Investment Moats

When a Bond Gives Equity Like Returns…

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Oxford University is planning to increase the size of their 100-year bond issuance.

The Financial Times reported that the university successfully raised 750 million pounds in 2017. This was a period where rates are low and they were able to issue at an interest rate of 2.54%.

This issuance may be priced close to 2.65% and is unsecured. This means that in the case of default, the borrowers will have no recourse over Oxford University’s assets.

There are some institutions that are in a unique situation. They can be likened to our Keppel or ST Telemedia. While they may not be a government organization, their strategic importance gives investors the impression that in case anything, someone would bail them out.

Oxford University happens to be in such a position.

What captured my attention was a crazy price chart of an Austrian 3.5 billion 100-year bond issue. This Austrian bond was issued at a yield closer to 2.3% a year. This is a pretty low rate already.

The price change since issuance

The bond trades closer to a prevailing yield of 1.1%. The price chart is so beautiful.

For those who think 2.3% is overvalued and madness, they probably missed out on a 60% gain in capital value (I take it the bond was issued at par of 100)

Different bonds are sensitive to the movement of the market interest rate. A rough way to measure how much they would move will be their maturity period.

A bond with 5-year duration will swing around 5% if interest rate swings 1%. A 10-year will swing around 10%. The relationship is not always equal. As the maturity increases the relationship should be more concave, meaning a 20-year bond will swing around 20% but likely less (15-20% range).

So a 100-year bond will have…… some crazy swing. This may make a great trading instrument without leverage lol.

I do wonder in what right mind would I invest in a 98-year bond at a 1.1% yield. It will take like near a century for my family to earn back the money!

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

I break down my resources according to these topics:

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

FX Rates Offered By Standard Chartered Singapore Tightens to 0.30%

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I updated roughly 1 month ago on my blog that through Standard Chartered Banking LiveFX, the exchange spread we get for currency conversion seems to have improved.

The spread that we used to need to pay was about 0.80% difference between what they quote versus the spot foreign exchange rates (FX). with LiveFX, this sort of reduced to about 0.40%.

I was helping a reader verify some figures on my Standard Chartered Banking LiveFX and noticed that the rates seem lower than 0.40% now.

Sell and Buy are rates offered by Standard Chartered LiveFX. We compare them against OFX and X-Rates

I compared the rates versus the quotes from 2 other platforms.

They have come down closer to 0.30%.

This is good news for those who are investing/trading overseas stocks.

At this rate, it is possibly cheaper than some of the traditional brokers. But not as close to the spot rates that we could observe if we were to use Interactive Brokers.

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

I break down my resources according to these topics:

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

3 Articles on Work and Life

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Dan*, a partner at a major Boston law firm, was due at the office, but instead, he was curled on his bathroom floor, unshaven and in his pajamas, crying into a towel.

– What Happens When Your Career Becomes Your Whole Identity

This feels more like a scene in a movie than from a Harvard Business Review article but it was actually from the latter.

The worse part of my job did not reduce me to this level but I would imagine some of my peers would have experienced something similar. Your friends would ask you seriously why put up with this, just quit it. However, if they were in your shoes, I wonder if they would take their own advice seriously.

Parts of your work is going to struggle and sometimes we do not know whether this is an acceptable struggle or that this is beyond our limit. As a new bird, you would not know which is which, thus the answer is not so straightforward.

Navigating work has always been an important aspect of financial independence. But perhaps not in a way that you think.

It is important not in the sense that the money allows you to be financial independence.

Rather there can be many conversations about work and financial independence. For example, are all work suppose to be repulsive? What if we do not find work repulsive?

How do you “survive” the period where you have set up your financial system and are just effectively waiting for the “cross over point” where your cash flow from your portfolio is more than your expenses?

Over the weekend, I came across three articles about work and I realize they are applicable to the topic of financial independence as well.

When Your Work is Your Identity

The first article explores some of our existential crisis: Who am I if I am not the highly paid, senior manager?

Many of us started liking what we do, but as we progressed in the career, we started being more and more unhappy in our career.

Progressing in our career usually means an emphasis on spending time at work, versus time for other things. We start to wonder if we would be happier if they have more friends and a happier family if we had spend our time out of the office instead.

But we are afraid to hate our job because our career has been such a big part of our identity that if we hate our career, it would be similar to hating ourselves.

Psychologist called this enmeshment with your career. Usually, it is used to describe the blurred boundaries between 2 people. However, in this case, it is between you and your career.

Being enmesh means your identity cannot be developed independently.

