Savings account with higher than FD interest till June 2020 (first 100k to 200k)

1M SOR rates has turned negative (https://www.businesstimes.com.sg/banking-finance/singapore-sees-negative-rates-creep-in-with-flush-liquidity). The latest Tbills auction closed near zero yield. As monetary base expand across the developed countries, savers are penalised as the printing of money force down the price and value of money. 

Looking at the current environment, some banks provide above average deposit rates:

Hong Leong Bank first 200k = 1.5975% 

CIMB first 100k = 1.43% (not stated valid till when)

RHB High Yield first 100k = 1.4125% (not stated valid till when)

Maybank Isavvy first 200k = 1.3%

SCB Esaver first 200k = 0.7% (till July)

Out of the 4 malaysian banks, I have 3 accounts with them. They do need a lot of patience to work with. HL bank does not even have a banking app (if you downloaded one, its the Malaysia's version). Maybank is actually the best among them in terms of online banking, recently improved interface sees them assimilating to our local banking digital expectations. 

As local banks with huge liquidity from locals and foreign funds are unlikely to match their rates, savers unfortunately have to put up with some inconvenience of having multiple accounts with sometimes frustrating digital banking experience.

Hong Leong Bank does not even provide estatements. You need to pay then to generate a statement of account standing. I do not think it will cultivate any customer loyalty as deposit rates becomes commoditized - ie the highest rates take all. But given the rates are higher than all new mortgages rates now, unfortunately, we would have to take it, even if there is no internet banking!

Setting aside a war chest of $500,000

It feels good to be able to work from home. 

Bloomberg terminal at finger tips with Netflix at the background.

The recent bear market provides a good opportunity for long term investors. I would gradually deploy the funds over the course of possibly 6 months to 1 year. It is hard to see where the bottom is. On one hand, the bulls are saying the Trillion dollars worth of stimulus will find its way to financial markets and raise the value of stocks. The bears are saying the recession will be worse than GFC and it doesn’t make sense for the market to just drop 20%.

I don’t know.

Buy when there are dips. My war chest are placed in HL bank @ 1.98% and Maybank @ 1.75%. I believe this 2 banks offer the highest no lock in rates. 

Do not buy insurance savings plan to save for retirement. Save 300k by reading this!

There are many endowment plans and single premium plan marketed by insurance companies. One of them works this way.

You pay $1M upfront and 5 years (60 months) later, you will receive income for life. The income is about 42k a year. After 5 years, your principal is guaranteed. Apparently, it is selling like hot cakes as people like guaranteed products.

To me it is plain silly because there are like a billion alternative investments equally safe and more liquid.

For example, you can buy a portfolio of Unit Trust. First State Dividend Advantage, Schroder Asian Income, First State Bridge, Schroder Asian Income etc. They are not the best but surely can generate 5% pa or more and pays you dividend straight away upon investing.

Or simply invest in infinity series world equity funds. Expense ratio of 0.4% only. 

You can buy 4 different bonds of different tenure. For example SPH 3.2 2030, Wingtai 3.68 2030. Or today's IPO Shangril 3.5% 2030 bond. 

If you still think it is risky, then buy STI ETF! It pays you at least 3% a year of dividends! I do not think the 3 banks + Singtel will go belly up in 10 years since they form majority of the STI ETF.

After 10 years, the insurance plan would have paid you 42k x 5 years = 210k + 1M capital.

STI returns assuming 3% dividend and 2% capital gains (cash out) would have become 1.5M after 10 years. Similar so for your Unit Trust portfolio, assuming 5% dividends and 0 capital appreciation.

Your SPH + Wingtai + Shangrila bond portfolio would have become 1.35M assuming your coupons are reinvested at 0%. I am not even talking about decent perps (since your insurance is in perpetuity right?!) like SPH 4.5 perp, UBS 4.85 perp, Ascott 3.88 perp, Mapletree 3.95 perp, wingtai 4.48 perp, FPL 4.38 perp.

