How to buy foreign currency fixed deposits in Singapore

As part of my ongoing efforts in diversifying my investments and looking for higher yielding instruments, I started to invest in foreign currency fixed deposits with Maybank using iSavvy.

Fixed deposits (FD) vs. foreign currency fixed deposits (FCFD)
We all know what fixed deposits or time deposits are. These are monies we deposit with a bank for a fixed tenure (time period) for a fixed interest rate. Fixed deposits are relatively safe instruments as unless the banks collapse, your principal and interest are much safer compared to other investments such as stocks and shares (equities) or unit trusts (mutual funds).

In return for this relative safety, the returns or the interest earned from fixed deposits are very low. On average, they hover as low as 1% plus to 2% plus. There is always a risk-return tradeoff in investments. Generally, safer assets such as fixed deposits give you a lower return compared to stocks and shares, derivatives (options, futures), commodities etc.

However, there is a type of fixed deposit that can potentially give you a much higher interest than the 2% plus you are getting and that is the foreign currency fixed deposit. What is a foreign currency fixed deposit that you can place with a Singapore bank? A foreign currency fixed deposit (FCFD) is similar to a singapore dollar fixed deposit in that you are also depositing an amount with the bank for a fixed tenure and for a fixed interest rate. However, the difference is that this deposit is denominated in a foreign currency.

Risks of foreign currency fixed deposits (FCFD)
Depositing in a foreign currency fixed deposit is available at most of the banks in Singapore. However, this type of fixed deposit is inherently riskier than the Singapore dollar fixed deposits. This is because exchange rates can go up and down during the tenure of the deposit. This can potentially cause your deposit to lose value if at the end of your FCFD tenure, the foreign currency depreciates or loses it value compared to the Singapore dollar. Conversely, if the foreign currency appreciates or gains its value compared to the Singapore dollar, your deposit and interest earned could gain in value.

Let us take an example to illustrate this risk.

Assuming you place a Australian dollar fixed deposit of AUD 10,000 for 12 months at an interest rate of 5%.

Principal in Australian dollar: AUD 10,000
Principal in Singapore dollar (at SGD/AUD : 1.20) : SGD 12,000
Interest earned in AUD at end of 12 mths: AUD 500

If you had put that same amount of Singapore dollars for 12 mths at 2% interest,
Principal in Singapore dollar: SGD 12,000
Interest earned in Singapore dollar at the end of 12 mths: SGD 240.

Scenario 1: Assume Australian dollar strengthens or appreciates against Singapore dollar (SGD/AUD: 1.30)
Interest earned in Singapore dollar at end of 12 months at 1.30 : SGD 650 (AUD 500 x 1.3)
Principal converted back to Singapore dollar at end of 12 months at 1.3: SGD 13,000
Principal + Interest in Singapore dollar: SGD 13,650

Under scenario 1, congratulations, you have made a better return of SGD 410 (SGD 650-240) over your interest and a exchange gain of SGD 1,000 (SGD 13,000-12,000). So you end up with a total return of 13.75% on your intial deposit of SGD 12,000 in the Australian dollar fixed deposit.

Scenario 2: Assume Australian dollar weakens or depreciates against Singapore dollar (SGD/AUD: 1.10)
Interest earned in Singapore dollar at end of 12 months at 1.10 : SGD 550 (AUD 500 x 1.1)
Principal converted back to Singapore dollar at end of 12 months at 1.1: SGD 11,000
Principal + Interest in Singapore dollar: SGD 11,550.

Under scenario 2, you realise you have made a better return of SGD 310 (SGD 550-240) over your interest. HOWEVER, you have made an exchange LOSS of SGD 1,000 (SGD 11,000-12,000). Your principal + interest exchanged back to SGD gives you SGD 11,550 or a LOSS of SGD 450! Hence, instead of enjoying a return of at least 2% if you had deposited in Singapore dollar fixed deposit or even 5% if the Australian dollar didn't move against Singapore dollar, you made a loss of 3.75%!

Therein lies the risk of FCFDs. The volatility of exchange rates during the tenure (time period) of your foreign currency fixed deposits can cause the typically higher interest of 5% to 8% on currencies such as Australian dollar, New Zealand dollar to be offset by the loss in your principal when you exchange back your foreign currency deposit to Singapore dollar.

Why do people still deposit in FCFDs given the risk?
Many investors still put in their monies into such FCFDs despite the risk because they recognise this risk and are willing to accept the volatility in return for higher returns. Others take up risk mitigating strategies. One such strategy that I have adopted is to invest in FCFDs when the exchange rate is relatively favourable, i.e. when Singapore dollar is relatively strong or when the foreign currencies have weakened relative to Singapore dollar.

