Investment Moats

The Illusion that Your Investment Strategy is Safe

by 2 Comments

In investing, things are most of the time not definite.

I make a very poor salesman because straight away, people can detect a lack of confidence. I would rather say, my face most of the time, show how uncomfortable I am with things.

That is why we have advisers because they don’t have this problem of mine. At work, I kept the deepest, darkest part of what I know about the markets and investing firewalled from them.

This is so that they can function. If you know too much, it affects your ability to push a good narrative.

My friends who teach investing courses, trading courses probably cannot share too many of these uncertainties. Placed enough uncertainties in a prospects head and they will not make a decision.

Outside of these two groups, I hear folks having high conviction in companies that will never die, strategies that will always work, REITs that will always be better.

Not sure if others feel the same way, but in the active investing world, seldom do you get a feeling an investment feels permanently safe.

In the past, I shared that you can build conviction in a stock, or a trend by digging deeper into the numbers and doing deeper qualitative analysis.

When I do more, I generally feel much more comfortable in putting money to work.

But I never had that “this will sure work” kind of feeling. The posture is always: “Think this is safe enough. Got enough margin of safety. Lets get invested. See how it goes.”

When prices starts to change, when events starts unfolding, it becomes: “Ok this is getting safe, let’s add more.”

Or “Shit man, this feels like a possible train wreck results coming up.”

I never felt things are definite. This is why I admire people who could have high conviction that

  1. Certain sect-oral trends would ALWAYS work
  2. This company will WILL survive
  3. This investing system WILL work

I dunno. Maybe I am a low confidence, risk adverse character by default.

I feel a lot of confidence people have is based on past history.

And today’s sharing might give a different perspective. We cover things passive investors, active investors and retirement planners can relate to.

The Limitations of Relying just on Numbers

The protagonist of this article (What I Learned From Losing $200 Million) eventually got a promotion and a great bonus. In the eyes of most people in the firm, he did so well and should be held up as a successful case study for others to follow.

I learn to have enough vulnerability to fully based investing decisions on my fundamental analysis after reading this article. Well, I had enough vulnerability before this, but this article really hits home the fact that if you do some really thorough work, if your framework has weaknesses, your investments will sometimes suffer from serious capital impairment.

Bob Henderson worked for a major investment bank during the 2008 financial crisis. He had a serious unrealized loss position to the tuned of $200 million at one point. In this article, Bob takes us through how he sees this deal. His firm largely viewed this deal as successful.

This is not a story of a trader that took a lot of risk and finally made a really bad trade that cost the firm. Bob describes their firms system as a collective effort. Bob was a physics trained PHD. He was hired for his skill in modelling.

By 2008, he has spent the past 10 years developing derivative and trading strategies. By and large most of the trades was successful. Bob thinks that his edge was not in predicting the future but simply for being careful and logical and systematic.

That sounds like what a lot of us want to think ourselves to be.

His models have worked for 10 years. This means that it has prevented large eventual trading losses. But 2008 was the first time he encountered the extreme tail end events.

His modelling is suppose to give the team a sensing of how much shit the open positions are subjected to.

His team’s models is mainly based on historical data. You can read the details of the trade from the article (it gives you a glimpse of why it is likely we may not be able to put out such trades by ourselves)

Bob would like us to think that his team’s models are very comprehensive. But that did not prevent his team from losing $20 million, then $30 million in 2 days. His model will show him that he is destined to lose even more money.

Until this point I’d managed the deal almost entirely on my own, making the decisions that led to where I … we … were now. But after a black cab ride from Heathrow to our Canary Wharf office, I got the guys off the trading floor and into a windowless conference room and confessed: I’d tried everything, but the deal was still hemorrhaging cash. Even worse, it was sprouting new and thorny risks outside my area of expertise. In any case, the world was changing so quickly that my area of expertise was fast becoming obsolete. I pleaded for everyone to pitch in. I said I was open to any ideas.

As I spoke, I noticed that one of the guys had tears welling up in his eyes. I paused for a second, stunned. Then my own eyes started to fill from a sudden wash of gratitude and relief that came, I think, from no longer being alone.

Basically, the math models stopped working in real world.

Historical Data Gives Us an Illusion of Control

Bob explains to us some of the frailties of using historical data.

I am trying to risk managed future situations with historical data. If the result shows that the probability of a high impact event is very, very low, I feel safe. If the maximum loss that I could suffer is still a manageable sum, I feel safe.

By doing this, I am expecting the future to be very similar to the past. In Bob’s case, 2008 presented real world events that is not contained in past data.

So what was once thought to be low impact, or very very low probability, became a reality and the models could not handled it.

Our models based on historical data makes us feel safe.

It gives us an illusion of control.

Bob thought he had good control for 10 years, until this one event showed him that maybe it is an illusion.

I understood immediately, having spent countless hours over many years struggling to extract probabilities and other forward-looking metrics from historical data.

