Singapore Savings Bond

qijian / / Investing

The Singapore Savings Bond is for lack of a better word – legit.

However like most of the good things in life, it gets tossed aside for nicer looking (shinier) but cui products.

WHAT IS THIS SORCERY?

The SSB basically works like this. You put in money (principal) and you get back interest. Sounds simple right? The closest approximation i can get to this SSB is something like a fixed deposit.

WHY ITS GOOD

The core of finance teaches us that the riskier a product is, the more returns you should theoretically be compensated with.

The SSB is backed by the government while fixed deposits are backed by the respective banks. In essence, the SSB is safer than fixed deposits.

Looking at this you would think that the SSB rates should be lower than the fixed deposit rates of the banks right?

Wrong. Currently, the 1 year SSB rate (for the upcoming issue GX17080Z) is at 1.05%. However, DBS fixed deposit rates for 1 year is at 0.35%.

Check:

SSB Rates : 1.05%

DBS Fixed D rates : 0.35%

UOB Fixed D rates: 0.25%

OCBC Fixed D rates: 0.25%

*For the sake of fairness, i have not included in promotional rates that requires you to jump through hoops.

Also, for a fixed deposit if you redeem early, there is a penalty that is incurred. However for the SSB, there is no penalty incurred for early withdrawals.

Our current scorecard:

Returns: SSB wins

Risk: SSB wins again, come on… its an AAA backed bond

Penalty: No penalty whatsoever, interest accrued is paid to you on withdrawal.

My verdict: The SSB beats any fixed deposit plans hands down.

WHAT ABOUT THE BONDS?

For those with a longer term horizon (eg, those looking for 10 years and beyond). SSBs are a huge improvement over their equivalent SGS bonds.

This is as the holder of the SSB has essentially a free option to liquidate. What do i mean?

The structure of the SSB works through a step-up interest ladder. Theoretically, LT rates should be higher than ST rates for a variety of reasons. The buyer of an SGS has to target at time t=0 which time horizon he wants to buy for.

The buyer of a SSB has no such restriction. He can buy and hold for 10 years and get the 10 year SGS yield. Or he can hold for 5 years and get the equivalent 5 year SGS yield.

CAN IT GET BETTER? (YES WE CAN) INTEREST WE CAN BELIEVE IN*

*(if you get the reference)

For bonds, investors make money through 2 ways.

  1. Capital gains between the difference in market value of the bond
  2. Coupon/”interest” payments

Generally for fixed income products, you want interest rates to fall. This is as when interest rates rises, the market value of the bond falls.

The reasoning behind this is a little bit complicated and out of the scope of this post but if you dont take my word for it, go here.

If you believe that rates are going to rise and you still want to put money in, then the SSB is a god-send. This is because the SSB is capital protected. In a traditional bond or even the SGS, the price of the bond might fall below the price you purchased it at – resulting in a loss. However for the SSB, the amount you put in does not fall is capital protected.

I repeat: It does not fall. What you can do is to take out that principal and reinvest it at the next issue with higher rates.

However, if you believe that interest rates are going to fall, in a traditional bond or SGS, you will get capital gains. For the SSB however, you will not get those gains. However on the flip side, you have managed to lock in higher interest rates still.

In my own uneducated opinion, i think that interest rates are more likely to rise than fall from here. An instrument like the SSB is useful in plugging the gap of investing in fixed income in a rising rate environment.

 

TLDR:

SSB is good because

  1. Higher rates than Fixed Deposits even though it is safer (?!!!!)
  2. Relatively liquid, i am able to take out my money with 1 month’s notice, almost like a checking account
  3. Capital protected even as rates rise

REVIEW:

You think that with such a good product, the SSB would be over-subscribed like mad right. Actually, no. It was massively under-subscribed on inception.

If you are wondering how fixed deposit rates can still be lower than the SSB, here is your answer. Perhaps not enough investors are taking the better option and thus forcing a correction.

Also, for those buying insurance “investment” plans or what not, please check if they can even beat the risk free 2.06% (this month’s issue) for 10 years (Compounded).

 

 

 

 

What the #$#$ are ETFs?

qijian / / Investing

ETFs 

Simply put, ETFs are one of the best instruments that are available to investors today; especially for retail investors like you and me.

