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Monday, December 10, 2018

Post-retirement investing: how much to put in and take out

By Genevieve Cua​
10 Dec 2018 

SOURCE: The Business Times © Singapore Press Holdings Limited.

THERE is a wealth of literature and products to help you save for retirement, but what happens when you are in retirement is something of a void.

How will you invest your assets for the years when income from work ceases? How much can you withdraw to ensure you don't outlive your savings? What happens if there is a major downturn just as retirement begins?

Large fund houses in the US such as JP Morgan Asset Management have begun to offer products that cater for the "decumulation'' phase - that is, when the portfolio still needs to be invested, but investors withdraw an income at the same time.

BlackRock expects to launch a product in the US next year, "but the technology and framework will work in Singapore too'', the group's chairman and chief executive Larry Fink told BT when he was in Singapore last month. "As people live longer, the fact that we historically thought we should only be in bonds when we retire is crazy. But the key is not just asset allocation. Wouldn't you feel better if we can tell you how much money you'd earn every month in decumulation phase?''

In Singapore, unit trusts are generally designed for the accumulation phase, although there are funds with an income objective. Some funds indicate a yield objective such as 4 or 5 per cent, and distributions are made accordingly even if it means dipping into capital to fulfil the distribution objective.

The insurance sector does offer a number of options for those who want to plan for an income withdrawal in retirement. These are generally structured as endowments, where you can choose the premium payment period and the age at which withdrawals begin. You can choose the duration of income withdrawal. The endowments are par or participating products, which means the funds are collectively invested by the insurer, and policyholders typically receive a combination of guaranteed and non-guaranteed returns.

The attractions of an endowment are that the policy's mechanism of smoothed returns shields investors from volatility, and there is the comfort of a guaranteed component of returns. It will be costly, however, to use endowments for the bulk of retirement income needs.

Here are some risks to plan for:

As Singaporeans live longer, how many years in retirement should you plan for? JPAM's research on Singapore retirement says there is a 56 per cent chance that a 65-year-old couple could live past 90 and a 7 per cent chance of living past 100. It says if you have a family history of longevity, you should conservatively plan for 30 years or more of living expenses.

There is a silver lining, however. Wina Appleton, JPAM Asia Pacific retirement strategist, says the typical rule of thumb of planning to replace 70 per cent of your last drawn pay is simply "not true''. Drawing from the Department of Statistics' Household Expenditure Survey, it finds that household expenditure peaks at around 50 and begins to decline at a faster pace at 55.

"The spending needs are very different in retirement. The good news is people spend less,'' she says. This is partly because children become financially independent, and the household size becomes smaller.

In the accompanying chart (Income replacement rate methodology), the light blue portions of the bars represent the annuity expected from CPF Life. The darker blue represents the actual income replacement proportion needed. It says CPF Life alone is not sufficient to maintain your lifestyle in retirement. Hence, private savings are needed.

The higher one's household income, the lower the income replacement ratio, although the absolute amount to be replaced is higher. Based on JPAM's analysis at around age 60, the household expenditure is estimated at roughly S$4,000 a month.

JPAM has come up with an indication of how much savings you should have built up at your current age, in order to maintain a similar lifestyle in retirement. The calculations assume 2 per cent inflation a year, annual returns of 5.5 per cent, annual contribution to savings of 10 per cent, and a 30-year withdrawal period.

For example, a 40-year-old couple today with household income of S$10,000 will need to have capital of S$410,000. The capital sum at age 65 is estimated at about S$1.4 million, which assumes a monthly withdrawal for the next 30 years at a 60 per cent income replacement ratio, discounted back to age 65. The actual accumulated sum at 65 should be around S$2 million when inflation is taken into account.

Providend chief Christopher Tan uses a proprietary framework RetireWell to calculate retirement needs. In its system, funds are invested into buckets. There is an income bucket for immediate income needs which is invested conservatively. Other buckets have progressively longer horizons and can take on more risk.

"What all this means is that with a higher return on investment at retirement age, and lower income needed in later years, the lump sum needed at retirement is lower… But in our experience most clients prefer a higher income stream in the early years of retirement while they are strong and healthy, so they can do what they always wanted to do, such as travel, while opting for a lower income later.''

Investment risk/Sequence of return risk
This is the risk that you are hit with poor returns in the first few years of retirement. Based on calculations by the Capital Group, assuming an investment of US$500,000 in the S&P500 and monthly withdrawals of US$20,000, the actual chronological order of return between 1999 and 2014 would result in a relatively poorer outcome, as the investor was hit with a market downturn in 2000 -2002 from which the portfolio never recovered.

If the return picture was reversed - that is, the return of 2014 happened in 1999 and so on - the outcome would be much different. The portfolio would end with a value of US$566,000 compared to US$213,000 in the actual chronological order.

Says Capital Group investment director Andy Budden: "The lesson is that a downturn early in retirement can hurt, but good returns early in retirement can really help. The reason is that so much of the person's total portfolio is held in the market at that point and so is subject to market forces… Similarly, very late in retirement, a huge portion of the previous portfolio value has been spent or withdrawn so a market downturn can't affect it.''

