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Tuesday, October 30, 2007

Financial freedom requires financial stability in your job and business

To achieve financial freedom, we need money... lots and lots of it! As the Pet Shop Boys song "Opportunity" goes:

"I've got the brains, you've got the looks
Let's make lots of money
You've got the brawn, I've got the brains
Let's make lots of -"

Financial freedom requires money
That sounds deceptively simple. The concept is straightforward. Build up capital through savings and invest this in investments that will yield sufficient passive income that supports our lifestyle.

How do most of you earn your money? Many of you are employees, working in organisations, companies and businesses. Some of you are running your own business or are full-time investors.

This post will deal with financial stability with regards to jobs and touches on the topic of performance appraisals being a significant determinant of your financial rewards as an employee.

The performance appraisal drama
Performance appraisals are something to look forward to and something to dread at the same time. It is the time where all your hardwork, sweat and tears or all the shirking, tai-chi and acting busy bears fruits. Your supervisor or boss will determine if the fruits you receive in terms of bonus, increment or even the very security of your job will be juicy, delicious or downright rotten.

Appraisals in my own limited experience has been a mixed lot. The few organisations that I have worked with all have on paper robust performance appraisal systems. However, in reality, the appraisal is to some extent a drama where the supervisor and the staff act out their roles in this performance.

In this drama, the supervisor will hold the "power" to determine the staff's remuneration, especially the variable or performance-based component. Many moons ago, when I started my first job, there was virtually no performance-based component and one's increment and promotion was based largely on seniority and not screwing up your job.

Fast forward to today's management and human resources thinking about linking pay to performance. It is good in theory but often fails in practice. WHY?

Why performance appraisal in practice sometimes SUCKS
Many corporate cultures still fail to instil the need to communicate and feedback performance to staff the whole year round and not only during the drama of the formal performance appraisal session. Many organisations also do not clearly spell out key performance indicators and targets with staff. Hence, the staff meanders his or her way through what he thinks his or her boss wants or desires in terms of work outputs and outcomes.

This is not to say that all organisations suck at performance appraisal but not many do it well.

Love it or hate it, performance appraisals are something we need to do well enough. We need to do well to maintain our financial stability from the cash flows generated from our job that helps to build up our investible savings to generate that passive income that will free us from the slavery to our jobs.

Surviving performance appraisals

1. Know your boss
Performance appraisals are carried out by people. People pretend to be rational but are mostly irrational. So know what your boss likes/dislikes and AVOID PISSING HIM/HER OFF. If you are now thinking but hey, that's not fair, appraisals should be objective and not be about personalities etc. The operative word here is "should". Life "should" be about a lot of things but it is not. DEAL WITH IT.

2. Document your work
Your performance appraisal should list down your achievements and not just activity. Show what you have managed to deliver and achieve as compared to writing the things you do.

Negative example:
E.g. I managed to process xxx number of yyy within the year. [*yawn*.... sounds like you just push paper which is the reality but you can spice it up that much more....]

Postive example
E.g. I process xxx number of yyy within the year achieving 110% of target and enabled the dept/organisation to .....(insert KPI for organisation/dept)... [*wow* sounds more postive and forward looking]

3. Be a team player
Nowadays, it is difficult to find a job where you work exclusively alone. You have to work with people and try to be professional and if possible, friendly with all. Never burn your bridges no matter how much you feel like strangling your colleague or boss.

4. Get some visibility
Promotions and rewards are a zero-sum game generally. Not everyone can be promoted and not everyone can get the variable or performance based rewards. Besides working hard, you need to also show to bosses and bosses' boss that you are working hard. Visibility is the name of the game. At important meetings where big bosses are around, show some initiative and be heard if you can contribute to that issue at hand. Don't be overly fawning and fake as big bosses didn't get where they are by being deficient in emotional quotient. Just try to "shine" a bit and get some traction in their minds that you are at least not the pits or bottom 50%. That will get you ahead of the pack.

5. Don't get overly upset about appraisals
Some of us live and die by bonuses, increments and promotions. One of the things I've learnt in my journey towards financial freedom is that I get less anxious about these sessions because I am not reliant on the bonuses for my day-to-day living. Bonus ARE bonuses, i.e. something extra to spur me on but I make sure I live within my monthly salary. This frees me to be less of a slave to my job and to be able to function with less stress worrying everyday about what my boss thinks of me.

I hope that as 2007 comes to a close, those of you who are due for your appraisals do well and score that increment, promotion or bonus. But ultimately, work towards your financial freedom so that YOU ALONE determine your financial security.

Be well and prosper!

Monday, October 29, 2007

Science Fiction and Financial Freedom


I love to read science fiction and recently finished reading "House Corrino" (written by Brian Herbert and Kevin J Anderson) being one of the three prequels to the Dune series of novels. Dune was written by the Hugo and Nebula award winning author Frank Herbert. The prequels were written by his son and other well-known science-fiction authors.

