Archives for posts with tag: Personal Finance
Photo by john paul tyrone fernandez on Pexels.com

This is one of those end of year posts so I guess it’ll be retrospective and yet forward-looking at the same time. However, being the end of a decade, I thought it’ll be interesting to look at some of the changes that has happened in my life in order to give myself an idea of what to expect in the next decade.

Career

At the beginning of this decade, I was a couple years out of school and working for the civil service. The job paid decent but was the scope of work was way out of my interest zone. Needless to say, I was there for another 2 or so years before I left for a teaching job in the public service.

Teaching foundation level economics has been fun but of course, the lack of depth impedes an understanding of real-world issues. Also, in this current day and age, economics has been applied in areas outside of the traditional business setting but being in the business school, the economics we teach doesn’t stray far from your traditional Econ 101.

In short, teaching economics at the school where I am right now is kind of limited in depth and breadth. Plus, it seems to be a business school phenomenon that economics isn’t all that important. Instead, the flavour of the times seem to be anything tech-related.

Fortunately for me, my interests and skills lie not just in economics but also in finance and in the next decade, the plan is to move further and further away from economics and more into the finance space.

Which area of finance? It should be in corporate finance and business valuation.

Health

It’s funny that I’m down with flu as I write this but my health hasn’t really changed much over the last decade. If anything, it has gotten slightly better.

I put on a fair bit of weight after working and in December 2017, I reached peaks that I had never reached before. That was the trigger for me to be more aware of my diet.

The thing is, I love beer.

So I searched and searched, and eventually I learnt that there was something called intermittent fasting. Long story short, I followed some version of it where I skipped breakfast except for a cup of coffee with evaporated milk, no sugar. And then I ate lunch at around 11:30am or so, followed by dinner at around 7:00pm.

I not sure I even did it right because some people say that you can’t have anything that has even a little bit of sugar in it (which the milk has) but anyway I lost about ten kilos and my weight has been at a comfortable level since.

I’m also sure it’s because I had light lunches on some days of the week but otherwise, I didn’t restrict my diet to any food groups. It was all about making sure you don’t overdo things.

The not-so-good part is that I haven’t managed to exercise regularly. Every time I’ve started to hit the gym again, the momentum somehow gets disrupted and the next thing I know, a week or two goes by and all my gym gains have gone down the drain.

I really need to start making a gym routine part of my week because I can literally feel my body getting weaker once I go without exercise for just a week or so.

Currently I try to do my gym sessions during lunch but I realised that’s not exactly a great idea because my timetable changes every semester which would be a deal-breaker for establishing a routine.

We’ll see how things go from here.

Life

Well, life is the big one, isn’t it?

At the start of the decade, I had a girlfriend. Now, I have a wife and three cats. Scratch that. Make it seven. How we got to seven is a funny story but we’ll get to that later.

So my wife and I have been married for almost 8 years now but it’s more than 10 years since we’ve met and gotten together. We’re not the perfect couple but we’re perfect for each other.

We can get upset at each other but we’ve never shouted at each other. We mostly just give each other the cold shoulder for a while before we realise that it’s not worth it and then we apologise and make up.

Most of the time, we just enjoy the simple things in life and each other’s company. Things like reading good books, eating good food (in moderate quantities) and relaxing.

In that way, we’re kind of like cats.

So, two years ago my wife (it’s always my wife who has the better ideas) asked if we could adopt a cat. She’s always liked cats but never owned one.

Since we don’t have kids, I figured it wouldn’t be a bad idea to have a cat to come home to and from what I read, cats are definitely lower in maintenance compared to dogs (or kids). I had dogs growing up so I kind of an idea about what kind of care you need for dogs.

And that’s how we got our first cat, Teddy. He wasn’t the cat we were going to adopt but then the rescuer suggested that as first-time cat owners, we adopt him because he was friendly and easy-going.

That turned out to be totally true because Teddy is the most low-maintenance cat I’ve ever met because you pretty much just have to feed him and make sure he has a clean litter box, and he’ll be a happy camper.

Then some time this year, the same rescuer asked if we could take in a kitten that was part of a litter rescued from Pulau Bukom, an island off Singapore, which is part of the oil refining industry in Singapore.

So cat number two, Pepper, came into lives and she has been a little ball of terror because she came with a parasite issue which caused diarrhea, refuses to leave Teddy alone hen all he wants to do it chill, and is super noisy when it comes to feeding time. But we still love her anyway.

