Wednesday, June 24, 2015

The Power Of Dividend Investing [Part 1]

There have been a number of emails from readers asking me how to calculate or get a decent dividend yield from investing in stocks. I've always subscribed to the idea that creating passive income is important in our lives if we want to achieve financial independence. We could then keep all our earned income and spend on our passive income to be self sufficient.

Investing for income or dividend investing is a good way to create passive income. This method has worked for many people just like how it has worked for me so far. Having extra money coming into our bank account every now and then is not a bad idea at all. I've always had the habit of transferring a portion of my salary to my other bank accounts. I make this process automatic so it is effortless on my part. Then, I can spend the rest of the money left in that one account.

Transferring out my salary but still have more money

I transfer a big part of my salary out from my bank account every month right after my salary comes in. When I do this, magic starts to happen to this account. At first, the money in that bank account seems to be decreasing but as time passes, the money in that account grew even though the automatic transfers were still happening. This was the result of creating passive income.

This was essentially what I did:

You can replace the overseas holiday with any other expenses which you might have. After transferring a big portion of my money out every single month, my account still grew to the point that I could now afford an overseas holiday to Japan, Europe or even the US without saving up.

If you want to enjoy,  go create it!

Too many people are just spending all their earned income in order to enjoy life. If we do that consistently, we will be broke all our lives. If you want to enjoy, go create it instead. By creating, I don't mean trying to earn more active income again. It is important to grow our active income and increase it but there will always be a limit on it.

If you can earn more active income but still have the time for other more important things in your life, go ahead and do it. If you take on an additional part time job on top of your full time job, sacrificing away your family time, it doesn't seem like a wise choice. Dividend investing for passive income can help us have more money and at the same time have more time.

The Power of dividend investing 

Dividend investing is a powerful concept. Most of us know Warren Buffett as a value investor but he is actually also a dividend investor as well, or we should say a dividend growth investor.

Warren Buffett's top 5 holdings are:
  • Wells Fargo
  • Coca-Cola
  • American Express
  • IBM
  • Wal-Mart
All of the five stocks above pays dividends. Wal-Mart has paid increasing dividends for over 40 years. Coca-Cola has paid increasing dividends for over 50 years. Stocks that increases dividends for the long term is a good choice for a dividend investor. Moreover, a company that can increase dividends may mean its profits increases as well which leads to stock price increasing. Dividend and growth sometimes do go hand in hand. 

Singapore Stocks for dividend investing

Some of us are not too familiar with the US market so let's start with the Singapore stock market. Are there companies which has paid increasing dividends over the years?

Yes there is. Let's look at some Singapore stocks and how it will turn out if we had invested in it over the years.


Starhub is one of the 3 telecommunication companies in Singapore. Its no doubt a dividend stock paying dividends to shareholders every quarter. In 2005, Starhub paid a total of 6.5cents in dividend. Fast forward to 2014, Starhub has increased dividends to 20cents for the whole of 2014. 

In 2005, Starhub's share price was trading at just $1.30. Today, the price is at $4.05.  If we had invested in Starhub back in 2005 and hold it all the way to now, we would be getting a dividend yield of 15.4% (based on a price of $1.30) and also the value of the stock price has increased by 3 times. $5000 invested in 2005 would become about $15000 now and we would still be getting about $800 dividends annually from the initial $5000 invested.  

Sembcorp Industries

Sembcorp industries is an energy, water and marine group. It has paid dividends every single year for the past 16 years. In year 2000, it paid total dividends of only 10 cents while today, it is paying dividends of 22 cents in 2014. Stock price was trading at around $1.70 in year 2000 and has increased to a high of $5.50 in 2014. 

$5000 invested in Sembcorp industries would have grown to $16000 in 2014. We would also be getting an annual dividend yield of 12.9% base on the price of $1.70 bought in year 2000. 

Jardine C&C

The most amazing dividend investing story would be from this company. Jardine C&C is a well know stock among investors especially for its high price of $36 now. At its peak, the price was more than $50. Jardine Cycle & Carriage engages in motor vehicle retail, distribution, and after-sales service.

