May 2020 updates

Hi friends, 

Hope that you guys are holding up well during this circuit breaker period. I wish that all of you are safe and that your incomes are not affected that badly. But, good news, I have managed to find a new internship. This should allow me to tide over until school starts again. Also, another good news, I have managed to get a professor for my Final Year Project (FYP). 

Let's talk about the recent stock market rally. It is really irrational, the US unemployment is at an all-time high, businesses are closing down, and yet, the stock market is rallying and we are having a 27% increase from the recent trough. 

This would land us directly in a technical bull-market territory. But if we were to look at the recent financial crisis, the 2000 and 2007, we can see that the market would go through a series of sell-down and rallying before reaching the true bottom. Hence, I would say that we are quite far away from the true bottom. You should wait (not financial advice, just my idea) for the second round of panic selling.

Let's talk about my portfolio
1. Stashaway (Invested $3,306, current value $3,418) 4.91% return
2. Stashaway Simple (Invested $10,250, current value $10,285.73) 0.35% return
3. Coasset (Invested $1,000, expected return of $1,090 in 2020)
4. Funding Society (Invested $2623, current value $1,948)
5. Endowment (Invested $6,000, expected return $6,556.4 in 2022)
6. FSMone - Nikkoam STC Asia REIT ETF (Invested $1,548, current value $1,632) 5.4% return

This would bring my returns to -2.22% (if I include the losses from funding society)
This would bring my returns to 1.86% (if funding society's losses were not included)

The reason why I separated the payment into two different portions is that Funding Society's losses are not yet confirmed. I bet a lot of you guys have heard of this news already (https://www.straitstimes.com/business/companies-markets/collapse-of-singapore-commodity-firm-agritrade-leaves-lenders-exposed). There is a high chance that the loss will be permanent and that I will lose my money. But. When I have signed up with Funding Society, I have already known about the risk. But ... IT'S STILL $675 OUCH MAN. :')

I will continue to put into money by DCA for Stashaway. The $10,000 in Stashaway Simple should last for 12 months of investing before I need to push in fresh funds again. Meanwhile, for FSMone, I will try to time the market for the FSMONE REIT ETF. Wish me luck with that. 

Till next time,
Stay vested, stay frugal my friends.

Dionysius

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Finance 101: What is a Mutual Fund/ Unit Trust?

Hi friends, 

Today, I will be talking about Mutual Funds (MFs)/ Unit Trusts (UTs). It is effectively own a pool of stock managed by a fund manager. 

By definition:
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors - Investopedia

A unit trust (or “mutual fund”, as the wacky Americans call it) is a fund where multiple investors pool their money. A fund manager takes that pool and channels it into a whole bunch of different investments. -Money Smart

Here are the keywords:
1. A pool of money - UTs get their capital from a pool of investors
2. Invest in securities (Stocks, bonds, money market instruments, and other assets) - buying assets to generate returns
3. Operated by managers - The assets are selected by professionals, they would decide when the purchase will take place, the portfolio allocations and how long to hold it for. 

So... What is a Mutual Fund?
Essentially, imagine you and a bunch of other investors invest a sum of money. Through that, a manager of the fund would decide what stocks to buy, how much to buy, how long to hold. The manager's aim is to beat the market and generate returns for you. It may be in his interest to beat the market, as his salary may be pegged to how much he can outperform the market. This is unlike ETFs, where you are buying the market. 

Now that we know what are Mutual funds, allow me to elaborate on their advantages and disadvantages:

Advantages:
1. Quick Diversification - You buy into all the stocks under that fund. 
2. Professional Management - By paying the fees, you can have a professional team of managers/ analyst that is working to maximise your profits. 
3. Reinvested Dividends - Some funds allow for your dividends to be reinvested and purchase it at a lower price. This would further increase the units that you are holding. 
4. Low barrier to entry - Similar to ETFs, mutual funds are relatively cheaper to invest. You can even do a $100 investment every month. 
5. Potential to beat the market - As mutual funds would steer away from the market index, this would give them the potential to do better than the market. 

