Archive for September 2014

Home Archive for September 2014

Source: A Singaporean Stockmarket Investor blog

I am an active reader of A Singaporean Stockmarket Investor (ASSI) blog because I am really inspired by AK and his articles. In one of his articles on money management and motivation, an image (left) caught my attention. It was about the end goal of only utilizing your passive income for expenses.

In order to do that, your passive income must be greater than your active income. If you are earning S$100,000 annually (active income), you will need an investment portfolio of S$2 million to generate dividends of S$100,000 (passive income) at 5% yield.

S$2,000,000 * 5% = S$100,000 (annually).

Yes, S$2 million. Seem like a very far goal to reach? Yes. Possible? I strongly believe so.

In order for our passive income > active income to become a reality, we have to take baby steps. Let's start with generating passive income that is greater than your annual savings (from your active income). If we save 10% of our annual active income and invest with a projected yield of 5% annually, it will take approximately 20 years to generate a passive income equivalent to your annual savings.

Using a S$100,000 annual income as an example, see the table below:

What about re-investing your dividends? It will take 5 years earlier to hit your goal. That is close to 15 years.

Generating Passive Income > Annual Savings

This is a very possible target - to be able to generate passive income that is 10% of your annual income. This example does not factor increase in annual income or savings. We would probably be earning more and decide to save a greater amount.

Well, this is not exactly Passive Income > Annual Income. My point is to start early, invest early and let the power of compounding work for you. To reach the stage of generating passive income equivalent to your annual savings first; is one step closer to Passive Income > Annual Income.

Read: 72, The Magic Number for Compounding Interest

You might not have noticed it but you have been leading a financial lifestyle of your choice. A lifestyle that subconsciously direct the way you spend or save money. In general, there are three categories of common financial lifestyle:

A Lifestyle based on Credit (Cards)

You are leading a life beyond your financial means and almost everything is financed by enormous debt. You might be living a "glamorous" life - driving the newest and best cars; wearing the latest high-fashion clothes; living in a private condominium - but you are living on credit. You decide your purchases based on whether you can afford the monthly payments. You might have reach a point that you are not able to finance or pay off the monthly expenses with your monthly income. You would just pay the minimum sum of your credit card bills and roll over the balance. Interest will be charged on your outstanding balance and your debt snowballs.

A Lifestyle based on Paycheck to Paycheck

Unlike the above lifestyle, you are leading a lifestyle that spends with a paycheck mentality. Your monthly income comes in and goes out almost immediately. You consume as much as your income allows you to. Just like the lifestyle based on credit, you buy the latest gadget, clothing and even dine out often. However, you diligently pay off your credit card bills, mortgage and other financing. You do not allow your debt to snowball but you are not able to build your wealth.

A Lifestyle based on Saving

Saving like a scrooge is a lifestyle and this is the extreme end. There are also people who take a better approach and save moderately from their monthly income. Do these people have credit cards and debts too? Yes, of course. But their debt is likely to be for a home mortgage with a payment they can well afford. They will also be using their credit cards for shopping and dinning; however the amount used is after what they have planned to save or have already saved. You might not have the highest income when compared to people from "A Lifestyle based on Credit (Card)" or "A Lifestyle based on Paycheck to Paycheck"; however over the course of your lifetime, you will eventually add (or save) up to substantial wealth.

Are these lifestyles familiar? Do your friends have such lifestyles?

The lifestyle you lead matters. If you do not even have any savings, how do you start investing?

Read: "Take Charge. Plan Ahead." - MoneySENSE

In one of my previous entry, STI ETF is a Simple Way to Profit, I mentioned that I would prefer to do Dollar Cost Averaging on the Straits Times Index (STI) Exchange Traded Fund (ETF) based on the current level of the STI. The STI is currently trading at 3,337 points after the low of 2,953 points in the first quarter of 2014.

I personally feel that Dollar Cost Averaging is a simple-to-execute strategy and is safer than just 'buying and holding'. So how should we execute this plan?

Invest a Fixed Amount in a Stipulated Period

For example, you can invest a fixed amount of S$1,200 every month into SPDR® Straits Times Index (STI) ETF (ES3). Or you could invest a fixed amount of S$6,000 every quarterly. It can also be investing annually. Once you have worked out the amount you feel comfortable investing and sustaining, fix a stipulated period. It can be the first trading day of every month or the first trading day at the start of each quarter (January, April, July, October).

Consistently Investing the same Amount of Money at the same Regular Interval

No matter what happens to the Index, you consistently invest the same amount of money at the same regular interval. When the ETF price is at S$3.00, your S$6,000 will buy you 2 lots (2,000 shares). Likewise, when the ETF price is at S$1.00, your S$6,000 will buy you 6 lots (6,000 shares). This means you will be buying more shares when the ETF price is low and fewer shares when the ETF price is high.