The sequence of return risk is one reason when one is near or in retirement, it is prudent to have more assets in lower-risk investments. In any case, a downturn early in portfolio when an investor has begun to withdraw for income means that the portfolio has to make up for both the market decline and withdrawals.

"If a strong upturn doesn't restore the portfolio, subsequent fixed amount withdrawals will represent a greater percentage of the remaining portfolio. Often this is not sustainable and the portfolio begins a downward trend that can be irreversible,'' says Mr Budden.

Still, Bradley Vogt, portfolio manager of the Capital Group, maintains there is a place for equities post-retirement. "We think investors in retirement can't just go into cash, but they need the right types of stocks...'' These include blue chips with stable higher dividends.

Withdrawal rate
Most retirement studies posit a withdrawal rate of 4 or 5 per cent. JPAM advocates a flexible approach taking into account market returns.

In its post-retirement product SmartSpending in the US, Ms Appleton says the firm gives advice annually on how much can be withdrawn. "We have a target spend-down year where the portfolio becomes zero.

Annually we give advice on how much we think can be withdrawn to stay on track.''

Mr Vogt says withdrawal rates will depend on the "total life picture''. "There are fundamentals. One looks at the yield of the portfolio and thinks of an amount that corresponds to the yield. If you take out more than that, you hope capital appreciation will make up for it. In recent times interest rates have been so low; equity markets were high, and dividends low. If you do a 4 per cent programme you need to hope markets keep going up.''

Retirees who are willing to draw down completely on the portfolio should be able to enjoy a higher withdrawal rate.

Monday, September 24, 2018

Should you withdraw CPF cash at age 55?

Weigh trade-off between cashing out money and leaving funds to grow for retirement needs

Lorna Tan
Invest Editor/Senior Correspondent
Published Sep 23, 2018

Stay in or cash out? That is the question for many people as they near 55 and the enticing pot of CPF money awaits. Some Singaporeans resist the temptation to grab their Central Provident Fund (CPF) savings, and leave the funds untouched so they can keep capitalising on the attractive interest rates before they eventually retire.

But 51 per cent of those who withdrew their cash on reaching 55 parked the funds in savings accounts at banks and finance firms, according to a recent survey.

Yet fixed deposit rates remain low, so these members may find inflation eating away the value of their savings over the long term.

Let's assume all your funds are in a savings account with an annual interest rate of 0.5 per cent. With inflation here at 2 per cent, your money will lose about 26 per cent of its value in 20 years, from $100,000 to $74,008, says Mr Brandon Lam, Singapore head of financial planning group at DBS Bank.

While withdrawal is an option once you turn 55, leaving cash in the CPF earns higher interest rates. The first $30,000 in the Special, Medisave and Retirement Accounts, for instance, earns 6 per cent. The next $30,000 earns 5 per cent, and amounts above $60,000 will earn 4 per cent.

So how to decide? The first thing CPF members should do is consider the trade-off between withdrawing CPF money to meet whatever immediate needs they have, such as home renovations, or leaving it in their accounts to grow for retirement needs.

SingCapital chief executive Alfred Chia says you should consider withdrawing only if you need to use retirement savings to repay loans, for children's education, for investment opportunities that can generate a minimum of 2.5 per cent returns, or to achieve important financial goals. If not, you would be better off leaving the funds in your CPF accounts to enjoy the attractive interest rates of up to 6 per cent.

CPF withdrawals

  • A Central Provident Fund Retirement Account (RA) will be created when a CPF member turns 55.
  • Savings from his CPF Special and Ordinary Accounts, up to the Full Retirement Sum, will be transferred to the RA to form his retirement sum, to provide a monthly income in old age.
  • The remaining savings in his CPF Special and Ordinary Accounts can be withdrawn any time after he turns 55, subject to the applicable withdrawal rules.
  • The CPF member may also apply to withdraw his RA savings (excluding top-up monies, any government grants received and interest earned) above the Basic Retirement Sum if he owns a property with sufficient CPF property charge or pledge.

"As CPF members can withdraw any amount (subject to CPF rules) at any time after age 55, it works like a private personal ATM with much higher interest than a bank savings account," he adds.

The good news for those who want liquidity is that there is more flexibility now when it comes to withdrawals. At one time, you could make only one a year but that has changed.

"Members can access the withdrawable monies in their CPF accounts when the need arises, and those who withdraw their CPF savings via PayNow can receive payments within a day," says the CPF Board.

The Sunday Times looks at the CPF Trends study and offers tips on what members can do with their retirement savings.

Leaving CPF savings untouched

The recent CPF Board study found that 40 per cent of members who turned 55 and had withdrawable CPF funds did not pull any cash out.

The study drew data from a survey of around 7,200 Singapore residents aged 55 to 70.

They were asked about their retirement and healthcare needs and how these have changed over time. Face-to-face interviews with these people are held every two years.

Withdrawing CPF savings

The study found that people who made withdrawals mostly deposited the funds in a bank or used them to pay for near-term expenditure needs or big-ticket items.

About 60 per cent of members aged 55 to 70 said they had made cash withdrawals since turning 55. The median amount taken out was $9,000 while the average amount was $33,000.

The median amount deposited for those who withdrew cash and put it in a bank account was $8,000.

This group did not report any specific purpose for making withdrawals, which suggests they were not prompted by immediate needs, says the CPF Board.