To read science fiction is to dream of the future
One of the things I love about science fiction is how it fires up our powers of imagination. Science fiction (sci-fi) authors dream of worlds, technologies and a future that not many of us can conceptualise and envisage. They bring us out of the realms of possibility into the realms of impossibility. They free our minds to dream of a future bigger than any of us could imagine.

Some of you must be wondering how reading science fiction helps one to become financially free? I'd like to share that in order for us to achieve financial freedom, we must be able to dream about it. To first conceive of the possibility of having enough passive income that supports our lifestyle and then being able to live our dreams without worrying about our rice bowls.

Those of you who are into self-help literature covering positive thinking, daily affirmations, programming our mind or self-hypnosis know that our minds are our greatest assets. Fans of Napolean Hill's "Think and Grow Rich" acknowledge the power of our mind to imagine and to visualise outcomes of being financially free.

To achieve financial freedom in our lives, we must achieve it in our minds!
The power to achieve financial freedom, i.e. the point where our passive income derived from portfolio investments, businesses, royalties, patents, copyrights etc. flows in such abundance that it pays for our living expenses and continues to allow us to grow our investments in a virtuous cycle of wealth and prosperity.

We can achieve this only if we first achieve it in our minds. I.e. visualise our goals clearly in financial freedom. Establish it vividly as a SMART objective, where S=specific, M=measurable, A=achievable, R=realistic, T=(specified) timeframe.

Now visualising it once or twice before we go and punt on 4D, TOTO or Big Sweep (or even the stock market!) is not going to cut it. It has to be a consistent, disciplined effort to consider our goals and let our actions then flow from bringing us closer or further away from our goals.

For instance, let's say you just want to build up your investment kitty by $5,000 this year or grow it by 5%. That's a clear and specific objective. During the year, before you spend money on upgrading your handphone or buying that new accessory for your car. Consider how your earning, spending and saving decisions move you closer or further away from your objective. What are you going to do when your bonus comes in? Blow it all on a holiday for the family? Blow half of it and save the rest? Or save up everything?

What you decide is based on how you have set your objectives
There is NO RIGHT ANSWER. It all depends on what you have set as your objective. In order for us to stay on course towards financial freedom however we have defined it, we need to be crystal clear about it because it is that clinical clarity that strengthens our resolve to save and invest. You will do it only if you find the reason compelling enough. If your reason for saving and investing is not compelling enough, chances are, your mind will tell you the thousand and one other reasons WHY you should just enjoy yourself, spend your entire bonus because LIFE IS SHORT... WHY DEPRIVE YOURSELF, LIFE WON'T BE WORTH LIVING and so on and so forth.

Life is INDEED SHORT, in that all of us have the same 24 hours to do as we choose. To live to the heights of hedonistic pleasures or to suffer by denying ourselves all that makes it worthwhile to live. We have to choose either way. By being OPEN to the possibilities of FINANCIAL FREEDOM and re-examining WHAT TRULY IS IMPORTANT TO YOU can you establish what, how and why you want to achieve financial freedom through this regime of prudence, savings, wise investments and some degree of risk taking.

Dune
In the novel Dune, the desert Fremen of the planet Arrakis (also known as Dune) desire one thing above all. To terraform the climate of Dune from the blistering desert to a verdant oasis. Would they be able to achieve this despite the imperial intrigue, politics and warfare that threatens the very imperium? Read Frank Herbert's novels and find out. But one thing is for sure, the Fremen BELIEVED IN THEIR VISION for Dune.

Do you have the same fervour for your own VISION OF YOUR FINANCIAL FREEDOM?

Be well and prosper.

Wednesday, October 24, 2007

The thrills and spills of gambling in the stock market

The thin fine line between investing and gambling
There is a thin fine line between investing and gambling and I think I crossed that line somewhat during the last few weeks or so.

I have been analysing my own investment decisions and other than one major decision to buy into SPC which was mostly due to luck and a bit on peak oil prices, most of my other decisions have been largely hit and miss affairs. My portfolio is still performing decently around 8% return but mostly due to the stellar results of SPC. Hence, you can see that the other investments having been so hot. :-(

The stock market can be a seductive place where you can match your wits and money against another person or institution. You buy, they sell. They buy you sell. Now because NO-ONE can predict stock prices consistently, stock prices reflect all available information that flows into the market via a random walk. Thus, your guess really is as good as mine in terms of where stock prices will go day-to-day. Who would have know that SembCorp Marine would suffer such a huge foreign exchange loss due to unauthorised foreign trading activities?

Hence, when I stray from the path of investing in dividend yield stocks and start punting on speculative plays, the gambling motive supercedes the investment motive.

Gambling is fun!
I admit it, the thrill of seeing the prices of the stocks you just bought go up over the next few days and weeks is exciting. It strokes your ego and makes you feel that you have "beaten" the market. But during times of corrections, when your stock price puts you at a paper loss, you agonise over whether to cut loss or hold. I realise my recent trades have been more speculative in nature and hence have decided to take a short break from this trading mentality because I am not good at trading.

