Why Dividends Are Important

Its been months since the start of the COVID-19 crisis,and the market has been going on a wild roller coaster ride. While the US market has climbed from trough to peak in a V-shaped recovery since March, the Singapore market has remained stubbornly depressed, with much of the blue chips and REITs I'm vested in still in the red. Keppel DC REIT is the only one that defied the trend, and thanks to it my portfolio is relatively unscathed from the bloodbath. But this isn't the main point.

What it is, is that even throughout the crisis, stocks (or at least those that I bought), never stopped giving dividends. Sure much of it was reduced, including even the banks, who have been instructed by MAS to cap their dividends at 60% of what had been given last year, but THEY DIDN'T STOP. And the result of this has been that my overall portfolio, accounting for dividends, is in the green, regardless of the ginormous crisis that the entire world is facing. Perhaps more savvy investors/traders might scoff at this, with their profits from swing trading or buying into tech stocks (big boomz), but it proves that the things I invest in, and the rationale that stocks are bought to provide cashflow for use, is not wrong, and that this is a slow and steady way to getting closer to my semi-retirement. 

Tracking My Spending in 2019

Another year gone, and another mundane and routine post on my spending. Though, something big happened this year, aka got married to my gf and bought a resale house, and with that came all the related expenses such as renovations, furnitures, bills etc. Though, we didn't hold a banquet (not yet anyway) and there were many things that the gf (now wife!) contributed as well, which lessened the burden a lot. Enough of the babbling, let's get to the meat of things. As can be expected, the spending fluctuated between the categories, but overall I'm still quite pleased with how the money have been allocated through the year. Do note that the housing related expenses won't be factored into this summary, as they took up such a large amount of money that they would skew the stats for all other spending, and also cuz they were fully funded with savings that were already set aside for them.

1) Spending came in at 52% of income nett of CPF contributions, 7 percentage points lower than 2018. This was achieved largely due to a decrease in spending, as nett income was more or less the same as 2018 once bonuses were factored in (I had a bigger bonus in 2018 than 2019, even though i had a modest pay raise in 2019). Again, this is a healthy rate above what is recommended, and also without factoring in any gains/dividends/interest from investments and bank accounts.

2) Top spending for 2019 went to insurance, which accounted for 20% of overall spending, 2 percentage points higher than 2018, or 10% of income, unchanged from 2018. No changes in my plans so far, other than premiums increasing for the hospitalisation plans. A healthy ratio so far, and I don't see the need to increase it as yet.

3) Holidays came in at 18% of overall spending, a 6 percentage points increase over 2018(!!!!), which included a two week long trip to Tasmania, a family trip to Bangkok, 2 trips to Perhentian Island where I learnt to scuba dive and assorted trips to JB now and then. Sad to say, I busted the budget I put aside for this by about 8%, and will have to keep this in mind for 2020.

4) Monthly allowances to my parents came in 3rd, at 14% of overall spending. This was strictly due to a reduction in the amount given to them, or as my mum puts it, a "discount" for moving out and no longer having to mooch on them at home.

5) Eating out came in at 11% of spending, a 7 point drop over the previous year, or 6% of income, a 5 point drop over 2018. I largely attribute this to 2 factors, first of which is a change in office, which greatly reduced the amount of money spent on lunches daily, as well as eating more home cooked food by the wife instead of spending it outside. I had actually planned to cut this to only 9-10% of my income (as mentioned in last year's post), so this came as an unexpected and very much welcome surprise.

6) Gifts came in at a very distant 5th, at 6% of spending, or 3% of income. Lesser weddings attended in 2019 meant lesser outlay in angbaos, meaning lesser spending in this category. Donations still ongoing though.

7) Wedding bands came in at 6th. Nothing much to say about this I guess, except that we didn't go for extravagant brands and were happy with what we got.

8) Transport came in 7th at 4% of spending, usual ezlink top ups and grab/taxi rides. Boring category, though the recent fare hikes irk me off.

9) Shopping came in at 8th, a drop of two places from 2018. About half the spending came from getting a new handphone after mine died on me, and shirt and pants to replace those already worn out. Didn't achieve my aims of reducing this to 1-2%, but then again that could have been quite unrealistic, since things wear out and need to be replaced every now and then.

The rest of the spending came in the form of bills and taxes, nothing much to mention about. All in all, a good improvement over 2018, and managed to cut out quite a bit of fat here and there. Cheers to a good year ahead!

When selling at a (significant) loss makes sense

In the words of a wise investor, there are two rules to investing. Firstly, never lose money. Secondly, never forget rule 1.Why then, did I recently sell off a stock that lost me a fair amount of money, having dropped by 80% in the year that I held it?

