Your first step towards financial freedom: taking action!

You've read a couple of books on financial freedom. You've browsed through some of my blog posts as well as other personal finance and investment blogs such as thefinance.sg or forums such as Sgfunds. You are ready to embark on this journey of financial freedom.  Kudos and bouquets to you! What you now need is to take the first step into ACTION.

The new paradigm of change - Taking action

It is very easy to be a passive passenger on this journey towards financial freedom. To read and just let the ideas slide off our minds like water sliding off a duck's back. Without having anything really stick into our consciousness and translated into ACTION or BEHAVIOUR that moves us towards financial freedom.

I love to read books on personal effectiveness. Some of the books I've read include: "The Seven Habits of Highly Effective People" (Stephen Covey), "Think and Grow Rich" (Napolean Hill), "Mind Mapping" (Tony Buzan). These are all good books but these books DO NOTHING for you if you do not put any of the principles in them. I too used to quick read these books and do nothing until I came across Napolean Hill's "Think and Grow Rich" . Hill urges us not to quick read and put it aside but to continually put into practice the powers of goal setting and power of the subconscious mind to channel our efforts towards what we have a strong desire.

Since then, I have gradually tried to put into use bits and pieces of personal effectiveness literature into my life. For instance, I use mind-maps to occasionally flush out the ideas and thoughts onto paper so that I can generate even more ideas and thoughts. Some of the new developments such as the launch of Singapore Fixed Deposits blog was due to a few mind mapping sessions on the theme "Financial Freedom". I also believe in affirmations and have some personal life goals set up in my net worth Excel worksheet in my office laptop to constantly focus my mind on what I am working so hard for.

How to take action towards financial freedom

There is no trick. The road towards financial freedom really consists of:

1. Living within your means
2. Saving and investing
3. Grow and protect your investment capital
4. Go back to step 1.

The hard part is to TAKE ACTION and OPERATIONALISE steps 1 to 3 and to avoid losing what you have saved in step 2. Now that the "secret" to financial freedom is known to you, what you need to do is to prioritise what is it that you are not doing so well and CHANGE it. For instance, if you are living on credit and relying on a TOTO windfall to give you financial freedom, then it is going to be very challenging for you to achieve your target of financial freedom. You need to consider how you can bring your expenses to within your income levels so that you start saving. Or you may have to develop multiples sources of income to be more than your expenditure. Either way, you have to TAKE ACTION and change behaviour that DOES NOT help you towards financial freedom.

Increase your means, grow your returns, protect your capital

If you are already living within your means, but you find that you cannot get better returns than fixed deposits and treasury bills. This means you may have to look at other types of investment which come with their associated risks and rewards. You have to decide if the risk-reward trade off is WORTH IT and TAKE ACTION accordingly.

If you are already investing and getting decent returns over and above risk-free treasury bills but find that the recent market downturn can potentially affect your investment portfolio. You have to consider ways to diversify your risk or consider proper cash management to make sure you can ride out the current storms and risks of US recession impacting major equity and potentially property markets.

Even if you decide that doing nothing, i.e. not buying/selling but just holding on to whatever investments you have now is the way, you can still take ACTION by reading more about other investment asset classes beyond what you are familiar with to give yourself more knowledge for trying out other types of investment.

In short, there is always some POSITIVE ACTION we can take towards financial freedom. We are in control of what ACTIONS we want to take.

One of the actions that I take towards financial freedom is the writing of this and other blogs. It helps me articulate my ideas and thoughts about financial freedom and at the same time helps in a small way towards developing an alternate source of income. I realise that the read-think-write process and feedback loop helps keep my mind on ways to help me move towards my goal of financial freedom.

What action have you taken recently? :-)

Be well and prosper.

When the market drops, you want to cry...

The market can go up and it can go down
The risks of investing in stocks and shares (equities) is that the price of your individual stock and consequently, your portfolio or basket of equities you own can go up and can go down!

Nobody questions why the stock portfolio goes up. But when the stock portfolio goes down, everybody wants to know WHY!!!

Unlike robots who have no feelings or emotions, you are a human being filled with flesh and blood. Emotions run through your heart when you perceive positive or negative news. When you see the Straits Times Index (STI) go up and your portfolio is full of index stocks, you are as happy as a lark! But when you see the STI go down dragging your portfolio from a +8% return to a -2% return, you curse and swear at high global oil prices, US sub-prime problem and Adam Cheng for his TV series being aired as all these appear to have caused your portfolio to melt in value.


I want to cry, too
The recent correction has also hit me (again!). For those of you who have been reading this blog, you will know by now that I am as expert as a chimpanze in picking stock winners. Most of my winners were due to the overall good economic growth from the low points in 2003 due to SARS up to the recent dizzying GDP 3rd quarter growth of 4.3%. The amount of liquidity and investments that Singapore has attracted in this upturn has helped many index stocks do well because their underlying business in oil and gas, financial services and property have done well these last few years. Fundamentally, the economy is still going strong.

