I went to lunch with my colleague Bryan on Friday, and we had this discussion on investment outcome.

Bryan did some reflecting and realize how little assurance we can get about our investment returns: You will only know your compounded rate of return earned when you are near the end of your time horizon, looking backward.

I do see signs of a good wealth builder in Bryan. To be good, you need to prioritize your time, and spending enough time reflecting on the investing knowledge you read and distill them, then make use of them. Reflecting on what he has learned is a right step forward.

Bryan’s conclusion, however, is the unfortunate truth that each of us face.

You May Not Get the Return You Envisioned In the End

At the start of your time horizon, you need to plan for how much you need to get to where you want to at the time you wish.

In short: How much $X you need so that you can fund something in Y years.

To figure out $X, you will need to use some compounded growth rate. The compounded growth rate is usually based on historical returns.

You read some books like Random Walk Down Wall Street, Stocks for the Long Run, 4 Pillars of Investing (all are pretty good books to start).

The historical rate of return of a balanced portfolio lies between 7 to 9% a year. You then decide to be conservative and use 5% a year in your projection.

There is a problem here:

Past performance may rhyme across various rolling periods, but they do not always turn out the same way.

For example, over a 30 years period, if you get a 4% a year return versus the 5% a year return, it does not look very far off. For most people, they will still be satisfied since 4% is close to 5%.

However, in terms of magnitude, over 30 years, if you contribute $12,000 a year, at 4% compounded return, you will get $673,000. If it’s 5%, you will get $797,000.

The difference is $124,000 or 15.6% difference.

The difference is small when the years are short but with longer duration the difference is big. As you contribute more money, the difference in the absolute amount of wealth is also bigger.

Now, when you plan with 5% a year return, and you definitely need $797,000 at the end of 30 years, you have a $124,000 shortfall.

You have a shortfall and you need to do something about (like makeup for it from another source)

This is an uncomfortable aspect of investing. We live with markets that are part deterministic part random in my opinion.

If You DIY Invest, You have Another Layer of Uncertainty

If you are investing by yourself, by doing it yourself, you have one additional problem:

How do you know your active stock investing, forex, futures and options trading, property speculating skills will eventually give you the projected returns you read in books?

The investing world is brutal in that even if you are a CFA, you are an analyst, you study finance in school, you are brilliant, you are a lawyer or doctor, you have a lot of wealth, you are a businessman, you may not eventually get to where the books tell you.

If I remember correctly, Professor Merton said that to truly assess whether a manager has an investing edge, and no luck, we require to assess a period of at least 20 years.

This means that we won’t know if we can gain real skill over our investing period or we are just lucky until we are near the midpoint or the end of the time horizon.

The opportunity cost if you don’t earn that rate of return over the time frame is big. We don’t have so many 20 year periods.  

A lot of wealth builders wake up one day 5 years later and realize their portfolio earned a compounded return of 0.40% a year when the general market earned 5% a year.

In the next 5 years, their portfolio would have to earn 20% a year to make up for the early 5-year poor performance. (but you have to take a lot more risks, and how many managers of funds out there use that kind of projected returns?)

How about Picking Good Funds?

The alternative of not doing it yourself is to invest in a reputed active manager upon the suggestion of your friends, investment adviser, financial planner.

Out of all the funds, a small number of them were able to outperform their benchmark. A large number of the funds may not last 20-30 years (we call this survivorship bias). Only a small handful of funds that were top in the last 5 years remain top in the next 5.

Even if they outperform the benchmark, you have no idea if you lived through a great period or a poor period. We also do not have much choices.

In short:

1. We live through one period. This period can be good, it can be not good, it can be mediocre. There is nothing much we can do about it. And this impacts our rate of return.
2. We will only know if we are skillful in our active investing or whether we picked a great fund at the end of the period. By then there are a lot of opportunity cost lost. And you need to make up for it.

So how should we handle this?

Some Possible Ways to Think About.

I do not have the perfect solutions but here are a few areas to think about:

1. The mindset that you should have is the world going forward is unknown. We can use a conservative reasonable return in our planning. If the returns eventually fall short, your eventual plan is going to be less affected. If things turned out very well, you will reach your goals earlier
2. Be prepared that your wealth value in the future is going to be very different from what your adviser, investment manager, or what you projected. Do not go around accusing people that “you promised this rate of return that time!” Not many people could unless there is a contractual guarantee and the firm does not default on it.
3. Do the legwork upfront. Find out the investment strategies that have given a lot of people positive return expectations AND it is implementable.
4. Do the investing work. Give yourself a period to see if it works out. Perhaps 3 to 5 years. Then make sure you put effort into it. After that, if it does not work out, either tweak one last time or fall back to the fallback plan
5. #4 may not work out. At the same time, you got to have a de facto wealth-building standard. For some it is properties for some it is a portfolio of funds. For some reason, I realize when your net worth gets to a certain level, they put a lot of their net wealth in funds. Some of these funds are sound some of them are not sound. You can get people to help you to invest, but you best be at least sophisticated to be able to separate the sound ones from the unsound ones.

