s probably something that Samuel Johnson said.

Anyway, what’s more important is how true that saying is. We are all creatures of habit and particularly when our willpower is low in times of stress, we revert to the very things that we do without much thought. The danger is when some people fail to realise that their habits have taken them down a dangerous path that increases their chances of permanent ruin.

This morning, I watched an episode of a programme called “My 600-lbs Life”. The show follows the lives of extremely obese people in their bid to lose weight and regain their lives. This particular episode featured a man named James K. from Kentucky who is probably the heaviest person ever to appear on the show.

What struck me over the course of the two episodes that aired was that this guy and his girlfriend made all these bad choices that they basically couldn’t unwind. He’s so fat that he was basically bedridden and therefore it was his girlfriend who kept bringing him both the wrong kinds and wrong quantities of food. Her justification was that if she didn’t do so, he would get grouchy, argumentative and basically a pain-in-the-ass.

I know the guy has a food addiction problem and his girlfriend was obvious taking the easy way out by giving him what he wanted when his willpower was depleted. It didn’t help that they seem to be in poverty because at one point, her car broke down and she couldn’t get it fixed and that prevented her from going to get fresh produce which James needed in order to stick to his diet. Seeing all that, it’s obvious they weren’t going to be very successful in their goal.

Which is why I’ve realised that more than anyone else, I’m a creature of habit. I go to the same canteen every day to order the same cup of coffee, I have pretty much the same thing at the canteen in my school. When I’m home, my wife and I are watching the same few channels. Most importantly, I channel a part of my income into my portfolio automatically each month when I get paid.

That’s the trick with habits- habits can be both good or bad. What you want to do is develop good ones that help you meet your goals. And if you have bad habits, you want to make sure that they are inconsequential ones. If they are big, bad habits, then the first thing is to recognise them and set out a plan on how to correct them. It’s the old zen tale of a master who poured tea for his disciple until the cup overflowed. When asked why he was still pouring the tea, the master replied that new ideas cannot take root until old ones are uprooted.

I’m not perfect. I have many bad habits that I should work on. But at least I’m aware.

PS: There are so many people I know of that have developed terrible habits that they aren’t even aware of. Even if they’re made aware, they become defensive and think of all sorts of reasons to justify their behaviour. If you’re aware of your shortcomings, then kudos to you, you’re on the first step to putting things right.

Holy cow! 1/3 of the year has come and gone. So how’s your portfolio doing?

I just wanted to share a great insight on investing prowess vs. building wealth. Obviously, the better an investor you are, the quicker you’ll build your wealth. However, for mere mortals like most of us, I want to assure you that it’s still possible to build wealth.

Enter exhibit A. (Actually, this is the only exhibit.)

 

navVSwealth.JPG

NAV per share (in blue) vs. Growth of actual portfolio (in yellow)

The blue line (NAV per share) shows how much $1 invested in the portfolio would have grown to. So naturally, this involves removing the effects of adding more cash to the portfolio which basically shows us how good an investor I am.

The yellow line (Actual growth) shows how many times the portfolio has grown by relative to the starting date. Of course, this includes savings and additional cash added to the portfolio.

If you’re aiming to be financially free, I can’t think of why building wealth would be inferior to being a good investor. Sure, being a good investor gets you there quicker and probably allows you to enjoy consuming more at the same time but if the goal is to eventually not have to worry about working for money, then getting a big enough portfolio that will allow you to live off a safe withdrawal rate (3-4%) should be your main priority.

My experience so far is that being an average investor will help you get there too.

 

PS: Of course, once your portfolio gets huge enough, your savings will hardly matter. An average household in Singapore makes something like 80-90,000 SGD a year. If the portfolio reaches 2 million SGD, saving half a year’s income (which is near to impossible for most people) will only move the needle by about 2%. Having said that, if your household can’t retire in Singapore on a 2million SGD portfolio with your house fully paid for, you have a spending problem.

An update on the Singapore property market. For background on this, read here. All data from SRX.

SRX_feb17

Using the price of HDB flats as the benchmark, we can see that prices for private property in all categories are at a sizable premium to HDB flats. Among the different classes of private property, the premium for private landed remains the highest although the index seems to be on a downward trend. For non-landed, it appears that resale units are at a lower premium than new units.

SRX_feb17byregion.JPG

As for sales of all (new and resale units) non-landed private property, it appears that the area commanding the highest premium to HDB flats are in the RCR (Rest of Central Region).

Of course, prices will vary for individual projects and units but from a macro perspective, it’s going to be much easier to bargain hunt during periods like the early 2000s and ’09-’10 where there was hardly any premium over HDB flats. In fact, times like 1999 would have been a godsend to property investors.

I guess my two main takeaways are (1) despite the Singapore property market supposedly being in a doldrum, private property prices are not cheap right now and (2) HDB flats do keep their value quite well being the cheapest form of housing in Singapore and therefore is a reasonable benchmark for evaluating priciness (or cheapness) of the private property market.

