Posted on by CTKS · 4 Comments

Change And Uncertainty

“The only constant in life is change.” – Heraclitus, Greek philosopher

The everchanging and unpredictable nature of markets is a going concern that stresses many investors out. Perhaps we have an innate desire for order and predictability, which explains why uncertainty and change make us uneasy. Whatever the reason, given that change and uncertainty is inextricably tied to investing, we investors can do better if we face the truth. In this article, I will share three main ideas pertaining to change and uncertainty.

1. Everything changes, embrace the idea of impermanence

For how much the world changes, it is unexpectedly difficult to visualise how quickly the world changes. A simple experiment borrowed from Warren Buffet illustrates this perfectly. Below is a list of the top 20 companies by market cap as of March 21st, how many companies do you think will remain in this list 30 years from now?

Surely Apple, Alphabet (Google) and Facebook will still be here, there is no other company like them!

Now, let’s take a look at the same list in 1989, 30 years ago…

You will see many familiar names on this list in 1989. However, what is striking is that none of these companies remain in today’s list. Zero. This goes to show how hard it is to predict the trajectory of businesses. This is not to say that it is impossible for the 20 largest companies today to remain on that list in 30 years time but whatever number we think it will be, chances are it is less. It is thus foolish to believe that certain things will NEVER change.

As investors, we need to be realistic and doing so will involve admitting that we cannot predict or be certain about the future. Instead, we should view the world through a probabilistic lens. Some companies have a higher probability of doing well and becoming successful, while others have a higher chance of failing. There is no such thing as a sure win. In fact, if anyone tells you that a company is sure to return you many times your money, take your money and walk away.

Looking at investing in terms of probability can help us make better decisions. As uncertainty cannot be completely eliminated, we should accept that there will always be a certain degree of risk in investing (i.e. there will always be a chance of failure). The goal is to find investments that has a high probability of working out and even if it does fail, the loss is marginal. In other words, a huge upside and limited downside. Therein lies the argument for having a certain degree of diversification. By having our eggs in different baskets, we significantly decrease the probability that our entire portfolio will go to zero. Even if the worst happens (the business fails due to low cost competitors or lawsuits or another recession hits), and it will, we can avoid crippling losses.

2. Even in an unpredictable world, certain things are surprisingly predictable

The future may be extremely unpredictable but history repeats itself. In the markets, cycles are surprisingly predictable. In the business and credit cycles, period of expansions are followed by periods of contraction. Likewise, in the stock market cycle, periods of euphoria are followed by periods of depression, which are then followed by periods of optimism again.

Thus, it is possible to study patterns in the past and use them as a rough guide for what could happen next. One such example is the stock market cycle.

As seen in the S&P500 chart above, a period of euphoria (from 1997 to 2000) is followed by one of despondency (2000 to 2002), which is then followed by another cycle of extreme optimism and greed (2002 to 2007) which is followed by severe pessimism (2008-2009). More recently, the Covid-19 pandemic resulted in a huge market sell off in March of 2020. Soon after, the markets rebounded to all time highs. Thus, it is inevitable that cycles will reverse and reckless excess will be punished, and vice versa. Therein lies a possibility of turning cyclicality to our advantage by behaving countercyclically.

However, this is not to say that we should start timing the market and enter at the bottom to sell at the top. After all, it will be foolish to think that we can predict when the tides will turn.

Since we cannot change the environment or predict it, we have to adapt to the prevailing climate by being more aggressive or defensive. Instead of thinking of whether to invest or not as a binary decision, we should see it in terms of a spectrum. When the market crashed in March of 2020, wise investors would have acted counter cyclically by deploying their cash reserves and picking up more shares in great businesses. At times like today when the markets seem to be approaching dangerous levels, we can perhaps hold back a little and start to accumulate some cash, waiting for opportunity to present itself. Some may even consider trimming their positions. However, I personally would never completely sell out of my holdings in expectation of profiting from a market crash. The expectation of successfully doing so is simply unrealistic in my opinion. As Warren Buffet puts it, “be fearful when others are greedy and greedy when others are fearful.”