Broadly, there were three main uses of the withdrawn cash:
•Leaving it in a bank savings account without having any specific use for the cash;
•Paying for immediate needs, such as household expenses or to pay off loans; and
•Spending on big-ticket items, such as holidays, overseas trips or home renovations.

Around 27 per cent of those who made withdrawals used the funds for household expenses, while 12 per cent used them for holidays or overseas trips, and 4.4 per cent used them for home renovation.

The CPF Board noted that people in this "withdrawal" group had more children on average than other groups. Some of them also used the money to pay for their children's education.

A relatively higher proportion of members in this group also reported poorer health and some indicated that the withdrawn funds were for medical expenses.
The CPF said members with higher healthcare needs should look to schemes such as MediShield Life and Medisave, where increased withdrawal limits would help to support their medical expenditures and provide greater peace of mind.

Five things to consider when you turn 55


The CPF survey indicated that 40 per cent of CPF members did not make cash withdrawals after turning 55. This allowed them to keep earning attractive, risk-free interest. If they later decide to withdraw their savings, they can receive them within a day with PayNow.


People who want to have higher retirement payouts can top up to the prevailing ERS of $256,500 at 55. This will allow them to receive monthly lifelong payouts of $1,910 to $2,060 from age 65. And if you have surplus savings, you can continue to top up to each year's prevailing ERS after 55 to get higher monthly payouts from 65.


Members who reach 55 and have not met their Basic Healthcare Sum (BHS) can transfer funds from their CPF Special and Ordinary accounts to their Medisave Account, up to their BHS. They must first have the Full Retirement Sum (FRS), or Basic Retirement Sum (BRS) with sufficient property charge/pledge, in their Retirement Account.

Members can also apply to transfer their Special and Ordinary account savings to their loved ones' Medisave Account if the recipients are over 55, up to their BHS. For members who turn 65 this year, their BHS will be fixed at $54,500, which will not change for the rest of their lives.

A loved one can be a spouse, sibling, parent, grandparent, parent-in-law or grandparent-in-law.

Medisave Account savings can be used to pay for your own and your immediate family members' medical expenses, as well as the premiums of approved medical insurance schemes, like MediShield Life.


In addition to enhancing your own retirement, you can also consider transferring some of your savings to the CPF accounts of your spouse and other loved ones.

The Government made it easier to do this in 2016. Members can now transfer their CPF savings above the Basic Retirement Sum, rather than the Full Retirement Sum (FRS), to their spouses.

From Oct 1, there will be a lower threshold for members to make CPF transfers to their parents and grandparents. You will be able to transfer CPF savings above your BRS to your parents and grandparents if you have sufficient CPF savings, inclusive of property pledge or charge, to meet your FRS.

Right now, you can transfer only CPF savings above your FRS to your parents and grandparents.

There were 15,789 top-ups and 4,345 CPF transfers to spouses above the FRS last year.


Around 13 per cent of members had used their CPF withdrawals at 55 to pay off loans. But if you use your CPF Ordinary Account savings to service a mortgage, note that CPF contribution rates drop over time.

Furthermore, a smaller proportion of our contributions goes into our Ordinary Account as we get older, so it's important to pay off the mortgage as soon as you can, says the CPF Board.

Four things to do with your withdrawable CPF savings


Mr Lam advises customers to assess their financial position and establish their retirement needs before allocating their funds to optimise returns.

Keep in mind that the average Singaporean's life expectancy is increasing - it's 85.2 years for women and 80.7 years for men.

Mr Lam notes: "Should you choose to withdraw your CPF funds, taking into account the increase in life expectancy, you should note that your investment horizon is also extended.

"If so, you might consider allocating a portion of your funds in assets which may yield higher returns over a long horizon (but are in turn higher risk) such as equities or exchange-traded funds."

Ms Chung Shaw Bee, head of wealth management at United Overseas Bank, says one income-generating option you could consider is multi-asset funds that have a focus on generating regular payouts. "You could also consider investing in a globally diversified portfolio of bonds as holding different asset classes enables you to hedge against risks across market cycles."


To supplement the CPF Life payout, you can consider putting aside some money in retirement insurance plans, such as annuities that can provide an additional source of stable income.

Besides annuities, life insurers have been rolling out retirement insurance plans that come with flexible premium payment terms and different payout periods to cater to your financial needs.


Ms Chung says that you could diversify your retirement investment portfolio by investing in short- to medium-term insurance endowment policies.

Such policies can offer lump sum proceeds at different maturity periods, so you get a staggered payout, or monthly cash benefits if you prefer higher liquidity. The yield from endowment policies can also hedge against the effects of inflation.


As interest rates inch upwards, the SSB is gaining popularity among retail investors.

SSBs, which are fully backed by the Government, are a principal-guaranteed, risk-free, affordable and low-cost investment option.

The SSB rate steps up over time, so over a 10-year period, the average interest is generally higher than that for fixed deposits.

To invest, you will need at least $500, lower than conventional Singapore Government Securities (SGS), which require $1,000. Corporate bonds usually require $250,000.

If you hold your SSB for the full 10 years, your return will match the average 10-year SGS yield the month before your investment. In the past 10 years, the 10-year SGS yield has been between 2 per cent and 3 per cent most of the time. The average interest rate a year for the October issue of SSB is 2.42 per cent.