Another strategy is not to exchange back your principal. Because it is the risk of the exchange loss on your principal amounts in foreign currency that can potentially wipe out all your additional interest earned on your FCFD compared to Singapore dollar FD, what I did was to earmark my FCFD for long-term investment and allow it to auto-roll or auto-renew. What this means is that I am deferring the possible exchange losses/gains to a later date because so long as I do not exchange the currency back to Singapore dollar, I will not suffer a gain/loss.

However, this is not 100% foolproof because if in the long term Singapore dollar appreciates against the FCFD currency, then I will still be hit by exchange losses in the future.

The only true way to mitigate this risk is to use derivatives to hedge yourself against the risk but this is outside of my scope as a small investor.

Invest at your own risks
What I have shared are just a way that I have diversified my portfolio by putting aside a relatively small portion into higher yielding assets. Currently Maybank's iSavvy foreign currency fixed deposits for 6 months in NZ dollar yields about 8%. This is 4x the average 2% interest you can get from Singapore dollar fixed deposits. This is risky because the New Zealand dollar fluctuates against Singapore dollar and hence this is not guaranteed returns.

I am prepared to hold for the longer term and only exchange it back if I need the cash or when the exchange rates are favourable. Please do your own homework and consult with professionals about the risk before investing as this is very much more risky if you do not have holding power or if the Singapore dollar is on a sustained rally against major currencies.

Consider your own risk profile and decide for yourself if this type of investment is for you.

Be well and prosper.

Like father like son, like mother like daughter

How many of us realise that our financial habits are a reflection of our parents' own habits?

Follow daddy and mommy, okie?
Our parents are arguably one of the most influential people in shaping our behaviour towards money. Some of your parents may adopt a frugal and prudent approach towards money. Some of your parents may adopt a let's get the lifestyle we want based on instalments, deferred payment or credit. Whatever is our parents' attitude towards savings, spending and investment somehow trickles down towards our very own ways that we manage our own finances.

My own parents
My own parents gave me one of the greatest gifts without realising what they did: the gift of frugality. Both of them grew up in very modest backgrounds where the father was the sole breadwinner while the mother was a home-maker. In the case of my mother, her childhood was even more harsh as her mother (my maternal grandmother) passed away when she was young and she had to take on the household chores of cleaning, cooking and washing when she was all of twelve years old. This instilled in her a fierce determination and discipline to make a better life for herself by working hard for the same employer for 30+ years and retiring.

My father who was originally from Malaysia, came to Singapore to build a better life and also worked hard with the same employer for almost 40 years before retiring. Both of them saved and scrimped for our family to have a better life and we did thanks to their sacrifice and love.

Thrifty habits
I remember when I was young, my mother would say she doesn't like to eat this or that when the dishes for the family meal was not sufficient as she had cooked just about right for our family dinner. She would willingly go a bit hungrier so that I could eat more instead of cooking another dish that would use up water, gas and meat/veggies. My parents both kept very frugal habits, for most of their lives, they lived without a car and our family homes were always well within the affordable limits of their combined salaries.

Now that I am all grown up with a family of my own, their frugality has filtered down to me. Relatively speaking while my lifestyle habits would be considered lavish by their standards e.g. a cup of coffeebean coffee on occasion while they would do with the simple kopitiam kopi-O for their caffeine fix.

Enduring good financial habits
I have adopted many of their frugal habits such as not spending beyond my means. Always saving a portion of my income and a more conservative approach to investments in my early years through fixed deposits and savings. This had allowed me to protect my investment capital although it did not fetch me spectacular returns early on in my career. The dividends from this approach paid off when I bought my own home as I could afford to invest more of my savings into home equity rather than borrow 80% from the bank. As a result, I am very lowly geared and am overall in a positive networth position after working for a decade plus.

In addition, I eschew consumer debt and pay off my credit card bills in full at the end of the credit terms. I reward myself with little luxuries in life when I make realised gains from my time deposits or stock market capital gains. I typically allow myself to spend 10% of the gains and lock in the rest for other investments such as treasury bills and equities.

A living legacy
My parents also taught me never to keep up with the Lims, Alis and Rajahs in our community as that was the quickest way to financial difficulties. While now I am better educated and well-versed in finance and investments than they ever were, my parents (especially my mother's) wisdom in money is a living legacy I will carry on with me and pass it on to my future generation. What they have given me is immeasurable and I am thankful for their wisdom, patience and love.

What is your own legacy?
What is the legacy that your own parents are leaving you in terms of your attitude towards money. As you examine your own approach and behaviour in managing your own finances, do you realise you are doing the right things which they did or are you repeating the mistakes that they did. We can all learn from the past and begin to take control of our financial destinies because it is not cast in stone.

