For the past week, I’ve been conversing with a reader with a very unique financial situation. I’ve summarised the key points below (keeping his identity totally anonymous for obvious reasons):

1. He is a new investor
2. He is in his 40s, earns about S$5.5k a month, spends S$2k for his son’s therapy monthly
3. Works shift work of about 12 to 36 hours each time
4. Looking at a 4% – 6% yearly payout for his investments, with a minimum of 4%
5. Currently on CIMB fast saver (1.0% p.a.)
6. Thinking of buying 100 lots of Lion Philips SREIT ETF (S$10,000) to start off, with a monthly investment plan into Mapletree Commercial Trust (S$100 to S$200 monthly)
7. Plan to leave the shares to his son in future, who does not have the capacity to manage the shares.

From this profile, it is very clear he has been through a lot of hardship in the past, and for him to still be going strong, and thinking about how he can invest the money for his son’s future, is truly an amazing achievement. Huge respect to you, anonymous reader of Financial Horse!

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Dear Anonymous Reader of Financial Horse,

Bank Account

First off, CIMB Fast Saver’s 1.0% per annum interest is definitely not the best in the market. Both UOB One, and DBS Multiplier offer interest rates of > 2%. As you earn a steady salary, you should be able to qualify for the DBS Multiplier. Apart from salary credit, you need to hit 2 other tiers for a 2.2% interest (other tiers are credit card, housing loan, investments, and insurance). The easiest tier to his is credit card, as you just have to remember to charge any amount onto you DBS/POSB credit card once a month and you should have hit the 1.9% interest tier. The next tier that brings you up to 2.2%, is harder to hit.

I know some people who like to set up a bond ladder using SSBs for this. This involves buying a small amount of SSBs every month for 6 consecutive months, such that the biannual payments from the SSBs result in coupon payments hitting your account every month, fulfilling the “Investment Criteria”. Don’t forget that for this to work, the bank account your CDP is linked to has to be with DBS/POSB. It’s definitely worth considering, as it further diversifies your investment portfolio, and the interest rates from SSBs these days are definitely not to be trifled with.

Multiplier Account Interest Rates

Here’s an easy breakdown of the interest rates¹ you get to enjoy on the first S$50,000 balance in your Multiplier Account. And remember, there’s no minimum salary credit or credit card spend required so, get multiplying!

 

With this, you should have easily doubled the interest on your spare cash that is lying around waiting to be invested, or that is being set aside as an emergency fund.

Don’t forget that before you start investing, you should always set aside an emergency fund of up to 6 to 12 months worth of expenses, to cater for any emergencies. The stock market is notoriously volatile, and if there is a crash, you don’t want to be forced to sell your investment to fund daily expenses, as this will set you back on your investment journey greatly. I can’t stress how important this is for all beginner investors, but especially so for someone in your situation.

Investments

So that’s the low hanging fruit. The question of what to actually invest in, is a lot trickier. From the numbers you gave me, you seem to have S$10,000 for a lump sum investment, and about S$100 to S$200 monthly.

Lump Sum investment

Let’s take a quick look at the other options available to you.

STI ETF

The STI Index consists of 30 of the largest companies in Singapore, and includes brand names like DBS, OCBC, and UOB. It currently trades at a 3.47% yield, which is below the 4% minimum yield you set for yourself. I wrote a more detailed article on why I don’t like the STI here, but I agree that the STI is not appropriate for you given the high volatility in stocks, coupled with the low yield. It’s good as a cheap and easy way to diversify your portfolio, if you ever decide to do so.

Picking individual REITs or Stocks

Given your small initial capital and unique personal situation that necessitates the avoidance of risk, picking individual REITs or Stocks, something that I would usually do, doesn’t seem like the correct option here. If you’re using DBS Vickers Cash Upfront, it’s a S$10 transaction fee each time you place a trade, so if you make investments that are less than S$4,000 each time, the transaction cost as a percentage of your investment goes up significantly, which is not ideal. So if we were to go down the individual REIT/Stock method, you’re probably only get exposure to 2 or 3 counters, which from a diversification perspective is just horrible. It’s okay if you’re a millennial with minimal bills to pay and a lifetime of work ahead of you, but not if you’re 40 year old and a kid with needs to provide for.

