What goes down in the Market must come up

In times of uncertainty, one of the most common questions revisited day after day, is to continue to fight or take flight. And by that, I really mean whether an investor should sell off or continue to stay vested and even pump in more money.

The S&P 500 continues to remain one of the best reminders on why long-term investment works and why as investors we should spend time in the Market rather than timing the market.

Widely regarded as the best single gauge of large-cap U.S. equities, there is over USD 9.9 trillion indexed or benchmarked to the index — one of the most commonly followed equity indices and one of the best representations of the U.S. stock market.

For the US, it had faced an uneventful past 10 years. At least 30 significant events to the market took place, coupled with the resulting ups and downs in price movements. COVID-19 is the latest event to hit (on the far right), leading to the market drop which we are experiencing today. However, the general trend is an upward continuation.

If we relook from a much longer perspective over 148 years, historic data and trends don’t lie. Major events still caused dents and depressions, but holding on for the longer term will still see a positive accumulation of wealth for investors.

This is so without even taking into account regular investment or reinvestment of dividends yet. The above chart shows the delta between an investor reinvest his dividends (green) versus one who doesn’t (blue). Reinvested dividends forms a substantial role in making wealth grow. The S&P 500 index today is about 17.9 times the 1980 value. With reinvestment of dividends, the same dollar amount would have grown 52.9 times instead.

What we are trying to address is the panic selling which we are witnessing in the retail market and the other extreme, which is the Fear Of Missing Out (FOMO). Staying vested for the long-term, buying on dips and getting a discount on undervalued stocks and ignore the noise of the crowd — investing should be boring as per the rules of engagement for Investing, and only by it being so, can a long-term investor continue to stay on top.

Life and personal finance in their Essence

Life, indeed, is short. 83.2 years — this is how long the average Singaporean expect to be on Earth, for year 2018.

83.2 years to leave a legacy, 65 years till retirement, 20 years to reach early adulthood, 12 years to end off the fun of a childhood. We don’t actually realise how short life is, till we take the time to map out each stage of life.

The phrase “it is never too late to try” is half a lie — it is not impossible but highly risky as well. Once you have passed a certain stage of life, you have “lost” the lower cost of opportunity to have done it in your younger days instead. Yes, there are people who have made it latter it life, but these are the exception rather than the norm.

A mid-life person with a family and commitments is not going to job-hob or pursue his passion without a care in the world as he could have done in his early adulthood. A person far into his mature adulthood isn’t going to take on risks to be an entrepreneur and spin off a business with his wealth built up over the years. There is just too much at stake and possible to lose.

Stage I: MIMICRY (Play, Imitation and Education)
Birth – Infancy – Childhood – Adolescence

Prebirth: Potential
Birth: Hope
Infancy (Ages 0-3): Vitality
Early Childhood (Ages 3-6): Playfulness
Middle Childhood (Ages 6-8): Imagination
Late Childhood (Ages 9-11): Ingenuity
Adolescence (Ages 12-17): Passion

Stage II: SELF-DISCOVERY (Enterprise & Adventurousness)
Adolescence – Early Adulthood – Adulthood

Adolescence (Ages 18-20): Passion
Early Adulthood (Ages 20-35): Enterprise

Stage III: COMMITMENT (Dedication, Contemplation & Benevolence)
Adulthood – Midlife – Mature Adulthood

Midlife (Ages 35-50): Contemplation
Mature Adulthood (Ages 50-65): Benevolence

Stage IV: LEGACY (Retirement, Wisdom & Renunciation)
Late Adulthood – Death

Mature Adulthood (Ages 65-80): Benevolence
Late Adulthood (Age 80+): Wisdom
Death & Dying: Life

People generally love facts, figures, evidence and proof to get themselves “woke”, sit up and pay more attention to their lives. Under normal circumstances, it is Business As Usual (BAU) as we all go about our daily lives, most of the time not having second thoughts on events that are daily repetitions. I daresay that people normally think harder and take action only when they face the slumps in their lives or a significant life event, e.g. loss of family member, business failure, brink of bankruptcy etc.

What we learnt from school in our early days are highly applicable to our lives today as well. We learn to work with the end in mind for projects. We work backwards to find out the key requirements or initial outlay required. Why do we not apply that to our own financial matters throughout the course of our lives as well?

The whole purpose of a lifespan is to live it out meaningfully. And for it to be meaningful, you have to have the resources or capability to make it meaningful. Working backwards from age 83 to 65, we have about a good 20 years of silver years to enjoy. Probably more, if you are in the pink of health.