However, I cannot time the market perfectly. Hence, when the correction hit in August 2007, I was able to mitigate some of its effect but cutting losses on losers and riding a winner. Fast forward to November 2007. Again, there has been a correction and even after factoring in my winner, my portfolio is down to the "fantastic" performance of 0.6%.

I too want to cry when I look at my portfolio because if I had put all the monies in treasury bills, I would have earned a risk-free 2% plus for the whole of 2007. But that is the fundamental risk of holding stocks and shares, the variability of the share price affects your portfolio performance. That is why for myself, I do not invest ALL my investible savings in equities. Currently, it is about 78% which is relatively high because I still believe that the Singapore economy is still robust enough up to middle of 2008 given our GDP and CPI numbers.

However, I do keep 22% in cash and cash equivalents to buffer me and to allow me sufficient cash to meet living expenses and emergencies.


Tips on making yourself cry less during market downturns
So how do you take measures to reduce the risk of the market downturns making you feel like crying when you review your personal net worth statement? Here are some of the simple principles I follow to make me cry less:

1) Invest less than 100% in equities (or major asset class)
The all-or-nothing strategy in investing is very risky, hence, I do not risk ALL my investments in one asset class. I minimally have at least 2 asset classes at any one point in time. For now, it is in savings deposits as well as foreign currency fixed deposits besides equities.

2) Have sufficient cash reserves
Some financial planners advocate have 3-6 mths of income or expenses as cash reserves for emergency living expenses. Assuming that you are working and drawing an income from your job or business, this reserves which should be in liquid form e.g. savings in bank accounts, funds supermart cashfund or even treasury bills (3 mths) or short-term fixed deposits. This provides you firstly with a relatively low risk asset class to balance the risk of your other investments and also provides liquidity in case there is some unforseen expense that needs to be met.

3) Live a simple life
You will be surprised on how simple a life you can live if you so desire. One of my heroes when I was young was the ex-Governor of Bangkok Chamlong Srimuang who lives a very ascetic life. While I am not advocating his brand of asceticism, we can learn to live with the little we have because at the end of the day, we cannot bring our life's riches to heaven.

A simple life stripped from the unceasing chase for materialism could be one way to counteract our ceaseless human desires. I realise that it is healthier too compared to the consumerist materialism we are all so accustomed to in Singapore.



Investing reflects our approach to life
At the end of the day, whether you choose to put 100% of your investible savings in one asset class, diversify it everywhere or do nothing and leave your money in POSB earning 0.25% reflects your approach to life.

No-one can make you do what you do not want to do. However, many of us who share similar financial goals of being financially free where our passive income from portfolio investments exceed our living expenses realise we have to adopt a disciplined approach to investing, to save and to take some risks by investing in asset classes providing for higher potential returns and higher risks mitigated by some holdings of risk-free assets.

In the meantime, enjoy the journey and learn to cry less when the market drops because we cannot all 100% time the market and if you have the power to hold, in the longer term, the market will tend to reward those who invest in fundamentally sound businesses that grow with the general economy.

Be well and prosper.

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.

Letting go is hard to do...

Winning and losing are part of the investment game
The recent market correction in August 2007 has hit my portfolio in terms of paper losses. I did not sell at the lowest of the lows when the STI tanked significantly. However, the STI has not recovered fully from that hit and I decided now that the STI was regaining strength, to sell into strength and get out of some of my underperforming stocks.

One of the fundamental principles of investing is putting in money that you can afford to lose. This principle is there for a reason. Firstly, if you are willing to take loss and exit out of under-performing shares, you can redeploy your capital to other investments. Secondly, you are also able to hold if the market turns drastically against you like it did in August. I count my blessings that I managed to hold on beyond August as when the STI was at its lowest point in the correction, that was the worst time to sell. If I had done that, my paper losses would have been in the 5 digit figure!

However, by now, I am fortunate enough to sell off underperforming shares which I bought at somewhat toppish levels. This allowed me to mitigate the impact of the losses. I still had realised losses to the tune of low 4 digits but it was still a painful lesson to learn from Mr. Market.

Why not hold forever?
This is a tempting strategy for those who have holding power. The reason I decided to pare down my portfolio by letting go of the underperformers was to unlock my investment capital to be re-deployed in safer instruments as at one stage my portfolio was almost 85% in equities and 15% in time deposits, savings and treasury bills. This was a highly overweight in equities and I felt that given the recent and likely continued volatility, a more comfortable exposure to the equity (shares) should be closer to 70%.

In addition, some of the counters that I bought looked to be real laggards and the dividend yields were quite low for the risk of further capital loss, hence I decided to prune this and now my porfolio is back on track in the green.