This company has paid dividends for the past 23 years. In 1993, total dividends paid was 10 cents. Today, in 2014, total dividends paid add up to $1.08 in total. This is more than 10 times increase in its dividend payout. Stock price was trading at $3.80 in year 2000 (I only have the data from 2000 onwards). Today, price is at $36. Dividends has increased 10 times while stock price has increased about 10 times too. 

$5000 invested in Jardine C&C would have grown to $50,000 now and we still get about $1300 in dividends annually. This is a 28% dividend yield on the initial invested capital. 

Parkwaylife REIT

Parkwaylife REIT is a real estate investment trust which owns hospitals such as Mount Elizabeth and Gleneagles. It has paid dividends for the past 7 years with dividends at 7.4 cents in 2009 growing to 11.4 cents now.  Its stock price was trading at $0.76 in 2009 and $2.31 now. 

If we had invested from 2009 till now, we would be getting an annual dividend yield of 15% based on the purchase price of $0.76. 

Dividend yield of more than 10%

From the above examples, we would be getting more than 10% or even 20% dividend yield if we had bought and kept those dividend stocks for the long term. However, not all stocks have increasing dividends and increasing stock price. There are many stocks which performed poorly over the years with decreasing dividends or even cutting dividends off completely. Share price would also drop as a result. 

The challenge would be to research and find the stocks which have the potential for long term dividend play. In the next part of this post on the power of dividend investing, we'll look into some of the selection criteria which we can possibly use and the strategies to build a dividend portfolio.

Read Part 2 here:

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Thursday, June 18, 2015

Never Rely On CPF For Your Retirement?

In my previous post on "You Can Never Retire If You Only Save 10% Of Your Income", I said if we only save 10% of our income, it is impossible to retire. There was a comment in that post saying that since we can't retire on 10% savings, then maybe we can retire on our CPF savings which we contribute 37% of our salary on a monthly basis.

In case you didn't realise, yes we contribute 37% of our monthly salary to our CPF. This is quite a high savings rate to speak of. 20% is contributed by us and 17% is contributed by our employer. It goes into 3 separate accounts mainly the ordinary, special and medisave account.

Most of us use CPF to pay for housing loans and medical insurance

However, as we all know, most of us will use our CPF money to pay for our housing loans and also medical insurance. In most cases, young people now and in the near future will need to pay about $1200 per month for their housing loans base on a $300,000 price HDB flat. If we divide equally between husband and wife, each will need to pay about $600 for their housing loan. For a fresh graduate who earns $3000, $600 is almost all that he contributes to his ordinary account. Assuming if salary remains constant, this person would have close to nothing in his ordinary account when he reach 55.

It is a good idea to rely on CPF for your retirement? If we think that we don't need to have our own personal savings because there is CPF, will we be in big trouble?

How much CPF will we have after using it for housing?

Let's demystify how much CPF will we have after using it for housing. Many people say that the future generation of young people will have no money left in their CPF after paying for the high housing loans. Is this true?

I've done the calculation and here is the scenario and the result:

  • Starts with $2500 salary and assuming it increases 3% per year 
  • Buys $300,000 HDB flat ($275,000 after grant)
  • Pays $556/month for housing loan from CPF OA (Divide by 2 with spouse)
From the above scenario, this person will have $580,978 in total from all 3 CPF accounts even after finishing paying for his or her housing loan. Doesn't sound too bad after all. 

From a chart perspective, here's how the CPF money will grow:

*Above figures are estimated and assumes no overflows from MA in excess of Medisave contribution ceiling

How much would we have if we did not use our CPF monies at all?

On the other hand, if we did not use our CPF money at all to pay for housing loans, how much would we have?

The number is......  $852,515

This is $271,537 more than the previous example of using CPF for housing. If you notice, the amount paid for the housing loan is only $166,800 per person ($556 x 12 months x 25 years). But, if the money is left inside CPF, there is about $100,000 more due to the interest compounded in the CPF accounts.