The biggest challenge was always that the answers depended so much on which timeframe you focused on. The past month? Year? Five years? And if you want to use data to estimate the probability of a very rare event, then you need a lot of data—the more rare, the more data—which means taking data from further back in the past, and the further back you go, the less relevant it probably is.

But what’s the alternative to estimating probabilities? If we can’t say anything about what the probabilities are, then we really are forced to worry about the absolute worst possible scenario. A trader would never sell options or short stocks, since his losses could be infinite. People would avoid cars, planes, marriages … everything really, for fear of the worst possible result. We’d all be paralyzed.

This Explains why Most Money is in Fixed Deposits and Properties

For many of us, we want to ensure things are very very safe (to ourselves) before we can take the plunge.

One of the lesson I learn from this is that the future may rhyme like the past, but it is never the same.

And therefore you can never feel comfortable.

As investors, we try to search for the holy grail:

  1. A very decent positive expected return
  2. Low volatility in value of the portfolio
  3. Not too much effort to tend to this investment
  4. This investment do not cost us a lot
  5. Very safe. There is no blow up or not a scam

What if, it does not exist?

For a lot of people they just became paralyzed. They do not invest. They leave their money in what they considered as “very very safe and decent return places”.

These are the fixed deposits, and property. By what they know from the long history.

Guessing in a Forward Looking Uncertain World

Bob realized his models were not working. It is just telling him things will only get worse.

He needs to find another way to save himself (and the firm)

He gives us a hint that the answer lies in Bayesian Networks. Bayesian Networks tries to gain inference by looking at the probability of events depending on other events.

It feels to me like its a systematic guesswork.

At this point, I agree with that thesis.

I realized, what saved my wealth from numerous occasion of potential blow-ups was not just the fundamental analysis but making the kind of dependence guessing.

For example, competitors results are not looking so good (or looking very good). Given they are in the same industry, and what we know about the company’s potential, there is every chance this company will not do so well (or do better).

It is guessing after doing a lot of fundamental work.

Guessing has a Cost to It

The cost of guessing is that unless we are very sophisticated, we cannot always get it right.

To guess well, you got to be very in tuned with the company to make that guess. A lot of investors make guesses and say it doesn’t work. That is because they don’t really know that company (despite they claiming they “done the homework”. Basically not in depth enough)

If you know the health of a company, its earnings potential in the past, and learn about the industry, you could increase your probability of success in making a good guess.

For those who preached passive investing in a portfolio of low cost funds, they believe that even folks like myself cannot outguess the market well over time.

I generally think that way.

The cost is that if you missed the best 50 days in the market, your average compounded returns might go from 7-8% a year returns to negative a year.

The opposite is also true. If you missed the worst 50 days, your returns will look much better.

However, the key thing is… if you are truly risk adverse, missing out on the worst days increases the chances of you staying in investing for the long haul.

Passive investing in a way is betting that future looks pretty much like in the past.

Dealing with the Weakness of Using Historical Data in Retirement Planning

If you ask me what I will recommend for your wealth building or retirement, I would say a broadly diversified, low cost portfolio.

You can get cash flow from it for retirement or financial independence.

Then you will ask me how safe is this strategy?

Well, this post probably show you the weakness.

Many also asked me whether spending an initial 4% of your initial capital in retirement, then subsequently adjust that initial first year spending by inflation is a safe spending method.

Well, this post probably show you the weakness.

You will move on and try to find the next holy grail in investing or retirement.

You will probably not find it. And would find an active boutique fund, or a dividend income strategy that gives you that illusion they have more control over these uncertainty than my suggestion.

The reality is that… the future is uncertain:

  1. The banks where your fixed deposit are in, have every chance of blowing up
  2. Your property’s future growth rate might be very different from in the past, on a secular basis
  3. Your unit trust dividend income is based on the earnings and capital appreciation of the fund. If the performances lags, dividend income goes down. If you need $1000 a month in dividend income and the fund gives you exactly $1000 a month, and you cannot live on less, you are screwed

My counter to your question whether these are safe is… what is your alternative?

There are some safer alternative:

  1. Build a bond ladder of high quality bonds or a bond fund with high quality
  2. Use Inflation Protected Bonds
  3. Use a less than 2% initial withdrawal rate

All 3 have similarities. They are very safe, likely takes care of inflation, but also need a lot more money.

So the solution to a lot of problems is having more money.

Summary

The value of Bob’s sharing for me is to lay out some of the uncomfortable things I feel in active investing.

The future is uncertain. But a lot of the time, the future rhymes with the past.

Whether it is investing, or retirement there are no ultimate investment, super safe stock or safest retirement strategy.

You just need to get better at understand and living with these things. Understand very well how things work, mitigate, transfer or accept the risks that come with it.