What did I learn from this experience?
Cutting losses is always painful because it means acknowledging that one did not buy at a sustainable price. The greed of wanting to recoup the losses by holding and hoping for the market to rally again is also strong and to overcome it I had to eat humble pie and recognise that those were mistakes. :) However, the positive thing about the experience was that I did use proceeds from my sales of those underperforming shares to buy shares that were undervalued during the correction. Hence, I got into a few blue chips that have helped lift my portfolio back to where it should be, showing modest growth that is on track to yield me a return of at least 2 x the highest prevailing fixed deposit returns.

Going forward
On hindsight, the buying and holding of quality bluechips for the long-term is still the best approach I should be taking. However, the trick is to go in at the price which gives you a higher chance of capital appreciation as compared to chasing a share at its day-highs.

I also need to guard against the gambling mentality which manifests itself strongly during periods of extreme volatility in the equity markets since that is the time where the large price movements intra-day make for good trading opportunities.

I hope that the August 2007 correction did not impact you too much and wish all of you to be healthy, well and to 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.

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.

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.

Panzergrenadier's stock portfolio

A reader JK has asked me to list down my stock portfolio to give an idea of what my investment preferences are. I thought that it would be a good idea to share. This is currently what is inside my equity portfolio that comprises wholly shares in companies listed on the Singapore Exchange:

In no order of merit or preference:

1. Ascott Reits
2. OCBC Bank
3. SingPost
4. Suntec Reits
5. Singtel

My approach to picking stocks on STI has been to look out for blue-chip type of companies as well as those that have a track record of dividends. You will notice that I have both Suntec Reits as well as Ascott Reits. The serviced residential segment represented by Ascott Reits should still be doing reasonably well given the tight supply situation for higher-end rentals. However, I didn't get into this stock early in the game. Am holding mainly for dividends.

Going for any of the banking stocks will not get you too far wrong. Both DBS and UOB are a bit pricey so I am holding onto OCBC as the prospects for the local banks are still quite good given the rising property market. In addition, wealth management products are starting to make more inroads into the heartlands and mass market and I think the banks will continue to do well.

SingPost is a very strong monopoly in both postal services as well as agency payment services. Their moneylending business bolstered by the introduction of EZcash and James products are doing very well and basically allows this defensive stock to stay strong and pay very good dividends.

Suntec malls are still very packed during weekdays as well as weekends and it is still prime real estate for retailers as well as for businesses to set up their offices. I think their prospects are still good in the current supply crunch for office properties.

SingTel is a legacy from the group A and group B days and I think I will keep this for the long-term and bequeath it to my future generation. :-)

There you have it, my equity portfolio at this point in time.

My current investment approach is to buy and hold and all my equities do pay dividends so unless I need to sell them to fund something new, they should stay this way for some time.

The rest of my investible savings goes into iSavvy time deposits and treasury bills.

How does your own portfolio look like? :-)

Be well and prosper.

Are you investing if you are monitoring your stocks all the time?

I invest in equities in the Singapore Exchange (SGX) but I work in an office environment. As I am exposed to the SGX, I have one of my internet explorer windows open to the poems stocks section where I monitor the daily gyrations of my portfolio as I do my work.

I have the internet down, I have the internet down
Today, something interesting happened... The internet was down for a few hours! Imagine that, 120 to 180 minutes where I did not know if the stock market had plunged, if my equity portfolio had been totally wiped out or made 100% gain in those 2-3 hours.

This set me thinking, are you investing or are you speculating on the SGX if you were in the same position as I was? Not knowing how much your porfolio was worth at that point in time when you needed to. For a long-term investor, do you need to constantly be monitoring your portfolio so that you can time some of your decisions whether to buy, hold or sell your stocks and shares at that point in time?

Holding power and your investment objectives
The key to answering this question is whether you have holding power and what exactly is your investment objectives? Holding power refers to the ability to let your investible savings continue to stay invested in the asset class you have chosen, be it property, equities (stocks and shares), bonds, REITS/business trusts, derivatives! (only for the sophisticated and the brave) or treasury bills and time deposits. This is a very important aspect of personal investment because without holding power, you become very easily affected by the ups and downs of the market and can be spooked into selling or buying based on fear and greed and sometimes both!

If you have holding power and your horizon is for the long-term, then the daily gyrations of market prices should not have a major impact on you if you are clear about the reasons why you are holding on to those assets that you have. In the case of equities, Peter Lynch recommends that as an investor, you should always have three reasons why you are holding on to the stock and these reasons are simple enough to explain to a child or a layman investor. If you are not able to articulate your reasons, it means that the reasons could be invalid or that you are more a speculator rather than an investor.

Your investment objectives (e.g. to beat 2 x fixed deposit rates) annually would then guide you in terms of how your respond to times when you do not know how your portfolio is doing at a specific point in time. If you have set up these from the start, missing a day or two of knowing what you are worth will not adversely impact you. This is because when you have holding power, you do not need to liquidate your portfolio until and unless the time is right for you in that you need the cash and you have decided that your ride with that asset class is over and you have reaped the targeted returns required.