Then a few months after we got Pepper…

One day as we were walking home, we noticed a cat hiding away at the bicycle rack, at the block of flats next to ours. We’d never seen her before and there are community cats in the area so it’s unlikely that another stray would have ventured into this area since cats are pretty much territorial. Plus, she was too friendly to humans which made us suspect that she was abandoned.

And so cat number three, Mudpie, came into our lives.

What we didn’t realise was that cat number three, was pregnant with four kittens. By the time we found out, she was two weeks away from delivering and so we now have seven cats at home.

They turned out to be such fluff balls

I think the next decade will easily see a mean reversion in terms of cats.

Wealth

Ah yes, and finally, all about the money.

I’ve been tracking this number ever since I started investing but my records for the early years haven’t been well-kept. The good thing is that I now have at least a decade worth of records so I can see exactly how much my wealth has grown.

The short answer is: a lot.

At the start of the decade, my portfolio was under $50,000. Today, it’s roughly eight times that. By the way, I only count monies that I can easily convert to cash. This means that I don’t include my CPF accounts nor the property that we stay in.

You could include those but that would mean giving up your residency status in Singapore. If that’s an option for you, then by all means, include those numbers. Otherwise, if you’re a Singapore citizen or PR, you have to ignore those numbers as those don’t mean much until you reach the age where you can cash out.

I’ve digressed so back to the increase in my wealth. Is that record impressive? Not really.

Because it could have been a lot more if not for two things: one, I was and still am, under-invested, and two, I was invested in the wrong places.

Let me explain.

I’ve had a huge allocation to cash in the last two to three years. This is despite the fact that as an investor, I’ve two things going in my favour. One, I’m relatively young and two, I’m still gainfully employed and likely to be in the foreseeable future (iron rice bowl, see above).

Therefore, I should have bumped up my allocation to equities, REITs or anything with a higher expected return than cash as I’ll be able to ride out any bumps along the way.

The second reason is that I was invested in the wrong places. Honestly, I started out the decade thinking that if I could read the financial statements, I would be a lot better than most investors. That is true but only to the extent that one is familiar, or willing to be familiar, with how the economic landscape that any company is in was going to change.

For example, there’s a company that I (like many other Singaporeans) am invested in where the shift towards online media has absolutely damaged the company’s main income generator. And this damage to their old business model means that the damage is irreparable despite their best attempts to diversify into other areas such as malls, nursing homes, and student housing.

Even if they are successful, trading a much higher-margin business where they had a virtual monopoly for one that is much more competitive and capital-intensive means that the whole business is unlikely to provide the kind of returns to investors as it once did.

Therefore, the market correctly priced in lower multiples and slower future growth which explains the situation that the company finds itself in. In case you haven’t figured it out, the company I’m referring to is SPH.

There are a number of other such mistakes that I’ve made in the past decade and honestly, I find it too much work for the extra returns that a broadly-diversified portfolio might return. Needless to say, I’ve had my successes but those aren’t anything to brag about either.

The main reason for the increase in my portfolio is simply the insane savings rate that I have. By my back-of-the-envelope calculations, more than half of that increase was due to savings. Another 20% or so due to returns from dividends and the rest from capital gains.

In short, while you are young, you can have shitty investing skills and still see a dramatic increase in your net worth if you save like hell.*

I still obsess about my net worth but ideally, I’d like to arrive at the day where I honestly don’t care about money any longer because what I have is more than enough for my wife and I to live how we want to.**

In the next decade and more, I have to stick to a better investing plan. I’m already fairly disciplined about savings because it’s pretty much on auto-pilot and I don’t spend very much compared to others.

The main focus now will be to stick to an investment plan that allocates a higher return to equities and be disciplined about the re-balancing process while keeping costs low. This will be the way to go as I have many decades of investing ahead of me.

Goodbye 2019 and 2010s

You’ll notice that I haven’t talked much about what’s going on in the world and frankly, none of it has mattered much to me.

We have politics becoming a joke in the U.S., strongmen steadily gaining power in Russia and China and in Singapore, we have our own Orwellian-esque POFMA.

The climate has also gone bonkers with records temperatures being reached and yet, people rode the wave to sell metal straws while the fear-mongering grows over solutions that smart people like Bill Gates are suggesting.

In the business world, startups that blow through cash (think Uber, Grab, the disaster now known as WeWork, or almost any other unicorn for that matter) gets seemingly unlimited amounts of funding for business models that pretend to be a tech spin to an older business model.

Even in my world, the mantra seems to be “tech” and “entrepreneurship” but the powers that be fail to realise that as a business school, it’s unlikely for us to teach “tech” well. And frankly, “entrepreneurship” isn’t something to be taught so I’m not sure how we’re going to justify charging the school fees for that one.

