Don't do silly things and we can retire smart too.

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A "special feature" (what I would call an advertorial or sponsored blog post if it were to appear in my blog which it won't) by a fund manager in The EDGE:

"Your CPF may prove inadequate upon retirement because of several factors."

The fund manager suggests "that both young and middle aged workers can invest in multi asset funds for diversification benefits." 

Do this and retire smart.

AK didn't do this.

How like that? 

AK in trouble?




Is AK going to run to the fund manager and put some money in multi asset funds? 

AK will kaypoh a bit and respond to the 4 points raised first. 

Point for point:

1. Be prudent in using our CPF-OA money. Remember, our CPF money is primarily for retirement funding. 

Just because it can be used for other purposes does not mean that it should be.

2. If we have excess money in the CPF-OA (i.e. no other use for the money), think about doing OA to SA transfer to earn higher interest of 4% to 5% per annum. 

Think about possibly doing cash top ups to the CPF-SA and enjoy income tax relief (for the first $7K of top up per year).

3. Don't use our CPF money for investments (unless Mr. Market makes us offers we cannot refuse). 

Think of the CPF as the investment grade bond component of our portfolio.

4. Have a good annuity that will pay us for life and the answer is, yes, CPF Life.




Aiyoh, simi answers? 

AK just talking rubbish again, right? I blur.

No one cares more about our money than we do.

Don't do silly things like asking barbers if we need a haircut and we can retire smart too.




Related post:
Building a cornerstone in retirement funding with CPF.
If you haven't watched this before, please do.

Tea with Invest Apprentice: 7 Reasons Why We Need Unit Trusts.

Another guest blog by Invest Apprentice and this should be read as a companion blog to the earlier guest blog. Please see related post number 1 at the end of this blog:

7 Reasons Why We Need Unit Trusts.

1) When we only have a small capital and it's too expensive to buy individual stocks or bonds in a certain market we want exposure to.

Eg. A global equity fund is a quick way to gain exposure and diversification to most of the mega cap companies in the global stock market.

2) When we want to diversify our risks and ETF is not a ready option. Our SGX exchange currently does not offer the range of ETFs compared to foreign exchanges such as the US, where you could literally buy an ETF for any sector, style, country, asset class etc. you can think of. They even have leveraged ETFs for you to “short” the market should you wish to (no thanks for me)! But until the day our SGX offers even half the range of ETFs, to some extent I’ll still have to rely on some unit trusts to diversify into certain sectors or markets.

3) When our research on macroeconomic drivers lead is to identify an undervalued sector or a country's market that is extremely promising, but we lack the confidence or funds to invest directly in specific stocks in that sector or country.

A simple example is the Phillip S-REIT Fund which I bought in late 2011 for my mum. She was new to investing and thus averse to picking REITs directly. That fund reinvested its quarterly dividend and has returned about 40% when I sold it in Feb this year.

4) When we favour the fund manager’s style and endorse the fund’s investing philosophy. For example, I still hold on to Aberdeen funds even though they underperformed their benchmarks last year, because I like the defensiveness of their portfolio selection and hold the view that going forward, defensive sectors like consumer staples tend to fare better in an increasingly difficult market.

5) When we don’t have a better alternative. Usually, this means that the sector/country/asset class we want to invest in does not have an ETF representing it, or the ETF is seriously illiquid in our exchange and therefore difficult to trade.

For example, there are unit trusts that invest in exotic frontier markets like Ukraine (!) and Vietnam which we may like to “try-try”, such as FTIF-Templeton Frontier Markets Fund managed by Mark Mobius.

6) When we want clean-cut portfolio allocation and easier time doing rebalancing. It’s easier to create a diversified portfolio like, “I want 40% into US equities, 30% into Asian equities, and 30% into global bonds, and I want to do that with $5,000”.

7) When we are not looking for spectacular returns, but a better than average market return at lower risk compared to investing in individual stocks.

Wilfred Ling did a breakdown of the various myths surrounding unit trusts. Some of my points are similar to his, although I added my personal interpretations:

 

Hopefully the above gives you a broader perspective on the role of unit trusts in one's portfolio. Personally, I am NOT a unit trust fan myself and I do my own active stock picking. I also use ETFs for investing in broad funds. I am just writing this as a response to the negative hype against unit trusts in recent years, at least among the fellow investors I spoke with or read about.

Every investing instrument has its place in the arena.

Disclaimer:
This is NOT investment advice and I am not a licensed FA. Invest on your own risk or seek a professional FA.

Related posts:
1. Can we trust unit trusts?
2. SRS: A brief analysis.

Tea with Invest Apprentice: Can we trust unit trusts?

