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What should I do? A letter from a 64 year old retiree.

Thursday, May 30, 2013

I am sharing an exchange I had with a reader a few days ago because I think others could possibly be interested in it:

Hi, AK71,
1.        I have been following your blog for quite some time and find your explanation and reasoning of the stock market very interesting.  Not many people are so frank like you that are willing to give an in-depth advice of the financial market.    So far, I did not pen anything in your blog to ask for your advice, as I could not express myself well in writing. 
2.        I would like to seek your kind advice to set up a reasonable and proper stock portfolio to earn passive income.  I am a 64 years old retiree and living on passive income from dividends from my 44 stocks in my portfolio.  Overall, I have made a capital gain of about 15 - 20% from these 44 stocks (with some profits and some losses for each stock).    I know that 44 stocks are very difficult to monitor but I do not know how to diversify them.  Each time the market drop, my heart drop too.  At this age, I cannot effort to loss much of my hard earned money, as I do not have time to wait for the market to recover again.
3.        I would appreciate your kind professional advice.  Thank you.

My reply:

Hi J,

I really hate to disappoint you but I am not a professional financial adviser. I would suggest that you find professionals and engage their services.

However, what would I do if I were in your shoes? This is the part where I talk to myself. Please ignore me.

First, understand my motivations! I am in my 60s and retired. I am not able to suffer another market crash for more reasons than one. I am interested in a predictable flow of passive income.

Secondly, go through my portfolio of 44 stocks. Compartmentalise the investments into those that match my motivations and those which do not.

Thirdly, keep the investments which match my motivations and think about possibly increasing exposure to these investments when prices are softer. Sell those investments which do not match my motivations at an opportune time and never look back.

Fourthly, money from divestments should go into a dedicated "war chest" to buy more stocks which match my motivations during times when Mr. Market goes into manic depression.

Throughout, I have to understand that this is the general framework that I must keep in mind but being a framework, it will overlook finer details which could influence my decision to invest or to divest in specific instances.

Best wishes,

Everyone has different circumstances and motivations. There is never a universal solution to all problems. If we understand our motivations, we will know what is most appropriate for us.

Related posts:
1. A letter from a 66 year old retiree.
2. A letter from a reader in his early 20s.
3. A letter from a 24 year old fresh grad.
4. Voices, noises and choices.



Hi AK,

thanks for sharing this post as it has also given me a valuable opportunity to consider about my family and my own plans.

It is also timely as the REITs and trusts universe seems to be going through a shift. Opportunities could present themselves to individuals who believe in passive income generation.

AK71 said...

Hi Solidcore,

Well, all investments are good at the right price. Easy to say and easy to remember but harder to practice. ;)

Now, with worries that interest rates might be rising higher sooner than expected, REITs are being sold down indiscriminately. So, you are right about how there could be opportunities to get more for less. :)

seefei said...

it is a good time to pick up some biz trusts and reits for passive income. market is beating down these stocks and investors are scrambling to the side lines.

AK, as for your "motivation" theme advice, i find it most easy to understand and very powerful. I find it useful too.

Thank you for this good post.

AK71 said...

Hi seefei,

I won't be surprised if many short sellers are actively pushing down the unit prices of some REITs too. ;)

I am glad that you find my blog post useful. You are welcome. :)


Hi AK,

I have the same suspicions as well especially the one with the rather long and difficult to spell reit. ;)

For now I am also sitting at a side.... Looks like Sabana might be reaching 8% soon once more :) however that tenancy issue is still present though.

AK71 said...

Hi Solidcore,

Whatever the case might be, if prices were to go lower, all else being equal, it means a bigger margin of safety. So, I might roll out my war chest. ;)

INVS 2.0 said...

I have gotten into the REITs and taken quite a beat, eventhough the prices which I bought are really low compared to a week earlier.

But a stock market usually recovers pretty fast from a strong shock in a non-recession condition. Hope I am right. :)

AK71 said...

Hi INVS 2.0,

From a FA perspective, the question to ask is whether things have gotten significantly worse for S-REITs or is it business as usual? Of course, conditions are different from REIT to REIT but that is the kind of general question I would ask first.

Then, I would ask if S-REITs were overvalued and if they are now more fairly valued. We don't want to buy something that is overvalued, of course. ;)


Hi everyone,

REITs which are usually mentioned in the previous posts are in the under 30 RSI reading. CMF is also entering negative territory which doesn't bode well.

Those with a strong stomach and courage to buy should, fingers crossed, reflect upwards in the very near term. But would it sustain?

But again, is price appreciation your main motivation to invest in REITs? It's not a bad thing to see a positive amount in our portfolio though.