Disadvantages:
1. High expense ratios and Sales charges - Research has shown that a high expense ratio would negatively impact your returns. The picture below shows the correlation, not including the sales charges. 
2. Bad fund Management - Some fund managers may use techniques to make their funds appear to be doing better than it is.
3. Limited trade execution - As you can only buy and sell units of a mutual fund at the end of the trading day. You might not be able to execute buy and sell orders immediately. 
4. Potential to do worse than the market - As mutual funds would steer away from the market index, this would also give them the potential to do worse than the market. 

How to determine a good mutual fund?
This would be tough to write about. There is a module in my university that talks about this. Students that went through that have to research and find 3 mutual funds based on criteria and present what mutual funds they think will perform well. 

Thankfully, I didn't have to take that module. But here are things that I found from my research:

1. The mutual fund's investment style:
If your focus is on receiving dividends, you shouldn't be looking at growth mutual funds. Likewise, if you are seeking capital appreciation, you should not be looking at income mutual funds. If you have a long time horizon and the mutual fund seeks to make returns in a short time, that would be a conflict in the investing approach. You should choose one that suits your style. 

2. Size of the fund:
Warren Buffett has famously said that if he only had a mere $1 million to invest, he could guarantee 50% annual returns. He then explained that having a large fund size would hinder the purchasing process. This is as your investment would make a substantial impact on the company's market cap - Imagine you have $1 billion, you want to find 5 companies to invest in. You would be limited to companies whose values are more than $200 million. Hence, even if there are good stocks that are under $200 million, you would not be able to buy them. 

Hence, a mutual fund needs to be small enough to be flexible in taking advantage of smaller companies. aka. Flexibility.

3. History of the fund manager and his trading frequency:
A fund manager that has been managing the fund for a long time may indicate that he knows the values of the assets that he is managing. A lower trading frequency would indicate that he is adopting the buying and holding approach to investing and that he is confident in the stocks that he chose.

4. The number of holdings:
A larger number of holdings would indicate diversification, this would generate a more consistent return in the long run. This is important as this is one of the advantages of mutual funds - quick diversification

5. Fees and Expense ratio:
You would want the fees and expense ratio to be as low as possible. As we can see the correlation between fee, expense ratio and the return that you receive from your mutual funds. 

6. Outlook on the market/sector that fund is investing in:
If you believe that the market/sector that the fund is investing in has the potential to do well in the future (ahem, China, India, Indonesia, etc), you can invest in those markets. Emerging markets are generally less efficient and mutual funds usually perform better under those conditions.

Thoughts and opinion:
As we have discussed in the SPIVA scorecard, mutual funds are unable to outperform the market in the long run. Fees and expense ratios are one of the reasons that contribute to this observation. Furthermore, I am a believer of the Efficient Market Hypothesis, especially in the efficient US market, no investor can consistently take advantage of the market. Plus, the success of a fund in one year does not translate to the next year (from the SPIVA scorecard), which means it is extremely hard for you to choose a fund that will earn you higher than market returns.

Yes, there are fund managers that consistently do well and deliver higher-than-market returns to their investors. They are Peter Lynch (who wrote a book on how to perform better than fund managers) and...... 

Sorry, I only know one mutual fund manager that was really successful and popular. 

If you're thinking of Ray Dalio and Warren Buffett, no. They are not mutual fund managers. they are hedge fund managers. This is a topic for a different day. 

Personal Portfolio:
As you can see from the way that I wrote, I sincerely do not believe in the value of mutual funds. It is my belief that mutual funds still exist as a lot of money is paid in the advertisement and marketing to sell to the public. As we become more financially savvy, we should see a decline in mutual funds. Just like in the US. 

With that, 
I end today's topic. 

