Starting a CPF 101 guide

I have added in a CPF 101 page today. Generally, having a 101 means that beginners new to the CPF can get up to speed on current CPF policies. The 101 guide aims to keep it simple and logical, illustrating all the basic principles and concepts.

Currently, it only covers the Introduction and Retirement scheme. I hope to cover also the Housing scheme, Healthcare scheme, Education scheme, Investment scheme in the near future. Though by covering all, it might be as thick as a book.

By making it clear on 1 site, it should allow you to understand without the need to flip back and forth pages on Q&As at the current CPF website or hunt for answers in other blogs.

Do let me know if there errors or feedback to the CPF 101 guide. It shall constantly be approved over time for clarity and accuracy.

Advertisements

Round-up for Oct 19

I started writing just days prior to the start of October, sharing my thoughts and sentiments towards the savings and investment journey of both myself and my child. While capturing the simplest details in life, it also allowed me an avenue to to delve deeper in my thinking and go beyond the surface on some issues.

Some of my readers might have resonate with what I think, others I may have left them to ponder even more after stumbling upon my thoughts. As I write, we learn even more together as a community. Rather than what is in it for you (as a reader), I hope that I have indulged in encouraging you think more on the same topics which you might have easily brushed past before. Me too, am not perfect, and I am open to learning from the very same community on whether things which I perceived to be the way is actually correct.

Let me learn from you, as much as you might learn from me. A quick round-up for October 2019.

Top 10 reads for October 2019

CPF SA Shielding before RA is formed at age 55 – 17,925 views
Take control of every dollar flow for your Monthly Salary – 2452 views
Your child should invest early in life – 1149 views
Do not be confused by foreign exchange rates! – 976 views
Why I refuse to fall between the cracks during my retirement – 968 views
Why I stress that working Singaporeans should maximise their tax reliefs – 901 views
How far have Singaporeans progressed with hacking their CPF SA/RA and SRS? – 798 views
Investing in UOB Gold – 755 views
Understanding why premiums differ for different insurance types – 684 views
Compounding Interest and Rule of 72 – 680 views

The Stock Market works by Day, but loves the Night

I am a long-term investor. While I enjoy looking at market prices, I do not however monitor price movement day in, day out. Usually, I would only check once for the day, on the market open versus previous day close. Unless you are trading, not investing.

As I mentioned early, Time in the Market versus timing the market. On a daily top-bottom fluctuation, would the range so significant that you have to persist in catching the “lowest price” possible for the day?

The Stock Market Works by Day, but It Loves the Night

Why is the Market Open important for me?

Price movement of the market is dependent on information absorbed, underlying assessment and subsequent actions taken by people. Prior to the market open, information from both overnight and international markets is weighed in and acted upon by traders/institutions. Traders calculate how intake of new information will affect the first few minutes of trading. Investors place pre-market open orders with their brokers after reading the news. Hedge/mutual fund traders may either be actively involved or sitting on the sidelines.

The market open is hence my first chance of getting a clue as to what the market thinks for the day. While it does not determine market direction (up or down), it helps me determine if the market is likely to be trending, ranging , volatile or sedate over the course of the session.

Opening Volume

Opening volume is generally only rivaled by closing volume – both being comparatively higher as compared to the rest of the day. Therefore, opening volume must be compared against other opening volumes for insights (rather than intra-day volumes).

High volume generally infers increased volatility and greater (likely) price movements. It may also indicate the involvement of institutions, thus higher probability of daily sustainable trends.

Low volume generally indicates involvement of primarily short-term traders, thus higher probability of a ranging day.

Trade Sizes

Size of the trades is also an important consideration for further insight. When volume is filtered by size, while small orders may make up most of the trades, large orders on the other hand account for most of the overall volume. Trending occurs if large orders manage to sustain themselves in a particular direction.

Large orders may happen on both sides of the market – this indicates short-term range bound. We can sure however as one side is conquered by the other, a trending move will occur. Minimal large orders may indicate more ranging movements instead.

Day-to-day gaps and International Markets

I personally note how far market open prices have moved from previous close on news or correlations with other markets. Aggressive moves in correlated markets may provide insight into possible market movements when it opens.

For example, did these correlated markets experienced severe declines or breakouts? Did oil, gold, silver, bonds and even currencies have unexpected movements? The market pricing will adjust according to their correlation with these markets. Little overnight action in other markets may indicate passivity and likely to be range-bound unless some drastic information feeds in during the day.

Conclusion

The first few moments of market open provide a lot of information and when collated, it help us to determine what type of market day it is likely to be. How do you invest differently from me?