It is risky because the commissions more than wipe out the capital gains from stock price appreciation of a few ticks.

As the end of the year beckons, I realise I have to cool down my itchy trigger finger that wants to buy and sell to make a quick buck. That is NOT the way of investing for the long-term. I have since pared down my equity stakes to around 70% of my portfolio in the market as majority of my stocks are still blue-chips that should move in tandem with the STI. The other 30% will be channelled back to safer and boring treasury bills and time deposits to balance off my portfolio.

Knowing yourself
Knowing yourself is important in your journey towards financial freedom. Sometimes you can be so caught up in the excitement of "making" money on investments that we forget that the ultimate first rule of investing is NOT TO LOSE MONEY. Beating inflation with well placed stock picks can work but you need to consider the thin fine line between investing and gambling / speculating!

Be well and prosper!

Tuesday, October 23, 2007

Panzer's equity portfolio

August, September and October have been active months in terms of my equity portfolio. A number of my stock picks prior to August had been duds in that I bought into shares that were over-priced prior to the correction. I took the opportunity to re-align my portfolio and in the process paid "tuition fees" to the market resulting in some realised losses.

This did help free up some capital and allowed me to buy into some stocks that have since performed spectacularly due to PURE DUMB LUCK on my part. Not all have performed spectacularly but one of them has been a winner. The following is my portfolio as at today (in no particular order):

Current Stock holdings

  1. SingTel
  2. Singapore Petroleum Company (SPC)
  3. Singapore Press Holdings (SPH)
  4. First Ship Lease Trust (FSL)
  5. United Overseas Bank (UOB)
  6. Tuan Sing
  7. Oversea Chinese Banking Corporation (OCBC)
  8. China Aviation Oil (CAO)
  9. ComfortDelgro
Three reasons for holding the stock
Peter Lynch recommends that as a stock investor, you should be able to articulate three reasons simple enough to convince a child why you are holding that counter. If you are unable to do so, then perhaps you shouldn't be holding that stock! It makes a lot of sense to me so let's try and see if my stock portfolio is able to pass this simple rule of thumb:

SingTel
1) Group A and Group B (Sold my Group C long ago at a loss!)
2) Singtel is still showing growth and dividends through its acquisitions - notably Telkomsel (where I have some first-hand knowledge of its growth in Indonesia, particularly Jakarta) and Bharti
3) Optus with strong Australian economy

Singapore Petroleum Company (SPC)
1) Peak oil prices
2) Oil and gas play
3) Fantastic dividends and only Singapore-based oil refinery play on SGX

Singapore Press Holdings (SPH)
1) Monopoly on national dallies and print classified advertisements
2) Emerging outdoor media and events business
3) Property investments are still doing well in real-estate boom times

First Ship Lease Trust (FSL)
1) Good dividend play (yields around 9%+ at my cost-in)
2) Shipping sector recovering and set for growth in tandem with global economy
3) Dividends!

United Overseas Bank (UOB)
1) STI component stock
2) Growing wealth management and banking services
3) Economy and growing GDP play

Tuan Sing
1) Commercial properties development potential
2) Riding the property boom
3) Speculative play (not a very good reason, hence I didn't bet big on this counter)

Oversea Chinese Banking Corporation (OCBC)
1) Growing wealth management and banking services
2) Economy and growing GDP play
3) Cheapest of the 3 banks to buy (not a very good reason too... :-( )

China Aviation Oil (CAO)
1) Oil and gas play
2) China QDII play
3) Speculative play

ComfortDelgro
1) Monopoly on bus services for allocated sector and NEL
2) Benefits from built-in fare increase formula
3) Virtual monopoly on taxi (Comfort/CityCab) rentals

As you can see. Some of my reasons are also pretty crappy. For example, CAO for me is a very speculative play and it's gambling really. The oil and gas play angle lends some veneer of respectibility but if I'm honest with myself, it's really VERY VERY SPECULATIVE as those who track china shares on SGX and CAO know this baby can move up and down very quickly in a SINGLE DAY!

Tuan Sing is also quite speculative in some respects because I'm banking on the management to develop their commercial properties in their holdings to unlock some value. Again, I really don't know that much about the company to really bet big and hence my exposure in this counter is relatively small compared to my overall portfolio.

Of the entire lot, SPC has been the best performer and really it was pure luck that I went into SPC when it corrected in August and since then peak oil prices have helped to push this baby into the stratosphere. Fundamentally, it is a very sound counter because it is in an incredibly sexy industry now : OIL AND GAS. In addition, the stock's dividend policy is pretty generous and at my cost-in I was already looking at 5%+ returns even before factoring capital gains.

Stock picks: As much tikam as analysis
My personal preference for stock picks depends on a few factors. One of them is whether I am looking to trade or to hold for the long-term or when the stock makes me a millionaire! :-) Most of my stocks tend to be blue-chips because these are fundamentally sound companies with good businesses. Blue-chips also tend to pay dividends which helps to generate a stream of recurring passive income. However, I also succumb to the "itchy-finger" syndrome and punt on a few with money I can afford (but hate) to lose. Stocks like CAO, Tuan Sing are punts for me that didn't turn out as I hoped and hence I am still holding them. I generally do not play contra as it puts undue pressure on my investing decisions.