Stay vested, Stay frugal my friends,
Dionysius



Taken from the morningstar white paper titled "study on investing expense ratio"

Sources:
https://blog.moneysmart.sg/invest/unit-trust-singapore-invest-guide/
https://www.dbs.com.sg/personal/investments/unit-trusts/get-to-know-unit-trusts
https://www.valuechampion.sg/introduction-funds-singapore-what-are-unit-trusts-and-etfs
https://www.moneysense.gov.sg/articles/2018/10/unit-trusts-guide-to-pricing-and-fees
https://www.investopedia.com/terms/m/mutualfund.asp
https://www.sec.gov/reportspubs/investor-publications/investorpubsinwsmfhtm.html#Common
http://oreillywa.com/wp-content/uploads/2017/08/morningstar-study-on-investing-expense-ratios-2016.pdf
https://www.thebalance.com/how-to-choose-the-best-mutual-funds-2466456
https://www.investopedia.com/investing/how-pick-best-mutual-fund/

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Finance 101: What is a REIT?

Hi friends,

I shall be talking about something that is considered safe and value would never fall in a country with a limited supply of land: Properties, more specifically; Real Estate Investment Trusts (REITs):

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves. - Investopedia
When you invest in a real estate investment trust (REIT), your money is pooled together with other investors' in a collective investment scheme that invests in a portfolio of income-generating real estate assets such as shopping malls, offices, hotels or serviced apartments. - Moneysense.gov.sg

As we can see from the definitions, the keywords are:
1. Owns real estate 
2. Pool the capital of other investors - Similar to ETFs and mutual funds
3. Income-generating investments - The income is generated from the rents paid by the tenant of these real estates 

So.. What is a REIT? 
Essentially, the trust managers would take the money gathered from a pool of investors, to buy properties like malls, office buildings, hospitals, etc. The spaces are leased out to tenants (think of shops in a shopping mall - Uniqlo, h&m, texas chicken). The profits from the rent collected after paying off the loans and fees borrowed to buy the properties are then distributed to the unitholders (similar to stockholders receiving investments). This is called distribution yield.

Here are the sectors that a REIT may specialise in:
1. Retail: (Shopping malls):

This is the most common one in Singapore, however, it is also easily affected by economic conditions. In a downturn like 2020, there might not be visitors to a mall and the tenants may default on their rents. A strong REIT would be one with a lot of stable tenants (think big brands) that can afford to pay the rent during an economic downturn and good foot traffic.  

2. Hospitality (Hotels, some residences)

This also easily affected by economic conditions, in a downturn like 2020, where there are basically no tourists, hospitality REITs are at a disadvantage as they no longer have any income. Hence, they will experience more volatility because of external market conditions. 

3. Commercial (Office buildings)

Commercial REITs are relatively more stable as the lease agreements with the tenants are longer in duration. Also, if the tenants are majority larger and more stable corporations, even in an economic downturn, the inherent income of the REIT would not be affected. 

4. Healthcare (Hospitals, nursing homes)

Healthcare REITs are expensive in Singapore. This is as Singapore is facing an aging population, we expect an increase in the demands for quality healthcare in the future. Singapore is also positioned as a location for quality healthcare for the region and investors know about it. 

I would say that healthcare REITs are stable, provided they have the proper management and loan ratio. 

5. Industrial (Data centers, warehouses, logistics buildings)

Industrial REITs are dependent on the type of industries that they cater to; some industrial REITs may focus on logistics buildings and when imports are not doing well, they would be negatively affected. 

However, they are also more stable as the lease agreements are also typically longer. 

Advantages of REITs:
1. Diversification (You would be investing in more than 1 property most of the time)
2. The steady stream of income through distribution yield (Passive income)
3. The gradual increase in property value (Especially relevant in land-scarce Singapore)
4. Liquidity (As Reits are sold on the stock market, transaction can occur immediately)
5. Low cash upfront (As compared to owning actual properties)

Disadvantages of REITs:
1. Exposure to only one sector (As a REIT usually focus on one sector, you would be exposed to the downside of the sector in certain economic conditions)
2. Management fees (As REITs are actively managed, fees are required to pay for their expertise)
3. Volatility (As a REIT is traded on the stock exchange, it is subjected to fluctuations of the stock market)
4. Subjected to changes in interest rates (Reits are allowed to borrow up to 45% of their total assets in Singapore, changes in interest rates might negatively affect the operations of these Reits) 

