A conversation on the CPF and investing in stocks.

A conversation which I think might motivate a few others here:

Hi AK,

I have been going through your blog on max up minimum sum. I really like the idea to have govt help to build our retirement fund.

Can i seek your opinion that if my SA has not hit the minimum sum of 161k, is it better to do cash top-up (even more than 7k, no tax rebate beyond that though) to SA? Is when we hit the minimum sum, then we do VC to further build up our CPF account. Whats your view?

Thanks and regards,
G

Hi G,

If you want to give your SA a boost, I think doing the MS top-up is a good idea. You will hit the minimum sum faster and get income tax relief (up to the first $7K yearly) to boot. Of course, it really has to be money that you won't be needing for anything else. Remember that the process is irreversible.

However, if we do this yearly, we would be saving a lot in taxes and we are also very likely to receive a very meaningful lump sum payment at age 55 (with most of the money being from the government). :)

Best wishes,
AK

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Hi AK,

So am i right to say we should only do VC after we have max up SA to MS and not before?

Thanks and regards,
G

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Hi G,

If you want to benefit from the income tax relief, yes, that line of thought is logical. :)

However, remember that we can only do VC if our mandatory contributions do not hit the contribution cap set by the CPF Board. This cap is revised yearly. I believe it is $31,450 for 2015, for example.

Best wishes,
AK

Thanks AK for the confirmation. Your blog really change my view on CPF and how we can build our retirement fund.

In your view, do you think govt will keep increasing the minimum sum? I dont think there is issue with PMET but for those low or low-middle income earner might be tough as they might not meet the MS by the time they retire.

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Hi G,

The minimum sum will increase yearly by about 3% to keep pace with inflation. This is a given.

The CPF is really to help the common people. You can tell this by how there is extra interest income for the first $60K in our account and how there is a limit to how much we can top up our CPF accounts. It is not meant to benefit the rich.

We need to educate those who need the CPF most for a financially more secure retirement. If lower income workers diligently top up their CPF-SA while staying financially prudent, the magic of compounding will help them have a meaningful retirement income for life. They need to start doing this as early as possible. :)

Best wishes,
AK

Hi AK,

Yes, i can appreciate after going through your blog. Thank you for the enlightenment.

I attended few of your sessions and like the way you analyse stocks. Can you share how you filter stocks, any key criteria before you put in your shortlist and start going through in details?

Thanks and regards,
G

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Hi G,

Oh, you did? I am glad you enjoyed the sessions. :)

Well, I cannot give you a set of criteria. Like Charlie Munger would say:

"I can never make it easy by saying. ‘Here are three things’. You have to derive it yourself to ingrain it in your head for the rest of your life."

However, I would tell you my starting point. I invest mostly for income. So, whether a stock pays a dividend is an important consideration. Then, pick it up from there. If you were to invest for growth, you would have a different starting point. It is important to match our motivation and our methods. :)

I have a section in my blog's right sidebar titled "Food for Thought". You might want to read the books listed there. Good primers. :)

Best wishes,
AK

Related posts:
1. Achieving level one financial security.
2. Suddenly, financial freedom is less remote.
3. A simple way to a double digit yield.

Tea with Matthew Seah: Investment scams.

This is another contribution from one of ASSI's most prolific guest bloggers, Matthew Seah:

Recently I got to know of a likely fraudulent company selling US distressed properties in a declining city. 

Thought I could clear some air about how fraudulent investment operations work.





After doing some quick search, I found an easy to understand video from the Financial Industry Regulatory Authority, Inc.

How to Spot Investment Fraud?


.




Here are some other warnings signs which I think are also easily recognisable:

Promises of high, guaranteed investment returns with little or no risk.

“If it sounds too good to be true, it probably is.” Many fraudsters claim 12 – 24% or even higher returns. 

Unless their names are Warren Buffett, Peter Lynch, or George Soros, most investments can’t generate 12% returns consistently. 

Furthermore, all investments carry some degree of risk, so a 12% guaranteed return sounds amusing to me.

Unlicensed or “exempt” sellers or dealers.

If the investment company is unlicensed or “exempted” from registration, chances are they are not regulated by MAS. 

MAS has an Investor Alert List for anyone with internet access to do a quick check on the spot.





Secretive or complex strategies.

Oftentimes, fraudulent investments comes with complex and secretive strategies. 

Ask them how the investment generates its returns and to provide supporting documentation. 

Sometimes, my friends who are already in such schemes would answer 

“I cannot tell you because it is a trade secret/proprietary/non-disclosure” 

or 

“Others might copy our business model if I tell you.” 





With no transparency, it is highly doubtful that the investment would be legitimate, don’t you think?

Scams come in many shapes and sizes. 

If you do not know if it is a scam, but are in doubt, best to stay away. =D




Related posts:
1. Advice from a fraudster.
2. Thought process of a scam victim.
3. (See the 3rd point I made at a conference).
4. Invest in real estate for high returns.

Frasers Centrepoint's 7 year 3.65% bonds: Who should buy?

Some readers alerted me to a bond that is being issued by Frasers Centrepoint and asked me what I thought of it. After all, investing for income, bonds are relevant instruments.

The bonds in question are 7 year bonds and have a fixed interest rate of 3.65% per annum. So, unlike the perpetual bonds issued earlier in the year by the same entity, there is a maturity date for these bonds.

Bond holders will get back their capital (as long as the entity doesn't default) at the end of the 7 year period. So, they are safer than the perpetuals which, like bond funds, I keep saying, we should avoid.

Of course, I also said that we should avoid long term bonds because as interest rates rise, bond prices will fall as Mr. Market expects higher returns for lending money. Yes, when we buy bonds, we are more lenders than investors.

There is no reason for Mr. Market to buy older bonds at their issue prices when the coupons or yields are higher for newer issues. So, prices of affected bonds will have to decline to give a comparable or more attractive yield.

Then, is a 7 year bond a long term bond? Well, conventionally, long term bonds are 20 year or 30 year bonds. However, I feel that a period of 10 years is also considerably long. What about a period of 7 years? I think it is pretty long.

In the next 7 years, is it likely for interest rates offered by the banks for money in fixed deposits to go to 3% or more per annum? When we consider how they have gone from about 1% per annum to as high as 1.6% per annum in the last one year, it is possible that they could go much higher in the next 7 years. So, we have to be prepared that the price of these bonds could decline in the next 7 years.

So, who should buy these bonds?

Those who are not only happy with a 3.65% coupon but are buying with money they are sure they do not need in the next 7 years and are prepared to hold for the full 7 years.

Read more about the bond in question: here.

Related post:
Frasers Centrepoint's Perpetual Bonds.