Capital gains are hard to predict as my ability to guess where a particular stock's price is going is as good as my prediction of the winning TOTO number. Since I am still spending time writing this blog and not relaxing in my dream palatial bungalow in Queen Astrid Park, it must mean that my predictive skills are NON-EXISTENT. But computing dividend yields is something I know how to do and at least that makes my stock picks less random and provides some basis for some of my picks. For example, SPH which will give me a yield of around 4%+ at the price that I bought it is doing reasonably well because I went in at a price that was reasonable and I have holding power.

Develop your own stock picking approach
Many investment books will teach you different ways of picking equities. There is no magic formula. For me, it is a mixture of dividend yield, my own understanding of the company's business and my "feel" of its share price given the historical price for the past year or so. This is combined with views from other punters in stock forums as well as my sense of market sentiment at that point in time. In short, my stock picks are guesses based on information I have to work on and my success rate is also not fantastic. But I can say this... While I cannot give up my day job and do day-trading, my equity investments have on average made me an additional 2-3 months bonus from dividends and capital gains annually and more importantly, allowed me to better understand how the equity market works and to understand human psychology that little bit more.

May you be well and prosper in your own quest for picking equities.

Sunday, October 21, 2007

Financial Freedom: Time for Reflections

I had an interesting reminder this weekend about why we should at times pause and reflect on our motivations for pursuing financial freedom.

Outreach in Batam
I was in Batam over the weekend for a one-day trip organised by my church to do outreach to two villages over there. Our role was to organise games and activities as well as to lead songs for the village children. The villages were quite poor. Their homes were made of thin cement and board while zinc roofs provided the protection against the elements. The pavements were dirt paths that became very muddy whenever it rains.

However, despite the relative poverty, the children were happy to see us, to get involved in the group games that we organised and sung heartily along with us to the bahasa Indonesian songs that we selected. Their happiness showed through even when some of them did not have shoes or slippers and their clothes were not the modern togs that children nowadays spot in Singapore.

A time to reflect
In the midst of my quest for financial freedom, I do at times get overly immersed in the world of investments, equities, treasury bills, saving money and making money. I look at my statement of net worth and track what is my year-to-date returns and compare this against the fixed deposits and treasury bills yields as benchmarks. I prepare, plan and plot how I can move myself ever a step nearer to my ultimate goal of being able to choose how to spend the 24 hours given to me without worrying about providing for myself and for my family.

There is nothing wrong in being focussed on achieving financial freedom. But at the end of the day, each one of you has to determine the reason why you are doing all this. Achieving financial freedom so that you can stop working is a decent reason, but it sometimes does not fulfil as much as considering about how you can touch others' lives in more powerful ways should you have the luxury of time that financial freedom gives you when you have achieved it.

Community Service can be satisfying
So far I realise from my own volunteer activities that community service is something that satisfies intrinsically like no other thing can. I have to strike a balance now to spend more time with my family and on growing my investments and passive income so that I can one day decide for myself whether I need a regular job for my paycheck. But as I traverse along this journey, I realise that the ultimate goal, after providing for family's needs (and some wants) is really to touch more lives in whichever ways we can for the better.

You can only eat that many bowls of sharksfin or adorn yourself with that many Rolexes or BMW cars. After a while, we need something more intrinsically satisfying.

Be well and prosper.

Tuesday, October 16, 2007

Quick 5 Step Plan for Financial Freedom













































If financial freedom is your goal in life, then what steps are you taking to achieve your goal?

Let me share the five step approach in building up your plan for financial freedom.

5 Step Approach in building up your financial intelligence

Step 1: Know where you are financially in terms of net worth
How many of you actually have a personal balance sheet detailing your assets and liabilities? Knowing our assets and liabilities in clear detail is the first step in knowing how to reach our goal of financial freedom. During my army days, the first step in trying to navigate the ground to get from point A to point B on a map is to first find out where you are on the map!!! This is what we called orientating your map to the ground.

If you do not know where you are on a map in a relatively new terrain, you will find it very difficult to navigate accurately to reach your destination.

Your personal balance sheet will tell you what exactly is your net worth, where:

NET WORTH = ASSETS - LIABILITIES

Assets can be your home equity (amount that you can realisitically sell your home for, e.g. valuation), cash in bank, fixed deposits, value of shares, unit trusts (mutual funds), gold, foreign currency fixed deposits, bonds, CPF monies), guaranteed cash value of insurance policies minus your liabilities that include your outstanding credit card balances, personal credit balance, hire-purchase balances, car loans, housing loans, etc.

It is common to find yourself in a negative net-worth position. All of us who own homes cannot finance it 100% using cash and CPF and must take out some mortgage. The trick towards financial freedom is to have a plan to move ourselves from a negative net-worth to a postive net worth to whatever we have set as our target for financial freedom.