My approach to ultimate financial freedom has been to:

1) Live within my means
2) Save and invest
3) Learn, learn and learn about investments
4) Repeat 1

It can be achieved, one realistic step at a time.

Be well and prosper.

Planning for retirement

I will be delivering a mandarin speech at my mandarin toastmasters club meeting.

Here is the draft speech in English and Mandarin. The English version are my own words while the Mandarin version is edited with the help of my toastmaster friend, Elaine.

Be well and prosper.

Making do with less: reducing life's expenses little by little

I was away on holiday for 10 days last month and called up my newspaper agent to temporarily stop my newspapers for the duration of my holiday. When I got home after my holiday, I realised that the agent had forgotten to restart my newspaper delivery and I had to only make do with the Today newspaper which happened to be delivered to all residents in my apartment.

Because I already have a Straits Times online subscription, I could still get my daily dose of the Straits Times without spending more money on the subscription. Hence, I decided to permanently stop my subscription to the newspapers every morning.

Doing the same with less
In my quest for financial freedom, I realise that you can do the same with less money little by little when you examine expenses in your life whether you really NEED it. In my case, I already have a subscription to the physical newspapers coupled with a subscription to the online edition. Therefore, in my case, I was paying twice for the same news content which was somewhat wasteful. My estate was fortunate to receive a copy of Today newspapers free-of-charge and hence I still had another paper to satisfy my daily dose of major headlines in Singapore with my morning cuppa.

Some of you might baulk at the idea of pinching pennies when you can afford to pay that $0.70 per copy of the Straits Times. That is not the issue, the issue is how you can examine your own life to find out really what you can do less of. I too could afford the $0.70 per day but by removing this expense which could be met by my Straits Times online subscription, this $0.70 pays for my morning cup of coffee from the cafeteria. :-)

Squeezing more out of existing stuff
Another example of squeezing more value out of stuff we own is to make full use of our household appliances until they break down. My 6 year-old Sony CRT television set is still going strong and I have resisted the urge to upgrade to an LCD or Plasma TV throughout those years. I do not intend to upgrade until the set breaks down as it is already beyond its warranty period. The same goes for my refrigerator and my washing machine.

Financial freedom is within our grasp
The more I save money and the more I apply these savings to investments, the more my goal of financial freedom beckons. I still have a long way to go but it is fun to see how you can squeeze out the maximum value out of what we have and see the spare savings materialise right before your very eyes. Given that the Central Provident Fund (CPF) minimum withdrawal age is steadily being pushed to 65 and beyond, it is very clear that if you want to retire earlier than 65, you must be prepared to build up your retirement nest egg independently of the CPF minimum sum and thereby empowering yourself to retire at the age where your passive income exceeds your living expenses even without considering CPF minimum sum.

Each of us has to decide what is important in our own journey to financial freedom.

Be well and prosper.

The three “Nos” of Investing in the Stock Market

Some of you who know me know that I am an avid toastmaster and I will be participating in a humorous speech contest tomorrow. Below is the draft of my speech (copyrighted by PG 2007) which I thought while being humorous, it also has some value as an investment article.

I'd thought I'll post it for a change.

Be well and prosper!

==========Humourous Speech by PanzerGrenadier=======================

OPENING

How many of you gamble/opps/invest or own shares in the stock market?

[Raise my own right hand]?

I can see that there are many gamblers...opps... [pause] investors here... !

Did you know that one-in-three or 1.3 million people subscribed for Singtel shares in 1993? So turn to the person to your left and right and congratulate them if they still held on to their Singtel shares. And if you had sold out early, pass them a tissue for their tears for the lost profits!

BODY

Mr Contest Chair, honourable judges, fellow toastmasters, ladies and gentlemen

A stock market is a place where fortunes are made and lost all in the blink of hours, minutes and even seconds! It is a place where you can make money and it is a place where you lose money and sometimes all in the same day!

I am going to share with you the three “knows” on how you can not only survive the bulls, the bears but even thrive in any stock market environment.

KNOW YOUR ENEMIES

This is the first thing that you need to know! Forget the technical terms such as price-earnings ratio, forget dividend yields and profit margins and most of all forget analysts reports.

You first need to know these two powerful enemies who whisper into your ears all the time when you are investing in the stock market.

Let me introduce to you, the best and the worst characters you will meet in your investing life, please give your applause to Missssssssttttteeeeeeerrrrrr :

FEAR and …………….. misssssssttttttteeeeeeerrrrrrrrr GREED: [lead the audience in applause!]

Why fear?

Besides death and taxes, all of us fear... TO LOSE MONEY! Hence, we have to understand our emotion of fear that strikes us everytime we make decisions to buy/sell or hold because we have to overcome this fear of losing money when we sell as the market goes lower and lower.

Why greed!