SSBs may be a viable option for your withdrawable CPF funds, particularly when the average returns go beyond 2.5 per cent. 

Sunday, June 10, 2018

Astrea IV bonds: What you need to know

Low entry point of $2k, yearly 4.35% coupon payout appeal to retail investors

Lorna Tan
Invest Editor/Senior Correspondent
June 10 2018

Retail investors who want to diversify and try their hand in private equity can now do so via the newly launched Astrea IV private equity bonds.

The features appear attractive at first glance when compared with other bonds. There is a low entry point of $2,000 with a yearly coupon payout of 4.35 per cent.

The holding period can be as short as five years for a full redemption of your principal, or less as the bonds are tradeable on the Singapore Exchange (SGX).

In fact, Astrea IV's Class A-1 bonds will be the first listed retail private equity bonds on SGX.

The launch has made headlines because private equity investments are not usually easily accessible to retail investors, as they require large sums of capital and long holding periods of 10 years or more.

That has meant that private equity is typically accessible only to institutions and wealthy investors.

In recent years, interest in private equity has surged as investors seek higher returns from non-traditional sources.

Information provider Preqin estimates that assets under management in private equity have grown 11 per cent a year since December 2000, and hit US$4 trillion (S$5.3 trillion) as at September last year.

The Sunday Times highlights what you need to know about Astrea IV.


Private equity refers to investments in private firms or listed companies that may be acquired and privatised. It is largely done via private equity funds managed by professional managers who raise money from investors.

These funds aim to improve the operations and financial performance of the firms they invest in and then exit the investments for a profit.

Historically, private equity has outperformed the public market indices such as the S&P 500 Index and MSCI World Index over an extended period.


The bonds have been launched by Azalea Asset Management, a Temasek Holdings subsidiary.

There will be three classes of bonds issued under Astrea IV to raise a total of US$500 million.

The least risky Class A-1 bonds will raise $242 million, split equally between retail and institutional investors here.

Class A-2 bonds, which carry an annual interest rate of 5.5 per cent, are expected to raise US$210 million, while Class B bonds (at 6.75 per cent) would raise US$110 million. Both classes are not available to retail investors and offer higher returns to compensate for the relatively higher risks.

Astrea IV's Class A-1 private equity bonds are the first in the market to break down entry barriers for retail investors by lowering the initial investment amount to just $2,000 and reducing the investment period to as short as five years.

The bonds are backed by cash flow from a diversified portfolio of 36 private equity funds invested in 596 firms in a range of industries, including consumer, information technology, healthcare and financial. These funds are valued at about US$1.1 billion in all.

Such diversification helps to minimise the impact of the poor performance of any one fund.

 Note that the funds' average age is seven years, which means that many of them are in the cash-generating stage of a typical private equity fund's 10-year lifespan.

As such, Mr Sam Phoen, co-founder of Wateram Capital, expects cash flow to be positive.

In the initial years, a typical private equity fund tends to exhibit negative net cash flow due to drawdowns to fund new investments, as well as fees and expenses.

However, in the later years (usually after five years), a fund will achieve net positive cash flow when divestments are made.

On a geographical basis, Astrea IV has 62.8 per cent concentrated in United States-focused funds, followed by Europe at 19.1 per cent and the rest in Asia.

Its strategy is largely to focus on private equity buyout funds which purchase controlling stakes in the firms they invest in.

While many retail and some corporate bonds are not rated, the Astrea IV Class A-1 bonds carry an expected rating of Asf, with "sf" denoting the rating for structured finance.

Astrea IV's structure is broadly similar to Astrea III, a private equity bond with an annual 3.9 per cent yield that was issued in 2016 and available only to institutional and accredited investors.

It was eight times subscribed and raised about US$510 million.


In a nutshell, Astrea IV private equity bonds will pay regular interest to bond holders and repay the principal at maturity. However, the interest is not guaranteed and the bonds themselves are not guaranteed by Azalea nor Temasek.

Such income to investors is generated through cash flow from private equity funds, including when firms that the funds invested in are sold.

Class A-1 bonds will pay a non-guaranteed interest of 4.35 per cent a year every six months. For a principal amount of $10,000, the interest payment works out to $217.50 on a half-yearly basis.

In addition, Class A-1 bond holders will receive a bonus payment of 0.5 per cent of principal at redemption if a performance condition is met.

This would be when the sponsor - Astrea Capital IV, wholly owned by Azalea - receives 50 per cent of its equity investment or US$313 million on or before the scheduled call date on June 14, 2023.

This is the earliest date the issuer can redeem the bonds if the cash set aside is sufficient to redeem all Class A-1 Bonds.

If the Class A-1 bonds are not redeemed in 2023, there will be a one-time step-up interest rate of 1 per cent a year.

The final maturity of the bonds is in 10 years or on June 14, 2028.

However, investors can sell their holdings on the SGX when the bonds start trading on June 18.

"As A-1 bonds are traded on the stock exchange, it provides daily liquidity to investors, an uncommon feature for PE (private equity) investments due to the long lock-up period," said Mr Phoen.


