Are you Financially HEALTHY?

Hi Everyone, last week I wrote about Personal Net Worth and why it’s the best metric to use as a benchmark for your financial goals. Today I will be diving deeper into the concept, and introduce a term called “Financial Health”, which you can use to assess the state of your finances. I will also suggest that the extraordinary times that we are living through now indicate that it would be wise to place a premium on liquidity, and to rely less on leverage to accumulate assets.

What is Financial Health?

Just like measures of your physical health – flexibility, strength, and cardiovascular health; financial health is measured by liquidity, resilience (low debt ratios), and the ability to go the distance (high savings rate).

Target indicated here is suggested by ST Invest

If you would like to find out more on how you measure up against your fellow Singaporeans – there was a survey done by OCBC last year that surveyed 2,000 Singaporeans, in what they call “Singapore’s First Financial Wellness Index” that covered the same metrics that were introduced in the ST Invest article. Similarly, I found BlackRock’s Investor Pulse for Singapore quite informative in understanding where Singaporeans stand when it comes to the financial health.

Why Financial Health is Important

Much like your annual health check up, it’s important to do a regular review of your finances from time to time. No time like a pandemic to remind us of our own mortality and the importance of looking after our health – the same goes for the economic crisis brought on by Covid19, and its impact on our finances.

Financial Health, in a nutshell, is how well your finances respond when things do not go according to plan.

Everyone has a plan until they get punched in the face.

Mike Tyson

To paraphrase Iron Mike above – a lot of the financial products that you may have been peddled just don’t stand up to the test of time, or to “non-normal” conditions like what’s happening around us right now (such as the unprecedented use of the word “unprecedented” to describe our current situation).

There’s something strange.. in the neighbourhood.. Who do you call? CEN-TRAL BANKS !

As I’ve alluded to in my introduction, I’m referring to investment portfolios that rely on leverage (e.g. structured products or real estate properties) to amplify their returns. Sure, they could show you a good back test, constructed using “average” parameters from a period where markets behaved “normally”.

This is why you haven’t been getting those “promised returns” recently..

This means that they work most of the time, but when they don’t work – they REALLY don’t work!

95% of all financial history happens within 2 standard deviations of normal, and everything interesting happens outside of 2 standard deviations.

Richard Kayne, Founder of Kayne Anderson Capital Advisors

And that’s what happened in March this year, when US realized that Covid19 was not just a virus confined to Asia, most market participants sold whatever they could, in order to meet margin calls on their other levered positions. This liquidity crunch resulted in market mechanisms malfunctioning and correlations between asset classes breaking down, at least until the Fed stepped in to soothe markets.

Source: Capital Finance Institute

If you were invested in illiquid assets (such as private assets or real estate), and were also financially extended (by leveraging to invest in stocks / real estate) – March wasn’t a good month for you. And in case you were wondering, no I do not consider cryptocurrencies as liquid assets – you need to convert into Fiat (usually USD) to trade in and out of your positions, and the exchanges are not as robust as the major stock exchanges that have had a much longer track record.

What iP2I recommends

The financial pain from Covid19 has not been evenly spread – some sectors are hurting more than others, such as the tourism industry, which accounts for 1 in 10 jobs globally. Also, given the tendency of people to find their partners in the workplace, chances are high that you and your SO could both be working in the same industry – this means that you could lose both incomes in a dual-income household at the same time.

Further, if you are a freelancer – the nature of your work means that you experience significant income volatility every month (up to 30%). Depending on your specialty and industry, you could see your entire pipeline for the next few months evaporate overnight due to social distancing measures.

Singaporeans expect that Covid19 will continue to affect their job prospects in the next 6 months

What Covid19 has taught us is that we may need more emergency savings than previously thought, and that more of our net worth would need to be liquid in a black swan / generation defining event (which is somewhat untrue IMO, as Millennials are now the Double Downgrade Generation) .