Why buy something, receive guaranteed negative returns for first 5 years, poor liquidity, pay interest for 5 years with no cash flow return (banks provide financing) and then get sub par returns thereafter?

If you are supporting your insurance agent, relationship managers, IFAs because of their excellent service, then give them money directly instead of compromising your returns! 

Effectively, you are foregoing almost 300k or 30% of your returns over 10 years!

Are their service and advice worth 300k? They probably make 10k commission from your 1M only. If they are from banks, the revenue works out to be 2k commission to them. Please, give them 11k from your pocket instead. Everyone will be happier.

Miles or cash back? An opportunity cost perspective

I used to be a 100% cash back credit card chaser as it is hassle free and cash is always better than a captive currency like miles.

Recently, I have been reading quite a bit on miles blogs. Apparently, there is strong interest in chasing the miles to redeem for premium flights. But do they actually make sense? The value per miles as advocated by some blogs is 1.9 cents per mile. Hence even paying 2% admin fees to buy miles make sense for some.

I would probably value it at no more than ~1.57 cents, which I will illustrate simply below, base on my personal circumstance.

As I spend 3k per month, I usually split up 2k on UOB one card (5%) cash back and 1k on OCBC 365 cash back card (averages 3.5% or so). For simplicity, the cash back I get back is roughly $135 per month. This works out to be 4.5% blended spending cash back.

If I were to spend it on miles, I probably would apportion my spending on 3 cards: $1k UOB Visa pay wave (4 miles), Maybank horizon (3.2 miles) $1k, miscellaneous $1k spending on UOB privi miles card @ 1.4 miles/dollar earn rate. I can earn approximately 8600 miles monthly.  

Hence the opportunity cost to earn the miles is to give up cash back of $135 which works out to be 1.57 cents per miles. The true opportunity cost should be even higher since cash is paid frequently  to offset bills and miles can expire (or even devalued).  

The attractive part of miles redemption is that business class tickets actually cost roughly only 30%-70% of outright purchase price when redeemed using miles. It is almost similar to earning a premium flight ticket discount coupon by using miles card.

For instance Sin-HCM-Sin business class ticket costs $1075 or 43k miles (opportunity cost $675 cash back from spending. 37% discount on ticket).

Business class ticket Sin-HK-Sin route costs $1800 but or 61,000 miles (opportunity cost $958 cash back, 46% discount on ticket).

The further the distance, the more value is derived from miles. Sin-Auk-Sin cost $5800 or 124,000 miles (opportunity cost $1947 cash back, 66.4% discount on ticket).   

It is actually uncomfortable for me to abandon cash back card altogether and earn delay gratification on business class travel. However, given that I am unwilling to pay for business class tickets, I would probably give miles cards a try.

Signs up are probably much faster to earn then spending. Hence, I am likely keeping my UOB one card for the 5% cash back but earning miles sign up bonuses to kick start the discounted business class travels.

Hence I applied for the SCB X card 100k miles for a start. That actually costs me $700 annual fee + $300 opportunity cost of using 5% cash back card = 1k. Hence my miles cost me 1 cent/mile.

In summary, it means that miles should be valued base on the cash back you give up (opportunity costs) and not on the advertised rates on blogs (base on the cost of business class travel – you wouldn’t spend cash on the tickets anyway).

Redeem miles on business class travel make some sense otherwise just stick to cash back cards to earn the cash and pay for economy class tickets.

It is possible to stick to 1 card for cash back (eg if spending is around $900/mth stick to OCBC/Citi cash back; $2,000/mth stick to UOB one card).

For miles chasers, a lot more planning is required on which card to use in order to stretch the miles rate.

You shouldn’t accumulate miles on your own and your partner should preferably share your obsession in chasing miles.  

A hybrid approach will stretch your dollars more; using miles card that earn 3.2-4 miles per dollar targeted spend; general spending to earn 3%-5% cash back is preferred over 1.4-1.5 general spending miles.  

It makes life a bit more fun, brains a lot more thinking to use a miles card!