Am I a investor or speculator
Today's internet disruption showed that while I claim to be an investor, there is still some speculative tendencies in me that I have to curb by holding on to my investment objectives and to keep sufficient cash in money market and cash to meet contingencies. As long as I stay true to my investment principles I should be able to handle times when I am not closely monitoring my equity assets since my investments are to fund my retirement and for my future generation.

How would an internet disruption affect you? Do share in the comments section!

Be well and prosper.

Money in the hand is worth two on paper

One of the challenges of investing is deciding when to exit the market. If you are someone who reads many of the personal finance or investment books, most of them advocate a buy and hold strategy for the long term in equities as it has been historically proven that equities yield a higher return than money market instruments and definitely more than cash in savings and fixed (time) deposit accounts.

So when is the right time to get out?
The right time is when you need the cash and for most of you, unless you are contemplating retiring right here right now and need the money to buy an annuity, you should stay invested in your portfolio of investments depending on your risk profile.

So if you still working or running a business generating income, you do not need the cash and can keep it invested in the market or in whichever investment asset class that suits your risk profile. Holding power is one of the most powerful forces that allow you to resist the temptation to take quick profits on a rising market. If you are investing for a long term, you should not be overly bothered by the gyrations or movements up and down of the stock index where some of your equities could be correlated to but instead look towards to long term. But life doesn't always play out like the personal finance textbooks, instead there could be times when we need to lock in our gains from our a portion of investments to pay off debt.

My periodic exits
This brings us back to the fundamentals of personal investing which is pay down debt first, put away some spare cash for emergencies and put the rest of investible savings into investment assets that reflect your risk-return profile. However, if you have bought a home that is financed by debt, you will realise that paying off the debt requires you to not just pay your loan instalments using your central provident fund (CPF) but also to make periodic repayments of your outstanding loan principal so that you save the interest costs that you are paying to service your loan.

In my case, I paid off my housing loan periodically whenever I received my annual bonus or when I managed to lock in some realised gains from investing in equities (stocks and shares). In this way, I was fortunate to ride the bull run of the SGX from 2003 (SARS period) to the current irrational exuberance of the stock and property markets. The paper gains I had would have been even greater if I had held some of my stocks. Imagine, DBS was going for $10+ per share a few years back. However, I needed to realise some of the gains because paring down my debt allowed me to save a lot of interest cost and allow me to accelerate my journey towards financial freedom even faster. This realisation of gains was for a purpose: to pay down debt. Currently, I will remain invested in the stock market because this allows me to participate in the stock market gains and generally bullish sentiment. For prudence's sake, I am not 100% invested and still have 54% in money market, treasury bills and some cash.

A number of investors I encounter on internet investment and money forums ask this question on when does one exit the market. I hope that some of my thoughts above will help them along in some way to clarify their own thinking.

When do you want to exit the market, you decide!

Be well and prosper.

Investing vs. Gambling on the Singapore Stock Exchange

In my quest to achieve financial freedom, I frequently find it a challenge to separate between the thin line between gambling and investing. If you too invest in equities listed on the Singapore Exchange, you will find that there are the two primal forces at work within us whenever we make a decision to buy, hold, sell or do nothing in the market-- The forces of FEAR AND GREED.

Fear and Greed in the Stock Market
How do these two emotions work within us to complicate the already challenging decisions we make on the stock market? If you are an investor who is already investing in stocks and shares (equities) on the Singapore Exchange or if you are a newbie to the world of stocks and shares you will encounter these two emotions. They are part of our human DNA and to deny their existence is to deny our very own humanity.

The stock market as represented by the Stock Index, for instance, the Straits Times Index (STI), goes up and down according to demand and supply for the shares in a company. While the STI may go up or down or remain flat, the prices of the individual shares in companies also go up and down. In investments, what you want to do is to put buy shares in a company whom you think will rise in the future. The price of a share in a company is affected by many factors such as the company's profitability, its dividend policy, its future growth prospects, its fundamental business. The share price is a function of buyer's and seller's expectation of future cash flows either through capital appreciation (price of share going up) or through dividends.

Fear
Fear comes in because of uncertainty. No-one can completely predict how the price of a company's share will rise or fall in the future. Hence, when the price of a company's share goes up, you fear that you have missed out on capital gains when you did not buy its shares earlier. Conversely, when the price of a company's share goes down, you fear that you may be buying at a price that will fall in the future. This fear is very real and good investors are those who recognise this and invest based on their objectives, risk profile and their knowledge and understanding.

Greed
Greed comes in when you hold on to a company's share when it is going up and up and you want to sell at the highest price you can possibly get. Greed also sinks its jaws into us when we see the price falling but we cannot get ourselves to cut loss and sell the shares because we think it will eventually rise.

The combination of these two emotions make investing in shares an activity that is very close to gambling because we are trying to time our entry and exit of the price of a company's shares. We are basically taking a bet on how prices will move based on fundamental analysis, technical analysis and sometimes based on pure luck.

