Is it bad to receive regular dividends and to sit on cash?

Many times, I have been asked what is the yield on my total portfolio. I have never bothered to answer the question for various reasons and because I don't ever answer such questions, I don't bother to find out what the answer might be.

I know more or less what are the dividend yields and distribution yields of my various investments in my portfolio but I have never really calculated what is the average yield.

A friend recently told me that the average yield of my total portfolio including cash must be much lower and he wondered if I was beating some kind of benchmark. I could see where the conversation was going and I gave a loud sigh.

I know there are some people who are like my friend, who are obsessed with measuring their performance and worried that, if they hold too much cash, they might under-perform the benchmark which in many instances is the STI. 

So, consequently, they are constantly on the lookout for assets to put money into in order to prevent their portfolio's performance from declining. It sounds stressful and I am stressed out just imagining this.

I am pretty simple minded when it comes to investments. I use some common sense and ask some questions which I think matter in that investment. If I am satisfied that I am not overpaying and the stock is likely to do pretty well in future, I buy some. Regular readers would know what I have been nibbling on in recent months.

Yes, some of the nibbles have been poorly timed but we can rarely buy at the lowest prices or sell at the highest prices. We can use some technical analysis to provide insights but if we did buy at the lowest or sell at the highest, we were lucky. I believe in holding on to investments that have good bones. Anyway, I sleep well at night because I "eat bread with ink slowly". Remember?

"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 and went to $2, but then they later went to $30." Peter Lynch.

"I buy on the assumption that they could close the market the next day and not reopen it for five years." Warren Buffett

Frankly, if prices did not come down, I would not have nibbled at anything. I would most probably just be growing my war chest.

Why should there be an urgency to buy something just because cash is going to be a drag on the overall performance of our portfolio? 

Is the overall performance of our portfolio so crucial? 

It could be to some, I guess.

I told my friend I am probably about 70% to 80% invested. So, I have 20% to 30% in cash. I don't know the exact percentage because I don't measure but it is about there. My investments are generating income in excess of $100,000 a year for me. Again, how much is it exactly, I don't know. I will know at the end of the year.

Even if I were to retire from active employment and not have an earned income, I guess I would be quite comfortable living off just a portion of my passive income. The rest, I could invest with when opportunities present themselves. If there should be nothing I fancy, I would just continue to build my cash position. Even if my cash position should be 50% or more of my portfolio, it wouldn't bother me.

AK is the proverbial frog in a well. There are many things in this world AK doesn't understand but AK knows that he feels good when he has more cash in his bank accounts. 

I am not a professional fund manager who has to answer to unit holders who might ask, "Why are we paying you just to sit on so much cash?"

Well, I understand that it could be that my friend and others like him imagine themselves to be pseudo professional fund managers. I understand that but it doesn't mean that I have to be like that. I am just a regular retail investor.

I would like to end this blog post with something Charlie Munger said before but it is probably a bit overused in my blog by now. Hint: It has something to do with some character sitting on something. So, I will end with a couple of quotations from Peter Lynch instead:

"In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten."
"If you can't find any companies that you think are attractive, put your money in the bank until you discover some."

I am not a professional fund manager and thank goodness I am not or I might be kept busy answering calls from irate unit holders. 

"Whose money is it anyway?" 

(Oops, I think that sounded like a question from a member of the opposition in local politics. Getting a bit mixed up in my old age. Cham.)

Related posts:
1. How did AK create a 6 digits passive income?
2. How did STE married with kids retire at age 44?
3. 5 revelations from a regular retail investor.

Should we buy a shoebox apartment in NE Singapore?

I was talking to someone who said he bought a second property for investment, a shoebox apartment in NE Singapore and said that he should be able to get a bit more than a 4% yield. He seemed quite pleased with himself and said that any yield lesser than 4%, he wouldn't consider.

Singapore Real Estate Exchange said before that 4% represents a psychological barrier when it comes to rental yields for investors seeking income from residential properties. There seems to be some truth in this. However, if we subscribe to the Rule of 15, 4% looks less attractive and does not provide a sufficient margin of safety.

There are many things that should be considered but basing our expectation of future rental performance on what are currently the market rates could lead to disappointment as more supply to the Singapore non-landed residential real estate market is on the way.

With vacancy rate at 7.2%, some experts are expecting vacancy rate to hit 10% by 2016. Wonder why? See this chart:

Source: URA.

A vacancy rate of 10% in the next few years is plausible as the inflow of foreign workers to Singapore has slowed down dramatically while more private non-landed properties are completed.

Experts have observed that there will be more completed condo units in the suburbs in particular and this will depress rents in OCR further.

"Between H2 2014 and 2015 alone, close to 30,000 units are expected to be completed, substantially greater than the previous two years' supply of 23,000 units. Of this, about 56 per cent will be in the suburban areas, and is thus likely to exert a further strain on rents as potential tenants will have greater bargaining power," said Ms Lee Lay Keng.

"The imminent supply glut could lead to a flight to quality, as some tenants will be able to move closer to the CBD for the same rental budget. The result is that the OCR (outside central region) residential landlords may get the short end of the stick," added Mr Nicholas Mak.

Source: The Business Times.

I have an inkling that Mr. Mak is right and it would mean higher vacancy rates in OCR in future. It might not just be a problem of depressed rents in OCR but depressed resale prices as well.

Remember also that ABSD is part of the total cost of buying that second or third property. ABSD, therefore, depresses the rental yield of these properties, all else being equal. The person I spoke with did not consider ABSD as part of the cost of the property. "It is an expense", he said. Sounded like an accountant.

Unless a residential property is able to offer a higher rental yield and, by that, I mean 5% to 6% which doesn't satisfy the Rule of 15 either, it really isn't a very good investment in an environment of worsening oversupply and impending interest rate hike.

In District 19 - which encompasses Punggol, Sengkang and Hougang - 2,300 new units have hit the suburban precinct in the past year.

This will be followed by a further 3,000 condo units over the next 12 months, with the completion of projects such as Sim Lian's 882-unit A Treasure Trove and Keppel Land's 622-unit The Luxurie.

"Because these areas have seen the largest increase in the supply of non-landed units in the past year, they are likely to see the most rental pressure as tenants would have a wider selection of options, increasing their bargaining power," said DTZ research director Lee Lay Keng.

Source: The Straits Times.

I know that a shoebox apartment in NE Singapore now might seem attractive from a price point. However, if we have done our homework, we might feel less confident about its prospects.

Related posts:
1. Rule of 15.
2. Pay the ABSD?
3. Where to buy shoebox apartment?

Curious about how life is like in a shoebox apartment? Read:
Home is a hut in the sky.