Random reflections on my spending

Been awhile since I blogged, in fact more than a year! The initial rationale of having a finance blog in 2008 was to detail my decisions on spending and investing to provide a platform for reflection.

As I progressed in my career, the probability of financial independence becomes more certain. Admittedly I became over confident that my decisions on spending are right; up to a point along the way it became ostentatious and losing myself. Buying branded goods, driving luxury cars, watches, hotel membership on dining, 6 travelling trips a year (just to maximise the free 24 priority pass lounge visits – every trip I can utilise 4, 2 in SG, 2 overseas) became a way of life.

 This is no good. This is not me.

Where did the initial child like ambition of early retirement and simple life disappear?

Slowly, I started to declutter goods that I bought for the purpose of _____. As I struggled to fill in the blanks, phrases like “showing I can afford”, “keeping my image”, “keeping up with my peers” appeared at first instance.

Quite retarded reasons.

Fortunately, I have managed to declutter some. 2 years ago, I signed up for the AIA vitality and discovered that by wearing a fitness watch, I am able to earn $10 grocery vouchers weekly, discounted movie tickets monthly and yearly $150 cash rebate. The perks are more than sufficient for me to wear any other watches that do not pay me weekly cash!

3 years ago, I was at the cross road to change my vehicle. It was extremely tempting. Back then, I was driving a 2.5L luxury car and finances allowed me to continue driving one. It didn’t help when peers were changing to nicer rides. I test drove Jaguar, Mercedes, BMW, Lexus, Infiniti. Porsche was very close on my list as well. After all, a colleague who was earning lesser than me could buy one as well. I can stretch my budget to 20k a year depreciation cost right?

Fortunately, good sense prevailed. I evaluated the decision economically. I only wanted a car slightly better ( in terms of size, design, performance) than a bread and butter (point A to B) car like Toyota Altis or Honda City with slightly higher depreciation cost. 

I managed to buy a 1.6L humble continental ride that comes with only 6 speed gear box, all around sensors, memory seats, 4 doors (keyless entry), leather seats, Apple car play, reverse camera, 18 inch sport rims and free 1 year insurance cap at 1.5k. The dealer also provided 5 years warranty and servicing further reducing my cost of ownership till 2022.

The depreciation on straight line basis worked out to be $10k/year, cheaper than a camry of around $12k/year then.

x

So far it has not given me any problems other than being a “laughing stock” amongst my peers.

“Car already so expensive in Singapore, it is stupid to buy an expensive one and not enjoy it!”

“No resale value one!”

“Kiam kanna!”

These are some of the remarks made by peers. Living with it saved me at least $5k a year. I think I can live with it.

My main cost of living is housing, transport, travel and food. For housing, as my property is in the money, in a way I am living for free. This is because I am able to cash out upon sale of my property and all payments made for the house from day 1 will be paid back to me. I can subsequently invest the money to generate an income to compensate rent or simply buy another HDB and fully pay off with my CPF balance.

I am actually contemplating to sell my house for a resale HDB in order to live even more simply. Of course more objections from people around me living in landed and condos:

“What for? Save the money and not spend it belongs to the bank!”

 “I have not seen anyone getting rich buying a resale HDB.”

It may not happen eventually, as I am comfortable at my place right now. 

Although I rarely use the gym, pool and have never booked the common facilities. 

The things I like (and not available in a new resale HDBs) are sheltered underground parking, kitchen built-in rubbish chute, nice lifts with aircon lobby, balcony (for plants and clothes drying) and my low entry purchase price (on hindsight). Moreover, the monthly maintenance of $300 is about $150 more than a comparable HDB (after accounting for parking). I will probably end up spending $150 on gym/pool facilities if I live in HDB hence the savings are insignificant.

For food I am spending approximately $1.5k a month on it. This works out to be $50/day. I do know that by picking up the skill of cooking I am able to keep food expense to $500 a month. It is something I would definitely explore as I move towards early retirement. However at the moment, I still quite enjoy the daily restaurants dining.