Despite their concerns around their job in the next 6 months, 1/3 of Singaporeans have <6 months emergency savings

Therefore I propose the following targets that one should strive for in order for their Financial Health to be “Covid-proof” and to not have to consider putting your healthcare needs on hold due to financial concerns.

iP2I suggests “Covid-19 proof” targets, over and above the recommendations by ST Invest

1. Liquidity

  • Household Liquidity Ratio: 6-12 months Income
    • To be prudent, you may aim for 6 months of INCOME saved instead of just seeking to cover loan expenses
    • If it helps you sleep better, you can save up to 12 months of income
  • Cash to Net Worth Ratio: 30%
    • I would shoot for a higher cash target, as I prefer to be nimble in taking advantage of opportunities in the market – I actually invested more in March

2. Debt Ratios

  • Total Debt Servicing Ratio: <40%
    • If your ratio is too high, you should consider downgrading your house, or skip owning a car
    • MSR (Mortgage Servicing Ratio) is set at 30%, so you have 10% left for your car/credit card loans
    • I’m currently at 0% debt, and will likely use CPF to cover the mortgage on my BTO when it comes + defer owning a car till I have kids
  • Debt to Asset Ratio: <50%
    • Assets here include Property Values, which usually take a dive in a downturn, while the outstanding loan amount remains the same – if you are over-leveraged, you may be forced to sell at a lower price than you would like in order to maintain Loan-to-Value (LTV limits)
    • Note: I did not change the target here from the ST Invest recommendation

3. Savings & Investment Rate

  • Monthly Savings Ratio: >20% Saved; >10% Invested
    • I doubled the minimum recommendation of 10% savings, and would suggest that you can look to invest 10% of your salary every month through an RSP (into UTs, ETFs, Stocks) or via a roboadvisor. Personally, I invest 10% each month through a roboadvisor (MoneyOwl) into a 100% Global Equities Fund. From time to time, I also top up my Interactive Brokers account depending on market conditions and whether I have new trade ideas – this account is mostly invested into US and Chinese Equities.

How often should I measure my Financial Health?

Measure your Financial Health, like you would your Physical Health !

If you are struggling to hit your savings targets each month, I suggest monitoring on a weekly/monthly basis to ensure that you remain on track – use an aggregator like Seedly/Financial Butler to find out more about your spending categories and patterns. This is akin to monitoring your weight on a regular basis to figure out the effectiveness of your diet and exercise plans.

Once a month/quarter, take stock of your investments and decide whether you need to rebalance or top up your investment accounts. To minimise trading costs, rebalancing is best done with fresh funds.

On an annual basis, much like your annual health check up, you can take a more in-depth look at your finances. If you have an insurance agent that you trust, this is a good time to have a look at your insurance coverage and decide whether you are comfortable with it. I would also take this time to make adjustments to my investment portfolio using my bonus, and make my SRS contributions and investment allocations for the year. Depending on your life goals, you can also look at adjusting the amount of CPF OA that you have, and potentially moving some of that into SA, or use it for CPFIS investments. More will follow in a later post.

If your goals have changed in the past year, you can use UP Plan to model those changes to the trajectory of your Net Worth. It’s helpful to visualize the impact of those changes, as that helps with prioritising what you really value in life.

Plan for your Financial Health, like you would for your Physical Health

So there you have it – Financial Health and why you need to care about it, especially during this health crisis. Leave a comment to let me know whether you agree with my recommendations.

Happy Sunday, and thanks for being here. One more day till the end of the Circuit Breaker – please continue to stay safe and well.

L.

Personal Net Worth – The ONLY Financial Concept that really Matters

Hi Everyone, last week I wrote about the 10 websites that you should be following on your investing journey. Today I will be covering the only Financial Concept that really matters for the budding investor – Personal Net Worth. I will also suggest a few apps and tools that I’ve found helpful in tracking that metric as you continue on your journey towards Financial Independence.

What is Personal Net Worth?

