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Want to be wealthier without higher risk?

Tuesday, November 6, 2012

More than a year ago, I wrote about a conversation I had with someone who was worried about the effects of inflation on his personal wealth. By chance, I met him over the weekend and we spoke briefly. He lamented that he did not listen to me as he could not come to terms with the idea that to protect his wealth, he had to take risk.


This reminds me of a saying in Hokkien I heard recently:
Afraid that grasping too loosely might let the bird fly away and that grasping too tightly might kill the bird.

So, fearing the wealth destructive effects of higher inflation, he wants higher returns from investments that have higher risk but the problem is that he cannot accept the higher risk!

If not for the fact that he looked so serious and troubled, I would have made a joke out of it.

This person is very careful with his money. Perhaps, too careful. Well, he has a family to care for and with young kids, I suppose he is right to fear risk. If there should be an investment that would offer him high returns with near zero risk, I am sure he would have jumped on it, but is there such a thing?

Anyway, I did not know what to say to make him feel better and after making some small talk, I bid him farewell. Would you know what to say to make someone feel better in such a situation?

Some people are just ill disposed to risk taking. Live and let live, I guess.

The paradox is that he is actually already taking risk by leaving his money in his bank account in the current low interest rate, high inflation environment and he is definitely not growing any wealthier.

Related post:
To protect our wealth, we have to take risk.

33 comments:

SC said...

AK71,

you can ask him to put his money into TEP, or what is known as Traded Endowment, which gives 4-8%, and is 90% protected under the UK equivalent of MAS.

At least they are more reliable than our MAS.

The downside is the exchange rate loss, but looking at UK pounds currently, the downside is pretty low, while the potential upside gain from pounds is much higher.

This is low risk, and better than fixed deposit, but no capital gain unlike Reits, and of course, no capital loss, except for the potential forex.

AK71 said...

Hi SC,

A friend told me about this before but I am uncomfortable with things I don't fully understand. So, I won't recommend this to anyone.

If anyone is interested, Mr. Tan Kin Lian blogged about this before:
FAQ: Traded Endowment Policies.

opal said...

Frankly, I have no solution to offer if someone asks me the same thing.
Agree that by not taking risk and putting everything in savings acc / fd, he or she is taking a risk. And it is fairly certain that inflation will erode its value.

Maybe he should consult a financial adviser.
I would imagine possible advices like identifying the amount that cannot be touched. And the rest to be invested. Personally, I think it s a little risky to buy shares of individual companies especially if one doesn't understand the business. He can consider buying index etf on a regular basis.

Don_Jerome said...

Hi AK

It's a catch 22 situation...I think it's hard to help such people because if they cannot sleep because of fear, it's better they stay out. Cos the fear will kill them be4 inflation. I generally try not to discuss such stuff with them, I think the best thing for them is not to think about it and just have a prudent savings plan.

maybe go into SG bonds?

AK71 said...

Hi opal,

This person would probably never consult a financial adviser. His brother who is a friend of mine from my NS days had an adviser from Prudential who helped to invest $100k of his savings a few years ago and then the GFC came...

Two years ago, this friend of mine asked me how I was managing my money and I told him I was able to get 10+% in yield per annum investing in selected S-REITs. He was very impressed but sceptical too.

I warned him that S-REITs' unit prices could fluctuate and he could suffer from paper losses. That might have frightened him away. Haha.. I told him that investing in S-REITs is primarily for income.

Anyway, since the GFC, he has not invested in any stocks or unit trusts.

AK71 said...

Hi Don Jerome,

There are people who are petrified by fear and there are those who act in spite of fear. ;)

Bonds could be a good idea for him, especially those which are higher yielding from blue chip companies. Singapore government bonds are not as attractive in terms of yield but they are safer, I guess.

EY said...

Hi AK,

Live and let live. :) To each his own. The best part about growing older is learning when to stop being helpful. For folks enslaved by fear, they are unable to snap out of that nagging negativity. Ask him to try bungee jumping. What doesn't kill will make him stronger. Epiphany gotto come from within. No? :D

Cheers,
Endrene

AK71 said...

Hi EY,

Yes, indeed and your mention of bungee jumping reminded me of a blog post that is almost 3 years old. Haha.. ;p
--> Bungee jumping, anyone?

