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Monday, December 12, 2016

Is a financial adviser really needed?

Yes, unless one has the time, interest and discipline, and doesn’t suffer from optimism bias. BY BARRY RITHOLTZ

MANY investors are not sure whether they need a financial adviser. New changes in law such as the fiduciary standard in the United States and technology such as robo-advisers have added layers of complication to the answer to the question: Do you need a financial adviser?

To know, you must evaluate your financial situation. Let’s work through it together, so you have a better understanding of your circumstances and can decide what sort of financial services you need. Let’s begin with the deceptively simple question: How much help do you need?

It depends on several factors:

First, how complicated are your personal financial circumstances? The simplest financial situation is a young single working person who rents his or her home.

At the other end of the scale is someone like this: A successful entrepreneur who owns a company (or three); is facing large capital gains reflecting the sale of a business; has children and grandchildren to pass wealth to;has multiple sources of income and a fairly involved tax filing to go with it including loss carry forwards; owns multiple real estate properties in the US and abroad.

He works with multiple lawyers, accountants and other business counsellors.

He has maxed out 401(k) pension contributions and defined-benefit plans; owns numerous investment portfolios at different firms;has a fully developed will, trusts and insurance policies; and is involved in major philanthropic endeavours.

Your situation is probably somewhere in between these two extremes. The more complex your circumstances, the more likely you would benefit from some
professional help.

Secondly, what are your long-term financial goals for the next five years or more?

Are you on track for making them?

These are the most common answers from investors:

- Saving to buy a home
- Paying for college for children
- Retirement planning
- Outpacing inflation
- Managing the proceeds from a sale of a business
- Philanthropy
- Tax management
- Generational wealth transfers
- Estate planning

I listed these goals in order of complexity. Saving to buy a home, pay for college or retire are the simplest investing goals. Financial planners have been thinking about these questions for a long time. One of the more useful way they conceptualise this is by breaking down your financial life cycle into three phases: accumulation, preservation and distribution.

These three phases usually track age. Younger people in their 20s and 30s have a
longer time horizon, not a lot of cash flow, and the ability to embrace more risk for potentially greater returns.

Middle-aged people in their 40s and 50s typically have more assets such as a home, portfolios, pension accounts, along with greater financial obligations such as paying for college and saving for retirement. They have a moderate time horizon and should embrace somewhat less risk.

People closer to retirement in their 60s and 70s have less potential time for markets to work in their favour and should be taking even less risk.

The distribution phase is exactly what it sounds like: planning to draw down your assets to live on them in retirement. Reward is a function of risk – and risk brings with it the possibility of failing to yield expected returns.

This is an important concept that many investors fail to understand. Very often, we see younger investors fail to take enough risk; they carry way too much cash and bonds for their multi-decade time horizon.

And the flip side is true – we often see people who should be in a preservation mode but are still aggressively embracing far more risk than they need to. That increases potential volatility and portfolio draw downs. Many successful entrepreneurs and business people – hard-working, competitive, driven – have difficulty making the transition between phases.

They are used to embracing risk and do not enjoy throttling back.

It shows in their portfolios, which are often way more volatile and aggressive than is appropriate.

Assess where you are on these timelines and determine whether you can manage
adapting to each phase of your financial life cycle. It is not terribly difficult, and with some time and thought many people can handle it themselves. Whether you want to or not is a different question.


Thirdly, how disciplined are you? Behaviour is where most people run into problems; it is also where financial advisers deliver the most value, in my opinion.

As I have discussed oh so many times, when it comes to assessing risk in the capital markets, you’re just not built for it. The biggest obstacle to your success is not your stock-picking prowess or ability to time markets but rather the one thing that actually is within your control – your own behaviour.

Whenever I speak to a large group of investors, I like to ask how many of them rank themselves as “above-average drivers”.

Typically, 70 to 80 per cent will raise their hands saying yes. That is, by definition, incorrect.

That is followed by the same question about investing: How many of you are
above-average investors? How many of you expect to beat the market this year?

The same optimism bias appears – about 75 per cent think they are better than average and will beat the markets. That is just the beginning of a cascade of cognitive, emotional and psychological errors that lead the majority of investors to do poorly. The average investor, according to numerous studies, is a terrible investor.

Here are some specific questions for the 70 to 80 per cent of you (heh heh) who are above average:

- Do you have an investment philosophy?
- How do you express that in a portfolio?
- Do you follow specific rules when investing?
- When do you overturn those rules?
- How actively do you trade?
- What is your portfolio turnover? How long do you hold your average investment?
- How much does your strategy depend on news?
- How much financial television do you watch?
- What is the role of economic releases and quarterly earnings in your investing?
- What did you do with your portfolio in 2008-2009? 2000-2003? 1997-1999?

If you answer those questions honestly, you should be able to determine whether you have the temperament and discipline to manage your own money.

If you have the time, interest and discipline, there is no reason you cannot do it yourself. It is relatively easy: Select an asset-allocation model, review it
quarterly, rebalance once a year, wait 30 years, retire. Voila! For the rest of you,
financial advisers are standing by.

The writer is chief investment officer of Ritholtz Wealth
Management and author of Bailout Nation. He runs a finance blog, The Big Picture

Monday, November 28, 2016

Just a mobile phone needed to pursue degree

The Straits Times
Nov 24, 2016

An online university does not charge tuition fees, is able to work with spotty networks

Having fled from a troubled Myanmar as a child, Mr Dingo Keidar spends most of his time in Mae La refugee camp in north-western Thailand.

Money is hard to come by, and the furthest he can venture is the nearby district of Mae Sot. But he is now attending university every day, through a second-hand mobile phone and a 100 baht (S$4.01) a month data connection.

Mr Keidar, 20, is enrolled at the University of the People, a California-based online university set up in 2009 to widen access to higher education. It does not charge tuition fees, only a US$100 (S$143) administration fee for each examination at the end of a module. This means a bachelor's degree would cost US$4,000.

Teaching and learning are done on a platform designed for the spottiest of Internet connections, to give students from all backgrounds an equal chance to succeed.

"We try not to be cutting-edge," said its founder and president Shai Reshef, an Israel-born entrepreneur who yesterday announced 50 scholarships for Myanmar students at a refugee clinic in Thailand. "We want to use the technology that everyone can use."

This means there are no video clips, audio files or other bandwidth-hogging elements in the material it gives students. All teaching and class discussion are done using text. Exams take place all over the world, at volunteers' homes, offices or other available spaces.


Everybody deserves the right to higher education. And the technology enables us to give that… We are showing that education can be great-quality with a minimum cost.

MR SHAI RESHEF, founder and president of University of the People, on keeping education affordable for everyone.

The non-profit institution, funded by The Bill and Melinda Gates Foundation and Google among other groups, now has 6,000 students enrolled in its business administration, computer science and health science bachelor degree courses, as well as master's of business administration. Curriculum is overseen by volunteer academics from respected universities like New York and Columbia.

Mr Reshef wants to double enrolment every year. Once it reaches 20,000, he disclosed, the model will be financially sustainable and volunteers can be paid for their services.

"Everybody deserves the right to higher education," he told The Straits Times recently in Bangkok. "And the technology enables us to give that… We are showing that education can be great-quality with a minimum cost."

Many governments spend millions of dollars to build universities that serve very few students, he observed. "We want to show governments that (our) solution is viable… we want to grow to show them and to show others that they can do it as well. What we do, every university can do."

He dismissed the suggestion that his university compromises on academic quality, saying that half of the students drop out after failing compulsory foundation courses for their respective degrees.

Its students are a diverse crop: Thirty-five per cent are from the United States, 24 per cent from Africa, and 14 per cent from East Asia. Of its active students based in South-east Asia, 20 are in Singapore and 38 in Thailand.

Some of these students are mothers juggling child-rearing and schoolwork, while others come from cultures where women are expected to be homebound. And then, there are refugees like Mr Keidar.

The ethnic Karen-Shan youth told The Straits Times he had despaired about his chances of getting a degree after his post-secondary education, the highest level available inside the Thai-Myanmar border refugee camps, which host some 100,000 people. But he managed to secure a University of the People scholarship earlier this year to read business administration.

"I had almost lost faith in my future," he said. "Now I'm really excited to see what's out there."

So far, the university has enrolled 1,000 refugees as students.

Despite turning its back on fancy technology, the institution is not short on ideas. One of its deans recently created an algorithm that identifies students weak in particular subjects and then pulls material off the Internet for them to read.

"We tried it in one class and the average improvement was half a grade," said Mr Reshef.

Next, the same dean is going to try to create an algorithm to match the best students in specific areas with those who are weak in that subject.

"The algorithm can see when you log in, what you read, how your homework was, and what grades you got," said Mr Reshef. "We know everything about the student."