Net Worth, simply put, is what you OWN (Assets) less what you OWE (Liabilities).

Source: Experian

You can think of Net Worth as the Financial Capital that you accrue by harnessing your Human Capital in this stylized chart below:

Source: Ibbotson Associates

It is also the metric used by Forbes magazine in its annual list of Billionaires.

Source: Forbes

Examples of Assets are as below, in order of Liquidity (high to low):

Here are some examples of Liabilities, again in order of Liquidity (high to low):

  • Credit Card Debt
  • Other Loans and Bills
  • Tution Loans
  • Car Loans
  • Mortgage Loans

Why does Net Worth matter?

It matters because despite what your life goals are, all wealth is ultimately fungible, meaning that your car can be exchanged for cash or something else of equivalent value, e.g. one more exotic holiday destination each year. Net worth is thus often distilled into dollars, and we have financial bloggers/sites in Singapore that have come up with financial goals such as:

Other goals that used to work well in the past included owning additional properties and becoming a landlord, or hope for an en bloc windfall. I say that it used to work well because of the ability to leverage and the fact that financing and maintenance costs are tax deductible. However, after ABSD was introduced in 2011, the economics don’t look quite as compelling. Also, unless you were wealthy enough to own a diversified portfolio of properties, you would have been subjected to concentration risks above and beyond that of a traditional investment portfolio mix of stocks and bonds.

Personally, I am quite privileged to have achieved a 6 Figure Investment Portfolio by 30, but bear in mind that I have not conquered other life goals such as owning a BTO, or getting married (yet) – goals that my peers have achieved at my age. I am also fortunate that I did not have any tuition loans to pay off – thanks Mom and Dad!

Right, so what’s a good Net Worth to shoot for?

In any case, I think it’s good to set goals for yourself – don’t worry if they may not seem as lofty as some of those listed above in the earlier section. Everyone’s situation is different – as long as your Net Worth continues to grow steadily, I think you are doing well! That said, I believe that it is important for a significant part of your portfolio to be liquid, in order to take advantage of opportunities, and also to prepare for contingencies, such as the ongoing Covid19 that has touched everyone’s lives.

This means that you should probably hold more emergency savings than you would otherwise have set aside before you start investing, as both breadwinners may lose their jobs at the same time during a pandemic or crisis like this – 6 months of emergency savings will now only last for 3 months. Relying on the kindness of strangers, or the government for handouts, may take its toll on your mental health, so why not ensure that you have sufficient savings to tide you over times like these.

You also need to make sure that your human capital is adequately protected, so that your dependents do not have to worry about your major liabilities (e.g. Mortgage) should something unfortunate happen to you. I will follow up with a post on the levels of savings and insurance that one should have in place, to ensure that you can invest without having to liquidate your investments against your will, and often at a poor price.

Ok I’m sold, how do I keep tabs on my Net Worth and ensure that I remain on track?

Don’t worry, I got you – I came across a few tools and apps over the years that I found quite helpful in tracking my Net Worth, so that you won’t have to key stuff on a spreadsheet (because who really has time for that after work?).

UP Plan

  • This is a new tool by a Fintech that allows you to MODEL the impact of life goals such as Education, Weddings, Holidays on the path that your Net Worth takes
  • What’s cool is that the app takes parameters from Singapore government agencies, such as salary growth, inflation rates; loan rates; retirement age etc.
Source: UP Plan SG

Wealth+

  • Up Plan is great for simulations, but it can’t track the changes to your Net Worth going forward. That’s because it’s intended to be a financial planning tool that refers you to a financial advisor (from Prudential) or Syfe (for investing)
  • Here’s where Wealth+ comes in – it’s an iOS app that I use to log my assets and liabilities every month to track the ACTUAL changes to my Net Worth
  • The resulting dashboard provides sleek line charts that elegantly paint a picture of your Financial Health over time
Source: Wealth+