Here is the chart for the scenario of not using CPF money at all:

Look closely at the chart again. After age 55 to 65, the person who doesn't use his CPF money at all is a millionaire at age 65. In fact, he has more than a million dollars at $1,152,048. Just by a starting salary of $2500 and growing at 3% per annum, a person can become a millionaire by age 65 if he choose to leave his money in his CPF account.

*Above figures are estimated and assumes no overflows from MA in excess of Medisave contribution ceiling

Should we use or keep our CPF money?

Using your CPF to pay for your housing loans or keeping your CPF money inside to earn higher interest is a decision we all have to make. What I have done is simply to show you the difference between using and not using your CPF money. The example above is never perfect with various assumptions. Some may say a starting salary of $2500 is not realistic and a consistent 3% salary increment doesn't sound realistic too. What if we lose our job along the way? Yes, these are all valid concern but the model above is just to give you a rough guide base on the assumptions.

There are also instances where we will earn higher salaries which is even better for us. I have done the calculations before that if we save $1500 per month and invest it at 5% ROI, we will achieve a million dollars in 28 years. CPF gives us interest of about 2.5%-5% for us who are below 55. It is possible to accumulate a substantial amount of wealth through the CPF system alone. Never rely on CPF for your retirement? It really depends on how you use it. Most of us will not be able to rely on CPF for retirement if we choose to empty it early in our lives.

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Monday, June 15, 2015

Become a Savvier Online Shopper: 5 Tricks and Tips to Note!

It’s time to face up to the facts - online shopping is in. With retail therapy conveniently moving online, physical shopping might very well be on its way to becoming obsolete. Of course, that shouldn’t be a cause for concern - any online shopper will know the satisfaction of placing an order online, and having it doubled when receiving the precious parcel a few days later. And there’s no need to have it all at the expense of your wallet - here are five insider tips to help you turn your online shopping trials into triumphs.

1. Filters

If you haven’t been using filters when you browse online, you’ve been doing online shopping the wrong way. Sort your online goodies from Price Low to High to root out the best deals on the site, and keep everything organized for your browsing ease.

For those frustrated at having to sift through pages of irrelevant but cheap items, that’s exactly where the price range toggles come in. Simply adjust your minimum price to something reasonable of the category and you’ll be good to go. Then again, for those who like challenges, feel free to keep the minimum price at $0 – after all, you never know when an extra value deal sneaks its way into the game.

Price filters aside, you can also play with the various filter options provided to you by the website - in clothing sections alone, filters like size, length of skirts, colours, brands and more can really help to narrow down your options so you can access exactly what you want, instantly and efficiently.

2. Sign up for the newsletter

Believe it or not, the online newsletter exists for a purpose larger than flooding your inbox with useless spam. Signing up for the store newsletter gives you advance notice on sales and updates that could do wonders for your savings account.

In exchange for your elusive email, stores tend to reward customer's loyalty with sneak-peek ‘first looks’ at upcoming sales, and sometimes even the handy coupon code. When that happens, you definitely don’t want to miss it out. For many online stores, if you go the extra mile to sign up for an account, you’ll often be gifted with a special discount code on your birthday.

It’s a worthwhile trade for your inbox space, but if you’re still a little hesitant, here’s a tip –create a separate account purely for online shopping accounts and updates. That way, if you’re ever in the mood to part with your money, you’ll find a whole host of avenues waiting neatly for you in one place.

3. Cash in (or out) on holidays

Public holidays aren’t just good for a free day off from work or school now – online stores have cashed in on the holiday hype (and the fact that people are happier on a break) to entice customers with special promo codes and sales. Take a look around: Zalora, ASOS, Lazada, Groupon are just some of the big names that have taken to offering holiday-specific discounts when the occasion arises. Take your pick from Mother’s Day, Father’s Day, Labour Day, and the many other extraneous holidays that bring with them an onslaught of much appreciated discount codes. So if you’ve got your eyes on something, it might help to keep the other eye out for any upcoming public holidays before you place that order. 