Sunday, October 30, 2016

High-tech Investing

 Dr Larry Haverkamp
The Sunday Times
30 October 2016

At the new technologies in the market can make your head spin. But how about investing? Does it have new innovations to lower costs, raise returns and reduce risk?

The answers are 'eyes, yes and yes'. We have had four investing innovations: ETFs, hedge funds, private equity and sovereign wealth funds.

ETFs are nearly an passively managed, which means they are index funds that simply duplicate a market index. like the S&P 500 in the United States or the Straits Times Index in Singapore.

The other three funds are actively managed, which means they try to do better than a market index by superior stock picking and market timing.

Of course, the billion-dollar question is. "Can it be done? Can smart managers out-perform the marker?" The answer, so far, has been "no," but hope springs eternal.

This optimism explains why we have actively managed funds and
the most well-known are hedge funds with US$3 trillion (S$4.18 trillion) of assets under management.

It matches the US$3 trillion in sovereign wealth funds, US$3 trillion in ETFs and US$1 trillion in private equity funds. Alt have sprung up from almost nothing 30 years ago.

Perhaps the biggest question is whether active management really works. Research indicates that it doesn't, because actively managed funds, on average, have failed to beat their benchmarks.

It means that passively managed funds, like ETFs, perform as well as actively managed ones. And they do it at a much lower cost since ETFs don't need to hire high-priced experts to pick the best shares. They simply duplicate an index by buying all the shares in the index.

The lowest-cost ETF charges an expense ratio of 0.04 per cent per year, which is only 40 cents for every S1,000 invested. It is not much, especially since ETFs do not charge a performance fee.

It compares to hedge funds which charge "2+20" which means a 2 per cent annual expense ratio and a 20 per cent performance fee above a minimum return. This cost has come down slightly in an effort to win back business lost because of low returns.

The big question is whether it is worth the money? Have hedge funds really outperformed their benchmarks?

Incredibly, no one can say for sure, as nearly all hedge funds declare themselves unique and so they don't have a benchmark. They judge themselves successful if they simply make a profit and not a loss.

These are called 'absolute return' funds and besides having no benchmark, many also use high leverage. Then, an investment might earn only 3 per cent but with three times leverage, the return rises to 9 per cent. Of course, leverage can also magnify losses.

Three times leverage may look high, but it isn't much when you consider that others have used extreme leverage, like investment banks that carried 30 times leverage prior to the 2008 financial crisis.

The stories hedge funds tell may be even more important than the numbers, especially if there are no benchmarks. Take high-yield bonds, commonly called junk bonds. By analysing the bond contracts one by one, it should be possible to pick out the best to produce high returns.

Well, that is the sales pitch. The problem is there is no obvious benchmark to compare to those leveraged returns.

Another example is emerging markets. Supposedly, experienced analysts can pick the best stocks in developing economies - like Africa - while developed stock markets have a longer history and are more efficient, making it more difficult to find a bargain. Again, the story sounds reasonable, but there is no obvious benchmark to use for comparison.

One more: Guessing the target company in a future take-over would be a sure money-maker. But can it be done and do hedge funds that try succeed? Again, the story is compelling but we don't have enough data from hedge funds to know.

The stories may have succeeded more than data in boosting hedge fund capital to an incredible U5S3 trillion.

Recently, however, investors have grown restless and some have given their required three- to six-months advanced notice to withdraw money, causing hedge fund assets to decline slightly while ETFs have continued to grow.

Hedge funds have an impressive record of returning 10 per cent in the last 25 years compared to 9 per cent for the S&P 500. And they did it with less than half the volatility of the S&P 500. That means the returns were high and the risks low, which is the standard measure of a fund's success.

But, as you may suspect, there is a catch. It seems that hedge funds earned spectacular returns of 18 per cent per year in the first decade, from 1990 to 2000.

Then, in the most recent decade from 2005 to 2015, hedge funds returned only 3.5 per cent per year. It is a low return that is hard to justify.

The billion-dollar question is "What happened? Why have hedge fund returns dropped so drastically?' And 'Do they have a future?'

It isn't certain but maybe - just maybe - all markets have become more efficient, which makes it harder for hedge funds to out-perform any index bonds, emerging markets or takeover targets.

That is one explanation. Another is that it is only a temporary market blip and hedge funds will make a comeback.

Sunday, September 18, 2016

Critical illness health insurance

Dr Larry Haverkamp
The Sunday Times
18 September 2016

A problem with business versus consumers is conflict. On the one hand, firms are tempted to boost profits by selling high-margin products.

The conflict is apparent in financial services like banking, investments and insurance. A reader wrote and asked me: "How about critical illness insurance? Is it worth the money? Should I buy it?"

My analysis is that critical illness health insurance is worth the money if you have a big budget. Like a Rolls-Royce automobile, it is a nice car, but do you really need it to move from point A to point B? It goes beyond the basics. That is the short answer: Here are the details:

The biggest reason not to buy critical illness health insurance is that it is double coverage. That is because you are already covered under MediShield Life and maybe under a private insurer's intergrated plan(IP) as well.

That makes it double coverage, which you can live without. But wait. Isn't double coverage health insurance disallowed?

Correct. But critical illness insurance is an exception.

The double coverage makes critical illness almost like gambling. If you fall ill, you win the lottery and collect a large one-time payout that you can spend however you like. You need not spend it on medical care since that is already covered by MediShield Life.

Critical illness covers 37 diseases. You can file a claim to collect if you fall ill from any of them. The more common ones are major cancers, heart attack of specified severity, coronary artery by-pass surgery, kidney failure and stroke.

Actually, your critical illness coverage can go beyond these 37 illnesses. Great Eastern Life, for example, has an add-on policy (a rider) which increases payouts and expands the coverage to 92 diseases.

But it is going to cost you. Like most things you buy, the basics are cheapest and add-ons - like extended coverage - are usually more profitable for firms and more costly for consumers.

It seems it would be important to covered under these illnesses but, as mentioned, you are covered already through your MediShield Life and possibly an integrated plan if you purchased one. Do you need an IP policy on top of MediShield Life? That is a hot topic that I will answer in the near future.

The rationale for double coverage of health insurance is that its purpose is to pay for lost wages.

OK. There is a certain logic to that. You have one insurance policy - MediShield Life - to pay for your medical costs and another to pay for lost wages.

The only issue is your wages may not be cut off when you fall ill. Many employers continue to pay wages if the time off is not too long, like for a month or so.

It also depends on the job. Lower income and hourly workers are more likely than salaried workers to have their wages cut when they miss work because of illness. Ironically, they are also the ones who are the least able to afford critical illness health insurance with its riders.

A side point worth considering is the employer has an insurable interest when employees continue receiving wages while on medical leave. It is reasonable therefore that employers - rather than employees - provide the insurance coverage.

Another side point: Could an unintended effect of critical illness insurance be that it could increase risk to the insured?

For example, I have a friend who had heart bypass surgery and made a claim under his critical illness plan. He was relieved that bypass surgery was one of the 37 illnesses covered under his plan but unfortunately. it covered triple bypass surgery and he only needed a single bypass.

So his claim was denied, and he had to pay with MediShield Life and his own savings. While it was a surprise, his employer continued to pay, so his costs were manageable.

He made the prudent decision. but it is an individual choice and someone on a budget might be tempted to delay the surgery. It is risky, but exactly how risky is not known for many diseases.

The joke at the time was he should have asked the doctor if he would please do two more bypasses since he was in there working on his heart already.

Then he could have collected on this critical illness insurance. Of course, it was only a joke since no doctor would do that, and my  friend didn't even ask the doctor.

A Sunday Times article from 2011 told the story of breast cancer patient Theresa Tan who had her critical illness claim rejected because hers was an early stage breast cancer.

She had three critical illness policies and was surprised to learn that all covered only later stages of cancer. All rejected the claims she made for her mastectomy surgery.

An adjunct professor at SMU, Dr Haverkamp contributes this column weekly to help our readers understand money matters better

Sunday, September 11, 2016

Four rules of thumb

Dr Larry Haverkamp
The Last Word

1. RULE OF 72.
How long does it take to double your money?
There is an easy way to get a quick and close-to-perfect answer. It is to use the formula (number of years) x (interest rate) = 72.

Let's say the interest rate is 4 per cent. Then how long will it take to double your money? (Answer: 72/4 = 18 years.)

Of course, you can do the same calculation to determine the interest rate you need for money to double. Example: If you will invest for 10 years. you need to earn 7.2 per cent interest (= 72/10) to see your money double.

People often wonder how to admit their portfolio as they get older. Most think. quite correctly, that you should accept a lower return and invest more cautiously as they age.

That is because if you invest in risky assets and lose money when you are old you will have less time to earn it back.

A good rule of thumb is your per cent of safe investments should equal your age.

