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Lucky to have Singapore Savings Bonds.

Saturday, May 14, 2022

Stock market is crashing.

Bond market is crashing.

Crypto market is crashing.

Suddenly, everyone is rushing for the exits and looking for safe harbors to park their money.

So, quickly now, withdraw all our money and stack them up at home (and pray that there are no termites.)

Alamak, I believe in keeping some cash at home for convenience but this is too much lah.

Of course, jokes aside, all of us know about the risk free and volatility free CPF we lucky Singaporeans have.

What about risk free and volatility free Singapore Savings Bonds or SSBs?

Well, long time readers of my blog might remember that I blogged about SSBs donkey years ago.

However, I hardly talk about them compared to how much I talk about the CPF.

I am blogging about the SSB now because many readers left comments about the SSBs in my blog and even my YouTube channel in recent days.

Whether something is good for us or not will depend on what we need and how well it fits that need.

The SSB is designed as another way for risk averse people to save money (up to a maximum of $200K at any one time) for the medium term.

We can tell this is the case because to get the maximum coupon, we have to hold the SSB for the full 10 years.

If our motivation is not to save money for the medium term, then, we have to accept the possibility of receiving smaller coupons if we should make premature redemptions.

The SSB is also safe because there is no penalty for premature redemption although there is a waiting time before we can get our money back.

So, it isn't the nearest of money which means it isn't the best way to store our emergency fund.

An easy solution is to park only a portion of our emergency fund in a SSB if we really want to use it that way.

This might not work if someone has a relatively small emergency fund in which case I think leaving the money in a fixed deposit might be a better idea.

I blogged about this way back in 2015 and if you are interested in what I said back then, read:

Singapore Savings Bonds: Good?

Now, having said this, with interest rates rising, if the SSB should offer an average coupon of 4% eventually, it might be a no brainer to park some money in SSBs for the full 10 years as it would mimic the CPF-SA.

It really is not easy to get a consistent 4% risk free and volatility free return especially in a strong currency like the Singapore Dollar.

It is utter mayhem in some markets and things could get worse before they get better.

Who knows?

Things could even get worse for longer if we get stagflation.

Still, as long as we are financially prudent, have a large enough emergency fund and are invested in bona fide income producing assets so that we receive passive income to cover a good portion of our expenses, we should do better than most. 

The aim is to be always prepared for winters.

I do not doubt that other than those who are super rich, most of us would have to make adjustments in the event of a longer winter even so.

Be pragmatic.

If AK can do it, so can you!

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keng said...

Hi AK, actually for SSB although you can an effective interest of say 4%, and you get your principal amount at the end of 10 years, won't the amount be depreciated already?

AK71 said...

Hi keng,

Oh, yes, for sure, S$1 today is worth more than S$1 ten years later.

Sometimes, it is about how to lose as little purchasing power as possible.

So, if inflation rate averages 4% per annum for those 10 years, at least, we would have done a pretty good job of preserving our wealth.

No growth but at least it didn't shrink. ;p

In a strongly inflationary environment, this is probably not a bad outcome for most people considering the fact that the SSB is risk free and volatility free.

Although my preference is to invest in income producing assets, if these assets are unable to offer a higher earnings yield to compensate for the higher risk free rate, they would become less attractive.

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