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

This Latest $15 CPF Rant is Going to Turn Rather Badly

by 4 Comments

If you would like to post some rather vulnerable rant about the CPF on your social media, you got to recognize a few things:

  1. The CPF team picks up these things rather fast. This may make people abuse the social media as a way to get their unreasonable request through
  2. CPF have a serious trail of where every $1 that goes into your CPF goes. This means
    1. Into which account whether it is RA, OA, SA or Medisave
    2. If it is paid out, when it is paid out
    3. Where every dollar comes in originates from, whether it is a voluntary top up, retirement sum top up, or from your employer or employee contribution

I am not sure if there is a need for this level of sophistication but in a way, in some situations it does help.

There is this little incident that got picked up in the media.

A certain Mr Toh Thiam Hock Michael was voicing his displeasure that he is only getting $15 back in his POSB account. While his HDB is fully paid up, there are much utilities that he has to pay.

Mr Toh probably is the generation that is still under the old Minimum Sum Scheme (MSS) instead of our FRS, BRS and ERS. Instead of CPF Life, once activated, CPF will pay out a certain fixed monthly sum depending on how much he has in his CPF.

CPF provides a Response

CPF picks up these kind of chatters damn fast.

And here is their response:

No truth to allegation that most of his CPF funds were transferred to MediSave without authorisation. His Retirement Account had already been depleted following monthly payouts to him since 2013.]

Mr Michael Toh Thiam Hock claims that most of his CPF savings had been transferred to MediSave without his authorisation. This is not true. If there were such transfers, it would appear on his CPF statements.

In February 2019, in response to Mr Michael Toh’s allegation that his CPF savings were locked up, we had informed him that although he does not have enough CPF savings to meet his cohort Basic Retirement Sum, he is eligible to make a withdrawal of about $10,000 from his Ordinary Account (OA) and Special Account savings. To date, he has not applied for his lump sum withdrawal.

Like all CPF members, Mr Michael Toh’s CPF contributions are allocated to the Ordinary, MediSave and Special accounts for his housing, healthcare and retirement needs. We note that he has used over $86,000 of his CPF savings to meet these needs. Over $54,000 was used for his flat which is now fully paid up. Mr Toh has also withdrawn over $9,000 from his Retirement Account (RA) since 2013. Although his RA is now depleted, he continues to receive $15 monthly due to the government paying extra interest on his OA savings.

Like all homeowners, Mr Toh may wish to enhance his retirement income through options such as (a) renting out a room, (b) right-sizing his flat, or (c) selling a portion of his flat’s lease back to HDB under the Lease Buyback Scheme. HDB officers are available to guide him through the process.

– CPF on Social Media

You can see their response is as dry as it can be.

What we are also able to observe is how clearly CPF knows where each of Mr Toh’s CPF dollar goes to. Mr Toh has an option to take out, which means he has money.

While he does not meet the minimum sum, he is still able to take them out over time.

A Different Rant in February this Year

During the response in Feb this year, Mr Toh’s gripes is a little different:

From the CPF statements it can be seen that he has $66 to $67k in his CPF accounts last year. This is far higher than what is in the Medisave account.

The most important thing is that Mr Toh is getting $250 a month in payout from CPF Retirement Account. But the account is running out of money.

Mr Toh’s gripe then was: Why do you keep so much of my money locked away?

Further Checks on Social Media

Mr Toh’s private life from what I can see…. is deeply concerning.

He has this political slant that seemed to be not too happy with the incumbent. If you are interested, you can do a search up his name and it should bring you to that page.

But my biggest take away is this post:

I am not sure this is a satire post, or him being sarcastic. Honestly, after this series of post, I lean towards not trusting what he says most of the time.

But if you wish to come up with a coherent narrative, why follow up a post of you not having much money to pay your utilities, with a post of not having passive income non-stop?

These Rants is Likely to Backfire Badly for Him

Mr Toh does not realize that it is these kind of rants that is going to eliminate rather than advanced what he leans towards.

They feel that the government is out of touch with society. But I do think they are the one that is out of touch with society. Especially the younger ones.

He has generated a whole narrative by posting some negative comments, and then see the whole social media tearing his argument apart.

People look at this whole story and think: “Wah liew, I better don’t turn into folks like this next time.”

And those who view him associate the behavior of the parties that he leans towards to be the same as him.

People wishes to be seen as able to make logical choices. The more we have these kind of episode is going to hurt them more.

And it seems, folks like Mr Toh is really out of touch with a key part of the society, not the government.

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

How Ready are You to Retire?

by Leave a Comment

This week is pretty much drained. So I don’t have any bandwidth to explore things that are new. Weekends is probably to catch some breath.

One of my reader that I met up with some time ago asked me these 2 deeper question about retirement:

  1. What amount of principal will you feel comfortable to quit the job & just collect investment dividends, with a not-too-spendthrift lifestyle?
  2. How much to “reserve” for medical costs?

I thought it is easier to tackle in this week that requires some decompression.

A Framework to Think about Whether You are Ready for Retirement

Before I shared my answer to some of the questions, I would like to give a shout out to a reader (a different one from above) I met this week.

