Sunday, March 15, 2009

Sunday's rambling

I browsed through Sunday Times today and noticed that there is an article on the low rate of interest provided by financial institutions in Singapore recently, presumably due to the plunging SIBOR rate, again presumably because the world's central banks are cutting their rates to boost the economy.

It's interesting that every politician have a fetish for growth. It's quite impossible to generate growth forever you know. Imagine that a hypothetical bacteria doubles their population every one minute - meaning a growth rate of 100% per min. If this rate goes on forever, we'll be covered by bacteria in maybe a few months? But this will not happen because somewhere along the nice growth rate on paper, there will be a limit to this whole growth process. In the case of the growing bacteria, either they run out of space, or they run out of food, or their toxins emitted kill each other, or all of them at the same time. I guess economic growth is the same too.

I looked at the article and there are suggestions by different people on what is the best place to put your $50,000. Almost all of them suggest at least a small part in equities related instrument, either 'safe' blue chips or a few well diversified funds.

If you ask me, where you are going to put your $50k depends very much on what you intend to do with the $50k. Are you saving up for short term use - like getting a property, a car or marriage within 2-3 years? Are you saving up for your child's education in 25 yrs time? Are you saving up for retirement in 40 yrs time? Basically the longer the time frame, the more you should put into equities related instruments. If now is not the best time to invest, when is it? 2006? 2007? If you need the money in 2-3 yrs time, I'm not so sure what you put into the equities market can be recovered in this time frame. Hence, if you can't afford to lose your capital in the event of pre-matured cash out, then don't put it there.

I'm put most of my money in MMF because of my short term needs (see my post on Budgeting for the near future). However, they are getting lesser and lesser returns (though I must add they are still better than banks' rate), with monthly returns dropping from 0.17% per month in May 2007 to around 0.06% in Feb 2009. This means that the returns per annum dropped from around 2% to 0.7%. I think I'll stop putting money and perhaps draw some out of it. The risk of losing the money in MMF (though low probability) is not worth the 0.06% returns per month I'm getting from it, especially since I'm not going to put it there for the long term.

For those interested, mine is the Phillips MMF. Here's the unit price for year 2009.

Here's the graph plotting for the unit price of Phillips MMF since I started tracking in May 2007. Can you see the shift in gradient starting in 2008?


SGDividends said...

Hi LP,

Just wondering...what will cause the unit price of POEMS MMF funds to go down?

I know MMF is invested in short term treasury bills and people are generally buying treasury bills now as it is considered a safe haven.

Increased buying leads to increased price but a reduction in yields.

So is the unit price of MMF related to price of treasury bills or yields of these bills...

Confused SGDividends Team

la papillion said...

Hi SGDividends,

To be fair to Poems MMF, I've not seen the unit price of it go down before since I started tracking it in May 2007. Other MMF have periods where the unit price actually dropped, as mentioned by some of my friends who invested in them.

To make the unit price drop, they must have made a loss in one of these instruments. I believe that it's the cashing out of short term instruments that might actually cause the unit price to drop.

For example, if there are a lot of pple who wants to withdraw funds out of MMF and the reserve cash funds have been used up (all funds will typically have a reserve cash to prepare for investors who wants to cash out), the fund will start selling off their instruments. In an environment where the price of the short term debt drops, selling it before they mature will result in a investment loss, thus causing the unit price to drop.

Having drop in yield should not cause the unit price to drop because have low yield means there will just be less interest collected. This will cause the unit price to rise at a slower rate. For example, in the past, MMF will rise 0.0017 units every month, but now the rise is just 0.0007 units per month in this kind of low interest rate environment.

Just my own thoughts :)

SGDividends said...

Hi La Papillion,

Thanks for your reply..

Haizz..i think its part of my training..i always have the inclination to know to the details and to me..its still a question mark though u cleared some air =)..

Maybe i should go work for POEMS...hehe..

Anyway, i agree with u that the career is the best place to invest in..but one must be careful in the kinda career though...

A career that is dependent on one employer and that lacks an increase in skills that one can use independently...its crap. Personal opinion =)

Cheers La Papillion..may the force be with you!

la papillion said...

Hi Sgdividends,

Haha, nothing wrong with being occupied with details :) Maybe u can ask those pple in POEMS and bug them till they give you a reasonable answer.

I agree with what you mentioned about career. Maybe I should put in more specifically: Invest in yourself, not your career :)

Take care!

WY said...

Hi SGDividends,

I guess one of the good ways to check for what can cause the fund value to go down is via its prospectus (if it has one).

It should have a portion for risks. This is how the fund manager covered themselves :)

PanzerGrenadier said...


3 month treasury bill yields have been heading south since the financial crisis hit. Previously, you could get treasury bills at 1-2% but now you're lucky if you can get 0.5%. Recent auction was 0.31%.

Be well and prosper.