And a Latte to go

A Latte, though, has got to be Starbucks.

I like to pair my a la carte Big Mac with a Latte – only when there is a 1-for-1 offer at Starbucks.

Just the day before, i used the Big Mac Index to gauge if foreign currencies are under- or over- valued relative to our local currencies. It seems that not just Big Mac, but several other everyday products can provide a good gauge as well on the ‘fair value’ of an exchange rate.

Indexes using Standard Products include

Starbucks Latte Index
MacDonald’s Big Mac Index
Domino’s Medium Pepperoni Pizza Index
Nobu Black Cod with Miso Index
Nespresso (capsule) Index
IKEA’s Billy (bookshelf) Index

The Starbucks “Latte Index” was created by the Wall Street Journal in 2013, which now tracks the price of a Starbucks Grande Latte in 76 major cities around the world.

Singapore is proudly in the Top 10 most expensive Starbucks Latte at about $6.13 (converted from USD).

Looks like it would be financially prudent to drink Starbucks anywhere else other than Singapore (and 7 other countries).

While many readers will find it an “economic pain” trying to appreciate burgernomics (Big Mac Index) and lattenomics (Starbucks Index), it is still a more fun way to get your hands dirty outside theory in understanding exchange rates practically. A lighthearted note: Both are still flawed, in terms of measures of Purchasing Power Parity (PPP) between countries. They are distorted by differences in the cost of non-tradables such as costs of raw materials, labor, production, advertising, taxes etc.  

How often do you grab a cup of Latte?

One Big Mac, please

I have discussed the pros of capitalising undervalued foreign currencies by travel to another lower costs city/country via Quasi Geoarbitrage and buying more foreign currencies by taking advantage of foreign currencies drops.

However, how would we know if the foreign currencies are under- or over- valued relative to our local currencies?

The Big Mac Index was created by The Economist in 1986 to measure Purchasing Power Parity (PPP) between countries.

In the long run, exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services in any two countries.

The burger here replaces the “basket of goods” traditionally used to measure differences in consumer pricing.

Many economists say it is roughly accurate.

I have been eating Big Mac burgers for as long as I could remember. From as low as $3.20 back in year 2000, the same burger (with the same ingredients and taste) now cost $5.80. An 81% increment over 20 years or annualised inflation rate of 3.02%.

Singapore is always trying to fight for the top positions in the world. It is of no surprise that we have steadily moved up the ranks to become ranked 12th for the most expensive Big Mac in the world. Ouch, next!

Switzerland and Norway have consistently been producing the most expensive Big Macs for the past 10 years. I was in Switzerland earlier this year, and I can assure you I ate a Hamburger meal instead – it was equally satisfying on my stomach and wallet.

According to PPP theory, any changes in exchange rates between countries shall eventually be reflected in a change in the price of a basket of goods over time. Yet a basket of goods in one country can rarely be precisely duplicated in another. For example, an Canadian versus Korean basket of groceries are likely to contain very different products.

A Big Mac, though, is always a Big Mac.

Now here is the fun part. Investors can use the Big Mac Index to determine if a currency is overvalued or undervalued relative to others and trade based on that data in foreign exchange market. Similarly, changes in values over time could be used to determine inflation rates and compare against official records. 3.02% inflation rate, anyone?

The Big Mac Index is not a perfect instrument. As of mid-2019, out of 195 countries, McDonald’s has outlets in only 119. Thus, the methodology cannot analyze PPP between the Singapore dollars against Icelandic krona or Bolivian boliviano, among others.

Nevertheless, it may be a fairly accurate real-world indicator of economics and purchasing power, since the pricing of a Big Mac must take into account local costs of raw materials, labor, production, advertising, taxes etc. But investors should remember that there are some important exceptions to the rule.

So I crunched some data based on Big Mac local pricing, the Big Mac exchange rate versus Singapore for each country and the foreign exchange rate versus Singapore dollars.

The higher the percentages, the more undervalued is the foreign currencies relative to Singapore. This is also indicative of which countries are more worth of travelling should we want to leverage on Singapore dollars strong currency.

Based on the Big Mac Index, the Malaysian ringgit was undervalued by 49.90% against the Singapore dollar in July 2019.

The Big Mac Index has become a global standard for price comparison. One can use it to track local purchasing power internationally. For example the same Big Mac while being super expensive in Switzerland, is frightfully cheaper in Russia.

As for me, I will grab my Big Mac any time when I hope over to Johor Bahru, Malaysia. Are you convinced?