Investment Moats https://investmentmoats.com Wealth Mentor for Financial Independence Wed, 14 Aug 2019 23:34:07 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 https://investmentmoats.com/wp-content/uploads/2017/09/cropped-sand-castle-3-32x32.png Investment Moats https://investmentmoats.com 32 32 28389540 Journal-ling the reaction when Dow Fell 800 Points https://investmentmoats.com/money/dow-fell-800-points/ https://investmentmoats.com/money/dow-fell-800-points/#respond Wed, 14 Aug 2019 23:32:46 +0000 http://investmentmoats.com/?p=10418 This is a follow up to the last post I did when the volatility of the markets picked up. Not to cause panic but I want to see how different ETF for different asset classes do.

800 points do look like a lot and for a market like this you realize there are not a lot of 3% moves.

The 20 year US Treasury Bond ETF always look good in times like this. Very uncorrelated and moving up 2%.

Gold Holdings ETF
The Gold Miner Stocks

Gold miner stocks is quite insulated. Since they are equities, you do not know how they are going to react when equity markets move down. The correlation relationship might not always be similar.

US Dollar ETF

Finally the USD ETF is performing better.

Japanese Yen ETF

The Japan yen is rather muted compared to the Aug 8 period.

Volatility ETF does it’s thing when the volatility picks up.

3 times leverage S&P 500 ETF
3 Times Leverage 20 year Treasury ETF

The UPRO and TMF are suppose to be in a constantly re-balancing portfolio.

Emerging markets, is still rather correlated. It has been very depressing.

REIT ETF

Lastly the REITs .

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.

Here are My Topical Resources on:

  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
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Do We Hoard Too Much Money? https://investmentmoats.com/money/hoard-too-much-money/ https://investmentmoats.com/money/hoard-too-much-money/#respond Mon, 12 Aug 2019 23:00:41 +0000 http://investmentmoats.com/?p=10405 What are we saving for? Are we saving for food and expenses? Or are we saving for lifestyle.

I was reading this very thought provoking post by Early Retirement SG. Well, he is currently not in Singapore, following his wife to work. So now he is living in Paris.

If you follow his posts, you will realize that whatever skill set you picked up on Freegan living, can be applied in Paris as well.

So now he has taken food that will probably last for 3 to 4 days.

Early Retirement SG reflected on how our insecurity with food may be similar to our insecurity with money in a certain way. But at the same time, it can be rather different.

How Knowledge of Capacity and Perish-ability Changes Things

The main difference between his insecurity with food and our insecurity with money is that there is a certain capacity that we can hoard.

I explained it as his insecurity because this is unique to him. For most of us, the supermarket is always open. The supermarket for most is pretty close to us. So there are no insecurity there.

However, when you are able to gather food that people do not want, the dynamics changes.

You start thinking about

  1. How much exactly I need?
  2. How long these food will last?
  3. How much can I store in my home?

When I went on an experiment to see how many I can last with food I can gather from all over the place, these are the considerations. Most of the time, we can get too much food. Both cooked and uncooked.

However, you also start seeing your psychic change.

I developed the hoarding mentality. However, for food, I cannot hoard much because I have to think about where I can put them. I am also limited to how long I can store them.

But you will start going through that mentality of “this is free!” to whether you can systematized this collection, storage, cooking, determining the optimum amount to take.

To me, back then it was a project. It was not really a need. It will be difficult to make peace with my father on different food philosophies. So it ended after I went through this Freegan experiential period.

The biggest learning experience for me was to learn about

  1. the supply chain of Singapore fresh produce
  2. where to find these unwanted food
  3. how much you can get
  4. how could you roughly systematized these things if you wish
  5. seeing my reaction to stuff that does not cost money from a third party perspective

Daniel Tay said that when he had more money, being equipped and earning as a financial planner, he never felt a sense of security. Freegan living did. I gotta say I agree with him on many levels there.

I digressed a little too much.

The idea is that…. I cannot bring home all. These things are perishable.

Perhaps another reason is that…. we know there is a limit to our capacity. How much does Kyith eat? How much does my dad eat? Since my dad disagreed on this philosophy, he would not eat as well. There is a few stuff I do not take for health reasons as well, so that limits things.

Food is something that we know the capacity limits (the refrigerator and the number of stomach capacity x number of meals per day x number of people that wishes to eat).

We often saw on variety shows, or in the news some old folks that keeps… quite a fair bit of things.

They probably also have a capacity. How big are their room and flat. The difference is that these stuff are not perishable. You can put them there for a long time.

Do We Hoard Money as Well?

Hoarding is often described as an excessive acquisition of and an inability or unwillingness to discard large quantities of objects that cover the living areas of the home and cause significant distress or impairment.

Hoarding for me feels quite psychological.

It often stems from some trauma at certain pivotal periods of your life. It is pivotal enough that psychologically you wish to prevent yourself from going to that situation again.

This can be not having any money when you were young, not having things you want. Then you suffer at the hands of your school mates, friends, society for them having it “easily” while no one can give it to you.

Or it could be when your family lost everything due to failed business. The quality of life suffered that behaviorally it shook you .

When older adults hoard stuff, they may have this fear that “some day that they will need it”. When they need it, they are afraid “they could not afford or it is senseless to spend extra money on it”.

It is a form of insecurity.

And to a certain extend I felt we can say the same about our relationship with money.

Some businessmen have a poor childhood.

It haunts them. It gives them motivation to do better. They eventually did. They made a lot of money.

However, while their economic status, and lifestyle changes, psychologically they didn’t grew out of that insecurity. They just keep accumulating. They didn’t know when to step down their efforts. They explained it by that is their work ethic, there is a strategic direction. That may be true to a large extent.

However, I felt that this money insecurity can be the greatest motivator.

We do not Know What We Want and an Uncertain Future

Those who tend to excessively hoard do that because there is a certain limit to what you can use an item for.

With money, we do not run into that problem. This is because one of the advantage of money is that it is used as a medium of exchange.

If you have a lot of that, you can buy different goods and services. It can do a lot of different things.

We hoard money because we do not really know what we want. Whatever the excess, we will save it. However, if you ask the folks what are they saving for, they do not have the clearest picture or how much they need.

Having money is better than not having any.

How could financial planning solved this problem?

I felt that majority of this problem is not going to be solved instantaneously by just providing some financial plan.

What we can do is to established a good framework to show you different levels of security and independence. And then we show you where you are.

If our framework is very robust, you should feel more safe. If the framework is not very robust, then you will feel more safe, but it is a false sense of security. We have failed in our job.

The framework established the various capacity. For example, how much do you need for you not to fully work. We can establish a investment portfolio that can provide a cash flow for you for 50 yo 60 years.

Another example is how much you need for your 2 children’s education?

How Secure would You feel about your Financial Situation?

In my comprehensive article on establishing financial security, I showed the graphic above. We are all haunted by our past to different degrees.

What we can do is to established different level of capacities. Those that are more risk adverse, would need more. But still, there is a limit to that.

For example, a very conservative measure is that

  1. You map out how you want to live your life in the future. This is your annual expense.
  2. We buffer #1 by 100%
  3. Then you withdraw 1% of your wealth in the initial year. For subsequent years, you adjust that spending amount by whatever inflation that year

You need a lot of money for this plan. But even then, there is still a numerical limit! A strong framework will give you what is this very upper limit where we can soundly conclude you are rather secure.

And then you can think of what you want to do with your money.

For those excessively financially insecure ones, yet have less resources, they probably need to make peace with themselves.

They have to be able to move up the spectrum to more risk seeking. But up to a certain point where they could accept (and also fundamentally sound. Some risk seeking can be really crazy).

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.

Here are My Topical Resources on:

  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
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Definitive Guide to Dividend Withholding Tax in Stock & Passive Investing https://investmentmoats.com/money-management/guide-dividend-withholding-tax-interest/ https://investmentmoats.com/money-management/guide-dividend-withholding-tax-interest/#comments Sat, 10 Aug 2019 23:08:47 +0000 http://investmentmoats.com/?p=10382 As an investor, you will invest in a stock, a business, a partnership that is based overseas.

These stocks, business or partnership are incorporated or domiciled in another country. These stocks, business or partnership may declare dividends, interests or capital payments to you as a shareholder in Singapore.

Once the dividends, interest or capital payments exit a specific country there is a withholding tax on these income, dividends, interest and capital payments.

There is no running away from withholding tax. I sort of validate this when I have the privilege to meet the subject matter experts that are recommending offshore investment bonds.

These bonds fulfills a specific tax planning role for expatriates, but also Singaporeans with assets in other countries. I shall not go too much into it.

Understanding withholding tax is something you cannot run away, whether you are a

  1. individual stock investor
  2. unit trust investor
  3. DIY passive index portfolio investor
  4. Robo- investor

This is particularly confusing if you are investing in a fund that is incorporated overseas. These fund manages a portfolio of stocks or bonds, which declare dividends as well.