“Hey, splash some cash for us to teach your kids the rules that they have to break.”

That’s probably the most honest marketing you’ll get from a business school trying to teach entrepreneurship.

Despite what’s happened, the 2010s have been kind to me. I’m extremely blessed to be living in a place free from strife, have loved ones that care about me, and seven cats.***

Notes:
* Of course this has diminishing returns as your net worth grows. It’s unlikely that your salary will grow in line with your portfolio and therefore the same savings rate will gradually add less and less to your net worth as the years go by.

**Skeptics will say that the day will never come but based on my current lifestyle, I’m pretty sure I’ll get there sooner rather than later.

***Of course, we’re not going to keep all seven.

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.

Let me state it up front: I’m not a fan of products offered by insurance companies.

Photo by Pixabay on Pexels.com

In Singapore, insurance companies no longer just provide the pooling and spreading of risks. The industry underwent a transformation decades ago that rebranded insurance agents into financial planners.

The message there being that financial planners no longer just help you plan to avoid unfortunate incidents that can happen but also prepare for the inevitable which is that one fine day, you’ll stop work but still need money i.e. retirement.

An Agency Problem

As Buffett once said, “Never ask your barber if you need a haircut.” Similarly, the common model of compensation for financial planners is a commission based on the dollar value of products that they sell. On top of this, the agency that they belong to typically has a quota that they require to meet. Add to that the problem that most people don’t really understand statistics well enough to make an informed decision and you have a recipe for being sold products that you either don’t need or is designed to benefit the seller rather than the buyer.

I’m not saying that financial planners are inherently dishonest. I’m just saying that most of them are telling you things that the marketing material tells them rather than what a person really requires for financial independence.*

Enter AXA’s latest product

Kyith over at Investment Moats did a breakdown of this product that promises escalating payout over the years. This deals with the problem of inflation (which is fantastic since most products don’t) and if you get this plan, you probably can be relatively assured that you retain purchasing power as you age.

So what’s the problem with this product?

Well, as Kyith calculated/estimated, the returns for this product (depending on the performance of the non-guaranteed portion) is probably anywhere from 1.92% to 3.75%. At the high end, that is scarcely better than the 10-year Singapore Savings Bond which has virtually no default risk.

Now, I’m using AXA’s product as an example. I don’t believe the other insurance companies can provide anything much better because their costs would be about the same and for them to generate more alpha (i.e. higher returns than a similar competitor) would be to take on more risk which may not be allowed by regulations.

There are much better alternatives

I would even argue that for such long time-frames, you could put your money in equities and expect much higher rates of return. While financial planners may argue that equity returns are non-guaranteed, I would say the same for their products. I would take my chances with the lower cost alternative which is a broad-based market ETF or index fund.

Buy Term, Invest the Rest


As far as insurance is concerned, I would remember the quote above. Buy for protection and learn how to generate returns on your own. You don’t really need an organisation to add layers and collect fees for doing nothing much more than “helping” you to invest. There’s so much information on the internet and anyway, most of us can’t really do much better than the market anyway.

Notes:
*By way of reasoning, my challenge for financial planners is to show me a successful planner who made money from actual financial planning rather than their commissions.

CNA ran a piece titled “Regardless of Class” which I think is going to stir up quite a bit of debate. It’s hosted by Minister Janil Puthucheary* and it’s a very good look at the income/wealth/class divide in Singapore despite some of the flaws in the questions asked and conclusions reached in the video.

I watched it mainly because I think wealth and income inequality is potentially the big destabiliser for society, and what’s bad for society isn’t really good for the economy as well. So, it’s kind of nice that this issue is getting so much attention lately (see here, here, and here).

I’m not going to comment on the video (you should go watch it. It’s really worth 50mins of your time). Instead, I’m going to share something I heard from a colleague of mine.

In the public service, we usually have some money budgeted for team bonding and what we usually do is go for a meal**. On one such occasion, the colleague that related the story went to a cheap buffet (you know, like those around $20 per person). Apparently, another colleague that was with her said something along these lines, “I don’t eat at these cheap buffets. I only go for those like ‘The Line’ at Shangri-la.”

 

The problem is the current Upper-Middle Class

The funny thing about the statement made by that colleague is that in my experience, it’s very typical of a statement made by those that made it to the upper-middle class. This is particularly so for those that grew up somewhere near the middle class and finally have some semblance of wealth.

I don’t really understand the thinking behind that kind of mindset but I think it must be something like this — when these people were younger, going to a buffet at a hotel was a treat. When they finally have some money, they get suckered into going for expensive stuff, thinking the price tag and environment justifies everything.

