STE: "I lost money enough to buy a 5 room flat in 2015!"

I always enjoy reading STE's very thoughtful guest blogs. Regular readers would know who I am talking about.

If you are new to my blog, you might want to read STE's other guest blogs as primers. You will find his name in the left side bar of my blog under the heading "Guest Bloggers".

Here is STE's latest contribution:

Honey, I lost a 5 room HDB## value in our stock investment in 2015!

Yes, that’s how our portfolio value fared as compared to Dec 2014 …but honey, don’t worry, market is such volatile in nature and this decrease is quite mild as compared to real crisis time e.g 1998 / 2000/ 2008 etc, which any portfolio value could be wiped out by 40 – 60%.

“But how about next year’s performance ?”

Well, we don’t have “ crystal ball “ to make any forecast, it might be better or worse . If anyone said they could give you a forecast or figure on stock’s performance next year, just listen with wide smile and walk away quietly .

Market is “random “ in short term and we should not be “Fool by such randomness “ ( read the book by Nassim N Taleb and Burton G Malkiel ). As I said, market could be worse or better next year, it could have another double digit drop in STI by end 2016!  It is anybody’s guess (read the book by Nate Silver ,, The Signal and the Noise ).

“In such volatile market, do we need to sell our share to avoid further loss in capital?”

Well , it depend on the stocks in your portfolio, any selling should be done based on changes of fundamental or underlying business of the stock and not the price. Panic selling based on price will not be good or help in your long term investment journey. We might be tempted to sell in panic ( read the book by Jason Zweig : Your Money and Your Brain and Richard H Thaler : MisBehaving ) but beware of the consequences of “market timing  as it may affect long term return of your investment .

“Well , you said investing in STI Index fund should be more stable and less risky, giving us around 8-9 %  average return p.a in the long run but why STI is down by more than 13% this year? Is Index investing safe?”

Ummm…. 8-9 % Index return (market return)  is being drawn on very long horizon (say 20-30 years). As mentioned, market is very volatile in short term, it can fluctuate from – 20 to 30% to  + 20 to 30% at any time.

Even in index investing, we should not lose faith in such investing strategy due to short term market volatility. Well, this is the “ Flaw of average “ ( Read the book by Sam L Savage : The Flaw of Average ). We tend to take the average figure by granted, eg we “anchor “ the figure of 8-9% return as benchmark of our return, but that average figure derive from long period of time .

“ What should we do if our portfolio value down by another 20%-30% next year? We may lose the value of a condominium then? “

Well , remember the concept of “ Mean reverting “ in my earlier post here in ASSI? The market moves in cycle and tend to revert to mean.

As mentioned earlier, “volatility “ should not be purely associated as risk … opportunities for profit are inseparable from RISK.

Honey, we deployed some of our cash to buy some stocks in 4^th Qtr 2015, well , price may drop further , really nobody knows but we see some value based on historically and statistically speaking . 

We often asking what will be the return of our investment in coming months or years.  But the more appropriate question to ask should be: “what will be the chances / probability of having returns in coming years.”

Allow me to quote: "Investors want certainty, and we cannot give them certainty. We can give them high probability; we cannot give them certainty" by Charles William Hamilton.

Statistically speaking, if market down by another 20-30%, chances of rebound in following year will be high if we could hold it for much longer period ( not using much leverage in stock investing ). We should deploy more cash if that really happen as what we did in 2009/2010.

Long term Market return of SP500 from 1924 till 2012:

“Do you think now is right timing for us to put our money into the market?”

Well honey, again, investing is about 3M = Market , Mind and Money Management.
 

Market :

As mentioned , market is volatile and unpredictable in short term , but we can see the trend in long term.

Market is not really cheap or deviate very far from long term mean / regression line but at the same time market is also not in very high valuation from long term mean. That’s why I said not too cheap and also not too expensive. Statistically speaking, it could down much from current level if real crisis hit . That’s why we are not deploying all our cash into the market at this point of time.

Always have “margin of safety “ and remember,   market could be irrational much longer than your think.  Buying at market PB of close to -1 SD will definitely give us some margin of safety.

90% of market movement in the short term is by psychology and only in long term , it shown an upward trend due to increasing economic value by demographic / technology innovation / productivities etc.
 

Mind :

 

Andre Kostolany, Germany's Stock Market Guru, said "Psychological create 90% market".
 

