Beginning the CFA Journey

I have been contemplating this for a while now. It was a couple of years after my university days and I thought that this was something that I was really interested in and should get started on, even as I was serving out my scholarship bond. But I guess so many things happened in the past few years – wedding, BTO, baby, etc. – that life got in the way and this got pushed to the side for a bit. Because of this extended WfH that my workplace is still on for the foreseeable future, I thought I could eke out some time to sign up for financial courses and pick up more financial knowledge.

So I did some research on my own, looking out for some courses to take on. Then I realised that almost every course were running into thousands of dollars for a couple days of workshop. And from what past attendees have shared with me, you usually need to attend a number of workshops before you get something tangible. After the few free SGX workshops that I signed up, I thought I had picked up some knowledge already but I was pretty sure there was still more to learn.

So I recalled my desire to take the CFA examinations previously and assessed the cost (see below) as well as the level of preparation required of me. Most people say that I need upwards of 300 hours to prepare for the examination sufficiently. There is even a website with that title dedicated to helping candidates plan and prepare for the examination. I figured that with my mathematical background that has familiarised me with some statistics, I have some decent grounding, but only in certain topics. This can at best compensate for more preparation time that I will likely need on the Economics part (which I never studied at A-Level) or the Ethics bit (which while I consider myself a reasonable ethical person, is probably quite a different standard when it comes finance). There are some decent freebies that are provided on the website – free practice papers and free study plan. So I am pretty hyped up that I am not short of resources.

So just yesterday, in the name of lifelong learning, I signed up for the February 2021 CFA Level I examinations. It cost a whopping USD 1,150 because I signed up during the Early Bird phase (which ended yesterday). If you are interested, you can find out more details at the website. I also learnt that it will be the first sitting where the examination is carried out online, which is really a sign of the times ahead. Cost wise, I think the registration fees are really just the beginning – I had a look at the online materials and decided that hardcopy textbooks are more suited to my studying style, and then there’s a financial calculator which I need to get too. And if you are so inclined, there are courses run by Kaplan to keep you on track, but I think that I should be able do without that.

All in, it will be an intense 6 months. I think I may even be writing less now that I have decided to take this up. I just hope that my discipline can see me through this period and pass the examination eventually so that I can move on to Level II next.

Anybody else who will be sitting for the same paper in February? Will be useful to find a study buddy particular for revision because my wife is not as keen. Or if you have any tips and tricks or an experience to share if you have gone through the process before? Wish me luck!

Wedding Costs

Yesterday was my sister-in-law’s solemnisation ceremony. Apparently, at least another 240 couples thought that 08/08/20 was a special date for them too. Thinking about weddings. I reminisced a little and wanted to post about my broad takeaways from this episode of my life, so that those whose turn are coming up can also think about them and the trade-offs you are willing to make. For proper framing and context, I will also highlight that I am making references to a combined wedding based on the Malay-Muslim tradition, which I understand can be quite different from separately held ones or a typical Chinese wedding held at a hotel ballroom. For the latter, you can find out more about the costs of those weddings from Seedly, DollarsAndSense and ValueChampion. Void deck weddings may also be cheaper, but only so slightly. Another caveat is that family dynamics and style vary from individual-to-individual and family-to-family, so not everything may be fully relatable, which is why I do not want to go so deep into the specifics either.

Back to my sister-in-law’s wedding for a bit – We intended to do the wedding reception the day after but because of the COVID-19 situation, we were unable to invite as many guests as we wanted to. Hence it was decided that part would be postponed to early-2021 instead. Personally, I thought that it would have been an opportune moment to hold a smaller and more intimate reception, and everybody else can still attend via Zoom. More importantly, it would have been much much cheaper. But I guess as far as the older generation is concerned, that was deviating too far from tradition. So my first takeaway is that the wedding industry is unlikely to see too much disruption in the near future – which means that when this situation blows over and we can gather again in huge crowds, wedding fever and costs will continue to go up.

Now on to my own wedding and its associated costs about four years ago, when it was held over 31 December 2016 / 1 Jan 2017 (My friends joke that it was a two-year long wedding). I still can recall doing up the budgeting, busting it each time and the various squabbles that me and my then-fiancee had over what we should spend and what we could afford to forego. My next takeaway is that tradition may cost more money. You can try all sorts of means to minimise cost but do note that there some Malay wedding essentials that we cannot do without. Then there are also ‘essentials’ that go beyond the religious and are costly mainstays of the tradition which should form part of the wedding depending on how much say you give to the older generations. And as far as I’m aware, this applies to any tradition.