If I were to give an analogy, ETFs are like “cai png” – Cheap and gets the job done whereas your traditional mutual funds are like “restaurants” – Expensive and sometimes cui.

vs

After this article, you will be able to understand the following

  • What is an ETF exactly?
  • Why is it so good?
  • What ETFs are there out there?

We will not be covering portfolio construction in this article as that is too complex and would require a separate article for itself to do justice to it.

WHAT IS AN ETF?

ETFs is an acronym for its rather unsexy and uninspiring name:  Exchange Traded Funds. The name originates perhaps for its unique feature that it is actively traded in the markets, much like a stock.

The analogy I would give for an ETF is that, if you think of stocks as eggs, an ETF is a basket containing the eggs and being sold together in a bundle.

Being actively traded brings about many benefits, namely, efficiency as well as liquidity. Before ETFs came to the forefront, if you wanted to buy a diversified portfolio. You had to go through an arduous process that could span weeks (imagine that). You could either buy the individual stocks yourself or buy a fund.

Purchasing it yourself could be a nightmare and if all you had was a few bucks, then it could prove to be almost impossible. After all, gaining exposure to 500 stocks when all you have is 500 bucks is not an easy task. (I mean… you can’t really buy 0.0001 share of APPL right?)

If you bought a fund, you had no idea about how the fund was doing except when the manager sent you their quarterly or annual reports.

ETFs have transformed that. Now, you can get a rather efficient price for your holdings at almost any time.

WHY ARE THEY SO GOOD?

We have covered some of the benefits of ETFs already above, however there are other benefits as well which makes it one of my favourite instruments.

  • Low Fees

Traditional funds charge a huge premium on their management fees, while studies have conclusively shown that most of them don’t even add value. Unit trusts are one of the biggest offenders with their enormous front and back loads (which can be as much as 5%). In the previous article (link) we have already uncovered how high fees can have a drastic impact on your investment performance. The lower the fees, the better. ETFs excel in this aspect with most of them charging fees of less than 0.2%.

  • Diversification

You would have also learnt that diversification stabilizes returns and is probably the only free lunch in obtaining risk adjusted returns. ETFs provides a cheap and easy way to obtain such benefits. If you were looking at the small cap US stocks, imagine the tedious amount of effort in going out and buying them in the right proportions.

  • Ease of obtaining exposure to illiquid asset classes

While most of us will only be familiar with equities, the truth is; equities is one of the smallest asset classes out there. Other asset classes such as currencies, fixed income (rates and credit), alternatives (commodities) are also essential in the investing journey. Diversification does not stop within the asset class, rather it should encompass your entire portfolio. ETFs allows one to gain exposure to these asset classes at a cost effective and manageable level. Imagine you wanted to invest specifically in property sectors with just $2000, that would have been impossible in the past, but with ETFs it is realizable now.

To summarize, ETFs are low cost, provides inbuilt diversification and allows one to gain exposure to asset classes that one might not have been able before.

 

WHAT OTHER ETFs ARE THERE?

The universe of ETFs is truly large. However, I have included a few below.

SUMMARY

ETFs offer one the ability to construct a meaningful investment portfolio per your own risk and return preferences.  We will cover portfolio construction and its mechanics in the next article.

Bonus: You can do it yourself now and gain wayyyy better returns than those ILPs that financial agents are constantly trying to sell you.

Bonus Bonus tip: If any “financial advisors” pester you about ILPs, just tell them that you invest through ETFs, it works almost as good as telling them i’m a student.

 

Before you think about investing

qijian / / Personal Finance

READ THIS

First of all, before you start thinking about investing, you should be debt free. The reason? The average investor might only be able to earn 5%-6% per annum but the cost of interest is usually higher than this. (And this is if you invest correctly). If you have credit card debt (~24% interest rates?!), pay those off first.

SETTING EXPECTATIONS CORRECTLY

Wait. Before all those gasps of collective surprises, 5%-6% of returns only? My friend, you read it correctly.

