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 

Read More

April 2020 updates + investment strategy for this period

Hi friends,

Wow. Just wow, it was definitely a blood bath the previous week. I am currently writing on the 4th week of march. But in the 2nd and 3rd week of the month, I experienced quite a big loss in my investment. It was an exciting experience. I was elated when the flash drop occur and the circuit breaker happened in the US market.

So, here are my strategy for this period of extremely turbulence (This is not a recommendation. I am just talking about my plans for my personal investments):

1. Increase my DCA into Stashaway to $1000 a month. (I have about $12,000 in my warchest. As a  bear market would last for an average of 13 months, that is how I will allocate my finances)
2. I have allocated $5000 for "timing the market" (NOOOOO, WHY AM I DOING THIS). I am trying to time the Nikkoam REIT ETF as I believe that there are fundamentally strong companies in the etf and I really like the idea of having 4-5% of passive income from the etf. (If I invest in this period of low valuation, I am expecting a higher dividend yield.)
3. If needed, I will be pulling money from my emergency funds and take this opportunity of a lifetime.

Now, let talk about my portfolio:
1. Stashaway (Invested 2900, current value 2777 )
2. Stashaway Simple (Invested 6900, current value 6929.13)
3. Coasset (Invested 1000, expected return of 1090 in 2020)
4. Funding Society (Invested 2623, current value 2720)
5. Endowment (Invested 6000, expected return 6556.4 in 2022)
6. FSMone - Nikkoam STC Asia REIT ETF (Invested 1548, current value 1584)

That would bring my returns to 1.41%. Not including cpf, life insurance etc.

There is this financial saying that more millionaires are made in a crash than a bull market (I will be putting that to the test). I cannot be a millionaire from the amount that I have, but I believe that I can set myself in a good financial position from this turbulent period.

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

Dionysius

Read More

Active management allows for better performance in market downturns?

Hi friends,

One of the counter-arguments brought-forth by active management believers would be that they can utilise some other instruments (bonds, derivatives, or even cash) in a market downturn to achieve better performance in a market downturn (like the one that we are having now). Thus, I will be examining if this saying holds up when we look like historical data:

Links:
1. https://www.onedayinjuly.com/active-vs-passive-in-down-markets
2. https://advisors.vanguard.com/iwe/pdf/FASAPMSM.pdf
3. https://advisors.vanguard.com/iwe/pdf/FASAPCM.pdf
4. https://www.morningstar.com/articles/852864/will-active-stock-funds-save-your-bacon-in-a-downturn
5. https://us.spindices.com/documents/spiva/persistence-scorecard-december-2019.pdf?force_download=true

From the POV of active investment:
Passive investments would rely on the market index (index funds/ etfs) for their investments. As the market goes into a downturn, active investment would shine as they would often own stocks that are outside of the index. This would mean that they have the potential of performing better than the market index when it goes down. A skilled manager would only pick the good stocks in the stock market and hence, it should perform a lot better than just buying all the stocks in the market using index funds.



Looking at the figure above, we can see there in a bear market, active managers do perform better than compared to a bull market. Hence, from a short-term perspective, active managements can be considered as a way of investment (Provided that we can choose the ones capable of choosing the right stocks)


However, when we attempt to look at things from a long-term perspective (i think of around 10 years?). The graph above actually shows that for the top 20% actively-managed funds in one crisis, only 23% would remain in the top 20% for the next crisis.

Effectively, only 4.6% of actively-managed funds would remain in the top 20% in their performance for a period of 2 crisis. The issue of how we want to select this 4.6% is beyond me, as I believe that it is more likely due to luck that they actually remained in the top 20%. Evidently from the 77% that actually slide below the quintile.

The same also applies if we look at the US small-cap funds and emerging market fund. Please look at link number 1 for that.

Also, looking at the SPIVA scorecard, which includes 12 equity buckets spread across Large-Cap, Mid-Cap, Small-Cap, and Multi-Cap. Each of those four broad categories is further divided into Core, Growth and Value sub-categories. The 13th category is Real Estate funds. The SPIVA score card has data started in 2001. 

Looking at the 2001 dot com bubble burst and the 2008 financial crisis, only 4 out of 13 of the categories has more than half of the active funds beating their respective index in 2001. In 2008, only 2 our of 13 of the categories has more than half of the active funds beating their respective indexes.  

Hence, even in a market down turn, we are unable to see substantial evidence that active management would perform better than their respective indexes. This is especially evident in the previous paragraph, where only 4/13 of the categories of active funds out perform their indexes in 2001, only 2/13 of the categories of index funds out perform their indexes in 2008. 

In conclusion: when we look at the short-term perspective, there are indeed a substantial proportion of active funds that will outperform the market (50%, so if you would want to choose a fund, you can choose to flip a coin), However, in a long-term perspective, there is no substantial evidence that active management would consistently perform better than passive-investments. Between one crisis to another, there is no consistency in which fund will always do well in the crisis. 

Read More