I will be upfront and say that I budgeted $50k for my wedding, knowing that I was able to set aside that amount of money by the time the wedding came around. I was able to afford it fully without either of us resorting to loans, which was my first benchmark. If I had things my own way, I would have budgeted and spent less. But alas, one big takeaway I had from my own wedding is that it is almost never just about the bride and groom. Everybody has something to say about the wedding and that’s how costs can easily balloon if not kept in check. So budgeting is important to show that spending more in one area equates to a trade-off that spending must be less in another.

I am sharing the template that I used to budget for my own wedding. You can start by putting down estimates and then filling in the costs and other details along the way as you confirm the various vendors you will be working with. Knowing what you have pinned down will also arrow you to narrow your scope for what you can budget for subsequent vendors. A checklist is also useful to make sure that you keep yourself on track on the stuff that really matters most – pre-marriage course preparations, booking of the kadi, etc. More significantly, the budget really forced me to review the paid and upcoming expenses for the wedding every now and then.

And then when it comes to the crunch, we had to think up of alternatives to reduce cost. What we chose to do may be slightly unconventional as we handmade quite a number of wedding props and decorations.

Up-cycling with Snapple bottles for guests to share anniversary ideas
Hanging props: straws, fishing line and a gold spray paint is enough to get the glittery look
Cardboard, black tape, red paint and quite a bit of man-hours; used for two weddings to make it worth the effort

It certainly took up quite a bit of time putting them together but I treated it as mini-art projects. Except the LOVE letters though – that was a big one that my family gamely got involved too. So basically, it was a trade-off between time and money and in this instance, I chose money. But I’ve also preserved the value of these wedding props because they now form parts of my own house decor too! They now make for interesting stories whenever I have guests coming over.

Budgeting is just one part of the picture though. The other part is maintaining cash flow. How is that relevant for a wedding, you may ask? Well, the budget that I set out at the start must be based entirely on my own means – what I had then and what I was willing to set aside along the way as I worked for the few years leading up to the wedding (and of course, not everything should be set aside for the wedding only). It may seem obvious, but I also know of some bad practices that we should all avoid: Don’t bank on the duit hantaran /dowry or any cash gifts from your attendees as part of the wedding budget. Those come after the wedding, and for the latter, as much as you can expect, there is no guarantee you will receive. So never put yourself in that precarious position unnecessarily.

Another takeaway that I have always advised those around me who are planning for an upcoming wedding is this: If you know that you’re going to have no choice but to spend a pretty big sum for a wedding, then might as well make the best out of it. When we met vendors, my fiancee would focus on the quality of their service. I would focus on the payment schedule and the different payment modes that they accepted. I already had my Citibank Premiermiles credit card (sharing my referral link for your easy reference) by then, so I charged all the purchases to that card to collect miles along the way. There were a handful of purchases that we made in JB, and that qualified me for bonus miles because of the overseas spending. The same can also be said for your honeymoon spending, which will allow you to rack up quite a bit of bonus miles too since you will definitely be overseas and likelier to spend more just to treat the both of you for a job well done because planning for a wedding is more than just about managing finances together (managing people is generally a much larger headache). And better still, the miles on the card never expired, so I was never pressured into spending more than I needed to.

Anyway, after everything was said and done, we ended up spending slightly beyond our budget: $54k. I’m thankful for the budget and proper tracking of the wedding costs, as it really kept me in check multiple times along the way. With all the cash gifts from friends and relatives, it helped to ease the overall load as I manage to ‘make back’ more than half that amount and ended with a deficit of $20k, which was not as bad as I initially imagined it to be. I know that there are some people which relatively richer relatives who can end up ‘making’ money from their wedding, but I guess this is just one of those things where we accept the final outcome and be glad that the damage was not greater than what it was.

For those with a wedding that’s coming up soon, any thoughts you might want to share? My experience through planning my wedding may shed some light on how to cut costs…

Taking Leave from Work

It’s going to be a while before we can use our leave for overseas travel given the current situation. I had initially booked a 3-week long holiday to the US West Coast but that has since been cancelled. So with quite a lot of leave still on hand, which I have not really used so far because it makes sense for me to clear my off-in-lieu’s first as those cannot be brought over to 2021.