While some of you might snob away at this paltry amount, do note that it is the averaged return over multiple market cycles; i.e periods of bear markets and terrible returns. In addition, I’m adding on a 2% p.a discount because humans are on average terrible investors. We tend to buy high and sell low. Look at all those advocates for passive investing right now when the market is at all time highs. Did you see any of this when the market was at the 2008 lows?

While all of us might think that we are above average, the truth is; this is like university, even if you went in as a straight A student, somebody has to take the Cs and Ds. Not everybody can be above average and you are essentially competing in the same market as the top investment professionals in the world. The game is tough.

COMPOUNDING IS MAGIC

So what if it’s just 5% or 6%?

Well. If you contributed $1000 a month from the age of 24 onwards, by the time you hit 60, even on a 5% return you would have 1.5 million

 

What if you started later at say 35 years old? How would that look like?

Essentially, by starting just 10 years later (which is pretty short in the 40-year investment horizon) your ending portfolio is half of what it could be.

KEEPING COSTS LOW

Most investment plans in Singapore charge huge amounts of fees while underperforming the market. To me, this is really the fastest road to being pok gai.

In the same case above, we invest $1000 every month. However, we are charged a 2% annual management fee.

Look at that!

MOST STOCKS ARE LOSERS

Yep. You read it correctly. Most stocks lose value and by buying them you lose value. Look at the top stocks 30 years ago, you had names like Kodak, Xerox. Where are they now?

Moreover, stock returns also exhibit a fat tail characteristic. There are a few stocks that win and they win BIG. (or bigly if you are Trump…)

If you miss these stocks your returns are highly likely to be below average.

Peter Lynch terms this as his “ten-baggers”. However, let’s be honest; you are highly unlike to be able to be exactly able to pick these stocks while avoiding the bad ones. Would you have been able to avoid companies like Enron while simultaneously picking companies like Google or Apple?

YOUR LIKELIHOOD OF OUT-PERFORMANCE IS LOW

Most money managers fail to outperform the index. The likelihood that an individual is able to do so is extremely low.

Also, unless you have more than a million dollars (in which, please disregard any advice from me because odds are, you are probably more well informed than me), there is little value in out-performance.

Let’s say that you manage to outperform the index by 200 basis points (on the same level of risk which is impressive), your net gain on 1 million is only… 20,000.

What is the effort required for that? Top money managers pore through vast amounts of reading material on a daily basis with an army of analysts to help them in their hunt for alpha.

20,000 for so much effort. You would be better off driving an uber on the weekends or concentrating more at work.

The effort to reward ratio does not make sense.

CONCLUSION

From reading this article, you should understand these few things

  • Investment returns on average are going to be about 5% – 6% on a nicely well-diversified portfolio. Anyone promising sky-high returns either requires you to take an inordinate amount of risk or are charlatans. Because, if it was so good, why would they offer you instead of hogging it themselves?
  • Start investing early because time matters
  • Don’t pay for sub-par performance
  • Stock picking is very very hard
  • Be diversified
  • Forget about outperforming the index

 

In the next article, I will talk about how you can obtain the performance of the S&P500 or any other stock indexes at a cheap cost (Hint, it’s called ETF)

 

A guide for fresh grads

qijian / / Uncategorized

OVERVIEW

Coming into your first job, you are finally making some money; there are so many things you could do with it, so many things to buy. However, in your past 4 years in university, it is very likely that nobody has taught you how you should use money. (Wait…isn’t it just about handing over the cash?)

Indeed, why would they? Money brings you financial freedom. The ability to do whatever you want (within legal means of course). The lack of money or even worse debt restricts your freedom, it keeps you subservient and you have to “do what you are told”. After all, you can’t just quit right?

What this article will give you is a framework on how to think about money. You will understand why it is important to save, why it is important to invest and also when you should NOT be investing.

A FRAMEWORK

Money in its most basic form is a “store of value” or to be more exact (with monetary “quantitative easing”) it is a “promise of value”. The easiest way to get money is to generate value and to demand payment for the value that you have generated.

That is in essence what a job entails. You come into work, generate value for corporations and they pay you for it. Of course, they will always pay you less than the value you generated for them. i.e If you helped them to make 200k this year, they might pay you 100k or if you have no idea just 50k.