Step 2: Know where you are going in terms of expenses and savings
Your net worth only details your financial position at a point in time. What gets you moving from where you are financially to where you want to be is your income and expenditure. You either study, work, run a business or are retired. Whatever your trade, profession, business or vocation. In order to reach your financial goal, you must have a source of income and you must also spend money. The key to financial freedom is to make sure your income (almost) ALWAYS EXCEEDS YOUR EXPENSES SO THAT YOU CAN SAVE!

Some of you may complain, but I NEED TO SPEND $XX ON A, B, C. Yes, all of us have living expenses BUT YOU DETERMINE THE LEVEL OF LIFESTYLE YOU WANT. If you do not take responsibility for your spending, then you might as well stop reading my blog and just live your life as you wish. I do not wish to impose my ideas on anyone.

Let us be adults and realise we have the power to determine whether every dollar we earn is spent on expenses or is saved to be invested. It is about deciding between needs and wants. The more wants we succumb to, the longer it will take us to reach our target of financial freedom.

Back to the income and expenditure statement. Once you have noted down your income (which should include passive income from dividends, interest, capital gains) and expenditure, note down how much you can save each month. This forms the basis of your investment monies. This how you grow your investible savings to be deployed to beat the pathetic bank interest of 0.25% or even fixed deposits at 2%+.

Step 3: Determine what rate of return is needed from your monthly savings to achieve financial freedom
This is where it becomes clear. Once you have established your networth, how much savings is coming in each month, then you can start to compute how long it takes for you to reach your goal of financial freedom. A very basic calculation (with illustrative figures for returns) involves:
1) Insert figure for financial freedom, say, $750,000
2) Compound your monthly savings, say $1,000 for next 30 years at different interest rates
a) At treasury bill returns of say 2.3% = $517,774
b) At CPF special account returns of say, 4% = $694,049
c) At equities (say, 8% per annum) = $1,490,359.

It becomes obvious that the higher the returns (and usually with higher risk or volatility of returns), the faster or higher the future value you can get in 30 years' time.

Step 4: Decide which asset class to invest in based on what is your targetted return/time frame
Therefore, depending on your time frame and % return you are looking for, different types of assets will be able to meet your criteria. The question is are you ready for the amount of risk that you need to take and do you know enough about the asset classes?

Step 5: Understand the asset classes that give you the required return and take steps to invest in them
The earlier steps help you clarify why you need different asset classes. In general, a safe and steady plough everything into treasury bills approach will get barely get you to about half a million at today's treasury bill yields. But it is very safe and guaranteed. In order to reach your financial freedom target realistically in your working lifetime where you can earn income and save, you need to seriously consider other investment asset classes because by taking on some calculated risk, you can reap much higher returns and move yourself faster towards your target of financial freedom.

Investment is RISKY. Financial freedom is a journey that is FRAUGHT WITH RISKS. But to avoid taking calculated risks to seek higher returns is to accept the RISKS OF INFLATION ERODING OUR PURCHASING POWER AND TO RETIRE ASSET RICH AND CASH POOR.

You have the power in YOUR HANDS.

You decide WHAT RISKS ARE WORTH TAKING AND WHY.

You control your own financial destiny.

Be well and prosper.

Sunday, October 14, 2007

Investing in our own health!

One of the most important assets we have in our lives is our good health!

Health, wealth and happiness
In our quest for financial freedom, we sometimes forget that one of the greatest assets in our lives is to possess good health. What good is all the gold in the world if we do not have good health to enjoy it?

One of the side-benefits of being a conscript in the Lion City is that physical fitness and health is not far away from your mind. The annual requirement to pass the Individual Physical Proficiency Test (IPPT) makes male Singapore Citizens who are medically fit push ourselves at least once a year to complete a series of tests including chin ups, shuttle run, standing broad jump, sit-ups and the dreaded 2.4 kilometre run.

What I realised from National Service was that my own health was in my hands. The ironic thing was that despite knowing that physical fitness contributes to good health along with a sensible diet, I continued to be rather slack in exercise and only really picked up a regular exercise regime after I have completed my 10 years of reservist.

Nowadays I try to play tennis once a week on Saturday mornings and jog on Sundays as well as one of the weekdays. My diet is also rather healthy as my breakfasts consist of multi-grain cereals from Mondays to Fridays and I tackle hawker fare for breakfast only on weekends.

Investment in health pays dividends
Investing in our health by having a sensible diet coupled with moderate exercise pays dividends by reducing our sick-leave, medical costs as well as generally well-being and peace of mind. I now realise that by being careful in what you put in your mouth, your choices of diet can affect your waistline. In my case, the multi-grain/quaker oats breakfast diet over the past 1 year has resulted in my pants getting looser over time. It is a good feeling that there is some spare space between one's pants and stomach.

Exercise is also a good stress reliever and helps to boost up one's immune system to fight off coughs, colds and flus that affect our quality of life and the quantity of our wallets! Given that medical inflation tends to be higher than the average consumer price index, our journey towards financial freedom can be derailed if our health gets impacted through neglect and apathy.