Sometimes talking to others interested who are interested in similar stuff, would make you realize a perspective that you didn’t think of in the past. So I got to thank him for that.

My reader, in a spectrum of Singapore wealth, put himself in a good position to consider retirement. I find that he has taken care of a few aspect that others would have been struggling with. So the questions are more deeper and harder to give an answer.

Both readers (this and the one asking the question above) questions all revolve around true retirement readiness.

True retirement readiness is not some 10 to 15 item article that after you go through them, you still feel something is missing. It is that if you get passed those hurdles, you should be ready to pull the plug.

It has to be said, that this is for the risk adverse. Because for the risk seeking, don’t like their job, or when the work pain gets much higher than the threshold, they just pull the plug without thinking so much.

I do not profess I have the answer, but this is what I thought about:

My Retirement Readiness Framework

This is roughly how I would explain it.

1. Your True Financial Situation

Suppose we know the true state of our financial situation, we take an important step towards retirement.

In true state, you know

  1. the exact lifestyle that you want in retirement
  2. how your expenses change over your retirement
  3. what are the unexpected expenses, or lifestyle that will occur in a few different people’s retirement
  4. the true state of your financial assets and liabilities
  5. the interest you have to pay for the debt
  6. to a high degree, you know the compounded rate of return of your wealth.

When you know the true state, if the retirement mathematics work out for you, this takes care of the mathematics side of things.

2. The Non Monetary Aspects

A lot of people consider the non monetary aspect of retirement to be easy.

The non monetary aspect could be

  1. whether you made peace with your professional identity
  2. how the society looked at you
  3. what you are going to do for the next phase of your life
  4. have you been responsible to those who helped you professionally

These items are needed to be considered. Less careful considerations may mean returning to the work force. These are not deal breaking, or life ruining.

3. Your Experience with Wealth Management

My conversation with my reader made me realize the wealth management part is rather crucial.

I realize in some of the past conversations with others, a common problem was finding out a better way to accumulate wealth, or an appropriate way of investing so that it is more conducive for retirement spending.

He has been living with his investing strategy for the past 6 to 8 years. It is one which is based on portfolio allocation and delegating the investing to fund managers.

I do find that he is more ready for this because he is comfortable living with this way of wealth accumulation. This method of investing is also more sensible in spending for retirement.

Without talking to my reader, I failed to realize that one of the reasons why I think this (financial independence) is doable is because I have been investing for years. To extend this into retirement, this looks doable still.

For others, I realize they have the net wealth. However, they are uncomfortable with the way they allocate their net wealth. It is either not high return enough, or it does not cash flow enough.

If we recommend a new investing method that meet the criteria, they will have the uncertainty whether the returns, the volatility will work as advertised.

This uncertainty will make them second guess whether they are ready.

What would retirement feel like if you have not taken care of these three aspect?

There will be different degree of comfortableness living in retirement.

For some, they might eventually become comfortable with this way of investing and getting their retirement cash flow this way. For some, they might just felt that what they have chosen is not sustainable.

If your financial situation is not the true situation, you might suddenly realize there are too much things you have not factored in, your spending is too much and you will need to go back to work soon.

We have briefly went through the non monetary aspects and I think that is enough.

Of course, it may turned out that your true financial situation and investing strategy are really sound, then your retirement would be better than you have anticipated.

Would a Financial Planner Helped?

The financial planner would take care of helping you assess your financial situation. Whether the assessment tells a person the true state of their retirement readiness, I feel, is a matter of competency.

My personal opinion is that non of us can find this true financial situation. If we can consider a lot of realistic scenarios and our numbers looked OK, then it is good to go.

The world is constantly changing, your life is always evolving, so all these parameters will keep changing. Someone sophisticated enough will considered enough and explain to you that you should be ready or not.

My belief is that not many will give a good view of your financial situation.

You could delegate the investments portion away to a professional. However, you will have to learn to live with such an arrangement. Delegating away solves the investing stuff, but you may not know how to live with investing this way.

When your adviser reports this fund and that fund dropped 20% and 30% respectively, what do you do? Those who learn to live with it, gain competency, would be able to make a decision to switch or to stay with the fund. Those who have not learn enough would get really edgy with their retirement.

Some advisers who have enough experience would be able to make you appreciate the non monetary aspect of things. However, I think for that portion it is best for you to figure out yourself.

What amount of principal will you feel comfortable to quit the job & just collect investment dividends, with a not-too-spendthrift lifestyle?

My answer to this question is unique for myself and might not work for others because my:

  1. the way of investing is different from you
  2. financial situation is different
  3. the non-monetary aspect is different

I went from being very spreadsheet based to just figuring out with withdrawal rates.

It is very simple. Every month, if the portfolio value change, I can just look at the withdrawal rate and know this is OK, this is not OK.

