Thursday, July 31, 2014

Rote learning is under-rated.

Occasionally when I teach students, you tell them to do certain things but they will counter by saying that they won't do it now but will remember to do it during exams. It's always those seemingly small and minute details like writing some key words in their answers, or writing a + or - sign before their answers. It seems that this minute details are so painful for them to do it on a routine basis that they will only do so in very rare and sanctified time like during exams.


It seldom work out this way. From what I see, if they forget to do so in routine practice, they will forget to do so in exams. Examination time doesn't immediately make the students aware of things that they always forget or neglect to do during practice time. But students don't see it, and no matter how often I remind them, they will use the same counter argument that they won't do it now, but will remember to do so during exams.


Okay, so I'll let them do what they want. But I'll give them a test and tell them to treat it as one, showing all that is necessary to secure the marks in their answers. 9 out of 10 will forget to do the things that I remind them about and that's the opportunity for me to come in and tell them that their counter arguments do NOT work and they are better off sticking to it even during routine practice. You can't just tell them straight away - you'll have to do better to convince them that their beliefs don't work. You have to show them the folly of their ways, so to speak.


When you tell people about rote learning, this is, more often that not, their reaction.


I believe that if you don't practice stuff all the time, when it comes to the real deal, and when you really need to use it, you'll fumble. There's value in repetition but alas, the youngsters these days believe only in efficiency and just-on-time delivery (meaning that they study just the day before the exams). 


We need to practice a thousand times so that when we really need to use it, we can snap our fingers and get right to the zone. You train so many times that your body and mind precedes your conscious thinking, thus building what they call 'muscle memory'. You do without thinking and you feel it. You think with your guts. Your instincts. So many phrases to describe a person operating in the zone but only one way to achieve it - just plain ol' practicing. 


This might sound old fashioned especially in these times, but I welcome rote learning. The ability to memorise chunks of texts in this fast paced world is not a disadvantage. There's value in sitting down and committing will power and discipline to practice the same questions again and again. However, some say this runs against the trend of creativity in the education domain. 


Nonsense. There is nothing to create when there is nothing in your mind. So how do we get stuff in your mind in the first place? Rote learning, of course.


Friday, July 25, 2014

I'm grateful for my bout of flu

Recently, I've been struck by a very bad case of flu. It comes together with its usual symptoms, like sorethroat, cough, sneezing and fever. My usual treatment is not to see a doctor, but to eat fruits and drink water and sleep like a baby to wait it out.

My philosophy in life is that whatever happens, it happens for the best. It's a better way to live that way instead of playing the victim's role. So, this bout of flu comes in very handy for me. Here's why:



Pikachoooo!


1. I've not been sleeping well. Maybe it's the weather, maybe it's some subconscious stress at work, but I've been having a very shallow kind of sleep lately. This recent illness reset all these. I slept like a baby for most of yesterday and the day before. Suddenly my mind seems so clear. If my body's way of resetting my body clock is in a form of an illness, so be it!


2. You realised that you're not so powerful after all. I was clocking work hours like crazy for the past few months, working 7 days a week with weekends clocking 10 hours. I've never had such a long working week before, and for so long a duration. But all these rest on the premise that I've good health. The moment my health deteriorates, I can no longer have the willpower and endurance to do such active work and my income will suffer. That's always the hidden condition when we're doing active work. It's just that during times of illness that we are reminded about it. It also underlines the importance of having another income stream that doesn't depend on you being there to generate money.


3. It just happens that after my lesson yesterday, I'm really feeling nauseous and don't feel like eating my dinner. Thankfully my student brought me some soup that her mum cooked for me. It's a very soothing old cucumber soup, filled with earthy carrots and red dates. I felt much better after drinking that. I'm so thankful that she brought me that, even though I didn't tell her that I'm sick. Couldn't have come at a better time!


Photos taken from masak-masak. Not the actual soup that I drank but close enough!


My wife also treats me like a baby, taking care of me when I'm having a really bad time. Not to mention well meaning friends and students (I'm not sure they are happy that I cancelled their lessons or that they are genuinely concerned about me - I give them the benefit of doubt lol) who asked me to take care. It's a very nice and warm feeling, you know?


See? Being ill isn't all that bad once you think about it eh?