But again, crystal gazing is never a healthy hobby to be in.

Rambling too much today... must be the weather giving me a bad cold affecting my thinking. *sniff sniff

Jay said...

AK: Thanks for posting this, and very thoughtful and intelligent response (as usual! ;-)

One thought I want to throw into the discussion (esp in the case your reader reads these comments): building an income-generating portfolio is not all about REITs! As much as they can play a useful role, I suggest to limit exposure to REITs if your heart drops when the market goes down. Maybe a portfolio that creates more stable (but lower) income streams is healthier to the heart. Examples:
- certain trusts (as an example, K-Green has not participated in the sell-down, but neither in the ralley before)
- bond income funds (some of them have actually monthly payouts which is nice too)

As you say, the best is professional advice.. I just want to temper the general enthusiasm for REITs if one cannot stomach ups and downs...

AK71 said...

Hi Jay,

Certainly, REITs are not the only income producing investments we could or should have. No question about this.

Personally, I am invested in some listed companies which pay decent dividends too and recently, I blogged about Old Chang Kee, SPH and ST Engineering.

Whether or not to invest in REITs and how much to invest would depend on whether conditions are friendly to them. :)

INVS 2.0 said...

Oh yes, I forgot abt the NAV part. I entered at a slightly overvalued price still. :(

Nvm, what's done is done and thankfully my latest entry into REIT is only a small lot. Just treat it as if I am collecting income. :)

AK71 said...

Hi INVS 2.0,

Well, buying into REITs above NAV is not a bad thing per se. During times when economies are healthy, they do generally trade above NAV. :)

INVS 2.0 said...

Thanks for the consolation. :)

AK71 said...

Hi INVS 2.0,

I am just telling the truth. Scout's honour! ;)

EY said...

Hi AK,

Thanks for this post. Inspired me to start on something I have been procrastinating. :)

Maybe time to do some homework on the unit trusts which we can use our CPF-SA account to invest in. Would like to compile a watchlist but I need to work out how best to categorise them to suit my investment objective. Thinking of making a list of equity-link unit trust by country or sector.

I honestly have not done any of such homework before so my ideas are still quite fuzzy. Wonder if you have any suggestions. Any finance blogger talks about unit trusts?

I'm not about to do anything to my CPF-SA funds yet. Just want to explore and learn more about this potential investment tool to grow my retirement funds when the window of opportunity comes. :)

BTW, I'm quite inclined to do my self-directed learning and research in bite size. Being very busy is one reason and being lazy is another. :P (You know I say this avoid being arrowed to do guestblog posts on this, right? :P)

Hmm...thougt if you would consider venturing into blogging about unit trusts, it would be marvelous lor! Haha.


AK71 said...

Hi Endrene,

I haven't looked at unit trusts in ages. I still have some which are underwater. I think they form less than 0.5% of my investment portfolio and I can't really remember what they are by now. ;p

The only time I had a really good experience with unit trusts was also the only time I used money in my CPF-SA for investments. That was during the Lemon Brothers crisis. ;)

On hindsight, I really should have kept the investment instead of selling it off. The gain was 4.5x that of what keeping the money in the SA would have earned!

As the CPF-SA's risk free 4% per annum return is hard to beat, I have not found any investment persuasive enough to utilise the money in the account since. I would require a huge margin of safety which means a much limited downside as well.

I am quite the chicken when it comes to money in my CPF-OA and SA. I am more adventurous with cash on hand. They are always my last war chests to deploy.

However, if you do find something, please do share with us. Thanks in advance. :)

EY said...

Hi AK,

I had similar experience as you with regard to investing in unit trusts. But I also believe that every dog will have its day. When the price is right, unit trusts will someday make a sound investment and a better alternative than the 4% interest in CPF-SA. I will not use cash to invest in this though.

For me, I'd been extremely adventurous when I risked my own money but a lot more prudent when it belongs to someone else. :D

Lesson learnt and costly mistakes mustn't be repeated. Like you, I would expect a large margin of safety with high potential upside to take the plunge with my CPF-SA savings. So, I'll see if my homework will eventually bear fruits. Going to do it at my own pace - which is darn sloooowww.... :P

BTW, I visited Hillion showflat near Bt Panjang just now. Another overpriced leasehold development. Selling point - mixed development above Bt Panjang bus interchange, LRT and MRT. Two-bedroom, 710sqft at $973,000? Shoebox unit - 463 & 474 sqft at $14XX-$15XXpsf. Was told the 3 and 4-bedder have all been sold out during VVIP launch. Anyway, felt really tired hearing the same sales pitch and the hard selling by the property agent. I was a bit difficult. Asked her about plot ratio and potential rental yield and told her what she quoted as rental returns is the benchmark for RCR not OCR. She said I should draw reference from Telok Kurau. Oh really? I'm sure she's calling me a b**** in her heart. Hahaha.