What this means is that this really long 6-day weekend is pretty much going to be spent at home, and some of it to help out with the preparations of my sister-in-law’s wedding. And I was actually quite excited leading up to it because there were a number of things on my to-do list that I was keen to do, but did not really have the time to think about it with a full presence of mind. Some things on my list are:

1. Complete an online course on Tableau since the beginning of this year – I had trouble doing so because it took so long to get the license key from my organisation as well as to gain access to the lessons. Now I can dedicate a good couple of hours specifically to this skill which I have been wanting to learn and is very relevant to my current and future work. Hopefully I can try out some nifty visualisations with financial data and share them here once I get really good at it.

2. Attend evening webinars – These are getting more popular these days since the advent of Zoom. It used to be the case that such 1-2 hour sessions were held somewhere in town and I had to make the trip all the way there just for that couple of hours. It also means I get to spend less time with my family. This arrangement is so much more convenient now.

3. Review various aspects of my financial portfolio – I have been contemplating whether this is the best interest rate environment to refinance or reprice my HDB mortgage loan. I recently received a letter from DBS that they are revising my floating rate downwards to 1.85% (FHR8 + 1.25%) and so I have been actively looking out for better deals since I started out with no lock-in periods. I hope to come to a final decision during this period seeing that this interest rate seems likely to stay. (Must really review this statement again in months/years to come…) Another part that I am also starting to take a keener interest in is to gain more financial knowledge (related to above point) and have signed up for free courses (and paid ones too) on SGX Academy. SGX also has free tutorials to go back to the basics of investing, which are always useful to review every once in a while.

4. Catch up on sleep – I usually sleep sometime near midnight and tend to get woken up early because my daughter will ask for milk at about 6am. Once we are all awake, there is that rush for breakfast and to send her to playgroup and by the time I am back home, it is time to start work. So this period will let me go back to sleep in the late morning and get some much needed rest.

I was quite used to the mentality of expending leave only for the purposes of overseas travel, otherwise it would seem like the leave had been wasted. But that was perhaps because I was teaching in a school and never really had to apply for leave until the school holidays and thus leave was not such a precious commodity until my current role. However, if I held on the mentality and limit myself to what leave should be used for, then I would be forcing myself to not ‘waste’ my leave and will instead continue to spend my time working without taking a proper break from work. And that cannot be good for my own mental heath.

The financial education that I have been receiving for the past couple of months has made me reframe my thinking about taking leave from work. Let’s be real – Nobody gets rich by working for somebody else, that only makes somebody else richer. So the middle ground for me right now is to be really focused in drawing boundaries between time spent at work for my income, as well as time spent in my other pursuits, with my family and to make myself more financial literate and one step closer to financial freedom. It does not in any way imply that I am cutting corners at work. Quite the contrary, it has driven me to be more efficient and to focus on what really truly matters, because otherwise by Parkinson’s Law, “work expands so as to fill the time available for its completion”. Taking leave is one way of drawing such boundaries and I will be looking forward to taking more of such mini-breaks in the near future!

The Inflation Illusion

What is inflation? In Economics 101 (which I must confess to not have taken formally in school), inflation is the phenomenon of price increase in the general price of goods and services over a period of time. When this happens, it might that for the same amount of money, we will be able to buy less in future. Or in economics speak, one’s purchasing power decreases as a result of currency depreciation. In Singapore, we measure inflation using the Consumer Price Index (CPI), which is compiled by the Department of Statistics monthly. For more information on inflation with the local Singaporean context in mind, check out this brilliant Economics Explorer series put together by MAS.

Singapore’s inflation experience aside (which is far too short anyway), I thought the history of inflation on a global scale also gives a good understanding of this phenomenon. You can look up these sources to get more details: Investopedia or Wikipedia. I claim no expertise on this topic, but here is my quick laymen recollection of it anyway. In the past, the Romans devalued their silver coins by making coins with less silver content after melting earlier versions so that they could make more coins with the limited supply of silver. In modern times, with fiat currency like dollar notes that have no intrinsic value, all the US central bank have to do is to print more notes. Simplistically, they do this because the US borrows from other governments, particularly China, and one way to make sure that they can repay their debts is to print more money. With such an oversupply of money (and even more as part of “quantitative easing measures”), it is no wonder that costs will rise because the value of money decreases over time.

Now imagine the three scenarios below and how you feel about it.
Scenario A: Receiving a 2% pay raise when inflation is 4%.
Scenario B: No change in pay when inflation is 2%.
Scenario C: 2% pay cut in a zero inflation environment.