How to consider a REIT:
1. Gearing ratio - The ratio of loans to asset, a low gearing ratio would allow the REIT to take advantage of lower property prices in an economic downturn. 
2. Management team - A good management team would make the correct decisions, such as increasing the gearing ratio when property prices are cheap
3. Outlook on the sector/ industry and the properties - If you think that over the long run, the specific sector will not do well, you should probably avoid, likewise for the price of the property that the REIT is managing
4. Occupancy Rate - A higher occupancy rate would mean that there are more distribution yield 
5. Tenants retention rate - A higher retention rate would mean more tenant are willing to continue their lease with the property
6. Fees - High fees would definitely dig into your returns. But if you're paying for the right team to deal with rationale tenants, unlike mutual funds, you would get return for your money 
7. Distribution yield - A history of consistent distribution yield could be an indicator that it will continue to pay out the same distribution yield in the future. 

Thoughts and comments:
For my personal portfolio: I have about half in REITs through my REITs ETF at the moment. If the price of the ETF is to keep falling, then I may consider increasing my weightage to take advantage of the low price. I love the idea of collecting passive income as a landlord. kekekeke. 

Do your own due diligence when it comes to investing, I am not recommending you to buy anything. 

With that, 

Stay vested, Stay frugal my friends, 
Dionysius




Sources:
https://www.investopedia.com/terms/r/reit.asp
https://www.drwealth.com/singapore-reits/
https://www.moneysense.gov.sg/articles/2018/10/understanding-real-estate-investment-trusts-reits

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Fundamental Analysis: Using PE and PEG ratio to gauge an ETF

Hi friends, 

As most of you can tell from my writing, I am a firm believer of passive investing. I believe in it as I do not have the skills nor the time to pick the correct stocks to beat the market. However, recently, I have been reading quite a bit of using the P/E (Price-to-earnings ratio) to gauge the state of an ETF. 

For those of us who are not familiar, the P/E ratio is a metric that measures the market price of the stock against the company's earnings. A higher P/E ratio would mean that the stock price is relatively higher compared to the company's earning, vice versa. This would mean that the stock may be over-valued. Investors would also expect a company with a high PE ratio to have a higher growth rate. 

Formula: 
1. PE 
(Price for one share)/(Earnings per share) 

2. PEG
(PE ratio)/(Earnings growth rate) 

Earnings growth rate = (EPS this year - EPS last year) / (EPS last year) 

A recommendation by the legendary investor - Peter Lynch has said that you would want PEG to be less than 1. It would mean that the growth rate is higher compared to the PE ratio. 

So, if we were to apply this to my most favourite index in the world. The S&P 500, we get the following graph:


From the picture above, we can see that the recent PEG ratio has been really really high if we used the Peter Lynch benchmark of 1.0 Hence, this might mean that the market might have really been over-valued.

With the recent prices, we can see that there has been a correction due to the bear market. But we shouldn't be diving straight in just because it is lower. It is not the time yet. 

If we were to look at the PE ratio, we can see that the current PE ratio is still within the mean of the historical PE ratio. Hence, further reinforcing my opinion that we shouldn't be rushing into the market yet. Do note that I am not recommending anything, do your own research and studies for your own investment.

Limitations:
The P/E and PEG ratios use the market price and earnings. The market prices are easier to determine. But the earnings are harder to obtain as earnings are only updated on a quarterly basis and there is a need to determine the long-term and short-term earnings.

Thoughts and comments:
It was a fun exercise learning about the PE and PEG ratio. But if I were to consider the impact that this knowledge has on my investing approach, there would not be much changes. At most I will be more aware of whether the market is over or undervalued and would attempt investing more during the undervalued phase. 

