Helping our parents invest their money.

This blog post is inspired by what I read at Bully the Bear. The blog master is now helping his parents manage some of their savings to secure higher returns. The money would have gone into fixed deposits, otherwise. Read: Why my parents are so eager to invest.

My parents also leave money in fixed deposits which they say give them a peace of mind. Whether it is a good idea or not is, of course, open to debate. However, peace of mind is priceless. If they do not wish to put their savings in "risky" investments, I won't go against them. This also gives me a peace of mind because if the "risky" investments turned out badly and I was the one who asked them to invest, then, it would be a nightmare of epic proportions.

Photo taken when I went on a cruise with my parents.

In recent years, however, my mom saw how my investments delivered regular income and instead of being purely a market speculator, she decided to have me help her invest some of her money. She now gets more than $1,000 in passive income from stocks per month which is a nice bit of extra money for a person in her 60s.

More recently, my dad asked me if I could help him invest some of his savings as well. Of course, I have to do it. Why? He is my father. No other reason needed.

I told him that I could possibly get an 8% yield for him but the principal sum will have to be locked up for at least 5 years. That was my only condition. So, he has to be sure that it is money he will not need. At the end of the 5 year period, he will get 100% of his capital back if that is what he wants or he could stay invested.

How am I going to achieve this over the next 5 years? Honestly, all things remaining equal, with great difficulty, I suspect.

I could consider investing in the following:

1. Sabana REIT
2. Croesus Retail Trust
3. SPH
4. NeraTel
5. Hock Lian Seng

There are many things we can say about Sabana REIT but the distribution yield is rather attractive with unit price just 1c shy of $1.00 and there is a chance it could go a bit higher with an occupancy level of under 92% now. This allows ample room for improvement.

Croesus Retail Trust has retreated in price since going XD. It is now close to my entry price. This Trust is going to deliver a higher distribution yield than Sabana REIT and if things go the way I expect them to, it could do even better in future.

SPH has always been a favourite of mine as a blue chip investment for income. With the listing of SPH REIT, I like SPH more now and increased my long position in the stock last year. SPH will increasingly morph into an asset light property play even as it tries to reverse the decline in its traditional print business.

Regular readers will remember how I increased my long position in NeraTel by 10x last year in an effort to divert resources into stocks which will not be affected badly by any increase in interest rates. NeraTel is still a net cash company with strong earnings which should see meaningful improvements over time as the company sets up offices in new markets.

Hock Lian Seng is an investment I have held for a few years now. I initiated a long position in the stock shortly after its IPO. It has a strong balance sheet and rather stable earnings. It pays out about 40% of its earnings as dividends. It is one of those stocks that I almost forget I have until it is time for it to pay a dividend again.

If I were to divide my dad's money into 5 equal portions and invest in the above, I estimate that I could possibly get a yield of about 7%.

So, how am I going to deliver the estimated 8% yield?

I am going to cheat.

OMG! AK is going to cheat!

Bad AK! Bad AK!

OK, I am so ashamed of myself. You can stop reading now.

Pause.

Pause.

Pause.

Er... Still reading? You really want to know?

Let there be light!

OK, then, my plan is to keep the money that my dad is entrusting to me in my war chest. Then, I will deliver the 8% yield from my existing investments while I wait for prices to go lower before accumulating with bigger margins of safety.

There is no hurry for me to buy anything from Mr. Market. Well, maybe I could increase my investment in Croesus Retail Trust which I believe is rather attractive if 87c should be retested.

What if prices did not retrace lower but stay at current levels or go higher?

Well, anyway, I have always planned on using a good part of the income that is generated by my portfolio to support my parents when they are no longer working. So, this proposed arrangement is just a matter of utilising my passive income earlier than planned.

It will make my dad happy and that gives me a peace of mind.

Note: If anyone is wondering whether to start an investment portfolio based on the 5 securities I have highlighted in this blog post, please read the disclaimer found at the end of the page first.

Related posts:
1. A strategy to grow wealth and augment income.
2. Hock Lian Seng: DPS of 1.8c.
3. Croesus Retail Trust: Luz Omori and Niz Wave I.
4. SPH: Results are within expectations.
5. Sabana REIT: Am I buying or selling?

First REIT buys hospital at 17% discount to valuation.

I like buying properties at a discount to valuation but, in reality, such offers are hard to come by. In the world of S-REITs, however, it has happened before and it has happened again as First REIT is going to buy Siloam Hospital Purwakarta at a 17.3% discount to valuation. The price tag? S$31 m.

The hospital has two parts, a 3 storey building which was completed in 2005 and a 5 storey building which was completed in 2008. Major refurbishment is now underway and is expected to be completed by late 2014. The good news is that all refurbishment work will be paid by the seller. So, First REIT will get a newish property. No additional cost.

