Portfolio Update & Open Challenge to Insurance Companies

Portfolio Update

I have sold one of my main holdings in Fischer Tech at 0.90. It has been a wonderful company which I discovered two years back. While the wonderful management has remained, the outlook of the automotive industry Fischer is so dependent on has not. China automobile inventories are building up and this may lead to lower orders. 

While Fischer is debt free and will survive the downturn, the prospect of declining share price due to declining revenue is why I have opted to cash out.

My DIY Challenge

Readers will be aware of my love for the "buy term invest the rest" concept vis a vis the whole life products offered by insurance companies. Blogged here

To actualize it, I will be starting a hypothetical insurance. It will be a whole life plan where one pays the premiums for 20 years. The sum assured is $100,000 and annual premiums are $2153.60. $153.60 will be for a term coverage of $100,000, while $1000 will be each channeled into the SPDR STI ETF and CPF SA. CPF SA will act as the "bond component". For queries on what happens to money when it enters the CPF SA, please read here. (under "100% of what is saved equally into STI ETF and CPF")

Let's see how I will stand against the titans of the industry over the long run. For those who have just bought whole life policies, feel free to compare your returns against it. It can be found under my "Challenge" Tab. Results will be updated yearly as long as this blog lives.

The "Onepunch" Financial Training

For those who have not watched "one-punch man"; Saitama (the main character), is the most powerful hero who blows villains away by his superhuman strength in punching. When being questioned on the origins of his superhuman strength, Saitama replies he of his daily repetitions he does without fail:

• 100 Push-ups
• 100 Sit-ups
• 100 Squat
• Run 10km 

And no matter how tough the training gets, he never stopped hit not even for a single day. It took him three years to reach that strength and perhaps, the strengthening of his mind. 

Maybe "one-punching" our way to financial freedom could be simple too. Instill financial discipline, sprinkle some repetitions, never give up on the regime and we become "powerpuff hero". 

So without further ado, here's the (possible) secret recipe to financial superpowers.

Save 20% of your monthly bonus 
You would have probably heard this phrase over and over again: "Income - Saving = Expenses". So yes, just save 20% of your take home monthly income (and 100% of your bonus). Always save 20% of your income first before you think of other expenditures. To summarise, save 20% of your take home pay and feel free to indulge with the remaining 80%.

100% employment 
If possible, keep working until you are 55. This is because when during the initial stages of your working life, your invested capital is very small. Any magnitude in gains and losses in your portfolio will not be as great as the amount of savings you add. 

Quoting from the business insider: 

"Buffett made $62.7 billion of his $63.3 billion networth after his 50th birthday. $60 billion — nearly 95% — is from after his 60th birthday."

This shows how the compounding effect on your wealth will only be significantly felt after you have amassed a sufficient amount of capital.

100% on term and medical insurance
Focus your insurance expense/need into buying only term and basic medical insurance (Don't buy any other kind of insurance for now). This insurance expenses should be part of your "80% expenses".

100% of what is saved equally into STI ETF and CPF 
Do it monthly. While people will ask what happens to the money in your CPF, let me share. Firstly, the money you deposit is automatically set aside for your minimum sum. This means when you turn 55, you can't withdraw the money if the rest of your CPF savings don't meet the minimum sum. 

However, if you have been working till 55 and earn about $2,500 per month, it is likely you would have met the CPF basic sum ($80,5000 currently) with ease, especially for Singaporean males. Using a simple illustration: 

CPF savings: $100,000; Contribution into CPF under this plan : $40,000

Assuming you decide to go with the minimum sum of $80,500. The $40,000 you have deposited on your own will be first used for the $80,500. This means the other $40,500 will be taken from your "$100,000 CPF saving", allowing you to opt for a withdrawal of $59,500.

If you are gungho enough and wish to skip the complexities of the CPF system, just channel the entire 20% into the SPDR STI ETF.

Train your mental resilience
Ignore those "trading seminars which promises high profits", keep to the regime. Alternatively, you may be tempted to take a break and indulge or your friends may suan you. But no! Keep to this regime! 

You are already indulging with 80% of your take home pay.

A small Diclaimer

However, I will like to do a disclaimer: " I do not think the STI will do well in the short run, the key is to buy in monthly as over the long run, the SPDR STI ETF has always done well - about 6.6% annual returns since its inception in 2002." Hence, I believe this strategy will outperform the numerous financial plans out there over the long run.

(*The author is merely a "B-ranked hero" who just started out on the hero journey. He is only a financial hero as a hobby, so please don't take him too seriously. Please note the publication of posts is solely for informational purposes and is not to be construed as a solicitation or financial advice)

Steps to take to accumulate more wealth

Some have asked how I had accumulated $200,000 at a young age. Below were some steps I took.