This is a guest blog by Invest Apprentice, someone whom I got to know on FB. Knowledgeable but very humble, I have been asking him to guest blog for ASSI for months. So, I hope you enjoy this:

Among my friends savvy in investing, the common perception is that unit trusts don't earn money, or they had lost money in unit trusts before. So, they would rather invest on their own.

It's true that unit trusts lose money in a few scenarios:
 

1) The underlying market they are invested in lose money.

2) High expense ratio and management fees.

3) They underperform the market they are benchmarked against.

For (1), this is the market risk that you can't run away from even if you use an ETF or you invest directly in the said market. For example, if you bought an emerging market unit trust since last year you would most likely have lost money, because MSCI Emerging Market index was -5% since last year. In an ETF, that would be the loss you make. If you pick stocks, they have to be strong enough to withstand the broad market decline.

For (2), it's true that unit trusts have a higher cost over index funds and ETFs over the long run. But you also need to pay upfront commission charges for buying ETF, especially if you are buying in small lot sizes. If you diversify your stocks the commission costs will mount up as well. Saying that low cost index funds beat actively managed, expensive unit trusts over the long run is accurate provided you kept commission charges lower than the expense ratio of the unit trusts you are comparing against.

For (3), this is due to poor active management skill of the fund manager. But what is active management? It means the fund manager is using his own analytical research, forecasts, judgement and experience in making investment decisions on what securities (stocks, bonds, commodities) to buy, hold and sell, given the investment universe dictated by the fund objective (sounds like what you and I do when stock picking).

The objective is to beat the benchmark of the fund. This means that if the benchmark returns -20%, and the fund returns -15%, the fund manager has “beaten” the benchmark, even though on your statement it shows a loss. And by the way, that’s supposed to be a good thing!

What we should lament is not that the unit trust we bought loses money, but that it underperforms its own benchmark. This happens when the stocks or bonds the fund bought did not rise as much as the index, or fall in value relative to the broader market. Remember this can happen to us stock pickers as well. I have bought and am still holding on to a number of stocks that are still underperforming the STI.

One way to mitigate this - besides looking at past performance - is to look at the investing objective and philosophy of the unit trust in its prospectus, and also the top 10 holdings and asset allocation of the fund. See if they practice what they preach in their prospectus. One can also read their commentary to see if they explain their rationale behind buying into or divesting of a security / stock.

My "favourite" example is Aberdeen unit trusts. I held a few Aberdeen funds (still do), and I always thought they are the best, until last year I checked the performance of Aberdeen Global Opportunity Fund vs the benchmark MSCI World. To my horror I realized that Aberdeen Global Opportunity Fund only returned 16% in 2013 vs MSCI World Index's return of 27%. Now, 16% is good performance, no doubt, but not when your benchmark returns almost 70% better - you might as well do indexing.

What happened? Basically if you look into their fund factsheet, their country allocation was underweight US in 2013 – and we know that US was the best performing market that year.

Looking at the fund factsheet (for this example: http://www.aberdeen-asia.com/doc.nsf/Lit/FactsheetSingaporeOpenAGOF) and comparing it with the benchmark’s factsheet (for this example, MSCI World Index: http://www.msci.com/resources/factsheets/index_fact_sheet/msci-world-index.pdf) will show you the distinctive investing style of the fund. Study their country and sector allocation.  In this example, you will notice that Aberdeen Global Opp is still underweight US (less than 30%) vs the index (54%). You will have to decide whether you agree with such an allocation.

Let’s say you agree to the investing style of the unit trust. The next thing to look for is the top holdings, also found in the fund factsheet.

If you like the top holdings, buying into the unit trust is a viable way of gaining exposure to these companies - especially if they are not represented in the index that your ETF is tracking. This way you can supplement your passive indexing.

There are of course other things to look for when choosing a unit trust. The above is only a quick guide.

Very often people look at the absolute return instead of the benchmark the unit trust is tracking. If we put things into perspective, buying the right unit trust at the right time can help a portfolio.

Disclaimer:

This is NOT investment advice and I am not a licensed FA. Invest on your own risk or seek a professional FA.

Related posts:

1. OCBC Blue Chip Investment.
2. SRS, CPF-OA and CPF-SA.

UOB Asset Management: Lost money and still losing.

Many years ago, I bought into a few unit trusts. I recently received reports from two which I have been a unit holder of since their inceptions:

Lost and still losing money. I would have been better off managing my own money.

Related posts:
1. Nobody cares about our money more than we do.
2. Tea with Solace: Common Sense Investing.
3. Is investing in stocks suitable for you?

SRS: E-book and a brief analysis.