I too am victim of this gambling mentality to gain short term gains on the stock market. If you read personal investing books, most of them advocate an index fund approach. This is because experience has shown that only a handful of professional fund managers or investors can consistently beat the market or the index return. Hence, unless you are the calibre of Warren Buffet or Peter Lynch, you are better off doing regular investment into a low cost index fund.

However, you will find that the thrill of participating in SGX by punting specific stocks plus the added emotions of fear and greed can make a very potent combination.

How do I overcome these two emotions
To invest safely and not succumb to the gambling mentality of short-term gains, it is important to consider the following principles:

1) Determine your investment objective
- what is your investment objective for buying and holding shares of companies listed on SGX?
- what is your targetted returns and over what time horizon

2) Determine your risk profile
- what type of companies you pick will be affected by your approach to risk
- do you prefer blue-chip stable companies with established dividend payout or high growth small cap companies

3) Determine that amount of money you can afford to invest (and potentially lose!)
- investing in the SGX is not the same as a fixed deposit or treasury bill
- you can potentially lose ALL of your investment monies as the price of a share could possibly drop to zero should a catastrophic event happen e.g. major fraud, collapse due to business calamity, natural disasters etc.

4) Know yourself
- know that you also have fear and greed inside your DNA
- beware of what these two emotions can cloud your investment decisions

Fear and greed will always be with you. Learn to deal with these two emotions by having an investment objective and plan to achieve your targetted returns.

May you be well and prosper.

Alternative investments

In our modern era of "get rich fast or die trying" culture, investments promise both financial freedom and financial ruin both in equal measures to the unwary and the unprepared investor.

Why is this so?

There's a sucker born every minute
As the famous saying goes, "There's a sucker born every minute." Investment scams abound in today's world especially with the internet replacing face-to-face interactions with websites, URLs, forums, MSN, emails and electronic communications. This helps to create an environment where fraudsters, scammers and other unethical scoundrels can leverage on the internet to lure you, yes -- you! the unsuspecting investor with lures of low risk and high returns. "Sure-thing" type of investment products and packages.

In order for us to be equipped to know more about the risks of investing, especially in fraudulent schemes, the Better Business Bureau (BBB) has some useful resources for us to check out.

The BBB warns us to consider the following taken from http://www.bbb.org/alerts/article.asp?ID=358, article titled, "Investment Fraud Proliferates":

• Take your time before investing your money. Don't be pressured into buying. Be wary if you are urged to "buy now or forever lose your opportunity to profit."
• Research the investment opportunity. It's unlikely you will make money in a business deal you can't understand or verify.
• Find out about the company's reputation. Invest only in offers you know something about.
• Obtain all the information you can about the company and verify the data with impartial, outside sources. Contact the Better Business Bureau to get a reliability report on the company.
• Be extremely skeptical and cautious about any unsolicited phone calls you may receive about investments.
• Also, don't believe everything you read - or assume that all slick promotional materials and web sites offering investment deals are legitimate.
• Don't send money by overnight delivery or wire transfer, or authorize a credit card, payment or automatic debit to your bank account to anyone you don't know.
• If in doubt, do not part with your money. Seek professional advice."

One of the key reasons why people lose money to scams and fraudulent schemes is the lack of understanding of the investment product or scheme. We fall prey because of lack of knowledge and sometimes because of lack of due diligence on our part to find out more about what we are investing in.

Before you go on into the next "sure make" type of investment be it land banking, wine investments, paintings, commodities, practice what Confucious said, "know what you know and also know what you know not, that is true knowledge."

Be well and prosper.

Do you think you can time the market?

I look towards the stock market to help enhance my returns from investments. My investment objective is very clear: to get returns that are double that of prevailing fixed deposits (time deposits). Given that time deposits are paying about 2% to 2.5% or so, I am looking at generating returns on my portfolio of at least 4% to 5%. So far, I have managed to meet my investment objectives mainly due to the buoyant stock market as well as careful investments in blue chip shares.

My achievements have very little to do with my own ability and skill. 95% of it is pure dumb luck! I happen to start going into equities since the 2003 SARS hit Singapore and our stock market and have been selectively trading blue chip stocks over the period of 4 years plus. The question you must be thinking is how does he time the market?

Timing the market is difficult
The problem of timing the market is that unless you have the ability to tell the future, timing the market at its very peak and its very trough are virtually impossible. However, what is possible is riding the trends while the market is moving towards the trough adn moving towards the peak.

So far I have been very fortunate because I manage to ride the bullish streak on and off through some of the blue chip counters such as SIA, Singpost, DBS, OCBC, UOB. Of course I do not own all these counters at the same time (though I wish I did!) but have held them on and off during these 4 years. I do not know technical analysis so my approach has been to use fundamental analysis to understand what are the key factors driving the outlook and earnings of these companies and more importantly, how other investors would perceive it. The share price is a function of the expectation of future earnings of the company as well as its business performance. The share price is also a function of investors perception on these and their sentiment. I take these factors into consideration in my investment decision while evaluating the price level of a company's share.