Now I begin to think having a big correction in the property market isn't a bad thing. People have to learn their lessons, somehow. Well, market is never rational. We'll just have to keep our eyes on it and our hands off for now. :)


AK71 said...

Hi Endrene,

Yes, all investments are good at the right price. When there is a risk free return of 4% per annum on our money, any alternative must be darn bullet proof in order to be persuasive. Well, we just have to remember that money should go to where it is treated best. ;)

I drive by Hillion's showflat every day. I think they are no longer hungry to sell because so many units were sold even before the showflat was up! Simply amazing. Irrational exuberance? Perhaps so.

$1,4XX - $1,5XX for shoebox units are the kind of prices we would see in D14 Geylang or D12 Balestier, all RCR and FH too. I believe that Bartley Ridge is also going at the same prices. The lower floors of 8 Riversuites too.

I really wonder how OCR shoebox units would perform. I guess we will know in 2015/16. Perhaps, there is something we don't know.

Telok Kurau is a place I have fond memories of. I stayed there when I was in primary school, the whole 6 years. Nice and quiet but no longer. With many low rise boutique condominiums completed in recent years, it is now overcrowded and I feel that the place is lacking in amenities. Not worth the asking prices.

A recession is probably the only thing that will cause a big correction in the property market. Although this is good to knock some sense into people, developers included, the hardship that many will go through makes me wish it will not happen.

Although a little anxious at what my little hut in the sky will be like when completed, I will be quite happy not to buy another property in Singapore in my life if prices stay elevated.

Rentals are softening and will continue to soften. This is a function of rising vacancy rate which is a function of weaker demand and stronger supply. So, properties will not be very good passive income instruments in future. There is a political bent in this and we cannot win the powers that be. ;)

EY said...

Hi AK,

Compared to other OCR property, I must say Hillion has got a pretty strong pitch. With the new downtown line, Newton is only 9 stations away. The bus interchange has a good number of buses that go downtown. Accessibility to transport and amenities will beat CCK central eventually. But air quality and noise will make it not that desirable to live in. Anyway, I went there out of curiosity more than anything else. I live near that area as well. :)

I had checked out 8 Riversuites before. I actually found it overpriced too. Cityscape is a better deal in comparison. The 27 storey high block that houses your little hut is certainly the best deal among all, if I have guessed correctly where you bought. Yes, ssshhhhhh.... :P

Nope, I don't think it needs a recession to bring about a major correction. But of course, that's one possibility and it is something I would never wish for. Said it before, livelihood of many hardworking and honest folks will be in jeopardy. :(

With the current measures and a tepid rental market, a steep interest rate hike will result in negative rental yields. When property is no longer 'affordable', we'll likely see the tide receding. Yes, we'll watch 2014/2015. :)


AK71 said...

Hi Endrene,

Actually, if Hillion were 15% cheaper, I would consider buying a unit. Bukit Panjang, in terms of geography, is about the same distance as Kovan to the city. The difference? Kovan has a MRT line. So, you are right, once the DT line is up, Bukit Panjang will become more desirable.

I agree that 8 Riversuites is rather pricey. The 441 sq ft shoebox units on the higher floors are just shy of $1,700 psf! It boggles the mind but when we think of $3,000 psf for similar in the city centre, it isn't so bad. That must be the way some people think because there are people who bought these.

I believe the current rental market is probably $2,500 per month for units that size in D12 which gives a gross yield of 4%. In another 2 or 3 years, rental softens more, interest rates up, I dare not think what would happen to all the investors of the hundreds of shoebox units in the project.

I considered Cityscape but dismissed it for some reason. I think it was the layout of the units and the facing which put me off. It was more than a year ago. So, you got one there?

Well, my hut is found in a project which is unloved because it is a 15 minutes walk to the MRT station compared to a 3 or 5 minutes walk. However, almost FH and some 30% cheaper, floor for floor, compared to 8 Riversuites means it is a no brainer for me.

The low rise project in D12 which you bought a unit in is across the river from my hut? ;)

EY said...