You can also look at these videos created by my friend Linus Lim about the same topic:
1. PEG Ratio:  https://www.youtube.com/watch?v=jflc_hF__f0
2. PE Ratio: https://www.youtube.com/watch?v=9N6C4VCHaFI

With that, 

Stay vested, stay frugal my friends.
Dionysius  

Sources:
http://www.yardeni.com/pub/spearnrevalgrpeg.pdf
https://www.investopedia.com/terms/p/pegratio.asp
https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/
https://www.forbes.com/sites/greatspeculations/2018/11/19/pe-ratios-are-misleading-especially-right-now/#5a223a4a2281
https://www.sgmoneymatters.com/pe-ratio-investment/
https://www.dummies.com/personal-finance/investing/investing-in-etfs-for-dummies-cheat-sheet/
https://www.dummies.com/personal-finance/investing/the-all-important-pe-ratio-in-etf-investing/
https://www.advisorperspectives.com/dshort/updates/2020/04/01/is-the-stock-market-cheap
http://www.munknee.com/sp-500s-peg-ratio-suggests-overvaluation-coming-correction/
https://markets.businessinsider.com/news/stocks/stocks-most-expensive-price-earnings-growth-ratio-bank-america-valuation-2020-1-1028824543

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Finance 101: What is an Insurance?

Hi friends, 

In the 3rd part of my Finance 101 series, I shall be talking about insurance. Oh, I would like to reiterate that I do not receive any commission or money from any financial institutions for my post. I am also not a financial agent or a financial consultant. I do not sell any products/ insurance/ investment plans. Hence, you can expect objective opinions. The finance 101 series is an educational series to spread awareness of the financial instruments available to us.

By definition 
Protection against loss for which you pay a certain sum periodically in exchange for a guarantee that you'll be compensated under stipulated conditions for any specified loss by fire, accident, death, etc - Entrepreneur.com

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured. -
Investopedia

Term insurance: No cash values insurance
Whole life insurance: Cash value
Participating insurance: Entitled to the profits of the insurance company
Non-participating insurance: Not entitled to the profits of the insurance company 

The keywords are: 
1. Protection against losses
2. Pay a certain sum periodically

So insurance works as a form of protection against losses (Death, accidents, critical illnesses, income replacements, hospitalisation, fire, car, etc.) by a periodic (monthly, quarterly, half-yearly, yearly) payment to the insurer. 

How I think of insurance is like this: 
For different types of fire, we would use different types of fire extinguishers right? Hence, for different types of losses, we would also have different types of insurance. If I feel that I have a higher susceptibility to cancer due to family history, I would purchase critical illness insurance to protect myself. 

Here are the different types of insurance available in the market. I will be judging them in terms of 5 Midas’ touch. The categories are Price, Payout, Ease of application. I will also write about the protection purpose of the particular insurance type:

Category A: (Term Insurance)

1. Term Life (Against death, terminal illness and Total Permanent Disability (TPD))

•  It covers for a chosen period of time, usually up to a certain age - 65,70 etc. It does not have cash values.
• There can be an option to convert term life to a whole life plan
• A recommended coverage would be how long it will take your dependents (children) to reach an age where they can earn their income. 

2. Term Personal Accident (Against loss of income due to an accident that results in loss of body parts, death, and permanent disabilities.)

• It can also cover up to a certain age.
• A recommended coverage amount should be around 5 times of your yearly expenses

3. Term Critical Illness (Against loss of income or to seek alternate forms of treatment not covered by hospitalisation plans)

• The payout would occur if the insured is diagnosed with a defined critical illness under the policy (It is possible that a critical illness occurs and there is no coverage because the critical illness does not fall in the definition 
• A recommended coverage amount should be around 5 times of your yearly expenses
• There can be features like coverage for early forms of critical illness (Stage 1, 2 cancers etc.), continued coverage after the first diagnosis.

4. Hospitalisation ( Price - 2/5, Payout - 0/5, Ease of application 4/5, Against the cost of sudden hospitalisation due to many reasons)

• This plan covers your hospitlisation fee upon checking into a hospital, up to a certain period after your discharge, up to a certain annual amount. 
• You can opt for "better" coverage by paying more. The plan covers private hospitals too.
• How you choose this plan would be highly dependent on your preference. It is hard for me to make a recommendation. For me, I would go for the private hospitalisation coverage. 