Seedly

  • Of course, how can I forget Seedly – I started using it in the good old days when you could still sync your DBS accounts
  • I am a little bit sad that they haven’t fixed this with DBS yet, as we could all benefit from a holistic overview of our finances
  • They have since expanded to become a content platform, and there is a lot of good localised content there, but be mindful that a lot of the contributors and forum members may not be as independent in the advice that they give, as some of them are financial advisors / insurance agents
  • Regardless, the app still serves a key function to help you aggregate your spending across accounts and credit cards, greatly aiding your budgeting and savings plans
Source: Seedly

Financial Butler

  • I came across Financial Butler’s ad when I was scrolling through IG stories, and thought to check it out, and I was not disappointed
  • Like Seedly, Financial Butler is an account aggregator app – in fact, they run on the same white label aggregator platform (Salt Edge)
  • However, the syncing process for FB is more seamless, as I only needed to key in an OTP or tap approve in my mobile banking app
  • Also, they can sync my DBS Account !
  • I guess if you like reading the content on Seedly, and you don’t mind having both apps on your phone – much like how we have more than one ride hailing app (Uber/Grab/GoJek) – then you can consider having them both on your phone in order to get a complete view of your accounts
Source: Financial Butler Asia

PolicyPal

  • PolicyPal isn’t strictly a Net Worth tracker, but it is useful in keeping track of your insurance policies, and maybe some of your investment plans that you purchase from your Insurance Agent/Company (not a fan of 2-in-1 insurance and investment products, but more on that in a later post)
  • As I said at the end of the previous section, an adequate level of Insurance is important to ensure that your Human Capital is sufficiently protected
  • I will also take this opportunity to tell my readers that Insurance is not meant to make you money – you should be thankful if you don’t actually need to claim anything as it means that you are physically safe and well
  • What’s cool is that PolicyPal relies on OCR technology that’s refined by AI – all you need to do is to take a photo of your Insurance Policy Schedule and most of your fields will be populated to a surprisingly high level of accuracy!
  • Another neat feature is that you can also include policies of your other family members, such as your parents or grandparents, so you can track and manage the policies of your whole family in one place
Source: PolicyPal

So there you have it – everything you need to know about Personal Net Worth and a few tools that make tracking it a breeze! Leave a comment to let me know whether you agree with the apps that I have chosen.

Happy Hari Raya Aidilfitri to my Muslim readers during these extraordinary times! To the rest of us, enjoy the off-in-lieu tomorrow. Thanks for being here.

L.

10 Websites you should be reading if you want to INVEST

Hi Everyone, if you are reading this – I know you can’t wait to get your feet wet and dive straight into the world of investing. The waters can be quite murky at times, so it’s important for you to get your information from the right sources, and in a timely fashion.

Warren is smart. Be like Warren.

In order to have a chance of success in picking the right investments, and at the right time – it would do you well to build a good reading habit.

“Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

Warren Buffet, CEO of Berkshire Hathaway

The Perfect 10

Indeed, reading and the thinking that follows will pay dividends for the budding investor. Based on my own years of trialing out what works and what doesn’t – I have carefully curated a list of publications and resources below to help you get started on your investment journey. I am calling this list the “Perfect 10” (coincidentally launched during the year I was born, and is now known to Gen Z as 987FM, IF they still listen to radio).

If something is free, you’re not the Customer – you’re the Product

In the era where fake news abounds, it is important to get your news from the right places, and that often comes at a cost. If you are a student, you may be able to get a discounted subscription, or even a free one for some of the Paid Publications listed below:

  1. Financial Times (UK/European perspective; in particular the Lex column. App and website are in the same salmon pink as its expensive newspaper)
  2. Wall Street Journal (US focused; with up-to-date markets analysis. The app supports Dark mode, so less strain on my eyes and my iPhone’s battery)
  3. Bloomberg (Up to the minute coverage; Bloomberg TV is also a good complement to reading)
  4. Business Times (Coverage and analysis of Singapore markets and companies)
  5. Economist (Weekly roundup of the week’s happenings around the world with a generous dose of British wit and humor – my new favorite column is Bartleby. The app also supports dark mode, and has a daily dose of curated news that is aptly named Espresso)

But.. I’m on a budget..