For example, if you are 30 years old, you might hold 30 per cent of your assets in safe investments like your CPF accounts and fixed deposits. The other 70 per cent would go into risky investments like stocks. If you are 90 years old. you would put 90 per cent of your wealth in safe investments.

The hard part is figuring out which assets are safe and which are risky. How about your house? Is it safe or risky?

The answer is "safe". Since home prices appreciate over time, sharp price corrections are rare and it is an asset that most of us hold for the long run.

Another major asset is your CPF money. Is it safe or risky? It is super safe for each of your CPF accounts, which includes Ordinary, Special, Retirement and Medisave accounts.

What about whole life and endowment insurance policies? Those are also safe.

Finally, how about a car? That one is a bit of a surprise since it should not be considered safe or risky. Since it depreciates over 10 years. it is part of your consump-tion and not an investment.

The retirement age is 62 and you probably know someone who is retired. Of course, you will retire someday too. It is helpful for retirees to know how quickly they can draw down their savings once they stop working.

A common rule of thumb is to spend 4 per cent of your assets every year. At that rate, your assets will last another 25 years even if you earn zero per cent interest. Of course, they will probably last longer since you will probably earn a little interest, at least.

How about your retirement and other CPF accounts? Are those part of your assets? Yes. And you should also count your CPF Life payouts as part of the 4 per cent drawdown.

For example, if you retire with $1 million in assets (including CPF) then your 4 per cent drawdown comes to 540,000 per year, which is $3,333 per month.

If you receive $1,000 per month from CPF Life, the 4 per cent rule says you should take $2,333 from your other savings for monthly living costs.

One more question: Should you include your home as one of your assets?

It is an important question and the answer is usually "No". That is because most people don't sell their home after they retire, so they wouldn't use it to fund their retirement.

Keep in mind that if your mortgage is fully paid by the time you retire - which it usually is - then it won't cut into your monthly income like it did in your working years. Eliminating this major expense makes it easier to live on a lower retirement income.

For most of us, the biggest debt is our home loan. Next are car loans. After that are our personal loans, credit card debt, renovation loans and even pawnshop loans.

How much should you borrow from each?

A big part of that question has been answered for you with new housing rules concerning your Mortgage Servicing Ratio (MSR) and the Total Debt Servicing Ratio (TDSR). The MSR limits your home loan to 30 per cent of gross income and TDSR limits total debt to 60 per cent of gross income.

For example. the MSR rule is that monthly home loan payments divided by gross income cannot exceed 30 per cent. Gross income includes your own CPF contribution but not your employer's.

TDSR is monthly loan payments for all debt divided by your gross income. When you purchase a flat, your new home loan cannot push your MSR and TDSR above the limits.

The purpose is to prevent home buyers from over-leveraging as well as to keep home prices affordable.

By the way, the TDSR max of 60 per cent applies only to home loans. If a car loan, for example, pushes your TDSR over 60 per cent, it will not affect your ability to take a car loan.

Sunday, September 4, 2016

6 little-known facts about the CPF

Lorna Tan
The Straits Times

Sep 4, 2016, 5:00 am SGT

More members are looking at putting more into CPF accounts with better rates amid low yields elsewhere

With the Central Provident Fund (CPF) enhancements making headlines in recent months, more CPF members are waking up to the fact that there is a viable investment tool in their backyard.

The low-yield environment makes even the Ordinary Account rate of 2.5 per cent appear attractive, not to mention the Retirement Account (for those above 55), which attracts up to 6 per cent interest.

The chatter these days seem to be skewed towards how people can put more into CPF to grow their nest egg, rather than withdrawing.

To recap, the first slew of recommendations by the CPF Advisory Panel was announced early last year. They involve different payout options and the flexibility of deferring payouts up to age 70 so as to receive more cash later. Last month, the last few recommendations, which include a CPF Life escalating payout option, were announced.

Despite the CPF Board's publicity campaign and articles written about the changes, some still find the CPF schemes complex and difficult to understand, judging from queries to The Sunday Times, as well as those posed during the question-and-answer session at the CPF Retirement Planning roadshow on Aug 27.

The first recommendations by the CPF Advisory Panel last year involve different payout options and the flexibility of deferring payouts up to age 70. Last month, new recommendations, which include a CPF Life escalating payout option, were announced. ST PHOTO: KUA CHEE SIONG

Here are six little-known facts about the CPF:


Every Singaporean newborn today has a CPF account set up for him or her by the Government for the purpose of receiving the $4,000 Medisave grant.

For children who are Singapore citizens or permanent residents, a CPF account will be automatically created when a first top-up or CPF contribution is received.

Some wealthier CPF members or those with excess cash have opted to use the CPF as a legacy for their children or grandchildren by topping up their Special Accounts the moment they are born.

In fact, you can contribute up to the prevailing Full Retirement Sum (FRS) of $161,000 into the newborn's Special Account in one go, under the Retirement Sum Topping-Up Scheme.

Some members have already done so.

Imagine the power of compounding over 55 years.

Assuming the Special Account's floor interest rate remains at 4 per cent, your initial contributions would compound to some $1.5 million over the next 55 years.

Another way of topping up your children's CPF accounts is to use the Voluntary Contribution Scheme, currently capped at $37,740 a year.

Contributions can be made to the Medisave Account only (up to the Basic Healthcare Sum) or can be split among the Ordinary, Special and Medisave accounts.

However, bear in mind that unlike cash top-ups to other loved ones like spouses, parents and siblings, you do not receive any tax benefit for topping up your child or grandchild's CPF accounts.

Of course, not everyone will be comfortable with locking up funds for 55 years.

Some financial experts recommend that it would be better to invest the same amount in equities and low-cost index funds - given the very long investment horizon that a young child has - which should reap potentially higher returns.


Some CPF members have taken to actively transferring their Ordinary Account savings to the Special Account to earn the higher interest rates.

But if your Special Account balance - including savings withdrawn under the CPF Investment Scheme - has reached the prevailing FRS, you would be unable to do further top-ups.

In the chase for yields, even the Ordinary Account interest rate of 2.5 per cent a year is not to be sniffed at, particularly if you are comparing it with fixed deposit rates which have fallen to paltry levels. Even the average annual returns of some bonds, such as the Singapore Savings Bonds, have dipped below 2 per cent.

Some insurance policies with guaranteed returns and a fixed tenure - usually three to five years - also pale in comparison with the Ordinary Account interest rate.

If you are below 55 and are confident of setting aside the requisite retirement sums at 55, you can consider the Ordinary Account as an alternative fixed deposit instrument but with less liquidity. Because of the lack of liquidity, this works better for those who are close to 55 and/or are confident they have no need for the cash.

For example, if you are 53 years old, you can park your spare cash savings in the Ordinary Account and consider it as a two-year fixed deposit. This is because if you are able to set aside sufficient savings in your Retirement Account, you can withdraw the rest at age 55 or later, whenever the need arises.

And you can still use the Ordinary Account savings for other investments under the CPF Investment Scheme and to purchase properties, after setting aside $20,000 in your Ordinary Account.


One way of putting cash into your Ordinary Account is to do so via a full or partial refund of the CPF savings that you had previously withdrawn for property purchases plus the interest accrued on them.

Some members wrongly believed that they could refund the CPF savings used for their properties only upon the sale of these properties.

Even if the properties are unsold, you can make cash refunds by filling out a CPF form and indicating which property you are making the refund for. However, you should note that such cash refunds are irrevocable.


Some members wanted to know if it is possible to deplete the Ordinary Account to zero when transferring CPF savings from that account to the Special Account, and still earn the higher interest rates.

This question was raised during the CPF Retirement Planning roadshow. Mr Soh Chin Heng, deputy chief executive officer (services) of the CPF Board, responded that it is possible.

For members below 55, when the Ordinary Account has zero balance, the first $60,000 in the Special Account savings will attract 5 per cent while the remaining balance will enjoy 4 per cent interest.


For members who are 55 and older, have the requisite retirement sums in their Retirement Account, and still have balances in both the Ordinary and Special Accounts, withdrawals will be made from the Special Account first before the Ordinary Account.

CPF said that this is because CPF members may still have commitments such as housing, education and investment after turning 55.

The board says: "As Ordinary Account savings can be used for continued participation in schemes after 55, the withdrawal sequence is catered to the needs of the majority of Singaporeans. Nonetheless, members who wish to benefit from CPF attractive interest rates have the option to top up their Retirement Account under the Retirement Sum Topping-Up Scheme."


Members are not restricted to only one withdrawal a year. Members who have withdrawable balances in their CPF accounts may submit an application any time and the Board will assess the application.

The amount of money that the member may withdraw will still be based on the applicable withdrawal rules and it does not change the amount of savings that can be withdrawn by the member.