Because all of us are want to have … [pause] MORE – MONEY, PROFITS, WEALTH through investing.

How many of you have ever bought low, sold high and wished you had sold higher?

How many of you have ever sold high, bought back low and wished you bought back even lower?

How many of us still wished to have known to held on to our singtel shares until now?

All of us do!

Knowing your enemies is not enough, we need to also :

KNOW THE MARKET

After knowing yourself, you need to know the market, i.e. the underlying factors that affect the share prices.

How do people analyse the market? There are fundamentally two ways:

FA = Fundamental Analysis or for brevity we will call it "FA" where you analyse the economic factors such as growth of economy, rises of falls in production, consumer price index, interest rates and exchange rates

TA = Technical Analysis or "TA" where you analyse the price movements and volume of shares using statistical methods and models in order to determine when is the right price to buy/sell or hold.

If you combine FA (?)and TA(?) = ?? grow or prosper or in the hokkien dialect we call it HUAT!

KNOW YOUR INVESTMENT OBJECTIVES

Knowing yourself and your market is not enough... You need to know your investment objectives .... so that you know how much profit or loss is ENOUGH!

If you have no specific investment objective e.g. get a return of 10% on your money invested, then your decisions to buy/sell/hold are all done without any reference to a benchmark. So how would you know if you are doing good, or that you should be doing better or you have done your best?

CONCLUSION
To recap, before you start to invest in the stock market, remember the 3 knows!

1) Know your enemies – fear and greed

2) Know the market

3) Know your investment objectives

Above all, to paraphrase Confucius,

Know what you know in investing and know what you know not. That is true knowledge.

Be well and prosper!

Mr. Contest Chair.

Diversification vs diworsification

During this recent market upheaval arising from the sub-prime issue. I re-learnt the lesson about investing only money you can afford to lose and also about diversification.

What is diversification?
Diversification is about not putting all your (investment) eggs in one basket. Metaphorically of course! What it means is that when you are investing, you may want to consider putting your money into different asset classes. For example, I do not allocate 100% of my investible savings into stocks and shares (equities) or 100% of it into fixed (time) deposits and treasury bills. My investment portfolio allocation changes depending on my own personal assessment of the risk of the markets and it has potentially ranged from 30% equities, 70% money-market or cash equivalents (treasury bills, fixed deposits, cash in bank) to 80% equities and 20% money-market or cash equivalents.

What this means is that even if the stock market corrected sharply, I am somewhat protected in that the 80% of my equities will get negatively affected on paper when I compute the market value of my investments at that point in time. However, because money-market and cash equivalents are less volatile and safer investments, they are relatively protected although their returns are much lower than potential gains from equities through stock price going up or dividends from equities.

Why do you need to understand diversification
If you are serious about understanding and taking charge of your own financial destiny, it is important to learn about different asset classes and to understand the needs for diversification to reduce (but not eliminate) risk. However, many sales people who push unit trusts typically trumpet "diversification" as one of the key advantages of having a basket of shares spread across different industries or sometimes countries and sectors. But diversification while reducing the volatility of your returns from investments also make your investments perform less than it could have.

Diversification vs. Di-worsification
Peter Lynch's book ONE UP ON WALL STREET is a relatively easy book to read for investors who are interested to know about developing their strategies in buying, selling and holding equities with a preference for value investing in companies that have sound fundamentals. Lynch talks about diworsification, where you can diversify until you cancel out all potential gains and also where companies lose focus and try to grow by acquiring businesses that are not complementary to the business strategy of the company.

The downside of diversification is that you are too safe until your returns are abysmal compared to equivalent benchmarks e.g. S&P500 or STI etc. Hence, each of us has to understand that a balance needs to be struck between having different asset classes so that your eggs do not get all smashed when a strong wind blows against the basket versus having different baskets which incur higher overhead costs and charges (e.g unit trusts, mutual funds). So far, most of the investment gurus recommend low cost index funds for long term value investing for those who do not have time or effort to manage their own investments. Unfortunately, there are not many of such products in Singapore.

So what do I do now?
Learn about different asset classes, their potential risks vs returns. Learn about your own risk appetite (or lack of!) and learn about your own investment objectives and returns. Decide on how you want to allocate your investible savings into various asset classes taking into consideration your cashflow needs, your own risk assessments and how aggressive or conservative you want to be in investments.

There is no one correct anwer, each one of you have to find out your own flavour of investing and what type of investment omelette you want to make at the end of your investment horizon.

Be well and prosper.

The flavour of life: stock market lessons from Utada Hikaru

Utada Hikaru is another jpop artist that I am listening to currently and her haunting and pure voice is simply out of this world. Utada chan is a very prolific and creative artist whose music videos blows your mind away with elements of anime, fantasy and also very real images of everday people.