The public service pays well enough if you’re somewhat prudent but they can’t possibly have gotten wealthy enough to become a one-percenter on their public service income alone. It’s amazing to me that public servants who are well-off but not filthy rich think like this.

And this colleague’s not along. I’ve heard another colleague who said something similar and I know a relative who’s also like that. Funny enough, they’re all in the same age group, working background, and of the same gender.

What’s wrong with this

Unfortunately, they tend to think of the good life merely through consumption. And for these people, the more expensive the things they consume, the better it is. It’s ironic that they rely on a price tag to determine the value of something.

In the immortal words of some wise man,

A fool knows the price of everything but the value of nothing.

I don’t understand the thinking of those who look at the price tag of something in order to determine its worth (and it happens a lot with fashion because seriously, a belt is a belt. Why should one cost $30 and the other $300?) because when I eat something, whether it tastes good or not is determined by my taste buds and not the price.

In fact, if it’s expensive, I expect it to taste good.

When it’s cheap and it’s also good, I’m totally blown away.

 

Notes:
*I’m not his biggest fan (remember when he said that him being a doctor is equivalent to serving NS?) and I think him hosting this show is somewhat of a PR stunt.

**Unlike what some people may think, the money budgeted isn’t that much.

pexels-photo-323705.jpeg

Is your housing expenditure detriment to your retirement?

 

Alternatively, this could have been titled, “An Ode to my CPF”.

I know I’ve given lots of shit to CPF (for example, “CPF monies: to depend on it for retirement is a pipe-dream“, the footnote in “Early retirement: some math“, or more recently, “What’s the economic logic behind CPF’s accrued interest policy?“) but think about it:

What if you had regular contributions to your CPF and you let it compound?

There is a group of people in Singapore that has spent so much on housing that they have barely any contributions to their CPF each month. Those that even have to fork cash out of their pockets to pay the mortgage are in truly dire straits. If you happen to find yourself in this situation, read on below.

A Very Personal Example

I happen to belong to the camp that has regular CPF contributions because my housing loan is so low that my monthly CPF contributions more than covers the monthly mortgage. Also, I will finish paying off my loan in another 4 years or so (background here).

So I decided to run the numbers on the following scenarios to see how much I would have when I turn 55 (the age that we can finally take some of the money out of our CPF accounts):

A: If I work for another 20 years
B: If I work for another 10 years
C: If I work for another 5 years

The assumptions I’ve made are as follows:

#1: Current contributions increase by $10,000 per year after our housing loan is paid off.

#2: Contributions remain constant over time. i.e. No increases in salary.

This is for easy math and anyway, I don’t expect my salary to increase drastically beyond the inflation rate so the contributions can be viewed in ‘real’ terms.

#3: CPF returns 3% across all accounts.

I’m assuming this despite having more monies in my Special Account (SA) at this point in time. I know the SA earns a higher rate of interest and combined sums (subject to a cap of $60,000) in your accounts earn an extra 1% but once again, this is for easy math and to set a floor.

#4: I’m starting with roughly $130,000 in both my OA and SA.

Numbers

Thanks to the magic of Excel:

Scenario        Final Amt at 55 ($)

    A                  $1,180,000

B                  $772,000

C                  $495,000

Final Thoughts

Obviously, the numbers above are not going to be representative of what another Singaporean might end up with. I’m making above the median salary although NOT much more than the Median Household Income. Of course, a major factor is that my wife also works and our household size is smaller than the average*.

I still believe that the CPF system needs a revamp. Way too many people are spending what should be their retirement savings on a property, either as an investment (which is still somewhat excusable) or on housing (gasp!). That’s probably one of the main reasons why only about half of CPF members can meet the retirement sum despite pledging their property.**

Also, one big sore point for many people is the Retirement Sum*** going up. There’s a good article on what the retirement sum may be like for younger people today when they reach 55 later on. Just eyeballing the table, it seems that based on my calculations above, meeting the retirement sum shouldn’t be a problem.

Very often, people forget that compounding needs time to work its magic but for compounding to work, there’s needs to be something to compound in the first place. If you spending all your money on housing, there won’t be anything left to compound. And if you want to turbo-charge compounding then you need both time and regular contributions.

 

Notes:

*I believe the average household size is 2.1 in Singapore. No, us having a cat doesn’t count.

**There are also other factors at play. I suspect that the labour force participation rate should explain quite a bit. Some (especially mothers) may have only worked very few years of their lives and hence have little in their CPF accounts. For example, my own mother practically stopped working full-time after she had me and my brother. By the time my youngest brother came along, she had already stopped working for some years.