EY said...

Hi AK,

Much as I sounded so ya ya, I haven't been insane enough to put my life on a line. Haha.

But when it comes to investments, I'd gone through that risk-seeking phase and busted my trading account twice through the 2 financial crises. Unfortunate but true, I'm one who needs to learn my lessons the hard way. So honestly, I can empathise with that guy for being risk averse. Losing money=losing the sense of security. That could challenge his belief about himself being the provider/pillar of the family.

I'm sure he'll do all right. Perhaps ask him to top up his CPF-SA account with some of his spare cash. The gahmen won't run away rite? And the first $60k will enjoy 5% interest. :)

Cheers,
Endrene

la papillion said...

Hi AK,

This type of person are extremely 'dangerous'. I'm afraid of giving advice. People who are too adverse to risk, when they follow your advice and something happens, I don't think you get anything good out of it. If things are well, of course everybody is happy.

The other thing is that for someone so adverse to risk taking, it's like a dormant volcano to me. One day, when the pressure gets so high and the top blows off, he'll tend to overcompensate by doing pretty risky things.

I don't know him, of course, so that's just my baseless speculations.

Not everybody is complaining to seek advice and to look for changes in their situation. Some are just complaining for the sake of it. To tell one from the other is wisdom indeed.

AK71 said...

Hi Endrene,

Sorry I called you EY in the earlier reply. ;p

Endrene is a pretty unique name and it is the first time I have seen it. I am hazarding a guess that it is a female name. Am I right?

Well, I didn't bust any trading account but I did lose a lot of money before to Mr. Market. Not a nice feeling, for sure.

See: Excuse me, are you an investor?

I lost in excess of $100K at one time. It was really painful.

As for topping up the CPF, yes, the first $20k in the OA and the first $40k in the SA will get an additional 1% interest.

I would also encourage him to start a SRS account to save on income taxes which can be quite substantial.

The drawback of all these would be the lock up periods, of course. :)

AK71 said...

Hi LP,

Ah, yes, you have read my mind. I didn't say much when we met the last time precisely because I was fearful that he was fearful. ;p

As for possibly overcompensating, I fear your suspicion could be right as well. Just imagine a product called "Mini Bongs" which is capital guaranteed with an 8% guaranteed returns per annum for the next 5 years. It is enough to lure people like him to the killing fields. Sigh... Then there are scams like Genneva Gold! Tsk, tsk...

I need more wisdom and will have to take SMOL's advice and do more "tok, tok, tok..." ZEN!

EY said...

Hi AK,

EY is all the same. And yes, I am from the opposite sex. I'm stifling my amusement at the thought of having a namesake who's a guy. Hahaha. But well, my guts and attitude aren't defined by my gender. I have this poster at my workstation, "Don't confuse my personality with my attitude. My personality is who I am, and my attitude depends on who you are." :P

Ummm...as for my losses, it was more than $100k. I burnt all the money I made from selling my investment property. And then, to 'get back' at the market, I burnt my savings as well. It could well be the best thing that happened to me. Knowing my own strengths and weaknesses. Anyway, I'm an optimist. So long as I don't take the extreme path and show hand every time, I know I'll turn out fine. :)

For CPF, I thought up to $20K in the OA will enjoy 1% additional interest means that they will pay SA first. Only if SA has below $60k then OA account stands to benefit. Is that not true? Hmmm...

Cheers,
Endrene

AK71 said...

Hi Endrene,

Could I have misunderstood the workings of the additional 1% paid on our CPF savings? See cartoon in point number 2: More $ For Your Retirement.

You sound like a really gutsy lady. Losing that kind of money takes a lot of strength to roll with the punches and to soldier on. I know as I have been there myself. Well, we never stop trying, did we? Now, we are in better shape. :)

EY said...