Most people will feel happier in scenario A because of the pay raise but in real terms, all three scenarios result in the same outcomes in your financial position – being worse off by 2% after inflation. And that is the inflation illusion that we have been fed in recent times. So what kind of inflation environment have we been in the past few years? That will allow us to better appreciate the context within which we are receiving any pay raises and whether our financial position is truly improving over the years.

Singapore’s average inflation rate is about 3% over the years

You can check out Singapore’s inflation rates for the past 80 years and look at a narrower time period here: Singapore Inflation Rate 1961-2020. Of more interest to us is perhaps the last couple of years, where the average yearly inflation has been pretty stable at about 0.5%. It is projected to be negative in 2020 because of the COVID-19 situation. So that means anybody who has a pay raise in the past couple of years will have quite likely improved on their spending power. And anybody who was fortunate enough to not suffer a pay cut or lost their job (quite possibly nobody) will likely be in a better position than they were in the previous year.

Inflation is also a good indicator of the success of your investment returns. Leaving money in a piggy bank means its value gets eroded over time, less so if it is a fixed deposit or savings in a bank. So when it comes to investing, you want to make sure that your overall portfolio can provided returns that allow you to swim against the tide of inflation that we constantly face. It is like swimming against the current – stop and you will constantly get pushed further back.

How Credit Card Companies Sell A Loan

Almost all of us who have been working for a couple of years own a credit card. Some perhaps more than one, each tailored for a particular purpose like online shopping, paying bills, groceries, etc. That’s what a YouGov survey says anyway. Thankfully, it also says that few Singaporeans are in debt because of credit cards, which is a good thing.

But I am sure we have all heard the story. Spent too much in a particular month on a fancy new item, could not afford to pay back. Owe them money and soon the interest itself spirals out of control. How does this all happen? Well, the first truth is this – that is exactly how credit card companies make their money. Each time they allow a credit card user to pay on credit, they are taking a risk. A risk that the user may not pay back in full or in a worse case, go bankrupt and default on his payment. So the interest that is being charged in the event of late or non-payment is to compensate the credit card company for the risk that they are taking on. So if you are the type of credit card user that always pays your credit card bills on time, then you are not the kind of client that they actually want, because aside from the annual credit card fees (which are usually waived), they do not really earn that much from you. What they really earn from is the interest.

I will not go too much into the late payment fees, because those are pretty crazy rates (26.9% p.a.) we are looking at and not too interesting. Instead, I will discuss the other way that they entice people to borrow from them – take out a credit card loan in as painless a way as possible. Here is an example of the kind of advertisement I constantly get from Citibank, just because I own a credit card with them.

It’s so special you have to wonder why there are two different interest rates.
Approval within a few minutes! How much less painless can borrowing money get?

The obvious question that stands before us is: What is the difference between 4.55% p.a. and EIR 8.50% p.a.? Before we answer that question, first we must know what EIR stands for. It is short for Effective Interest Rate, which reflects the true cost of a loan and uses the following formula:

EIR = (1 + \frac{i}{n})^n - 1, where i is the nominal interest rate (stated rate associated with a loan, but not what a borrower is paying) and n is the number of periods (usually in months or years).

So why are there two numbers? Well, 4.55% p.a. here refers to the nominal interest rate. I’ll demonstrate this with a bit of math, assuming that I’m borrowing $1,000 over 36 months and counting backwards using the monthly instalment of $31.57 as shown below.

In 36 months, the total amount paid is \char36 31.57 \times 36 = \char36 1,136.52.
As a percentage of the original loan, that is \char36 1,136.52 \div  \char36 1,000 \times 100\% = 113.652\%.
Averaged over 3 years, that is \frac{113.652\% - 100\%}{3} = 4.55\% per annum.
But like I said above, that’s not really how you should understand interest rate. Instead, we need to look at the EIR by understanding at the T&Cs and the mortization table to get a sense of its effects:

Always read your T&Cs!
Pay, pay and pay after you borrow.

So look at the T&Cs clause 12 and you will find a formula for calculating the interest component of each monthly statement, which uses the formula EIR \times outstanding\;unbilled\;Program\;amount \div 12 [months].

Rather than work out the EIR, let’s get a feel of it by working out an example after paying the first instalment of $25.65, with principal paid $24.49 and interest paid $1.16. So that means the outstanding unbilled Program amount is \char36 1,000 - \char36 24.49 = \char36 975.51,
and the interest component for the next monthly instalment is \frac{8.5\% \times \char36 975.51}{12} = \char36 6.91, rounded up to 2 decimal places.