So how does the withholding tax picture add up? In my Dimensional Fund Advisers article, I explained in depth. However, I think not a lot of people manage to read to that portion. So in this article I will try to talk specific about this.

Tax When Money Flows out of the Country

I think the best way I find to remember this is that every country, who choses to have a greater than 0 withholding tax, wishes to tax money when it flows out of the country.

So if you think about it this way

  1. When a China incorporated subsidiary declares a dividend and pays a Singapore parent, there is withholding tax (10% for China)
  2. A German unit trust owns a Spanish company. When the Spanish company declares a dividend to the German unit trust, there is a withholding tax when the money leaves Spain (20% for Spain)
  3. A Singapore investor owns a company incorporated in United States. The company pays a dividend to the Singaporean. There is a withholding tax on the dividend

As you can see whether you are an individual stock investor in Singapore, or Hong Kong, or other countries, you are affected. This is because your stock have overseas subsidiary.

As a unit trust or exchange traded fund investor you are affected as well.

What is the Implication?

A lot of times, the implication means is that you get a smaller dividend.

For example, you have a stock that is domiciled in Spain that is at $50 and it gives a $3 dividend. Your dividend yield would be 6%.

When the money leaves Spain and reaches you in Singapore, your dividend yield will be (1-20%) x 6% = 4.8%.

The Withholding Tax around the World

Each country do change their tax rates from time to time. So as an investor, you can check with the company you are interested to invest in, or you can download the latest withholding tax table.

I find that it is better to check with the company you are interested in.

To help with today’s discussion, here are the latest withholding tax as current as 2019 from Deloitte:

You realize countries have different withholding tax for different kind of payments. There are also different rates if you belong to different country unions or two countries have a dual taxation agreement.

Bermuda is like one of the tax haven. You will realize a lot of listed company are incorporated in Bermuda. Their withholding tax is so friendly (0% for all). Barbados is also one.

Recall the USA REITs Manulife US REIT and Keppel KBS all switched to a Barbados based structure when the 2017 Tax and Jobs act was announced. (Explained more in detail here)

Singapore is pretty friendly as well.

Switzerland’s withholding tax is obscene.

It is not Where it is Listed but Where the Company is Domiciled!

One thing that bamboozled a lot of investor is that they think that all the stocks listed in the United States are automatically subjected to a 30% withholding tax (which is the withholding tax for United States)

The way to remember is where the company is domiciled or incorporated.

It means where this company calls its home.

A good example is Royal Dutch Shell ADR. The American Depository Receipts (ADR for short) is a scheme that can easily allow an American to own a foreign stock like Royal Dutch Shell.

The US investor can buy this Royal Dutch Shell ADR listed in a United States stock exchange.

As a Singaporean, you can also invest in Royal Dutch Shell ADR listed on the United States stock exchange. So how much withholding tax do you have to pay?

Royal Dutch Shell is incorporated in UK but is a tax resident of Netherlands. You can check out the company website to find out more.

Based on this the withholding tax you pay is 15%, and not the United States withholding tax.

How do we tell where a Stock or Fund is Domiciled or Incorporated?

In the section before, Royal Dutch Shell ADR is incorporated in UK but calls Netherlands a tax resident.

The best way is to check with the company you are interested in, browse the website.

If not most of the time finding out where the company is incorporated or domiciled. Usually, the annual report or financial statements will show it.

Ping An Insurance is a Chinese stock listed in Hong Kong Stock Exchange. The withholding tax in Hong Kong is 0%. In China it is 10%.

A look at Ping An’s financials will show us that this company is incorporated in China. There is likely a 10% withholding tax on Ping an’s dividend.

The above is extracted from Dimensional’s annual report for their funds. Dimensional funds invest in stocks and bonds from all over the world but they are incorporated in Ireland.

A review of their annual reports will show you where they are incorporated in and whether there are any withholding taxes.

What about Dual Taxation Treaties?

You will observe that for some countries, there exist a dual taxation treaty. This enable you to enjoy a relief from getting tax in both countries.

The common ones that I encounter that affects some of the investors here are:

  1. For those investors with ETF or unit trust domiciled in Ireland. These ETF and unit trust would own a basket of stocks, with some stocks in the United States. There is a dual taxation agreement between United States and Ireland. Thus, the dividends withheld is 15% instead of 30% when the dividend exit United States to Ireland
  2. For those who purchase unfranked stocks in Australia, they are taxed at 15% instead of 30% due to a dual taxation agreement between Australia and Singapore

Unpacking the Withholding Tax on Exchange Traded Funds and Unit Trust

One of the reason I wrote the original post is to illustrate the advantage of Dimensional funds that are domiciled in Ireland. They are more tax efficient, when it comes to dividend withholding tax and estate duty/inheritance tax.

This fund dividend tax thing can be rather confusing and in this section I will try to explain it.

The investors who are affected are:

  1. If you purchase an exchange traded fund (ETF) that is listed and domiciled in the United States. This ETF pays out a dividend. We know that United States have a withholding tax of 30%
  2. If you purchase an ETF that is listed in UK and domiciled in Ireland. This ETF pays out a dividend or accumulates the dividend within the fund. Ireland has a 0% withholding tax
  3. If you purchase an unit trust like Dimensional funds that is listed in UK and domiciled in Ireland. This ETF pays out a dividend or accumulates the dividend within the fund. Ireland has a 0% withholding tax

How much withholding tax in total do you pay?

There are many layers of withholding tax. I think it is better to explain in a diagram.

The most prevalent investing method for funds are:

  1. DIY Investing: Buy 1 to 4 Low Expense Ratio ETF listed in United States
    1. ETF is domiciled or incorporated in United States (30% withholding tax)
    2. Both Equity and Bonds
    3. Covers the whole world
  2. DIY Investing: Buy 1 to 4 Low Expense Ratio ETF listed in London
    1. ETF is domiciled or incorporated in Ireland (0% withholding tax)
    2. Both Equity and Bonds
    3. Covers the whole world

Based on the withholding tax, you would think that #2 is a better choice than #1. I think it is. But it is important that you understand the mechanics involved.

Let us use 2 prevalent ETF to illustrate:

  1. Vanguard Total World Stock ETF (VT) listed in United States
  2. iShares Core MSCI World UCITS ETF (IWDA) listed in London

#1 matches #1 in the DIY Investing I mentioned in the previous list. #2 matches #2 in the previous list. These two funds are equity funds that seeks to cover the large cap stocks in the world. So you will get a very diversified portfolio.

Suppose we take it that for these 2 funds they are made up of 3 stocks domiciled in 3 different countries. These 3 stocks all give a dividend of 3% before withholding taxes:

  1. US Domiciled Stock – 3% dividend – 33% of fund
  2. China Domiciled Stock – 3% dividend – 33% of fund
  3. Germany Domiciled Stock – 3% dividend – 33% of fund

How to think about the different layers of withholding taxes considerations

There are many layers of withholding taxes considerations.

In the eyes of the professionals they look at it in 3 different layers:

  1. Tier 1: Portfolio Level
  2. Tier 2: Fund Level
  3. Tier 3: Investor Level

You will hear them say they are taxed at Tier 1 and not taxed at Tier 2. To me that sounds all that confusing.

The idea is to think in terms of gateways. Every time when money leaves a country, there is a withholding tax consideration. Also when money enters a country, there is a certain tax consideration (this is probably not withholding tax but how your country chooses to tax foreign sourced income)

It would look something like this:

A model to frame your mind to tackle withholding taxes

As an investor you may live or domiciled in Country D. suppose you own a stock listed in Country C with a subsidiary in Country B, which owns another subsidiary in Country A.

At every point there is an exit withholding tax consideration. At every point when cash flow is coming in, there may be a foreign sourced income consideration.

Typically, foreign sourced income entering a country is less of an issue. The focus tends to be on money leaving. Government are more concern about ensuring money just don’t flow out like that without some form of “control”

Let us go through the two examples with VT and IWDA.

Vanguard Total World Stock ETF (VT) Case Study

VT Dividend Withholding Tax
VT, domiciled in United States

The illustration above shows the taxation at different levels.

Since VT is domiciled in US, when the dividends from the US stock is paid to the fund, there is 0% withholding tax. There are however 10% and 25% withholding taxes for the China and Germany stock. 

At the fund level to the investor’s tax office in Singapore, there is a 30% withholding tax. 

Since Singapore currently do not tax on investor’s foreign sourced income, there is 0% tax when the investor receives the dividend finally.

So this works out to:

  1. US dividend: 3% x (1- 0.0) x (1-0.30) x (1 – 0.0) = 2.1%
  2. China dividend: 3% x (1- 0.10) x (1-0.30) x (1 – 0.0) = 1.89%
  3. Germany dividend: 3% x (1- 0.25) x (1-0.30) x (1 – 0.0) = 1.575%
  4. Overall dividend: 1.836%
  5. Dividend withholding tax cost: 3%-1.836% = 1.163%

The mileage would vary depending on the size of the average dividend, and the composition. 

