Monday, June 22, 2009

Bond funds??

I was reading an online magazine and a financial advisor from a reputable company suggested a bond fund portfolio for risk averse people. He claims that it has low risk and by having bond funds, one can invest in global fixed income and withdraw a portion of it from the bond fund periodically, funding one’s retirement.

Well, even though I am about to have exams in less than a week’s time, I can’t help but to write something to kick the joker’s ass.

I have compiled, as much as possible the SGD returns of bond funds, available to the DIY investor from fundsupermart. The below data are correct as at June 22nd, 2009.

Returns tabulated using the data of bid to offer returns to account for sales charges. Returns tabulated are also compounded. Example, if I invest $100 in Fund A and it gives me a 3 year compounded return of -2%, I will have $94.11 at the end of 3 years.

I have tried to compile the funds that are named like fixed income instruments. I could have inevitably missed many other bond funds. Apologies on that.


Bid to offer returns:

3 years: -0.7%

5 years: 1.8%


Bid to offer returns

3 years: -1.6%

5 years: -0.9%

DBS ASIA BOND FUND SGD (CL A) (only up to 3 years data)

Bid to offer returns:

3 years: -3.9%

5 years: NA


Bid to offer returns:

3 years: -2%

5 years: -0.1%


Bid to offer returns:

3 years: -7.5%

5 years: -3.2%


Bid to offer returns:

3 years: -3.7%

5 years: -2.2%


Bid to offer returns:

3 years: -6%

5 years: -4%

FIDELITY INTL BOND A-SGD (only have 2 years of record)

Bid to offer returns:

1 year: -9.5%

2 years: -6.1%


Bid to offer returns:

3 years: -5.1%

5 years: -0.7%

ING RF EM MKTS DEBT HC EUR (only 4 years of record)

Bid to offer returns:

3 years: -3.3%

4 years: -0.9%

As one can see, most if not all of the bond funds returns are in the red!!

In Finance 101, we know that bonds are definitely part of the stock portfolio to lower the overall beta and risk of the portfolio. However, bond funds are altogether a different animal. There are a lot of expenses, upfront and inherent costs that erodes away investors’ value. The recent 3 years should theoretically be a bull market for bond funds, as equities tanked (they are inversely related, theoretically). Why is it that they are performing poorly as well? Are fund managers acting on the best interests of the investors? Are they imposing too hefty expense ratio or incurring unnecessary transactional fees that are ultimately borne by investors? We do not know.

If I were to invest in bonds, it will be truly bonds that pay me a fixed coupon rate and redeemable upon maturity. Not bond funds that pay me nothing and return me less than my principal!

Just for information sake, a bond is a debt issued by a company and pays a fixed amount (coupon) which will be redeemable at par value(price which was originally sold) by the company upon maturity. The maturity date can be 1 year to 100 years, depending on the financing needs of the company. It can be traded at the secondary (bond) market.

Ok, I hope I sound more convincing than the joker financial advisor. Who is employing me for financial advice now? Kidding!

Friday, June 12, 2009

Marriage: A risky business

Lately I came to know a few friends from different social circles getting married. I am not sure if you call it pre marriage jitters, but 2 different couples who have already bought HDB houses are already having 2nd, 3rd thoughts about that person they want to marry.

One couple was together for 6 years, and the reason for getting married is because they have already known each other for 6 years and time is running short! The guy in the relationship really hates to receive SMS and calls from his fiancée, often trying to avoid her whenever possible. Breakups have been tried and failed due to pressure from the fiancée’s whole family, he was time and again held hostage emotionally by them.

As for the other couple, they rushed into a marriage less than 1 year of their relationship as they were keen to receive the 40k CPF housing grant by buying a resale HDB. Both are unwilling to go through the marriage now, but the house had been bought, banquet booked, bridal shoots taken and renovation paid. All by installments. There is little they could do but carry on with the mistake. And by the way, they no longer talk anymore, even over dinner.

Needless to say, we can foresee that they might not live happily ever after upon marriage.

Risk: Considering sunk costs

“It will be a waste if we don’t get married after being together for so long” is not a good reason to get married. Even if we were to analyze the issue from finance perspective, knowing each other for years is actually a “sunk cost” which should not be considered when making cost benefit decision. (Sunk costs are costs that cannot be recovered once they have been incurred. However sunk costs greatly affect actors' decisions, because humans are inherently loss aversive and thus normally act irrationally when making economic decisions. )

Actually marriage is a cost benefit decision between 2 persons. We should be choosing the person we love that would provide the biggest benefit and lowest cost to us in FUTURE. In order words, we want to maximize returns and minimize risk. Hence, “sunk costs” like knowing each other for years, already spent a lot of money on him/her, already bought the house etc should never be considered for marriage decision making, if you are a rational person.

We should rather, be concern about opportunity costs. If I forgo this girl (or project) and I invest time and money in another girl (or project), what is the projected benefits (cashflows) from the new selection? Is the net present value or internal rate of return higher? It depends on your expectations (discount rate) though!

Unfortunately, for marriage, the payback period for the investment is often minimum 40 years. Hence, it is a risky investment!

Risk: Non diversifiable risk

The other reason to consider marriage as a high risk activity is because of its non diversifiable nature. I can only choose one spouse and live with it. I cannot marry many (for non muslims) and spread my (their) eggs over few baskets. Hence, it is of paramount importance to choose the correct one! Even if one may argue that you can choose the best wife from many girlfriends (though not ethical), choosing the correct girlfriend may not turn out to be the correct wife, mother (for you children) and daughter-in-law.

Just like business climate, tax policies and consumers’ taste change rapidly; your spouse will also change. The same spouse today may not be the same one 10 years later. You will need to discount and adjust your expectations accordingly, which may be painful and difficult experience.

Risk: Unfavourable historical returns

Look around yourselves. Are there happier married couples or happier singles? What is the percentage of divorce and broken families? Again, from current statistics and “historical perspectives”, most people are better off single, which again points to the risky nature of marriage!

So if you are considering to get married, do think carefully! Do not get married for the wrong reasons!

After all, life can only be understood backwards; but it must be lived forwards.