Why listening to Utada Hikaru helps you in stock market investments
The recent market upheaval that has seen my stock portfolio drop almost 10% below cost made me feel scared, desperate and worried. Fear of losing the value of my stock investments was almost too much for me to bear... until I tore myself away from the poems stock screen to check out some of Utada Hikaru's videos.

Her cool, clean and crisp voice cuts through the stress, uncertainty and worries as you focus on her music and the images from her music videos, you find yourself being more centred and focussed on listening to her voice, her music, her expression of her feelings into her songs.

It is times like this where the asian stock markets are being sold down by hedge funds, fund managers and retail investors who are spooked by the sub-prime issues and possible credit crunch in the US financial markets that maintaining the rational mindset amidst the irrational fear and uncertainty that permeates the sentiments of the investor.

Maintaining your sanity in the midst of market "insanity"
In the stock market, traders make buy, sell or hold decisions all the time. As a longer-term investors, you want to generally buy and hold for the long-term, but the markets do not always keep going up in the short-term as the recent sharp corrections in the Singapore Exchange has seen a lot of the 2007 gains in stocks wiped out last week. One of the key lessons I learnt during this episode is that you cannot time the market. Hence, the ability to hold and the ability to analyse the fundamentals of the business underlying the stocks that you invest in is paramount.

During such periods of pervasive irrational sentiment, you may need to take a step back, breathe deeply and listen to Utada Hikaru's songs to clear your mind before you decide if you should continue to hold, to buy more or to sell. There is no right or wrong decisions, it's whether the decisions make you money (in the mid-to-long term) or lose you money.

May your stock investment choices be cool and rational ones. :)

Be well and prosper.

Speed: The power of market forces

Speed's energy is infectious
I enjoy watching Speed music videos because the four girls, Hiroko, Eriko, Takako and Hitoe were typically featured in very energetic dance moves orchestrated to their (mostly) high energy tunes. The two lead singers Hiroko and Eriko were and are very competent singers who could perform live to the energetic dance routines while carrying the tune. Most impressive!

Kinetic energy in stock markets
Their energy reminds me of the raw power of market forces that has been unleashed in global financial markets resulting in the STI being beaten again down even as the bears successfully win another day on the NYSE. My portfolio has also taken a severe beating and essentially I have turned into a long-term investor as liquidating my portfolio under such circumstances would not help me very much. It is fortunate that I have holding power and hence am able to ride this market crash well enough under the circumstances. But it has been a humbling experience to see the raw power of pessimism and reaction to negative news arising from new disclosures of the extent of subprime problems permeating onto the shores of all markets in asia.

The market moves downwards demonstrate how when the fear, doubt and uncertainty translates into real doubt, real fear and real certainty in real selling down the stocks resulting is such a depressed stock market even when locally our fundamentals remain strong with the Integrated Resort and Formula One races coupled with positive economic outlook being factors that the Singapore market has conveniently chosen to ignore: or at least the foreign fund managers punishing the market has chosen to ignore them.

Turn adversity into a positive energy by learning from it
The only sliver of a silver lining that arises from this meltdown has been to acknowledge the power of market forces to move up and down very quickly in a short span of time when the market conditions are right. Investor sentiment can turn so very quickly in a blink of any eye when bad news from subprime fed with fear, doubt and uncertainty about the nature and extent can sweep through not just the US but global markets to result in the bears winning the days and weeks. It has also exposed my own lack of effective knowledge and strategies to counter such moves by using different types of instruments to hedge or to mitigate the hit on my portfolio.

Learning from Speed
I take comfort from being buffeted by the stock market perfect storm through learning more about myself, my limitations as well as my own emotions even as market forces pummel and send the STI moving one way or another. I take comfort in listening to Speed and letting their infectious energy jazz up my day and to dwell on the positive and not on the negatives. For tomorrow is another day and if you hold steady to the fundamental principles of investing, i.e. to invest only money you can afford to lose, have holding power and have a clear investment objective, those will help you ride out the storm.

Be well and prosper.

Steady: Riding the Market Upheaval

Jpop Group Speed
The picture on the left is that of the jpop group SPEED that was (and is) arguably one of the most popular Japanese female pop groups of all time in terms of record sales. According to Wikipedia, during their time from 5 August 1996 to 31 March 2000, each of their 11 singles sold at least 550,000 copies. That is a massive number by today's standards.

What does Speed has to do with the recent market upheaval?
The reason why I brought SPEED into this blog post is because I was inspired by their single, "Steady" which one of my favourite songs from their album "Moment". Since I cannot read or speak Japanese, it is the title of the single and the word "Steady" that is relevant to you (and I) during these times where the recent market turmoil from the sub-prime contagion on the global financial and equity markets.