New let us look at IWDA’s situation

iShares Core MSCI World UCITS ETF (IWDA) Case Study

IWDA dividend withholding tax
IWDA, domiciled in Ireland

IWDA is domiciled in Ireland, when the dividends from the US stock is paid to the fund, there is 15% withholding tax. Withholding tax on dividends in China is 10% and withholding tax on dividends in Germany is 25%.

Typical dividend withholding tax for United States domiciled companies is 30%, so why is the withholding tax only 15%?

This is because there is a dual taxation treaty between United States and Ireland.

Thus on US, they only withheld 15% of the dividends for taxes.

So this works out to:

  1. US dividend: 3% x (1- 0.15) x (1-0.0) x (1 – 0.0) = 2.55%
  2. China dividend: 3% x (1- 0.10) x (1-0.0) x (1 – 0.0) = 2.7%
  3. Germany dividend: 3% x (1- 0.25) x (1-0.0) x (1 – 0.0) = 2.25%
  4. Overall dividend: 2.475%
  5. Dividend withholding tax cost: 3%-2.475% = 0.525%

IWDA in this regard, and for the Irish domiciled ETFs, should be the most tax efficient. 

Dividend Withholding Tax is just One Evaluation

It is important to realize that optimizing the withholding tax you will need to pay is important. However, you have to weigh other considerations as well:

  1. The expense ratio (while US may be withholding tax inefficient, their ETF, due to their size may have lower expense ratio)
  2. Tracking error to the index (Some more liquid ETF and exchanges may have lower tracking errors
  3. The difference in the funds you are going for. You may lean towards certain investing philosophy
  4. Dividends, might be a small proportion of the overall total return for the fund!
  5. You have to consider the estate duty/inheritance/ death tax should you passed away

#5 tends to be a major component to think about and not easily bypass (But there are ways. Shall not discuss too much here)

Dimensional World Equity Fund Case Study

This is not in the realm of discussion but since I already done the work, I might as well put it here.

The local Dimensional funds you can purchase through MoneyOwl, Providend, iFast and GYC financial are domiciled in Ireland.

In a way, their withholding tax treatment is pretty similar to IWDA since both are domiciled in Ireland and their portfolio covers the world.

DFA Core Equity Fund Withholding Tax
Dimensional World Equity Fund, domiciled in Ireland

The illustration above shows the taxation at different levels. Since DFA funds available for Singaporeans is domiciled in Ireland, US withheld 30% of the dividend, China withheld 10% of the dividend, Germany withheld 25% of the dividend.

At the fund level to the investor’s tax office in Singapore, there is 0% withholding tax, since Ireland currently do not have withholding taxes. 

Since Singapore currently do not tax on investor’s foreign sourced income, there is 0% tax when the investor receives the dividend finally.

So this works out to:

  1. US dividend: 3% x (1- 0.30) x (1-0.0) x (1 – 0.0) = 2.1%
  2. China dividend: 3% x (1- 0.10) x (1-0.0) x (1 – 0.0) = 2.7%
  3. Germany dividend: 3% x (1- 0.25) x (1-0.0) x (1 – 0.0) = 2.25%
  4. Overall dividend: 2.326%
  5. Dividend withholding tax cost: 3%-2.326% = 0.6735%

You will notice a difference between IWDA and the Dimensional fund. The United States withholding tax is 30% instead of IWDA’s 15%.

But both are domiciled in Ireland.

Why is there such a difference? I have no idea. I guess that is how its treated because the structure of ETF and unit trust in Ireland is different. One is a fund while the other is business.

This is why these tax stuff can drive you up the wall.

DFA funds available to investors are UCITS funds and they have certain advantages to guard investors interest.

UCITS

The Handling of Withholding Tax on Interest Income – Prevalent in Bond Funds

How much interest income withholding tax the fund is subjected to depends on the withholding tax on interest income in each country.

In the early section, you can see for each country there are different treatments to dividends, interest and royalties possibly

In the USA, exchange traded funds that generate qualified interest income and short-term capital gains, may be exempted from United States withholding tax when distributed to non-US holders.

The US Tax law permits a regulated investment company (“RIC”) to designate the portion of distributions paid that represent interest related dividends (normally known as qualified interest income) and short term gain dividends as exempted.  

  1. you need to be a regulated investment company and provide proper documentation to qualify. Thus, DIY investors would not be exempted
  2. bond interest income from USA bond generally are exempted from dividend withholding tax

Here are some examples:

  1. for US Government Bond ETFs, typically 100% of the interest income qualify as Qualified Interest Income. One example is the iShares 10-20 year Treasury Bond ETF (TLH) used by Stashaway
  2. for US Corporate Bond ETFs, perhaps only 70-80% of interest income qualifies as Qualified Interest Income. One example is the iShares IBOXX Investment Grade Corporate bond ETF (LQD)
  3. for international bond ETF domiciled in USA, the Qualified Interest Income may not be applied at all. One example is the iShares International Treasury Bond ETF (IGOV) used by AutoWealth

For those funds or ETF domiciled in Ireland, the USA bonds are subjected to withholding tax and that could be 30% or 15% depending on whether it is a fund or ETF. 

Do remember, while USA have been a popular discussion, the withholding tax treatment for other countries will mean that there may be withholding tax incurred there, which might be more or less than the United States withholding taxes.

The above is taken from Dimensional Global Short Term Fixed Income fund. The United States portion constitute 10% of the fund. You would have to contend with the interest income withholding for Canada, France and Germany as well for example.

What if your Fund is Accumulating and does not pay out a dividend to you?

The fund might not pay out a dividend to you. However, the underlying companies, owned by the fund, still pay a withholding.

IWDA dividend withholding tax
IWDA, Domiciled in Ireland

IWDA is an accumulating ETF, which does not distribute dividends. But the underlying companies owned by the ETF will still get their dividends reduced.

Conclusion

Lastly, do not treat what I wrote as gospel.

A lot of work went into this through

  1. What I researched myself
  2. What others who are interested in investing researched
  3. Other investors’ experiences
  4. My experiences
  5. What I can find out from my peers in the industry who I am grateful for to share

Let me just say…. even those in the investing industry… they are also trying to figure this out.

And your own personal situation may be different from mine or the general public.

This is why you would never get very clear cut answers about these stuff. The motherhood statement is Consult your Tax Adviser.

But to get started, you got to have a blue print to start going down the rabbit hole. So I hope this is enough.

If you have more to volunteer, do let me know.

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.

Here are My Topical Resources on:

  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
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Innovative Wealth Strategies to Redistribute Nation’s Wealth https://investmentmoats.com/money/innovative-wealth-strategies-to-redistribute-nations-wealth/ https://investmentmoats.com/money/innovative-wealth-strategies-to-redistribute-nations-wealth/#comments Fri, 09 Aug 2019 23:12:40 +0000 http://investmentmoats.com/?p=10379 Bloomberg has a good article a few months ago on re-thinking wealth. They highlight 3 suggestions that may be explored to re-distribute wealth in a fair manner.

These articles may end up behind a paywall so I want to share this over here at Investment Moats. I will add my interpretation as well.

Two of them are rather interesting to me. More because of the way they were suggested because one involves retirement withdrawal. The other feels like a conversation on financial independence.

So here are the suggestions.

Baby Bonds

The gap between a median white family and median black family is wide. The white family has $171,000 in wealth while the black family have $17,600. We include home equity here.

If we use average instead, the white family will have $800,000 more than the black ones.

Baby Bonds – This establish a universal birthright to capital.

This was the brainchild of Senator Cory Booker.

  1. The government will put $1,000 in a federally managed, interest bearing trust account
  2. This account will only be accessible at adulthood
  3. The government will add money to this account based on family income over time. This with lower income will wish to be benefited more
  4. According to the math, children from the poorest family can have almost $50,000 at 18 years old

Tax Big Spenders – Financial Independence Folks are Safe!

The VAT or GST in Singapore, should tax the rich. If wealth inequality is a problem than we should tax the rich. The rich tends to spend more, so a goods and services tax should be a way that we can tax them.

But the goods and services tax affects the poor as well.

Unless you implement it like other countries. In other countries those staples, which constitute a large proportion of the expenses of the lower income are not taxed.

Laurence Kotlikoff , an economics professor at Boston University suggest we scale up the tax:

  1. Tax consumption above $100,000 per year starting at 5% rate
  2. This taxes goes up
  3. If you consume $1 mil or more annually, you are taxed 30%
  4. Consumption is calculated as all income (cash flow or what a household takes in during the year minus all the money the household invests)

If you look at the formula (#4), it seems real conducive for those folks pursing financial independence.

Imagine a couple that earns $200,000 a year (according to Singapore statistics this is not far off. This couple decides to pursue this radical, niche lifestyle call saving 70% of their income.

So they spend $60,000 a year and save $140,000 a year. The consumption tax will be on $60,000. Of course this is only consumption tax, and there might be additional income tax. The high earning couple may not be able to escape that.