Hi AK,

"The first $60,000 of your combined CPF balances, with up to $20,000 from your Ordinary Account (OA), will earn an extra 1% interest." I've been assuming that priority is given to SA, i.e. if there is $60k in SA, the additional 1% interest goes there. Well, this cartoon explains it better. Thanks for taking time to dig out this link! In my case, I've a very low balance in OA, which means more of my SA earns the extra 1%. :)

Gutsy? I much prefer to think that I'm reckless. Hahaha. But now I have less chips to be able to afford losing big time. Age is not on my side as much as it used to be. I really can't thank you enough for being an inspiration. I'm quite a spendthrift. Always buying things that are good to have but can do without. Justification is that if money can buy happiness, why not? Then, after reading your blog, I finally steelify my resolve to buy happiness in the stock market instead like I used to when I started working. High time to work out a down-to-earth plan than to do CFD. Spent enough money attending different types of training on TA. Should put knowledge to better use. Lo and behold, thank you again for sharing that income investing can be really rewarding too!

Cheers,
Endrene

AK71 said...

Hi Endrene,

I transferred all my CPF-OA funds to my CPF-SA in the first few years of my working life. I got time on my side and the government is effectively helping to grow my retirement fund in the CPF at a faster clip, risk free. With the additional 1% interest we talked about, it hastens the build up a bit more. :)

After having sold my properties last year, my CPF-OA is now another war chest which stands ready. I have to keep telling myself not to touch the CPF-OA money unless there is a melt-down in the property market or the stock market. That is the war chest of last resort. ;p

What if there is no melt-down? Well, I guess getting 2.5% per annum guaranteed, risk free, is not a bad deal either. How many investment grade bonds can do that for us?

I still think you are gutsy. Haha.. Why? Because reckless might see you bankrupt by now! Choy!

As for spending money, we have different priorities in life. I have a car and the late Dennis Ng would have frowned on this. ;)

I try to remind myself all the time that it is not a matter of affordability. If it is affordable, does it mean I should buy it? It should be a matter of value for money, not affordability.

If money can buy happiness, why not? You know, I agree with you. Money should be used to provide a better life for people we care about.

Money is a dead thing. If someone finds joy in the accumulation of money, he is finding joy in the accumulation of a dead thing. Like other things in life, we should know when enough is enough. This is, of course, very subjective.

I am glad that you are planning to invest for income. Although it is not the holy grail, it provides some measure of stability in our investment returns. :)

INVS 2.0 said...

Hi Ak71,

I bought some Singpost lots today. Blue chips will form my core investment for its well-maintained 5% passive income and stable price fluctuations. I read Singpost financial statement and it looks good. What do you think of it? :)

EY said...

I too have transferred quite a good portion of my CPF-OA to CPF-SA! I reckon that if I have at least $150K in CPF-SA by 40, at the rate of 4% compounded interest, my nest egg for retirement at 65 will be $400K. If I invest that amount with a 5% return p.a., I’ll have $1,667 per month as pocket money without touching my capital. But of course, that’s a simplistic calculation and there are some rules on CPF withdrawal and what we can do with the money. Like you, I’ve come to think that my CPF savings is sacred. Had lost a 5-digit sum in unit trusts and a stock that had tanked and drowned (Jurong Tech)! So now, I’ll let my CPF money stay in its safe haven and would only use cash to pursue both my sane and insane trading/investment interests. :P

Well, money isn’t ours until we spend it. I like this paradox cos it helps to neutralise the guilt of anyhow spending my hard-earned money. Ahh, about value for money. That’s a trap! I’m very good at value hunting, comparing prices and looking for substitutes (Economics 101!). I shop fervently on eBay USA where I pay only a fraction of the retail price for all my fashion purchases. Feel so smug appearing like I jumped out of the fashion spread while spending so much less. Now, that’s my idea of ‘savings’. Hahaha. But no dispute, being able to afford doesn’t mean we should buy.

I must say different stages in life would encourage different spending habits. While I buy less into the notion that I need to be more financially prudent, I’m convinced that hoarding resources (consumerism) diminishes humanity, denying the less fortunate their rightful access to same resources which they need more. Opportunity costs, at the macro/social level. But it’s been easily 10 years since I’ve been offering this rhetoric. Hope I can finally walk my talk. :)

Ok, that’s all for now. Need to do my performance review and work plan for 2013. :)

Cheers,
Endrene

AK71 said...

Hi INVS 2.0,

I am not tracking Singpost although there are many bloggers who do. So, there is no paucity of opinions out there. ;)

However, I took a quick look at the numbers. They look good. Seems like a bullet proof investment to me. :)

AK71 said...