Wednesday, July 23, 2014

Thoughts after 1/2 yr of managing my parent's money

I recently handed a cheque of $600 to my father. It's his half yearly 'coupon' from buying LP's bond with a principal sum of 60k. It's right on track to deliver 2.5% to 3.0% returns per year. Actually it's more than that, but LP's bond is capital guaranteed, I've to reserve a certain amount of cash paid out in the event of redemption of bonds that I've bought above par value to cover the capital loss.


Ya, I know it's still lower than CPF, but it's hard to achieve this kind of returns in this time and yet also guarantee the capital. Still, it's better than my parent's initial plan of putting their money in fixed deposit earning maybe 1% pa. I'm potentially offering 3 times as much, and I'm glad I did it for them, even though I don't need to.


I heard from my father that another tranche of money is coming in at the end of this year. It's from his endowment plans he put earlier, amounting to about 100k. Not sure if I can offer capital guarantee again because I'm holding quite a big portfolio already from my parents (160k!). I will most likely outsource the risk to others...maybe find a good annuity for them? We'll see how it goes when he gets the fund and perhaps let me know what's his intentions are for that amount of money.


Not a good sign eh?

With their medical fees mostly covered by hospitalization plans, and knowing that they have a sum of money to do what they wanted to do during their retirement phase, having paid up all their housing debts and having their children giving them a monthly allowance to cover their transportation and food bills, I'll be happy to be in their shoes. All in due time I suppose. I'm not expecting to have any inheritance from my parents - they are pretty down to earth folks who had worked hard to get to where they are. They should spend all their money up before they go. At the very least, I'm quite sure they won't be a financial liability to their children. That's already a big plus.


Managing their retirement fund makes me want to have my own retirement funds too. But alas, I've a hefty housing bill to pay, amounting to 1k per month from me, and another 1k from my wife. I'm trying to raise capital that can draw dividends amounting to 1k per month to at least cover my housing contribution. That will greatly relieve my fixed expenses per month. 1k per month for 12 months will be 12k per year. If I have to invest at about 4% to 5%, that'll be about 250k to 300k. If luck is on my side, I should be able to reach that amount in another 3 or maybe 4 years.


That should be my financial goal in the near future. We all have to start somewhere to boost up our passive income. There's a lot of unknowns, but I'm sure I can handle it when I reach there.

Monday, July 21, 2014

To change yourself, first change your environment

People who are not good in personal finance are usually in the presence of people who are not good in personal finance too. Birds of the same feather flock together, so they say. I think this phenomenon is due largely to the fact that we like to be with people who are similar to us, so that there isn't a lot of peer pressure to match up to the group's average. Imagine you are thrifty, but you are in the presence of people who do not care two hoots how much they spent on. You'll find that you'll have this pressure for you to act like one of them too, unless you truly don't care about their company (which might be a luxury you do not have, because of work related reasons).


It's really easy to say we should spend less and know our needs from our wants and other very sound advice given by financial bloggers, including me. But that's because we are already like that. It's like asking a sprinter how to run faster - he'll tell you to train on this area, do that every week and other great advice, but ultimately, one cannot help but think if the sprinter can run fast because he puts himself in an environment where there are other sprinters all doing the same thing. I'm not saying it doesn't take hard work to reach his stage of growth, but it's made all the easier to train the way he does by being in a group of people who are doing the same thing. It takes away the will power that we have to expend doing something different from the others in your peer group. By putting yourself in an environment where you want to grow to become, you become that environment yourself.


Up to a point though. This is not exact science, but I think part of that motivation for change comes from within, as well as without. You can put yourself in an environment where you want to grow towards, but if you really don't want to change, no force in nature can make you change.


To sum up:

1. If you're disciplined and super motivated, you can grow to become whoever you model after, in spite of your environment.

2. If you're somewhat neutral and don't mind the change, you'll be better off changing your environment best suited to your change and following the crowd thereafter. E.g Join some mailing list with some financial blogger, fill your facebook friends with financial bloggers and remove people who are not in line with your new growth. How to even get all the motivation to do just that? I don't know, maybe something catastrophic happened in your life?

3. If you're not interested at all, and totally resistant to change, then it doesn't matter no matter the environment. Can't force a horse to drink even if you bring the water next to its mouth.


Since pt (1) won't hurt with a change of environment and pt (2) needs a change of environment, it's still a good bet to adjust the friends you hang out with and immerse yourself in an environment with the change you want to see in yourself.

