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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."