Save a significant portion of salary

Don’t live a paycheck to paycheck lifestyle, save a portion of your salary for investments and future consumption.

Don’t put too much Money in Bank accounts and FD

I hate putting a lot of money in saving accounts because the interest rates of these accounts are very low. The only advantage saving accounts have is the liquidity it provides. I suggest to place approximately $10,000 in these saving accounts unless a major expense is coming. This is because $10,000 equates to approximately 3 months expenses incurred by ordinary Singaporeans.

The rest of the money should be placed in Singapore Saving Bonds (SSB) or stocks. This is because the SSB provides a higher interest during the initial years and this interest becomes higher if you keep it with government longer. Furthermore, the SSB is relatively liquid where you are able to make a withdrawal in one month. This will be handy in situations where you need the money. Also, there are no conditions we have to meet to enjoy these returns unlike the OCBC 360 and UOB account. 

For starters, I will recommend Singaporeans set aside some money to bid for SSB once a year. Fixed Deposits in banks are a definite no no given the current climate. They lock you up for a period of time and offer rates only in the region of SSB's. I will only consider SGD denominated FD if the interest offered is at least 2% per year.

Buy Term and Avoid Whole Life/Endowment/ILP

I have shown how buying a term policy and investing the rest in CPF and STI ETF is likely to yield a better return than whole life. You can read it here. This method is likely to empower you to accumulate more wealth than insurance plans.

Investing when Young

This is very important. Investing does not mean putting money in bank FDs or insurance policies. It is to invest in the stock market.

Yes, the stock market is a casino to the layman. However, there is still a way to grow one's wealth in the stock market. That is via the SPDR STI ETF or Nikko AM ETF. Both are index funds and are good instruments to help grow your wealth.

For individuals with a sound understanding in finance and accounting, it is likely the stock market will not be a casino to you. This is because the wealth of experience and knowledge you have accumulated will help discern between the value traps and stocks with true value. If discerning these stocks are still a challenge, it is advisable to stick to the 2 ETFs mentioned above.

Why the STI ETF is better than most unit trusts

Are you a full time employee who finds it hard to make time to monitor one’s investment due to commitments? Or feel daunted by the market jargon and maze of financial statements when investing in the stock market?

If your answer is yes to either question, it may be good to leave your investment to fund managers. In my opinion, the best way is by investing in an ETF which tracks the Singapore Stock Index.

What is the Straits Time Index fund (STI ETF)?

Alvin from Bigfatpurse has written a comprehensive post about it.

For those who are busy or daunted by the lengthy article. Below are 5 points to know:

1)The Straits Time Index (STI) comprises of 30 companies listed on the SGX and is a net market capitalization weighted index

2) You do not invest directly into the STI index; this is done by investing in either the i) SPDR STI ETF or ii) Nikko AM STI ETF. There are listed on the SGX with stock codes ES3 and G3B respectively

3) While these 2 ETFs attempt to track the STI index, there is a small degree of tracking error

4) Investing in ETF is ideal for individuals who have a small investment capital or has no interest or knowledge to pick stocks

5) ETF are passive management funds while there is an alternative group of funds doing active management of funds called unit trusts

Bigfatpurse did an analysis on the returns of the SPDR STI ETF against unit trusts who possess a long track record investing in Singapore equities. Based on the 10 year performance of these unit trusts, the SPDR was ranked second in his analysis as of Feb 15.

How about at end August 2015? For the past two months, we had witnessed a stock market rout. Perhaps given the top dollars paid for these unit trusts’ managers, their brilliance would have protected our money better than the passive SPDR STI ETF. Here are the 10 year performance:

1 SPDR STI ETF – 5.7%

2 Schroder Singapore Trust – 5.7%

3 Nikko AM HIF Spore Div Equity – 5.5% 

4 Aberdeen Singapore Equity Fund – 5.5%

5 Amundi Spore Dividend Growth – 4.8%

6 Deutsche Singapore Equity – 4.7%

7 Nikko AM Shenton Thrift –3.8%

8 LionGlobal Singapore Trust –3.4%

9 United Singapore Growth – 3.3%

As of end August 2015, the SPDR STI ETF is now tied for first place on a 10 year performance basis. This is despite the higher expense ratios paid to fund managers who supposedly possess a wealth of investing experience or are top graduates. If we were to account sales charge, the STI ETF will lead the unit trusts.

Hence, for the lazy or time strapped individual, passive investing via ETFs may be a simple way to invest wisely.