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!

Modest Gain in my Unit Trust Portfolio

I seldom keep track of my Unit Trust portfolio as I have spent extensive time to construct it at the onset. It is engineered to pay monthly dividends as a form of consistent profit taking and ideally, the $600k portfolio should be paying 5% dividends and having 0% growth. It was constructed with a balance portfolio in mind, diversified between equities and fixed income; invested across different currencies, geographies and having negative correlation with different asset classes such as US treasuries, equities and soft currencies. 

By and large, the portfolio exhibits low volatility month on month basis. I am actually please to see negative positions as this means that there are some form of negative correlation within the funds. I will be worried if everything is positive (or negative!). 

The investment horizon for the Unit Trust  portfolio is for extended period and rebalancing is not required (ie selling underperformers and buying more winners) as I ignore market noises and continue to receive the monthly dividends. I will opt for dividends reinvestment should a bear market comes. 

The Unit Trust portfolio excludes my CPF and SRS funds. I still hold a concentrated portfolio of Singapore equities comprising of 12 stocks. 

Good bye textbooks..

Today my maid was clearing my room and asked whether she could (finally) clear my unwanted texts, files and notes I have not touched for years. I gladly agreed.

I used to have the habit of keeping ALL my textbooks religiously for fear that I may need them if I ever meet an unsolvable problem at work. My belief was shattered as over the past decade, nothing of such happened. 

No wonder I do not see any plumber or air con technician bringing along their work manual to my home! The notes and text I have “saved up” no longer serve any purpose other than giving me lift to nostalgia lane. Over the years I have accumulated a lot of books but not knowledge; a lot of information but not intelligence; learnt a lot of case studies but not actionable plans. Are they worth keeping if they no longer serve the purpose of education?

I am a firm believer that the purpose of education is to fill an empty mind to an open one; thus I would gladly trade them for a cleaner room.  

Finally, I have more breathing space to fill up an open mind!

SBC predictions: Elections will be this year 2015 (2H), BEAR market after.

In my course of work, I am rewarded directly how accurate I read the future. If I get it right, clients make money and I am rewarded with trading fees.

Often, I base my decision on a combination of logic, pattern observation and intuition. Sometimes the trend are extremely obvious, eg we should be buying USD or HKD ever since there are talks from the Fed to hike rates last year; we should have been (and still) borrow in Eur, in which the interest rates is below 1% and buying into higher yielding assets like USD or good grade SGD bonds. When Capitaland issued a new 10 year bond paying 3.8% (reduced from initial price guidance of low 4%), everyone who has money should have bought it, as banks are willing to lend at least 70% of the purchase price and your outlay is only $75,000 for a $250,000 nominal value bond excluding fees. Today the bond trades above 102 bid. The upside in H shares look extremely glaring with good banks like ICBC, ABC, BOC (and many more), trading dividend yield of 7% with PE ratios of 5. Warren Buffet has made a comment that this is as good as money on the ground. Just pick it up. It was a no brainer that SIA and other airlines will benefit hugely from the massive oil correction; local banks will benefit as interest rates are expected to go up (3 years ago till now) etc.


I thoroughly enjoy the satisfaction that comes with monetary reward when I am proven right at work. Sometimes I do get it wrong as well. For instance, I did not expect HK gaming stocks to take a 40% hit within a short span of 6 months, oil to correct more than 50% or CHF will be rallying 30% last night. Good quality china property bonds are still paying more than 7% coupons but yet trading less than 95 and many more. I don’t get it wrong often, but sometimes not expecting an event means getting a forecast wrong due to the ripple effect of events. That’s life.


Today let me make a free forecast on the timing of Singapore elections. Again, I have a 50% chance of getting it right, if its not this year, it will be next. However, it is more likely to be this year, after National Day and PM rally for the following reasons:

The SG50 is an elaborated celebration. I rarely follow what it is about, but it seems to have propaganda to let Singaporeans have a euphoric feel on our past achievements and be ecstatic about the future.

Mediacorp channel 8 shows are advertising blatantly in their drama on the pioneer generation cards and other excellent policies the government has administered. Ministers are attending talk/interview shows on TV frequently!

Mediacorp is 100% Temasek subsidiary.

There will be more COE supply from Feb 2015 onwards, alleviating our cost of car ownership.

The earlier the elections, the better for the ruling party. Less youngsters turn 21 to vote against them (if you have been reading SMRT feeback and The Real Singapore on Facebook), while more elder generation are alive to vote for their favourite elites.

The bull market started in 2009 March, it is in the 6th year and we all know we are nearer to the next bear than an extended bull. Will the ruling party want to take the risk of having an election where there is a financial crisis, where unemployment will be higher and less votes for them?

Revamp of IPPT and RT this year. This will please many reservists, including myself. I will only need to pay a fine if I do not attend IPPT after elections this year. Good job for that. I appreciate the grace period.


Low oil prices will mean inflation will be lower this year, giving MAS more leeway to weaken SGD and this will be a boost to our GDP as we are 300% dependent on exports. Oil prices will not stay low forever anyway. Many countries need it to be at US$100 to balance their social budgets.

What’s the use of predicting? It is useful for me as I can have a view of what will happen this year and plan my investments or even my career according to my central view of the world.

I used to work in a civil service and I could not stand the hypocrisy of incapable people playing politics to hide their incompetence. Though I have seen many good people in mediocre roles (myself included! Haa!) who on hindsight could achieve much more if they have worked in the private sector. Yet the environment was so stifling and many doubted themselves thus not daring to venture out of their familiar zones but stayed in the old place, suffering. In 2009, I made a prediction that the markets will definitely turn around sooner than later; studied a masters in finance then and started a junior role in banking while studying part time. Today I have enjoyed a good 5 years in banking and grown my personal investment to a 7 figure sum, pretty much in tandem with the bull market. Hence I am a firm believer that everyone should have some form of predictions that will aid them in earning their first and subsequent pot of gold.


Back to my predictions; look at the return on STI on the following election years


2 Jan1997 general election, STI contracted from 2449 (2 Jan 1996)- 2216 (3 Jan 1997), loss of 9.5%. 1.5 years later, STI hit 856 in August 1998.

3 Nov 2001 general election, STI contracted from 1952 (3 Nov 2000) - 1341 (1 Nov 2001), loss of 31%. STI was nearly at the bottom then but 1.5 years later, on 1 April 2003 STI fell to 1281.

6 May 2006 general election, STI rose from 2161 (6 May 2005) – 2632 (2 May 2006), gained of 21.8%. The bull market saw STI at 3805 in Oct 2007. 2 years after elections, STI fell to 1594 in Feb 2009.

7 May 2011 general election, STI rose from 2752 (7 May 2011) – 3099 (2 May 2011), gained of 12.6%. STI is around 3300 now.

If my prediction that 2015 Sept is the elections, by past 4 patterns, it seems that STI will always be lower after elections, meaning a bear market will occur. There are no visible patterns on whether STI will hit higher before elections.

Be careful of your investments, after elections.