Takes Away the Emotion from Investing

No matter what happens to the index (whether its goes up or down), you will be investing at your stipulated period. This takes away the emotion in investing in the ETF or even timing the ETF. You just have to stick to your plan for a long term and basically treat it as paying for your "Retirement Fund".

Hypothetical Scenario - 6 Years and Counting STI ETF Plan ...

I was browsing the historical prices of ES3 on Yahoo! Finance. Decided to do some maths on a plan based on a S$20,000 every semi-annually (start of April and October) investment. For simplicity, the cost of transactions will not be calculated. See the table below.

The ES3 (SPDR® STI ETF) has a board lot size of 1,000 units. Therefore, at S$3.13 on 1st April 2008, a lot of 1,000 ES3 shares will cost S$3,130 and the maximum number of lots you will be able to purchase is 6 (S$20,000 / S$3,130 = 6.39).

In the Dollar Cost Averaging strategy, you will consistently invest the same amount of money at the same regular interval. From this simple plan, you would have acquired 86,000 shares and invested a total of S$243,000 over 6 years. Based on the current price of ES3, S$3.37, your total investment will be worth S$289,820 now. That is an unrealized paper gain of S$46,820. We have not factored the dividends collected.

Just for the record, based on the accumulated 86,000 ES3 shares, the dividends collected in April 2014 will be S$3,698.

Does Dollar Cost Averaging Method beat the Buy-And-Hold Method?

The Dollar Cost Averaging method does not always outperform the Buy-And-Hold method. For the Buy-And-Hold method, it really depends on the price you purchase the ETF for. Nevertheless, the Dollar Cost Averaging method prevents you from buying the Index ETF at an all-time high point, only to see the value of your investment reduce when the prices fall drastically.

Start Small, Start Early ...

If you are planning an investment for the long term, Dollar Cost Averaging the Index ETF is a viable option. You can start early by investing S$300 every month for the next 30 years. You should do the maths and see if this investment will grow to a decent amount.

The cost of commission and brokerage fee has to be considered when you plan your stipulated interval for Dollar Cost Average. To keep it simple, you generally make more money if your fees are lower. I will highlight some alternatives in keeping your transaction cost low in another entry.

The key message is to start early.

Read:
1. Exchange Traded Funds - Simplified
2. STI ETF is a Simple Way to Profit

In the National Day Rally 2014, PM Lee announced that the Lease Buyback Scheme (LBS) will be extended to 4-room HDB flats. Other changes were announced yesterday. All changes will come into effect on 1 April 2015. See the info-graphic, provided by the Ministry of National Development, below.

Source: Ministry of National Development - dated 4 September 2014

Extended to 4-room HDB Flats with S$10,000 Cash Bonus

The LBS, as mentioned by PM Lee, will be extended to 4-room HDB flats. 4-room HDB flat owners will receive a S$10,000 cash bonus per household when they sell the tail-end lease of their flat to HDB. The cash bonus is on top of the proceeds they received. The cash bonus for 3-room HDB owners participating in the LBS remains at S$20,000.

To qualify for the full cash bonus, there is always a "However".

However, the household will only get the full S$20,000/S$10,000 cash bonus if the household's total CPF top-up is $60,000 or more from the LBS proceeds. If the total CPF top-up is less than S$60,000, the household gets a pro-rated cash bonus of S$1 for every S$3 CPF top-up.

Income Ceiling for participating in the LBS to be raised to S$10,000 per month

The income ceiling for participating in the LBS will be raised to S$10,000 from S$3,000 per month. This will make more seniors eligible for the scheme. I believe this is in line with the Government encouraging elderly to continue working, if possible, and still qualify for these monetisation options in this LBS. Please note that the income ceiling is based on the gross monthly household income.

Top up of CPF Retirement Account with the LBS proceeds will be relaxed

This is probably the most attractive change in the LBS. Instead of topping up to the full age-adjusted prevailing Minimum Sum to his/her CPF Retirement Account, each owner of the 3 or 4 room HDB flat will only be required to top up to half the age-adjusted prevailing Minimum Sum.

Owners will be able to retain more cash upfront from participating in the LBS. Alternatively, owners can also top up their own CPF Retirement Account beyond the minimum required up to the prevailing Minimum Sum to get a higher monthly payout under CPF Life.

Please note there is a S$100,000 cap on the household's cash proceed. Owners are required to top up the excess of S$100,000 into their respective CPF Retirement Account.