With the money that you are paid, you have 4 main choices.

You can consume; basically spend this sum of money to derive utility/” happiness” from it. (This is the best case scenario, sometimes we spend money and we feel bad from it; cafes anybody?)

Or you can save; Saving is what your parents always exhorted for you to do. “Ah boy ah, go put that ang pao into the piggy bank” – Sounds familiar?  Savings basically provide the function of a rainy day slush fund for you. However, be mindful that it earns no returns and in today’s monetary madness of QE, suffers from an erosion in value from inflation.

investing is one of the more hyped up and most commonly misunderstood uses of money. When you invest, you basically hope for your money to grow. There is much money to be made in misguiding investors, especially in such an opaque field where information is plentiful but often misleading or downright wrong. There are many investment products in Singapore that charge you excessive fees while underperforming. What does this mean?  It means you lose money.

paying off debt; Like what it means, paying off debt reduces your interest expense and is one of the best ways to use your money, especially when starting out initially as a fresh graduate with student debt. Avoiding interest payments of 6% p.a is like getting returns of 6% p.a (Please tell me if you can find such returns in “safe” instruments)

YOUR CURRENT POSITION IN LIFE

(*yup. That’s me right now as well)

After graduating from university, most of you will be looking at student loans of about roughly 30k, on a plan that demands about 5% interest rates (assuming you took student loan packages from the local banks which will charge you interest at the prime rate).

You will probably have a job that pays you about 3.5k and after deducting for CPF and taxes, you will have about 2.8k left.


THE GUIDE

It is not hard to retire comfortably and early if you follow every single step here. It is a mathematical certainty.

When you still have student loans –  Lv 0

Step 1) Pay off all your student loans as fast as possible.

If you have parents, do ask them if it is possible for them to pay off your student loans and then you pay them back. This way, they earn interest instead of the bank. (By the way, really please do pay your parents back since it is only right to do so)

If not, try and pay it off in 2 years. You are looking at monthly payments of 1.3k. The amount of total interest you pay if you do so is about 1.5k, if you take 5 years to do it, you will end up paying the bank 3.9k in total interest. By doing this, you save yourself 2.4k that you can use to take a trip to Japan (yolo).

Step 2) Cut expenses

Honestly, if you only earn about 2.8k in take home pay, you have no business drinking starbucks or eating at cafes. The truth of the matter is (and research also shows), we treasure experiences way more than buying things. All those daily starbucks and weekly café trips add up (to the waistline too).

By cutting out a daily starbucks and a weekly café treat, you save about $230 a month, which works out to about roughly about 1.4k in a year (half of a month of take home pay). Imagine getting an additional bonus of 0.5 months. (sorry could’t think of a sexier way to sell this)

After paying off student loans – Lv 1

Congratulations, you have cleared the first obstacle in your student life!

You should currently be in the second year of your career and have had a pay raise.

The game of life is very different for you now; You will have savings (because you no longer have to pay down debt and interest)

What do you do with these savings?

Step 3) You invest them in a passive, low cost ETF like SPY or some MSCI World Equity ETF.

I will explain why, how and the mechanics in another post, but honestly if you are not an investment professional, you have no business trading your own money (It is very very hard) and like what I said before, most active managers do not outperform the market so no point trying to pick funds as well.

In short, out of your 2.8k take home salary, if you want to take the fast route in life, this is what you will be spending on.

  • 500 dollars to your parents (because filial piety yo)
  • 500 dollars for expenses (Spending 10 dollars on a weekday, 20 on a weekend with an extra 100 for a social event of your choice)
  • 100 dollars for bills
  • The rest (1.7k) towards paying off your student loans.

 

In conclusion, it is possible to thrive financially even if you have an average salary. Being in Singapore, we are lucky to be in one of the countries with the greatest amounts of opportunity (No other country offers so much support to start your own company, more on entrepreneurship and why you should do it in another post)

 

Tldr: Repay all your student loans, replace Starbucks with Kopi O Kosong to save your wallet and waistline, replace cafes with Hawker Centres so that you can be the de facto expert on Cheap and Good Eats, read the next article when you have repaid all your student loans to find out how you should invest.