This was a stock which had held great potential as it reported net cash positions every quarter, and with promising prospects as new factories were being built. However the share price kept dropping, seeming to ignore all the good news that were being reported. The market being inefficient were our conclusions. This view was reaffirmed as the company reported that it had successfully completed a private placement to major investors at a price which presented a premium of about 20% to its current share price sometime last year (can't really remember when). But yet, even with the consistent good news, the price nosedived as time went by, almost following the trend of Noble, albeit without all of the accompanying bad news.

What triggered the selling was ultimately an announcement that the company was going to have a 1 for 1 stock issue, of which the net proceeds would be used as working capital including salaries, administrative expenses, other operating expenses and other future expansions. The stock option was also issued at 1.5 cents, less than half of the then stock price.

So then, the question becomes, why did we sell? Firstly, the reason for the option, which included using the proceeds as ''working capital including salaries, administrative expenses' rang an alarm bell as it indicated that the net cash position that we had gone in for was possibly smaller than we thought or even be an accounting figure which had no real assets to back it up with. Secondly, it proved that there was the management of the company was incompetent, or had sinister intentions, as the option was priced way below the then stock price of approximately 3+ cents. Announcing the option had immediately caused the price to plunge 40+%, wiping out a ton of market value for its shareholders.

Thus, the decision was made to bite the bullet and sell the stock as both the fundamentals and faith in the ability of the company's abilities had deteriorated, and were deemed unable to recover. The base analysis for buying into the company in the first place was no longer there, and thus selling it, even at a big loss, makes sense.

TL;DR: Selling a stock, even when its at a significant loss, makes sense when the base analysis for buying into it in the first place has either changed for the worse, or completely disappeared.

What One Year of Tracking My Spending Showed Me

After reading several financial blogs, a common theme I realised was that most of them advocated tracking your daily spendings, both as a way to keep to a budget, as well as to see what you were spending on, and to see if reductions could be made. So on October 2017, I started to do just that, and here's a summary of the results.

1) Spending came in at 59% of income, aka a savings rate of 41% was achieved, a healthy rate above what is generally recommended (10-20%). This was achieved without factoring capital gains/interest/dividends obtained from bank accounts and investments. However, keep in mind that I am still living with (leeching off) my parents, which leads to reduced spending on food, mortgage, groceries, utilities bills etc etc. Still, something to be happy about right off the bat.

2) Top spending has been the monthly allowance to my parents, which came in at 22% of overall spending (or 13% of income). This is a fixed cost that is unlikely to change in the near term, nothing much to comment on this.

3) Eating out came in a distant 2nd at 18% of overall spending (or 11% of income). Lots of casual restaurant lunches and dinners with colleagues and the gf, though the highest spending was in Sept for my dad's birthday treat. This can certainly be reduced further, maybe with more meals at hawker centres/food courts or even cooking and bringing my own lunch to work. This needs to be balanced with a healthy social life though, but a good aim could be to cut this to maybe 9-10% of income (measuring against spending is not ideal as it could just mean that I'm spending more in other areas).

4) Third was insurance premiums, coming in at 18% of spending (or 10% income). This amount is inflated as I'm paying for my mum's and brother's premiums as well, which I'm not sure is how much when broken down to individual figures. But for myself, I'm covered under a 100% hospitalisation plan, and a term plan that provides coverage of $500,000 until the age of 85 for Death and Critical Illness. This amount is likely to increase, as I'm mulling over an additional term life policy offered by my employer that could up my coverage to $1,000,000. This is subject to the increase in my salary as I want to keep this spending at 10% of income.

5) Surprisingly, gifts to people came in at 4th, amounting to 14% of spending (or 8% income). More than half of this was for wedding ang baos, which thankfully are one-time gifts and unlikely to be repeated year after year. Other than that, the more significant ones are from the monthly cash donations done through www.giving.sg, and again this is a fixed cost that wont change. Likely to see a big drop in this area for 2019.

6) HOLIDAYS. This comes in at 5th, at 12% spending (or 7% income). This includes a 5 day trip to Vietnam, 9 day trip to Japan, and assorted short trips to Malaysia and Bangkok all in. Every year I set aside a seperate budget for such trips, and total spending came in at 80% of this budget. Will not adjust this budget for 2019, since vacations are important for the body and soul to recover from the toil of working.

7) Shopping comes in at 6th, at 9% spending (or 5% income). Nothing much to comment, except that 75% of this came from buying a new desktop and a secondhand Nintendo Switch. Will probably see this drop to 1-2% of income next year.

8) Transport came in next at 5% spending (or 3% income). Mostly from Ezlink top ups, with the occasional Grab/Taxi rides. Unlikely to change much in 2019 unless the government wants to increase transport fares by 23410483640123721093%.

The rest includes my income tax, phone bills and other insignificant spendings and are either fixed costs or one time costs. In summary, my spending pattern tends towards food and vacations, and I'm happy with that. Will keep tracking my expenses for another year to see if I managed to cut out any fat from these.

OH NO THE MARKET IS CRASHING!!!