4. Resist – curb the urge!

Strangely enough, playing hard to get with your favourite online store works, especially when you’re usually a loyal purchasing customer of the website. From a tried-and-tested perspective, if you refrain from ordering from ASOS for a substantial period of time – whether intentionally or not – this British retailer will very graciously send you a “We miss you, take 20% off!” promo code, exclusive only to you.
Singapore’s Zalora too, has been known to show the occasional act of generosity if you leave something simmering in your cart for a few days. For anyone intending to make a hasty purchase at full price, it might be worthwhile to consider playing the waiting game, because indeed, good things come to those who wait. 

5. Use CashBack Websites!
It’s a little novel to us here in Singapore, but getting money back when you shop has been a popular trend for quite a while now. Most famously done in the US, shoppers can get cashback from purchasing their favourite brands through the particular cashback website. It’s a nifty notion that has thankfully made its way onto our shores  – the cashback sites get their commission, and you get a portion of the money you spent credited back to you.
One such website that offers cashback to the South East Asian consumers is ShopBack Singapore – in addition to cashback on over 500 shops, you’ll get access to current active promo codes and discount codes for those stores including ASOS, Zalora, Groupon, Expedia,, and hundreds more. Once you’ve accumulated at least $10 of cashback in your ShopBack account, you can conveniently cash it out into your bank and PayPal accounts helping you save more online. 

At the end of the day, getting the most out of your online shopping experience comes down to shopping smart. Understanding and knowing how best to work the ways of the websites will help any avid shopper get a good deal - possibly even more than in shopping real-world retail. And honestly, who needs instant gratification when you can have the delayed pleasure of receiving a parcel addressed to yourself, from yourself?  

Amanda writes for cash back website ShopBack Singapore and has 48 pairs of shoes. Other than that, she's pretty good at handling her finances.

This post is brought to you by Shopback. Sign up and start enjoying cashback for your online purchases today!

Thursday, June 11, 2015

Earn As Much As You Can But Never Sacrifice Your Soul To Do It

Money..... The most important aspect of our lives? Or is it not? From the day we graduate from school and enter the corporate world, we devote so much of our time for work that it seems like we do not have enough time for anything else. Replying to emails in the middle of the night, answering calls even during weekends becomes part of our lives.

Busy is the word that constantly comes out from our mouths. The bills to pay, the house to pay, the car loan to service and the children to feed keeps us moving higher up the corporate ladder to earn more. Before we know it, we are sucked into this corporate world for God knows how long a period of time.

The rat race is what most people call it. The rat keeps running on the wheel but never reaches a destination. Going round and round and round for so long without a purpose. Is that the life we want for ourselves? Or is there a greater purpose to life than just making money? 


Earn as much as you can but never sacrifice your soul to do it is the message. We all know our limits when our soul is sacrificed. When we start to neglect our health to earn money, when we start to neglect our family to earn money is not a good choice to make. Money lost can be earned back but time lost can never be recovered.

I had a colleague who choose to focus on his children and family instead of just aimlessly making money. In the past, he was working full time in the day and worked as a property agent by night. The money was good but his time with his children in the evenings and weekends were sacrificed. One day, while he was alone in a client's apartment thinking about his life, he asked himself is it worth it to spend less time with his family just to earn this extra money? His answer was No and never regretted ever since.

How We Get Ourselves in The Rat Race? 

A conscious decision early in our lives can make a difference on the path we will take in life. Let me illustrate this with a story:

There was a man who lived with his newly wed wife and they own a simple house at the outskirts of the city. The couple were excited for the new family they are going to have and had many plans for their future. They wanted to renovate their house to make it nicer, buy a car, build a beautiful pond, have children and also build a barn to raise animals. However, after calculating their budget, the couple realised they could only do one thing only.

The wife suggested that they renovate their house. The husband asked: "why should we renovate the house?". The wife replied: "If we renovate the house, our house value will go up so it is a good choice." The husband however said: "We should build a barn to raise animals." Both of them could not come to an agreement and quarrelled aggressively over this issue. The wife was so angry that she questioned her husband: "Are the animals more important than me?"