3. First be lucky, then be humble

In being honest with ourselves about our limitations and vulnerabilities, we will come to appreciate the role of luck and risk in our lives and investing. Regardless of whether we like it or not, the two cousins play a role in every part of our lives and even more so when the markets are concerned. Where there is luck, there is also risk. From the lottery of birth to the successes in life, luck plays an elusive yet decisive role.

Thus, we should always remain humble and never get ahead of ourselves. We may make a series of successful investments/bets, but never take it for granted that our future endeavours will see the same success. As quickly as luck can bestow us with an obscene fortune, risk can take it all away.

It also follows that we should be grateful and contented with what we have. Do not succumb to greed and take riskier bets or taking on too much leverage such that when the unexpected happens, we will be in financial ruin and unable to climb back.

Exercise adequate scepticism and prudence in this uncertain world. Do not take anything for granted, be it that Apple will continue its dominance or that a company will continue its growth trajectory linearly. Yes, this may mean that we will miss out on some of the explosive returns we are witnessing in meme stocks today. However, it also means we are protecting ourselves from financial ruin and remaining in the game, making sure that we always have another chance for luck to be on our side. This is perhaps the only way to deal with luck and risk.

Posted on by CTKS · 3 Comments

Three Fund Portfolio – For Lazy Singaporeans

For those who have been following my website for a while, you will know that I am a huge proponent of passive investing. This strategy involves buying and holding ETFs that track a broad index. The philosophy behind this strategy is encapsulated in this quote from John Bogle, the founding father of modern day index funds: “don’t look for the needle in the haystack, just buy the haystack!”. In today’s complex and uncertain world, keeping our investment strategy simple is perhaps one of the wisest things we can do.

Proponents of this method of investing, known as “bogle heads”, have popularised a three fund portfolio that is inspired by John Bogle’s simple and low cost investing strategy. Typically, a three fund portfolio consists of the following:

  1. U.S Stocks
  2. International Stocks
  3. Bonds

However, given that this portfolio was created with the U.S. context in mind, I have adapted the three fund portfolio to suit my personal goals and preferences and Singapore’s unique context (many blue-chip stocks and REITs, no withholding taxes on dividends and the CPF system).

Here is an outline of the three fund portfolio adapted for Singaporeans.

1. An ETF that tracks a broad index

When it comes to passive investing, there is a plethora of ETFs to choose from. For starters, choose which index you would like to track. For instance, there is the S&P 500 index, the total U.S. stock market, the Russell 1000 index, world indices, etc.

If you would like to invest exclusively in the United States, your choice will be between the S&P500 index, the total U.S. stock market and the Russell 1000 index. From here, it will depend on whether you would like some exposure to small and mid cap stocks. If you do, pick the total U.S. stock market fund. Else, the S&P500 and Russell 1000 index are fine as well.

If you believe that the other markets could provide greater returns than the United States in the years to come, I would suggest opting for an ETF that tracks a world index. These indices typically have about 60% allocation to the United States and a 40% exposure to the rest of the world, providing adequate diversification away from the United States.

The ETFs I picked for my own portfolio are CSPX, which tracks the S&P500 Index and VWRA, which tracks the FTSE All-World Index. Both of these ETFs are Irish-domiciled ETFs, which are more tax efficient for Singaporeans compared to their US-domiciled counterparts. Additionally, they are of the accumulating type as I would like to maximise the compounding effect while minimising costs. For more information on Irish-domiciled ETFs and how to choose one that suits your preferences and goals, check out my article here.

For investors who only wish to pick one ETF, I would go with VWRA because it provides greater diversification and exposure to emerging markets such as China as well.