When you engage in any intense activity for a great majority of your waking hours, that activity will tend to become more and more central to your identity. It displaced other activities that you might identify with.

For some of us, our career achievements are highly valued in our family or community. There are high value placed upon professional and financial achievements. We fear failure will make our family disconnect with us. And thus this drives our identity to be more work focus.

We have also reached a certain socioeconomic class. It may not be the glamorous things but that you have succeeded to have access to your friends you are comfortable with now. Our identities are highly influenced by how we present ourselves to them.

Whichever level in this socioeconomic class, your identity is focused on certain wealth, achievement and influence. To maintain these 3, you need to maintain this good career.

Some of the better suggestions provided sound very cliche:

  1. Rebuild your network. Reach out to friends and family. recent research on adult friendships has shown that having just three to five close friends is associated with the highest levels of life satisfaction.
  2. Decide what is important to you. Review your principles and values. “Values Clarification”: Reflecting on your desired direction in areas like relationships, community, careers, and parenting. Rank their importance to you as well.
  3. Look beyond your job title. Reframe more in terms of skills at work that can be used across different contexts than on your job title.

Tasting the Extreme Ends of Working and Living Life

Julian Hebron at The Basis Point shares his reflection of working, not working and ultimately coming back to work on his own terms.

  1. Career success is measured by metrics such as money, expertise, and credibility.
  2. Life success is measured by something much more personal.

To gain career success it requires you to put in hard work and often, it involves some sacrifice of time from personal and family time. This will win you money, expertise or credibility or a combination of all three.

If you continue down this path you will either

  1. Taste career success through a combination of money, expertise, and credibility
  2. Gear down career success ambition and gear up life success ambition
  3. Pursue #2 but eventually settled for a blend of #1 and #2

What I understand from Julian is that when you have a taste of two extreme ends, you tend to understand where you would not wish to go. The most comfortable position might be a blend of somewhere in the middle.

Julian was able to gain this perspective because he climbed high enough that he has seen some form of success. He was able to weigh the tradeoff between career success and life success.

Not everyone has attained that privilege.

At the same time, we cannot discount that successful people have accumulated wealth capital, wellness capital, and social capital.

Why are Older Workers Less Anxious at Work?

Washington Post has a good article questioning if we reduced our ambition as we age. I thought the article explain the heck care attitude that people tend to stereotype older workers.

I do not think older workers do not care about their work so much. Perhaps I have seen some older workers who are more dedicated, always telling the younger ones to maintain certain standards.

However, perhaps as we get older, our philosophy about working have gradually shifted:

  1. We find contentment with the station in our life. We wish to perhaps learn to enjoy this setup in our lives.
  2. We may start becoming more selective in pursuing gigs and less anxious about how they would turn out.
  3. Started shrugging instead of worrying whether the kids will be late for school.
  4. We accept that we will die one day and are selective about who we spend our time with.

A lot of studies have indicated adults’ happiness over the years resembles that of a U-shape. We started off in our grown-up years feeling pretty good about ourselves. This falls over time until our 50s to hit our peak happiness around 65 to 72 years old.

All this seems to set us up for a period where we feel like we are more in control, and that we are least anxious about things (in terms of our work, not life). This might free us up to do better work.

I think what was not explicitly spelled out was that as you stay in the industry longer, some of the skills that used to take you a long time to do well became much easier for yourself. You tend not to forget how to do these things and you could customize these things well to suit what is required.

Trying to refine these areas of your work might not yield the highest benefit. The biggest wins tend to be able to selectively carry out those projects that you are best suited for.

Unfortunately, not everyone can be in such a privileged position to be able to do this. What I do see are very competent, older folks being overloaded with more work, from acceptable load to unsustainable load until it breaks a person.

Overall, the theme seems to be that if you are able to move up to a higher part of the value chain, all this advice will work for you. However, if we have not, then you would find these advise a little unrealistic.

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

I break down my resources according to these topics:

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

Comparing Money-Weighted Returns Versus Time-Weighted Returns

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MWRR/XIRR is a different way of measuring your returns compared to the traditional TWRR/CAGR. Both have their strengths and each has its weaknesses.

There are usually a few prevalent ways to see if your portfolio or net wealth is performing well, versus others.

But the most common debate has been Time-Weighted Rate of Return (TWRR) and Money-Weighted Rate of Return (MWRR).

Another name for MWRR is also the Extended Internal Rate of Return (XIRR). TWRR is also known as Compounded Average Growth Rate (CAGR).