Who do you think won the argument in the end? The wife or the husband? In the end, the husband eventually won the argument. The husband said: "If we build the barn to raise animals, the income from the animals will pay for the renovation. More than that, it will also pay for the car we want to buy, the pond we want to build and the children we want to have."

Most of us sacrifice our soul to earn more money because we "renovate the house" first. When we entered the workforce, we start to spend more thinking that we are increasing our standards of living. We buy a car, we renovate the house, we go on expensive holiday trips. When our income doubles, we double our expenditure too. In the end, we have no money to build the barn and still have to work doubly hard to sustain our so called higher standards of living,

Remember, we can still have the pond, the car, the renovation without working doubly hard and getting into the rat race. Build the barn first and let it pay for the others. Gradually, let money work for you while you're still working for money. It takes time and some sacrifice not to renovate the house first in the beginning to build the barn but it'll be all worth it. A conscious decision can change your life forever.

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Tuesday, June 9, 2015

You Can Never Retire If You Only Save 10% Of Your Income

Saving 10% of income is better than not saving any money at all? That's what a lot of people say. But, is it wise to save only 10% of our income? Saving 10% only means spending 90% of our income. If you earn $1000 and can only save $100, it is still acceptable as you may not have much money to spend. But if you earn $5000 and only save $500, it is a whole different story.

Saving 10% of our income takes us 51 years before we can retire. Even if you start saving since the day you start working, you still can't retire in your 70s. Many people may say they want to double their income so they can have a better lifestyle and don't have to sacrifice too much to save money.

The scary part about increasing your income to increase expenses is that it has a negative doubling effect on your life. It is the simple reason why people who earn higher salary can get into an even worse financial problem than another person who earns lesser income.


Percentage of Savings makes a difference

Previously, I wrote that there was a report on Asiaone which showed how people in their 30s got into financial problems. Below shows 2 of the cases:

Case 3  
The third person is a 33 year old who earns $4000 monthly. Has credit card debt totalling $15,000 which was accumulated since 2007. 
The lifestyle:
  • Go to the spa every week for massages, mani-pedis and hair treatments
  • Take cabs everywhere
  • Eat at expensive restaurants twice a week
  • Always treating friends to drinks when outside
There were several instances where she was flat broke and has to walk one and a half hour from her office back home because she doesn't even have money to take a bus or MRT home.  

Case 4
The fourth case is a couple of age 34 and 36. Both are lawyers and have a combined income of $17,000. This amount of salary is an envy for many but they still can get into trouble. Currently has debts amounting to a couple of hundred thousands dollars.Their lifestyle:
  • Spent $100,000 on wedding
  • Pay six figure sum for a condo in a prime district
  • Spent even more money on renovating and expensive furnitures for the house
They said the debts will probably take them 3 years to clear. 

In case 4, the couple had a combined monthly income of $17,000 but has debts amounting to a couple of hundred thousands dollars. This is more than the $15,000 debt which the person in case 3 who earns only $4000 monthly.

The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a DOUBLE effect:
  1. it increases the amount of money you have left over to save each month
  2. and it permanently decreases the amount you’ll need every month for the rest of your life
If you ask a person who spends $5000/month how much he needs for retirement, he'll probably say about $5000. If you ask a person who spends only $2000/ month how much he needs for retirement, he'll probably say about $2000. It is very very hard to change your "upgraded" lifestyle once you're up there. Some people may say that they can downgrade their lifestyles when they are older but how many have actually done it? 

Creating income for retirement is better than saving for retirement. If you spend $5000/month, you have less money saved per month and it takes a longer time to create a $5000/month income for your retirement. You need $1.5 Million dollars to create a $5000/month income base on a withdrawal rate of 4%. If you earn $10K per month and spend $5K, it takes about 17 years to do it. That is a 50% savings rate invested at 5% yearly compounded returns to achieve $1.5 Million dollars in 17 years. 