In fact, I do try to dine at odd hours where possible where there are 1 for 1 deals in town and neighborhood areas. Some credit cards also allow 50% off dining which fits my budget and taste buds comfortably.

Some random rants! I think I need to blog more or I will just have endless to say in 1 post!

Rent or Buy House In Singapore?

As I reach MOP for my house, I face 2 choices: To cash out and rent or to buy (another one). Conventional wisdom (or culture) states that we should always buy, otherwise we are subsidising the landlord. This mindset is especially prevalent in Singapore where house ownership is more than 90%; public housing is highly subsidised and housing instalments are paid for via CPF.

Due to the CPF restrictions, many people feel that they are not paying for housing as it is paid for via CPF contributions. This reasoning is flawed as CPF can be cashed out at age 55 and pays a respectable 2.5% risk free rate. If we were to ignore mental accounting and view CPF as really our own money, the tendency of owning a home may differ substantially.

Let's breakdown the cost of my home ownership and determine if it makes sense to rent or buy.

Owning a home (calculations exclude utilities)

20% Downpayment for a 1.2M private property: SGD 240k (add 10k for basic renovation to round up to 250k)

Yearly interest payable base on 2% (long term rate) approximately = 960k x 2% = SGD 19,200. I am assuming interest rates rising gradually but the principal is reduced hence yearly interest paid works out to be 19,200. It is hard to forecast the total interest paid but let's just simplfy it to SGD 19k.

Yearly maintainence: SGD 4000

Property tax: $400

Spending on servicing of aircon, repair/change appliances - $600

Hence per annum, the cost of maintaining a 1.2M home for own stay is $24,000.

I am not factoring monthly instalments (of $3500) as the principal paid is your own money and can be recouped upon sale of property.

They key deciding factor is whether you can generate enough returns on the SGD 250k downpayment such that renting makes more sense to buying.

Assuming a 5 year investment horizon (on non leverage basis), a 250k investment if lucky enough, can generate a 5% return or 12,500 per annum return. If we were to be risk adverse and purchase the 4.35% Astrea 4 bond, assuming a buy price of 102, redemption of 100 at year 5, total return is 49375 or 3.95% (assuming interest accumulated reinvests at 0%).

The base case scenario will be to park the funds idle in CPF at 2.5% and thus earning $6250 interest per year.

Looking at the calculations, the cost of owning a 1.2M home works out to be

Opportunity costs (6,250 to 12,500)+ Interest 19,000 + Tax, servicing, maintenance 5,000 = $30,250 to $36,500

Renting the same house works out to be $2,500 - $3,000 per month assuming it is either a 2BR in suburbs or 3BR in further flung places.

How do we make a property purchase decision if we are indifferent to buy or rent? I think a key differentiator will be a person's investment ability.

For a person who can generate 10% P.A on 250k, it is intuitive selection for him to rent and invest the rest. However, not many people I know (myself included) can invest at that rate (especially when equities markets are at record highs).

The selection is much easier (no brainer actually) when the person is deciding whether to purchase or rent a HDB. HDB is highly subsidised (and conditional, not everyone can buy) and cost probably just 2.5k/month to rent a 4 room flat (in central areas). The interest cost is halved and home ownership expenses works out only to be less than 20k including opportunity costs. (Renovation costs more for HDB flat though).

(I am not factoring utilities or other expenses which need to be paid if one were to rent as well)

Furthermore, buying a home provide you with an option (up to lease expiry) to hedge against housing/rental inflation as long as you continue servicing your mortgage. It comes with a piece of mind that you own the place and not be at the mercy of landlords when markets are rising. However, it places a unnoticed strain on retirement income due to constant depletion of CPF savings.

So how? Rent or buy?

For people who choose to stay in HDB, buying makes perfect financial sense.