First REIT will pay S$26.5 million using debt and issue new units to the seller equal to a value of S$4.5 million. This is rather innovative. It makes the purchase financially less demanding. Gearing level will then rise by a more modest percentage from 32.3% to 33.9%, post acquisition.

This purchase will increase future income for First REIT and the 15 years Master Lease agreement will provide stability. A 6 months rental deposit will also be collected.

Now, as investors for income, we are probably more interested in how DPU will be affected. First REIT will have more units in issue after this and also a higher debt burden. So, both NAV per unit and DPU will only see very marginal increases, post acquisition. So, don't go spending any money on a lion dance troupe.

Everything else remaining equal, I would say that First REIT is a fairly good investment for income but, like the management of the REIT, I would like to buy stuff at a discount to NAV and the REIT's NAV is currently about 97c per unit.

See announcement: here.

Related posts:
1. A simple way to a double digit yield.
2. Distribution reinvestment plan: First REIT.

Graduating soon? Take steps towards financial security.

Received an email from a reader who is about to graduate and join the workforce:

Hi AK,

I am C and this is actually my first time writing to a blogger.

I've recently found your blog and you've been such an inspiration to me and my "future financial life".
 
Would like to sincerely thank you for setting up this blog to benefit us youngsters in Singapore. :)

I am about to graduate soon in a couple of months and I'm just wondering if you can provide some advice to me...
 
Upon graduation and receiving my first pay check, would you recommend me to first set up my emergency fund or invest in FDs or buy insurance or voluntarily top up my CPF or invest in a SRS account or a combination of some? 

There just seem to be many things I should do but I'm not sure which one I should focus on to get my priority right.

Thank you for your kind advice, AK.

Warmest regards
C

My reply:

Hi C,

I am not allowed to give advice but I am happy to share with you what I would do if I were in your shoes. :)

1. Buy a term life policy. 

Very important if we have parents or other dependents to care for. 

How much should the coverage be? 

It is up to you but I feel that $500K is probably more than adequate for most.

2. Buy a good H&S policy. 

Personally, I have NTUC Incomeshield with Assist Rider. 

We don't want to be sunk by hospital bills. 

How much you would spend here depends on whether you are comfortable with Class C, B or A wards or if you want to stay in private hospitals.

3. Buy a Critical Illness policy. 

We need this money to help pay for long term treatments if we should be diagnosed with one of these illnesses and not die. 

I am covered for $300K but, for a start, I think $100K should be comfortable.

4. Set up an emergency fund. 

Slowly build this up so that it is enough to cover at least 12 months of regular expenses (including insurance expenses). 

My preference is for 24 months. 

In case we lose our jobs or are unable to work for some reason, this is the fund we would draw upon.






Once we have done all these, we can start thinking about investing for a second stream of income.

Of course, if we can pay less taxes, we should. In planning for retirement, you want to consider topping up your CPF-SA to a maximum of $7K a year. Of course, you could also start an SRS account.

The tools are out there to help us achieve financial security. You will do quite well if you make good use of them. :)

Best wishes,
AK

If anyone has any ideas to share, please leave comments here and I am sure C will read them. Thank you.

Related posts:
1. Why a meaningful emergency fund is important?
2. How much for hospital and surgical insurance?
3. Tea with Solace: Getting ready for investment.
4. Build a bigger retirement fund with CPF-SA.
5. SRS: A brief analysis.

Invest in real estate for high returns!

A reader, Gary, asked me for my opinion about something he saw in Bukit Merah Central.

"... Saw a roadshow in Bukit Merah Central which displayed "24% per annum"! Company is Islandia and I'm not so sure if really can get 24% per annum! Sounds like scam but the strange thing is that there are people manning the booths!"






So, with some help from my friends, Victor Chng and Matthew Seah, I discovered that Islandia is actually a proposed integrated resort to be developed on an Indonesian island called Pulau Abang Besar. 

Apparently, construction work started in the middle of last year.

See PDF file:
http://www.cuffzholdings.com/News/The%20Islandia%20AsiaOne%20Feature.pdf

This project is a joint venture by Cuffz Holdings and Huafa Assets.

Digging around a bit more, we found that Cuffz Holdings is actually partnered with IOC Group Limited.

IOC Group Limited is listed on the MAS Investor Alert list: http://www.mas.gov.sg/IAL.aspx?sc_p=I

Scroll down the list and you will see it.

What is the MAS Investor Alert list about?






"The Investor Alert List provides a listing of unregulated persons who, based on information received by MAS, may have been wrongly perceived as being licensed or authorised by MAS."


If I were approached by anyone promising me a return of 24% per annum by investing in a piece of real estate, I would be very wary.

If I were approached by anyone promising me a return of 24% per annum by investing in a piece of real estate that is under construction, what should I do?