My approach to stock picks
I pick mainly blue chip stocks that have a track record of dividends, preferably dividend yield is close to or near fixed deposits returns. Strong competitive position in their respective markets is also a quality I look for and also the prospects for that company as the broader local and global economy grows. Liquidity is another concern because illiquid shares can leave your funds stuck during a time when you want to cash out your equity holdings and move your money to safe havens such as treasury bills or Singapore government securities.

A tale of two stocks
Singpost
To provide some examples of what stock picks I do, here are some examples. :-) Singpost was a share I have been monitoring even since its IPO, it is a type of share I will hold long term although I have been trading in it when its price shot up a lot last year. I still hold it. Why do I hold Singpost? While some people were spooked by the liberalisation of the postal service sector this year, in reality, Singpost is in such a dominant position for basic mail and post services that it is effectively a monopoly. The capital infrastructure needed to get into basic postal services are too prohibitive and cannot be easily duplicated by any new entrant. But what's really sexy about Singpost is that it is a monopoly on agency services. It has one of the largest (if not the largest) retail presence for accepting counter payments for statutory fees, charges and payments such as TV licences, CPF top-ups/contributions, income tax, property tax, road tax, etc. There is still a significant segment of residents here who do not own a ATM card and do not know how to use the internet to make payments. I think it's long-term prospects are good even with the occasional hiccup when they tried to buy a local SME.

China Aviation Oil
My purchase of this stock was really pure speculation and not completely in line with my investment strategy. I happened to chance upon some internet chatter than this share could be a performer after it went through restructing. I monitored it for some time and decided to go in at 1.03 for 10 lots. The price was pretty stable and it shot up to 1.17 at one stage and I sold it. On hindsight (and that's why you can never 100% time the market unless you can tell the future!), it has since go up to $2.30+ and I missed out on $13,400 profits on just this one counter. :-( This and many lessons have taught me that you can never time the market, so take your profits and run! I have also met some people who lost money on CAO before it collapsed under its losses from trading oil derivatives under old management and it is this human greed for more profits and fear of losing out potential profits that you and I as investors must guard against.

What is your own investment objective and strategies? Share them in my comments section!

Be well and prosper.

How should I buy treasury bills: using poems or direct to banks?

I am a regular at two main forums. One of them is Hardwarezone and the other is SgFunds. The interesting thing about forums is that there are many young people who are new to investments and they ask many "newbie" questions.

Newbie questions may be irritating to some but they are a veritable gold mine for me to write posts about personal finance because it allows me to know what people want to find out and hence by responding to their posts with answers, I also generate content for this blog!

It's a win-win situation!

Poems or Banks?
One of the questions that arise after new investors learn of treasury bills is how should they do their investing? Should they go through the bank or use Phillips securities Poems trading platform?

The main difference between buying from a bank and buying through poems is as follows:

1) Time
If you are working a day-job and hardly have time to go queue at a bank, it is better for you to invest in treasury bills using poems as you can do it online with a poems trading account. If you are a retiree or work flexible hours or afternoon shifts, you may want to consider applying for Singapore Treasury Bills or government securities direct through the banks as there are no commissions or charges by the banks as primary dealers. The bank is doing "national service" to process your application for Singapore treasury bills to the Monetary Authority of Singapore.

2) Cost
Poems levies a spread of around 15 basis points (0.15%) between the cut-off yield arising from the treasury bill auction and the yield that you get investing through Phillip securities. Hence, if you had applied for the treasury bill direct, you would have saved this 0.15%. If you are a small investor with a couple of thousand dollars, this does not make much of a difference. If you have a couple of million to invest, then you can probably afford to get someone to go down to the bank and apply for the treasury bill to save that 0.15%. :-)

3) Knowing the yield
When you buy treasury bills from poems, you know what is the cut-off yield (less 15 basis points). When you apply for the same tranche of treasury bills through the banks, you are basically going in "blind" as a small player, you want to get your allotment by accepting the cut-off yield after MAS matches the succesful bidders for the auction. Hence, if you think that treasury bill yields may go up or down and want to know what is the yield before locking up your funds for the next 3 months, you may want to consider investing in the treasury bills through poems after comparing the yield against what you can get from the best fixed deposits rates for the amount of funds that you have on hand.

Therefore, the answer to this question really depends if you have time, are concerned about the 15 basis points spread and you would like to know what the yield is before investing. How you invest depends on what is your objectives in approaching treasury bills.

Be well and prosper.

How can I find out more about treasury bills

treasury_bill
Originally uploaded by panzergrenadier

How can people find out more about treasury bills? In today's internet enabled world, it is shocking that an internet search for the term "Singapore treasury bills" only yields 73 results!