#This plan is only appliable to Singaporean/ Singapore PR. 

5. Loss of income (Price - 2/5, Payout - 3/5, Ease of application 3/5, Against daily living cost if you are unable to perform your original role due to an accident/illness)

# I am unable to give an adequate opinion about this as I do not have this
You may look at this link if you want to:
https://www.moneyline.sg/disability-income-insurance/

Category B: (Whole life / Participating Insurance)

1. Whole Life ( Price - 5/5, Payout 5/5, Ease of application 5/5, Against death, accident, critical illness using riders)

• As the name implies, this is a life plan that covers you for your whole life. 
• There is also a cash value component to the plan as well. 
• You can customise the plan to your needs by adding accidents, critical illness and multipliers riders to your plan.

2. Endowment ( Price - 3/5. Payout 3.1/5, Ease of application 5/5, Think of it as a saving plan)

• Essentially: You hand a sum of money to the insurance company every year, you will receive guaranteed and non-guaranteed return after a while. 
• There are two major types in Singapore, one where you can receive "cashback" every year and towards the end of your policy, and the other where you receive return at the end of your policy or near the end of your policy. 
• There are also death benefits to it (Usually 105% of the amount that you paid)

3. Investment-linked policies - ILPs ( Price 5/5, payout 1.1/5, Ease of application 5/5, think of it as linking investment to insurance)

• There are two components to this plan; Insurance (Which acts similar to a whole life plan) and Investment (Which you are able to choose mutual funds that you believe would give you good returns for your money)
• ILPs can include attractive sign-up bonuses, loyalty bonuses - These differ from insurer to insurer, hence, I shall not talk about them. 

Thoughts and comments:

From my point of view, insurance should serve as a form of protection. If you wish to invest, you should take matters into your own hands and invest yourself. With that logic, you should choose the best price-coverage insurance, such that you may get the best protection for the least amount of money.

Here are some of the objections that I have heard when I voice this opinion of mine to different insurant agents:

1.  What if the company that you choose yourself goes bankrupt? Ans: What if I buy my insurance from you and your company goes bankrupt? If they try to convince you by saying that their company is AAA-rated and it will definitely not fail. Avoid them at all cost, they do not understand how these ratings work.  
2. How do you know that your investment will make money? Ans: How do I know if I put my money with you guys that it will confirm make money? (Shameless reference to my active vs passive investment article. Do take a look at that)
3. All the products in the market are similar because it is governed by MAS, there's no need to choose? Ans: Just run far far away. To compare insurance, you can use some of the websites available or seek advice from an independent financial consultant. They can help you compare insurance across different insurers. Compare yourself and see if there is a difference. 
4. Would you do your own heart surgery? You need someone to be with you on this "journey" Ans: -Facepalm Even heart surgeons would not do their own heart surgery. 

Limitations of this post:

• I have mostly dived into life insurance and not general insurance (Simply because I do not have a need to research into them.). 
• I have written this post from the POV of someone that knows how to invest, the financial instrument out there to reach my goals and risk management. If you do not know all these things, I would recommend buying the endowment insurance rather than allowing your money to lose value to inflation

In my belief, you should learn to take your own personal finance into your own hands. I am speaking from my own personal experience, having family members cheated by insurance agents who preyed on their ignorance. That is one of the reasons why I started this blog, to teach you about finance and such that you may take your money in your own hands. 

From what I can see: there is a generation of more financially-savvy people entering the workforce who are more willing to understand their own finances. This would force insurers to come up with competitive/ more comprehensive policies. This would be great for consumers.

With that, 

Till next time, 

Stay vested, stay frugal my friends. 

Dionysius


Sources:
https://www.investopedia.com/terms/i/insurance.asp
https://www.moneysense.gov.sg/insurance
https://blog.moneysmart.sg/life-insurance/insurance-singapore-beginners-guide/

https://www.entrepreneur.com/encyclopedia/insurance

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Mid April Update: Importance of emergency funds and a financial framework

Hi friends, 

I just needed an update: My internship was terminated due to the Corona Pandemic and my side hustle got halted also because of the pandemic. I have definitely lost >80% of my normal monthly income. Sad to say, most of my family members are also experiencing the same problem. 