In all the advice, there is a sense of uncertainty whether you are going to get X% in Y years. And that is how it should be.

A lot of the times it is doing the right things, focus on the process and try to get better. Hopefully along the way even if you fall short, that short would still be immensely useful.

Lastly, if we think from the financial planning perspective, there are definite things that gives a high return on investments and within your control:

1. Be flexible on your income expectations
2. Put away money consistently into your portfolio
3. Choose to delay when you need the money
4. Optimize your expenses
5. Curate your philosophy to spending & retirement

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

I still have some work to do over the weekends so its no stock analysis, less reading, all work.

Meantime, I came across some stuff that you might find interesting. Something on FIRE, something on media coverage, a little on the HENRYs and my thoughts on annuities.

My Thoughts on Annuities

In my last Sunday article, I profiled how an insurance adviser manages the potentially volatile nature of his income.

He has a question for me that I forgot to address and so I do owe him an answer.

Basically, what do I think about annuities?

It is a weird question but this question can be about what I think about it as a wealth accumulation tool and what I think about it as part of retirement spending. I think my friend is more interested in my opinion about it as a retirement tool.

As an accumulation tool, annuities are likely to be underpowered. They should return you 2.5% a year to 4% a year. If you take on leverage, you would boost your IRR to above 4%.

You do take on more risk when you take on leverage. Interest rate movement can be 50% up and down within a short time.

As a retirement spending tool, they look appealing. Guaranteed income + non-guaranteed income. Those that are close to being retired like them a lot because they promised passive income payouts.

As I have explained in this Providend Passive Income article, what matters is the total return when we are in the accumulation phase and it is as important in the de-accumulation phase.

When a person buys an annuity, it is a vote that

1. I wish to have passive income
2. I am not good at having a systematic way of varying my spending up and down. I prefer for someone to tell me how much to spend on

The greatest benefit to those retiring is that they transferred the investment to the insurance company. They have also transferred the cash flow management to the insurance company.

There is a cost to this. The cost to this should be lower returns.

If this is the case, it makes these cash value endowments and whole life to be poorer wealth accumulation tools. But if you are really bad with money, you can consider getting them. But at the end of the day, you cannot run away from some financial planning problems such as how much can I safely spend.

If you have 10 streams of income, and you do not know how to spend without exhausting your capital, having 10 streams of income is less useful.

Another drawback is… I think the payouts are not inflation adjusting. Thus annuities can be used to address your core/survival expenses. But they cannot take care of the inflation adjustment of your core/survival expenses.

Start Your Financial Planning at 40 and Forget about F.I.R.E

Alvin Teo wrote this pretty popular article over at the Astute Parent. The basic premise is that life is pretty volatile before the age of 40.

The advice is that realistically, you can only start planning your retirement after 40.

FIRE is difficult because

1. You need a high income
2. You need low expenses. But this is difficult to achieve
   1. Cars are a necessity and expensive

Alvin is a financial planner so what he said should hold some weight.

The 25 to 40 period is said to be the most volatile because you are in your career building phase. Your income has not reached a level where your family feels comfortable with. You have 2 young children and logistically you will need a car.

I think it is not because your cash flow is volatile.

The right word will be that your expenses keep climbing and you could not have a high savings rate. A high savings rate is a very, very important part of accumulating money fast for financial independence or other goals.

So he is not too wrong there.

But I got some push back.

No one said that if you do not retire by 40-year-old, you are severely missing out.

It seems that his brain is fixated on this 40-year anchor or someone imprinted that in his head.

Alvin cited Pete Adeney as one of the pioneers in this movement. One reason that he could reach his magical number at age 30 is because they are working in software engineering. They earn a good salary and thus they have a leg up.

If you read through Pete’s route to accumulating his US$600,000, you will realize that while he earns above average, relatively speaking, it is not out of this world kind of salary.

His first salary is US$41,000 a year. I am not sure if this is out of this world high. It probably was higher than average in 1997. In today’s dollars, this is US$71,000 a year.