The basic idea is this: The higher your EIR, the more you interest you are paying much earlier in the instalments and that’s the true interest that you are being charged for the remaining principal that you still owe after borrowing. In other words, unless you can guarantee that you can find an investment that earns at a rate higher than the EIR with the amount you borrowing, then forget about it.

I hope this post gives you a better sense of the size of the hole you are digging when you decide to borrow from the credit card companies, banks or any financial institution for that matter. They can always easily fudge the numbers by showing you the smaller nominal interest rate which only represents the total interest you pay over the course of the loan tenor. So be clear what the numbers actually mean before you make your financial decision and make sure it makes sense!

“Not easy ah…”

I say this with no intention to disrespect whatsoever: My father is a typical boomer parent. Every time I suggest that he pick up some investment lessons with me or explore a potential business idea on the side, this phrase “not easy ah…” comes up. That’s not to say that he is lazy or does not bother about his personal finance at all. Quite the contrary, he is in full control of his financial plans for retirement in the coming years and barely even needs his pension payout to keep him going. In fact, he planned so well that neither me or my siblings have had to worry about our financial status in our growing years, and we had the fortune of seeing through tertiary education without being saddled with college debt. It is a real blessing indeed and I am forever grateful of having a father who had the foresight to make those plans as a sole breadwinner of the family on a blue-collared worker’s salary, even if he may have started later than most.

But this phrase comes up many times when my siblings and I suggested ideas to my father, not just to financial ideas, but anything in general. It could be suggestions to make my DIY wedding props – “not easy ah… just engage somebody to do and pay for it la…”, or to renting out the spare bedroom – “not easy ah… later the tenant give so much problem… not worth the effort”, or making plans to go on a cheaper DIY holiday since he has so much spare time on his hands – “not easy ah… must coordinate the flights and hotels… just book tour and let them tell you all the details”. As I reflect on this, I guess he has arrived at a financial position where coughing up money is often the more convenient thing to do instead of spending time and effort when he does not see meaning in it.

He also uses it when I bring up suggestions to learn about other ways of making money besides working a full-time job. He then takes on the perspective that we are looking at an investment opportunity that does not guarantee his principal and that could be scary enough to him that he blocks his mind off it almost immediately. He too admits this – if it were a fixed deposit, Singapore Savings Bond or an endowment fund with guaranteed capital, he is more than willing to consider it as a viable option. He is also confident to share all his knowledge about the various CPF top-up schemes and SRS policies, and how to avoid tax legally (note: tax evasion is illegal but tax avoidance is fine) in Singapore. He takes the effort to find out more about any updates to CPF policies and CPF life because it was particularly important to make the necessary payout arrangements to pay as little in taxes on his pension as possible. So actually, not too bad lahh… From his various sharing, I also picked up the desire to learn more about minimising costs to myself too.

However, when it comes to the stock market or some business idea, he finds these endeavours too high-risk and admits that he does not have the intellect nor the drive to pursue it such that he can make a profit at the end. In his mind, he has already put in the hard work over the many years to secure his own hard-earned retirement and it should not disappear because of investment decisions that he feels is not easy to keep tracking. Perhaps at his age, it is by far one of the sounder things to do, rather than take on risks unnecessarily. But I would also say that not having any exposure to the market, when one has already set aside enough in low-risk instruments also means that inflation will only erode those savings over time.

At the same time, he gives the same boomer advice most other parents his generation also give: study hard, get a good and secure job and work your way up one career ladder to guarantee yourself an increasing monthly payout to support your expenses. He will soon retire from the first job he took right out of NS, and the company took care of him, his career progression and our family along the way. His well-intentioned advice was borne out of his experience, which is also only representative of the world of work from a distant past.

In the past, when he said the phrase “not easy ah…” and bring up all the various challenges, I would try to convince him of my thinking, but almost to no avail. These days, I am more understanding of where he is coming from. So while he still uses the phrase after I share an investment opportunity that I am hopping on, and I will take note of all the possible hiccups that can happen along the way, I sometimes turn it into a challenge that some things are worth doing perhaps because they are difficult to begin with.

Why do we work?

On average, employees in Singapore engaged in about 44.7 paid hours per week in 2019 (Data in 2020 is slightly less but this has been an anomalous year anyway). That works out to 9 hours on each of 5 working days, with 2 days of rest over the weekend. Considering that we spend so much time at work, it is worth pondering the purpose of why we work.