2. Singapore Dividend Stocks

One of the advantages of investing in Singapore is that there are many high dividend yielding stocks (blue-chip stocks and REITs) and no taxes on dividends. This is why so many Singaporeans are obsessed with dividends (myself included). While dividend stocks may not produce spectacular capital gains compared to high growth companies in the United States, I would argue that there is still a place in our portfolio for them. In investing, we should not seek to maximise our returns but instead seek to build a resilient portfolio that generates adequate returns. These dividend stocks are typically more stable and continue to pay dividends during times of economic downturn (albeit less). A steady stream of dividend income is extremely desirable as it can help tide us over a crisis or challenging period. The Covid-19 Pandemic is the perhaps the perfect example to substantiate my point.

In terms of dividend stocks in Singapore, there are two main ETFs to consider.

  1. SPDR STI ETF (Ticker: ES3)
  2. Lion Phillip S-REIT ETF (CLR)

As I am not a fan of the Straits Times Index (STI), I invest directly into the banks (OCBC, DBS and UOB) instead (mainly because they have higher yields than the STI and tend to perform better). If you would like to stick with the most passive form of investing, dollar cost averaging into the STI is fine as well.

Additionally, the S-REIT ETF is an excellent ETF to include in your portfolio. It boasts a higher dividend yield than the STI and Singapore’s vibrant REIT market is definitely something that we should take advantage of. Read my article on REITs to find out why I think they remain a worthy investment today.

At this point, some of you might say that my portfolio has more than three funds and deviates from the most passive form of investing (buy and hold ETFs). However, I would argue that the additional work required to invest in the banks and the S-REIT ETF is minimal and well worth it. Furthermore, no harm in having greater diversification! That being said, there is nothing wrong if you wish to stick with only three funds, just pick either ETF (STI or S-REIT) and stick with it.

3. CPF

Lastly, I have opted to replace bonds with the retirement system that Singaporeans have a love-hate relationship with. Despite the limitations of CPF, namely not being able to receive any pay outs until much later in life, CPF has “bond-like” characteristics that makes it a suitable replacement. Let me explain my thesis.

Firstly, I have an extremely long term horizon as I am investing for retirement. Thus, the fact that I am not able to touch my CPF money does not bother me as I have the intention of leaving the money in there for as long as I can. Of course, there is a chance that I will need cash urgently (due to a recession or emergencies). This makes the case of first having an adequate emergency fund.

Next, CPF provides a 4% rate of return that is essentially risk free (as it is guaranteed by the Singapore government which is rated triple A, the highest possible credit rating). This is much in excess of any triple A rated bond in the world.

Essentially, the CPF system makes it a bond on steroids that can give us steady, guaranteed pay outs well into our retirement as long as the Singapore government does not default. Given our government’s history of prudence and huge reserve, this is extremely unlikely.

Even if you are intending to pursue FIRE, CPF can be your safety net, allowing you to still achieve an adequate retirement in the event that your FIRE plan falls through.

Either way, we are forced to make monthly CPF contributions from our salary, which should be form quite a substantial part of our portfolio. However, if you want to allocate a larger portion of your portfolio to CPF, you can make voluntary contributions which can lower your taxable income as well.

That being said, I would like to add a caveat that I am mainly investing for retirement. The CPF system should only be seen as a replacement to bonds if you have an extremely long term horizon. If you are intending to take money out to make a big ticket purchase, consider having greater allocation to stocks and actual bonds.

Thus, a Singapore three fund portfolio will look something like this:

  1. VWRA
  2. STI ETF or S-REITs ETF
  3. CPF

Finally, we come to portfolio allocation.

Below are rough guidelines I intend to use to portion my portfolio at different stages of my life. Do note that these just rough numbers and are subjected to change depending on numerous factors.

In my 20s, I intend to be aggressive as I wish to attain financial independence as early as possible. Thus, I have a huge allocation to U.S. and international stocks (VWRA and CSPX). I also have a small allocation to Singapore REITs and blue-chips (namely the bank stocks), which I picked up last year when they were at huge discounts. Finally, my CPF makes up less than 10% of my portfolio as I am not working yet. Currently, my portfolio looks something like this:

US + Rest of the world: >70%

Blue-chips and REITs: 20%

CPF: <10%

For the next 5-10 years, my portfolio will likely look similar in terms of allocation. I intend to continue to DCA monthly into CSPX/VWRA, only adding to Singapore REITs and blue-chips if they are selling at huge discounts.