The gut-wrenching market moves has reinforced how you should be steady in your investment approach and strategy and your objectives of your investment portfolio. If you are in the Warren Buffet long-term investor mood and go for value-investing in shares of companies that has strong fundamentals, then you would have been relatively steady in pursuing your investment strategy. However, not many of us can remain steady to our original investment objectives when faced with paper losses on our portfolio. I can remember how many times I was so very tempted to liquidate some of my stocks amid the turmoil generated from the fear, uncertainty and doubt and coursed through the investment forums, market chatter and CNBC market reports. It seemed like the end of the word was nigh !

Steady as she goes
After these moves for the last two to three weeks, this week sees the market starting to work out the subprime issues as now analysts have flipped from their positions where they were questioning the depth and breadth of its effect on Singapore equities and flopped to saying that the banks were oversold as the central bank (MAS) was ready to inject liquidity into the market and that all 3 local banks (DBS, UOB and OCBC)'s exposure to asset backed securities affected by the subprime issue was negligible.

We are the market and the market is us
Again we are reminded that the market is a mis-mash of market players consisting the big boys, the retail punters and every Tan, Muthu and Abdullah who wants to buy, sell and hold stocks and shares who are affected by emotions, facts and news that breaks all the time.

Remember to evaluate what is your investment strategy? Investor or trader and act according to how steady you hold your beliefs (or not)!

Be well and prosper.

Fear, uncertainty and doubt in the stock markets

FUD in online forums
The recent turmoil in the stock markets sees some market players who spread fear, uncertainty and doubt through rumour-mongering and posting of views and opinions that aim to dampen sentiment and create the feeling that the whole market is collapsing and that you should short the market or sell if you are holding on to the stocks that appear to be going down.

In any market, you need to have a willing buyer and a willing seller who agree on the price and the quantity of the goods or services that they wish to transaction. The problem of a fast moving market where prices and moving upwards or downwards quickly is that our capacity for information processing lags behind the news and rumours that affect market participants' views on the situation.

Shortists (kateks) attack
Take these few days activities. The internet chatter on investment forums teams with swarms of people who take a bearish view that the stock market is going to collapse and they want to buy good value shares on the cheap. What some of these people do is that they will take the available news about the sub-prime issue affecting Amercian and European banks and insinuate that the same will happen to the local banks and hint that DBS, UOB and OCBC are not laying out all their cards about how the sub-prime contagion is affecting them.

In my view that is absolute bullsh** because all banks in Singapore are closely regulated by the Monetary Authority of Singapore and if any of these banks have significant exposures that affects the them materiallly or may impact the banking sector adversely, the MAS will have to step in with statements of fact and to boost up the confidence of the banking sector which they have done by talking about them being ready to inject liquidity into the banking system if needed.

The good, the bad and the ugly players in the market
Opposite views in the forums are welcomed but what irks me is when some of these rumour mongers have a vested interest (who is undeclared) and who use fear, uncertainty and doubt to scare the weak sellers into parting of their shares at firesale prices when such actions run against the fundamentals of the company and its business prospects. Such FUD is usually not supported by specific facts or figures but by allusions to possibility that something unknown is looming in the dark waiting to pounce on the unsuspecting investor.

The stock market brings out all types of behaviour in people: the good, the bad and the ugly. And where it comes to profits, the ugly behaviour can be so grotesque and mercenary that it really sickens me to the stomach.

Invest based on your own convictions and principles and remember that make decisions based on information and facts and not on fear, uncertainty and doubt!

Be well and prosper.

Managing fear and greed with your investments

Volatility is the name of the game
The recent two weeks have seen extreme volatility in the equity market world-wide. The NYSE Dow Jones gyrated violently for the last couple of weeks due to the sub-prime issues in the USA and this sub-prime slime as the CNBC analysts refer to it has tarred even the Singapore Exchange. Our shares, especially the banking shares and penny stocks have been battered beyond all recognition despite most analysts saying that fundamentally, the Singapore economy is on very sound footing.

Fear and greed strikes us
It is during times like this that fear and greed rapidly takes hold of our emotions. We are in fear of losing our gains in our portfolio and seeing double digit percentage paper losses in our equity investments. Some weak retail sellers who bought into the rumour that the sub-prime slime was affecting our local big banks DBS, UOB and OCBC were caught by the onslaught and many sold off their holdings only for them to see that the big players (institutional buyers) are mopping up the floor of the SGX by buying the bank stocks on the cheap.

This episode has reinforced my view that you need to be extremely focussed, have a clear investment objective and invest within your means when approaching the equity market. Volatility is something you have to stomach because you are buying and selling to another human being. Your counterparty who buys or sells from you is also affected by the twin terrors of fear and greed that strike especially when the market reacts to good or bad news.