Private equity bonds are targeted at investors who want regular income at a fixed rate rather than capital growth. Note that returns are limited to the bond coupon, as returns of higher multiples typically associated with successful private equity investments do not apply here.

Early last week, Temasek Holdings chief executive Ho Ching referred to the Astrea IV offering as a way to help enhance individuals' retirement savings.

Mr Kelvin Goh, head of investments at OCBC Bank, said that as part of an overall diversification strategy, these bonds may be useful for investors looking for income strategies that are different from traditional income sources.


There are several safeguards in place which help to mitigate against potential risks and to ensure that sufficient funds are available to fulfil interest payment and principal repayment obligations.

Reserve accounts are set up and measures - for example, cash is set aside every six months - are put in place to enable a fast build-up of cash reserves for the redemption of all Class A-1 and A-2 bonds on the scheduled call date in June 2023.

The debt-level limit is set at 50 per cent, which will trigger action to lower the total net debt if crossed.

Besides foreign exchange hedging, there are also bank facilities set up which will cover taxes and administrative expenses, management fees and interest payments to bond holders in the event of cash flow shortfalls.


The Astrea IV Class A-1 bonds have been available for public subscription through DBS (including POSB), OCBC and UOB ATMs, Internet banking platforms and DBS mobile banking platform since Wednesday.

Applications close at noon on Tuesday. The bonds can be bought with cash but not with Central Provident Fund savings or Supplementary Retirement Scheme funds.


As with any investment, it is prudent to understand the underlying risks involved before investing.

•Fluctuating interest rates may affect the bond price Changes in market interest rates may adversely affect the value of the bonds. Like all fixed-rate bonds, the market price could fluctuate due to interest rate movements. Generally, a rise in interest rates may cause a fall in the prices of bonds, while a fall in interest rates may lead to a rise in bond prices. There is no assurance that low interest rates will persist.

•Uncertainty on cash flows The ability of the issuer to make payments and the timing and amount of such payments on the bonds are highly dependent on the performance of the Astrea IV fund investments. These can be highly variable and there is no assurance that any fund will achieve its investment objectives.

•Adverse market conditions could impact distributions As with all other investments, an adverse change in market conditions could result in falling asset prices and cash flows, said Mr Kelvin Goh, head of investments at OCBC Bank. This would impact the amount or timing of distributions from the underlying private equity fund investments.

•Limited trading market There may be a limited trading market for the bonds, so prospective investors must be prepared to hold their bonds until the maturity date.

•Illiquidity of private equity investments and reliance on key private equity professionals There are risks associated with the illiquid nature of private equity fund investments, and reliance on key private equity professionals in managing these funds, adds Mr Goh.

•Limited disclosures from underlying private equity funds Bond holders will receive limited information regarding the private equity funds that form the Astrea IV portfolio due to the nature of such fund investments, which usually require investors to keep certain information confidential.

Sunday, May 27, 2018

Five things I wish I knew when I was young

Lim Say Boon
MAY 27, 2018, 5:00 AM SGT

A hot tip can be stale news by the time it reaches you, says banking and financial media veteran while sharing the insights gained over the years

If I had known when I was young what I know now - after 36 years in banking and the financial media - I would have been very significantly wealthier. As they say, hindsight is "20-20 vision". Well, let me share five "20-20" insights.


There's a line in a recent Andy Lau/Donnie Yen movie that goes: "Riches or poverty, it's all destined." Fatalism is poison to wealth.

Building wealth is more akin to Renaissance-era philosopher Niccolo Machiavelli's ideas of "fortune" and "virtue". Good fortune without virtue/human endeavour is opportunity wasted. So, a lot of becoming wealthy is about human endeavour, effort, and a winning mindset. Here are some of the attributes of that mindset to start you off.


Be suspicious of anybody who tells you making money is easy. The paradox is, the sooner one accepts that making money is difficult and requires effort, the easier making money becomes.

Much money and even more time are lost by investors waiting, hoping for that "big one" that will bring them overnight riches. The truly long-term average annual returns on stocks is around 10 per cent. That's history, that's reality. Most "get-rich-quick schemes" are either naive, fraudulent or illegal.

I think back to the Sept 11, 2001 terrorist attacks in the United States. Markets shut. And when they reopened, there was panic selling, and very few buyers. Like many others, I bailed out at significant losses. If I had simply held on, every one of the stocks I sold at losses would be worth a lot more today.

What about "hot stock tips"? The market is so efficient in pricing legitimate news - and it often happens within hours, if not minutes - it is likely that a "hot tip" is already stale news by the time it gets to you. Or worse, it's the concoction of rumour mongers with stocks to unload on the gullible.


Time is money, as the saying goes. Even more so when the time lost relates to planning your finances. Many people put off the more uncomfortable but necessary tasks, focusing first on the easier or more pleasant jobs, often at considerable cost to themselves.

When I started working in 1981, I hardly thought of investing. My priorities were cars, girlfriends and parties - in that order. Well, it was difficult to get a girlfriend and get to parties if I didn't have a car. So, I was a gold medal-winning procrastinator when it came to managing my own money.