Very simple. Don’t need complex spreadsheet. I can do that because… let me just say I looked at enough Monte Carlo simulations, withdrawal rates arguments, historical simulations that it affected me this way.

No professional will tell you with a single ratio, you are financially ready. So it only works for me.

So here is a rough fast walk through of how I do it:

1. Appreciate your Lifestyle and Expenses

To even begin this you need to know your expenses and lifestyle well. You can take a look at my past annual expense reports.

If you don’t know your expenses or lifestyle, think don’t bother to continue to read this.

2. Categorize your expenses into 4 categories

Your expenses can be broken up into the following categories:

  1. Non-Recurring Essential Expenses
  2. Non-Recurring Non Essential Expenses
  3. Recurring Essential Expenses
  4. Recurring Non Essential Expenses

The Non-essential expenses, they are good to have. If your portfolio is not doing well, cut them by 25%, 50%, 75%. If it does well, boost them or take harvest of this so that you can spend it when times are not good.

The essential expenses, you have to make sure that they are there.

The non-recurring expenses are not going to take place every year. In other countries, roof needs to be replaced. Locally, your home needs a 15 year once renovation for example. These are essential but non-recurring.

Even healthcare can be considered non-recurring.

For the non-recurring expenses, figure out the present value of these non-recurring expenses. I will go through this later with the medical sinking fund question.

3. Create a few Lifestyle Schemes

Once you figure this out, create a few lifestyle schemes for the expenses.

I created the following:

  1. Survival: Recurring essential expenses only
  2. Baseline: Recurring essential expenses + 25% of recurring non-essential expenses
  3. Current: Recurring essential expenses + recurring non-essential expenses

Survival is for me to figure out in the worst of the worst case, whether I can survive as a human being. Baseline is a lifestyle that I feel comfortable in living for a long time. Current is how I am living now.

If you need to live like what it is like currently in retirement then #3 will be the most important for you.

You can create a few other schemes, depend on what you prefer.

From what I read, and my observation, a lot of us think we will live the same way as when we are working. That might not be true.

To come up with a scheme, remove the money part. Take yourself through what you will do 30 days in retirement. Then come up with the cost for it. This may be a scheme that you can use to estimate how much you need for retirement.

4. Deduct the liabilities from your portfolio

When you go through the expenses and find the non-recurring essential and non-essential expenses, these are the contingent liabilities that you need to set aside money for.

This will come from your net wealth, or from insurance.

For example, you can compute the present value of all your vacations. They are likely non-essential and non-recurring. Then you can get the present value.

If you are adverse to dementia and would like to prepare for it, estimate when you will get it and for how long. Get the present value for this.

Take your net wealth, deduct these 2 present value (vacation and dementia) from it.

5.Calculate the initial withdrawal rate from the net wealth

For those 3 schemes (Survival, Baseline, Current), you can take the annual expenses / net wealth left after deducting the liabilities.

If your withdrawal rate is low enough for you, congratulations, you are ready numbers wise.

To circle back to my original framework, you probably have to take care of the wealth management and non-monetary aspects.

This table below shows the decision tree whether you are ready to retire or not, and if not, what is the recommendation:

Click to see Bigger Decision Tree

My Withdrawal Numbers:

The Survival Withdrawal Rate is probably 1%.

The Baseline Withdrawal Rate is probably 1.3%.

The Current Withdrawal Rate is probably 1.7%.

Do note that I have not deduct much non-recurring expenses. I treat most of the expenses as recurring. What this means is that the numbers might look a little different.

You can look up that decision tree chart above to see what are the recommendation for myself.

Typically, the recommendation is to ensure you are able to guarantee to have a cash flow for your survival expenses. This will mean you have a withdrawal rate of 3% or less. If you are conservative, the baseline withdrawal rate can aim to be less than 4% if your essential expenses are covered well below 3% ( this will mean you spent nearly 1% on 25% of your non-essential recurring expenses)

Medical Sinking Fund

The question of medical sinking fund is damn tough.

Medical budgeting is so tough that even Lee Kuan Yew School of Public Policy took it out of their paper. (Read this)

As a planner, you have no choice but to try and model this, if you feel that you need to factor this in.

I would break up the expenses into:

  • Recurring essentials: The medicine you have to take daily in order for your condition not to become bad, insurance premiums
  • Recurring non-essentials: The supplements that are good to have
  • Non-recurring essentials: The medical sinking fund for conditions that are likely to happen in the future.
  • Non-recurring non-essentials: if there is any

The recurring portions will go into the expense schemes I have explained previously.

Determining the Non-Recurring Essentials

I thought about this at work and it can be rather tough to determine. Do you just keep adding so many contingent liabilities?

An adviser shared with me that if you get disabled, a lot of the other expenses might come down. If you keep adding these contingent liabilities together, think you can continue to work in an unhappy job for a long time.

Dementia Case Study

Likely we cannot find out the true costs. But if you have medical professional as friends, you can find out the probabilities, frequency of occurrences, and how much it costs.