Friday, August 19, 2016

Six types of gamblers on the stock market

By Fong Wai Mun

The lure of making a quick buck is all too common among individual investors. In my book, The Lottery Mindset: Investors. Gambling and the Stock Market, I began with the statement that "investors have a remarkable ability to lose money in myriad ways''.

I then went on to show how different types Of investors "donate" their hard-earned money to the stock market through various ill-conceived investment strategies. They are:

■ The overconfident: They overrate their ability to read the market, choosing to own just a handful of stocks. Instead of spreading their investments across many stocks in different sectors to diversify risks. They also display a "home bias" by putting the bulk of their investment in domestic stocks instead of diversifying into a more international portfolio. Investors who under-diversify are in effect betting that their stock picks will be winning bets. Unfortunately, most investors are poor stock pickers. Research shows that investors who hold less diversified portfolios do worse on average than those who hold diversified portfolios.

■ Market timers: They try to "beat the market" through market timing. piling into the stock market before a good runup and cash out before a rundown. When market timers try to predict the future by extrapolating from past price trends, they become "trend chasers". Research shows that on average, trend chasers lose money compared to buy-and-hold investors. The empirical evidence is that money tends to flow into the market after superior past returns, and (importantly), before inferior subsequent returns.

■ Pattern chasers: Stock prices fluctuate randomly, giving rise to the description "random walk" used by statisticians. Random sequences (like the outcomes from consecutive coin tosses) can sometimes show up as intriguing patterns such as six heads out of eight throws). What's interesting is that while most people acknowledge the unpredictable nature of coin tosses, they have a much harder time applying the same logic when they are investing their hard-earned money, The result is that investors read too much into noisy stock price fluctuations and trade to their detriment.

■ Active contrarians: Unlike trend Chasers, contrarians tend to sell when the market is "hot" (have risen strongly recently) and buy when the market is "cold''. But if stock prices are random walks, both trend chasing and contrarian trading are futile. As legendary investor Warren Buffet once said, the stock market is "a game of a million inferences". in other words, it is foolhardy to try to outguess the market since stock prices are influenced by so many factors, rational and irrational.

■ The overtraders: They buy and sell actively instead of adopting a passive buy-and-hold strategy focused on long -term returns. In the 1960s, American investors held stocks for an average of about eight years; now it is less than two years. A similar trend has also been observed in many Asian markets. Investors eagerness to trade actively is not surprising as technology has made it easy and cheap to trade online and around the clock. Yet. while trading might he an entertaining distraction, research shows that investors who trade frequently underperform those who are less active.

■ The lottery player: Many investors are strongly attracted to stocks with low prices such as penny stocks, stocks with highly volatile returns, and stocks with prices that have risen strongly in recent months. Researchers use the term "lottery-type stocks" to describe stocks with such characteristics. As the name suggests. lottery-type stocks attract investors with a strong desire to gamble. Just as real lotteries give people the hope of becoming instant millionaires, so highly volatile or speculative stocks are highly sought after for a "shot at riches", while "'boring" stocks are sidelined. The demand imbalance ultimately leads to lottery-type stocks being overpriced and yielding poor returns compared to more stable stocks. Indeed. research evidence shows that on average, the most volatile stocks underperform the least volatile ones by a very wide margin. Similarly, investors should be wary of stocks that attract intense media interest as these 'attention-grabbing-stocks are also likely to be punters' favorites.

Despite the myriad of behavioral biases, investors are not doomed. Poor investment habits can he reversed by acquiring investment literacy and putting this into daily practice. lnvestors can acquire investment literacy by reading investment books that discuss principles of investing. They should also learn to be aware of emotions and cognitive biases that can lead them into a minefield of bad investment decisions. Once investors know the right approach to investing, they should put this into practice and not waver. As the saying: "Sow a habit, reap a destiny."

The writer is associate Professor of finance at NUS Business School and advisory board member (Asia-Pacific) of Brandes Institute

Tuesday, August 2, 2016

Value investing: grit, timing, compounding - and a dash of volatility

Experts at seminar share pointers on how to build up a retirement nest egg

By Renald Yeo


IMAGINE this: You are middle-aged and planning for your retirement. Instead of letting your hard-earned cash sit around in the bank, you make the wise choice to invest your life savings - say, a million dollars - in a bid to produce even more dollars.

What if you invest your entire savings in an all-equities portfolio, and actively ignore 'safe' instruments such as bonds and fixed deposits? What if you could withdraw a part of that sum for your own expenditure - say, S$50,000 a year - and at the end of 30 years, your portfolio would consist of about S$7 million, all while you were spending the equivalent of your original capital of a million dollars?

Sound like a get-rich-quick scam? A Nigerian prince lurking somewhere in the background, perhaps?

But a portfolio as described above is entirely possible through value investing - along with grit, good timing, a dash of volatility in the markets and compounding, a panel of experts said on Saturday at a retirement seminar.

The seminar was jointly organised by The Business Times and Aggregate Asset Management. Value investing basically entails picking up bargains in stock markets and holding on to them until prices rebound, fund manager and executive director at Aggregate Asset Management Eric Kong said during the panel discussions.

One way to find such bargains is to divide the share price of a particular firm against its book value per share; a 'bargain firm' would be priced lower than the book value of the assets - such as cash, property and inventory.

In contrast, an "expensive counter" trades several times above the net asset value, Mr Kong said.

He espoused the potential dangers of investing in those counters. "If you are paying 10 times the asset value of a company, when earnings take a dip or when there is bad news, nine times of that can disappear. "That's because the nine times consist of goodwill, and goodwill can disappear instantly."

To mitigate risk, Mr Kong advocated for investors to diversify their portfolios across many firms across different industries and indeed, across different countries.

Aggregate, for instance, has investments in more than 500 counters, Mr  Kong said, reducing its average exposure to individual stocks to about 0.2 per cent each.

Since its inception in 2012, its flagship fund Aggregate Value Fund (AVF)  has returned a compounded 8.5 percentage points a year, and has outperformed the MSCI Asia Pacific All Countries All Caps Index by 6.1 per cent on an annualised basis, Mr Kong said.

AVF has more than S$300 million in assets under management.

Yet, the investment process is one that investors can undertake on their own.

"To begin the process, you need to know how much you need to invest in for your retirement," said Mr Kong.

The general rule of thumb is for investors to multiply their annual expenditure during retirement by about 20 times. "So, if you need S$50,000 to spend during your retirement annually, you need to invest S$1 million," he added.

With the capital on hand, an investor would then look for stocks trading at a discount to the value of its assets; when hunting for these assets, volatility - often a hated term - plays an important role, Mr Kong said.

During periods of volatility, stocks may trade at discounts due to over-reaction from the market, and those periods are when value investors can swoop in to "buy low, hold until it recovers and then sell high".

Indeed, it is that grit to hold a longer-term view that can bring the best results; Aggregate's research shows that an investor who bought into discounted stocks in Singapore - starting from 1983, for instance - would see his initial capital grow by seven times over the next 30 years. This contrasts with negative returns from investing in the market as a whole.

When asked by a member of the audience on why the investment strategy ignores growth stocks like "the Alibabas of the world", Aggregate executive director and head of research Teh Hooi Ling said: "When a stock is growing very quickly ... and has a high valuation, you pay top dollar for it, but the future that it will be there 10, 20 years down the road - you can't see it.

"When you buy stocks based on assets they actually own today at discounts, the possibility of your investment capital still remaining after, say, 10, 20 years, is quite high."

Monday, July 18, 2016

KBS Singapore Trip 2016

KBS (Korean Broadcasting Station) Singapore Battle Trip 2016:

South Korean variety shows are pretty huge here in Singapore — so when two big TV personalities travelled to the Lion City for an episode, people took notice.

Singer Lee Sang-min and variety show star Kim Il Jung took their Battle Trip segment here recently.

Watch the rest of their Singapore food adventures on the KBS World TV.

Looking for ideas on what to see and do in Singapore? The official destination website has plenty of fun-filled suggestions to keep you busy during your visit.
Your Singapore

Garden by the Bay

Singapore’s most iconic local dishes such as laksa, Hainanese chicken rice, bak kut teh and even the humble curry puff took the spotlight among the list of Bib Gourmand awardees in the 2016 Michelin Guide Singapore released by Michelin this morning.

 Of the total of 34 eateries that received the Bib Gourmand rating - which is usually announced by Michelin a few days before the full guidebook launch - 17 are found in traditional food centres while 14 are restaurants and 3 came under the 'other street food establishments' category. To qualify for the rating, venues must offer a good value meal for under S$45
Michelin Guide Singapore

Chilli Crab

Monday, May 23, 2016

More about bonds

Dr Larry Haverkamp
The Sunday Times

There are two ways that companies and governments borrow. One is to use banks and the other is to use bonds, which is a way to borrow from whoever buys the bonds.