Now if the couple were not aware of this financial independence movement, and do the normal stuff were they just save 25% of their income, their consumption tax will be on $150,000!

This looks to be a tax not just on those earning well, but less prudent with their money.

Index Socialism – What if we all become Temasek’s shareholders and we get a Dividend?

The article uses American wealth. However, I decide to use Singaporean wealth, since this is so close to our National Day.

Credit Suisse Research Institute 2018 Global Wealth Report puts Singaporean’s total wealth at US$1.3 trillion. Our current population is 5.7 million.

  1. If we divide this amount equally, each Singaporean will have a net worth of $228,070.
  2. At a 5% rate of return, each of us will earn an investment income of $11,403 a year
  3. Pool our resources, invest the money, make every one a shareholder
  4. Under this collective ownership, everyone gets paid a universal dividend

This is not a new concept. If you look at your Blackrock, Vanguard, they manage trillions of dollars for a lot of clients. The difference is that these are the folks who can afford it.

A suggestion would be for the country to create a government operated unit trust. All Singaporeans own an equal, non-transferable share.

Use the tax to fill up the fund with return-generating assets.

Then pay out an annual dividend to Singaporeans.

This sounds very much like our sovereign wealth fund Temasek. Their shareholders are the government of Singapore.

Would it make sense for a Singapore government managed unit trust?

One thing Kyith will say is that distributing a constant 5%… or a constant percentage 5% of the value, is a very good way to deplete all our money.

There is every chance for the assets to grow a lot. There are equal chances that the money will not last as well.

Compared to the Americans, who can divide such that every Americans owned US$300,000, maybe we are just not that rich.

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.

Here are My Topical Resources on:

  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
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Wharf REIC (1997) – a Storm coming for Dividend Yielder https://investmentmoats.com/stock-market-commentary/value-investing/wharf-reic-1997-storm-coming-dividend-yielder/ https://investmentmoats.com/stock-market-commentary/value-investing/wharf-reic-1997-storm-coming-dividend-yielder/#comments Wed, 07 Aug 2019 23:10:44 +0000 http://investmentmoats.com/?p=10369 Wharf Real Estate Investment Company’s (REIC) interim results was not too bad.

Wharf REIC Interim Income Statement

I first wrote about Wharf REIC here. If you are not familiar with it, you might want to get a short overview of it through that article.

Operating profit showed an improvement over last year. The profit attributable to shareholders was lower due to a reduction in fair value increase of the investment properties.

That portion should be OK. We should look upon the recurrent earnings or cash flow aspect of the business.

The majority of the revenue for Wharf REIC (1997) is from its retail and commercial office rental income. In the past, since the cash flow is so recurring, we would annualized the earnings or cash flow. We could then assume a no growth scenario and see the relative valuation of Wharf REIC versus its peers in the same industry.

If we take the operating profit ($6.7 bil) – Income Tax ($1 bil) – Non-Controlling Interests ($0.08) – Financing cost of ($0.460) we arrive at a recurring net income of $5.16 bil. Annualized we get $10.32 bil.

Wharf REIC currently has 3 bil outstanding shares, thus the recurring EPS is $3.44. Wharf REIC current trades at a price of HK$45.20.

This gives Wharf REIC an earnings yield of 7.6%. Wharf REIC have a dividend policy of paying out 65% of its earnings income. This brings its dividend yield closer to 4.9%.

How should we look at the valuation?

Wharf REIC is results is driven by 2 retail malls, Harbour City and Times Square. To give you an extend of the influence of these 2 malls, together, they account for 10% of Hong Kong’s retail sales including wet market, motor vehicles but exclude F&B. Harbour City is 4 times one of our biggest mall VivoCity.

Wharf REIC’s net debt to asset is 13%. This means the leverage factor is low.

Unlike a REIT, Wharf REIC pays taxes. Name me a few retail mall REITs of this quality that trades at a recurring earnings yield of 7.6%.

I doubt you can find many.

And how many gives a historical dividend yield of 4.9%, backed by high quality assets on 65% recurring payout?

Wharf REIC

Harbour City (HC) and Times Square’s (TS) occupancy cost is rather manageable. We know it is higher versus Capitaland Mall and Frasers Centerpoint Trusts.

Wharf REIC’s dividend per share have observed to be consistently growing. It’s occupancy since 2009 have been consistently high. The revenue trend have also been consistent.

When a company do not pay out all their free cash flow as dividends, and they have a good recurring business model, they can show a rising dividend per share trend.

Certain tenants of Capitaland Mall, a Retail REIT in Singapore is on a percentage of turnover rental revenue model. This means that part of the rent is determined by how well the sales is. It gives the mall operator an incentive to do their best to make sure they also deliver in bringing greater footfalls to the tenant.

Upscale malls like Harbour City and Times Square should take a certain part of their rental revenue from percentage of sales. That would explain the good revenue trend.

Here are the average passing rent per square foot per month:

  1. Harbour City: $508
  2. Times Square: $290
  3. Plaza Hollywood: $102

The disparity is huge.

Here are the respective retail sales for the past 6 months:

  1. Harbour City: $18.5 bil
  2. Times Square: $4.4 bil
  3. Plaza Hollywood: $1.2 bil

We are investors who are seeking to make money. Whatever happen in the future is what we are concerned about. To find out whether the cash flow is growing and recurring, we look at the past to find results.

And since the intrinsic value of a stock is based upon the aggregate of future cash flow discounted to present value, what if all these riots and protests fundamentally alters Hong Kong?

Wharf REIC highlighted how the 3 mall revenue changes during the recent 2 downturn. In 2008, we observe a -19% shift in rental revenue.

The webcast or the webcast transcripts were not out yet, but in an article on the South China Morning Post (SCMP), Stephen Ng, the chairman & managing director of Wharf REIC and Doreen Lee, vice-chariman and executive director of Wharf REIC have these to say:

  1. “This time, it is like a perfect storm. External factors and internal factors are all erupting at the same time,”
  2. “In July and August, Hong Kong’s overall retail sales are not [expected to be] very optimistic. We will be affected,”
  3. “Overall, tenants’ businesses [have become] more difficult.”
  4. “We all know Hong Kong’s retail and catering industries are [facing difficulties], particularly in shopping areas [such as] Tsim Sha Tsui and Causeway Bay,”
  5. “The second quarter was worse than the first quarter. But it is not a significant plunge. It is worsening gradually. The hotels [sector] is not optimistic, nor is retail.
  6. “Will it be worse than [the 2008 financial crisis]? It is possible but … I do not have a crystal ball. I hope there will not be such a big wave.”
  7. “Demand is weakening. In the short term, we think the outlook is not very optimistic,”
  8. “Currency is a very important factor … As the Hong Kong dollar strengthens, it has a very big impact on Hong Kong’s overall consumption and demand,” “Yesterday, the yuan broke the 7 [yuan to a US dollar] threshold. This is an even bigger warning.”
  9. “In these few months, all tenants suffered from a certain degree of impact,”
  10. “We have to pray for the best, and hope the situation improves,”
  11. How long will it take? It is difficult to determine.” A drop in office rents in the second half, if any, will be in single digits,

When you put out information to the media and shareholders, you will wish to control the narrative. Some of my peers will say there is no value in attending AGMs or results brief.

I will say attending these briefs gives me some insights on the narrative of things the management cannot provide in data. You have to view these subjective data in the context of what they have been saying in all these briefs. If a certain management have always been positive, positive, positive and suddenly become…. withdrawn in their outlook, it may be significant enough to take note.

Management usually tries to give a balanced narrative. Some companies with less substance will talk up their company. So these tend to paint a rather positive picture.

But man, Doreen and Stephen were asked some tough questions and they are not hiding much. From what they say, in the short term, you will expect the second half results to be not as good. Just to what extend it is not good.

Recall that we annualized the earnings and say the earnings yield is 7.6%. Going forward, at least in the short term, the earnings yield might not be as high as 7.6%. As a longer term investor, what we are more concern of is not these short term earnings yield BUT the longer term ones.

This might be murky because… has Hong Kong permanently been altered? Would the international retail scene changed in a permanent manner? How fast is this change? How secular is this change?

The above questions are the more pertinent ones than all the pictures of the riots and mayhem.

Some short term changes remained short term. Those are noises. Some… become secular. Those are the ones that may make a gem like Wharf REIC become a value trap.

The history shows us evidence of quality or absence of quality. True quality is a moat. Short term it gets disturbed. The stock price may be mispriced. However, when the quality really disintegrates, then it becomes a real value trap.

If you run a concentrated portfolio, you make educated bets. If quality retains, your portfolio will flourish as a result. However if quality disintegrates, your portfolio will take a big hit.

This is what makes individual investing tough. There is value in good critical thinking. But that is not enough, you also need to go at least deeper into understanding something more than crowd. You also need more info about the business more than the crowd.