Related post:
Invest $10,000 and get 24% yield in 24 months.

An annuity plan for retirement needs.

Sharing an email exchange with a reader and I hope to hear what readers have to say:

Hi AK,

I am P, one of your loyal followers in your blog. I have a silly
question that I ponder the past 2 days that I could not decide. So, I
thought you are very financially wise, maybe you can help me.

It is like this: I am 45 years old. I am thinking of buying an annuity
that will gave me $300 per month for life from age 65.I need to pay 10
years of premium totaling $45562. If I die at age 66, my dependents
will get $50, 798. This is the same for my dependents even if I die at
age 86. If I die at age 86, I will get $300 per month for 20 years.

Another alternative, I could invest for income and maybe buy OCBC
shares, I will get a rate of 3.5 per annum. It seems higher.

I am at a loss at what to do, what will you do if you will me?
Assuming that you do not invest in high yield income and only at OCBC
shares. What will be your considerations? For me, I am more worried
about my dependents and hope that they will be happy and not to always
worried about money. That is why I hope to give them an income for
life. It is the only thing that a mother can best give to her children
and also to teach them to be financially literate.

Hope you can help me.

Thank you, AK for your kindness.

Regards
P

My reply:

Hi P,

I am not a financial advisor. So, I am not going to give you any advice on this but I will share with you what I think.

You did not say when must you start contributing to this annuity which will accumulate over a 10 year period. So, I will assume that you must start contributing now at 45 years old since you are thinking to buy one now.

I will also assume that you are contributing the same amount every year over a 10 year period. Total: S$45,562 means S$4,556.20 a year.

The guaranteed payout is S$50,798 in the event of your death at any time from age 66 to 86. Otherwise, you would get S$300 a month over a 20 years period or a total of S$72,000.

The attraction of an annuity plan to me is really the predictability it provides which is important in our old age. Of course, we hope that the insurance company doesn't go bust.

Now, predictability is good but is it that difficult to do better than what an annuity promises to do for us?

Assuming inflation is 3% per annum, the initial sum of S$45,562 which you have progressively contributed from age 45 to 54 should become at least S$54,798 at age 55 just to keep pace with inflation. By age 66 when you start drawing $300 a month, this sum should then become S$73,644.

A 5% draw down per year from age 66 would give you about $307 a month which approximates the $300 a month you have been offered. Assuming that nothing is done to the money to grow it over the 20 years draw down period (e.g. keep the money in a biscuit tin), the money would be depleted over the same time period. Don't ask me what happened to the excess $7 a month.

The annuity will deliver maximum monetary benefit to you and your estate if you were to live up to age 85 years and 11 months. Total benefits: S$ 71,700 + S$50,798. To me, it is almost like a game of chance and it probably is.

Now, assuming that you did your own investments and you managed to only keep pace with inflation at 3% per annum, that S$73,644 you would have accumulated by age 66, if invested, would probably still grow at 3% per annum and even with that 5% draw down a year, you would not end up with nothing at age 86.

After 10 years, at age 76, by my calculations, you would still have S$53,907 for your estate. After 15 years, at age 81, S$43,380. At age 86, $28,512.

Hypothetically, if you could consistently receive a 3.5% yield by investing in OCBC alone, the difference is even more stark and would beat this annuity plan flat.

Of course, share prices will most likely fluctuate but if the business is strong and grows over time, that 3.5% yield on cost is likely to grow as well and with it, the share price of the company.

Best wishes,
AK

Related posts:
1. Will I retire happy?
2. Retiring a millionaire is not a dream.

Will I retire happy?

I received this email from a reader recently:

Hi Mr. Tan,

I stumbled upon your blog and read about your analysis on the inflation-adjusted retirement plan. currently, I have a term plan and am currently considering on a retirement plan, which I have recently signed.... 

And it is the above-captioned one.




I am 35 and based on this plan, I expect to retire at 55 and this plans covers me up to 70.

I will be paying total premiums of $70,875 for 15 years,


In which there will be a 5-year accumulation period.

Thereafter, my total guaranteed retirement income is $115,875 from age 65 to 70.

If I assume the inflation rate from now is 3% p.a., I should expect my guaranteed payout to be $115,171.88 for 15 years. 

Which seems like the plan is marginally palatable. 




But now that you got me thinking about the returns on my capital, it looks like I am losing the returns during the 5-year accumulation period. 

Am I right? Should I be worried?

I have already signed the plan and realized that there are more demerits to my proposal than I thought it had because I was focused on reserving retirement income while having a longer coverage on death & terminal illness. 

Like I cannot surrender it before retirement age, or else I lose everything.

Also, it would be great if you could post an article advising on securing more $ for retirement for worried young Singaporeans.

I hope I can get your advice on this.