Do investors get a good deal? Yes. Over time, bonds pay less than stocks and property. But the return is predictable, plus bonds are the best way to reduce volatility when you add them to any portfolio.

We talked about debt last week, but we skipped over a key question: Which is best, an individual bond or a bond fund? The difference is huge, especially since interest rates are (probably) about to rise.

That is the question. What is the answer?

As you may have guessed: "It depends." On what? Mostly on your preferences. and to a lesser extent, on how much you invest. As for where to buy, you have the usual choice of a bank or a stock broker.

The advantage of buying an individual bond is it is one of the few investments where it is nearly impossible to lose money. That is because bonds are almost certain to pay all interest due, plus principal. Where else can you be so sure of getting a steady return and not lose your principal?

True, you could lose money if the firm went broke but it is easy to handle. Simply invest in investment-grade bonds and avoid the risky ones, called junk bonds. But these have benefits of their own since the risk makes them almost like stocks, with high risks and returns.

A second danger is if the ratings are wrong. It is rare but can happen, like when a new type of bond received too high a rating from Moody's, S&P and Fitch. This was highly misleading and in 2008, it contributed to the US housing market failure as well as the worldwide recession.

Fundamental to bonds is the inverse relation between a bond's prices and market interest rates. It only happens with bonds and the rule is: When market rates rise. bond prices fall and vice versa.

Now, imagine market rates rise, as expected, over the next two or three years and, as just explained, bond prices fall. Does it mean you will suffer a loss?

Yes. it certainly does. But the good news is it is temporary, which makes it loss-free if you simply hold the bond and wait until it matures, like in one, two, five,10 or 20 years.

If you don't sell. the loss is a paper one. also called an opportunity loss. It becomes real only if the bond price falls and you sell. Hold on, and you can be confident of getting your money back since the company must repay its debts or bondholders can force it into bankruptcy.

It is almost certain to pay in full if it is an investment grade bond, which is ranked BBB or higher by Standard and Poor's. But what about unranked bonds? Ah, that is another problem for another day.

The rule I just explained about repayment of principal supersedes all others, including the rule that high interest rates bring down bond prices. Think of those lower prices as a temporary effect. By maturity, the bonds will have risen to repay the full amount borrowed, called the face value or par value.

What a deal! There is no other investment where you will get back your money plus interest with almost no chance of loss.

Now for an equally popular choice: Bond funds. What makes them opposite from individual bonds is they are continuous. When one bond matures, the fund takes the money it receives and buys another.

But if interest rates have risen, the new bond will be priced lower and that lowers the fund's price. It is similar to the stock market opening "gap down" from the previous day's close. Of course, it can work the other way too. If market rates fall, bond prices will rise and fund owners will enjoy a capital gain, which they can sell at a profit.

More important than the fall in price is the higher yield the fund will earn when interest rates rise. This turns out to be dominant. so the net effect from falling prices and rising yields is positive, as is expected to happen soon.

An important advantage of funds is they hold multiple bonds, which provides diversification. That is especially useful for high-yield and risky bonds, like junk bonds, where a few may fail but you don't know which.

It is also beneficial as a way to get bonds that you probably can't buy on your own like certain junk bonds, emerging market bonds and convertible bonds. You usually find these in an ETF rather than a bond fund.

As for costs, it is a drawback for bond funds and even for the famously cheap ETFs. That is because both charge annual expense ratios while individual bonds do not. 

So which is best? Well, it is like asking: "Which is better, vanilla or chocolate ice cream?" Of course, that is a matter of individual preference, just like the choice between an individual bond versus a bond fund versus a bond ETF.

A rule of thumb is to buy a fund or ETF if you invest less than $100.000 and buy individual bonds if you invest more than $100,000. But it is a rough guide and most people simply follow their preference.

An adjunct professor at SMU, Dr Haverkamp contributes this column weekly to help our readers understand money matters better

Tuesday, April 26, 2016

When you invest, diversify to minimise risk, protect your gains

Richard Hartung
Published: 7:51 AM, April 24, 2016

Some investors figure that buying shares in just one company or only a few is the way to make the most money, since they’ll earn more if those few go up a lot. Shares can go down too, however, so they could just as easily lose big if the share prices plummet. A far better strategy, which balances risk and reward, is diversification.


Diversification refers to investing in different categories of investments, such as shares and bonds and real estate and commodities, rather than just one category. Within each category, diversification also means investing in shares or bonds from many companies rather than just a few.

The reason for diversification, as investment research firm Morningstar explains it, is that investors can improve their risk-return profile by investing in multiple investments rather than concentrating in a single one. Holding a single stock rather than a perfectly diversified portfolio increases annual volatility by roughly 30 per cent, according to the American Association of Independent Investors (AAII). A single-stock investor has a portfolio volatility of about 45 per cent, AAII found, which is far higher than the average market volatility of about 15 per cent.

Research in Singapore as well as other markets has indeed shown that diversification results in a better risk-reward ratio, because different categories of investments have historically tended to move in different directions. UBS here said that spreading your funds among a basket of different assets – whether it’s cash, bonds, hedge funds, or public and private equities - that are not correlated to each other is an effective way to minimise risk, and research shows this diversification accounts for just over half an investor’s return. Looking at the US, Morningstar similarly said that as stocks have soared over the past five years, long-term government bonds have reliably gone in the opposite direction.

Even investors as big as the GIC here use diversification. GIC says it manages “a well-diversified portfolio to produce sustained, superior risk-adjusted performance.”

While a diversified investment portfolio will likely not have as high returns as shares in one company that soar, neither is it as likely to have the volatility and the losses of shares that plummet. Investors benefit from diversification, then, because it improves the predictability of investment returns and ensures a better balance between the risks of any one company and the rewards of investing in a multitude of firms.


After deciding to diversify, the next step for investors is to decide how to do it and move forward.

As investment management firm Vanguard Singapore noted, investors should start by setting measurable investment goals and developing plans for reaching those targets. The plans will likely include the length of time to hold the investment, the objectives to achieve, and what types of investments to make. With that plan in hand, there are several ways to diversify your investment portfolio to optimise your returns.

One is to select a multitude of individual shares, bonds and other investments by yourself.

While early research in the 1960s by J. Evans and S. Archer showed that holding shares in 15-20 companies might be sufficient, more recent research has shown that holding shares in at least 30 or more companies can result in better returns. For bonds, investment management firm PIMCO similarly said that maintaining a diversified bond portfolio can help investors prepare for shifts in the economy and interest rates, allowing them to capture opportunities while minimising the risks of overconcentration. Bonds can be diversified by, for example, maturity or quality or geography. You could select shares and bonds from dozens of companies, then, to achieve diversification.

An alternative is to select different unit trusts or exchange-traded funds (ETFs) that hold shares or bonds from many different companies, as well as ETFs that hold real estate or commodities such as gold. Along with investing in ETFs such as the Singapore STI ETF and the ABF Singapore Bond Index Fund to gain diversification in Singapore, investors can select other ETFs that hold international shares or international bonds.

While diversification is indeed essential for optimising the balance between risk and return, it is also important not to over-diversify. As investment advisory firm Motley Fool in Singapore noted, an overly diversified portfolio can result in an investor merely matching the market’s return. “That’s not necessarily a bad thing, but it could be detrimental if the investor’s aim is to earn market-beating returns. At the same time however, it is important that we bear in mind how crucial diversification can be.”


As Santa Clara University Professor of Finance Meir Statman said: “People who hold undiversified portfolios, like people who buy lottery tickets, behave as gamblers since they accept higher risk without compensation in the form of higher expected returns.” Investors can do far better by creating a diversified portfolio with various categories of investments so that they optimise the balance between risk and return.

Sunday, March 27, 2016

Is gold a good investment?

The Straits Times
27 March 2016

Dr Larry Haverkamp

That brings me to today's scam, I mean topic, gold.

Yes, gold has a somewhat unsavoury reputation, probably because of our experience with Ponzi gold schemes. Those promised yields of 20 per cent and 25 per cent, although the money didn't come from earnings. Unknown to anyone, it came from new investors. Like with all Ponzi schemes, new  investments dwindled, and when they did, the fund went broke.

Why are people so in love with gold? Maybe it is that gold is the only yellow-coloured element that cannot be replicated. Many call it beautiful. Besides that, it is transparent with prices that are updated daily in newspapers and on the Singapore Stock Exchange (SGX).

You can buy gold in small gold bars, called pamp gold, that is sold by UOB. You can also buy gold jewellery, although it is not the best investment since much of the value is in the workmanship. A rule of thumb is that your jewellery's price will fall by 50 per cent the moment you walk out of the shop.

"All that glitters is not gold. Gilded tombs do worms enfold."

If you are still determined to buy, the best option may be a Gold ETF, known as "SPDR Gold Shares". It is one of the 19 ETFs which are EIPs, or exempt investment products.