There will be those that say this is a secular shift bet on it. There will be those that say this is not a secular shift and bet on it.

I write more about my thoughts on active investing below.

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.

Here are My Topical Resources on:

  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
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Market Volatility is Up. What I am Thinking about Now. Might help you a little. https://investmentmoats.com/money-management/market-volatility-up-what-i-am-thinking-about-now/ https://investmentmoats.com/money-management/market-volatility-up-what-i-am-thinking-about-now/#comments Mon, 05 Aug 2019 23:50:06 +0000 http://investmentmoats.com/?p=10349 Trump said something. Then China did something.

So what we have is the DOW, S&P 500 and Nasdaq down 3%. But they been falling for a few days.

It gets even worse for me considering a large part of my equity holdings is in Hong Kong. And you know what is going on there.

This article is taking a look at what goes on in my brain. You might have some takeaway from this.

An Eye on the 10 Year US Treasury

Honestly, I can be rather myopic on things. Since Manulife US REIT is a rather large holding, I do keep an eye once in a while on some things relating to it.

The US 10 year Treasury Rate for Jul and Aug MTD

They are likely to refinance their Figueroa loan (quite sizable based on their loan portfolio) in July. We just do not know when.

There was even a spike up above 2.10%.

So they are rather unlucky in that, if it is a refinance in August, they could refinance, for 5 years at a much better rate! A 30 basis point fall is not very small here.

But you got to practice some gratitude because 1 year ago people are worried about the DPU when they are refinancing at 3.10%.

So it is a matter of perspective.

Anyway, this is the monkey brain. Focus so much on something, that I totally missed my Hong Kong holdings.

Now I am getting a spanking there.

You can look upon it as a Curse or an Opportunity

When there is an uptick of volatility, it tends to send your heart beating faster.

For some wealth builders, this is an opportunity to collect the financial assets such as stocks, unit trust that they been interested in but could not bear to buy at “expensive prices”.

For others, they just made their purchases not too long ago. Some have even invested in a lump sum, made a specific individual stock purchases and are cursing their luck.

Either way, it is how you frame things. Some see this as an opportunity, some see it as a curse.

But it is more than that.

In a behavioral manner, you are affected by how much currently your net wealth is subjected to this “crazy downside”. And this might make it difficult for you to think.

Think about Your System of Building Wealth

Quietly ask yourself if you still remember what kind of game you are playing here:

  1. Are you a low cost, passive portfolio investor? What is the system you are playing at here? What is the appropriate thing to do in this system at this trigger moment?
  2. Are you a medium term speculator? What is the system you are playing at here? What is the appropriate thing to do in this system at this trigger moment ?
  3. Are you a dividend investor? What is the system you are playing at here? What is the appropriate thing to do in this system at this trigger moment ?
  4. Are you the so-call value investor? What is the system you are playing at here? What is the appropriate thing to do in this system at this trigger moment ?

If you have no idea what you should do at this trigger moment, then you are the game here. Regardless of which wealth building system you choose, there are a few appropriate things to do and not to do.

I tend to run through my head what the hell I am trying to do. Why it should give a good positive risk adjusted return. These days I tend to do that less. This is because I am pretty clear about things.

I have 2 systems mainly

  1. Core Equity Holdings: Identifying financial assets that gives a positive expected return in the long run
    1. These are financial assets that I am comfortable in holding
    2. I purchase at fair value and below if the asset is higher quality
    3. I purchase at below fair value if the asset is lower quality
    4. They give a sustainable dividend
    5. Sell when you realize they are not resilient, or sit on them if there is a good story / momentum to it and watch them closely
    6. Sell when there is something that is even more core than this asset
  2. Speculative Holdings: Identifying financial assets that gives a positive expected return in the short run
    1. They are special situation. You think there is a catalyst soon. For example, a fundamental sound company that have some insider buying or based on the news, some things might be on the move
    2. Stupidly cheap companies that has no quality. You do not wish to hold them for long. This is because at certain point you can see it turning in the opposite direction. Convert to longer term hold if you realize you made an error in your prospecting
    3. Earnings and market sentiments

Run this through in your head.

Think about your Net Wealth Allocation

Ultimately, you are putting your wealth in risky assets because for the market risk, you wish to be compensated with higher positive expected return.

This is so that you can build wealth.

Building wealth to achieve certain financial goal.

Be it saving for

  1. Financial security
  2. Financial independence
  3. Your children’s education fund
  4. Traditional retirement
  5. Sabbatical in 5 years time

Be aware of that.

In financial planning we call this knowing your time horizon and knowing the amount you need.

How far away from these there are appropriate things to do. For some, just plonk in 100% of all the pay check if you can. For others, you should be de-risking and selling. You may not have taken care of these well.

Some articles to help:

If you have not thought about this, do consider it.

Many folks just look at what I do and think I am incredibly bearish. They failed to put on the financial planning hat and think about why my allocation is this way. (Those seasoned readers would know where I show my portfolio. I will not comment much)

And this is my gripe with the individual stock investor. They tend to think they are know-it-all.

But in truth, they only see the forest most of the time. You cannot blame the individual stock investor. You need a lot of time to get good so that you can have sustainable compounded growth.

However, most of the time, you tend to not take care of the portfolio allocation, or even the financial planning section.

I am almost a near retiree.

And if you understand what a retiree needs at different phase of retirement, you should have an understanding why the portfolio leans closer to the way it is.

I practically wrote a whole section here on what a person planning for retirement should consider. So the answer is deep in there somewhere.

Have that goal in mind. And what are fundamentally sound strategies to reach there. If you have no idea, man I think you need a good financial planner that is competent, have integrity and watch out for your interest

  1. Low net wealth: MoneyOwl
  2. High net wealth: Providend (disclosure: I work for Providend)
  3. Somewhere in between: Wilfred Ling (disclosure: affiliate link)

Think about Past Mistakes

I tend to review in my head some of the things I think I did poorly in the past. I ran through why I did it.

Do I have a fundamentally sound solution to it? If I do not have, that is a grave problem. If I have, think about what I tell myself last time. Is it still valid?

The idea is to have positive expected return over the long run, make more good decisions than poor decisions.

It also means make more fundamentally sound decisions than unsound ones.

One of my past mistake is immobility. This is behavioral.

The solution is to feel the pain. Feel the uncomfortable nature. Be very sure what you are doing is fundamentally sound. Then just keep doing it.

Think about the Lock Step of Investing

This is in the context of individual stock investing.

How much to systematically invest in core equity positions
How much to systematically invest in core equity positions

Morgan Housel used to provide this table during his Motley Fool days. It shows an investor how much to invest based on the frequency of market draw downs.

Some frequency of draw down is very long. Some folks spend forever waiting for them. Keep this in mind.

Tend to the Garden

This is in the context of individual stock investing.

Look less upon the gains and the losses.

Frame it as how I can position your portfolio in the best way going forward.

Prevent sunk cost fallacy from setting in.

If my portfolio fall from $1 mil to $700,000, don’t think about the $300,000 realized or unrealized losses.

I only have $700,000. The $300,000 is gone.

But if you don’t position the $700,000 in a way that going forward, it give you a positive risk adjusted expected return, that is even worse.

If based on your wealth building method, these are just volatility, your financial assets is really diversified, then this is nothing.

So I do look at what I wish to be Core and what are Special Situations. What looks more attractive. Then I just sell and buy them. It is hard but try to look less of the losses. It means nothing (unless to evaluate your performance). Just think in terms of tending to the garden, sniping away the weeds, watering the plants.

Review Opportunities

The job of identifying the fundamentals of businesses has to take place before the opportunity arises.

During this period is to find out which is the ones you deploy to and how much. Perhaps also to review if going forward, the fundamentals are intact.

But we are always prospecting, so just keep prospecting, be it good times or bad times.

Look at Beautiful Charts

I tend to have an interest now to see what are the instruments that really do well when there is a draw down.

So it is good to indulge in a little side hobby.

So here are some charts.

S&P 500 in US: Not the first day of fall….
NASDAQ ETF: Very correlated!
Emerging Markets ETF: Very correlated!
The REIT ETF: Whoever told me REITs are bond like! Very correlated!
The 20 year Treasury ETF: This is less correlated as with tradition
The Gold backed ETF: This time round it is less correlated
The Gold Miners ETF: This is looking good. Uncorrelation!
USD ETF: Traditionally this is suppose to be a safe haven. Not sure why its falling when USD is strengthening!
The Japanese Yen ETF: Another traditional safe haven. This is working out pretty well!
The leverage VIX ETF: Spiking!
Crypto: Still doing OK but in truth they seem to be very uncorrelated with the main markets
Some of the Telegram group is looking at a leveraged strategy with ETF. This is a look at the components.
And this is with that strategy as well.

Ok. Time for work. You can ask questions. I will not comment on my portfolio holdings. Better to ask about portfolio management and financial planning.

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.