In not-so-latest news, Minister of National Development, Lawrence Wong came out to caution people from buying older HDB flats* in hope that the government places the flats under a SERS programme under which owners of the old flat get compensation in the form of cash (with the flat valued at market rates) or a choice selection of a new flat in the vicinity.

Of course, the good minister didn’t want his words misconstrued as “all other flats not selected for SERS, which make up a majority, have a chance of their value plummeting should the leases be allowed to run its course” so he came up with additional thoughts on why HDB flats retain their value.

First thing to notice is that the good minister did not say that HDB flats are a good form of wealth enhancement. He only said “store of value” which everyone who has done econs 101 would interpret as keeping its “real value”. In other words, any monies sunk into an HDB flat will retain its purchasing power should you wish to monetise your flat. If you make money from your HDB flat, then count yourself lucky.

The second problem, which other netizens have pointed out, is that Mr. Wong’s example doesn’t reassure buyers who bought older flats which have already run through a good chunk of the leasehold life. (For details, see this link)

This brings me back to a point I made some time ago. Most Singaporeans sink their CPF monies into their property. If your property is going to, at best, hold its value, you better think twice about counting solely on your property to retire.Even

Even monetising your HDB flat through the HDB’s lease buyback scheme where you trade the remaining years of the lease for a monthly income has problems. First, the payouts are not inflation-indexed. Second, inflation for retiree households tends to be higher as healthcare and transportation are two of those components in CPI that rise faster than the average component in the basket. In short, fixed incomes and rising costs don’t make a sound retirement plan.

 

Notes:

*HDB or Housing Development Board flats are Singapore’s form of public housing. The flats are of decent size (compared to places like Hong Kong), decent quality and generally cheaper on a dollar per square foot basis compared to private property. However, all HDB flats are on a 99-year lease from the government. At the end of the lease, the flat is returned to the government. However, with Singapore being such a young country, there hasn’t been a single case of whether the government pays any compensation for taking the flat back or the value of the flat goes to zero.

 

Ah, Valentine’s Day. The day where people all around the world find a reason to celebrate or profess their love for one another. Sure, some countries do it differently from others. Japanese custom has it that women give chocolates to the guys they are interested in and wait for ‘White Day’ where they hope to receive something in return. Getting something in return from a guy they like will mean that their Valentine’s Day gift and feelings have been reciprocated.

Well, doesn’t matter where you are in the world, but if the society you’re in celebrates Valentine’s Day, you can be sure that things are going to get expensive. Flowers will be more expensive, restaurants will come up with “special set menu” where the most special thing will be the price of the menu and gift shops would have seen an increase in business. Of course, this all boils down to the forces of demand and supply as well as price elasticity of demand but no one can deny that Valentine’s day is a very, very commercial construct.

So then, how to think of Valentine’s Day if you’re a Singaporean trying to build up your wealth? In my opinion, the best way to think about it is to figure out how much satisfaction or utility you would get from things such as buying overpriced flowers or going for an expensive meal.

What did I do for Valentine’s this year for my wife who absolutely deserves the best that I can give her?

I bought flowers and I cooked a meal.

So, this story turned up on my Facebook feed this morning and I thought it’s an excellent example of how life sometimes requires struggle before you see the reward. The story is about how the Philadephia 76ers basketball team is starting to see the results of a strategy that was started some years back. The strategy consisted of being deliberately bad for a few years in order to get better players that would be around for the longer haul. Unfortunately, the owners of the team couldn’t wait long enough to see the results and forced the general manager in charge of the strategy out. I’m not an expert on basketball and there might have been a less painful way to turn a team around but the one thing you can’t argue is that the strategy didn’t work because going by the 76ers current record, things are certainly much better than before.

What I think is important is that the above also applies to many areas of life. Some months back I read Paulo Coelho’s The Alchemist for the first time and the book tells a simple tale of never giving up and having faith in the journey that you have to take in order to reach your dreams. While the story doesn’t reflect the complexities of real life, the struggles that the character goes through for practically the entire tale does provide a cautionary tale for anyone who dreams of success- that the path to success is often filled with numerous false starts and it is a long and arduous journey not for the faint of heart.

Since humans develop habits by the way of a cue, routine and feedback, savings money is a pretty easy thing to do. Money that comes in from a paycheck (the cue) can be channeled to an account used for investing (the routine) and as you see that amount get bigger, you feel a sense of satisfaction (the feedback which is positive).

However, things can screw up when it comes to investing. After putting money into a carefully selected invested, the value of the investment could decrease. This leads to the investor questioning his or her ability when it may be no fault of theirs if markets tank in general. It may also not be of concern if the stock tanks in the short term due to unnecessary pessimism. The bigger question is, will the investor be able to stomach a decline in value of their holdings?

This is where I think it’s absolutely necessary to have an investment process which should be able to do a few things. One, it should help an investor enter or exit the market during periods of extreme valuation. Two, it should help investors select securities (equities or bonds) which have a more than fair chance of surviving in the long-run. Three, results should be evaluated over a period of at least 3-5 years and certainly not just over a year or two.

Having said that, sometimes we also need a little faith that we’re doing the right thing. Trust the process.