If now you earn only $6K and still spend $5K, it'll take you 41 years to create an income of $5K as compared to 17 years in the above example. In this case, this person only saves 16% of his salary. It really is just simple maths, saving 16% will mean spending 84%. 

How Much Should We Save?

10% savings takes 51 years before we can create an income that surpasses our expenses for retirement. If we do that, we will never be able to retire at all unless you have other alternatives. This is the hard truth of life and the reason why many people cannot retire today. 

If 10% savings is a no no, how much should we save then? I've done the calculations and here's the verdict:

Savings Rate (Percent)Working Years Until Retirement

Look at the savings rate and the working years until retirement. If we want early retirement in our 40s, probably a 50% savings rate is good. If we want to retire before 60, we should save at least 25% of our income starting from our 20s.

It is really not that hard to retire if we can see the road ahead and plan accordingly.

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Thursday, June 4, 2015

Saving For Retirement or Creating Income For Retirement?

Let me tell you the truth, saving for retirement no longer works in Singapore. If you're living in another high cost of living city like Singapore, most likely your money saved up for retirement isn't going to last you a long time too.

1 Million dollars isn't going to last very long for a lot of people. During the national day rally by our prime minister last year, a poll was conducted to ask the audience how much money do they think they need a month for retirement. Most agreed on the sum of $3000 on average. If we were to spend $3000 per month during retirement, 1 Million dollars is only going to last us about 27 years. This means, if you stop working at age 55, your 1 Million dollars will run out by the time you're 82. With longer life expectancy now, most of us are going to be still alive at the age of 82. If you have less money to retire, retirement is probably going to be painful for you.

Fortunately, there is always a workaround for every problem. If we know that we can't follow the traditional way of saving up for retirement, then its time to explore other ways.

Let me illustrate to you the difference between saving up for retirement and creating income for retirement.

We as Singaporean love durians. So, let's use durians as an example in this illustration.

If we save for retirement, its like we are accumulating durians all throughout our lives and consume it only when we stop working.

How long can the durians we accumulated last us? 1 year? 3 years? 10 years?

Now, how about we rack our brains a little and instead of accumulating durians from other durian trees, we plant our own durian trees?

How long will the durians last this time round? Unlimited and perhaps infinity?

Don't Just Accumulate Money, Create Money

A durian tree produces durians that can possibly last a lifetime. You might be thinking a durian tree can die so what happens to the fruits later? The trick is we can keep planting durian trees and if one dies, we still have others to rely on. As with multiple durian trees, we can also have multiple streams of income.

Most people accumulate money from other money trees. This money tree is probably from your company which pays you everytime you work. However, most people do not know that it IS POSSIBLE to plant their own money tree. By doing that, we have created money (fruits) for ourselves that can last a life time. 

If we save $1500 per month and invest it at a 5% rate of return, we would be able to create a passive income of $3000 per month after 26 years, base on a 4% withdrawal rate.

If we save $3000 per month and invest it similarly at a 5% rate of return, we would be able to create a passive income of $3000 per month after 17 years, base on a 4% withdrawal rate.

The 4% withdrawal rate means we invest in a stable asset which gives us a consistent yield of 4%. This rate is known as the safe withdrawal rate which is the maximum rate at which you can spend your retirement savings, such that you don’t run out in your lifetime.

Most of us, if we start planting our money tree in our 20s, will be able to enjoy an unlimited flow of $3000 per month in our 50s. You need to save at least $1500 per month and invest it at a 5% rate of return for it to become a reality. You either save more or increase your rate of return to accelerate the process. It can even be achieved in your 40s.

Insurance products for retirement?

If you're depending on the insurance you bought for retirement, you'll regret when the time comes. Most insurance products are for INSURANCE. That is the sole purpose of buying insurance. Some people use endowment policies as a form of savings but if you realise, even after putting your money inside the endowment policy for 25 years, you still don't get much money back.