In my 30s-40s, CPF as a percentage of my portfolio will likely increase substantially due to mandatory and voluntary contributions. At the same time, I will start to allocate more money to dividend stocks and cut back on growth stocks in order to start building a dividend income in order to achieve financial independence. My portfolio will likely look something like this:

US + Rest of the world: 40-50%

Blue-chip and REITs: 30-40%

CPF: 20%

In my 50s and beyond, I will hopefully have achieved financial independence. I intend to do this by having the bulk of my investments in dividend paying stocks. This will allow me to have a steady stream of dividends to fund my desired lifestyle. However, I will still be allocating some money to growth stocks so that my portfolio will still achieve desirable rate of return.

US + Rest of the world: 10%

Blue-chips + REITs: 60%

CPF: 30%

As with most other things in life, there are no hard and fast rules in investing. What may work for someone else may not work for you. I adapt ideas from other successful investors, copying what I deem fit and omitting the rest. In fact, my own plans, preferences and goals may be subjected to change and so will my portfolio allocation as well. The key is to remain flexible in order to create a resilient portfolio that works for you.

Posted on by CTKS · 2 Comments

4 Reasons Why You Should Invest

Still on the fence about whether to invest? In this article, I will make the case of why investing is essential, and perhaps even necessary for most of us.

The first reason why you should invest is because earning and saving is only half of the equation to building wealth over the long term. When we work, we are “exchanging” our time for money. As we only have 24 hours a day, there is a limit to how much we can work and how much money we can earn using our time. If we want to maximise our earned income by working more hours, we will eventually have to work at the expense of having less time to rest or to do things that brings us joy. Worst still, our mental health will deteriorate and we may become at risk of burning out. Personally, I view investing as making your money work for you, even when you are asleep. As your income from investing increases, it can supplement your main income stream and this means it will free up more time for you to do the things you love such as pursuing your hobbies or spending time with family and friends.

This brings me to my next point, which is that investing can help diversify your sources of income. Diversification one’s sources of income is a topic that is not talked about enough. One only needs to look back at the past year and a half to see why diversifying our income streams is necessary. As Covid-19 ravaged the world and forced many economies into lockdown, many people lost their jobs. If our day job is our only source of income, losing it means having to survive on stimulus checks an watching our savings whittle down. During the same period, the stock market has continued to chug along, rewarding those who remain invested. Thus, a second source of income via investing could potentially help tide us over in a time of crisis. Furthermore, research has shown that generally, the more sources of income you have, the more income you tend to make. With dividends and capital gains being the most common income streams after earned income, investing in equities is a good place to begin.

Next, I view investing as a way to protect your savings against inflation, the silent killer. Today, cash sitting in the bank earns an interest of 0.05%, essentially nothing. Imagine that you saved up a respectable sum of $50,000 by the time you are 30 years old. If you were to leave this sum in the bank, it will be worth less than $33,400 in real terms by the time you reach 50 years old (assuming an average inflation of 2%). Essentially, you would have lost over $16,600 by simply doing nothing. Investing, on the other hand, allows us to earn a return greater than the inflation rate. This grows our savings in real terms, protecting them from being eroded by inflation. Inflation is so deadly because it lurks in the shadows and goes largely unnoticed. By the time people feel its effects, it is often too late. Thus, the sense of assurance we feel when we have loads of cash in our bank account is a false one. If you are not convinced about the threat of inflation, just ask your parents how much a cup of coffee or a bowl of noodles cost when they were a student! Thus, while returns on investing in stocks are not guaranteed, leaving your retirement savings in the bank is a sure way to have your savings eroded.