Hi Endrene,

You have a sound plan for your CPF money, I dare say. I am 41 this year and I still do not have $150K in my SA. :(

I am glad that I have not lost any of my CPF money although I have experienced a total loss before in my cash porfolio. Not Jurong Tech for me though. It was Ferrochina. A 5 figure sum too. I have a portfolio of freezer stocks too. Bygones!

Blogging has opened some doors and, er, windows to me. Buying things on the internet was a foreign idea to me until recently. Being in sales, however, I wonder what would happen to all the retailers in the malls if most people shop online in future. Oh well, what will be will be. I am convinced that it is a rising tide and it is the way of the future.

So, I have no doubt that you will continue to be tempted by value in what you can find in online shopping. ;p

Different stages in life... hmmmm... I don't know which stage I am at now although people have offered different ideas. These days, I don't really buy much for myself. Food and drinks mostly. I have very few wants now.

Have fun planning for 2013. :)

SC said...

AK,

I suppose TEP is not widely known and not marketed like all those pathetic endowment plans you have in Singapore.

Read this post to understand it better. Of course UK TEP is a company bought over by Dennis, and his own personal portfolio has about 10% in TEP as well.

http://www.masteryourfinance.com/forum/phpBB3/viewtopic.php?f=5&t=1006&p=23169&hilit=Traded+Endowment#p22023

EY said...

Hi AK,

I need a sound plan for my CPF savings so that I can afford to 'show hand' using my cash! LOL! Two more years to hit 40, and based on my conservative calculations (not taking into account that extra 1% interest), I am, ahem, on time, on target! See, feeling smug again. Guess I should change my name to 'Howlian'!!! :P

Sigh..Ferrochina. China stocks. Picking at my ugly scar. The biggest loss from my cash portfolio was Cosco Corp. 20 lots at $6+ and finally decided to chop off an arm and a leg when it got to $1+. In fact, at that point, I divested the entire portfolio to test out a different trading idea. Recouped some losses subsequently, but stumbled another time in 2010 doing day trading when I took a 6-month sabbatical to complete my Masters. Yes, gotto let bygones be bygones. Money in exchange of wisdom. I think it's all worth it. :)

Yes hor, if everyone does online shopping as much as I do, the retail malls will have to close down. Then there goes our income stream from retail REITs! Oh my, I need to go out there to shop now. Spend money to earn money! Hahaha.

Funny that you spend your money 'mostly' on food and drinks. So you must be drinking like a buffalo? :P Plain water is mostly free. If not, you can consider bring your own water bottle like we did in pri school?!?! LOL!

Cheers and toasts,
Endrene

AK71 said...

Hi SC,

Ah, yes, now I remember. My friend went for a talk by Dennis and was sold on the idea.

Thank you for the link.

AK71 said...

Hi Endrene,

Hercule Poirot admitted that he was conceited but it was ok since he had something to be conceited about. Hahahaha... ;p

I tried to transfer more money from my OA to SA but I couldn't. They told me I hit the limit or something. Oh, never mind then.

I think it is hard to find anyone who has not paid school fees to Mr. Market before. Even Warren Buffet has lost money before. As long as we recover our losses and come out on top over the years, we are OK. The important thing is not to stop learning and trying, I suppose.

My exposure to retail REITs is limited to LMIR and Suntec REIT. Most of my investment in REITs is in industrial REITs. Perhaps, the growing trend of consumers cutting out the middle men could be a good thing for me as demand for warehousing space stays strong. Hahaha.. ;p

I have a weakness for Jia Jia Herbal Tea, Florida Orange Juice, Vitagen, Milo, Ribena... I like going to the supermarkets. They are where I get my retail therapy.

When I am at work, I drink Dasani water. Sounds atas but it is free! Company has water dispenser mah. ;)

talesteller said...

All this talk about CPF prompted me to transfer most of my OA monies to SA too :)

EY, it's really nice to hear from another lady on an investment blog! Exactly zero of my female friends have any interest whatsoever in trading and investments.

AK, I like shopping at supermarkets too. When I was on exchange in Sweden, the shopping markets there had weekly "newspapers" with special deals and I never failed to pick up on some extra cheap groceries every week :)

AK71 said...

Hi talesteller,

The transfer from OA to SA works best for younger people as there is more time for the savings to grow. I talked about this before as well in a blog post two years ago: Do you want to be richer?