But if I had invested just US$1,000 in the S&P500 at the start of 1981 and left it alone, re-investing dividends, that US$1,000 would have grown to US$54,000 (S$72,300) by the start of this year. Now that's annual returns of around 11 per cent a year. That might not immediately make you go "wow" but cumulatively, that would have worked out to over 5,300 per cent returns today.

Now, if I had continued to invest - increasing my investments by 10 per cent every year - I would have ended up with an equities holding of more than US$1.3 million today. Not bad for investments totalling US$330,000.


When I eventually got around to investing, I was a speculator. And it didn't help that I worked for many years in the trading environment of stockbroking companies. I traded in and out of stocks, chasing the thrill of the "win".

But I would have done better had I followed the advice of an elderly and successful client from decades ago who told me his formula was simply: "Buy good, buy cheap, don't sell." Time is money. But an even more profound twist is "money is time".

You see, the long-term history of stocks is about mean reversion on rising trend lines. That is, stock markets go through cycles - up and down. But in sound economies, stock prices generally go up and down against a rising trend line.

For example, international investment firm Morningstar's estimate of one-year returns for US stocks in the period 1926 to 2017 puts the periods of gains at 74 per cent versus 26 per cent for periods of losses.

But as the period of returns lengthens, the odds of making money rises dramatically. For five-year annualised returns, the periods of losses reduce to only 14 per cent. By the time Morningstar got to 15-year annualised returns, the periods of gains were 100 per cent. No periods of losses.


At many periods in my life, I held far more cash than was necessary for emergency purposes. Often it was just haphazard planning. My excuse was always: "I'm too busy to deal with this now." And sometimes it was risk aversion.

But here are the historical facts about holding cash over long periods of time. Yes, over the very short term, cash is "safe" - in the sense that a dollar in a bank today will still be a dollar next week.

But be wary of the illusion of money. US$1 million from 1926, held literally in cash - the metaphorical "money under the mattress" - will today have lost 93 per cent of its spending power.

Put simply, the US$1 million will be able to buy only around 7 per cent of what it would have been able to buy 92 years ago. So, similarly, the savings you have now will almost certainly be worth a lot less in real spending power in 20 years.

You know how your parents say: "A hundred dollars was a lot of money when we were young"? Now you know why.

•The writer, a former chief investment officer at DBS Bank, is an investment professional in banking and finance, and the financial media.

Sunday, May 20, 2018

Stress-free investing (or at least, close to it)

Lorna Tan Invest Editor/Senior Correspondent
PUBLISHED MAY 20, 2018, 5:00 AM SGT

The severe jolt that rocked global markets early this the year, after 12 months or more of bullish gains, spooked plenty of investors. It was a sharp reminder that shares can fall just as fast as they can rise. Invest editor Lorna Tan lists four approaches that will provide some peace of mind, regardless of where the market is heading.

Not putting all your eggs in one basket is a sensible rule for retail investors. You can diversify by spreading your investments over different securities in various asset classes.

The Investment Management Association of Singapore (Imas) says diversifying gives you a portfolio that can weather the ups and downs of economic cycles and market volatility.

Let's assume you have invested all your money in shares. Your capital drops by 20 per cent if the stock market falls by 20 per cent.

What if you had split your investments equally into shares and bonds?

As they are sometimes negatively correlated, a fall in shares may tend to be associated with a rise in bond prices, says Imas.

Assume that in this case, bond prices rise by 5 per cent. Your share-bond portfolio will then fall by just 7.5 per cent, the average of the return for shares and bonds. As such, there are more diversification benefits when we include more asset classes in the portfolio.

To diversify effectively, you need to invest in a variety of securities and asset classes. You will have to invest in many shares and bonds spread across sectors. You may also want to invest internationally.

However, not many investors have the resources and time to do all these. This is where unit trusts and other types of pooled products, such as exchange-traded funds, can offer you a practical route to diversifying.

With an investment of as little as $1,000, you can invest in a well-diversified basket of securities, adds Imas.

For a two-year period ending in February, The Sunday Times ran a Save & Invest Portfolio Series that featured the simulated portfolios of three individuals.

The series indicated that at different points, different asset classes in the portfolios outperformed their benchmarks. The key takeaway is that it is impossible to predict all the factors that affect financial markets and, therefore, it is best to invest with a long-term horizon in a diversified basket of assets.

This means buying a basket of stocks that are trading below their fair value and with low borrowings.

In addition, these should be firms that are generating cash from the business and paying out some of the cash to shareholders as dividends.

Ms Teh Hooi Ling, portfolio manager of Inclusif Value Fund, says that because of low borrowings, the stocks will not fall to zero.

"Because you buy a big basket of such stocks across various industries and various countries, it is unlikely that all will go down significantly at the same time," she adds.

"And as you are paying only 60 cents a share for a stock that's worth $1, your downside is protected. Besides, you get paid regularly because the firms are paying dividends."

At some point, the market will recognise the value of the stock. When it trades back to, say, 90 cents, you would have made a 50 per cent return.

In the intervening years, you would have collected yearly dividends of, say, 3 or 4 per cent, notes Ms Teh. She points out five ways the value of such stocks can be unlocked.

•A company with unrecognised value could be privatised by its majority shareholder.

•An undervalued company may be bought by a bigger firm or by another strategic partner.

•A company can unlock the value of its assets by divesting some of them or by distributing what it owns to all its shareholders.