On this occasion, the bad news from the USA should not have fundamentally affected sentiment to the extent that it did in Singapore because our housing market is vastly different from US. There is hardly sub-prime lending unless you count the illegal money lenders or loansharks. Hence, in terms of rational analysis and later clarified by our local banks, the sub-prime does not materially affect their investment portfolios or funds under management. Thus, it is really the irrational bearishness that descended as opposed to the irrational exuberance that has seen our market climb up so fast since the beginning of 2007.

Back to basics
If you manage your own money and some of it is in the SGX. Remember your investment basics:

1) Invest what you can afford to lose
2) Have a clear investment objective
- Are you able to articulate your reasons for holding the stock for the medium to long term
3) What is your investment horizon
4) Have diversified asset classes
- E.g. treasury bills/fixed deposits

Above all, remember that investing is for the long term while speculating is for the short-term. If you want to speculate, by all means do it within your means and with prior knowledge that you can make a lot of money and you can lose a lot of money and sometimes all in the same day.

Be well and prosper.

Defending yourself against the bearish hordes

Are the bears winning?
If you do not know by now, the bearish sentiment appears to be overwhelming all the bullish news about the booming Singapore economy and property market. As far back as a couple of weeks back, bullish sentiment was strong with people talking about how the Integrated Resorts, Formula One night races to be held in Singapore were going to boost tourism, the economy and propel Singapore into the "Golden Age".


Stock markets can go up and go down, so what can you do to defend yourself in this type of market?

Let's re-examine the fundamental principles of investing:

1) Invest within your means
Investments should be done with savings that is not needed for urgent expenses such as the rent, living expenses etc. Invest only what investible savings you have after putting aside three to six months of income as a buffer for unexpected emergency expenses. To invest by borrowing is a very risky strategy as you are risking capital you do not have. Use your own capital unless you are very sure of what you are doing with other people's money.

2) Diversify
The stock market can go up and it can go down. The price of the shares you bought can go up and can go down. Hence, never put 100% of your investible savings into stocks and shares unless you have backup plan, for example, rich parents to bail you out. If not, do set aside some investments into low yielding but low risk e.g. fixed deposits, high yielding savings accounts or treasury bills. Not putting all your eggs in one basket gives you a psychological boost as you know you have some protection against major market moves.

3) Understand your investments
You have bought into company ABC. Do you really understand why you are holding the shares of this company? Peter Lynch shares in his book, "One Up on Wall Street" that you should be able to articulate three reasons why you are holding the shares of any company and to do so in layman terms that even a child could understand. Hence, you may want to analyse your share portfolio to see if it can meet this test. In general, while the current bearish sentiment scares away a lot of newbie investors, experienced investors who have holding power and are diversified know it is not the end of the world. If the company you are investing is fundamentally sound, has a good business and is showing profitability and decent dividend yields even at current depressed prices, you can hold out for the dividends.

Shares of companies which have strong fundamentals will tend to outperform fixed deposits or money market. Know your investments and know yourself.

4) Understand your emotions
Fear and greed is in everyone of you. I struggle with it whenever I see the market moving. The trick is to be able to practice the principles and to know when and why you want to enter or exit the market. In hindsight, no-one can fully time the market but knowing your reasons and being rational in the sea of rationality will help you overcome decisions made under panic and stress from needing to cash out because you do not have holding power.

Be well and prosper.

Maximising our own returns on investments

When i first encountered Real Estate Investment Trusts (REITS), it was interesting to see the business model involved in such structures. What a REITS does is that it takes the real estate assets of a specific category, for example, retail malls or industrial properties, injects these into a special purpose vehicle and then manage these assets to maximise yields or returns on the capital employed in these assets. REITS helps to increase yields mainly because by combining similar types of assets such as retails malls together, the manager is able to exploit economies of scale and efficiencies as one group managing many similar assets can do it better and cheaper than many different groups managing their own individual retail malls.

Why REITS
Of course, REITS also frees up capital for the owner who does not have to hold the entire retail mall in his balance sheet and who can use these capital for alternative investments. In addition, the REITS structure allows the owner to tap the capital markets for investment funds. Also, because the assets are all of similar nature, it is easier to benchmark and track the performance of yields and returns for this specific asset class and allows the REITS manager to see where the inefficiencies and lower returns are. Usually, REITS managers fees are tied to the performance to the REITS and they would tend to want to maximise the REITS yields to shareholders as that also boosts their own performance measures and rewards.

Applying REITS principles to our own finances
The reason why I bring up REITS is to illustrate how you (and I) can learn from such principles. Examine your personal investments and see if you are tracking your own individual performance in terms of your stocks and shares, treasury bills, time deposits or whatever investments you have. I have a simple spreadsheet that tracks the cost and market value of my portfolio and also record my capital gains or dividends from shares for each month and year. This helps me tally my investment returns and see if I made better returns in 2004 vs. 2005 etc.