The reason is because endowment polices mostly generate only an average 3% yield and there is also an insurance element in it which is paid as expenses. For example, assuming every $1 you pay for an endowment policy, 80 cents goes into a life fund as savings which yields on average 3% and 20 cents goes into paying for the insurance coverage. The 20 cents paid can never be retrieved back. It is expenses paid. This is similar for a whole life plan.

What happens when you get that lump sum back in your retirement years? That lump sum is just like the basket of durians in the earlier example above. How long can it last? If you draw out $3000 monthly on a $250,000 lump sum, it can only last you less than 7 years. The question is, will you even get back $250,000 on your insurance policies?

The Creation of CPF life

Knowing that Singaporeans are living longer and a sum of money cannot be enough for retirement, the Singapore government introduced CPF life as a form of annuity which pays us monthly income during our retirement years (65 years old) for the rest of our lives. This is as if a durian tree has been planted for us. It provides the money we need for our monthly expenses for life. Previously, Singaporeans could draw upon their CPF savings for only 20 years.

However, there will still be limitations of this scheme. The maximum amount of monthly income we can get now is $1750 to $1900 if we put in the maximum allowed enhanced retirement sum of $241,500. If you want a monthly income of $3000 for your retirement, you still have to find other alternative ways to create that extra $1100 of income for yourself.

That being said, if we want a stable flow of income of $1900 per month during our retirement years, we should definitely utilise the new CPF life enhanced retirement sum. $241,500 is not a lot of money to get $1900 for life. If we want to create a similar amount of monthly income on our own, we need to save up about $580,000 to get $1900 per month, base on a 4% withdrawal rate. It is more than doubled the amount required as compared to CPF life.

Now, assuming that the retirement sums in the CPF life scheme will go up over the years, we could possibly put in more money to get a $3000 or more monthly income in the future.

Earn more, save more, plant the money tree early. That's the formula for creating income for a lifelong retirement.

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Tuesday, June 2, 2015

The Top Down Approach To Investing

Many people have asked me how do they start investing? There are so many ways and so many techniques to investing that it makes a lot of people confuse. Do we look at charts? Do we use financial ratios? How do we know which companies to invest in?

I too was confused about the whole world of investing many years back. It was until I discovered what investing is really about that this confusion begin to disappear. Its like I saw the light at the end of the tunnel. In this post, I'll share with you a method of investing using the top down approach. Before we begin, let's understand what investing is really about and clear some misconceptions about the stock market once and for all. This will help you in understanding the top down approach better.

Misconceptions on Investing

Over the years, I've realised one main thing which caused the confusion for investing. It is that we do not understand investing at a deeper level. You see, most of us want to invest because we want to make a profit or grow our wealth. This is not wrong but it is not entirely correct either. Most of us end up trading the stock market which is totally different from investing.

Trading makes the stock market look like a gambling den. We look at charts and buy low sell high. Most will end up buying high and selling low. The main purpose is to make a profit and make as much money as possible. Some people even use software to give them buy and sell signals which makes the whole thing purposeless. In the case of trading, the companies we buy and sell is just a name. We just look at numbers instead of the company itself. If we take away the name of the companies and replace it with football team names, it becomes sports betting. If we take away the name of the companies and replace it with horses name, it becomes horse betting.

Don't get me wrong. I'm not saying trading is bad and there are professional traders out there who are successful in their own way. But if you're thinking about investing, then invest with the right approach and it'll be much clearer for you.

What exactly is Investing?

Investing is owning a part of a company. When a company is listed on the stock market, it becomes a public company. Investors who wish to own a part of that company may buy the shares of it through the stock exchange. When we own shares of a particular company, we are entitled to certain rights such as voting rights and we also get a portion of the income in the form of dividends. When the company grows, the value of our shares in that company increases as well. It becomes more valuable.


Top Down Approach To Investing

Now, when we know that investing is owning a part of a company, we should really ask ourselves what do owners of a company really want? What do we as owners want to see for the company?

I'm sure most of us would know the answer to the above question. We want the company to make money and grow. This is the best way to get return on our money for investors like us. There are two main elements that move a stock price. One is earnings and the other is news.