The other 72 ETFs traded on SGX are SIPs, or specified investment products. These require that the investor be qualified, usually by taking a written test administered by a stockbroker. Who needs that hassle?

Like most ETFs, the expense ratio is low, at only 0.4 per cent per year, which means you pay $4 per year for every $1,000 of your SPDR Gold Shares.

You must also pay a brokerage commission, which is about 0.6 per cent round trip (buy and sell), plus a small spread between the bid and asked price. It is a US dollar ETF, so you will also pay a currency conversion fee, which is hard to know, but I estimate it at 1 per cent.

It gets expensive, but an ETF is still the cheapest, and it is liquid. So you won't need a big mark down in order to sell, like with jewellery.

Gold also has drawbacks. Such as its reputation as the curse of India, because people sank a lot of their wealth into gold even though the country is poor. The nation might be better off today if the money had gone into productive investments like roads, factories and education.

A drawback for all commodities. including gold, is that it has no yield. For example, bonds pay interest, stocks pay dividends and property pays rent. Gold, however, has no yield, so all you will get is a capital gain if there is one.

Those gains depend on supply and demand. The supply grows at about 3 per cent per year from newly mined gold, which helps stability. Demand comes mostly from gold jewellery. which is enormous. But it is constant. so it has little influence on price fluctuation.

That leaves sentiment, which is the most important determinant of demand. but it is hard to predict. That is because it depends mostly on whether there is chaos in the world. which pushes investors toward safe havens, like the US dollar and gold.

The problem is it is hard to know when a crisis is about to happen, making gold prices hard to predict. This unpredictability may be the best reason for giving gold a pass and staying with "plain kway teow" investments like stocks, bonds and property.

If you insist on gold, however, you can use your CPF money. It lets you buy gold using up to 10 per cent of investible savings from your ordinary account.
An adjunct professor at SMU, Haverkamp contributes this column weekly to help our readers understand money matters better.

Monday, March 7, 2016

Putting retirement savings in equities pays off in long run

Teh Hooi Ling
Mar 6, 2016, 5:00 am SGT

By stretching out investment period and making small withdrawals, impact of market volatility is greatly reduced

With the stock markets being so volatile in the past six months or so, people who have their retirement savings in equities must be going through an anxious period.

The most common piece of advice financial advisers have for individuals is to start saving when they are young, and to let the savings compound with time.

With interest rates being so low, putting one's money in fixed deposits is a very inefficient way of achieving the compounding effect. Consider this: It takes 72 years to double your savings from say, $100,000 to $200,000 at an interest rate of 1 per cent a year.

 However, if you can find a way to grow your money at 10 per cent a year, your $100,000 would grow to $200,000 in less than eight years. In 24 years, your $100,000 would have grown to some $1 million. That's the magic of compounding.

One way of letting the money compound at a faster rate is via the stock market. However, this route entails significant volatility, as we have witnessed in the last six months and in various episodes in the past, for example, during the global financial crisis, the Sars epidemic and the Asian financial crisis, to name just three.

Now, let's take a look at how market volatility impacts one's retirement savings. Let's assume that the analysis is done using the Straits Times Index (STI), with dividends reinvested. No transaction costs are taken into consideration.

Let's say the retirement savings plan entails putting $10,000 each quarter into the STI for 20 years, with dividends reinvested.

That's $40,000 a year over 20 years. So the principal amounts to $800,000.

The good news is, over a 20-year period, every single person who has consistently put money into the stock market quarterly would have managed to have a pot which is bigger than the capital put in. Most people would end up with a retirement sum of $1.95 million - double the principal they put in.

The not-so-good news is, depending on when one starts investing in the market and when one retires, the outcome at the end of 20 years can vary significantly. It can mean a difference as large as $1.6 million.

The lucky person, let's call her Jane, who started investing, say in the third quarter of 1987, would have had a pot of $2.7 million after her retirement as at the third quarter of 2007. That was the peak of the market just before the global financial crisis.

However, the person who joined the workforce just four years earlier and started investing in the first quarter of 1983, let's call her Mary, would end up with a retirement pot of just $1.1 million as at the first quarter of 2003. That was when the Singapore market was depressed from fears of the Sars epidemic.


This is called sequence risk. A saver may earn a different sequence of returns during the accumulation phase and that made a world of difference to the final outcome. In Mary's case, even though she got good returns early in her savings plan, she suffered bad returns near her retirement, when her account balance was higher. Jane, however, was lucky to have caught the bull run from 2004 till 2007.

Here is how the two retirement savings plans grew over time.

Mary would have got very miserable returns for her 20 years of diligent saving had she withdrawn all her money as soon as she retired.

However, if she left the bulk of the money in the market, and took out just 5 per cent, or $55,000, to fund her living expenses that year, and continued to take out just 5 per cent of the portfolio value every year since, her portfolio as of today would be worth much more.

Between 2003 and 2015, Mary would have taken out $1.5 million to spend, and as at Feb 29 this year, her portfolio would be worth $2.1 million. Mind you, this is valued based on rather depressed pricing for the STI currently.

As for Jane, she would have done better had she taken out her entire retirement pot at the peak of the market. But she had to have the courage to reinvest the entire pool back when the market corrected. Had she not, she would most likely be worse off in a few years' time.

Let's assume she had taken out her total pool of $2.7 million and put all the money in a fixed deposit that yielded her 1 per cent a year from 2007 until now, and that she took out 5 per cent from her pool every year. By now, she would have taken out $1.07 million and her pool would be $1.77 million.

The amount she is withdrawing reduces by the year as her pool shrinks since her interest is not compounding as fast as her 5 per cent withdrawal every year.

In comparison, had Jane left the money in the market as Mary had done, she would have taken out a slightly smaller sum of $969,000 between 2007 and now, and her portfolio is worth $1.69 million as at Feb 29 this year.

Again, market valuations as of now are pretty depressed and there is a very high chance that they will recover.

Notice also that Mary's retirement pot today is larger than Jane's. Starting early does pay.

To recap, for retirement savings, end-of-period market valuation makes a difference if one decides to withdraw the entire sum at that point. It is less decisive if it is a piecemeal redemption.

And for a plan of constant investment over a 20-year period, the starting market valuation doesn't really make a big difference either.

The takeaway is: Stretching out the investment period and making piecemeal redemptions take the stress out of managing one's retirement fund and one will not be held ransom emotionally and psychologically to market gyrations.

That is from the comfort of knowing that one will never run out of money with 5 per cent redemptions a year from a pool invested in a basket of productive and decently priced companies. So one can tune out the market noise.

•The writer is a partner in Aggregate Asset Management, manager of a no-management-fee Asia value fund, and author of Show Me The Money - Fighting Paralysis In A Market Meltdown.

Saturday, March 5, 2016

Why Trading in Retirement Is a Bad Idea

MARCH 4, 2016

You have a significant retirement portfolio, it’s yours to manage and you have time on your hands. You’re a smart person and you’re sure you can beat the market — or at least do better than a boring basket of mutual funds and income investments.

That’s what Elmer Naples, 75, a former utility company engineer in Trenton, said he was thinking when he retired 20 years ago. Then the stock market started doing its trapeze act and he thought better of his plan and switched to a fee-only financial planner 10 years ago.

“I tried everything,” Mr. Naples recalled. “I owned stocks, mutual funds, C.D.s, bonds, diamonds and silver. I was handling all of our finances at first, then I got a little tired of the stock market. I wanted to put things on automatic.”

Like millions of retirees, Mr. Naples used his time to research investments that he hoped would preserve and increase his wealth. And like millions of others, he learned that it’s hard for an individual investor — even a retired one with lots of spare time — to outdo the pros and beat the market’s maddening volatility.

The Achilles’ heel for investors in retirement is a punishing stock market downturn that reduces not only their income stream but also their total wealth. Even the most astute individual investors have a hard time seeing bubbles inflating and knowing when to get out. They may even be part of the bubble inflation.

According to findings by the researchers Terrance Odean, Eduardo Andrade and Shengle Lin, investors naturally get excited by investing during bubbles and are often blinded by emotion. They may not understand how vulnerable they are when the bubble pops.

“Rapid, unexpected increases in wealth during the appreciation phase of asset pricing bubbles can lead investors to experience intense, positive emotions,” the researchers found. If they’re excited about, say, tech stocks, they buy more of them.

When markets turn sour, though, and professional investors are buying stocks whose prices have fallen, many individual investors retreat to the sidelines. For those in retirement, this is a sure way to underperform the market and often lose money. Because no one quite knows when it’s time to leave an inflated market or when to return and shop for bargains, millions of people guess wrong or follow the current trend. Market timing is a mug’s game.