Here are My Topical Resources on:

  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
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Dealing with the Uncertainties in Financial Independence Pursuit https://investmentmoats.com/financial-independence/dealing-with-the-uncertainties-in-financial-independence-pursuit/ https://investmentmoats.com/financial-independence/dealing-with-the-uncertainties-in-financial-independence-pursuit/#comments Sat, 03 Aug 2019 23:02:09 +0000 http://investmentmoats.com/?p=10343 Few things ran through my head currently but I will keep this post on some of the struggles and what I think about these struggles.

In the short span of three months, I have had friends dealing with grief and great struggles.

B wrote about the sudden turned of events when his dad suddenly came down with ischemic stroke while his dad is overseas. Due to that, he would have to shift his plans for financial independence. You can read about it here and here.

My friend Chris also shared a little more about his dad who has to be in and out of hospital recently. We discussed more about his dad situation, twice. Ironically these discussion was during two different funerals for a friend of ours. He had to organize 2 funerals in a short span of time.

I thank both Chris and B for their sharing and we wish both dad a speedy recovery. Their courageous sharing to me is frank. If you have read about their investing, and life experiences, you would be thinking we all got all these money & life stuff figured out.

These experiences just shows that everyone of us is trying our best to figure out the best path going forward.

In the financial independence community, we face a lot of naysayers. We were told a lot of times we didn’t factor in this, we didn’t factor in that.

In short, we either didn’t considered something that may happen or that we consistently underestimate certain things we already know.

This looks like a victory for them in a way.

I tend to think not. And I can provide some perspectives.

If you choose not to pursue Financial Independence, it does not mean you can handle Sudden Uncertainties better

Firstly, it is not that the pursuit of financial independence, will increase the chances of these events from happening. These events are likely to occur to most of us regardless whether we pursue this odd and niche lifestyle goal.

Someone could be still slogging in the corporate world, have a wife and two kids, with aging parents. While on holiday with the extended family, a similar situation befall them.

Secondly, what gets to critics is that there are so many known unknowns that could occur in you. If you do not plan for it, and you retire fully, then it is not going to work out for you.

It is the fully stopping work, and not earning anything but still got passive income coming in that gets people really riled up. In a way, we are going to live the life they wish they could live. A life that they think, they cannot have.

So the best way to solve this is by throwing known unknowns at us.

Financial Independence is a journey. Here is the typical process:

  1. Try to earn more
  2. Know what makes you happy in life. Spend enough to get you that
  3. For the rest, mercilessly cut down on the expenses that means less to you
  4. With the usually high savings rate, build wealth well with them
  5. Check in once in a while to see if you are there

This looks like a more intentional, escalated and advance version of personal finance.

And I do struggle to say whether it is wrong to pursue this.

What is the alternative?

  1. Try to earn more
  2. Spend on things that make you happy
  3. Spend on things that don’t make you happy
  4. Spend on other people that, deep down inside, is not really close to you
  5. Have a normal savings rate of 10% or less
  6. Don’t build wealth wisely. Don’t know any other alternative method to build wealth. So you put down a down payment on a 99 year old leasehold condo and continue to service the mortgage

A catastrophic situation occurs that would require you to come up with $20,000 to $120,000.

What do you do?

  1. Can you liquidate enough assets to have that amount of money that you need immediately?
  2. Some medical condition requires a recurring monthly treatment cost
  3. Could you be so flexible to shift your expenses to accommodate these recurring treatment costs? Bear in mind that at this point, you are of the frame of mind that all your expenses are necessary

There are certain things about the pursuit of financial independence that gets lost in the noise:

  1. These folks who are on the path tend to be good performers or aspiring to be one. If you want to earn more, you are likely to want to learn from others, try to get better. You tend to be more employable
  2. When you try to get better, you tend to be someone that people like to have around. Your professional network tend to be better as well. If you have started some side businesses, it is seldom likely that you have a good business but a poor network
  3. If you are #1 and #2, there is little chance that at 40-50 years old, you are happy with an existence that you do not work at all. Most likely you will do some kind of work, be it volunteer or not. Often you will earn some form of compensation
  4. Those who pursue, tends to develop competency in various sub life disciplines. Some even developed mastery in some of these sub life disciplines
  5. As they are often trying to find the best framework to do things, trying to balance pros and cons, they also tend to be more open about possibilities
  6. They tend to know the levers that they can pull when it comes to their life. They lived a more nimble life.
  7. Financial Independent does not mean you quit

In a way, those who decide to be on this path, tends to be those who are trying to scale the social ladder.

Whether they managed to reach financial independence, that matters less.

The essential tools to reach financial independence includes a lot of things that would put you in a better position then if you are not on the path.

There are lots to think about…. When it comes to Uncertainties

How do we address these uncertainties that the detractors talked about in financial independence?

In financial planning, this can be solved by baking in more cash flow requirement. On a present value basis, baked in 30-40% more to what you think you need.

This is a rule of thumb.

If not, you can plan for the worse case scenario that needs the most money.

One good example can be when one of the parents got dementia, need to stay in a home. The monthly cost is $4,000 a month. On an annual basis that will be $48,000 a year. Let us estimate that the parent need to be there for 15 years.

On a discount rate/inflation rate of 4%, the present value is $533,682. Realistically, if you can be closer to financial independence 10 years from now, what you need may be, $789,980.

For every uncertainty you can come up with, we can compute a cost for it.

Then you can save towards it, with your standard savings rate.

If you feel your current retirement is hard to save towards, note that you have to factor in these uncertainties as well, so that is either $500,000 to $800,000 on top of your retirement sum.

The naysayer wishes for the perfect plan. In the absence of that, they conclude retirement is impossible.

If you are trap in a well paying job with an overbearing boss, and you have not accumulate enough for retirement or financial independence, should you stay in the job?

The naysayer would stay in the job and be unhappy. The naysayer would probably move to another place. As luck would have it, the naysayer would feel the world is against him or her.

Those who are on this path would:

  1. Re-look the numbers
  2. How realistic is his or her plan to fully be financially independent
  3. If it is not, what are the risks he or she is exposed to, if he or she takes the leap
  4. What are the alternative lifestyle schemes to consider?

B and Chris took the plunge I think, because the job just suck too much out of them.

Too much bullshit. Too much time away from self and the family.

If we want a full proof plan before pulling the plug, then this is what they call FAT FIRE. It means you decide to retire but with a cash flow that can sustain your current lifestyle that is not bare-bones.

FAT FIRE is very comfortable. With a lot of buffers.

You can aim for that. Hope you have a nice salary because most often you would need it.

We should have done better to think about some of these uncertainties.

To make such a niche and incredulous concept looked realistic to the masses, the message must be easier to digest. When the message is more simple, a lot of deeper stuff is not discussed. These became some of the uncertainty.

Whether you can take the plunge or not depends on how risk seeking or risk adverse the person is. To address the anxiety of the risk adverse, we got to discuss this better.

There will always be Chink in One’s Armor

What I do observe is that no one has everything plan out so well.

We have folks we chat with in Telegram chats that seem to have every shit nailed down so well. And then he or she goes on to share some befuddling financial boo boo.

In the span of 3 months we are presented with a few different healthcare situations.

The insurance advisers will be using these case studies to prey on the availability bias and tell you to get this insurance, that insurance.

One common similarity with these 3 of my friends as well as myself is that the chink in the armor is the parents.

In all three cases, you realize, the kids cannot run away from this. This eventually becomes wholly your problem, or partly your problem.

Protecting parents can be hard. For some, they have enough pre-existing conditions that the insurance cost is high, or it renders them not insurable.

The cases I been through with, I have not heard many that gets a big critical illness payout. With a critical illness payout, it goes some way into help alleviate some new cancer treatments.

These new cancer treatments, most often, are not subsidized and are not cheap. To pay a 6 month out of pocket cost might set you back $100,000 to $200,000.

My stance for this has not changed:

  1. Insurance covers those low probability but high cost impact situations. Do your best to get them cover within your own abilities
  2. Keep your insurance cost in control
  3. You do not wish to fall into these medical shit, so a lot of it comes from trying your best to live a life that reduces your changes of getting them. You cannot avoid them but you could try not to escalate it
  4. Keep nimble and flexible. A rich and fixed life would give you a bigger issue when these stuff hits

Chris probably balance things up with his reflection of the medical care his dad is getting.

Conclusion

I guess the overall idea is that, you can failed in your pursuit of financial independence.

However, if you have truly learned enough on this path, it puts you in a better position.

Some of my readers did not reach there. They got some stuff thrown at them along the way. I do find that they are less lost. They would ask questions like they thought about doing this and that. They lean towards a certain path but just wanna hear what I think.

I believe that pursuit have made them fit mentally. They are also nimble because they have paid down, or could pay down their debt. Being unencumbered is a great position to be in.

However, we should absolutely discuss the things that could go wrong and considered them.

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.