You like visiting the supermarkets too? There are weekly specials published in the newspapers here too. Every Thursday, iirc. :)

Sometimes, I would end up buying stuff I did not plan on buying just because they were on special offer... :(

EY said...

Hi AK,

Spot on about CPF planning works best for younger people, since they have more time for interest compounding. The amount we can transfer to CPF-SA is capped at the stipulated Minimum Sum ($139k as at July 2012). This includes the CPF-SA funds used for investments. With returns at 4%p.a., CPF-SA has outperformed many unit trusts (which of course, I learnt it the hard way). Based on my computation, if one has $150K in his/her CPF-SA by 40 years old, the account will grow to $270k at 55. The continued contribution and interest accumulated from 40 to 55 will add another $120k to $150K (considering also the contributions diverted from Medisave after the Medisave Contribution Ceiling is hit at $43500). That means at 55, even if we stop working, we would have built our nest eggs to $390k-$440k. Leave that with CPF till 65, the retirement funds would be around $580k-$650k. And yes, the best part of this plan is, there is no extra work except to make periodic transfers to CPF-SA. In my case, now that I have $125K in my CPF-SA, I don't have to do anything more. The account should hit $150K in 2 years' time. :)

Hi talesteller, nice to be acquainted with you too! :) I started my investment journey when I started work and stumbled along the way. So far, I've made more wisdom than money, I guess. :P

Well, as AK said, staying positive, staying on course, learning and reflecting, will lead us to better days ahead.

Let us all 'jia you' together! :)

Cheers,
Endrene

AK71 said...

Hi Endrene,

It is a bit spooky because when you talk about how the CPF-SA could be used as a fail safe in personal financial plans, I could almost imagine myself talking! Then again, if anyone has given some serious thought to the idea, he would say the same thing too. It is mathematical and there is only one correct answer. :)

Of course, to be fair, the idea might not be viable for a young person who is thinking of buying a home early on in his working life. Anyone reading our exchange here should weigh his own priorities and act accordingly.

Like you, all I have to do now is to sit back, relax and watch the money in my CPF-SA grow year after year. It is the best long term savings tool Singaporeans have. :)

Sandy said...

Hi AK & Endrene

Your dialog has convinced me (well at least 90%) that I should transfer all my OA funds into my SA account now. I also noted that you both agreed this is prudent for someone younger, and ahem, I am only a few years younger than both of you, so am no spring chicken either ;-) The age factor , plus the worry that loan interest rates may in the near future suddenly rise significantly and I decide to use CPF to repay some of my housing loan- these are really holding me back from transferring all from OA to SA,

By the way Endrene, I am also ♀ :-) Very inspiring to see a lady who is so financially-savvy, as you mentioned not many of my female friends are that interested or knowledgable about investing or financial planning.

AK71 said...

Hi Sandy,

As you might need to use the money in your OA to pay down a housing loan in the event interest rates spike up, not transferring all your OA money to your SA is prudent.

How much to transfer then?

Well, since interest rates are likely to stay low till end 2015, courtesy of Mr. Ben Bernanke et al, you might want to transfer to the SA what you are contributing on a monthly basis to your OA. This will ensure that your OA funds are not depleted and stays at the same level as it is now, ready for you to use if required.

Since you are a few years younger than us, your SA money has more years to grow. :)

AhJohn said...

I think OA should be kept for property investment, with rental income (~3-5%?) and seems for sure appreciation (if >10 years). Will it be better idea?
http://mycpf.cpf.gov.sg/CPF/my-cpf/buy-house/BH3.htm

AK71 said...

Hi Ah John,

I think few things in life are "for sure" and it gets really dangerous when people all think that we will definitely make money investing in properties.

Whatever our beliefs and whatever we decide to do, we have to do it within our means, of course.

Voluntary community service by ASSI: Buying a piece of real estate within your means.

AK71 said...

“It’s becoming a country where only the very rich will age in a very dignified way,” said Devasahayam, who has published papers on the nation’s policies for the elderly. “The inflation is just impossible to catch up. When you think you’ve saved enough, things keep going up and then you just find you still do not have enough.”

Inflation averaged 4.6% in 2012 and the island is the third-most expensive Asian city to live in and the sixth globally, according to an Economist Intelligence Unit ranking published in February.


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