And I'm sitting here just chilling. No its not because I'm loaded with money and can afford to lose all my money. Nor am I an investor with the 'magic touch' and everything I buy turns to gold. In fact, my portfolio is down by about 10% so far. Though, to be fair, much of these losses were due to the speculative stocks I had bought previously trying to bank on capital gains. Accounting for these, the entire portfolio is about 3% in the red.

Still, these losses are bearable and I have not engaged in any panic selling so far. The key reason here is due to the investment thesis of "stable cashflow". Much of my holdings are either large stable blue chips (Singtel, ST Engineering), or high quality REITS (First Reit, Capitamall Trust, Keppel DC Reit). These provide stability and buffers in the event of a market decline, as they are able to provide good cashflow in dividends in both good and bad times. While the amount of dividends can vary in accordance to company performances, they are unlikely to stop, providing a much welcomed respite from the shock of the declining market. to put this into perspective, once dividends are accounted for, the portfolio is down only by 5%, a significant buffer from what we saw previously.

High quality defensive companies are also more likely to have a price support even in times of market decline, putting a lower bound on the drop in your portfolio value. Other than Singtel, which has seen a precipitous drop in the past 1 year, most of the defensive stocks I hold have actually increased in value since I bought them, proving the value of such an approach.

tldr: Buying high quality, defensive stocks which give stable dividends can buttress your portfolio in times of market decline, steeling your balls.

How To Adult #1: CPF

After talking with many friends and colleagues, I've come to a realisation that there are many people out there who for one reason or another have little to no knowledge of basic financial stuff like investing, high interest savings accounts, or even how to ask for a waiver of fees and charges.

And thus, a new segment is born!!! "How To Adult" will be weekly (hopefully) articles on basic knowledge that all adult Singaporeans should know of, and will be short and sweet so as not to bore everyone to sleep.

And what else to start the the ball rolling than the ubiquitous and somewhat mystifying thing called the CPF, otherwise known as the Central Provident Fund.

The CPF is officially billed as the national pension system, aka what you are meant to retire on. It is, however, slightly more complicated than that.

1. If you are working for an organisation and your salary is above $500, a percentage of your salary will be deducted into your CPF accounts. Your employer will also be required to pay a certain percentage of your wages to the account as well. That rate is different by age groups and income, but as an example a person below 50 years old and earning more than $750 a month will see a 20% deduction from their pay, as well as an additional 17% contribution from the employer, for a total of 37%.

2. The CPF is split into 3 accounts, Ordinary Account, Special Account, Medisave Account.

1. Ordinary Account is where most of the contributions will go to. It earns 2.5% interest per annum (3.5% for the first $20,000 in it), and can be used for a variety of purposes, the most commonly used of which is to buy a property, whether HDB or private.
2. Special Account is meant for pure retirement purposes, and earns 4% interest per annum (5% for the first $40,000). It can be used to buy a variety of investment/insurance products, however most who are knowledgeable in financial management agree that one should just leave the money in there given that the 4% is risk free and guaranteed.
3. Medisave account earns 4% interest per annum, and is used for medical purposes, such as hospital visits, consultations and payment for Medishield Life, a national healthcare policy.

3. As the national pension fund, there are two ways of getting your money out of CPF.

1. At age 55, you can withdraw money from your combined Ordinary and Special account, calculated as either $5,000 or any amount that is above a ceiling that is decided by the government (currently $166,000), whichever is more. The leftover money will then be combined into a new Retirement Account, which earns 4% interest per annum (5% for the first $60,000, 6% for the first $30,000)

2. The monies will then be used to buy an annuity plan known as CPF Life, which gives you a sum of money every month from the time you turn 65 years old till death. The money you receive each month will be proportionate to how much money was used to buy the annuity

4. Other than the monthly contributions, you can voluntarily top up your CPF account with cash, either to take advantage of the guaranteed interest rates, or to reduce your taxable income.

Whew, this post went longer than expected, and it barely scratches the surface of the labyrinth of schemes and rates of the CPF. But I believe much of the basics have already been captured here, and should suffice to help you understand what CPF is about. For more information, perhaps Google, or go to www.cpf.gov.sg to read up more. Or if you feel particularly lazy, just write a comment below and I’ll get back to you ASAP.

Money Tips #1: Check your bills

Received a rare letter from DBS the other day, normally I'd just chuck letters from banks as they're mostly bills or ads, but as I don't have an active card with DBS I opened it out of curiosity. To my surprise it was a letter saying I had negative $70+ on one of my deposit accounts with them, and that if I didn't bank in the required money my account would be deleted.

Called DBS up, and realised they were charging a fall-below fee, and after talking with customer service for a while I managed to get it waived off.

Moral of the long story: Always check your bills, be it credit card, telco, or whatever it is. Sometimes the companies will charge you for various fees (eg. late fees, fall-below fees, annual fees etc) which could easily be waived by either calling in or even just emailing the companies. This could save you hundreds a year, especially credit card annual fees, which is just a lazy way for banks to earn money from you.