REIT ETF

I wrote a review on the REIT ETFs previously. I don’t like their high fees (0.60%), and I don’t like their lack of liquidity. Unfortunately, I also understand that with S$10,000 it’s not easy to replicate the kind of diversification that you are getting with an investment in the the Lion Global S-REIT ETF, without incurring ridiculous transaction fees. Given your position, I suppose the concern is primarily to reduce risk, and a diversified REIT ETF is definitely safer than just picking 1 or 2 REITs. So it’s a bit of a case of the least worst option here. And I don’t disagree with your decision to go with a REIT ETF.

Monthly Investment into MCT

You mentioned that you will be doing S$100 to S$200 monthly investments into MCT. My immediate question then, is whether this is the amount that you save every month, or this is the amount that you plan to allocate to MCT each month? You incur about a 1% transaction fee each time you do such monthly investment plans. Typically my advice would be to wait until you have S$4000 to make a lump sum investment into the market, but in your savings rate is S$100 to S$200 a month, that’s going to take 20 months to hit that target, even if I am being optimistic. So yeah… a monthly investment may actually make sense.

Transfer CPF Ordinary Account (OA) into Special Account (SA)

I don’t normally advocate this for younger readers who are saving up for a house, but given your age, it may actually be a fantastic move to transfer your CPF OA into your SA. Beyond the initial S$60,000, CPF OA earns 2.5%, while CPF SA earns 4.0%. Whatever amounts that you don’t require in your CPF OA for housing needs, you should transfer it into the SA for the extra 1.5%. It unlocks at 55, but you can leave it inside CPF even after that and nominate your son to receive your CPF proceeds. 4.0% risk free interest, compounded over a multi-decade period, can really work wonders.

Market Timing

I’ve never advocated for market timing. However your situation is quite unique. To elaborate, the current economic cycle is quite late in the day. With the Fed on a rate hike cycle, we’re starting to see the effects on emerging market currencies, as well as a yield curve at its lowest since 2007. Nobody can predict the exact timing, but I would say that chances are good that some time in the next 3 to 5 years, we are going to see some economic instability, and lower stock prices.

If you’re a beginner investor starting out in investing now, you can either put your money into the market now, and continue to do so into the next recession (basically dollar cost averaging), or you can park it in a high yielding savings account for the time being, and invest it during a crash.

It’s definitely a high risk kind of strategy, because you’re losing all the opportunity cost in the interim, and you’re potentially sitting out a powerful late cycle bull run. But when you’re investing a S$10,000 lump sum and S$200 monthly, even an impressive 30% return is only about S$3000 to S$4000, all of which could be wiped out in the next crash.

So I’m not asking you to market time. (Note: If you want to do so, you have to set some ground rules for yourself (eg. I will buy MCT when it drops 20% from it’s current price of S$1.63), because it is incredibly hard to pull the trigger when stocks are falling and all the reporters on TV are talking about an economic collapse). But to be realistic, it is an option that you can consider for yourself, and decide if it is appropriate.

Investing is not a silver bullet

At this point in time, I do need to caution you that investing is not a magical silver bullet that will solve all of your problems. It requires time for the initial investment to grow and compound, and the results only start coming in over long, multiyear periods.

The other side to successful investment, is to increase your savings rate. At S$100 to S$200 worth of savings a month, it is going to take a long time to build up a comfortable nest egg to support yourself and your son. The key then is to increase the amount that you’re able to invest a month.

This can be done via either increasing your earnings, or by decreasing your spending. Decreasing spending may be difficult in your situation, as S$2000 monthly for your son’s treatment expenses, coupled with housing loan, and day to day expenses, would not leave much left for saving. Are there any grants or support schemes that you can explore to help with the treatment payments?

