Friday, August 21, 2009

Crash is King

After reading W.E.B's op-ed, I have some thoughts to share. Cash is really not king presently. Look at the returns of the following possible places to park your money:

All returns are quoted in per annum time basis

1. Cash - savings accounts - 0.1% to 0.25% (DBS)
2. Cash - fixed D - 0.1% to 0.7%
3. Money market fund - 1-2%
4. SGD treasury bonds - 15 yr bonds - 3%
5. Stocks dividend - roughly 5% (don't kill me over this figure pls, I know there are higher yield than this)





Considering a rough inflation rate of 3-4%, I think most of the places to park your money will give you negative real returns. Except of stocks that is. But this is not a blog post to ape W.E.B's op-ed cry out to buy buy buy. I'm just showing you how much you stand to lose by holding on to the false security of holding cash.

Some of the older folks are holding dear cash since forever, afraid that the stock market will eat up their money. Oh, that's undeniably true - stock market gives good returns and do note that it is also the ONLY one listed above that your capital can be eaten up too. The rest are more or less risk free and pretty much capital guarantee. It reminds me of the boiled frog parable - if you put a frog in boiling water, it'll jump out to safety. If you put a frog in water and warm the water up to boiling point, the small differences will not be perceived so readily by the frog and it will scorch to death.

This analogy extends to holding cash. It's rather easier to get 'eaten' by inflation at the rate of 3% per year passively than a one shot (possible) 5% loss punting the stock market actively.

Still, don't go out and just BUY BUY BUY. Ask yourself this: what to buy, when to buy and how to buy. The market is not your mother - it will snatch the milk bottle off your mouth, steal your toys, tempt you with poisoned sweets and maybe, there's a chance that it will reward you for taking that risk.

19 comments :

CreateWealth8888 said...

"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." - President Ronald Reagan of the United States

Lemizeraq said...

Hi there,

Great article :) Like your examples in this post about the different ways people put the money away and the analogy of the frog.

la papillion said...

Hi bro8888,

Thanks for the nice quote. I agree it's very deadly, but you can't escape from it!

la papillion said...

Hi Les Miserables :)

Oh, the example just struck me when I was typing :) When I start an article, I only know vaguely what I wanted to say (maybe only 5%). When I type it out, I let the 'flow' guide me and lead me to what it should be.

Thanks for visiting!

slowlybutsurely said...

Nice posting!

Thien Rong said...

I supposed the "Crash" misspelled is on purpose?

la papillion said...

Hi Thien Rong,

Yes, it's done on purpose. I think stocks is the way to go, so if the stock market crashes, it's a good time to buy. Hence, my title :)

Anonymous said...

How to buy bonds ???? fund supermart????? any lower charges????

CreateWealth8888 said...

When market really CRASH, how many pple out there got the balls to buy?

Musicwhiz said...

If you purchase shares in strong companies based on fundamentals, then you would welcome lower prices as it implies higher chance of future capital gains and higher dividend yields as well.

Anonymous said...

Genting, and Sihuan these two counters really strike TOTO for me, heeeee...

PanzerGrenadier said...

Hi LP.

Stocks can cause up to 50% to 100% paper loss in capital. I experienced up to 55% capital loss on paper if I had sold at the height of subprime and the bottom of the market.

Equities can move up and down very fast. Even in the "long-term" if the stock market is dead, one would be hard pressed to obtain cash flows for retirement expenses when one wants to exit the market.

Even long-term investors have to "time" the market to obtain liquidity for retirement living unless they still have other sources of income.

PanzerGrenadier said...

Hi LP

Just a public announcement. Maybank iSavvy is offering 0.75% p.a. for balances > $50k.

Check out http://singapore-fixed-deposits.com/wordpress

la papillion said...

Hi PG,

Yes, I understand that stocks can go up and go down. I think I experienced more than 55% losses in capital so I understand how it feels like.

I was thinking splitting the porfolio up into cash flows (dividends) and capital gains. A bit of both is probably good for anyone. I've also no problem with timing the market since I'm not a true blue type of investors.

As for the isavy, I think I can get better returns in poems Money market fund. They give me around 0.08-0.09% per month, no lock ins and min of only $500 or $1000 to start it. Anyway, I need the money in very short term so no pt locking in. Thanks for your recommendations though, I think I might use it in the future :)

PanzerGrenadier said...

Hi LP

No problem. So far, Maybank iSavvy offers one of more competitive savings account rates around.

Be well and prosper.

Musicwhiz said...

Hi Panzer and LP,

Just to add, I am using Maybank iSavvy for my emergency and opportunity fund(s). The interest rate is indeed one of the better ones.

If interest rates were to rise in future, I am confident this will rise in tandem as well.

Cheers,
Musicwhiz

Createwealth8888 said...

Experiencing up to 55% capital loss on paper can be painfully. Do pillow stocks aka zero cost investing and you never see capital loss on paper anymore.

Hapi said...

hello... hapi blogging... have a nice day! just visiting here....

Touzi said...

Hmm...Mayank iSavvy FD interest for 3,6 months is lower than its iSavvy saving account (for >$50K) !