It can be for many reasons. On one end of the spectrum, there are those who struggle to make ends meet and work solely for the pay check. The work may be overbearing or has no meaning and if given the option to hop over to another job that pays better, one would do so without a heartbeat. Then there are also very demanding jobs, and one may prefer not doing it, but it pays well enough to be worth the sacrifice, whether in terms of time or even emotional well-being. It is clear that the sole motivator for these cases is money.

On the flip side, people stay on to the jobs because of the friends at their workplace or maybe because one has grown comfortable and is familiar with the work inside-out. It may not always pay well either. Then of course some find that they are very good at what they do and it might even be impossible to contemplate doing something else altogether.

There are also those who are fortunate enough to be able to pursue their passions, make (decent) money out of it and enjoy what they do. The famous Mark Twain quote says it all, “Find a job you enjoy doing and never work a day in your life”. This struggle could even have started way before you even starting working, right from the point where you have to choose to take an obscure degree and saddle yourself in college debt against all practicalities. It is strange though, because my generation has been brought up through school with the belief that “we are all unique” and “the world is our oyster”, but the realities of life seem to suggest that is better to those who are suited (pun intended) for the world of finance and business or were born with a silver spoon.

Ikigai roughly translates to “a reason for being”.

Then there is Ikigai, a Japanese term that describes the above three considerations of a job, aligned with something that the people and the market actually needs. In an earlier life, as an educator, I found that sort of peace within myself. But there was a niggling itch behind my back that pushed me to always go beyond the four walls of the classroom and see the world out there. So I did not rest on my laurels and made use of what available time I had on the side and during the school holidays – I did a part-time post-graduate diploma in Islamic studies, worked with a professor-friend at a local university to do some research and was on the constant lookout for investment opportunities. Just because we spend much of our lives during the weekdays already working does not mean we cannot bring ourselves to do a different sort of work in our spare time. And neither should we feel guilty about not devoting more time to our full-time job, because there is always enough work to go around and not enough time to complete it. The more important thing to do is to find a work-life balance so that our spiritual life is attended to as well.

I was once asked to share my thoughts to fresh graduates on any advice I may have them as they soon find themselves bogged down with a full-time job and a career ahead of them. My advice, which resonated with others was short and sweet:

9 to 5 is to keep the stomach full. 6 onwards is to keep the soul alive.

MillenialSGDad

This was in contrast to my parents’ generation, where I saw my dad who came back from work and then plonked himself on the sofa and spends the evening watching TV. I do not discount his hard day’s of work and the time needed to de-stress, but I told myself that I could not be satisfied if work was the only thing that kept me going, even if I had found internal satisfaction in it. And let’s be honest, even after I told myself that, it was even more difficult to actualise it, because I did finding myself gaming or catching up on series after work. I am not saying that we should not engage in these activities as they are important part of keeping the soul alive as well. I guess it comes down to what our priorities in life are and what we want to achieve at the end of it all. That comes with recognising that everybody are at different stages of life and have different starting points and goals to work towards.

Today, I live in my own place that does not have a TV. We have a projector instead and set it up only when we want to watch movies and will screen in our wall. I do not own a gaming laptop either. Instead, I spend more quality time with my own family, and visiting our own parents over the weekend. After work, when my daughter is fast asleep, I scour the Internet for investment ideas and advice, or set aside time to catch up with old friends and think about plotting my next moves, whether it be in my full-time work or my side businesses. It has made me busier and just recently I realised that I have not watched a show in a long time, but it has also made me feel more fulfilled and reassured about what I want to get out of own future.

Spend some time to think about what your own work means to you and what you have been spending your time doing post-work hours. The greatest potential for growth does not always come from the work place.

StashAway (2 Year Portfolio)

I started using StashAway slightly more than one year ago on 17 April 2018, putting in my first $1,000 and then stashing away $200 every month for about a year or so before upping it to the current $400 per month. I recognised that it was not a less risky way to invest in the stock market, but rather, just an automated way to Dollar Cost Average. There are of course many different platforms to do this, but I quite like the interface and the ease of transacting with StashAway.

So from the chart, you can see that my StashAway portfolio was also hit quite hard by the market crash back in February, but I guess the subsequent inflow in March and April and then the bull run more than made up for it. About two years in, I find myself up by a cumulative return of 13.2%, which gives an annualised performance of 5.66%. I prefer to use annualised performance as the more accurate indicator because it accounts for the compounding effect over the years, but it is still less accurate than using time-weighted returns (TWR), especially since there have been monthly injection funds. Perhaps I will just calculating the TWR some day, just so that I can compare against my own stock portfolio and see how both portfolios measure up.