Are you then able to explore alternative ways to increase your income? If you have a spare room in your HDB, can you lease it out to a tenant, and use the extra S$600 to S$800 for your savings? Are you able to partner with another Grab driver to drive a Grab in your down time?

Closing Thoughts

As much as I hate to say this, there’s only so much that investing can do, when you are only able to invest S$10,000 upfront, and S$100 to S$200 monthly. The stock market (and the co-odinated policy of monetary easing by global central banks) has been criticised as a case of the rich getting richer, and there’s no better illustration than here. When you’re making S$500,000 a year and investing S$200,000 a year in stocks, it’s amazing to see stocks go up 10% every year. When you’re on S$60,000 a year, have a son with needs to provide for, and only able to invest about S$10,000 a year, it’s a lot less attractive when stocks go up 10% a year, but cost of living goes up significantly as well.

As much as we can criticise the system, none of that is going to change anything. To get out of this cycle, the key is truly to increase your savings rate, whether by decreasing expenses, or by increasing income. If you do so, and invest the money prudently, you’re definitely on the right track. You seem like a very sensible guy, and your choice of investments (REIT ETF, and MCT) are all very sound choices, that I don’t have many comments on.

Good luck with your investing journey, and please don’t hesitate to reach out if you ever need any help.

Regards,
Financial Horse

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Financial Horse Facebook Group hits 2000 members

As posted on the Financial Horse Facebook Group.

Hi Everyone!

When I first started Financial Horse earlier this year, I intended it as a means to catalogue my investing thoughts. But what I never expected, was the overwhelmingly enthusiastic response from readers, the open and heartfelt sharing, and the words of wisdom from fellow investors smarter than I am. It has been a truly heartwarming experience to see investors from all walks of life come together in this Facebook Group, united by the common goal of becoming better investors.

The Weekly Horse

All Financial Horse does in his free time during the week is read financial news. With this new initiative (“The Weekly Horse”), hopefully some good can come out of it. During the week, I post articles that I enjoyed on the Facebook Group (do join if you want a sneak peak), and every Sunday I will collate the links for readers. I also take the opportunity to address queries from readers, or share any thoughts that I have for the week. If you enjoyed this post, do share your thoughts in the comments below!

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Recently discovered Bill Gates blog and absolutely loving it. I’ve always believed that good investing requires one to read broadly, and Bill Gates is the epitome of that. Here’s a nice quote from him.

“It took time for the investment world to embrace companies built on intangible assets. In the early days of Microsoft, I felt like I was explaining something completely foreign to people. Our business plan involved a different way of looking at assets than investors were used to. They couldn’t imagine what returns we would generate over the long term.

“Complexity is more expensive. Complexity is more fragile, less robust. Complexity leads to procrastination.
Simplicity costs less. Simplicity leads to clarity of purpose. Simplicity leads to action.”

Sometimes in investing, the simple portfolio is the most elegant one that outperforms it’s more complex cousins.

Get Rich with Simplicity

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Hopefully DBS will jump on the bandwagon soon 😉

https://www.cnbc.com/2018/08/21/jp-morgan-to-unveil-new-investing-app-with-an-eye-catching-disruptive-price-free.html

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Shared by a Reader:

I am thinking of the headline. If 2 of your competitors combine force to compete with you. Is it a good thing? The price rise seems to think so on the back of Citigroup’s analyst comments that Singtel ‘will face less competition’. Really? The new resulting competitor, with their combine resources shd be a greater threat to Singtel. The sum of their mkt share after merger is not going to reduce. It is not as if one player is exiting the mk which if so, will then really reduce the competition. Is it not better to have 2 smaller opponent who are not united? ( the rule of divide and conquer). Perhaps the increase in price is due to the other news, the possible bid for Amaysim Australia Ltd, rather then this merger that is not even confirmed ( exploratory only)

https://www.businesstimes.com.sg/companies-markets/singtel-shares-surge-75-on-potential-union-of-australia-telecom-rivals

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