Wednesday, July 09, 2014

The Can of Soup with Better Value

I saw this question when I was teaching a student. It's not new and I've seen it a long time ago, but it always tickles me whenever I read it. The link is here but I'll type it out here too:


Two different sizes of tins of soup are shown. The mass of the soup and price are given below:

SMALL can : 415 g @ $1.04

LARGE can: 815 g @ $1.98




Which size of tin gives the better value? Show your working properly.


There are a few ways to answer this question correctly to get the marks:

1. Find the cost per gram for each can of soup. Whichever gives you the lowest cost per gram gives the better value

2. Find the mass per unit dollar for each can of soup. This tells you how much soup you can get for each dollar spent. Whichever gives you the highest mass per unit dollar gives the better value


However, I was remarking to my student that even though the calculation is correct, it’s based on a few assumptions:


A. You really love the soup and want as much as your greedy hands can grab at the lowest cost your wallet can suffer

B. The expiry date of the soup are the same

C. You have enough money to buy both cans of soup


Let’s take a look at all the assumptions more critically than what a student should do in a national exam. Because, you know what, if you think too much in exams, you just might be marked wrong since the answer script don’t allow deviant though logical solutions. Th

A. You really love the soup and want to get as much as your greedy hands can grab at the lowest cost your wallet can suffer

This is fairly important because I’ve seen many occasions when marketers trick consumers into buying something that cost more absolutely but cost less on a per unit basis. To sell the higher priced item, you just calculate the amount of ‘savings’ you’ll get if you calculate it per unit mass, per unit volume, per unit whatever. It’s a marketing gimmick, IF you don’t need the product but get persuaded to buy something you don’t need for a ‘cheaper’ per unit cost.

I’ve fallen for this one every now and then. Typical example goes like this: Curry puff auntie says buy 1 curry puff at $1 but buy 3 at $2.40. You do your sums and realized that buying 3 curry puffs means each curry puff is at $0.80. You buy 3, then you can’t finish and you throw 2 away.  Well, if you really want 3 curry puffs (to share, for example), then it’s a steal to buy 3. If you really wanted one, spending $1 instead of $2.40 is a better deal.

I’ve seen many people eating at hawker centres and wasting one full bowl of rice because they’ve already paid for it since taking the rice (whether you’re eating it or not) gives a better value for your money. For goodness sake, if you don’t want to eat, then don’t waste lah.

B. The expiry date of the soup are the same

Sometimes, when the expiry date of the food is drawing near, stalls will try to sell it off as soon as possible, otherwise they can’t sell it past the expiry date anyway. You start to see discounts on them.  If you’re not discerning enough, you might have bought a bigger can of soup with a shorter expiry date. If you can’t finish it in time, you’re going to waste both the food and your money!

My wife tends to do that. I’ve read somewhere that when a woman shops, she buys things at a cheap price regardless of whether she needs it or not. However, when a man shops, he buy things he wants regardless of the cost. It’s quite true, at least to both of us. She won’t hesitate to buy 2 more bottles of stuff if there’s a discount, never mind that she might not be able to finish it before the expiry date.

I hope I’ve shared how the expiry dates of products can affect one’s perception of value.


C. You have enough money to buy both cans of soup

I think it’s important to consider both the unit price and also the absolute price. Things are almost always cheaper if you do bulk purchase, but you will tie up a lot of cash in ‘inventories’ under your balance sheet. If the goods are perishable, you’re practically burning money if you can’t consume them in time. If the goods are not perishable, you run the risk of having forgotten about it, rendering them unusable. I think your cash can be put to better use rather than to store them in the form of consumer products.

I always make the joke that in a zombie apocalypse, sticking to my wife will save my life because if I’m to live alone, I won’t bother stocking up on things. I just don’t like the idea of my cash tied up in some products stored in the store room. Personal preference.

So, in the end, which one is a more value buy? I wish I can say for sure that it's the cheapest one, but life's not that simple. If there's one advice I can share, it certainly isn't to buy the things you really want as cheap as possible, but to avoid buying things you don't need regardless of how cheap they are per unit basis or absolutely. No matter how cheap things are, if you don't want it, you really don't want it.

Can this be extended to investments? I'm sure it can be. As in real life, so it is in investment.

Friday, July 04, 2014

Is it worth it financially to reduce taxes through donation?

In Singapore, if you donate to Institutions of a Public Character (IPC), you'll get a 2.5 times deduction of the amount donated to your chargeable or assessable income. This tax deduction period of 2.5 times is extended in 2011 and will last until 31st December 2015.