For example, last August, Pan Hong Holdings said it would distribute all its 73 per cent stake in Hong Kong-listed property developer Sino Harbour to its shareholders. Its share price more than doubled two months after the announcement.

•Some news may trigger the recognition of a stock's value. Malaysian stock Kuchai Development doubled over a three-day period in January when it was reported that it was poised to be a major beneficiary from the impending listing of Great Eastern's insurance arm in Malaysia. Kuchai owns 3.03 million shares in Great Eastern, which in turn has a stake in Great Eastern Life Assurance (Malaysia).

•A small cap can get recognised when it delivers results.

Japanese company Nichidai Corporation develops and markets precision dies and moulding products for automobiles. It also produces sintered wire mesh filters used in the aerospace, petrochemical and pharmaceutical industries.

Four months ago, its shares were trading at close to a 50 per cent discount to its net tangible asset despite the company being consistently profitable and generating cash from its operations.

Earlier this year, it announced that net profit had more than doubled.

The stock rose more than sixfold after that. The price has since corrected but it is still trading at close to 100 per cent above its level four months ago.

Financial experts such as Schroders say reinvesting dividends is one of the most powerful tools available for boosting returns over time.

The fund manager points out that investors in the MSCI World index would certainly have noticed the difference over the past 25 years.

If you had invested US$1,000 in MSCI World on Jan 1, 1993, the capital growth would have produced a notional return of US$3,231 (S$4,340) by March 7 this year. Annually, that represents a growth rate of 5.9 per cent.

However, this changes once dividends - the regular payments made by companies to their shareholders - and the miracle effects of "compounding" are included, says Schroders.

"By reinvesting all dividends, the same US$1,000 investment in MSCI World would have produced a notional return of US$6,416, representing annualised growth of 8.3 per cent.

"In percentage terms, it's the difference between your money growing by 323 per cent, without dividends reinvested, or 640 per cent with dividends reinvested, nearly twice as much," it says.

The reason for this stark difference in returns is the compounding effect, where you earn returns on your returns.

Why could dividend reinvestment be effective?

When buying a share, investors can typically elect how they will receive any dividends.

They can choose to receive cash, referred to as income, or use that money to repurchase more company shares. When you opt to repurchase more shares, it triggers the start of the compounding process.

Compound interest is interest on interest and it helps an investment grow at a faster rate. So by reinvesting dividends, you give your stockholding the potential to earn even more dividends in the future.

Over time, shareholder value rises, especially when share prices increase.

Mr Nick Kirrage, Schroders' fund manager for equity value, says dividend reinvestment is one of the most powerful investment tools available. Its research shows the potential difference to the rate of return that dividend reinvestment makes could be substantial.

He adds that in an era when interest rates are so low, investors need to be aware of relatively simple investment techniques like dividend reinvesting that can help build returns.

"Over time, those seemingly small amounts reinvested can grow into much bigger sums if you use them to buy even more shares that pay dividends in turn," he adds.

"Investors need to do their research and make sure the company they are investing in can afford to pay dividends on a sustainable basis. Your original capital is also at risk, so it pays to be picky."


Nevertheless, it is important to remember that firms do not have to pay dividends and that they can be reduced or cancelled at any time.

Some firms even borrow money to pay dividends to keep investors happy, which may be unsustainable.

Borrowing to pay a dividend could be a symptom of a firm with a weak balance sheet.

As with all investments, do your due diligence before making any investment, says Schroders.

Even with a crystal ball, you will struggle to predict the market. Of course, if shares are on a clear upturn, investing a lump sum at the lowest point is likely to yield good returns. But what happens when you are unsure?

Many financial experts recommend dollar-cost averaging as a suitable strategy to mitigate the risk of being wrong about the market. Simply put, it involves regularly buying a fixed dollar amount of a particular investment, regardless of the share price. By doing so, you buy more shares when prices are low and fewer when prices are high.

So over time, you will have a lower average share price.

For those who think the stock market is overvalued, dollar-cost averaging lets you invest small amounts over time and not miss out on any big rally.

Studies show that investors who choose to stay on the sidelines waiting for a rally typically miss the best days.

Mr Sean Cheng, portfolio manager at Providend, says the dollar-cost averaging method typically outperforms the lump-sum investment approach when the market is declining and when it is U-shaped.

"The key is to keep investing when the market is down and you would have benefited when it recovers because your average price is lower," he says.

Mr Cheng adds that it could also help most investors in their emotional stability.

"Ample data has shown us that most investors are unable to withstand the fluctuations of the markets and tend to bail out during tough times, thereby making what would have been temporary losses permanent instead," he says.

Dollar-cost averaging would help most people to not only stay invested - because they would only have invested a portion of their savings - but to also keep investing through the tough times since it means they can keep getting a lower average price, Mr Cheng explains.

Financial experts advise that dollar-cost averaging is usually more suited for investors with a lower risk tolerance and a long-term investment horizon.

Note that the approach is no guarantee of good returns on your investment.

For instance, it is not prudent to apply dollar-cost averaging to an investment that keeps falling.

You should still do your own due diligence and select investments that have a good track record and that you understand.


Sunday, February 11, 2018

Bide your time until a crash to enter market?