Here are My Topical Resources on:

  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
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Singapore Savings Bonds SSB September 2019 Issue Yields 1.95% for 10 Year and 1.65% for 1 Year https://investmentmoats.com/uncategorized/singapore-savings-bonds-ssb-september-2019/ https://investmentmoats.com/uncategorized/singapore-savings-bonds-ssb-september-2019/#respond Fri, 02 Aug 2019 23:10:50 +0000 http://investmentmoats.com/?p=10329 Here is a higher yielding, safe way to save your money that you have no idea when you will need to use it, or your emergency fund.

The September 2019’s SSB bonds yield an interest rate of 1.95%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS)

However, if you only hold the SSB bonds for 1 year, with 2 semi-annual payments, your interest rate is 1.65%/yr.

$10,000 will grow to $11,962 in 10 years.

This bond is backed by the Singapore Government and its available to Singaporeans.

A single person can own not more than SG$200,000 worth of Singapore Savings Bonds. You can also use your Supplementary Retirement Scheme (SRS) account to purchase.

You can find out more information about the SSB here.

Note that every month, there will be a new issue you can subscribe to via ATM. The 1 to 10 year yield you will get will differ from this month’s ladder as shown above.

Last month’s bond yields 2.01%/yr for 10 years and 1.68%/yr for 1 year.

Here is the current historical SSB 10 Year Yield Curve with the 1 Year Yield Curve since Oct 2015 when SSB was started (Click on the chart, move over the line to see the actual yield for that month):

What is this Singapore Savings Bonds? Read my past write ups:

  1. This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?
  2. More details of the Singapore Savings Bond. Looks like my Emergency Funds now
  3. Singapore Savings Bonds Max Holding Limit is $200,000 for now. Apply via DBS, OCBC, UOB ATM
  4. Singapore Savings Bonds’ Inflation Protection Abilities
  5. Some instructions how to apply for the Singapore Savings Bonds

Past Issues of SSB and their Rates:

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.

Here are My Topical Resources on:

  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
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Family Inc: Measures of Health of Family Wealth https://investmentmoats.com/money/family-inc-measures-of-health-of-family-wealth/ https://investmentmoats.com/money/family-inc-measures-of-health-of-family-wealth/#comments Sat, 27 Jul 2019 23:27:03 +0000 http://investmentmoats.com/?p=10299 Personal finance books would usually teach us how to tell whether we are in a good or poor financial position.

Today, we continue with our Family Inc Series with a look at what Doug McComick recommends as metrics to measure the health of our family wealth.

You could use these metrics for a snapshot of how your family is doing. You could incorporate them into your tracking as well.

I take particular interest in this chapter to see if there are metrics that we can incorporate into my firm’s financial planning practices. You gotta keep trying to do better.

It is important for you to have an idea about your income and net wealth. And having personal income and balance sheet statements are a way to know how well you do.

We take a look at what Doug thinks we should take note of.

The Income Statement

In a financial statement, the income statement shows the readers the profit that the company or group of company earn in a year.

On a personal basis, your income statement would show your money inflows and outflows. Usually in a company’s income statement there is a separate cash flow statement. However, on a personal level an income statement or a cash flow statement is good enough.

Investment Moats recommends creating your personal cash flow statement.

Income (or Revenue) Concentration

The concentration shows the mix among the sources of income. It shows how evenly split are the two spouses’ income.

I used to have this thinking in my brain that if my friend makes $60,000 a year, her spouse also make $60,000 a year. Turns out, after more observation, for some reason the income mix is always not proportionate.

This ratio can be 50% if it is evenly split.

If you make $60,000 a year and she makes $40,000 a year, then its 60:40.

The idea of this ratio is probably more to keep in mind if your family allocates their budget according to how much each brings in.

It is also for your family to consider if you are taking up mortgage loans for example.

Surplus (Savings) Margin

Readers should be familiar with this one.

Surplus Margin = Cash Surplus / Revenue

Cash surplus is how much savings you have after satisfying all your expenses.

Doug says this is the most important metric in the page because it shows how efficiently you are able to turn labor assets into capital.

The faster you save, the faster you expand the investments in your asset management business.

The surplus margin also measure how much buffer you have, against contingencies that is inherent in you Family Inc.

A family that has a 25% surplus margin can experience a 25% decrease in income and still maintain consumption. A family with a 10% surplus margin, by contrast, would have to cut the expenses by 15%.

Does that mean that…. if my surplus margin is…. 50%, If I lost my job, I can survive for 1 year?

That is powerful indeed.

Fixed Expenses, Semi-Fixed Expenses and Variable Cost Margins

Doug explains that in the business context, this is the order of preference (top being most preferred):

  1. Variable costs
  2. Semi-fixed costs
  3. Fixed costs

The more fixed costs you have, as a percentage of your total costs, the less flexibility you have.

Doug says, if 80% of your costs are fixed, it would be impossible over the short term to reduce your consumption. That is, to reduce enough to accommodate a 25% decrease in income.

With variable costs, you can adjust quickly.

I tend to not like these terms over the years because it can be confusing. However, I absolutely get Doug’s grouping.

As an example, is your food, transport and home fixed costs, variable costs? These are technically variable but you cannot live without it. So likely these are the semi-fixed costs.

The fixed costs would be the taxes, on going medical costs, household maintenance… but even these, I can see you having a debate with me.

However, the reason for the margins is real:

If almost all your costs are fixed, then you have no flexibility. When it comes to planning for your financially independence, you need a concrete large sum as well.

Fixed plus Semi Fixed Charge Coverage Ratio

This is a comparison of your after-tax income versus (fixed + semi-fixed expenses).

The higher this ratio the greater your financial security.

Doug says if this ratio of yours is less than 1.25 times, the family is exposed to excessive risk of financial distresses.

I think this is something like the top ratio. I could invert it and it shows the ratio of income to fixed expenses.

It basically wishes your fixed expenses is small versus your income. High savings ratio usually keeps this ratio in check. If you own less stuff, your ratio might be lesser as well.

The Balance Sheet

The balance sheet, or net worth, or net wealth, or equity are referring to the same thing.

It shows your total assets, your total liabilities.

When you deduct the total liabilities from total assets, you will get total net worth/ net wealth/ equity.

You can read my personal net worth statement article here.

In this section, Doug highlights a few key measures of wealth.

  1. Family Inc Net Worth. This is total assets minus total liabilities
    1. This is broad
    2. Includes you and your spouse or (children that are not married?) expected after-tax future labor
    3. Includes your government pension value such as CPF
  2. Financial Net Worth. This is your total financial assets minus total liabilities
    1. Excludes Labor
    2. Excludes Government pension value
  3. Financial Earning Net Worth. This is financial net worth excluding the following:
    1. Assets or durable purchases that lose value, or depreciate, with normal age and use
    2. E.g. cars, trucks, appliances, electronics and furniture
  4. Investment Assets. This is the sum of all financial assets other than depreciating assets. This keep track of productive assets your business has working for you at any time

Why so much different measures?

I get this question a lot. Do you include your home? Do you include your CPF? There is a need to have these differentiation firstly to let you know what are accounting for.

The Family Inc Net Worth is likely for you to see the importance of your labor when you are starting out. When you start out, you do not have anything. However, the life time value of your labor has a substantial value. In contrast, for a person that is 56 years old, his labor value would have been less.

Financial Net Worth or Financial Earning Net Worth is closer to what we use in our financial independence planning. It eliminates the establishment risk that is of the government and also labor tends to be intangible. You have to accumulate investment assets in order for it to be tangible for some concrete planning.

Knowing how much investment assets you have is more relevant to keep track of how they are performing.

The Importance of Your Asset Composition

Doug provides some real Kung Fu here when he emphasize this: You need to take a hard look at what your assets are composed of all the time.

  1. Your labor assets will eventually be less useful over time
  2. It will be converted to other assets
  3. Different assets have different long term rate of return. For example, properties have a rate of return of 2 to 3%. Equities 5%. Your depreciating assets have a rate of return of -10%
From Family Inc

If you have allocated your assets well, exchanging it for productive capital assets, your wealth should grow well.

If it is sub-optimal, you would need to look into it.

Your Liquid Accounts

Liquid accounts that you will own will include

  1. checking
  2. cash equivalents
  3. short-term fixed income

These accounts provide your daily cash flow needs and as a safe store of value.

Months’ Contingency Capital

Months’ Contingency Capital = Liquid Accounts / Monthly Expenses

If you are unemployed tomorrow with no income, this ratio will tell the number of months your liquid assets could support your current rate of consumption.

This is basically like your emergency fund. And Doug recommends maintaining 3 months.

In this financial independence community, there are the crazy folks that would have 120 months for this!

Borrowing Capacity

This represents the max you could borrow from various sources of credit (mainly a home equity line of credit and credit cards) after deducting any outstanding balances.

In Singapore context, some sources would be personal loans and borrowing on the value of your cash value life insurance policies.

These stuff… if you are less sophisticated is like a ticking bomb. For those who know what to do with them, this can be used to blow up and sculpt a work of art.