***The Retirement Sum is the minimum you need to have in your CPF accounts so that the CPF can slow-drip the money back to you in old age so that you have enough money to meet your basic spending needs.

For some reason, if you go over to thefinance.sg, you’ll see a collection of posts from many Singaporean bloggers on their net worth. I find it kind of amusing that so many people would want to publish their net worth so openly. I guess it’s inspirational for others who may be around a similar age group but it’s probably also #humblebrag.

My point today is not so much about a person’s net worth in Singapore but how it’s calculated. On the site, I’ve seen a few people in their late 20s or 30s with a self-reported net worth or portfolio of investments in the 600K-700K range. It’s not that the numbers are impossible but it’s just that I find it quite rare to have so many people report similar numbers.

That’s when I realised that many people have different ways of calculating their Net Worth. Some only include their excess cash and investments (stocks, property etc.) while some include money in their CPF accounts, and some even include the share of their home equity (i.e. the value of their primary residence minus outstanding mortgage).

In my opinion, there are only two approaches we should be using and I’ll go through each of them and what they mean.

Approach #1: Comprehensive a.k.a What the Government does

Singapore Household Balance Sheet

How the government measures household net worth. Source: Singapore Department of Statistics

From the table above, you can clearly see that the government’s version includes everything one owns minus everything one owes. This includes all forms of property, be it your primary residence or your CPF monies.

I call this the “comprehensive approach” as it measures all your assets net of your liabilities. Some people may argue that CPF monies are highly restrictive in their use and your primary residence should not be included because you actually “consume” housing when you live in it instead of being able to rent it out and gain some rental income.

The counterargument to both those claims is that money is fungible. One could always migrate overseas and the monies in your CPF accounts would be released. The argument for your primary residence is that we cannot confuse cash flow with investment gains. One may not be able to rent out one’s house while staying in it but there is still the chance of capital gain if one chooses to sell the house.

Anyhow, if you choose to use this approach to measure your net worth, this is the most comprehensive approach. MoneySense provides a nice calculator for you to measure this.

Approach #2: Conservative a.k.a What Bankers Do

HNWIs are defined as those having investable assets of US$1million or more, excluding primary residence, collectibles, consumables, and consumer durables

Alternatively, if you aspire to join the ranks of the wealthy, then it makes sense to measure yourself like one. Banks also classify clients by Net Worth but their calculations are slightly different. They use a benchmark called “investible assets” which doesn’t include the place you stay in or other assets that may not be so liquid (i.e. not so easily converted to cash). In this case, I don’t think the monies in your CPF account counts.

Since this approach only counts what can be converted to cash without economic tradeoffs (your primary residence doesn’t count because if you sell your house, you still need to spend some cash finding another place to live in), this is probably the best measure of how wealthy you are.

In other words, this approach actually measures how much you would be able to freely spend on goods and services.

Conclusion

Doing both calculations, I find that the first approach gives me a much higher number than the second approach. This is because a substantial amount of my assets are in my CPF accounts and home equity.

I suspect that most Singaporeans will find themselves in the same shoes as me and if I were the government, I would be really worried about the ratio of approach 2 to approach 1. The more wealth that is tied up in CPF accounts and home equity, the more people may think of moving overseas to unlock the assets that are essentially trapped in their homes and CPF accounts. After all, what’s the point of having so much money that you can’t use because most of it is locked away in the form of a house or in an account that drip feeds you the money?

flight technology tools astronaut

Where do you see yourself in the future?

 

I just attended a symposium on how Behavioural Insights and Big Data can influence public policy. The interesting thing is that at the symposium, A/P Hal Hershfield talked about how people tend to view the future version of themselves as another person instead of part of themselves. And because they view their future self as someone distinct from their present self, the decisions made in the present could be less than desirable for their future.

A/P Hershfield provided not just philosophical views but a neurological view that supports the view that people then to view their future self as another person and the studies he presented were in the context of how much people were likely to save as well as how likely they were to enroll in an automatic savings programme.

This is really interesting because I find it a mystery how other people seem to find it difficult to save money when it’s always been very easy for me to sacrifice consumption in the present for my future self. If A/P Hershfield’s theory is true, then it makes sense that some people find it harder to save money for their future because they view their future self as someone else and if you view your future as distinct from yourself, then your future self’s interest may not align with your own.

Solutions

If you find it hard to save for your future then maybe you may find some of the following useful. The presenters at the symposium presented some solutions that have shown to work in experimental settings.