Studies show there is a cost to waiting and a buy-and-hold strategy mostly fares better

Teh Hooi Ling
PUBLISHED FEB 11, 2018, 5:00 AM SGT

The long-awaited market correction finally came last week. The question we'll try to answer is: Would investors have done better waiting for a dip or a crash before entering the market, especially when prices are deemed high; or are you better off deploying your money into the market as soon as you have it?

Consider this friend of mine who, back in late 2013, said to me: "I'm staying out of the market. A crash is coming! I can feel it in my bones!"

In the four years till the end of last year, the Dow Jones Industrial Average had gone up by 58 per cent. With dividends reinvested, it's a whopping 74 per cent in Singapore dollar terms. The Singapore market had done more modestly - at 7 per cent in that time, or a more decent 23 per cent with dividends reinvested.

In contrast, there's another friend who knew of someone who said he would jump into the market only when there is a crash. He would then cash out when the market recovered. Most of the time, he'd be sitting on cash waiting for the next big crash to come. According to him, he hadn't done too badly for himself.

To find the answer, we at Inclusif did a study.

We looked back over the past 30 years in the Straits Times Index (STI). We came up with eight trading strategies. Each strategy has a combination of buy and sell triggers. The buy triggers range from a 10 per cent to 25 per cent market correction, and the sell triggers range from a recovery of 20 per cent to 50 per cent from the point of entry.

During the 30-year period, the STI - with dividends reinvested - yielded a 7.9 per cent compounded annual return.

Of the eight strategies, only one outperformed the buy-and-hold strategy, and only marginally at that. The strategy of buying after a 20 per cent market correction from the preceding nine-month peak, and selling after a 50 per cent increase from that entry level generated a return of 8.2 per cent per annum over the last 30 years. The rest of the seven strategies underperformed the strategy of being fully invested in the market throughout the whole 30 years. Monthly data is used for this study.

Hence the conclusion is: Waiting for a correction before entering the market mostly fared worse than a buy-and-hold strategy.

Below are our observations from the study:

• The buy and sell thresholds are arbitrarily set and have no bearings on the fundamentals of the market. Each cycle may be different and results may differ slightly if, say, daily or weekly data is used;

• But generally, if you define the crash threshold too loosely (say, a drop of 10 per cent), you are likely to suffer further drawdowns - that is, the market is likely to continue to decline, after you enter the market;

• If you define the crash threshold too stringently (say, a drop of 25 per cent), you stay out of the markets for the most part, which is bad because long-run equity returns are positive. This is what happened in Plan F. The correction in 2015/2016 did not hit 25 per cent, so the buy threshold was not reached. As a result, that portfolio has stayed in cash since May 2013. Consequently, it missed out on a total return of 12.5 per cent from then until the end of last year.

• If you define the recovery threshold too loosely (say, up 20 per cent), you exit the equities market too quickly, which is bad because long-run equity returns are positive.

• If you define the recovery threshold too stringently (say, up 50 per cent), you pretty much get returns that are quite similar to a buy-and-hold strategy, since you will stay invested for a long time once you enter.

Recently, we came across a study which drew the same conclusion - that it does not pay to wait for a stock market correction.

The research, done by Elm Partners, a London-based asset management firm, tried to find out: At times when the market has been expensive, what has been the average cost or benefit of waiting for a correction of 10 per cent from the starting price level before entering the market, rather than investing right away?

It used US market data over the past 115 years and defined expensive as times when the stock market had a cyclically adjusted price-earnings ratio or CAPE that was more than one standard deviation above its historical average level. The waiting period is three years.

They found that:

• From a given expensive starting point, there was a 56 per cent probability that the market had a 10 per cent correction within three years, waiting for which would result in about a 10 per cent return benefit versus having invested right away.

• However, in the 44 per cent of cases where the correction doesn't happen, there's an average opportunity cost of about 30 per cent - much higher than the average benefit.

• Putting these together, the mean expected cost of waiting for a correction was about 8 per cent versus investing right away.

Put in simpler terms, it means that while we may reasonably expect a correction to happen some time in the future, we don't know when for sure. When the correction doesn't happen for some time, some investors may get pushed to invest at higher prices. And when the correction finally happens, it may be from a significantly higher level from today. The after-correction level could still be higher than the level today, in which case, investors would have missed out on that return.

It is well documented that we humans tend to underestimate opportunity costs relative to realised costs. As with my friend at the beginning of this article, he would have suffered significant opportunity cost had he stayed out of the market for the past four years or so.

Elm Partners then did a sensitivity analysis, allowing the entry levels to range from 1 per cent correction onwards to 10 per cent, and reducing the waiting time to one year and increasing it up to five years.

What they found was that across all scenarios, there has been a material cost to waiting. The longer the horizon that an investor has been willing to wait for the correction to occur, or the bigger the correction for which they are waiting, the higher the average cost.

If you believe the stock market has a negative expected return to a particular horizon, then waiting for a correction to invest makes sense, said Elm Partners.

However, at least as far as the historical record for the US stock market goes, and quite similarly for other markets, higher market valuations are consistent with lower prospective long-term returns, but not negative expected returns.

• The writer is the portfolio manager of Inclusif Value Fund, a no-management-fee Asia-Pacific value fund (