Bearing in mind that what we really want for the company is to make profit, the top down approach will start making sense now. This approach takes into consideration of the whole macro economic conditions that is happening now and also would happen in the future.

How to use the Top Down approach in investing? 

The first step to the top down approach is to understand the elements of the macro economy. Some of you may have studied economics in JC or University which will be useful for this approach. If you have zero knowledge of economics, do not worry. I'll list down some elements and examples here which will be simple for you to understand. Let's start!


Every country has their own currency except for the countries in the European Union which uses the Euro. More often than not, companies would have their business operated in a few different countries. Take for example a local company, Breadtalk. Although this company is started and headquartered in Singapore, they have branched overseas to more 15 countries including China, Philippines, Vietnam, Hong Kong, Taiwan, Cambodia, Malaysia etc.


As Breadtalk's main HQ is still in Singapore, they report their financials in Singapore dollars as well. When currencies of other countries weaken, it does affect the revenue and profit of Breadtalk. Companies can limit their exposure to currency risk by hedging using currency swaps.

Currencies fluctuate mainly due to monetary policy changes which shifts the demand and supply of it. For example, when US embarked on its massive quantitative easing which in essence is the printing of more money, the US dollar depreciates in value. Similarly, when Japan also embarked on its massive QE known as Abenomics, the value of the Yen depreciated as well. From these news on policy changes, we can predict quite accurately the movement of a particular country's currency and make smarter investment decisions.

Interest Rates

Interest rates drives the economy and affects a company's earnings. When a company has unsecured loans, they will be affected when interest rates rise. They will need more money to pay for the higher interest rates which in turn lower their profits.

Interest rates movement are mostly determined by the central bank of each individual country. The US central bank, called the federal reserve, often announce an increase or decrease in interest rates. Many countries practice an interest rate monetary policy including the European union and China. However, Singapore has an exchanged rate policy where our central bank strengthen or weaken the Sing dollar. Interest rates are increased when the economy is doing well and decreased when the economic situation is undesirable.

Commodities Prices

Commodities prices such as oil, sugar, gas and other raw materials affect different companies and different sectors. When the price of oil dropped recently, there were concerns that those companies in the oil & gas sector would be affected. As such, this concern sent the prices of these companies down drastically. Similarly, when the cost of raw materials such as aluminium goes up, it can affect the margins of construction companies and they will earn a lower profit.

Commodities prices are mainly affected by the supply and demand of the economy. For oil prices, it is mostly controlled by the Organization Of Petroleum Exporting Countries (OPEC). OPEC is a cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries. Simply said, when they pump in more oil into the economy, the prices of oil drop and when they withhold oil from the economy, the price of oil increases.

Picking Stocks using the Top Down Approach

The above 3 elements are just some of the factors that can affect our investments. When picking stocks, we can look at the general outlook of the economy and determine which companies or industries will possibly do well in the future. Remember, if the companies do well, we get good returns on our investments while if the companies perform poorly, we can lose money.

Back in 2013 when I first looked at the economic situation in Japan, I thought it might be a good time to invest in the Japanese real estate market. The whole motivation behind investing in Japan's real estate is fundamentally due to economic reasons. Japanese prime minister Shinzō Abe has launched Abenomics which is a combination of measures such as quantitative easing (QE), increased public infrastructure spending and the devaluation of the Yen. All these stimulates growth which will increase asset prices. Investing in Japanese property may be a good choice if growth does set in and bring the Japanese economy out of a decade of deflationary economy.

True enough, real estate prices has been rising in Japan over the past 2 years. Rental yields have also gone up. As a result, the dividends I received from the Reits and business trusts I invested went up as well. It has given me stable income of about 7% consistently for the past 2 years.  You can read about my investments in Japan here.

Knowing how the macro economy functions can help us narrow down the potential areas we could invest in. This is just one of the strategy in stock picking. To learn more on how to pick stocks, you can read my previous post on stock picking here.

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