Stage IV is the stage of life where you should (preferably) not be spent still working but enjoying the fruits of your hard labour in your younger days. You would be living on your pension or annuity payouts, dividends, drawing down from your savings, and lastly from your investment. Roughly in that order. Some people may live off on less e.g. 70% of what they live on when working, or even more e.g. going on well-deserved vacation trips, YOLO-ing at the right time etc. The question really mains that are you really Poor, or not?As a general observation, you might have worked out some sort of legacy as well, perhaps to the deserving next generation or giving back to society of your choice. I personally have some forward thinking plans as well when I will my assets, share and share alike.

Stage III is probably the most crucial part of our lives. This period of life is probably when we earn the most (maturity in career advancement) but also spend the most (family and housing commitment, taking care of aged parents). Most people who were less matured in their thinking or played around in their younger days would have woken up in this phase. And by being “woke” is to account for and take control of every dollar flow for their Monthly Salary

Stage II is the reflection of the beauty of youth and the spirit of the ability to take on higher risks. Career exploration, stepping out on your own footing as an entrepreneur or starting your own business — this is where we are the strongest in taking on setbacks and failures and bouncing back from them. Time when used wisely during this stage, will build a strong foundation for the latter half of life. Waste it, and suffer the consequences through no fault of others.

This stage in life is also many times underlooked. Phrases in life like “YOLO whilst you are young”, “there is always tomorrow”, “you are only young once” do little but sink a person deeper into complacency in life.

Stage I is the stage which I feel is most undermined by people. Age, as I have experienced, is only a number. It not only applies for the older folks, but also for the younger ones. I guess that there probably should be a balance between leveling up their understanding of the world quicker but at the same time have a regular and fun-filled childhood. However, this is also the best time in a person’s life to inculcate good habits and also to leverage on this usually overlooked period timeframe for the additional boost in savings and investment via workings of compounded interest or returns. As a guardian and caretaker, your child should really invest early in life.

By breaking life down into stages and working backwards, we find that time is finite. Even as I think deeper about it and write this, time is still ticking by. Let’s not waste life as it is. Have you went through this thought process yourself or with your family?

Looking at the past, planning for the future

CPF remains as one of my several retirement tools that I am closely watching and building up towards my retirement planning 30 years from now — a move that I am confident in not fallling between the cracks during my retirement.

Mr Loo’s concept of 4M65 or 4 Million dollars accumulated as a couple at age 65 is a very interesting proposition, which he will illustrate in his subsequent articles. At $2M per individual, an average but comfortable retirement lifestyle is still possible even if you take into account inflation — you wouldn’t be living in pure luxury, but you wouldn’t starve either. Of course in today’s dollar value is 4M65, we can ignore the argument on the numbers and future value of money, but agree on the concept. I will probably have a go at mapping out my child’s journey, who has a longer timeframe from birth.

Moreover, this $2M is just like I mention, just one of the retirement tools. We have not included other sources of retirement funds to draw down from e.g. equities, annuities.

Honestly speaking, I had not taken an interest to my CPF ever since I started working in 2011 all the way to 2016. Like taxes by IRAS, I took it very harshly as a tax by the government on my monthly income. It’s working is transparent to me as I can only “see” take-home pay as money I could spend.

2 scenarios close to my heart that I was glad such a source of funds was available at the right time. I wasn’t from a well-to-do family. An overseas education was definitely out of the books without a scholarship. My dad had worked hard all his life as a lone working parent to raise both my brother and I up, with my mum as a housemaker. CPF funds came in handy as I managed to graduate with a degree with a $26K CPF education loan.

For my first house at 32, I realised that I had the dreams but not the means to pay. Being able to foot the monthly installments wasn’t enough. You had to have the dough to foot the downpayment. There goes $117,374.44 (including housing grants) from my own Ordinary Account. That explains the large drop in CPF balances from 2016 – 2017.

I realised that money is important as a means to the end. And there are many paths to it. The main obstacle for many folks is to get started or initiating the first step. You would be surprised on the inertial to get people to actually open a brokerage account, or to spend some time reading up on investment, or to communicate and be open about conversations on finance.

So every year on the 31 Dec, CPF will prepare to send out the Yearly Statement Of Account (YSOA), something that I do not spend more than 30 sec for about 8 years of my life. Taking a closer look, the yearly contributions, whether it is employer/employee or my voluntary contribution or even the interests earned, it is and could be a substantial part of your wealth building.