I was teaching a student about tax because it's covered in the syllabus. The syllabus is actually quite simplistic, so I took the liberty to incorporate real life elements into the picture so as to show her what is the tax situation here in Singapore. I mentioned about the use of donations to reduce chargeable income and it carries with it a 2 times deduction to chargeable income. Well, I was wrong...they changed that to 2.5 times already and apparently I wasn't updated about that information. While teaching her, I was wondering if it's worth it to make donations to IPC such that your tax amount is reduced to more than the amount donation, including all the 2.5 times mutiplier.


Here's the rates of tax for year of assessment 2014:


As you can see, the top tax rates for the highest income bracket is 20%.


For every $100 of donations, you get 2.5 times deduction to chargeable income, so that's a $250 deduction off your chargeable income. Below is the table that shows the amount of deduction to your taxable income, taking into the tax rates for different income brackets.


Chargeable Income (up to) Income bracket Deduction to tax
$30,000 2.00% $5.00
$40,000 3.50% $8.75
$80,000 7.00% $17.50
$120,000 11.50% $28.75
$160,000 15.00% $37.50
$200,000 17.00% $42.50
$320,000 18.00% $45.00
> $320,000 20.00% $50.00

The conclusion is something I didn't expect. If you're in the highest income bracket of 20%, earning more than $320k in year of assessment 2014, your $100 donation to IPC comes out to be $50 deduction to your tax. For those having lower income bracket, the final deduction to your tax is even lower than that. Before all these calculations, I would expect that there is a break even point where if you donate sufficiently large amount, you'll get to a point where it becomes financially worth it to do so. Nah, you're smart but the system is not stupid also.


Before you start flaming me, I'm just curious whether it's worth it financially to donate so that we can offset taxes. There's plenty of reasons to donate to a cause that you support, and knowing that it's not worth it to do so financially shouldn't stop you from doing it for other reasons. If anything, this small deduction to your tax is the cherry topping on top of your cake - let it be another reason, but not the sole reason, to donate to a worthy cause.


Okay, nagging doubt in my mind is resolved. 

Thursday, July 03, 2014

Starburst IPO

I happened to chance upon this soon to be IPO-ed catalist listed company called Starburst. I must have found what they are doing interesting because during my last reservist, I went to a indoor range with artificially controlled lighting (that means you don't have to wait for night for night shoots) and was suitably impressed with the construction and professionalism (I think they are run by CISCO) of the people there.




Business

Starburst is a Singapore based engineering group that specializes in design and engineering of firearms-training facilities. They have a track record of 15 yrs in the industry. Their 3 main business segments are


1. Fire arm shooting ranges - They design, fabricate and install their proprietary anti-ricochet ballistic protection systems for indoor, outdoor and modular live firing range, close quarter battle houses and method of entry training facilities. It's not stated anywhere that they are involved in the firing range that I went to in my last reservist, but from the pictures provided in the IPO prospectus, I'm quite sure they are involved.

2. Tactical training mock ups - They design, fabricate and install those simulations scenario, like sniper tower and counter terrorism operation training

3. Maintenance services and others - Basically design, supply and fabricate structural and architectural steel works, also maintain facilities.


Among the 3 segments, this is the one that is recurring in income. The other two are one-off and therefore their revenues are going to be lumpy. They stated that they are going to increase their maintenance services segment so as to provide more earnings visibility. I think that's a good move. The other business segments doesn't provide that kind of assurance to investors.


Revenue breakdown FY2013 FY2012 FY2011
Firearm shooting ranges 14639 (69.6%) 16188 (93.4%) 21211 (93.3%)
Tactical training mock ups 3460 (16.4%) - 351(1.5%)
Maintenance services and others 2946 (14%) 1149(6.6%) 1172(5.2%)

Ratios

Take a look at their ratios:

FY2013 FY2012 FY2011
ROE 33.7 47.7 72.6
Profit/revenue (net margin) 41.5 37.3 26.4
Revenue/Asset (asset turnover) 0.523 0.930 1.120
Assets/equity (leverage) 1.554 1.376 2.451
EPS based on post IPO share base 3.49 2.59 2.41

The kind of business they are doing certainly have huge margins! You're talking about 26 to 41% net margins here! ROE is a strong double digit for the last 3 years. I think in FY2011, the ROE is artificially raised because of the higher leverage which they used (look at their assets/equity of 2.451 in FY2011 vs 1.554 in FY2013).