The performance difference between TWRR and MWRR is based on what has a heavier weight

  • TWRR/CAGR: Weighted more heavy to time. So those transactions that are older, their performance will matter more than those transactions that are younger
  • MWRR/XIRR: Weighted more heavy to money. So those transactions that are larger in value, their performance will matter more than those transactions that are smaller in value

So which one is better?

The answer is that each has its own advantages

  1. TWRR/CAGR is good if you wish to show the returns over different time frames, with no bias towards the investment actions of the investor/fund manager
  2. MWRR/XIRR is more applicable if you wish to show the quality of the investor/manager
  3. TWRR/CAGR typically shows the performance of the investment/stock/REIT/bond you wish or bought into. MWRR/XIRR shows the investment decision you made.

Let us go through some examples hopefully, I can explain well.

TWRR/CAGR is Great to Show a Model Portfolio’s Performance Returns

Dimensional Emerging Markets Large Cap Index 2000 to 2019 (19 years)

The chart above shows the growth of wealth of $1 invested at the start of 1st Jan 2000 into a Dimensional Emerging Markets Large Cap Index and your wealth at the end 20 years later.

Your $1 becomes $6.48. That is seriously good returns!

If we use TWRR/CAGR to measure the returns is 9.8% a year. If you ask most investor they will be happy with this return. TWRR is great at showing model portfolio returns.

Factsheet of iShares Core MSCI World UCITS ETF

TWRR/CAGR is what you will see in all your unit trust, hedge funds factsheets.

In the above factsheet, it shows the annualized performance. If you hold the ETF for this long, say 3 years, your CAGR is 12.42% a year. If you look at the label of the chart, it says a growth of $10,000 USD since inception.

In other words, there is a starting point to this measurement.

If there were No Uneven Cash Flows in Your Portfolio, your MWRR/XIRR will be Equal to your TWRR/CAGR

Now, if we do not factor in when you invest your money, all these returns will be the same.

XIRR calculator computing the same Dimensional Emerging Market Large Index from 2000 to 2019

The table above is an XIRR calculator I have created in Google Sheets. It basically computes a stream of net cash flow (column E) and a series of corresponding cash flow date (column B) and throws out the result.

If you like to try out this XIRR spreadsheet, you can make a copy of my XIRR calculator here and go to the Manual XIRR tab.

In Excel or Google Sheets there is this XIRR formula that you can use.

So I contribute $1 into the portfolio on 1st Jan 2000 and I sell everything on 30th Nov 2019 and get back $6.48.

You can see the XIRR is 9.83%, which is the same as the TWRR/CAGR returns of 9.8% a year.

If you have invested at the start and there are very little cash flow movements, then your returns should be pretty close to the model portfolio in the spreadsheet. However, this is near impossible.

Usually, the fund is incepted in 2003 but you only got to know the fund in 2015. You could still measure the TWRR from 2015 to 2019 to see your compounded return in the past 5 years.

MWRR/XIRR Allows You to Know the Quality of Fund Manager or Your Own Investment and Capital Allocation Decision Making

Suppose for the same $1 we put it in the hands of the investor.

The Investor decides to put in $0.50 at the start in 2000 and $0.25 near one of the lowest points in Feb 2009 and the rest of $0.25 in 2014 after he grew so impatient that his money is not compounding.

The XIRR when we split the money into 3 batches.

We get an MWRR/XIRR of 9.7%. This is not too bad. Firstly, instead of $6.48 the money only grew to $4.26 because a lot of the money was put into work much, much later. The money did not have time to compound.

You can think of this 9.7% as the “interest rate a year” you earn for this stream of uneven cash flow over 20 years.

The MWRR/XIRR return is pretty close to the TWRR/CAGR because this investor made some good decision to only invest at a rather low price.

Now let us switch the investments around. This time let us see the return if the 2008 amount is more.

More invested in 2009 compared to the other 2 period

The XIRR is higher at 9.76%. Surprisingly, even a better decision to

  1. Wait until the market crash into the deepest part
  2. Putting in the majority of the money at that point

Didn’t earn you a better return. In fact, if we reviewed on Nov 2019, your absolute cash you get back was lower ($3.38 vs $4.26 or $6.48).

We missed out on a lot of the compounding.

More invested in 2014 compared to the other 2 periods

Finally, 2014 was not the best time to invest. In 2015, emerging markets were not doing too well and the investor’s money went into a tailspin.

Still, the XIRR is 9.26%. It definitely suffered compare to the previous 2 but not by a lot. In absolute money terms, $2.93 is lower than all the previous one but not too different if you time it well versus the one where you invested most in 2008.

I hope through this small exercise, you can see that if you break up the cash flows up, your returns will differ.