Then you can get the present value, figure out the rough amount you need today.

For example, you are 41 years old. Suppose someone similar tomorrow gets dementia and needs to be admitted to a nursing home.

This form of estimation is probably the most extreme. The idea is that, if you managed to provide for this scenario, you should be able to take care of the smaller ones.

Typical cost of nursing home comes up to $4,000 a month (if there are vacancies). That will be $48,000 a year. Suppose you are worried about inflation. Use 7% inflation. We invest the rest of the money in a portfolio that compounds at 4.5% a year. We estimate that this dementia patient survives for 60 years.

I found this awesome spreadsheet calculator and it gives the following result:

A 60 year surviving dementia patient

The awesome thing about this calculator is that it computes the payment at a different rate of growth from the investment rate of return, and when the payment is differed for a number of years.

The formula for present value is this:

=p*IF(i=k,(1/(1+i))^t*n,(1/(1+i))^t*((1-((1+k)/(1+i))^n) / (1-(1+k)/(1+i))))

In our base case, you will need a sinking fund of $6.3 mil.

Suppose you buy some disability insurance which hopefully covers this when you are before 65 years old. We differ the need for this payout by 25 years and we need the money for 35 years.

The present value is lower at $860,000.

If we estimate that onset of dementia happens after 65 and last for 10 years, the figures work out like this:

The sum becomes more manageable.

I feel it is better to figure out roughly how much you need. Like what my adviser friend said, your expenses may be cut down when you are this disabled. The net wealth can go to fund for this scenario.

Hospitalization Case Study

We do not know when we will be hospitalized. Each of us have different genetic profile. Some of us have pre-existing illnesses and so the frequency of future hospitalization are also different.

My suggestion is to plan out a few scenarios and see what is the sinking fund amount you can get to. Then you set aside this amount as a sinking fund.

Suppose we estimate that within a 60 year period, you will have 3 different levels of hospitalization:

  1. Small: $3000 per visit
  2. Medium: $30,000 per visit
  3. Large: $300,000 per visit

This is before your hospitalization and surgical plan, or your shield plan. You will need to pay a deductible and a 10% co-payment at the minimum. Let us assume the deductible to be $3,000.

If we assume medical cost go up by 7%, you can come up with the following:

First Part of my Medical Cost Spreadsheet
Second part

We can see the year, age, deductible paid, the size of the actual bill for small, medium and large problems, adjusted for inflation. Then, we can work out the total deductible plus co-payment required.

Approximate the value back to present value in the last column.

This figure comes up to $289,000 in present value. Readers let me know if you have such a frequency of medical hospitalization. Every 15 years, there is a major surgery. Every few years there is a big one.

If you have $52,000 in your CPF Medisave, it means you need $237,000 more.

You can vary the frequency. What I can share with you is that, the small problem don’t move the needle.

Removing the major illnesses costing $2 mil and $6 mil cuts the present value needed to $124,000. Removing all the medium problems cut the amount to $66,000.

Play around enough, and you would have an appreciation how many major and medium problems you need to cater for.

Conclusion

This took longer than expected. However, I felt it was a nice exercise to go through trying to find out how much does our future medical cost will be in today’s dollars.

I will probably expand on the medical sinking fund idea, either here or in a work article of mine.

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

Some Thoughts on DBS’s ETF digiPortfolio

by 3 Comments

Both Straits Times and Business Times ran the update that DBS will be launching their Exchange Traded Funds (ETF) portfolio for the investors.

And it got me thinking about a few things.

Firstly, the product.

A Human-Robot Managed ETF Portfolio

There will be 2 portfolios that are launched:

  1. The Asia Portfolio: Gives you Singapore listed ETF exposure to countries in Singapore, China and India
  2. The Global Portfolio: Offers UK-listed ETFs

You can invest with a minimum sum of $1,000.

The investor will be charged an AUM fee of 0.75% per year. You can look at this as the company wrap fee.

There will be no more sales charges, locked in period or platform fees. More on this later.

The portfolio is actively managed.

A team of portfolio managers led by Mr Christophe Marciano, head of discretionary portfolio management, will review the portfolios on a quarterly basis to ensure that they remain resilient to market volatility, provide optimal returns, and remain aligned to DBS Chief Investment Office’s views.

So if we understand from this, this portfolio will be “actively re-balanced”, or “strategically allocated”.

Lower Cost than Unit Trust

Using exchange traded funds is great. But I do have to be clear. Using them is good because they are relatively low cost enough, versus the past competition such as unit trust.

Unit trust on average would have 1% to 2% in annual expense ratios, which are recurring costs. ETF listed in Singapore at least have below 0.75% at least. (this is not including commission, the AUM fees)

Cost is an important component because it eats into your return. If we go by past history, it is very difficult to make out-sized out-performance versus the indexes these ETF and funds are measured against. Thus, usually the best they can do is to keep up with the index they are suppose to outperform.