For people who are at the cross roads between renting and buying private property, take note that renting is akin to shorting the property market - you borrow a house, pays interest (rental on it) while waiting for housing markets to come down. If it comes down, you can buy for instance at 10% discount from current levels thus profiting $120k savings (10% of 1.2M). The rental you have paid eg 5 years x 30k = 150k; Add on the 250k returns of 3.95% = 49,375, the difference is SGD 19,375. Not too bad since the future savings on the original 1.2M property is compounded over the long term (on purchase).

It is not an easy decision to buy or rent, long or short. If we are in the middle of a financial crisis, it is an easy decision to rent (a year) first, buy later. Since rental is low and home prices will continue to fall. However at current juncture where there are no foreseeable crisis on the horizon, shorting the housing market may not yield positive return over next 5 years. There is always the risk that investment on the initial 250k goes sour or markets run flat or higher for another 10 years. Then one would have to continue renting for even long period to ride out the market.

In summary:

Buy HDB is always better than renting if you can

Rent private housing only if you can invest and earn at least 4%-5% P.A on your downpayment + reno budget

Buy private housing if market is trending upwards and be prepared to rent at least 5 years if one is timing entry into the property market. This is to provide the runway to allow cash investments to reap their intended returns while waiting for housing markets to show signs of bottoming.

That said, refer to my blog post in 2013 on HDBs. I think I am fairly accurate here. https://sgbluechip.blogspot.com/2013/01/hdb-prices-will-come-down-because-1.html

Knowing my willingness and ability to take risk

In finance world, willingness and ability to take risk belong to 2 different concepts. Willingness to take risk refers to one’s character, education, investment experience, culture and even religion.

For instance, many colleagues around me are high income earners. However, they only invest in time deposits as they are either conservative, have poor experience in investment or simply cannot invest due to religious constrains. They are unwilling to take risk for mainly emotional reasons.

On the other hand, ability to take risk refers to quantifiable criteria like level of wealth, investment horizon, liquidity preferences and investment objectives. A investor with $5M in his account will most likely not hesitate to invest $250k into a high yield bond. His ability to take risk comes from his ability to lose (more) compared to the investor with a much lower level of wealth.

Similarly with a lower liquidity preference and longer time horizon; investors are recognised as having higher ability to take risk and hence often advised to invest in riskier asset classes to enhance returns.

In a bullish market, investors’ ability to take risk increase dramatically as their wealth increase in tandem with the rising market; the euphoria sets in, reinforcing their positive experience and thus raising their willingness to take higher risk. Unfortunately, all bull markets will eventually lead to high levels of speculation towards the end cycle of bull markets. For instance, the China market rallied more than 50% within 1 year of mutual fund investment. I took profit then, realising close to a 50% gain as seen below due to the unsustainable yearly returns.



Vice versa, a falling market will always lead to lower stock trading volume as investors become poorer and reduce their ability and willingness (due to poor experience) to buy risk assets.

However, the above definitions are purely academic. Ability and willingness to take risk, really, is subjective and varies for an investor sometimes even at different times of a day!

Nobody truly knows their willingness and ability to take risk until going through at least one bull and bear market cycle. Suitability tests on investments are just a rough gauge at best to determine one’s risk profile.

This is the same concept for inflation figures. Our official figure for inflation is between 2%-4% over the past few years. However, the inflation figure is only true for us if we consume products in the exact same composition of the basket of goods used to calculate inflation.

In reality, every one’s inflation figure is subjective; by the same token, every individual’s risk profile is unique and cannot be measured using standard questionnaires.

The current bear market is into its 11th month. Till date I have reinvested all the dividends (for funds) and traded bank bonds (which have rallied due to risk aversion) to higher yielding bonds. At times, I do have regrets of not selling EVERYTHING at the peak (who doesn't!) and purchasing now instead. However, every bear market I experience will only reinforce my mindset to stomach risk, enhancing my willingness to take risk. It also serves as a test of my current portfolio's Value at Risk and its ability to resist market shocks like now. In fact I have a better idea of how my portfolio will behave during stressful market conditions.

Thus, in order to maximise your return on investment given your risk profile, stay invested in bear markets and lime me, you will know yourself better on your ability and willingness to take risk!