Lastly, being able to retire on savings alone is a luxury. For someone who earns the median wage of $4,500 in Singapore from 25 years old to 60 years old, being able to save $1 million dollars for retirement seems like an impossible uphill task. They would need to save $2,380 a month, more than 50% of their income, in order to hit this goal. If the same person were to dollar cost average into an ETF that has an 8% annual return on average, he will only need to contribute $465 each month to achieve the goal within the same time period of 35 years. Now that is a much more achievable goal! While I admit that this is a theoretical example, the 8% return is a rather conservative one given that the S&P500 has a historical average return of 10% annually. Furthermore, by saving and investing more than the $465 there will be more leeway for any potential setbacks.

I hope that this post has convinced you about the importance of investing in order to achieve achieve our financial goals more easily. While there are indeed risks involved, as with most things, avoidance is not the solution. Instead, we should recognise the risks involved and understand that successful investing can be achieved with the right strategy and mindset. Thankfully, these are well within our control. If you would like to learn more about investing, check out my other posts on how to invest here. Additionally, I will be sharing which ETFs I personally DCA into monthly so click here to join The Dollar Sapling telegram channel and stay tuned!

Posted on by CTKS · 4 Comments

How To Begin Your Journey To Financial Independence

Financial management is an all important skill in life that I believe should be taught in every school. The fact that this important life lesson is not taught in school is what motivated me to create this blog. For this reason, I am very excited to be sharing about how to begin your journey to financial independence in this post and I hope that you will feel motivated to take your first steps.

As financial independence is a lifelong process, I am a proponent of starting as early as possible. Thus, I hope you find this blog useful no matter how young you are as it is never too early to start planning for retirement (for reasons I will cover later).

Financial independence refers to the status of having enough income to pay for one’s living expenses for the rest of one’s life without having to be employed or dependent on others. In other words, an ideal retirement.

Why do people not plan for retirement?

Before we begin, it may be helpful to understand why some people fail to plan for retirement. I hope that when you face these common pitfalls, you will recall this article and make the best decision.

The main problem here is one of instant gratification. Psychologically, people place a greater emphasis on satisfaction gained from consuming a good or service now than in the future. For instance, when weighing the satisfaction from the latest iPhone, PC or TV today versus the benefits of a secure retirement 40 years later, many will place a greater weight on the former. Furthermore, the fact that retirement seems very far away (especially for someone in their 20s who just started to work) only exacerbates the issue as the benefits of financial freedom seems very intangible and tends to be underestimated, compared to something tangible like the latest gadgets today.

Another common reason is that people fail to see how their small actions today can have profound impacts their future well-being. For instance, saving $10 today might not seem like much when you require hundreds of thousands to buy a house. However, the small amounts of money that you save can quickly add up to a significant amount. Furthermore, owing to the power of compound interest, money saved and invested early can grow exponentially to a substantial amount! Another benefit of these seemingly small actions is that it will help you form a habit of saving, which you will undoubtedly find beneficial throughout your lifelong journey to achieve financial freedom, especially when your income increases and you start managing more money.

Finally, many people think that they have a long time to plan for retirement. As it is human tendency to procrastinate, it is no surprise that many fail to start planning ahead. To this, I have one very compelling reason to urge you to start as early as possible: the earlier you start, the easier your journey to financial freedom will be.

The final reason is also why I am a huge proponent of starting as early as possible. Let me now elaborate on why starting earlier will only help you on your journey to financial freedom.

Why you should start to plan for retirement as early as possible

Firstly, starting earlier will mean that you have a longer run up to take advantage of compound interest. This will allow you to compound your investments exponentially and make it easier for you to achieve financial freedom.

In order to illustrate this, let us take a look a hypothetical example.

Tom, who is 30 years old, and Jerry, who is 20 years old, begin to invest in the same S&P500 ETF that has an average annual rate of return of 10%. Assuming that both retires at 60 years old, Tom will have 30 years to invest while Jerry will have 40.