You can maximise your returns relative to your own pre-defined benchmarks only if you track them. Other than a fuzzy "I want to get good returns" feeling, you need to be able to define what is good e.g. beating average fixed deposits for the year x 2 or beating S&P500 or even STI. :-) The second part is tracking your portfolio in terms of knowing the gains at least on an annual basis or even monthly if you are able to track to that detail.

Based on my own tracking, I have come to realise that on an annual basis, I have been able to beat fixed deposits returns x 2 which is a reasonable benchmark for me and it also shows me that I need to keep my day job as managing my own investments does not generate sufficient returns to replace my salary! But I've come to appreciate that by tracking your own returns, i.e. realised gains and losses as well as portfolio positions periodically, I am in a better position to know how I am doing in my investments and my exposures to the market.

Start maximising your own returns by tracking it
You may want to consider tracking your own investment track record as if you were a individual REITS. You determine how much risk you want to take and how much returns you want to squeeze out of your individual portfolio, ultimately, you are your own investment manager because you and not anyone else makes the decision to buy, sell or hold!

Be well and prosper.

Are fixed deposits in foreign banks in Singapore safe?

If you shop around websites such as Money section in hardwarezone forums, there are discussions about how you can get the best rates for your fixed deposits. In many of these discussions and research done by many contributors, many have come to realise that our local banks generally DO NOT give good interest rates for fixed deposits.

In fact, the more competitive rates tend to be offered by the malaysian banks, Indian banks and other non-Singaporean banks. Why is this so and are these safe?

Foreign banks
Foreign banks licenced by the Monetary Authority of Singapore can borrow funds from the public through fixed deposits but they are generally unable to tap on the savings and current accounts as their banking licences do not allow them to do so. Only Qualifying Full Banks are able to tap on the retail market to obtain funds from such sources. Hence, in order for these banks to compete against the big local banks for a share of the singapore dollars with less reliance on the inter-bank market is to offer competitive rates against them for the fixed (time) deposit dollar.

Are fixed deposits denominated in Singapore dollars placed foreign banks safe?
These are generally safe as these foreign banks are regulated by the MAS and have to maintain minimum capital and liquidity requirement as well as statutory deposits with the Monetary Authority of Singapore. In addition, these banks allowed to operate in Singapore typically are the local branches of large banks in their home country e.g. Maybank Singapore is part of the large Maybank group in Malaysia.

So if you are considering better and relatively safe returns for their excess funds, you may want to consider such banks. You can find a list of them on the MAS website.

The beginning of desire: Credit Card Brochures

I talked about examining your wallet in an earlier post and brought up the point that many Singaporeans have a few credit cards in their wallets. The thing about owning a credit card is that you have allowed the bank that issued you the credit card access to your deepest desires!

How so?
Once you are a credit card customer of a bank, they will send you a monthly statement reflecting what you have billed to your credit card. Without fail, the bank will throw in brochures, buy-one-get-one-free vouchers and catalogues with the monthly statement to entice, encourage and egg you on to satisfy your desires for the cute hello kitty bag, that cool Nokia N95 phone or that irresistible spa package at a very special price only if you charge to your credit card!

The intense competition for unsecured credit by banks literally throwing themselves at those who qualify for credit cards has seen my handphone hit by cold calls for balance transfers, free personal credit line weekly. Hardly a week passes without me being bothered by telemarketers working on behalf of the financial institutions trying to get you to have easy credit to engage in retail therapy and pamper yourself. Life is short, enjoy it! You DESERVE it!!!

Throw away those credit card brochures now!
To counteract the machinations of the banks, I tend to throw away the brochures without even reading them! "What?" you may exclaim, "Throw out the brochures without seeing if there is a BARGAIN or GREAT DEAL to be had???!! Are you siao Mr. PanzerGrenadier?"

No, I am quite sane. If you have come to understand that human wants and desires are unlimited and human needs are limited, you will realise that by not seeing the "BARGAINS" or "DEALS", you are reducing the opportunities for yourself to be tempted by the goods and services you see in the brochure that are all aimed at attracting and assimilating your hard-earned money into sometime called "PROFITS" for the bank.

So if you truly want to continue on this resolute journey that we are taking together towards financial freedom, you may want to seriously consider breaking the cycle of I-see-I-want-I-buy-I-regret. At the end of the day, if that good or service in the brochure a need or a want. YOU DECIDE.

Pamper yourself by all means if the spa deal is a really good deal.

Buy that gadget on a 12 month instalment plan if the price is very competitive versus what you can find in retail shops.

Do whatever you want, but make an INFORMED choice.

As ever, be well and prosper!