EPS of 3.49 cts in FY2013, and their IPO price of $0.31, means that their PER is about 8.8 times, which is not excessive. What's the weighted average PE of STI index? It's 15.1, according to this. Starhub has a PE of 19.4 while DBS has a PE of 11.3, to give you a feel of the PE ratio of different big companies you know. The NAV before adjusting for the IPO proceeds is 12.94 cts, so the P/B is about 2.4. ST Engineering, a company with about the same industry as Starburst, has a PE of 20.4 and a PB of 5.29.


Revenue

FY2013 FY2012 FY2011
Revenue $21,045 $17,337 $22,734
Profit before income tax $10,107 $7,641 $7,145
Cost $10,938 $9,696 $15,589
Finance cost $82 $135 $308
Project/production cost $8,412 $6,682 $11,558
Net profit $8,729 $6,464 $6,013


Revenue is lumpy, given the variability of the contracts they can secure in their order books The cost seems very contained, giving them a very high profit margins. The majority of the cost is the project/production cost, accounting for about 70 to 80% of the cost. Take note that a majority of their employees are foreign workers (77% as of 31st Dec 2013), so they are also going to face the same issue as all SME with regards to the labour policy and shortage. 


Cash flow



Operating cash flow is again lumpy, and highly dependent on whether they secure projects. The payment for the projects are based on percentage of completion, and the contracting party can retain 10 to 20% of contract sum upon completion of works in order for them to assess shoddy work or work-yet-to-be completed. I guess that's standard practice, like all construction firms. I'm not very good at analysing cash flows, so I won't even try. 

FY2013 FY2012 FY2011
Assets $40,212 $18,650 $20,291
Current  $24,690 $13,134 $15,471
Non-current $15,522 $5,516 $4,820
Liabilities $14,331 $5,096 $12,011
Current $8,953 $2,923 $10,070
Non-current $5,378 $2,173 $1,941
Total equity $25,881 $13,554 $8,280

But based on their balance sheet, their current ratio is pretty healthy. But not all their current assets can be liquidised to pay off short term debts. Let's see the breakdown of their assets:




I think most of their operating cashflow in FY2013 is locked up in the form of contract work in progress and also other receivables. Once they convert that to cash, their operating cash flow should improve greatly. But in the meantime, I don't think they have issues with paying off any short term debts. Their receivables turnover for FY2011, FY2012 and FY2013 is 55, 16 and 10 days respectively. They said it's attributable to their stringent internal controls policy...okay, anyway, it seems really alright.


Dividends?

Any dividends? They are giving out at least 20% of their profit after tax as dividends in FY2014. Their order book for the firearm shooting ranges and tactical training mock ups is 19.7 million, which will be translated into revenue over the next one year (it's about there, if you add up the trade and other receivables and the contract work-in-progress for FY2013, you'll get about 20 million). As for maintenance services, they said that it'll be approximately 26.1 million, which will be translated over the next 1 to 19 years. I don't think you can add up 19.7 million to 26.1 million to give you 45.8 million in order book for FY2014. I'll just divide 26.1 million by 19, THEN add to the more or less confirmed 19.7 million, to give a estimated revenue of FY2014 as 21 million. That's also about the same revenue as that earned in FY2013.


Their net margin is about 40%, so that means their profit after tax in FY2014 is about 0.4 x 21 = 8.4 million. 20% of that will be distributed as dividends, so that's about 1.68 million, or 0.672 cts per share. The offer price is 31 cts, so that's going to give us a dividend yield of around 2.17% pa. Ah, you have to compare with ST engineering, which gives a yield of about 1.8% pa. This is after all a 'growth' company, so don't expect lofty yields of 5 to 6%. You should be looking at capital gains instead.


Competitive advantage

They listed down their local competitors, namely Cubic Range (listed in US), Meggitt Training systems (pte), Microcircuit systems (pte). The industry is such that a main contractor will bid successful for a project, then they will sub tender to others, so there's a fair amount of cooperation  between all the competitors. As for Cubic range, I read through their annual reports but it's not a fair comparison since they do a ton of other things as well. If you must know, their latest net margin is about 1.4% only, compared to Starburst's 30 to 40% net margin. 


There are of course other competitors internationally, since Starburst is also going overseas in middle east to bid for contracts.


Their main advantage over the others seems to be that they can fabricate and install bullet containment systems using their proprietary IP. I don't know how great that is, but from their net margins, it does appear to be quite unique. If only I knew about the margins of the other players...