Currently, my SA balance currently stands at $98,250.04, slightly more than half of 2020 FRS or 54.3% of the journey as per my CPF Balances Update – February 2020. Just a quick calculation from the employment contributions and interests earned, it is very likely that I will reach Full Retirement Sum (FRS) within the next 2 years when I am 36 years of age. I could then let the SA continue to roll, while I channel my efforts to grow my OA past the current 2.5% yield.

The main idea is to take plentiful of small, manageable steps in making a positive change for the future. I have also crafted my own Personal Finance Journey by taking into account my past experience. Now that I have looked back on the past, I have no qualms on taking much larger, more decisive steps for the future for both myself and my family.

CPF Balances Update – February 2020

It is the end of February with all mandatory contributions and cash top up in for the month.

OA to SA transfer for the month of February is also completed. SA balance currently stands at $98,250.04, slightly more than half of 2020 FRS or 54.3% of the journey.

There’s a slight change in strategy from February onwards. The COVID-19 has brought with it market opportunities with the dips it presents. As such, I have transferred all but an amount left in the OA to go towards the monthly housing loan. The cash at hand is channeled from payment of monthly housing loan towards the equities market.

I continue to top up my child’s SA for $200 monthly. SA balance currently stands at $903.75.

Inflation can only be beaten by Investing

Cash, savings account, government bonds and low interest-bearing time deposit account are not exactly good storage of value. In fact, these instruments are a sure way of losing your monetary or purchasing power over time. Inflation in essence is the cause — pure economists will relate it to the interaction of demand and supply factors in the economy to form what we know as price.

Every single one of us are affected by inflation, and first hand experience as a consumer. Why my daily coffee has risen 20 cents? A bowl of noodles now is 30 cents more expensive as compared to last year! And many more examples.

Any idea of the annual inflation rate in Singapore?

2%? 3%? For the past 5 years, annual inflation rate had been at 0.44% (2018), 0.58% (2017), -0.53% (2016), – 0.52% (2016) and 1.03% (2014). Surprised? Some would spend 5 sec to think about it: inflation is that low? Definitely manageable with the way I am managing my money now!

If we look further back, things were not always so rosy. Inflation rates were 4.58% (2012), 5.25% (2011) and 6.63% (2008) for instance. From a long-term overview, inflation rate is about 1.5% to 2.0% annually on average.

Why do we need inflation? Couldn’t the Central Body or government intervene to keep inflation as close to zero as possible? Low and stable inflation is thought to be essential for steady and sustainable economic growth year after year. High inflation is definitely not desirable; deflation is equally harmful, which we would then appreciate the logic for low inflation.

Deflation is a widespread, broad-based and sustained decline in prices for all, goods and services in the economy. This generally also means that companies and employers have less capability to pay out the same rate to employees due to decline in business and profits relating to price, which in turns leads to depressed wages and lower purchasing power for consumers.

So let’s not get too happy yet. 2% while low is still significant over the run long. At 2% inflation rate, $1 is worth $0.67 today, essentially losing 33% of its worth. You would require $1.49 for the same $1 purchasing power in 20 years time.

$1 today is worth
in X years
10 years20 years30 years
1% annual$0.91$0.82$0.74
2% annual inflation$0.82$0.67$0.55
3% annual inflation$0.74$0.55$0.41
How $1 today is worth in X number of years

To have the same $1
worth today in X years
10 years20 years30 years
1% annual$1.10$1.22$1.35
2% annual inflation$1.22$1.49$1.81
3% annual inflation$1.34$1.81$2.43
How much you need to have to have the $1 purchasing power in X number of years

In short, the longer the period of time and higher the inflation rate will ‘eat up’ the value of your money more. It is quite straightforward to see that having an savings rate return or investment return of 2% only serves to preserve your wealth. Essentially, you need to substantially aim for a return much greater than 2% to actually grow wealth.

This is not to denounce cash instruments such as savings account, government bonds and time deposits as non-practical. They are an essential part of your portfolio, both for it maintaining relatively high liquidity as well as a smaller role in preserving your wealth in a relatively risk-free manner.

Instead of falling back on lamenting about societal circumstances, economic conditions, blaming the government etc, inflation is not something which cannot be beaten as long as you start taking an increased interest in investing. Honestly, I doubt people would actually take on additional jobs for more income to ‘beat inflation’. In fact, it doesn’t actually beat inflation; your monetary value is still being eroded over time. By far, investing is the only way to beat inflation.

Investing in equities or good dividend-paying stocks over a long period is one of the many ways to stay ahead of inflation. Dividends tend to keep up with inflation as they are tangible returns paid out by companies. The less investment savvy investors could turn to index funds or even robo-advisors to avoid the stress of stock-picking the right ones.

How is your own investment portfolio keeping up with inflation?