The top secret investment in Singapore
That shows that treasury bills are indeed the "secret" that financial institutions in Singapore appear to be keeping close to their chest. And who can blame them? Treasury bill transactions are basically borrowings by the Government, through the Monetary Authority of Singapore, from financial institutions, corporates and retail investors. But retail investors have not been educated on this very low risk and at time reasonable yielding product that is available for the low investment amount of SGD 1,000 (Singapore Dollars One Thousand Only)! Financial institutions who are primary dealers in Singapore Government Securities (SGS) do not earn any fees from their customers walking into the banking hall and asking to buy treasury bills. They need to process the application as part of their role as a primary dealer in SGS.

Treasury bills compete against fixed deposits
If bank customers put money in treasury bills, banks would not be able to borrow from them and would lose out a valuable source of cheap funds which is their fixed deposits and savings accounts. Banks are borrowing at such low rates they pay on savings accounts and then in return lending out such funds to consumers in terms of credit card debt, personal credit, car loans, home mortgages and business loans etc. Why rock their gravy train? Why make it difficult for themselves to borrow cheap funds from the domestic market to fund their profitable lending? Why not make more money?!!

We need to be more aggressive in educating ourselves
Dear reader, for too long, we have not been more aggressive in educating ourselves on low risk reasonable yield investments such as treasury bills issued by the Government of Singapore through the Monetary Authority of Singapore. For too long, we have been losing side of information assymetry. For too long, we get hit with low fixed deposit rates for our hard earned monies while banks make use of these funds for very profitable lending.

Rise up and become financially literate
It's time to empower ourselves with the internet! Rise up and get ourselves financially literate! Teach our children and youth to appreciate the value of hardwork, savings and investment. Rise up to learn more about how to get into safe and decent yielding financial assets. Learn to make use of the power of compound interest to grow our wealth, lead us to financial freedom... one realistic step at a time!

Are foreign currency fixed deposits safe?

In today's low interest rate regime in Singapore, many retail investors are looking around for fixed deposits that give a higher return than savings and they are asking the question,

"Are foreign currency fixed deposits safe?"

What is a foreign currency fixed deposit (FCFD)?
[Source http://www.investopedia.com/terms/f/FCFD.asp]

Investopedia defines an FCFD to be "a fixed investment instrument in which a specific sum of money with an agreed upon time and interest rate is deposited into a bank. Although fixed deposits have virtually no risk, foreign currency fixed deposits introduce an element of risk because investors must exchange their currency into the target currency and then covert it back again once the term is over

When foreign currency fixed deposits are larger and longer in duration, they receive much higher interest rates. An FCFD can be a very useful and safe way to invest your money. However, you must make sure that you do not need that money for the entire duration of the term."

We understand fixed deposits
Most of us understand what fixed (time) deposits are. They are a deposit with a bank but for a specified period of time, usually 3 months to 12 months, at a interest rate fixed at the start of the tenure. Fixed deposits typically pay a higher interest than savings because your money is kept by the bank for a fixed period of time and most banks would levy a penalty in terms of forgone interest or even administrative charges if you wish to withdraw the fixed deposit before maturity.

FCFD introduces exchange rates
Now what happens with a foreign currency fixed deposit is that we introduce another variable, which is the exchange rate.

Therefore, a FCFD now has two elements:
1) Interest Rate
2) Exchange Rate

How does it work - An example
Assuming USD (US dollar) to SGD (Singapore Dollar) is 1.5 and USD Foreign Currency (FC) deposit pays 4% interest for 1 yr.

Now for you to get the 4% interest at the end of 1 year in SGD, the interest rate would have to be the same at 1 USD : 1.5 SGD. But in reality, the exchange rates go up and down all the time.

In addition, let's say you want to deposit SGD 10,000 into a 1 year FC, assuming now the exchange rate is SGD/USD is 1.5, when you invest, the bank converts your SGD into USD, say at 1.55 (because the banks will make a spread over the exchange rates) so you already lost 3.3% in value. So now you have USD 6,453.61 earning 4%.

Your interest may be less than FCFD rate if SGD appreciates
After 1 yr, your USD 6.453.61 at 4% earns =USD 258.06 interest, if you decide to withdraw capital and interest, it will be USD 6,711.75. When you exchange that back to SGD, assuming that SGD has strengthened against the USD to say, 1.4. So when you translate back your USD 6,711.67 to SGD, it becomes SGD 9,396.34!

If you play around with the interest rates, so long as the SGD strengthens to below 1.49 (> 4%) against the USD, you will lose the benefit of the higher interest rates. So it that is the additional currency risk you bear when you deposit in FC fixed deposits. Of course, the converse is true, if SGD weakens, then you will make 4% interest plus exchange gain!

Risk of FCFD
The example above shows that FCFD comes with a higher risk because exchange rates can go up or down. In general, if you do not need the fixed deposit and can let it renew without exchanging it back to SGD, then you are not affected by the variation in exchange rates. In general, where the SGD appreciates against the foreign currency that your FCFD is in, then there is a high chance of the increase in SGD exchange rate to a point that it erodes or even causes a loss to the value of the FCFD when the amount is changed back to SGD.