One solution was to have participants view a version of their future self by digitally altering their photo. Being able to visualise how their future might be automatically led to people feeling a deeper connection with their future self.

So, what you can try is to visualise yourself, 20 or 30 years in the future and leading the kind of life that you want. If you’re able to make an emotional connection with that mental image, then it may be possible that you’ll find it easier to take concrete steps today to help you reach that goal.

Another solution was to have people feel that their future is closer than they think and the test that they did was to frame the question from ‘future to present’ rather than from ‘present to future’. For example, they asked test subjects to think about from ’20XX to 2018′ rather than from ‘2018 to 20XX’. There’s some psychological explanation involved but somehow there is a difference in how we view the future from the present versus thinking about the future back to the present day.

The behavioural economics solutions are also powerful — having a pre-commitment device or default settings (which I’ll elaborate on in the next section) means less mental cost for us to take the action required. For example, it’s easier to commit to saving a portion of a pay raise before you actually get it. This is an example of a pre-commitment strategy i.e. you tie your decision in advance to avoid you making bad decisions later on.

I really like this idea of auto-escalation. Nobel prize winner Richard Thaler, together with Shlomo Benartzi came up with the idea of having people pre-commit to saving a certain amount of their pay raise and this results in an increase in savings over time. You may say that our good old CPF is doing the same thing by making it compulsory for us to save a certain percentage of our income each month and to be honest, it helps provided you haven’t spent it all on housing.

Framing was another solution that was presented. Whether participants were given a choice of saving ‘$150/month’ or ‘$5/day’ affected the enrolment rates in a savings program. In case you are wondering, the ‘$5/day’ case got much more sign-ups in the programme. So, one way to get yourself to save more may be simply to target saving ‘$X/day’. If you have problems saving, I suggest you start small like “S$1 or S$2/day” and bring that number up by another dollar or so once you’ve got through a whole month of doing so.

What worked for me

In a sense, saving more is one of those problems where there is a conflict between the present and the future — the present self would love to consume as much as possible today but this comes at the expense of the future self. However, this idea can also be used to tackle other issues of a similar nature like losing weight, smoking less or drinking less alcohol.

What really worked for me (even though I’m far from the best investor) was the idea of having default behaviours. Saving money has never been an issue for me because I set up my bank accounts so that a certain portion of my pay gets transferred automatically each month from one account to another account. And the money in that account is used solely for investments.* What I’m working on is having default behaviours for investing because I tend to take too little risk when I, of all people, can afford to take on more risk.

But that’s another story for another time.

Conclusion

If you find yourself struggling to save for your future, it could be because you don’t feel a connection to your future. If that’s the case, it may help to set up default behaviours and/or imagining what your future would be like if you didn’t have to worry or think about money.

 

Notes:

*In standard economics, this is nonsense because money is fungible. There should be no reason why we have separate accounts for different uses of money. However, what I find is that having separate accounts for money that you spend versus what you invest restricts one from using the money freely.

The focus has turned to the markets this week. Here are some things to catch up on.

gold link pocket watch

Compounding requires Absorbing Damage so You’re Never Forced to Quit (Investment Moats)

Kyith has a post that I think underscores that in order for compounding to work, it takes time. And throughout that period of time, things can (or should I say, will?) get pretty nasty sometimes.

For me, the interesting bit is that I never knew there was an ishares ETF that tracks the Singapore market. Kyith’s example about how buying this ETF at its inception* during the highs of the Asian Financial Bubble led to paltry returns over the next 21 years is also very illuminating.

In short, if you buy when markets are expensive, you will live to regret it.

 

New cooling measures: The show has just begun (Property Soul)

Vina at Property Soul has come out with her take on the new ABSD measures and what it means for the property market in Singapore. I’m pretty sure many of you may have already read this but FWIW, stay tuned to her site for more in the coming days.

 

Some Considerations For Investing Globally (A Wealth of Common Sense)

Ben Carlson has a great post on the case for investing globally. He’s written it from the perspective of an investor in the U.S. but of course, the same would apply for someone outside of the U.S.

What’s interesting for me is how the S&P 500 and MSCI EAFE (which represents investing in developed global markets) have taken turns to outperform one another.

While the simple case would be to invest equally in both and rebalance periodically, the more enterprising investor could invest in one, and then start switching to the other as valuations become relatively cheaper in the other.

Also, based on the table, might it be suggesting that in the next period, markets outside the U.S.? From a valuations standpoint, it certainly seems possible.