The above illustration is a favorite of mine to show that over time, the costs do eat into the returns, if the strategy does not generate an edge. Each of the lines is 7% returns plus different cost. You can think of them as your expense ratio and sales charges.

Your returns are uncertain, but your costs is always incurred, whether the fund does well or not.

It is not only ETF that can be lower cost than traditional unit trusts. Some unit trusts can be lower cost than the traditional unit trust. The Lion Global Infinity Series of Unit trust is a wrapper around Vanguard low cost unit trusts. Not super low cost by Vanguard standards but still lower cost enough. You can read my review of the Infinity Global Fund, which is one of the fund that tracks the MSCI World Index.

I written about the Dimensional funds in the past. That is also a low cost unit trust, but you can only buy it through an AUM structure. The Vanguard funds, available to accredited investors in Singapore, are also unit trust that is low cost.

I am not sure if the Active Management can Deliver Outperformance

DBS’s digiPortfolio is not the first that came up with the human + robo tilt. MoneyOwl brands themselves as bionic, which is roughly the same thing.

The difference is that there is a manager tilting the allocation of the ETFs in the digiPortfolio so that they give you optimal returns (what is optimal returns?) and controlled volatility.

MoneyOwl implements Dimensional funds, which are not passive as well. They rely on Dimensional’s deep research over the years, and currently, on what are the factors that gives pervasive and persistent out performance.

So the DBS manager is going up against a team that have been doing it for close to 40 years.

The harsh reality is that in the past 7 to 8 years every one’s returns pales to the S&P 500 or NASDAQ.

A lot of the value, size, momentum tilts was not working for a long time. If you are not in growth, you are rather screwed. What this means is that most of these manager’s tilt should under perform.

Since I track these things at work, I can safely tell you that Dimensional funds have been under performing the index they compared against. Not just that the funds such as Aggregate, Inclusif, Lumiere Capital, Lighthouse Advisers as well.

Source: DBS Treasuries

Perhaps the best way to think about this is in this way. Since they are actively managed, let us look at the performance of their unit trust portfolios for their higher net worth clients under DBS Treasuries (more on that later)

Slow n Steady, Comfy Cruisin and Fast n Furious should be 3 different allocations ranging from conservative, balanced to aggressive.

That half year 2019 returns look great. However, the market have recovered much from last year.

The best way is to measure against a model portfolio. It is strange that is not published but perhaps we can take reference from some of my model index portfolios at work.

These model index portfolios are made up of MSCI World, MSCI Emerging Markets, Bloomberg Barclays aggregate bond index. They are not what the clients invest in but what the funds are measured against.

2019 YTD up till June index benchmark model portfolio results are as follows:

  1. Conservative (USD): 9.96%
  2. Conservative (SGD): 9.15%
  3. Balanced (USD): 12.20%
  4. Balanced (SGD): 13.08%
  5. Equity (USD): 15.42%
  6. Equity (SGD): 15.49%

You be the judge. Do note that DBS did not put out a model index portfolio they benchmark against. If they do, please let me know.

The DBS unit trust portfolio actually did better than some of the boutique funds this year.

The Global Portfolio

I will not say much about the Asia portfolio because it feels… like another actively managed unit trust. There is a home region bias sometimes and for those who feels more at home in Asia, this may be up to your consideration.

The Global Portfolio is interesting in that they make use of UK Listed ETF. These ETF’s tend to be domiciled in Ireland, and for the international investors, there are some tax advantages. (I talked about these tax differences more in my Dimensional article and withholding tax article here). It has to be said, not all ETF listed in UK are domiciled in Ireland.

It shows that DBS is also paying attention to what the smarter local investors are doing here and what they are doing on DBS Vickers platform.

DBS have the opportunity to give investors a easier access to some of these low cost iShares or Vanguard ETFs.

What the more cost conscious investors will look to are

  1. What are the underlying ETFs
  2. How is the active strategic management carried out

I think we will know the fund details next time. So there are not much we can comment here.

The competition for sophisticated investors is not each of the robo invest firms but against the Gold Standard DIY Option.

The Gold Standard DIY Option is to invest in certain low cost, Ireland Domiciled, UK Listed ETF through Interactive Brokers.

The advantage of digiPortfolio is a much more stream lined interface. I do think for some very bochup investors, if the manager does a good job, there are certain advantages for them to manage their money through an active manager.

You would have to see if that is worth it over the cost difference of 0.75% per year AUM versus 0.05% per transaction cost. (for investors with lower sums than US$100,000, the cost difference might be lower. Refer to my dimensional article)

Could you RSP or GIRO into an ETF digiPortfolio?

Even till today, I do think why Insurance Endowments, Investment Linked Policies and Unit Trust sell well is because you can initiate a regular savings plan (RSP).

Once setup, the money will funnel from your bank account, to the unit trusts, ILP and endowment.