It is a double-edged sword and adds an element of risk that investors should review carefully before investing in such products.

Be well and prosper.

Financial Planning: Big vs Small Picture

How many of us have been approached by insurance agents, financial planners, personal bankers to do financial planning?

How may of us actually realise that financial planning is basically more of an art than a science?

I will explore what financial planning is to me and why I find that we get the priorities wrong in establishing the details without critically examing the big picture in our lives.

Traditional Financial Planning
Financial planning from what I experienced from the consumer's viewpoint, entails the financial planner helping one to establish our assets, liabilities and cashflows and then projecting it against our needs in the future. The typical financial planner will come armed with his notebook to key in critical details such as age, sex, occupation, income levels, housing type, mortage loan, car loans, investments. Now going through this part of the exercise is useful as it allows one to get a snapshot of our assets/liabilities. In accounting terms, we call this having a balance sheet or a simple statement of net worth where:

Net Worth = Assets - Liabilities

Examples include -

Assets:
Investments - stocks and shares, bonds, unit trusts, fixed deposits, savings accounts etc.
Property - valuation of property (this is contentious as I will explain further)
CPF Balances - ordinary account, medisave account, special accounts

Liabilities:
Short term credit - credit card debt, personal credit line debt etc.
Medium term credit - vehicle/car loans, renovation/bridging loan etc.
Longer term credit - outstanding HDB/private housing loan (property)/commercial building loan, etc.

Most of us tend to have a net deficit position, i.e. our Net worth is negative because our outstaning housing and other loans is more than our investments and savings. Hence, we need to work for a living for the cash flows that funds the liabilities plus our living expenses.

Now the second part that the financial planner goes through is fraught with subjectivity, estimation and guesswork. Here is where he/she asks you for when do you want to retire, do you want to provide for college tuition, how many children do you want to have etc.

Financial Planning is an Art not a Science
One of the issues I have with this part is that the future is uncertain! Whatever, we plan now is just based on what we think and there are many assumptions made. For instance, when we want to retire is both a function of our choice plus whether we have earned, saved and invested and obtained sufficient targetted returns to do so. In today's globalised ever-changing world. I am of the view that these plans are mere stabs in the dark for most of us. The number of imponderables that may hit us are limitless yet we are supposed to be able to make financial decisions based on assumptions we ourselves may not believe in to provide the information that the financial planner is able to recommend products/investments that will help us achieve our objectives.

There are some areas where the financial planner can help clarify. For example, if you have no medical insurance in terms of a shield-type of plan and your employer does not provide health coverage for in-patient (i.e. hospital care) then buying a shield plan is a no-brainer. But advising on putting money aside for college education, upgrading of house etc, are just assumptions. These change all the time and that once every other year financial planner with the tool to tell you this product or that product is good smacks of lack of real understanding of one's situation. I believe each of us who are willing and able to spend some time learning about personal finance can and should do it.

How much are you willing to live on?
The key idea is how much are you willing to live on? This one single question will determine how much you are willing to save. Ideally, establish the lowest minimum you are willing to spend on living costs and the remainder goes to savings and investments. It can be potentially that simple. Of course, this is a deliberate over-simplification as one needs to consider insurance needs etc But the key idea is that our standard of living really drives our savings level. We can try for the best paying job and career but really no level is sufficient. No one can ever say, I have earned enough as human wants (and that includes our salary!) is limitless but our needs can be moderated.

Needs vs. Wants
Is a car a need or want?
Is having 1,2,3 children a need or a want?
Is staying in 3 room, 4 room, 5 room, exec flat, condominium, in districts 9, 10, 11 etc a need or a want?
Is buyng that Louis Vutton bag a need or a want?
Is buying that newer model of handphone/MP3 player/gadget a need or a want?

We have choices. No-one forces us to make the choices we do (except for conscription and taxes). :-)

7 Step Primer for Reviewing Your Financial Plans
So where do we go from here? My simple no-frills self-financial planning process:

1. Establish Net Worth ==> Where are you now?
2. Reduce liabilities (highest interest rates to lowest) ==> Compounded interest kills you
3. Spend within your means ==> Thrift = financial freedom
4. Save, save and save ==> Grow your nest-egg
5. Read, discuss and learn about personal investments ==> Be educated!
6. Invest, invest and invest ==> Take steps to grow your net worth
7. Go back to step 1 ==> It is an interative process that you own... There are no shortcuts.

I have found that this works for me though I have also gone through financial planning sessions with various big insurance companies with those software tools and fancy reports and pie-charts. So far, my best financial decisions have been step 2 and step 5.

May you grow and prosper!

P.S. I am not running down financial planners and their tools, they do serve a need in the community but I am providing an alternative view to individuals who want to see things from a different perspective. Caveat emptor, let the buyer beware!