Include health as part of your financial goals
Our quest for financial freedom should not ignore our health. One of my personal affirmations is,

"Everyday in everyway I attract health, happiness and wealth!"

I deliberately put health and happiness in front of wealth because I see wealth as the means to an end and not the end in itself. If you are healthy and happy, even eating porridge and salted vegetables allows you to be happy. Occasional newspaper articles featuring the lifestyle habits of folks who make it to the century mark in terms of their age usually show these longevity experts as having simple lifestyles filled with regular exercise, simple meals and a positive outlook in life.

If you haven't already done so, do include an affirmative statement in as part of your daily affirmation or goal setting. It helps you to focus on what is important, your health in addition to your focus on financial freedom.

Be well, be healthy and be prosperous!

Tuesday, October 9, 2007

Want to do, don't be scared

The hokkien expression goes, “要做就不要怕,要怕就不要做!”. (ai zo mai kia, ai kia mai zo) Loosely translated, it means, "if you want to do something, don't be scared, but if you are scared, then don't do it!"

Investing is risky!
Investing is a risky business, make no mistake about that. Whenever you invest your money in the stock market, commodities, foreign exchange, derivatives, money market instruments, unit trusts, etc. There is a risk that you can lose EVERYTHING. But that is life! Risks abound in every thing we do. Even if we do nothing, i.e. park our money under our pillow in a milo-tin, there is still the risk of inflation eroding away the value of our savings. Currently, with inflation forecast to around 1-2% this year and average bank savings rate of 0.25%, your bank savings now earns you the grand return of........NEGATIVE 0.75 TO 1.75% per year.

That means the purchasing power of our money is being destroyed slowly year by year as the banks take our money at 0.25% for savings and invests it in higher yielding (and usually more risky investments) assets that earns money for the bank and its shareholders.

Why are many of us so risk adverse?
Human beings do not like risk. Most of us want to live peaceful lives, with some degree of predictability and a little dose of excitement too but not so much to stress us out. This spills to some extent to our own investing lives. We want investments that have some degree of predictability in returns and yet doesn't have the volatile swings in price that on one day gives us paper gains and on another day gives us paper losses. We want our investments to be safe, to give us high returns, to make us financially free.

Our risk adverse nature could be due to us being more educated about how a fool and his gold are soon parted. As a result, the need for capital preservation (i.e. don't lose your savings) overrides the consideration for obtaining reasonable returns. But, the reality in investing is that..... THERE ARE VERY FEW INVESTMENTS THAT GIVE YOU HIGH RETURNS FOR LOW RISK. Either it is illegal e.g. insider trading tips on market sensitive news or you have the capital and clout to structure unfair investment deals and sell it to the unsuspecting small investor.

Hence, in order for us to realistically get a better return on our investments to at least beat the rate of inflation, we have to accept SOME risk in our investments. I am NOT advocating that you run off to the nearest Singapore pools outlet to punt on this weekend's English Premier League Matches or to buy a system-7 ticket for TOTO. Rather, I am advocating that we re-examine our approach to the risk-return trade-off and make an informed choice on which part of this risk-return spectrum we want to be.

Re-examining our investment mindset
In general, the higher (potential) returns you want, you will have to accept some degree of higher (potential) risk. Therefore, the tried and tested route of investing in fixed deposits and treasury bills will only barely keep you up with inflation as fixed deposits and treasury bills are giving a return of approximately 2% to 2.5% (depending on amounts and tenure of your principal amounts) around Oct 07.

To be able to beat inflation comfortably, we need to look at history. If you look at historical trends about stock market performance, the S&P500 has consistently been shown in the long-term to beat inflation and money-market instruments like time deposits (fixed deposits) and treasuries. Thus, one of the realistic ways for us to grow the purchasing power of our money in a consistent manner is to participate in the stock market.

Investing in the stock market
Stock market investing requires effort, discipline and understanding yourself. If you are a long-term investor and go for quality shares that are in stable or growing businesses, pays dividends and are held by institutions, you have a higher chance of protecting your capital and yet reaping the benefits of growth of the equity (stock) market.

Buying and holding stocks is not for everyone. As a general principle, most investment books recommend that you invest monies you can afford to lose. You should continue to have 3-6 months buffer in cash and cash equivalents e.g. savings, fixed deposits and treasury bills/government securities and consider parking spare cash you can afford to lose into the stock market. Stock selection is another topic by itself altogether although my general rule of thumb is to use dividend yield as one of the main factors to look out for in evaluating stock picks. My take is that if the dividend yield at the current price beats fixed deposits, CPF returns etc, then there is a higher chance I will invest in that stock compared to others, ceteris paribus. But of course, there are so many other factors to consider in stock picks such as future cashflows, growth prospects for the company's business, quality of management, general economic indicators that can affect the performance of the company and thus its share price.