Investment is driven by "Psychology and full of Fear and Greed". Be a stoic investor and minimize our “Emo and Ego” throughout the journey of investing.

Understand the pitfalls and shortcomings of our Mind will help ( read book by James Montier : Behavioural Investing ) to know better about bias  ( Confirmation biases / Over-Confident / Anchoring / Loss Aversion / Endowment effect / Mental Accounting / Money Illusion etc ).

This might avoid common mistake of “selling in panic / buying hot stock / keeping loss stock (even knowing Fundamental has change and hoping for rebound ) / trading too much / looking at 52 weeks high / low as selling or entry price etc.
 

Money Management :

As I mentioned in earlier post, understanding our Cash Flow / expenses/ debts level  is very important even before we talk about Investment.

"Well, honey, don’t worry, we still have positive cash flow even our stock value dropped by that much. We could still save more than 60% of our “portfolio income “ after all expenses in 2015."

We live like it is before my “sabbatical leave “ in Nov 2014 , we manage our expenses by not spending on things beyond our mean. Our standard of living has remained the same.

Life is about making choices and what kind of life style we want is a choice. Everyone has expectations on the life they want to live with. We cannot really say my life style is good but it suits my expectations.

We are happy that we could go on 3 holidays and have more quality time with our kids in 2015 since my early retirement.

“Honey, some people said “dividend income “ is just from “right pocket to left pocket “ due to price change after XD, what do you think about this ?

Ummm… is quite subjective. Let’s see if I could explain better based on my own understanding.

 

Well, at least some institution or government agency do not recognize “dividend“ as income. I have seen this recently in one of the blogs post that he is facing problem is explaining “dividend“ as income in getting his domestic helper since there is no CPF contribution from employment or IRA’s statement to show that.

"Honey, we may face the same problem since these agency / financial institution do not recognize “dividend “ as income"
(hahaha.  that’s just side joke …but is true and facts.)

Well, you may notice that I use “portfolio income“ and not “dividend income“ in above mentioned. Dividend from stocks is just part of the income generating from one of the asset class. Income can come from Fix Deposit with bank / rental from housing / interest from Bond etc .

Each asset class is having their own Risk/Reward characteristic. Even cash or FD is subject to risk of value depreciation due to inflation and bond also could subject to default by issuer .

With stocks, we could see prices fluctuate second by second. We don't see this fluctuation when collecting rental from real estate which we rent out, for example. We don’t get quotation on the value of our house minute by minute (since we do not intent to sell it).

Stock prices are not static. Sometimes, stocks can be overvalue or undervalue. In an extreme example, if price stay at $1 and the company announce 10cts of dividend each year, price adjust after ex-d, will the price become –ve in Year 11? No, as people will see the value from the asset which generated the consistent cash flow and reflect in stock price eventually. It is not a zero sum game. Well, accounting is useful but sometime is not meaningful.

It would be more practical to look at the capability of the underlying business in generating the “cash flow“ to pay out the dividend or is the dividend declared from cash flow derive from “debts“ or other source of “creative accounting “.

As AK mentioned, a “Healthy cat“ is more important than “regardless white cat or black cat , if it could catch the mice“.

Lastly , look at our cash flow and spending money wisely is more important than defining the “cash flow“.

Appendix :

STE's Portfolio Income generated from share (exclude Bond / FD /CPF) in 2015 : $ 180,454

** We should  treat CPF interest as part of our total income as this will be our money eventually .

We continue to do voluntary contribution in 2015 although we don’t have contribution from employment .

Combining average interest of around 3.1 % (OA/SA/MA) is rather high since we treat it as AAA low risk bond rate .

Well, this another “margin of safety“ in our portfolio, with combine interest of more than $20+ K p.a from CPF, this would gave us another $ Mil upon reaching our withdrawal age of 55 .

 

“We will be fine, honey! You know, we are very “kia shi“ type of people that having more than 30 stocks in our Portfolio as we diversify across sector and industry.” This is to ensure that we will not have any problem in case any counter went “kapuk“ in our portfolio since it will not take more than 8% of our total value.

Well, same time we will not see our portfolio value growth much since it is very diversify and a ten bagger in our portfolio will not increase the value much. Again, it suits our investment strategy.

Lastly, wishing all A very Happy and Prosperous New Year in 2016 and hope all will have a very successful investing journey ahead! Cheers!