Tom makes an initial investment of $500 and subsequently, makes monthly contributions of $500. Using an investment calculator, he will have almost $1,050,000 at the end of 30 years. Not bad! But let us take a look at Jerry, who makes an initial investment of only $250 and makes monthly contributions of merely $250. At the end of 40 years, he will end up with more than $1,400,000. This is $350,000 greater than what Tom has! Furthermore, at age 60, Tom’s total contribution will add up to $180,000 while Jerry’s will equate to only $120,000. In other words, Jerry has contributed less and ended up with much more. You can now see how much difference 10 years can make and why it is easier to hit your retirement goals if you start earlier.

Secondly, starting earlier will give you more leeway to make mistakes. While we want to minimise the number of mistakes we make, it is inevitable that we will make some mistakes along the way. Thus, starting earlier will mean that we have more time to recover from any mishaps. Additionally, learning how to handle small amounts of money will train you to handle larger sums of money. This will make you more adept at managing your money in the future. As you approach retirement, you will want to avoid any mistakes that will cause severe capital loss and set your retirement plans back by several years. Thus, the values you cultivate, lessons you learn and habits you form will only serve to make you a better manager of your own finances.

Now that you understand the pitfalls that people face when planning for their future and the reasons to start early, let me go through some crucial steps to kick-start your journey to financial freedom.

Things to do before investing for financial freedom

The first step is to save more money. This might sound like common sense but many people often take this for granted and unknowingly overspend. To put this into context, the extra money you save can easily add up to be greater than the returns on investment of a small sum of money. For instance, saving an additional $10 per week will equate to $520 a year. In order to earn an annual return as high as this, an investment of $5,200 will be required (this is assuming an annual rate of return of 10%). That is a considerable sum if you are just starting out.

I hope to motivate you to save more by introducing the 21/90 rule. The rule states that it takes 21 days to build a habit and 90 days to build a lifestyle. While it will require a lot of self-discipline to spend less initially, it will eventually become a habit and you will do it subconsciously after some time. Hence, I strongly encourage you to consciously make an effort to spend less and save starting from now.

Next, it is of utmost importance for you to pay off any high interest debts. For instance, credit card debts in Singapore has an average interest rate of 25% per annum and will eat away at your investment returns. In comparison, the S&P500 index, which tracks the largest 500 companies in America, has a returned an average of 10% annually. Few investors can achieve a return on investment higher than 25% consistently. Thus, interest payments on such debts will likely be greater than your returns, making you suffer losses and eroding your savings.

In order to visualise this, imagine that you have a credit card debt of $1,000 with an interest rate of 25%. If you pay off the $1,000 today, you will be saving yourself $250 in interest which will go straight into your savings.

If you had invested the $1,000 instead, you would have made $100 (assuming annual rate of return of 10%). However, you will have to pay $250 in interest. You will thus end the year with a net loss of $150 ($250-$100).

In other words, paying off such high interest debts can be seen as a guaranteed rate of return of 25% since you will be saving yourself from paying such high interests in the future.

It is also crucial for you to build an emergency fund in case you require money at moment’s notice due to unforeseen emergencies such as accidents, medical illnesses or loss of job due to a recession or pandemic (touch wood). When such incidents happen, you will not want to liquidate your investments without enjoying the full compounding effect or worst still, at a loss. Thus, it is crucial to put aside enough money for a rainy day. The amount recommended by experts ranges between 6-12 months worth of your monthly expenses. However, this is just a rule of thumb. You may want to put aside more money if you are planning to buy a house or have a wedding in the near future.

While trying to build your safety fund and pay off your high interest debts, it is essential that you take this time to learn the basics of investing. This will help you build a strong foundation that you will undoubtedly find helpful when you start investing. To get started, check out my my other posts related to investing here.

Once you have built a sufficient emergency fund, paid off all your outstanding high interest debt and learnt the basics of investing, you are ready to move on to the next step and start investing in order to achieve financial freedom!

If you are just starting out, it may be hard to build a sufficiently diversified investment portfolio with a small capital. I highly recommend you to check out my other post where I share how to start investing with little money.

To end of this post, I would like to quote part of a famous saying by Hillel the Elder: “If not now, then when?” So start planning for your future today!