What was a success for them was:

1. Their magical number is measurably smaller
2. They control their spending
3. They control their family dynamics
4. They well optimized their slightly above middle-income salary

Having a high salary helps speed up accumulation and improves planning a lot but overly focus on the high income dissuades people who fit these criteria from achieving something that is useful.

The 40s and 50s Can be More Volatile

So here is more likely his plan. Manage your expenses before 40 by getting your home infrastructure in place. This means get married, renovate your home, budget for both your children, pay off your mortgage.

By the start of your 40s, you should have a much more comfortable financial situation:

1. should understand your family budget better
2. have less big-ticket / lump sum expenses that you would need to pay for
3. if you have done correctly, you may have de-leverage your home mortgage loan

The problem that we may face is that the 40s and 50s may not be less volatile.

We can roughly map the milestones

1. 30s: Child-bearing, wedding, buy-house
2. 40s – 50s: Kids tuition, Children tertiary education, taking care of parents
3. 60s: Retirement spending

Many of us feel the expenses never go down. It just keeps going up. And so the salary would have to keep up.

An emerging problem is that the 40s and 50s is just as challenging

1. Mid-life crisis & depression
2. Your job hits terminal salary growth faster than you imagine
3. Retrenchment and having to re-climb the ladder again
4. Taking care of parents, losing your parents

Now, imagine being middle income and having limited resources, facing the above. Not less volatile isn’t it.

In fact, you may not be more employable.

We end up funding our lifestyle to just be in time for when our salary is more volatile. (Unless you believe the old corporate ladder system still existing)

The point is that 40s and 50s are not less challenging than the 20s and 30s.

Everyone’s Situation is Different

When you write for the masses, you have to use a very average person as an example. However, there are some of you who would really do better doing what Pete Adeney did.

Your spouse and yourself earn $160,000 a year that in 5 years you could amass $500,000. A $500,000 wealth at age 33 would be able to grow on its own over time if it is deployed well. You worry less about uncertain future career in the 40s and 50s by pre-funding it now.

And since you could maintain a frugal nature, it is likely your family can use 1 year of savings for wedding, renovation, and furnishing.

Funding goals need not be spreading your money out evenly over time.

You can choose not to fund retirement first. First-year save up $92,000. That is equivalent to your 2 children’s local degree in today’s dollars. You could put this $92,000 in a balanced portfolio and let it grow over time.

Then next year, commit that $92,000 to something else.

Higher than average salary, with knowledge, plus intentional living is what pursuing Financial independence is really about.

You can choose not to pursue it and go with a traditional route. But some of you would have missed out on some great life opportunity costs.

The Surprising Part of the Eagle Hospitality Trust Coverage

Recently, in the financial space, what is on people’s minds is the Eagle Hospitality Trust saga. A seemingly not very popular REIT became one of the most scrutinized REIT in a few short weeks.

Enough bloggers write about it because we crave for eyeballs and ad dollars but also… because perhaps this is a genuinely good buying opportunity.

When a stock goes down with poor news, either they have long term fixable issues, or that there is a change in fundamentals. The former would mean this is a good buying opportunity, and we might want to stay away if it is the latter.

However, I would like to comment on a certain aspect of this EHT narrative.

We realized that established news sources such as SPH have deeply researched company pieces. The same journalist who wrote a deeply investigative piece about Best World also wrote about Eagle Hospitality Trust.

Deep scuttlebutt is not something that journalist cannot do. Even the average joe can do it if they put their minds and deductive minds to it. I have seen conscientious average retail investors try their best to do it. If you are willing to dig, you are able to find things.

I do think that if you write as a job, there are just so many things to do. So much so that I wonder if someone is providing journalists with areas to look into. I grew to empathize with analysts when people say some of their reports do not value add. I want to see you put your heart and soul into writing when you have to cover so many companies.

Would the people providing these sources have some agendas?

Let us pay attention to whether there are deeply researched articles without the crisis elements in SPH Business Times next time.

The HENRYS – Huge Opportunities that can be Lost Easily

HENRY is short for High Earners Not Rich Yet.

There is this site called HNWORTH with a rather well-researched article on it. I appreciate him trying to do the research work.

This is a group that is likely earning between $250,000 to $500,000 a year. It is probably the dream of all financial advisers to make up the majority of their client base with clients of this stature.

The take-away that I get from the article is that the gap between this group and those above them, versus the rest are getting wider. Their income and wealth are growing versus other groups which are struggling.