The defense industry is likely to be very recession proof. I just don't see defense budget being cut...at best it'll be kept the same. And we're talking about big players - government or defense ministry - who command huge budgets. I think it's a good industry to be in with huge barriers of entry. You can't just apply to build such things because you need to have a good track record and have the relevant certification level, and Starburst's 15 years of experience in the industry should count for something.


Why are they doing it?


The two founders are going to hold 80% of the shares, with the remaining 20% of the shares (all 50 million of them) for the public. In the IPO, only 4% (a mere 2 million) of the public tranche is for retailers in the IPO. The remaining 48 million are up for placements. As usual, the controlling founders cannot sell their shares before the six months period is up. They must also hold at least 50% of their holdings for another six months. 


A big part of the proceeds (all 45% of it) is going to be for acquisition of leasehold land and buildings. The next big part (37%) is for general working purposes. I just don't know why they want to IPO it. Perhaps the two founders want to take back their capital and liquidise their holdings (don't they all?)


Worth getting?


I think this is fairly valued, and certainly not a sucker's deal. But the problem is getting enough of it to matter during the IPO. In the IPO, it's likely to be very hot, given the low 4% available for us mere mortals to bid. With 20% of available shares available for trading in the first 6 months, I think this is going to be those illiquid counters with huge movements. I'm going to take a second look once it's properly listed and all. Closing is on 8th July 12 noon. Trading will start next Thurs, 10th July.

Monday, June 30, 2014

My salted fish had turned over

First of all, sorry for the long hiatus. This had been a crazy June holiday, so all my free time is sucked up into never ending work. I'm very glad that June holidays is over, to the dismay of all school teachers in Singapore, lol!


Recently, I noticed that one of my salted fish had turned over (咸鱼翻身). Yup, you heard me right - that's when a stock that you had bought long long ago, and had dismissed it and wrote it off because of some mistakes in judgement but nevertheless held on to it, and is now suddenly revived. This particular salted fish is very fragrant because it had been salted since April 2010. I had bought it at an all time high of 0.270 and subsequently averaged in at 0.240, giving me an average buy in price of 0.255.


Wow...why did I buy it then? It's based on some rumors that I had long forgotten. It didn't materialise, and thereafter the stock crashed and burned but I still had on to it after all these years. Reason? It's a good reminder for myself not to buy stocks with rumors. I'm glad I've not made the mistake then, so in a strange fashion, it's quite a good tuition fee paid.




The company had been paying dividends, so it helped to reduce the cost of bearing the stock. After collecting dividends every year, it amounted to around 11% of the capital sunk in, so it's not that bad. I initially thought of cutting losses, but since I do not require the capital locked up (it was a rather small amount), I just held on to it. More like a reminder to myself rather than an aversion to realise paper losses. I must say I'm quite relentless in cutting stocks.


So, what's the rumor that's propelling this unloved penny to a parabolic capitulation now? It had recently announced that it had made placements shares arrangement (at around 0.160+) with two big investors to dilute the total holdings to around 20%. If you ask me, that's a pretty huge investment in a 'okay' company. One of the two investor is none other than Sam Goi, better known as popiah king, who is quite an astute investor and businessman. I wonder why he got into this, and with such huge stakes in the company as well. Usually share placements are frowned upon since it leads to dilution of everything, including dividends. But the market had absorbed this seemingly bad news quite unexpectedly by capitulating upwards.


Yeah, but who cares...I get to exit and pass the buck to another better player lol

Friday, June 06, 2014

The holy trinity of returns, risk and liquidity

There's been much talk about the CPF rates being very low. About 2.5 to 4% depending on which account you're talking about. It's kind of hard to get higher returns than that while maintaining the same risk as that of a fixed deposit. What risk am I talking about here? It's the risk of capital losses. And I'm not just regurgitating this - I've actual experience in maintaining a retirement fund for my parents, so I know what I'm talking about here.


My parents are not risk takers. The riskiest kind of investment product that had in the past (without losing money) are endowment funds from some insurance companies. You put in a lump sum at the start and wait for the term to mature, then you take out a sum greater than the lump sum you put in at the beginning while still giving you assurance that if anything goes wrong with you, you'll still get paid when it matures - that's basically how endowment plan works. This tranche of money that my parents had, they initially wanted to put in a fixed deposit offering maybe 1.2 to 1.3%. I thought I can do better than that, and offered to give them a higher return and also offer them capital guarantee too but they have to tell me a few months in advance if they need the money back. In other words, they are buying a bond from me, with me as the party guaranteeing that amount invested with flexible maturity date.