I hope that the same situation would not happen to you. Trying to find another internship and finding more side hustles are mentally draining processes especially in this climate. So now I have a lot of time to write and plan the contents for this blog and learn python to upgrade myself. 

I feel that this is a good time to convey to you my financial framework and it is because of this framework (and the resilience package) that I can sustain my lifestyle in this climate despite my loss in income. I believe in the tier-model of personal financial planning, in that each tier would take care of my goal in terms of time horizon. Allow me to introduce it to you and I will only move on to the next tier after I prepare one tier:

I will be speaking in very general terms, you should tailor it in accordance to your situation.

1. Emergency Funds (6-12 months of your monthly expenses):

Instruments - High yield saving account (You need it to be as liquid as possible)

This is the first and most important step in my personal finance planning. I have about 8 months' worth of expenses saved in my bank account and it's because of this that I can maintain my current lifestyle. 

The emergency fund is meant to allow you to maintain your current lifestyle in the event that you experience a loss of income. This can be due to a loss of a job, quitting for a new horizon, etc. The emergency funds also serve as your holding power, such that if you lose your job, you would not have to dig into your investment (which might be at a loss at that moment). 

If you have a business. you would want to prepare a cash reserve of around 12-18 months such that you can maintain your business in the event of something like the Covid-19 situation. During this period where other businesses are dying, you would be positioning yours for accelerated growth. 

2. Insurance (Term life: How many years it takes for your dependents to be independent, Accident and Critical illness: more than 5 years of your living expenses and Hospitalisation: To your own preference):

Instruments - Insurance

For more, please refer to my finance 101: What is an insurance? The main point about insurance is such that you are able to hedge against the long-term loss of income due to accident, critical illness, death. 

Emergency funds would take care of your short term issues like loss of jobs. Insurance would protect you from unwanted events that might devastate your whole life (long term impact). 

You might be tempted to buy a whole life plan, adding in critical illness and accident protection. But I would urge you to compare the differences in price. You could invest this difference and after a long period of time, you would make back the amount. Furthermore, the cash value of a whole life plan is not guaranteed as the company would decide how much interest/bonus you would receive. 

3. Short-term investment (1-5 years goals like the downpayment of a house, car, etc):

Instruments - Bonds, Bond Funds, CPF, Short-term Endowment

These are goals that you would need to fork out money for in quite a short period of time. This period of time would mean that you would not want to invest too aggressively in stocks, but rather, you should aim such that your stash of money would hedge against inflation and not to make much returns.

4. Long-term investment (For goals like retirement, education, you have a long time horizon. around 20 - 30 years):

Instruments - ETFs, Stocks, Mutual Funds

Due to the inherent volatility of stocks, I would only recommend that you look to them if you have super long-term goals that you would want to achieve. I say this as in the long run, the stock market has a historical return of around 8%. This would also be the last tier of your financial planning. If you have completed tier 1-3, your excess income should come here, such that your money can work for you. 

A very simple way to visualise would be using the rule of 72: It would roughly take 9 years of compounding for your money to double. Imagine having 30 years to invest. your money would grow to almost 8 times of its original amount. 

As everyone's financial situations and goals are different, feel free to tailor this framework. If you have any questions, do feel free to approach me. I do not mind helping you clear some of your doubts. 

With that, 

Stay vested, stay frugal my friends,

Dionysius 

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Finance 101: What is a stock?

Hi friends, 

Today I will be talking about stocks. No. Not chicken stocks. I'm talking about owning a portion of a company that you believe will do well over time. That portion would be called a stock/share.