Indeed, in the 2008-9 sell-off, willingness to take “above-average or substantial investment risk” fell to 19 percent in 2009 from 23 percent in mid-2008, according to the Investment Company Institute, a mutual fund trade group. The appetite for risk didn’t return to pre-crash levels until 2013 — and those who stayed out of the market missed most of the rebound in share prices of American stocks.

George A. Akerlof and Robert J. Shiller, Nobel laureates and the authors of “Phishing for Phools: The Economics of Manipulation and Deception,” call the siren call of Wall Street’s latest darlings “phishing.” That’s when a profit can be made off deception, enthusiasm, weakness and greed. Too many investors believe the narrative of the next best thing or easy money, derailing millions of retirement portfolios.

“It’s the world’s oldest story,” said Professor Akerlof, who is now at Georgetown University. “Someone’s always dangling an apple, and that snake decided to be there.”

When it comes to investing, he noted, people love stories. What company will make everyone’s life easier, connect the world and cure disease? “Stories get people to buy,” Professor Akerlof said. “But when the story goes viral — or becomes a New Yorker cartoon — it’s time to sell.”

How many retirees have the discipline to resist compelling narratives, especially when they have a lot of time to think about them? Not many, which builds a case for either studied self-discipline, such as a firm, long-term investment strategy, or employing an outside adviser.

In Mr. Naples’s case, after careful consideration he and his wife hired Len Hayduchok, a fee-based certified financial planner based in Hamilton, N.J., who set them up with a passively managed portfolio and counseled them on their financial and estate goals.

“For some folks, investing might be something they’re qualified to do,” Mr. Hayduchok said. “But many underestimate the expertise needed. The average investor gets returns that are half of the benchmark.”

At the very least, a qualified third party such as a financial planner or a registered investment adviser can take a lot of decisions off the table.

No longer will you have to worry about whether you are buying into a bubble or need to know when to get out. The focus will be on your long-term goals and not short-term headlines or manias. Besides, you stand little chance of success in an age of high-frequency trading and mountains of real-time information being absorbed by big traders every second of the day.

“Most normal buyers should do buy-and-hold,” Professor Akerlof recommended. He said he invested his own retirement money in index mutual funds.

“Adopt a strategy that’s ‘phool-proof’ and go for long-term investing,” he suggested. That means holding wide swaths of global stocks, bonds and real estate through mutual and exchange-traded funds sold by BlackRock (iShares), Dimensional Fund Advisors, Fidelity Investments, State Street Global Advisors (SPDRs), Charles Schwab and the Vanguard Group.

Still, investors might keep their hands in managing if they trade with no more than 10 percent of their portfolio. You may be able to insulate yourself by buying stocks with solid dividends and reinvesting the quarterly payments in new shares commission-free, through dividend reinvestment plans. You can often snag bargains when the market dips, as it did in the first weeks of this year.

For the bulk of your portfolio, how do you find a professional who will shield you from your worst instincts? Seek out a fiduciary — that is, someone legally obligated to put your best interests first. They should not receive a commission from selling you anything. They can charge by the hour, a flat fee or a percentage fee based on annual assets under management.

A financial planner, a chartered financial analyst or a personal financial adviser can draft and maintain a holistic financial plan that takes into account taxes, income,estate planning and other financial considerations. At the very minimum, a financial adviser who identifies, analyzes and respects your long-term goals — and keeps you on track — may be worth the investment.

Tuesday, March 1, 2016

S$10 a Day, Retire the Smart Way Time To Take Action

According to a study by DBS Bank , a large percentage of Singaporeans have thought about retirement and hope to retire comfortably, but few are taking steps to reach their goals. Over 76% of the 1,000 people surveyed stated retirement as their long-term goal, while only 25% were acting on it(1).

The same study showed that Singaporeans' sentiments towards retirement are that it takes plenty of time, effort and money, yet only pays off far ahead in the future. Furthermore, many Singaporeans lack a proper financial plan.

So what should be your first step towards a comfortable retirement in the future? Just start saving! Even if you have to start small, with just S$10 a day, starting as soon as possible is key.

The Power Of Compounding

Albert Einstein once said that compounding is the eighth wonder of the world. The power behind compounding lies in the snowball effect – it makes your money grow over time.

It is also easy to start doing. Simply start by making regular deposits into a savings account. Imagine that you are a 25-year-old fresh graduate starting your corporate life. You make $3,000 (the average gross monthly salary in Singapore was $3,705 in 2013 ) a month and put aside S$10 a day. Within a month, you would have accumulated $300, and within a year, $3,600. You put that amount into a savings account, which earns you 1%, interest each year, and at the end of 35 years, you would have $151,477 in your account.

What if you invested that same amount in the stock market? The Nikko AM Singapore® Straits Times Index ETF has given returns of approximately 14% since 2009, up till the end of June 2015. Based on this, if you had invested $3,600 in the Singapore Stock Market through the STI-ETF annually for the next 25 years, that would potentially generate a total amount of $746,398 .

Another asset class to consider is real estate through investments in Real Estate Investment Trusts or REITs, which are funds that develop or manage a basket of real estate. There are various types of REITs such as healthcare, residential, hotel, retail, mortgage, industrial and more; and the 34 Singapore-listed REITs offered an average total return of 12.9% in 2014(2).

Additionally, if you were thinking of an annuity that would provide a fixed monthly income for 30 years beginning in 35 years time, setting aside that $3,600 annually into a savings account with an interest of 4% (i.e. CPF-SA savings), will provide $1,000 of annuity income annually for 30 years.

There's no better time than now to start saving. To get yourself used to developing this habit, start with S$10 a day. It's not difficult especially if you have a steady job. You can further challenge yourself by finding ways to cut down on your expenses as well.

Go through your channel subscription; let go of some premium channels if you realise you don't watch them often.Is it worth signing up for an expensive plan to get the latest phone? Consider downgrading to lower plans if it is more cost-effective.Eating out can be costly; try cooking at home more often. This could even lead to a healthier lifestyle.

The future of your happiness lies in your hands. The most important thing you can do for yourself is to make the decision to take charge and start taking positive steps. No matter how small, a step in the right direction brings you closer to achieving your goals.

"The journey of a thousand miles begins with a single step."

Sunday, February 21, 2016

Fighting paralysis in a market meltdown

Having an anchor on where asset prices should be gives us the conviction to fight in face of fear

Teh Hooi Ling
FEB 21, 2016, 5:00 AM SGT

Back during the dark days of the Asian financial crisis, the sell-down of the Straits Times Index (STI) and other regional bourses was relentless. Investors watched in horror as the value of their portfolios got smaller and smaller with each passing day.

When the STI hit 800 points on Sept 4, 1998 - from 1,700 just six months earlier - a panic-stricken remisier went up to his head of equities research, and said: "Oh no! We have only eight days to go before we hit zero!"

The logic was that, if the STI continued to fall by 100 points a day, there would be only eight days left for the market.

It sounds funny now when the story is recounted. But at that time, that was a very real fear of investors and market participants alike. The numbers on the screens represented one's wealth. Every point of decline in the index would translate into a loss in the value of one's portfolio.

The thing is, when we are too absorbed in the violent market actions of the day, we lose sight of reality. If we were to step back and view the market with a cool head, we would realise that there was no way the stock market would hit zero. Why?

One, the stock market represents real businesses with real assets. It represents the real economy. The stock you own gives you a stake in a company that makes money by selling a service or a product. Even if it is not profitable, it still owns assets like buildings and machinery which have a value and a price in the real marketplace. If one can buy the shares of a listed company that owns a drinks bottling plant at half the price of building one, nobody would build a new plant. Those with money would just buy up the existing plants via the stock market.

This will drive up the stock prices of drinks factories. When the stock prices rise to such a level that it may be cheaper to build a new plant, a new set of entrepreneurs will come in to build new plants. This will mark the end of the "up" cycle in the stock prices of drinks factories.

Given that the companies in the STI own a substantial amount of assets in Singapore and derive a significant sum of their income from Singapore which itself is a very open economy, it may be instructive to peg the movements of the STI to the GDP to get a sense of where the stock index should be.
Similarly, stock market prices cannot go so high as to defy market realities. Say, you can install fibre-optic cables for just $1 but you can sell the completed network to investors in the stock market for a whopping $10. On that basis, you could guarantee that many people would want to do that.

This would result in overbuilding and prices for the use of fibre-optic cables would plunge. And when listed companies that own these networks cannot make money, their stock prices would fall. This was exactly what happened in 2001 and 2002.

Two, the productive capacity of the economy (or the company) comes from the skills and size of the workforce and the country's (or the company's) accumulated intellectual and physical capital.

"If gross domestic product (GDP) were to fall by 5 per cent, it would not be because our ability to produce goods and services had fallen by 5 per cent, but because aggregate demand for those goods and services had fallen. When the demand returns, the economy will be able to ramp up production quite quickly," Mr Ben Inker, asset management firm GMO's director of asset allocation, wrote in a paper entitled Valuing Equities In Economic Crisis.