The magical point of all portfolio - to balance returns, risk and liquidity. Can't have it all.


The portfolio consists of preference shares from banks and some high grade bonds with strong corporate (and government backing, so they say). No equities at all because given my parent's requirements (they really just want their initial capital to be safe and liquid). How's the projected returns? It is expected to give around 3.6%, with capital losses incorporated (Most of the pref shares and bonds are bought above par from the secondary market at SGX, so when it's recalled back, I'll lose some capital). Can I push it above 3.6%? Yes, but something will have to go. The risk of capital losses increases with the portfolio yield. I can get some very high yield bond (e.g. from Olam) but if something happens, I'm the one bearing the losses because I'm the guarantor. Bo hua for me.


So yes, I totally get it that if CPF returns is 6 to 8% pa, then it can't be capital guaranteed. We have to balance portfolio returns, risk and also liquidity and you just can't have it all.


But not easy doesn't mean that CPF board should take the easy way out to beat inflation by raising the minimum sum. I think more options can be given to CPF holders to participate in the growth of their retirement funds. I would really be happy to see more growth in the bonds market offered to retail investors. If you're talking about normal bonds, you need at least a quarter of a million to participate - and how many people has that kind of money to spare? If SGX can break up the size of the offer into smaller chunks (in 1k lot, for example), it'll be a great move towards helping retail investors adjust their respective portfolio returns with the risk of capital loss.


More selfishly, I think it'll be good for people who don't have CPF (like me) to plan their retirement funds their own way.

Wednesday, June 04, 2014

So far so good

I've been using YNAB, a software that allows me to track expenses and all my cashflow in different accounts with great precision and accuracy, since Aug 2013. Almost a year now. It works very good for me because there's so many times that I've missed out on something and I didn't know about it until the end of the month when I did my month-end accounting and found out that things don't add up. I'm very sure I would have missed these errors if I persisted in using my spreadsheet way of tracking expenses. I'll still highly recommend it to anyone who is serious about budgeting and tracking expenses. Don't buy it now though...wait for a great offer to come (at Steam, that online platform to get games), which is a matter of when and not if.



Thought I'll do a half year update how my savings percentage is like, given the new found accuracy. In the past, my spending is relatively low. I'm not truly independent yet and a lot of expenses are paid for by my parents. Though I gave them allowance to offset some of this, I'm quite sure it's not enough. Why? I don't have to pay for rental (for a room). I don't have to pay for my own breakfast and dinner. If there's a problem with some household items, I'm not the one paying. When the toiletries are almost finished, it'll magically refill and appear. In short, a lot of expenses are paid for by others. Hence, it's hardly a miracle to have my savings percentage (relative to income, of course) at 70 to 80%. Of course, I always know it's not going to be realistic going forward.




After a few financial bombs that nearly wiped out all my savings, I got myself married, bought a resale flat, paying for a pre-owned car and started paying for things I never had to pay for in the past. Nobody is paying for me now, as it should be. Everything in, my year to date savings percentage hovers at 47%. (If you're not self employed like me, don't compare - I don't contribute to cpf. So, if you include your CPF contribution as well as your employer's contribution, in addition to your own savings from your take home pay, you'll probably beat me or even out.) This statistic is not going to be useful until I finished year 2014 and tabulated everything, because there is just too much variability in my income stream and also my expenditure patterns. There's some big ticket items in the second half of year 2014 that occurs annually (like insurance premium, road tax etc) so it might lower down my savings percentage. On the other hand, my peak season occurring around Aug to Oct might boost my income too. 



Going forward, I'll try to keep my savings percentage at around 50%. It can be higher but not lower. I already shared my monthly expenses - everything in, it's about 3.5k per month. Hence, it's very clear to me that my income better be more than 7k to have that kind of savings percentage. In fact, during my peak months, it better be much more than 7k so that it can even out those drier months. Life's a bitch when your pay resets (though not necessarily to zero) every year and you have to work hard to reach the same pay as before, and work even harder if you want to earn more than the year before. No complains here - I chose this myself.



My savings target of 30 to 40k seems right on track. Savings percentage is a tad lower than projected, but still alright. Will have to see it again at the end of year 2014. So far so good.