Here are the age-adjusted Minimum Sum based on the prevailing Minimum Sum of S$155,000:

Flexibility in the Length of Lease to Retain

Instead of having the standard 30-year lease, owners will have the flexibility to choose the duration of lease to retain, subjected to a minimum lease based on the age of the youngest owner (See table below). Nevertheless, a household must have at least 20 years of lease to sell to HDB to be eligible for the LBS. Those that prefer a longer lease can choose to retain more than the minimum required for their age, in 5-year increments, up to a maximum of 35 years.

Eligibility Criteria - Most Important to Note

Age & Citizenship

All owners at CPF Draw-Down Age (currently, the age is 63 years old) or older
At least one owner is a Singapore Citizen

Income

Gross monthly household income of S$10,000 or less. Please note it is the total household income.

Flat Type

4-room or smaller HDB flat (exclude HDB terrace houses)
No concurrent ownership of second property
All owners have lived in flat for at least 5 years
Have at least 20 years of lease to sell for proceeds

How the LBS works - Putting everything together

The Straits Times graphic provides a good understanding of the LBS:

Source: Straits Times - dated 4 September 2014

Enhanced Lease Buyback Scheme definitely gives more Flexibility

The enhancement in the LBS definitely provides greater flexibility to suit different preferences in terms of the duration of lease and cash. I personally think that being able to retain more cash upfront from the LBS proceed is attractive. In the past, 3-room HDB owners that were complementing to participate in the LBS would be put off when they were required to top-up a large part of their LBS proceeds into their CPF Retirement Account to meet the Minimum Sum. With this relaxation, owners can choose to retain more cash or top-up their own CPF Retirement Account beyond the minimum required.

Monetizing your HDB flat is one way of supplementing your retirement income. The LBS may take away the option of bequest but I feel your retirement should be your main focus. If your monthly income (from all sources) is insufficient, LBS can be explored. I believe your children will be happier to know you are leading a good retirement.

For more information on the LBS, please call HDB Branch Service Line at 1800-225-5432 between 8 am and 5 pm from Mondays to Fridays.

Read:

1. CPF Explained

2. S$2000 (monthly), Enough for Basic Living?

3. PM Lee National Day Rally 2014 - Assurance in Retirement?

Apart from winning the lottery, compound interest can slowly transform your small investment account into large fortunes over time. Some people have all the luck to win 4D or Toto (Singapore's versions of lottery). Before I ever get lucky, the power of compound interest will be my best friend.

Just the other day, I was reading an article from Business Insider about Warren Buffett titled "17 Facts about Warren Buffett and his wealth that will blow your mind (by: Elena Holodny, dated 14 August 2014)".

I will list the top few facts that caught my attention:

1. 99% of Buffett's wealth was earned after his 50th birthday.

5. In 2014, Buffett made on average S37 million per day - that's more than what Jennifer Lawrence made the entire year.

10.

11.

12.

13. If you have invested $1,000 in Berkshire Hathaway in 1970, you'd have $4.86 million today.

14. If you have invested $1,000 in Berkshire Hathaway in 1980, you'd have $531,165 today.

15. If you have invested $1,000 in Berkshire Hathaway in 1990, you'd have $28,785 today.

16. If you have invested $1,000 in Berkshire Hathaway in 2000, you'd have $2,218 today.

17.

For the rest of the interesting facts, please read the article.

The article, not only states how rich Warren Buffett is, but indirectly points out how compound interest builds wealth over time (See fact 13-16). The rate of return definitely has an impact on how fast your investment grows as well. However, in all common sense, the earlier an investor begins, the more wealth he or she will accumulate.

Rule of 72

The Rule of 72 is very simple. Most of you have probably heard about this rule. To determine how many years it will take an investment to double in value, simply divide 72 by the annual rate of return. For example, an investment that returns 5% annually doubles every 14.4 years (72/5 = 14.4). Similarly, an investment that returns 8% annually doubles every 9 years (72/8 = 9).

The Magic in Compounding - A Hypothetical Scenario

At age 30, Ali invests S$5,000 annually in "I-will-earn-you-8%-annually" fund for 10 years and stops investing. His total investment is S$50,000.

Muthu, at age 40, invests S$5,000 annually in the same "I-will-earn-you-8%-annually" fund for 30 years. His total investment is S$150,000.

Finally, at age 70, both Ali and Muthu decided to use their investment fund to enjoy their retirement. Ali's fund will be worth S$787,176 (after investing S$50,000) and Muthu's fund will be worth S$611,729 (after investing S$150,000). By starting 10 years earlier and making one third of the investment, Ali ends up with more.

Start Early

Leverage your time (by starting early) to make the power of compounding work for you.