Not just that, the data seem to give me an impression that

1. deposits and cash have growth a lot
2. private property have grown a lot
3. CPF has grown a lot

The rest have not grown as fast.

There seemed to be a pent up demand for private properties, as if, there is not enough residential private properties around for investments.

I have sort of form this view about a segment such as this. The typical higher decile Singaporean household would spend between $4000 a month to $9000 a month. Those on the high side would spend between $7000 a month to $12,000 a month. This depends on how frugal or spendthrift they are.

What this means is that it is likely they will have a high savings rate (about 40-70%), to channel into saving and investments. So there is much pent up money waiting to be invested.

The main instrument would be private properties. With the ABSD, psychologically this might deter some of them from buying another one. Other good investments for the HENRYs would be what is provided by the private bankers.

The HENRYs are in a position where a lot of people wishes to manage their money and eventually, they might end up with an assortment of financial assets that they forget the initial reasons for buying them (if there is any)

They have great opportunities, but they may easily lose all these opportunities as well if they are not careful.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

The last time all these value factors didn’t work so well, for such a long time is in the 1920s.

That is a long time.

Our brains would probably reason that there are similarities today to the time back then. When there are periods of extreme financial upheavals, the value factor does not seem to work so well. (When we say extreme it is this kind of financial meltdown, not your typical 20-30% market drawdowns)

Looking back, the value factors came back. As an investor having a 30 years horizon, you would have enough time to benefit from it.

There is also another dislocation.

The investors living through these past 10 years will form the opinion that the only place to be is in United States stocks. And they are not wrong.

Their experience with the market is that U.S Stocks Trounced all others (that is not true. There are more obscure markets that did better).

Albert Bridge Capital did some data crunching and present some insightful data.

They are based in Europe and thus, they are more concerned about the market performance in Europe versus other markets.

For 3 decades, the performance of MSCI Europe has matched the S&P 500. Europe did better in the first and third decade. United States better in the second.

If you are a wealth builder, I would say that if you have $50,000 on 31st Dec 1979, and you add $3,000 a year for the past 30 years, you would have amassed $652,528 at the end of this 30 years.

But after 2009, everything changed.

We can observe the difference in the last decade. United States did better.

My friend Mr 15 Hour Work Week said something along the lines that Europe and Hong Kong is Trash. I guess it is ridiculous to invest in them.

Sometimes I do not know.

Most folks expect that if these markets are so visibly poor, then it should mean they perform very poorly. Most folks are also heavily influenced by what is happening recently.

They have this idea that these correlations between asset classes, geographical markets that they just experienced will stay consistent throughout.

It is only older farts like ourselves that see the period where the United States were doing not too badly yet the markets were not performing well (refer to the second decade in the chart above)

My Judgement was Also Clouded

We recently have to help one of our advisers do up a growth of wealth comparison. Basically, we want to compare how much $1 invested in different indexes will be at the end of a certain time period.

In SGD.

Both my solutions head and myself have this mindset that the S&P 500 will do the best.

We were not wrong.

From 2010 to 2019 1 or 2 months ago there was this tremendous outperformance. And for those who are saying Singapore market is shit, you are not wrong as well.

I choose to see that for our Providend clients who invested in the Dimensional World Equity Fund, their money would double in Singapore dollars.

But let us factor in 10 years before, from 1999 to 2019, and see how is the result:

The MSCI Singapore and DFA World Equity Index proxy in SGD, absolutely killed the S&P 500.

My boss and I originally think this is because of the strong SGD. We shifted it back to USD. Still the same. It is not a currency thing.

Nothing is Set in Stone

Will Europe or Value factors go back to “the balance”?

I am not sure. I guess that is my posture in all this. I am currently an individual stock investor. As an individual stock investor, whether which market outperform or underperform, you can have a game plan to do relatively well.

If you are not good, you get smashed pretty badly.

If you are a passive wealth builder, this might matter to you more.

And my answer to this is, I do not know.

If you lean towards an opinion that despite what Kyith presented, I still think there is no way the United States and growth would do worse than any other markets than you should invest that way.

But if you are of the opinion that I do not know whether THIS TIME IT IS REALLY DIFFERENT, the better way is to hold a moderate portfolio that gives you exposure to all and let the market tell you.

This can be an MSCI World ETF, a low-cost global equity unit trust like the Dimensional World Equity or Dimensional Global Core fund and a global bond fund.

The takeaway I get from this is… man… we have really short term memory of things. But also the future is unknown. “the balance” in the past might not be “the balance” after factoring the future.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works