Hi AK,

If Hillion sells for $12XX for the one-bedder, it will certainly be a more compelling offer. :)

As for Cityscape, the smallest unit is at 969sqft - a 2-bedroom unit. Yes, layout isn't that fantastic. Also find the baywindows and the big balcony a rip off. In terms of facing, most of the units are East or West facing, just like the developments along Rangoon Road. I didn't buy that development. For own stay, it is too much to pay. OCR makes more financial sense. :)

Oh, is there a river near your little hut? Pardon me, as a Geography major, I would much like to think of it as a monsoon drain. You got tricked by the marketers?!? :P Nope, I didn't buy that one-letter, two-digit development across your hut. Had a unit somewhere nearby, also sitting on some imaginery gemstones that sounds kinda atas. But I sold off in June last year for a small profit to switch back to D8. Used to own a unit in City Square but slaughtered my golden goose way too early and fed the crocodile. Lost an arm and a leg as well. *Sob*Sob* Bygones... :P

My little investment is a 657sqft unit in D8, very near the MRT but in a quiet enclave. SE facing. Would be expecting 4.5%-5% gross rental yield. The D12 unit would have been able to fetch 6.5%. But I reckoned that when the market softens, the risk of vacancy would be higher as that unit isn't ideal in a good number of ways. So I just sold it and started hunting again. Initial choice was a resale unit from Oxford Suites but my offer was turned down. The final closing price was more than $80K above my offer which was based on the price sold for the unit one floor above this unit. Well, if the price isn't right, I'll just walk away. Subsequently, I managed to unearth a leftover gem after more than a month of ploughing on Property Guru and cross checking on URA website. :)

Meanwhile, I have no passive income since the development hasn't obtained TOP. So I better work harder and save even harder to invest more. :D

Well, when your hut is ready, I'll definitely drive by that area to see what I have missed out. :P


AK71 said...

Hi Endrene,

Any development in D8 that is not overpriced near City Square would be good for rental. Unfortunately, I could not find any good projects at good prices. Lucky you. :)

I shan't ask you how you managed to lose an arm and a leg selling your unit in City Square. Doesn't sound probable to me. Hmmm...

I know what you mean about being too expensive for self stay. I was being indulgent and stayed in a D3 2 bedder for more than 4 years before finally selling it away for a nice capital gain. Now, I am being a good boy and staying in CCK again with family. See? I wasn't always prudent. ;p

Got monsoon drain so big one meh? However, if you are right, then, I think I wasted 4 years majoring in Geography so many years ago. Marketers! -.-"

Site layout and architecture are always important for me. The project must appeal to me aesthetically and this one did.

From a purely investment point of view, location will be above all other considerations but with the much lower price I got, the less ideal location is acceptable.

I kind of figured that if a high floor 441 sq ft unit in 8 Riversuites should ask for $2,500 a month, I could ask for $2,000 a month and still have a higher gross yield. ;p

As a possible resale unit, I have realised that it is always an absolute quantum play. If I were to buy a D12 441 sq ft unit at $750k, how much more would a potential buyer be willing to pay for it?

Anyway, all on paper talk soldiers now. Time will tell. :)

EY said...

Hi AK,

Yes, I totally agree that luck played an important part in my property purchases.

For my City Square unit, I made a 6 digit profit. Lost an arm and a leg because I fed the crocodile (stock market). The 'Lemon Brothers' soured the deal and I lost more than what I made from the property sale. Cosco Corp was my biggest loser. 20 lots at >$6.50 and were divested at $1 plus. Jurong Tech was another big loser. Tanked without a trace! Think I had some 120 or 150 lots. Can't recall how much I lost in total. Selective amnesia is the best defense mechanism that helps me get back on my feet. :)

Anyway, many good lessons learnt. Very glad that I had never over stretched myself. Kept to losing what I could afford to. Just that my piggy bank ended in smittereens, no less! Haha. The road to recovery is still long and winding but I have learnt to be zen. 钱财乃是身外物,命里有时终须有,命里无时莫强求。:)

Hmmm...should there be any difference between a river, canal, and a monsoon drain? If you prefer it to be a river then it's a river lor. Haha. And interesting to know that you also majored in Geog. I did my Honours in GIS on housing development in Bukit Panjang! :D

I'm sure you have done your sums right. A high floor unit where you bought should be able to fetch $2K plus even if the market softens by 20% then. And yes, we'll let time tell. I begin to wonder if you are staying in the same development as I... :D


AK71 said...

Hi Endrene,

Oh, I am a firm believer in luck being important in everything we do in life. 30% hard work and 70% luck is what I always say. Of course, there are many who disagree but I'm OK with that. :)

I am sorry to hear about your misadventures in the stock market. Yes, misadventures. Sometimes, we get a bit too adventurous and throw caution to the winds. I have had my fair share. Like you said, bygones. :(

I was a little more adventurous in my Honours year. I went overseas to do my thesis. Very interesting but burnt a hole in my pocket. Those were the days of thoughtless youth. ;p

I am sure we are in the same neighbourhood but probably not in the same project. I stay in a flat now, not a condo. :)

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