Caveat Emptor (Let the buyer beware)
Investing in stocks IS RISKY. There is a real chance of capital GAINS, there is also a real chance of capital LOSSES. To completely ignore the equity market is to lose out on one of the avenues for investing. You will not lose anything but you will also not gain anything. Putting some of your investible savings into the stock market risks some of your money. Stock markets can collapse and be in bearish cycles for a long time, e.g. 1997 Asian Crisis, dot.com bust in 2000s etc. If you have holding power and pick quality stocks, you can participate in the upturns while riding out the downturns.

You have to decide what is in your best interest for nothing ventured, nothing gained.

Sunday, October 7, 2007

Why I do not like to invest in Unit Trusts (Mutual Funds)


One of my readers asked me if I could blog about Unit Trusts or Mutual Funds and this post is a result of being responsive to my readers. :-) Talk about semi-interactive blogging!

What are unit trusts?
Wikipedia defines Unit Trusts as "... a form of collective investment constituted under a trust deed."

It goes further to explain that, "Unit trusts are open-ended investments; therefore the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations."

How a unit trust works is that you invest a certain sum of money with a professional fund manager who will take care of buying and selling the underlying assets in order to grow the unit trust. Generally, this is achieved through the fund manager being paid a performance fee should he hit or exceed his performance targets.

Sounds good so far, doesn't it?

The Unit Trust "Catch"
Now the catch of any unit trust or mutual fund (US term) is that regardless of how the fund manager performs, they will continue to earn a management fee from you even if they perform way below their benchmarks. Hence, if you put your money with them, and the benchmark is the STI, and STI has performed, say 20% and the fund manager has only managed 10% return, he would have underperformed his benchmark. He may not be given his performance fee but by golly, he will continue to deduct his management fee for taking care of the unit trust portfolio while you are busy slaving at your job for income and savings to pay for the expenses of the fund.

Most fund managers do not consistently out-perform their respective benchmarks
Statistically, most fund managers under-perform their benchmarks over the long-term. If you believe in the pareto principle, i.e. the 80-20 rule, you will realise that only a small selection of good fund managers are able to consistently outperform their benchmarks. The key here is consistent outperformance. In any given year, there will be fund managers of unit trusts that achieve sterling results. But how many of them can replicate this performance year-in year-out. Most investment books "One Up on Wall Street" by Peter Lynch or "Random Walk Down Wall" Street" by Burton Malkiel all point to one fact, that it is the minority that consistently outperforms their respective market indices after factoring in fund expenses.

I used to invest in unit trusts. I still have some but they form the smaller portion of my investments. Ever since 2003 when I began to learn to manage my own money, I have not invested in any new unit trust since then because I just do not believe in paying for mediocre performance. I can do that all on my own without the management fees and expenses charged by the fund against my investment monies. :-)


Should I invest in unit trusts then?
Unit trusts are not without their advantages. For instance, if you wanted to participate in the China market for the last 5 years, the only realistic avenue for the small investor was to invest in China through a unit trust. The growth of China has seen heady double digit growths in these sectors. Similar for India and other emerging economies. In addition, many of us have a day-job and cannot afford the time to be monitoring the markets all the time.

However, many financial gurus usually advise small investors to buy a low cost index fund and put some money in it through a regular investment plan and go for the long-term of 20-30 years. That is the way to beat money market, inflation and be relatively safe from the fluctuations of specific stocks or sectors.

I feel that investing is a very personal choice and it is up to each person to decide based on their experience, skills and objectives. Most unit trusts perform average and I hate to pay management fees for average performance. Diversification is also overrated to some extent and some funds e.g country or sectoral funds can even be riskier than holding individual blue-chip shares on SGX in my view. Take the example of Technology funds that tanked when the dot.com bubble burst in 2000-2001. Where are these funds now?

Before you decide to invest in unit trusts, at least visit the moneysense website and get information on making sense of unit trusts before you take the plunge.

There are many other investment asset classes to consider, do invest in learning more before parting with your money.

Be well and prosper!

Tuesday, October 2, 2007

Mitigating the Risks of Investing in Foreign Currency Fixed Deposits

Foreign Currency Fixed Deposits - A Whole New Ball Game
The risk of foreign currency fixed deposit is the risk that the foreign currency you invest in loses its value (or depreciates) against Singapore Dollar. That can potentially wipe out the higher interest you earn from putting your money there. Therein lies the potential risk, and therein also lies the potential returns as well.

I was fortunate in investing in my first foreign currency fixed deposit (FCFD) just after the sharp correction in New Zealand Dollar (NZD) and managed to lock in at NZD/SGD 1.07 at a rate of 8.4%. I was lucky in that now NZD has risen against SGD to about NZD/SGD 1.12 or +4.67%. This could have easily been reverse (i.e. -4.67%) if the US Federal Reserve had not cut the Feds fund rate thereby contributing to investors seeking better returns from higher yielding currencies such as NZD or Australian dollar (AUD).

