Good deal because price has dropped.

"Don't ask barbers if we need a haircut."
There was a time when I enjoyed visits to the banks. As a boy, I was very interested in getting the highest interest rate possible for my savings. I enjoyed visiting the banks to update my savings passbooks when interest crediting became monthly instead of yearly. There were no auto update machines in those days but I didn't mind waiting in line for a teller.

I no longer enjoy visits to the banks. If I go to the bank, I run the risk of being accosted by bankers eager to sell me some products. Actually, these days, we don't even have to enter the banks to get accosted. Walking past a bank could be a frightful experience. Detour? I would if I could.

Recently, I had to visit the bank. It is my once a year compulsory visit, if you know what I mean.

The expected happened.

B: "This pays you 4% per year. Better than leaving your money in a fixed deposit."

AK: "How does it generate 4% per year for me?"


I was given a fact sheet and I was not surprised to see that it was a unit trust which had a big exposure to bonds.

B: "The unit price dropped. You are getting a better price now. Really good."

AK: "(OMG...) And do you know why the unit price has dropped?"

Awkward silence.

AK: "Would you be surprised if I tell you the unit price will drop further?"

B: "How do you know?"


I was not amazed nor amused.

AK: "Did you buy this yourself since you think it is a good deal?"

Awkward silence again.

AK: "Bonds pay their holders an agreed coupon. We know interest rates are going up and if we expect interest rates to go up by 1% this year, the market would demand a proportionally higher yield. Demanding an increase in yield from the current 4% to 5% would mean a 20% drop in unit price for this fund."

Awkward silence yet again.

Then, I knew how my maths teacher felt when I gave her a blank look after she explained to me some maths thing a long, long time ago.

You also blur? I also blur.

What an unemployed 53 year old can do with $20K?

Dear AK,
I am 53 and I have been jobless for more than a year. I have given up on job search. Fortunately, I am a saver and have almost 200k in savings.
Jobless 10 years too soon, I need to make my savings last longer. 
My sister told me about a 5 years endowment plan from _____Life.
Minimum required is $20,000.
2.25% p.a. is more than fixed deposits. (Email truncated.)


Hi JK,

5 years is a long time and if we believe that interest rates are rising and could continue to rise in the next few years, then, this endowment plan is not attractive to me. In another year or so, could FDs offer 2% interest per annum? I wouldn't be surprised.

Unlike a FD, a premature termination of the endowment plan would mean losing quite a bit of money. With a FD, if you break it, you just lose all or some of the interest you would have otherwise earned. Your principal sum is safe.

Here is an idea. If you are quite sure you do not need the $20,000 for the next 5 years, if you have enough in your CPF to meet the Full Retirement Sum (formerly the Minimum Sum) and if your Medisave has already hit the BHS* level, you could consider a voluntary contribution to your CPF account.

*(Basic Healthcare Sum (BHS) which was known as the Medisave Contribution Ceiling (MCC) in the past has been raised from $49,800 to $52,000 in 2017.)

Being 53 years old, the "lock in period" is only 2 years. At 55, you would be able to withdraw from your CPF account all money (including this $20,000 and the interest earned) in excess of the Full Retirement Sum.  

In effect, you are getting 2.5% to 4% interest per annum for a 2 years "fixed deposit".

In fact, you might want to max out the CPF Annual Limit ($37,740) this year and next. I am unemployed like you and that is what I plan on doing.

I hope you like a shorter lock in period and higher interest rates. I know I would if I were in you.

(Watch the video at the top of this blog post and you will learn that AK is economically inactive and JK is a discouraged worker. We are not considered unemployed by the Ministry of Manpower.)

2016 ALLOCATION RATES:

Related post:
AK is buying a 12 year bond.