ETF transactions at Robo is still very clunky, perhaps with the exception of MoneyOwl and Endowus since they use unit trusts.

With RSP, the wealth building can be more passive.

When it is more passive, there is less behavioral tendency to act more rashly.

The Cost Comparison

I am not going to do a deep cost comparison because, frankly I am not in the mood to do that.

Smartly vs Stashaway vs Autowealth vs OCBC Robo vs CIMB eWealth vs Endowus vs Moneyowl - Cost comparison
Comparing the full cost stack of a few Robos (click to view larger image)
Low cost investing solutions in Singapore - Interactive Brokers vs Standard Chartered vs DBS Vickers vs Fundsupermart
Comparing the full cost stack of a few DIY solutions (click to view larger image)

You can however take a look at some of my past comparison.

Note that the 0.75% AUM fee is equivalent to the Company Management Wrapper Fee line item.

DBS likely is not absorbing the underlying expense ratio. This is the difference between DBS and OCBC’s All Seasons Fund (not listed up there). In that All Seasons fund, there is a company management wrapper fee of 0.50% but from what I understand, you are not charged the underlying fund expense for the Lion Global funds. You are for the non Lion Global fund.

The DigiPortfolio have an advantage over some DIY solutions because they have custodian fees, which is equivalent to platform fees. DigiPortfolio do not have platform fees.

For that they have an advantage over MoneyOwl as well because of iFast’s 0.18% platform fees.

Given that, if digiPortfolio give you a IWDA or VWRD, you can get invested at 1.05% in total all in cost (around 0.30% expense ratio + 0.75% AUM fee)

I think that is close to the Infinity Global’s cost, which is not too bad.

The Positioning of These 2 Portfolios versus The Global Portfolios

DBS have already rolled out 2 portfolios for the DBS Treasuries Clients. These are the clients with AUM of $350,000 (actually it can be lower because some of my friends with less money are inside)

These 2 portfolios, The Global Portfolio and Global Portfolio Plus, use actively managed unit trusts. For each there are 3 different bond and equity allocations.

The stuff that is in one of these unit trust portfolio

The ETF portfolio are positioned as more suitable for investors with no prior experience.

So I wonder what happens when the investor becomes more experienced. Should they switch to a Global Portfolio and Global Portfolio Plus?

The Robos have a certain philosophy and they implement it in their portfolio. Then they market one portfolio.

The banks have too many products.

Experience tell me different products suit different wealth builders of different nature. However, I find it hard to make out the distinct differences that a portfolio of higher cost unit trust suit you more than a low cost ETF portfolio (both are marketed by the same firm)

Personally, I think they just make those who know less even more confuse. Then they get on Seedly to ask XX, YY, ZZ which is better.

The Distribution Channel

The existing Robos have to burn a lot of money on advertising because they do not have an existing distribution channel. And still they would struggle with getting the sizable AUM to be profitable.

The banks and brokerage platforms have the distribution channel with their banks and customer service people. Not to mention the financial muscle. And it is this distribution channel that will make them gather AUM much faster than the Robos could.

The idea of investing has to be sold most of the time. Folks seldom wake up and have this idea that they need to invest.

But I do wonder, with Manulife’s 15 year bancassurance partnership with DBS, given the choice, which would their people push more for the every day people.

Perhaps after the initial spurt, interest would die down.

The Death of the Traditional Stock Broker Platform

At that time, it moved a number of its employees from DBS Vickers into the bank in an effort to cater to demand for a more holistic wealth proposition.

A few months ago, I started hearing the rumors of movements within DBS Vickers. It seems that DBS may have realized that they need to rationalize the brokerage business.

This digitization of investments may be it.

I have not received any notices whether my brokers are still around. Usually, I will email her via email. So I shot her an email just to test 2 months ago. Usually she will reply me with a call in the day.

No response.

Then last week, I received this Whatsapp message:

Hi XXX,
I’m YYY, your remisier from DBS Vickers (DBSV). I tried calling you and WhatsApp you since Aug 23 but could not reach you.
I enclose specimen letter and Transfer Request Form, in case you have not received them.
I shall be grateful if you will complete, sign and return the Transfer Request Form to me at my email address:

Apparently, UOB Kay Hian took the Remisers in.

UOB Kay Hian, the largest securities brokerage in Singapore, has emerged as a keen suitor for the 150-odd remisiers and retail equity trading representatives at DBS Vickers, the broking arm of Singapore government-linked DBS Bank.

Business Times

However, my confusion was what should I do?

Is DBS Vickers not going to be around anymore or not going to serve me? No sound at all.

Conclusion

I think at this stage, the UK Listed Global Portfolios look promising to what I advocate wealth builders with less time to do. But you should evaluate if you wish to go with Interactive Brokers as well.

It is not the most straight forward to use and I can see why people would go with a Robo despite costing more. The hassle of the onboarding and transaction process matters to some people.

We have to wait and see what is in the portfolios.

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