A big thank you to STE for this guest blog which is loaded with wisdom.

Related posts:
1. Invest for income and ignore the two Ms.
2. What to do as stock markets crash?
3. AK is showing off his CPF-OA and MA.

AK is showing off his CPF-OA and MA numbers.

A reader said he shared my update on my CPF-SA with his elder brother and his brother was not only incredulous but called me a show off. 

I consoled the reader by saying there are many different people in this world and they will not all react in the same way.

Having said this, I must say that it took a lot to get me out of my comfort zone to share the numbers. They should be confidential. 

However, because AK's identity remains largely a secret, he has some protection. With all the numbers out in the open, AK will need his anonymity even more.

When I share personal numbers and they could be my passive income, my CPF-SA, OA, MA or even my body weight, I am sharing important messages. 

What people wish to focus on and how they want to interpret the blog posts, I have no control over.

Now, at risk of being labelled a show off once more, I am sharing numbers for my CPF-OA and MA. Again, there are important messages here:

What are the important messages? I won't repeat myself. If you are interested:

See my message on the CPF-OA: here.

See my message on the CPF-MA: here.

Of course, for the recent blog post on my CPF-SA savings (here), the most important message was that the magic of compounding takes time to work and giving it a boost by injecting more funds in the early years, it gets even more magical.

Alamak, I just repeated myself.

I am glad that talking to myself has helped many people. I used to feel somewhat sad but I guess I have to accept that there will always be many more who ASSI cannot help because they refuse to help themselves.

So, go ahead, share the messages but don't feel down if the reactions are negative. At least, you have tried.

Related post:

Getting the most out of ASSI.

An update on AK's CPF-SA which outperformed in 2015.

Exactly one year ago, I shared my CPF-SA numbers, as a friend put it, to shock and awe the most cynical of readers into action. 

I think it worked as that blog post has received almost 400 FB Likes so far and also generated quite a bit of discussion.

Last month, I receive a request from a reader:

At that time, I was not sure that it would be helpful to share my CPF-SA numbers one year on but, on second thoughts, it could be a good idea. 

After all, the shock and awe generated by that blog post a year ago could have worn off by now.






So, here are the numbers:

"VC" stands for voluntary contribution. 

AK is not allowed to do Minimum Sum (MS) Top Up to his CPF-SA anymore as he has exceeded the MS.

There was a "VC refund" for excess contribution made the year before. 





I blogged about it here: 
The CPF is a national PONZI scheme.

So, I received a full year interest of $8,210.28 for my CPF-SA savings. 

The interest I receive yearly, I believe, would more than cover the planned 3% annual increase in the MS, now the FRS, from year 2018.





To find out more about the BRS, FRS and ERS, read this: 
Proposed changes to the CPF system.


All of us should try to benefit fully from the CPF system and make our CPF savings a cornerstone of our retirement funding strategy. 

To me, it is really a no brainer.





The CPF outperformed the S&P 500 and the STI in 2015. S&P 500 was flat. 

The STI declined 15% and Barclays junk bonds ETF dropped 12%.
Source:
http://www.cnbc.com/2015/12/30/singapores-cpf-saving-plan-beat-markets-in-2015-with-steady-returns.html

We should always make room for a risk free and volatility free component in our investment portfolio. 

What might that be? 

I am sure you know the answer.





(If you are new to my blog, you might want to read related post number 1 below.)

Related posts:
1. A lot of money in my CPF SA is... 
2. 2016 changes to the CPF and SRS. 

2016 changes to the CPF and SRS for a better retirement.

I was reading the papers on changes to the CPF and SRS which took effect on 1 Jan 2016 and thought to myself that working Singaporeans are a lucky bunch.

If you are a middle income worker, rejoice because mandatory CPF contributions by both employer and employee per month are now based on a higher salary ceiling of $6,000 a month instead of $5,000 a month. Your CPF savings will grow at a faster clip.

If you are a worker between 50 to 65 in age, your employer will now contribute an additional 0.5% to 1% based on your monthly wage into your Special Account (SA). 

If you are 55 years old or older, you will also receive an additional 1% interest on your first $30,000 in CPF savings which means you get 6% interest per annum, risk free!

It would be a good idea for younger readers to communicate this change to their parents. If at all possible, consider topping up your parents' CPF SA or MA if they do not have that first $30,000 in their accounts. 