 

Mainland developers are ‘money mills’ that rely on spiralling asset prices (South China Morning Post)

Many people have been warning about credit bubbles in China for some years now. This opinion piece provides a look at the mechanism by which the credit bubble has developed. If this is true, then the stock markets in China may be on to something after all. And if it bursts, then expect HK and SG markets to be badly affected as well.

 

Wealth Is What You Don’t See (Fervent Finance)

Sustaining Wealth is Harder Than Getting Rich (A Wealth of Common Sense)

Finally, on the personal finance front, two different articles which highlight what should be obvious truths.

The first one makes the point that for most people, getting wealthy is a result of cultivating good habits with money — being frugal and thrifty are sufficient components to getting rich.

I personally know a few colleagues who have been mid-level civil servants for a good 30 years and right now, they would easily qualify for the top decile in terms of net worth. Yet, they watch every dollar. To them, the best meals are the ones in the hawker centre or coffee shops. They fly economy because it’s cheaper and they would never stay in a 5-star hotel unless it came at a good price. They are some of the most practical and humble people I know.

The irony is that some of the kids we teach think buying Yeezys or NMDs, which cost hundreds of dollars, and 80-dollar T-shirts show that they are rich. What they don’t realise is that the guy standing before them in the classroom could be worth millions, never have to work another day in his whole life but is wearing a $20 polo tee and sport shoes he copped at a sale.

The second one makes the points that getting rich and staying rich are two different things. You may have gotten rich through a lucky break such as riding the wave of an industry that’s experiencing unprecedented growth or an inheritance. But staying rich takes much more than that.

You can’t spend like a drunken sailor (which is essentially what Johnny Depp did) and expect to remain wealthy. This is why the Chinese have a saying that “Wealth doesn’t last three generations.”

In my life, I’ve seen how some of my extended family behave and everything is playing out according to the pattern above. In my family’s case, it may even be accelerated. The first generation built the wealth through sheer hard work and grit. The second generation has grown it (somewhat) but my generation, the third one, is pretty much spending it away.

 

 

chinahustle

More money has been lost reaching for yield than at the point of a gun.” – Raymond DeVoe Jr.

 

So, I just watched this awesome documentary on Netflix called ‘The China Hustle‘ and it brings to mind some events that happened in our local stock markets some years back.

The China Hustle

The film is a documentary that follows how some investors in the U.S. got into the business of short-selling Chinese companies listed in the U.S. Basically, what they uncovered was that some Chinese companies listed on the U.S. stock exchanges were selling stories too good to be true.

The thing is that no investor can trust the financials for these companies because the numbers were all inflated in some way. What made things worse was that the investment banks, together with the auditors, bringing these companies to the market either didn’t or couldn’t do the due diligence on these firms but brought them to market anyway.

Stage two of the play saw the banks promote these stocks to clients and after having cashed out, the CEOs of the company in China, the banks who collected the fees for helping the companies list, and the brokers who sold investors the stock all made out nicely.

Stage three then saw the investors left holding on to stocks that were worth much less than they paid for them because the underlying business was then exposed as being worth many times less.

The film also interviews three investors who lost a lot of money from investing in those stocks and it’s quite painful to see retirees lose six-figure sums from what is essentially fraud.

I’m pretty sure the film also has its agenda and, therefore, takes that angle quite consistently so the thing to keep in mind is that not every Chinese company is going to turn out to be a fraud or that every banker out there is working against your best interest.

Getting educated about such things is one thing we can do to ensure that we don’t fall for schemes and scams that could ruin our lives.

 

S-Chips: The Singapore Version

Why did it bring to mind some things that happened in our local markets?

Well, first, the short-seller featured in the show who was purportedly the first one to expose a Chinese company is none other than Carson Block. Carson who? Block is the guy who runs Muddy Waters who basically wrote a damning piece on Olam way back in 2012. Of course, Olam turned out fine after Temasek took a stake in it and is definitely not in the same category as the Chinese companies featured in the show.

More importantly, Chinese companies listed in Singapore (called ‘S-chips’) have been a feature of our market for some years now and quite a few of them had their own accounting scandals brought to light after the Global Financial Crisis.*

There’s an anonymous account by someone who’s supposedly a former S-chip CEO that has been circulating on the internet since 2009 and it reads pretty much like the stories presented in ‘The China Hustle’. Go google and you’ll realise that it wasn’t just a problem confined to the U.S. or Singapore, the Australian and U.K. markets were similarly hit by such cases.

Of course, the China growth narrative has been played, some investors made money, and some lost big time.

 

People Never Learn

It’s crazy but if you’ve been investing the markets long enough, you’ll see certain patterns repeat over and over again.