I think the most important part of this exercise might not be the difference between MWRR vs TWRR but if you invest and let time do its magic.

MWRR/XIRR allows you to factor in the Cash Drag in Your Portfolio and Your Discretionary Fund Manager’s Underperformance

When you read what people posted online about your returns, you got to ask what goes into the computation. If someone factors in all the idle cash in their portfolio, then it tells a different story from one that did not.

So let us go back to the Dimensional Emerging Market example where we invest $1 at the start in 2000.

Suppose I am scared to invest and decide to keep another $1 on the side. The purpose of this $1 is to build towards my financial independence but I was afraid of the volatility and in general, I just started out my investing journey so I do not know what I was getting myself into.

So for this $1 I put in average savings yielding 1% a year.

If you factor in this, your returns will look like:

Factors in $1 more kept in cash at 1% a year interest for 20 years

The MWRR/XIRR gets reduced overall to 7.00%.

The MWRR/XIRR reflects the wealth-building abilities of an individual or an entity better than TWRR/CAGR.

It is also myopic to tell people “Hey, I have invested in a fund that grew from $1 to $6.48!” when this is just 10% of your money, while the rest is earning 2% a year.

Your returns will look like:

$1 invested in Dimensional Emerging Market $9 invested in a 2% a year instrument

If you factor in the rest of the assets that were too conservative or are losing money, the overall portfolio MWRR/XIRR goes down to 3.5%.

A lot of the time, your overall compounded rate of return is determined by your asset allocation. You may have assets performing very well but largely speaking, most of your money is not doing too well.

MWRR/XIRR Allows You to Measure a Portfolio Made Up of Different Assets with Cash Flows of Different Timing

A lot of times, we received comments from readers or clients that our returns are not good enough.

There may be some truth to that.

However, I would also question them back: How do you measure the performance of your ENTIRE portfolio against what we put your money into?

Our solutions are very transparent and simple. If you need a 60% equity, 30% bonds, 10% cash, we put all your $5 million split into these allocation. End of each year, we can compute your returns based on exactly how much you put in when you put in.

For some folks, their “portfolio” can make up of things like this. Trust me, I am simplifying things sometimes. I have not added to the number of cash-value policies people usually have.

When you are managing this yourself, you are the investment manager and possibly the financial planner all rolled into one.

In order to compute the returns, you got to keep track of the cash inflow and outflow for each of these assets. When is the transaction and how much flowed in and out?

For most people, you cannot be the investment manager because life is already busy as it is. I wonder how many investment managers or financial planners help you with this.

As a firm, we cannot evaluate past returns well because of incomplete transaction records.

However, there is a bare minimum you could do if you arrange your assets well.

In the diagram above, we can arrange how we flow our cash through 2 accounts. The DBS account would be like an “Investment Cash” account. when you receive your pay or income from your business, it flows to your OCBC account.

You can periodically fund your portfolio by transferring your money from the OCBC account to the DBS account. When your investments need funding, the funding will come only from the DBS account. Could you have more than 1 savings account in your Portfolio (other than the DBS Account)? Yes, you can. You would just need to compartmentalize the roles of these accounts well.

The beauty of this is that you only need to take note of

  1. When you transfer from OCBC to DBS and how much
  2. When you transfer from DBS to OCBC and how much

You do not have to take note of a lot of the cash flows between each of the assets inside your portfolio. Just those 2 mention before. This makes it much more livable to keep track.

To compute your MWRR/XIRR, you record down the current value of your properties (net of mortgage), all your managed accounts, deposits and treat it as you will sell them.

So if you have consistently contribute $50,000 a year for 20 years, you can tally against the cash flow received from the DBS account into your OCBC. The XIRR/MWRR of 4.64% shows the level of your wealth management expertise.

Summary

The biggest problem we faced are usually miscommunication.

Why are returns so low? Perhaps, it is due to what goes into the calculation of the returns. Often it is due to lack of awareness of the time period.

If not it is what we are comparing against. Exclude all the poor performing assets or the assets that you cannot remember, but a prospective investment against the best performing fund you owned.

This miscommunication is the most prevalent among the property investing crowd. I got so many comments saying my property post is overly optimistic, too pessimistic at the same time.

Each individual property is unique. What is the net of downpayment, renovation, furnishing, constant maintenance capital expenditure, paying agents, collecting rental, property taxes, air-con servicing, seller stamp duty, buyer stamp duty, insurance?

MWRR/XIRR is not perfect but it allows you to measure the returns of apples and oranges.

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

I break down my resources according to these topics:

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