UPDATE (YA 2018):
Taxpayers who make SRS contributions on or after 1 Jan 2017 should note that the overall personal income tax relief cap of $80,000 applies from YA 2018 (when the income earned in 2017 is assessed to tax).
Read: SRS INCOME TAX RELIEF.
Feb 16, 2017
See examples:
https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Deductions-for-Individuals--Reliefs--Expenses--Donations-/#title7



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SRS e-book

Recently, I came across a couple of blogs talking about the Supplementary Retirement Scheme (SRS). 

Over the years, whenever I talked about how I started an SRS account from the time the scheme was introduced in 2001, listeners would be incredulous. I was only 30 years old in 2001. To me, the tax benefit was too obvious to be ignored. Since 2001, I have contributed to my SRS account up to the maximum sum allowed yearly.




In a blog post on 24 Dec 2009, I mentioned that "As long as a person is paying income tax, he should start an SRS account and contribute to it yearly so that he pays less income tax (or none at all). For me, it's that simple." 

Well, it might be that simple for me but for people with many financial commitments, it might not be so. For these people, they might not have much money leftover after taking care of all their routine expenses. So, voluntary contributions to the SRS account could be difficult.

Having said this, as long as we are paying income tax, voluntary contributions to our SRS accounts should be viewed as an important part of planning for our retirement. We should try to include it in our retirement planning.






Voluntary cash contributions to the SRS account are eligible for tax relief. For some, contributing just a few thousand dollars a year could mean not having to pay any income tax. So, there is no need to contribute the maximum of S$11,475 per annum. This is the maximum allowed for Singaporeans and PRs.

Therefore, I would suggest that we look at how much of our income is taxable and to contribute to the SRS account sufficiently to become free from income tax. After all, funds in the SRS account should not be withdrawn till the statutory retirement age to avoid penalties. So, cash in hand is still better than being in the SRS account.




Of course, if our taxable income is much higher, contributing the maximum sum allowed would save us much in income tax although it might not mean being free from income tax. How much to contribute, if ability allows, therefore, depends on individual income levels.

Money in the SRS account could be used to invest for higher returns. Examples are fixed deposits, single premium insurance policies, shares, REITs, ETFs and unit trusts. SRS funds cannot be used for purchasing real estate, for example.







Upon reaching the statutory retirement age of 62, if we had been making regular contributions and investing prudently, money in our SRS accounts could be an important part of our retirement income. 50% of the funds withdrawn upon retirement would be subject to income tax. If we keep our yearly withdrawal within the non-taxable bracket which I believe is $20K, we would not even have to pay any income tax.

So, theoretically, if we had $200K or less in our SRS accounts by the time we retire, withdrawals could be non-taxable. Withdrawing the funds in ten equal portions over a period of ten years would lower the income tax payable if we had more than $200K in our SRS accounts by the time we retire.

For anyone paying income tax yearly and still wondering if the SRS is necessary, do consider the points I have made in this blog post. Financial security in our old age is one of the most important things we have to plan for in life.




UPDATE (18 July 2014):
The maximum contribution allowed for the SRS account now is $12,750 per annum.

NEW: From 2016, max contribution is $15,300.

Read Supplementary Retirement Scheme.
Updated Booklet on the SRS: HERE.

From the FAQ section on SRS in MOF's website.

Update:
"... the caps on contributions to the Supplementary Retirement Scheme will also be raised to $15,300 for Singapore citizens and permanent residents and $35,700 for foreigners."Source: The Straits Times, 23 Feb 15.

Related post: Double your income, not your income tax.

101 investment choices

There are so many things we can invest in these days. Basically, it's a whole gamut of stuff including stuff like wines, art, watches, jewelry and antiques. Heck, I collected comics when I was in school because a friend of mine told me how they could appreciate in value over time! The comics are probably still mouldering away at home.

For the average person, there is no need to be knowledgeable in all or even most forms of investments and there is definitely no need to diversify into 101 areas in investment. I am quite contented to have the following:

1. Bank deposits
2. CPF
3. SRS
4. Foreign currencies (RMB and IDR)
5. Gold buillion coins
6. Single Premium Endowment Policies
7. Regular Premium Endowment Policies
8. Regular Premium Life Policies
9. Unit trusts
10. Equities (High yielding types mostly.)
11. Real Estate

I am able to manage these on my own and, in aggregate, if they outperform the returns from fixed deposits and outpace inflation, I'm happy. To me, investment is not a complicated matter. It's quite simple.

Keep things simple. Don't complicate things for ourselves. Land banking? Wine? I don't need these. There are many money making opportunities with the tools I have now. That's enough for me.