The other thing that you may notice is that my StashAway portfolio is barely 10% of my stocks portfolio as maintained in my StocksCafe. That is really because I have different purposes for both portfolios. I am looking at the former as money partially set aside for my daughter’s university education and also for retirement. I hope for this portfolio to beat inflation rather than leaving it in the bank. Yes, some may say that it is riskier and I should consider safer alternative like bonds or endowment funds. My take is that the money I am setting aside here has a pretty long time horizon of at least 20 years or so, so I would expect that over the long run, with time in the market, it is quite likely to outperform these safer alternatives. I know that setting aside just $200 for 20 years is not going to cover even one year of university education, but it’s a start and I will be looking to increase it in the years to come.

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Paying Monthly Mortgage by Cash

I often look forward to reading the Sunday Times particularly because of the Invest section, because of interesting gems like this article. It is not always relevant to my own financial position, but this time round, it reflects exactly my financial beliefs and practice. This article discusses the role that CPF OA monies *should* play in paying towards for your HDB monthly mortgage, if at all.

What is not addressed in the article is perhaps the more fundamental and underlying principle of how one treats and understands the role of CPF in your own retirement portfolio. At this point, it helps to re-visit and appreciate the history of CPF and past major housing reforms. If we stick to its original intent of “building up our retirement savings”, then it necessarily means that we should try as much as possible not to use it, even when we are allowed to. But the government also recognised that home ownership is an important part of our retirement adequacy and thus relaxed the rules to allow for CPF monies to pay for HDB flat mortgages in 1968 and then private housing mortgages in 1981. To many, this was a welcome relief as the monthly payment would not require cash at all for some, including my own dad. There was also no real worry about the insufficient funds in the CPF, because both salaries and housing prices were rising across the board and when people flipped their HDB flat, they generally pocketed a handsome profit to upgrade to larger place or have more disposable cash for spending. Either way, everybody seemed to win.

But times have since changed. Our generation will be hard-pressed to see prices even double, let alone by multiple times (for the record, my dad’s first jumbo flat was sold at more than 5 times he bought it from HDB). So after coughing up a hefty sum for downpayment and renovation, and even in this low interest rate environment and possible government housing grants for those eligible, it will be challenging to make capital gains on our property like the generation before us did.

This confluence of factors should be enough for us to re-evaluate how best we should service our monthly mortgage and with this, there are varying schools of thought. At one end, some still stick to the tried-and-tested method of paying by CPF in full at the risk of depleting or at least not seeing gains in our CPF account. This option is often taken by those who harbour the mentality that CPF is “money that I can see but can not touch” and hence if it can be used for housing, it should. An in-between option is to pay using a mix of CPF and cash, up to one’s comfort level. Like the article below, my wife and I made the decision to pay our monthly mortgage only via cash and I will use the remainder of this post to explain why. I must also caveat that there is no best option, because you need to find what works for you depending on your financial and family circumstances, your take-home pay, your housing type and your aspirations.

Back in 2015, we applied for a BTO and after all was said and done, we settled for a 5-room flat at $417,400. Unfortunately because neither of us worked for at least a year prior to our application, we did not qualify for any housing grant even after appealing to HDB. Over the years, even as we saved and spent on a wedding and honeymoon as well as began on my investment journey, we were also putting aside money for the housing down payment and renovation by working part-time after hours in addition to our full-time job.

Based on the above, we made two key decisions in 2018:
(1) Take a bank loan instead of a HDB loan. Compare the differences here.
(2) Service my monthly mortgage fully by cash instead of CPF.

At the 80% loan-to-value of $333,920, with a 1.75% interest rate over 20 years, I calculated that we would incur ~$62,000 in interest or 15% of the property value. This is in comparison to ~$98,000 in interest or 24% of the property value with a HDB loan at 95% loan-to-value of $396,530 and at 2.6% over the same period. And while I took up a floating rate package, which meant that the numbers are purely theoretical, it does give me a good sense of the costs that I am incurring and also the range of selling price that is acceptable to me, minimally to break even.