One pattern is how speculators get FOMO and end up chasing the next growth story. In the early 2000s, it was tech, then housing. Then it was financials and China.

The last two years? It’s definitely been tech. People have been so open to putting money into technology (think crypto) that hasn’t any demonstratable proof of profitability. The venture capital space also seems to have no problems raising money and even in the publicly-traded space, which is usually where private investors find an exit for their holdings, investors have been quite happy to pay PE ratios of a few hundred for stocks like Amazon and Netflix.

When you see news like how Jeff Bezos is the richest person in the world and how Mark Zuckerberg is poised to overtake Warren Buffett in the richest people in the world standings, you know that’s where money has been flowing to.

I’m not saying that these businesses are not legitimate or that you’ll lose money investing in these companies. I’m also not saying that the stock prices of these companies are going to fall tomorrow.

What I’m saying is that when most people get too optimistic about something, that’s when I’d be careful about it.

Notes:

*If you’re interested, Cynical Investor has a whole collection of posts on the troubles that S-chips have had in the past.

 

 

pexels-photo-164527.jpeg

Photo by Pixabay on Pexels.com

In 2013, I wrote this piece ($100,000 before 30) that highlighted an article written in The Straits Times on how realistic it is for someone in Singapore to amass $100,000 before turning 30.

More than a few people in Singapore have already proven that $100,000 by 30 is more than possible (for example, see here). What I thought I’d explore is the possibility of that same person reaching $1,000,000 by 60.

Why 60? Because that’s slightly before the official retirement age in most countries. In fact, the official retirement age is probably going to be 67 or 70 for someone in my generation. However, most people feel that they don’t have enough money to retire on even after working for a lifetime.

I want to show that’s not true.

Of course, a million dollars will not be the same in 30 years as it is today but I think for many people, a million dollars is still a sum that seems unachievable even after a lifetime of work. We’ll also look at the scenario where purchasing power is retained.

Anyway, I want to look at the possibility of a 60-year-old obtaining $1,000,000 because  $1,000,000 for a 60-year-old is kind of the same mental block that $100,000 might be for a 30-year-old.

Starting assumptions

Using the numbers from the “$100,000 by 30” article, I’m assuming the following:

Starting sum at age 30: $122,919
Savings per year: $22,805
Years to compound: 30

The article assumed that the hypothetical person saves 50% of his/her income. For the sake of easy calculation and to be conservative, I’m going to assume that the amount of savings will not change. i.e. the hypothetical person continues to save only $22,805 per year from age 30-60.

Scenario 1: $1,000,000 by 60

Using a trusty financial calculator, I found that with the above assumptions, one only needs a rate of 1.24% p.a. to reach a million dollars by the age of 60.

1.24% per annum for the next 30 years.

Let that sink in. That is a seriously low bar to cross. As I write this, the 30-year Singapore government bond has a 2.88% yield. Assuming rates don’t change much, the latest issue of the Singapore Savings Bonds which everyone loves will also get you there if you keep your money in it for 10 years and repeat the process another two times.

Scenario 2: Retaining purchasing power

Of course, those worried about losing purchasing power to inflation will point out that $1,000,000 today is not the same as $1,000,000 thirty years later. Well, historically speaking, inflation has been roughly 2.5-3% per year. This means that our 1.24% p.a. needs to be something more like 3.74 – 4.24% p.a.

Scenario 3: Becoming an actual ‘millionaire’

In order to retain the purchasing power of a millionaire today, that rate of return needs to be higher. Assuming an inflation rate of 2.5% p.a., $1,000,000 today will be equivalent to about $2,097,567.58 in 30 years. In order to become the equivalent of a millionaire in 30 years time, our $100,000 by 30 person will need a rate of return of 5.12% p.a.

Keep Calm and Continue the Process

Of course, scenarios 2 and 3 are the goals we should be aiming for and that’s not going to be achieved with government bonds but neither is it an unrealistic rate of return. The $100,000 by 30 article assumed investing in a 60/40 stock/bond portfolio which should easily give us 5% p.a. It may not get you to scenario 3 but it won’t be far off.

My point is, for many people, being a millionaire seems like a pipe dream. It isn’t. Not in both nominal or real terms.

If you’re one of those that already hit $100,000 by 30, this post of mine is to provide some comfort to keep doing what you’ve been doing. What you’ve been doing is right, and you’ll be just fine. In fact, if you can bump up the savings rate or get higher returns, you can get there is fewer years.

Now, if you can’t even amass $100,000 before 30, then what are you waiting for?