By definition:
A stock (also known as "shares" or "equity") is a type of security that signifies proportionate ownership in the issuing corporation. This entitles the stockholder to that proportion of the corporation's assets and earnings. - Investopedia 

A stock is a type of investment that represents an ownership share in a company. Investors buy stocks that they think will go up in value over time. - Nerdwallet

As we can see from the definitions, the keywords are:
1. Ownership
2. Go up in value over time
3. Entitles the stockholder to ... asset and earnings

So.... what is a stock? Let me illustrate this with an example: 
I have an awesome business plan, but I do not have the capital to start it. I have $5,000 in my own savings and I raised money from my friends and family to have $10,000 in total. My friends and family would have a 50% share of this company. 

This is similar to a company, where the company would try to raise money by distributing shares to the public/ financial institutions. Owning some of these shares would make you a shareholder of the company. In times where the company makes a profit, there can be dividends distributed to the shareholders or it can be reinvested for future earnings.

Here are some of the different types of stocks, I will sort them out in terms of growth out of 5 Midas' touches. The categories are price, growth, dividends, earnings, stability:

1. Blue chips (Price - 5/5, Growth - 4/5, Dividends - 4/5, Earnings - 4/5, Stability 5/5)

They are the leaders in their industries, they have strong-ish growth potential and they are expensive to own as well. They are suitable for investors that have the capital to buy their stocks, aiming for stable dividends and want some growth (not as much as growth stocks as they are already the largest in their industries). Examples are Coca-cola, Disney, Intel, Microsoft. In a Singaporean context, it would be DBS, UOB, OCBC, Hong Kong Land holdings, Capitalands, Dairy Farm

2. Growth (Price - 2/5, Growth - 5/5, Dividends - 1/5, Earnings - 4/5, Stability 3/5)

These are companies that are expected to grow in prices. These companies may have a higher profit margins, higher year-on-year (YOY) growth or higher growth percentage compare to their peer. As they would be focused on growing their business, and like-wise, share prices, you should not expect dividends from growth companies and should expect more volatility. Examples are: Amazon, Facebook, Qualcomm (You can expect a lot of tech stocks)

3. Income (Price - 3/5, Growth - 2/5, Dividends - 5/5, Earnings - 4/5, Stability 5/5)

These are the companies with strong and stable income sheet. They are companies that have quite a bit of earning every year but might not have opportunities to invest these earnings for future growth. Hence, they would distribute these earnings as dividends to their investors and they would have a higher dividend yield compared to their peers. Some of these companies can be found on the S&P 500 Dividend Aristocrats Index - Companies with a track record of increasing dividends for at least 25 years. Examples are 3M, Caterpillar, Oracle etc. 

4. Value (Price - 3/5, Growth - 4/5, Dividends - 5/5, Earnings - 4/5, Stability 5/5)

Have you heard of value investing? It means to find stocks that are currently trading at a price lower than the value that you perceive it to be. Your perceived value can be influenced by the management of the company, the brand power, the cash flow and so on. This is made famous by the Oracle of Ohama - Warren Buffett. 

5. Penny (Price - 1/5, Growth - ?/5, Dividends - ?/5, Earnings - ?/5, Stability 1/5)

Have you watched "The Wolf of Wall Street" starring Leonardo DiCaprio? The movie was portraying Jordan Belfort, who was a former stock broker that sold penny stocks to people. Penny Stocks are low-priced and speculative in nature. Many stock exchanges would not allow them to be traded. These are meant for investors that seek a rapid growth by buying into their stocks. HOWEVER, because they are speculative in nature, and their value might not be based on tangible assets, I would not recommend anyone without deep financial understanding to invest in them. 

My personal portfolio:
I have not bought into any individual stocks as I do not have enough capital to buy into stocks while ensuring sufficient diversification. Hence, I will be sticking to ETFs at the moment. I do have a few stocks that I am looking out for. But as I cannot disclose them as I am not qualified to make any recommendations to anyone. 

With that,
I end the second of this new series.

Stay vested, Stay frugal my friends,
Dionysius

Sources
https://www.nerdwallet.com/blog/investing/what-is-a-stock/
https://www.investopedia.com/terms/s/stock.asp
https://www.cashay.com/types-of-stock-blue-chip-penny-growth-income-value-153353359.html
https://www.drwealth.com/blue-chip-stocks/

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