Mitigating against foreign exchange loss risk of foreign currency fixed deposits
However, you can mitigate the risk of the foreign currency depreciating by considering the few options:

  1. Rollover of both principal and interest
  2. Rollover principal but collect interest
  3. Invest in foreign currencies whose economies are strong

Rollover of both principal and interest

Foreign exchange rates rise and fall over a period of time, if you have holding power, you can theoretically roll over your forex fixed deposit indefinitely or until the exchange rate is favourable to mitigate the risk of exchange losses wiping out the additional interest you get from investing in higher yielding currencies.

Rollover of principal but collect interest
Because the main risk of foreign exchange loss is due to the principal amount, you can reduce this risk by leaving your principal in the foreign currency (roll-over of principal). This helps you mitigate the loss because if your foreign currency interest is high e.g. NZD at 8%, SGD has to appreciate by more than 6% for you to be better off to have left your money invested in a Singapore dollar fixed deposit.

Invest in foreign currencies whose economies are strong
While we cannot predict exchange rates, we can see underlying themes e.g. NZD and Australian economies are doing okay as they benefit from the minerals boom created by demand by growing economies of China/India. Inflation is also rising in those countries and hence there is a higher chance of their central banks raising rates rather than cutting rates, as compared to US where many feel that the US Federal Reserve will likely cut rates in Nov 07, thereby weakening the USD further.

Foreign currency fixed deposits are with risks, and hence you should not be putting 100% of your investible savings but the current interest rates ranging from 4-8% interest for deposits is 2 to 4 times what you can get from an equivalent SGD time deposit.

You have to decide if the risk-return trade-off is worth it.

Be well and prosper.

Monday, October 1, 2007

Riding the Bull: September 2007

The picture above shows the famous bull that you can find in New York City which was taken in 2002.

Riding the bull in the equity market
The Singapore stock market has been relatively bullish this last week or so following the Dow's performance in breaking 14,000 points. The STI is also testing new highs at 3,800+ and news about the private property as well as HDB resale market has also grown significantly.

For my own personal investments, I suffered some realised losses because I had bought into a few stocks that were trading at relatively high levels prior to the August 2007 correction. So when the correction hit, I didn't immediately sell but waited about 2-3 weeks to get out of the under-performing stocks and bought into banks and oil and gas sectors selectively as these were available at reasonable prices relative to their dividends as well as their overall business.

My few picks are STI component stocks and have benefitted from this recovery into bullish momentum that sees them performing well above any fixed deposit, treasury bill or even the CPF 4% return on Special, Medisave, Retirement Accounts.

Riding the momentum of the market
Whilst it is challenging to consistently outperform the market, there are advantages to riding the momentum of the market if you have the experience and necessary temperment to invest in stocks and shares. The key is discipline, i.e. to invest only monies you can afford to lose and to have the patience to do a little bit of research into the companies of the stocks you are investing.

Investing money you can afford to lose puts you under less pressure. This is because when you invest using borrowed money e.g. on margin or using share financing, the interest costs eats into your gains and if you make paper losses, you may need to top up your margins as the value of your shares drops below the amount you borrowed. In addition, if you are a contra trader, that is, you buy and sell shares within T+3, you will also feel pressured to sell or buy back within this period to close off your position or risk suffering big losses should your decision be wrong.

A buy and hold strategy can pay off if you hold quality stocks that are undervalued. Of course, that sounds good in theory but how do we put it into practice? I do not have any magic formula on my own neither do I claim to be able to generate extraordinary profits. But so far my foray into investing in equities has yielded me realised annual profits of about 2 months salary on average in the last 5 years. :-)

I realise that reading helps you develop the type of mindset and approach to managing your own money. By continuing to invest in expanding incrementally your understanding of both stock market mechanics as well as investing psychology, you become more attuned to opportunities in investing.

Investment is about risk taking
Investing is inherently risky. There is no guarantee of making money and there are real risks of losing it all. However, if you are serious about growing your own retirement nest egg and to have a big say on WHEN and HOW you are able to retire, you should consider taking some calculated risks now when you still have a job, a stable income and your health.

By participating in the growth of markets, one can then grow our investments prudently while making considered investment decisions while balancing risk and return. There is no risk-free asset that yields a high return. To get a reasonable return (to me it is at least 2-3 x rate of inflation or rate of risk-free treasury bills) of at least 6 to 10%, I need to take on some risks and invest in the Singapore Exchange.

While I have been fortunate because my returns have been mostly due to blue-chips performing in line with the general economic conditions, I was also fortunate that I took that first step back in 2003, to learn to invest my own monies in equities (stocks and shares), treasury bills, foreign currency time deposits and plain vanilla fixed deposits. This is just a small fraction of the investment assets available but has allowed me to grow my savings at a rate faster than inflation.

Different paths but one similar destination
We all take different paths in our lives in terms of how much and how do we spend, save and invest our hard-earned monies. No matter how we want to live our lives, we have to recognise that ultimately, each of us has to take responsibility for our returns.

Decide what and how you want to achieve your own definition of financial freedom for the path is unique to each of us.

Be well and prosper.