We really should not pass on a 6% annual return from a AAA rated sovereign bond!

A comfortable retirement need not be a dream.

As for the SRS, the ceiling is raised to $15,300 for Singaporeans and PRs. It is $35,700 for foreigners. So, if you pay plenty of taxes each year, this is another tool to help pay less in income tax.

I think it is important to count our blessings and not keep complaining. Probably, there is more than a handful of people who think that the changes are not good enough. Fion Lau, 41, said that the changes do not go far to provide retirement adequacy.

Well, I would like to remind Fion that the CPF is, like I always say, a cornerstone in our retirement adequacy strategy. It is not the entire foundation.

Related posts:
1. SRS: A brief analysis.
2. Retiring before 60 is not a dream.
3. Retirement: Buy a AAA rated bond.

Filial son working hard towards financial security in 2016.

Young people often feel invincible. I am not saying that it is a bad thing but it is important to realise that we are not really invincible and that life will throw problems our way.

So, what to do?

Have measures in place so that the feeling of invincibility has some genuine substance beneath it. Then, the only thing that could destroy us would be Kryptonite...

Sorry, couldn't resist that.

Here is a recent conversation with a very sensible young person:

Hi AK, 

I'm 26 this year. been working 2 years plus all due to due to NS. 

I have been reading your blog for one whole week and i realise you share alot of impt details.

I start to feel very stress when i login to both my parents singpass to check their cpf. both of them are self employed. my dad 58yo, oa and sa is less than 1 k. his ma is have 40k. my mum 56yo, oa,sa,ma all less than 500. they always claim that they have insurance. but after checking from moh site, they doesnt have any H&S insurance at all.

As i earn only 2300 each month. for myself i already brought dps and h&s already. this week i have been meeting AIA, Prud and going to meet NTUC agent next week. i read alot of advise from your blog.

I have transfer all my oa to sa and using excel to calculate how much i gain from SA in the next 25 years. For now, i doesnt have much savings, but i plan to pay insurance for my parents using my MA and giro as well as i plan to apply UOB one card or OCBC frank card to gain more interest. (tips in your blog) however their age is expensive to buy insurance now. but i will check out the enhance income shield for them and buy the maximum age so at least the price is maintain rather than increase if they need to renew.

I just paid 20k for my part time degree. my saving only have 2k now. i did my planning on expense and saving. once i settle my parents H&S and term plan. I aim to save up 5k and start doing s-reits first, then follow by stock to get 4-6% yield each year. but i will also ensure i do my Emergency fund to least me at least 6 mth first.

I am going to finish my studies in jun 16 and i plan to change job, hope to pinch a better pay. I also learn from you, i do freelance designer to earn extra money, recontact iphone and sell yearly to gain extra cash to pay my mobile bills and expense,

I hope you can continue to share more knowledge in stocks and reits. i will spend time to read TA and FA first, and save up money first. Meanwhile waiting for MR market to give us the opportunity to enter a good price when he is depress.

Lastly, i just wish you good health and thank you so much once again. i hope to have the chance to meet the session with you next time. And also i start to share with my frens about oa transfer to sa. but like you said. most of them doesnt bother and feel lazy. so I just ignore them and let them regret in the future. Last of all. wishing you and your family stay healthy and happiness.

Thanks AK. you change my life.

AK's reply:

Hi S,

Welcome to my blog.

I can appreciate your anxiety but you are taking steps to rectify the issues you have discovered. That is a good thing. Of course, it will take time.
Rome was not built in a day.

For your parents' H&S needs, I would like to make a small suggestion that could help you save some money.

If your parents do not mind staying in Class C or B2 wards in government hospitals, there is no need for you to buy H&S policies from any of the private insurers as they only need Medishield Life. It will be less of a burden on your pocket.

I shall look forward to more updates on your journey towards greater financial security. In the meantime, gambatte!


Time is a dwindling resource for all of us. All young people have one big advantage and that is time is on their side.

With the new year upon us, I hope this blog will nudge younger readers to consider their own situations and what action they might want to take to achieve financial security.

Wishing one and all a financially more secure and happier year in 2016!

Related posts:
1. Graduating soon? Think financial security.
2. How much to have in emergency fund?
3. Beef up and achieve financial freedom.
4. Do the right things and transform our lives.
5. Medishield Life and hospitalisation.
(Read related posts too.)