The reason to assess this is because this also serve as contingency funds.

Months’ Borrowing Capacity

Months’ Borrowing Capacity = Amount you can borrow / Monthly Expenses

This is a variation of Month’s contingency capital.

This basically expanded your emergency fund by almost double or triple the base amount.

You do not need to draw down on it. However, if you absolutely have to, this is available.

Net Debt

Net Debt = Total Debt – Liquid Accounts

This is a refined measure of how leveraged you are.

It is what I used when assessing business as well. In the event that you are forced into a tight spot, the debt that you are worried about would be the amount you need to pay off.

For some, you can have $400,000 in debt but have $400,000 in liquid accounts, your situation is not too bad.

Net Debt to After-Tax Earnings and Net Debt to Investment Assets

There are 2 ratios here.

The first one is

Net Debt to After-Tax Earnings = Net Debt / After-Tax Earnings

This will show you how much of your income can be used to service the debt before consumption.

This is particularly sensitive to life cycles.

A young family may incur significant amount of debts to finance a home and education. When you measure it against their increasing earnings, you can assess whether these costs that you have spent are worth it.

Net Debt to Investment Assets = Net Debt / Investment Assets

By right, we should not have more debt than our investment assets. You would have more debt than investment assets, if the mortgage is on your primary residence. That is not counted as an investment assets. So this will make your ratio look….

I think if you hold a lot of investment assets, it can also show your ability to sell off the investment assets to repay the debt.

Doug recommends a net debt to after-tax earnings to be less than 6 times. I think this is not too conservative but good enough. Usually, I would use 5.

Doug recommends a net debt to investment assets to be below 1.

If you bought a primary residence with debt, your net debt to after tax earnings will be high. If it is an investment property, this ratio will go down because the rental income is part of earnings.

If your debt is consumption related, the net debt to investment assets will be high. That is not a good thing.

Liability Composition

This section will be rather short. Doug provided some advice on how he would look at debt.

  1. Maximize real estate loans over all other debt. Mortgage loans provide a sweet spot between low cost, long maturity and tax deductibility
  2. Finance significant purchases such as automobiles and education with available loans as long as the rates are less than 6%. Doug explained that these debts are attractive because of government funding for education and lenders for autos have recourse to the assets (they repossess the car if you do not pay)
  3. Compare between fixed rates and variable rates. There are no rule of thumb here. It depends on what you want
  4. Use credit cards as a loan of last resort
  5. Include your home equity line of credit as a potential source of cash to support your contingency planning program

The general idea is Doug is in favor of using leverage, but it has to be controlled and monitored. If you read this article in full, you will realize he has some monitors in place such as

  1. Months’ contingency capital
  2. Months’ borrowing capacity
  3. Net Debt to After-Tax Income
  4. Net Debt to Investments
  5. Asset Composition
  6. Fixed and Semi-Fixed Ratio to Total Cost

Conclusion

There are a few that I have not encounter before. I appreciate this book for sharing them. This book could go into this discussion because the readers tend to be more advanced.

Doug’s breakdown of the measure of wealth is good.

If you are doing your net worth tracking spreadsheet, those will be some categories to track over time. Most of my metrics look tip top but that is because my situation is a bit different.

How did your metrics look?

Family Inc is a Good Book. You can pick them up in your book store or the library.

My Family Inc Series of Articles are:

  1. Viewing Your Career as Investments
  2. 8 Weaknesses of Conventional Family Asset Allocation
  3. Measures of Family Wealth

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.

Here are My Topical Resources on:

  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
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Retiring in the Worst 30-year Period https://investmentmoats.com/budgeting/retirement-planning/retiring-worst-30-year-period-1/ https://investmentmoats.com/budgeting/retirement-planning/retiring-worst-30-year-period-1/#comments Mon, 22 Jul 2019 23:13:29 +0000 http://investmentmoats.com/?p=10289 You may be planning for your retirement.

And you might be thinking about what kind of risks you should be considering in your planning. The common fear is that in the first 5 years of your retirement, you experience a very large draw down of your portfolio.

On Investment Moats, I have highlight the risks of a negative sequence, and the havoc it could do to your retirement. Some friends have asked me: What if you have very good rate of return? Does that mitigate the risk?

Well…. Yes and No.

Because while sequence of return is a big monster to tackle, high inflation seemed to be a bigger monster.

I managed to do some data crunching recently. They told me that the most challenging 30 year period was either 1966, 1968 or 1969.

1969 was a real monster. But the most surprising thing about 1969 after I looked at the numbers was that…. I couldn’t detect what was so bad about this sequence.

I am going to show you how some indexes perform for the period of 1969 to 1998:

  1. We factor in a 1% annual expense ratio
  2. The portfolio is a 100% equity portfolio in that index
  3. The initial portfolio is $1000 and we will withdraw $40 in the initial year (the 4% withdrawal rate)
  4. After spending the $40, the year after, we adjust by the inflation for that particular period

We want to see if we are able to spend an inflation adjusted income for the 30 year duration.

A Pure S&P 500 Portfolio

S&P 500 1969 to 1997, 1% Expense Ratio, exhausted in 1989

First up, S&P 500 portfolio. The annual withdrawal rose by high inflation. In 10 years, the spending doubled to $80. In 24 years, the spending have doubled again to $160.

The money was exhausted by 1989.

The compounded average growth for this period is 11.07% a year. That is not… low.

What if the Retiree’s brother retire…. just 1 year later?

S&P 500 1970 to 1998, 1% Expense Ratio, not exhausted

Now next, think of the brother of the retiree before, only for this brother, he chose to retire 1 year difference.

His net wealth last him for the full 30 years.

You realize that he went through almost the same high inflation. His compounded rate of return is 12.38%.

How can 1 year difference matter so much??

The whole of 1961 to 1970 was a tough decade. I realize for those years in that decade, you cannot have too big of a negative years in the first 2 years. In those high inflationary years, it is less forgiving.

I do not think anyone would term a -9% return as a very bad sequence. However, this -9% is the difference between a very successful retirement from a not so successful one.

So next, what if your rate of return is high enough?

The same time frame but… with Dimensional US Small Cap Value Index

Dimensional US Small Cap Value Index 1970 to 1998, 1% Expense Ratio, not exhausted

We replaced the S&P 500 with a Dimensional US Small Cap Value index. Small cap and value factors did very well in the past. The compounded average growth is much higher at 14.99% a year (after fees).

Observe that in the same sequence, the small cap value is more volatile than the S&P 500. It dropped almost 30% versus the S&P 500, which dropped almost 10%.

In 1973 and 1974, it dropped a massive 31% and 18%. That is a 44% draw down.

In 1974, the $1000 portfolio dropped to $239.

However, this sequence was able to survive because the growth from this portfolio was crazy.

What about Fama/French US Large Value Research Index?

Fama/French US Large Value Research Index 1970 to 1998, 1% Expense Ratio, not exhausted

We have another example of an index that did well. This large cap value index had a smaller draw down but still larger than S&P 500.

This portfolio ended with 10 times as more money as originally started:

  1. after the high income requirement in this high inflation environment
  2. after poor negative sequence

Conclusion

1969 was a tough retirement year.

click to view larger chart

Here is how the three pure equity portfolio stack together. I had initially thought having a great investment return may not alleviate sequence of return risk.

However, if the rate of return is high enough, apparently even if the sequence is poor, inflation is higher, things will still work.

This might make a case of choosing an index that have a high expected returns. It lends weight to the factor tilts of Dimensional Funds available to Singaporeans via MoneyOwl, Providend and Endowus.

In the chart above we zoomed into the first 14 years.

I do wonder that, if you are in retirement, and you see your portfolio go down from $1000 to $239, will you keep to the plan and not make adjustment?

I think we will make adjustment because this leans very close to failure mode.

In retirement planning, we should view it less as a failure, but that the client will need to adjust his or her spending plan:

  1. Choose not to inflation adjust the income
  2. Step down the income by 20% since current withdrawal rate is too high
  3. Step up the income by 10% or slowly ratcheting up when you have more net wealth and can spend more.

In this way, you can be observe to be proactive and keeping up with the times.

Your plan for retirement is one:

  1. That you can stick with over a period of time
  2. And one that you are reviewing enough with someone who knows what they are doing, and adjusting when needed.

Some other take-away:

  1. 1969 was a bad year because 2 things add up
    1. High inflation increase your spending so much that it puts pressure on the portfolio
    2. Just a poorer sequence, although the sequence, by historical standards is actually rather livable for most
  2. It is hard to simulate this sequence in a Monte Carlo. How do you add up a specific scenario that is high inflation and poor sequence?
  3. Even if your money will last, there is every chance you will be forced to make stupid decisions
  4. If your rate of return is high enough, relative to inflation, relative to what you need to spend, it might work out

I will probably talk more about 1969 next time.

My other retirement articles are below in my retirement planning, financial independence page.

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.

Here are My Topical Resources on:

  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
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