Thank you very much!

SI

My reply:

Hi SI,

Er... I am not a Mr. Tan. 

I think you might have mistaken me for one of the 4 presidential candidates in the last presidential election. ;p

If you have already signed up for the plan, there is little else you can do about it, I suppose, short of terminating it and suffering losses.

I think that if you follow my reasoning and calculations in the blog post you mentioned, you will see why I don't think the product will do the job it says it will do.

Anyway, I don't wish to cause you further anxiety. 




There is a non-guaranteed portion in the product. 

It could work out nicely for you in the end if they deliver on that, much delayed though it might be. :)

As for how to secure more money for retirement for 'worried young Singaporeans', I blog about it on and off:

1. Earn more
2. Spend less
3. Invest for a second stream of income

This is my peasant mentality to financial freedom. :)

Best wishes,
AK

Related posts:
1. Inflation adjusted retirement income plan.
2. To be a happy peasant.
3. Very first step to becoming richer.
4. Wealthy nation cannot afford to retire?

Saturday with Victor Chng: Becoming a better investor.

In case you missed the blog post on what is happening this Saturday morning, a friend of mine, Victor Chng, is going to share his views on an unloved sector of the economy and how we could potentially make quite a bit of money by capitalising on this.

So, if you are interested in Victor's analysis and if you are free this Saturday, get your tickets at:

Level Up Life Series.

Price: S$9.00 per ticket.
Bring a friend and pay S$15.00 for a pair.
If you are a student, show your matriculation card at the door and you go in for free.

If you want to bring it a step further at the end of the half day event, ask Victor about the discussion forum he is organising. That will be another value for money learning experience.

I try to be a better investor by listening to better investors. I believe that Victor is a better investor than I am.

The book Victor wrote with Rusmin Ang.

Related post:
Saturday morning with Victor Chng: Level up..

AIMS AMP Capital Industrial REIT: Good price?

A reader, Mark Wong, asked this in the comments section:

"Hi AK71

"The REIT is trading at $1.315 now. Will you consider this as a good price to enter? I have not yet holding any of the REIT at this moment."

As I feel that many do not read the comments section of my blog and I really think that my reply to Mark could be of interest to others, I am publishing my reply as a blog post instead:

"Hi Mark,

"I feel that the more important question is to ask whether you are getting the value you want. What do I mean?

"Referring to the blog post above, a realistically optimistic distribution yield at $1.08 a unit (the price of the rights units) is estimated at 9.26% , post rights issue.

"So, at $1.315 a unit, we are looking at a prospective yield of 7.6% with the added benefit of a stronger balance sheet which could allow the REIT to do more AEIs which could increase DPU in future. So, everything else remaining equal, we could see distribution yield inching up from 7.6%.

"By my estimate, the REIT is currently not trading at any discount to NAV whereas, previously, at a higher unit price, it was. $1.315 per unit is probably close to valuation.

"So, if you were to ask me, I would say that the REIT's units are fairly priced although $1.315 (post rights issue) looks "cheaper" than $1.415 (pre rights issue), that is just an illusion created by prices.

"There is nothing wrong with buying at a fair price, of course. So, I won't tell you if now is a good time to buy into the REIT. You have to answer that yourself."

Related post:
AIMS AMP Capital Industrial REIT: The rights' value.

Singapore Short Stories: Man collects rent from his boss.

Everyday, Mr. Tan went to work in a local SME in an industrial estate on a sunny little island called Singapore.

Mr. Tan was a model employee and was always on time.

Mr. Tan was also rather frugal. 




He would prepare his own food to bring to work and saved a big portion of his earned income. 

Mr. Tan's biggest fear was to be destitute in his old age.

Mr. Tan always remembered what a famous man called Warren Buffett said:

"We never want to count on the kindness of strangers in order to meet tomorrow's obligations."




Mr. Tan was a regular guy and didn't have any dreams of greatness.

Sometimes, after a trying day at work, Mr. Tan would wonder if he could stop going to work and still receive an income? 

Being rather practical, he dismissed it as wishful thinking.

Then, one day, he had a conversation with the accountant in the company he worked for.

In the conversation, the accountant said that the company had to pay rent and salaries every month but the difference was that the landlord didn't have to work for the money while they had to.




Hey!

Get paid every month?

Didn't have to work for the money?

Idea!

A few years later, Mr. Tan still worked in the same local SME in the same industrial estate on the same sunny little island called Singapore. 

A big difference was that some of the rent paid by the company every month to the landlord ended up in Mr. Tan's bank account regularly, enough for Mr. Tan to stop working for a living if he had wanted to.




Now, how did that happen?

Let me ask my bowling ball.



Is this an easier way to be a landlord?

Related posts:
1. Building and preserving our wealth.
2. 2015 full year income from S-REITs.