Why bank loan? Basically, anything less than 2.6% interest per annum meant that I would be paying less interest than if I went with a HDB loan. My calculation also showed that in 12 years’ time, the sum of my CPF OA and monthly savings of $1,000 that I have set aside in cash would catch up with the principal sum that I borrowed. This means that after 12 years, I have the “nuclear option” of paying off everything if the interest goes high (>2.6%). That’s the long-term picture and I am about 2 years into the loan now and thus far everything has been working according to plan as interest rates have also dropped recently and I am looking to re-finance to get even lower interest rates.

In the short-term, I had to pick a reasonable tenure that I was comfortably to pay, whether in cash or in CPF. Some suggested to use the longest period possible, but I thought that was unnecessary to incur more interest. In hindsight, to ease cash flow, that might be worth considering. Nevertheless, I have been paying between $1,650 to $1,729 monthly for the past 2 years as the interest rates have fluctuated. Had I gone with a HDB loan, it would have been $1,854 per month. So clearly, a bank loan for me was justified, so long as I had the discipline to pay each month and not incur additional interest for no good reason.

Next, why cash? I have three main reasons.

Arbitrage between earning interest from CPF OA and paying interest on my housing loan. I have explained above in terms of comparing between a housing loan and a HDB loan. But now, because I pay in cash, the monies that are thus kept in the CPF OA earns me 2.5% interest, which is more than ~1.x% that I am paying in cash. It does not make sense for me to lose out on the 2.5% interest. Some may say that I should just CPF OA monies anyway because I could possibly earn more by investing the cash instead. I agree, but I have also already set aside funds for investing purposes, and this is the more conservative side of my portfolio that I am looking at.

Option to ease cash flow in the future by switching to CPF OA instead of cash. Since I can afford it now, I should pay by cash as much as possible. That allows my CPF OA to accumulate and snowball. If either me or my wife gets retrenched, or my wife wants to stop working to take care of our daughter, then we always have the option of shifting to pay by CPF OA and thus making our monthly commitments slightly easier to fulfill money-wise.

Unlocking cash when I sell. It is quite likely that I will not be staying in this BTO forever. If and when I sell the place, I will get cash in return and have less accrued interest (not that it matters that much since I will be able to use it to pay for my next property anyway). But in this case, unlocking for cash allows for more versatility in terms of investment options then. Some may then say that it is actually investment options that I am foregoing now, but as I have mentioned previously, I have already set aside money for that purpose now.

So yes, the article talks about being prudent by using cash to pay for the monthly mortgage. I fully agree. But as I previously mentioned, there are also other factors to consider too. What I have decided on is understandably not the most common option.

Do you agree with my decision or assessment of it?

The First $100,000

After 4 years and 4 months (I just checked) of stock-picking and being invested in the stock market, I find myself with a portfolio valuation that just passed the $100,000 mark. This comes in spite of the huge crash earlier this year, and me pouring in another $15,000 just the month before the crash. My lesson from that crash was to grit my teeth, knowing that the fundamentals of my stock picks were not changing drastically (yet) and I suppose the past 2-3 months have shown that they have indeed recovered.

Surpassing the $100k mark

But let’s be real. It’s not like I made $100,000 in profits. Truth be told, since my first day of trading, I have a capital inflow of $75,000, with $25,000 split between $16,000 in actual returns (i.e. closed transactions + dividend payouts) and $9,000 in paper gains. Digging deeper, I tend to compare my time-weighted returns (TWR) against the ES3 and SPY, which track the STI and S&P 500 indices respectively. This is reasonable since I am holding onto both SG and US stocks and if I cannot outperform either of these, then it means I might well be better off just investing in these indices instead.

TWR of 61% is not too far off from SPY’s 69%, but we should aim to do better than that.

My portfolio TWR was constantly performing before these indices up till mid-2018, where I made a drastic shift in my portfolio by selling some SG stocks to invest in more US stocks. And that’s where the portfolio slowly picked up and rode the wave of the US market to where it is today.

I must say that I am still on this learning journey. I know many people say making the first $XX is the hardest, and intuitively it makes sense because there should be reinvested dividends should yield higher returns. But I think the bigger gains comes from time in the market, experiencing the highs and lows and learning how one’s emotions respond to the market and how one should practice emotional restraint and not be too quick to buy or sell just based on what is trending. So it will be interesting to see how long I take to make the next $100,000 and whether it will indeed take me shorter than another 4 years 4 months. Hopefully with more knowledge of the markets and the businesses I am invested in, I will gain more confidence and trust in my stocks picks, alongside my other forms of investment tools.