The Great Depression caused the United States' GDP to fall by 25 per cent from 1929 to 1933. But that fall, as extraordinary as it was, was a fall in demand relative to potential GDP. It was not a fall in the economy's productive capacity. The economy eventually got back to its previous growth trend as if the depression had never happened.

Equities are long-duration assets - that is, they are valued based on the assumption that they will generate perpetual streams of income. So even if the economy is going to be horrible for the next five years and dividends are going to be cut by 50 per cent, the present value of the stock theoretically should be reduced by 5 per cent. A 10-year slump would wipe out only 10 per cent of the stock's value.

"To us, the true value of the stock market changes very slowly and smoothly. It is the myopia of investors that causes market prices to vary so wildly," he wrote.

Of course, demand for a company's product or service may never come back after a slump if it can no longer produce things that the market wants, or at a price that the customers are willing to pay. Still, it would own assets like buildings and factories that another competitor may find value in.

There is one drastic scenario where demand would fall significantly and large swathes of industries would be affected - that would be a near complete destruction of the earth with more than half of the world's population being wiped out.

Barring the above scenario, the economic activities of the human race are unlikely to cease.

Where is the bottom for STI?

The markets all over the world have been in turmoil since the start of 2016. It's partly a continuation of the episode we had in August last year, plus renewed fears of a global slowdown in demand and the helplessness of central banks and governments to do anything about it.

As investors are gripped by fear and horror watching the daily meltdown in the local market, it is timely to be reminded of the two points above: that companies own real assets and that the productive capacity of the economy (the company) comes from the skills and size of the workforce and the country's (company's) accumulated intellectual and physical capital.

Given that the companies in the STI own a substantial amount of assets in Singapore and derive a significant sum of their income from Singapore which itself is a very open economy, it may be instructive to peg the movements of the STI to the GDP to get a sense of where the stock index should be.

Let us examine this relationship by setting the STI at 100 points when the market was at its lowest during the Asian financial crisis in the second quarter of 1998. That was crisis-level valuation. We also set the Singapore GDP at 100 points from then onwards. We then track how the two have moved since.

The GDP seems to act as the floor for stock prices. From 2000 to 2003, three major negative events - the burst of the bubble, the terrorists attacks in the US, followed by the Sars outbreak - halved the value of STI stocks from its peak in end 1999 to a level just 17 per cent above the Asian financial crisis. From 1998 until 2003, GDP grew by about 11 per cent, and the stock prices did not go below the support provided by the GDP.

During the global financial crisis, prices did go slightly below the GDP support, but the rebound came soon after.

Given the level of Singapore's GDP today, the crisis valuation for the STI based on this simple relationship is 2,510 points. If the GDP were to fall by 5 per cent, the crisis- level valuation for the STI is 2,355 points. Admittedly, we are not facing a systemic crisis like that of the Asian financial crisis or the global financial crisis - at least for now.

Having an anchor on where asset prices should be gives us the conviction to fight against our paralysis in the face of fear.

•The writer is a partner in Aggregate Asset Management, manager of a no-management-fee Asia value fund, and author of Show Me The Money - Fighting Paralysis In A Market Meltdown.

Sunday, January 3, 2016

What's new in the CPF scheme?

Lorna Tan
Jan 3, 2016, 5:00 am SGT

Enhancements that came into effect on Jan 1 will boost savings to offer more retirement income

There were several recommendations made for the Central Provident Fund (CPF) scheme last year with more to follow this year. Some of the enhancements have just kicked in, aimed at boosting our savings so we can enjoy more retirement income in our golden years.

The enhancements that came into effect on Jan 1 include different payout options to better suit our needs and the flexibility of deferring payouts up to age 70 so as to receive more cash later.

The Sunday Times highlights the latest CPF changes.


At least 544,000 CPF members stand to accumulate more savings while working due to the salary ceiling rising from $5,000 to $6,000 on Jan 1.

In addition, workers over age 50 will see their CPF rates increase by between 0.5 percentage point and two percentage points.

The CPF rate for members in the 50 to 55 age band has gone up two percentage points. That will be split equally between employees and employers, a move that restores the CPF rate fully to the level of younger workers at 37 per cent.

A 50-year-old worker earning $6,000 or more will now reap a $370 increase in monthly contribution in his CPF account - $200 from his own pocket and an extra $170 from his employer.

That additional $370 will add up to about $30,000 more when the 50-year-old reaches 55, based on the higher CPF salary ceiling and the two-percentage-point hike in the contribution rate.

But he will have $200 less in disposable income every month, so that needs to be taken into account when budgeting.

The CPF rate for workers in the 55 to 60 age band has risen by one percentage point on the employer's side to 13 per cent while workers from 60 to 65 are getting a 0.5 percentage-point rise by the employer to 9 per cent.

The employee contribution is placed in the Ordinary Account, which can be used to service home loans, while the employer's contribution goes to the Special Account to boost retirement savings.


Members over age 55 are getting an additional 1 per cent interest on the first $30,000 of their CPF savings, making 6 per cent interest a year.

This is on top of the 1 per cent extra interest on the first $60,000 in CPF combined balances, which everyone enjoys.


Basic Retirement Sum: $80,500, which allows estimated monthly payouts of $660 to $720 at 65.

It applies to property owners. CPF members can halve their Full Retirement Sum to withdraw more savings.

Full Retirement Sum: $161,000, allowing estimated monthly payouts of $1,220 to $1,320 at 65.

This is for those who do not own a home or want higher payouts. The $161,000 sum will not be revised until January next year.

Enhanced Retirement Sum: $241,500, allowing estimated monthly payouts of $1,770 to $1,920 at 65. This will be suitable for CPF members who want to top up their CPF savings and get higher payouts.

It is not a requirement for you to top up to any of the three Retirement Sums, as your retirement payouts solely depend on how much you can and wish to save.

Members with amounts falling between the three Retirement Sums listed here will have their payouts pro-rated accordingly.

For example, if your retirement sum is $60,000, the estimated monthly payout will be $528 to $570. If your retirement sum is $120,000, the monthly payouts will be about $940 to $1,018.

These payouts are estimates based on the CPF Life Standard Plan.


The Basic Retirement Sum for CPF members turning 55 from 2017 to 2020 will be increased by 3 per cent yearly for each cohort, to account for inflation and rising standard of living.

The sum is made known ahead of time to allow for better retirement planning.

It is set at $80,500 for members aged 55 this year, rises to $83,000 for those turning 55 next year and $85,500 for the next cohort of 55-year-old members in 2018.


Previously, members who did not own property and did not meet their cohort's Retirement Sum could withdraw only $5,000 on turning 55.

But if you turned 55 in 2013 or later, you can withdraw up to 20 per cent of your Retirement Account savings at 65 - this amount includes the $5,000 sum - on top of monthly payments.

However, withdrawals from your Retirement Account will affect your monthly payouts, so work out your sums first.

Let's assume CPF member Andrew Tan withdrew $5,000 at 55 and has $60,000 left in his Retirement Account. In 10 years, this will grow with interest to $90,000.

He can either withdraw another $13,000 (20 per cent of $90,000 minus $5,000) at 65, which results in a lower $450 monthly payout for life, or leave the money in his Retirement Account and receive $530 for life.


Rules were relaxed on Jan 1 to allow members to choose CPF Life plans only when they start receiving payouts, that is, between the payout eligibility age and up to 70.

This gives us a better idea of our retirement needs and allows a more informed choice as to whether we should opt for the CPF Life Standard or Basic plan.

The payout eligibility age for those born in 1954 and after is 65 while for those born up to 1943, it is 60. If you were born between 1944 and 1949, your payout eligibility age is 62. For those born between 1950 and 1951 it is 63, and it is 64 for those born between 1952 and 1953.


Based on the Labour Force Survey 2014, 40 per cent of residents between the ages 65 and 70 continue to work. So if your financial situation allows it, you can opt to defer your CPF Life payouts from your eligibility age up to 70 years old.

Doing so means you would enjoy 6 per cent to 7 per cent more in monthly payouts for each year deferred.


Before the changes on Jan 1, savings above the Full Retirement Sum could be transferred to your spouse.

There is now a lower threshold so members can transfer CPF funds above the Basic Retirement Sum to top up their spouse's CPF account. Both will benefit from the extra interest that will be paid in the respective accounts and there is peace of mind as the spouse will have her/his own source of retirement payouts.


This year sees the introduction of the Basic Healthcare Sum (BHS) of $49,800, which is the permanent amount for those turning 65 this year.

For those below 65, the BHS will be adjusted yearly. But there is no requirement to top up to meet the BHS when withdrawing CPF savings. Savings above the BHS will flow over to your other CPF accounts, according to your age.

Meanwhile, the Medisave Minimum Sum has been removed.