But of course, there are also some good and cheap / free resources that one can turn to when first starting out:

  1. Straits Times Invest (Great write-ups and actionable advice on the topic of personal finance for Singaporeans every Sunday)
  2. The Market Sum (Newsletter by the editor of Investopedia that sums up market happenings – I usually make sure I read this one, even when I am on short on time)
  3. Robinhood Snacks (US-centric newsletter by the eponymous brokerage, targeted at Millennials)
  4. r/investing (One of the better subreddits out there, to ask questions and hopefully get a good answer. That said, you may have to battle some trolls, and sift through sh1tposts, but probably not as much as WSB. Also, the discussions tend to be mostly about American markets and stocks, so they may not be fully applicable to a Singaporean investor)
  5. Investment Moats (Written by Kyith, the OG Financial Blogger in Singapore. If you only have time to follow one other blog – this would be it. K. writes about dividend investing, and mostly invests in high dividend yielding Singapore stocks to help him to achieve FIRE)

So there you have it – the Perfect 10 to accompany you on your Investing Journey, much like how the DJs of yesteryear used to accompany my generation during bouts of late night studying.

Looks like they cut 20% of their workforce, so they can’t call themselves Perfect 10 anymore.

Leave a comment to let me know whether you agree with my list.

Happy hump day, and thanks for being here.

L.

The STORY behind It Pays to Invest (iP2I)

Hi Everyone, if you are reading this – welcome to iP2I. I hope you find the content here useful in your journey towards financial independence, and in achieving your life goals.

Why did you start this blog?

I decided to start this blog because I realized that many fellow Singaporeans don’t really know where to begin when it comes to the world of investing. This was an idea that I toyed with for the past year or so, but finally decided to get down to creating it because of the coronavirus induced circuit breaker that has trapped me at home with just my Wifi and not much else.

I also recently saw this article on Today that talks about how Covid19 is renewing financial worries for our youths, especially those that are graduating into the workforce, so I thought that it is a good time to launch a blog, with the hope that some of those youths would stumble upon this page in their search for answers.

March Madness and Market Mayhem

Also, in March 2020, markets sold off and economies around the world entered into recession, ending the uninterrupted economic expansion since the last crisis over a decade ago during the GFC. The following month in April saw the best monthly returns in decades. How on earth is one supposed to make sense of the madness coming out of the markets? Is it a good time to invest or not? Now that we are in May, is it time to Sell in May and Go Away?

You’re in Finance right? Tell me how to invest.

I do like a good pair of shoes and enjoy watching movies, but the rest just doesn’t apply.. at least not in Singapore (I hope).

Well, I studied finance in uni, and work in finance, so my friends and family kinda see me as a finance guy and often ask me those questions. The truth is, while I was equipped with a good theoretical understanding from textbooks, they don’t quite prepare you for the emotional aspects when it comes to dealing with money, especially your own. Further, markets were under severe stress for a brief period of time during the month of March, leading to trading days where assets included in portfolios to provide risk diversification, such as bonds and gold, moved in the same direction as stock prices. Harry Markowitz, the father of Modern Portfolio Theory (MPT), would disapprove.

While market conditions stabilized after the Fed stepped in swiftly to provide enormous amounts of liquidity to ensure that we did not have to deal with a financial crisis in addition to the economic damage brought on by the ongoing pandemic, the fact remains that low interest rates aren’t going to cure Covid19 on its own. As it stands now, markets appear to be detached from economic realities – economists are engaged in constant battle over the shape of the recovery, while we are now close to retracing the highs in February (V shape recovery complete?). More will follow in later posts.

What else are you going to write about?

Other things that I intend to blog about are:

  • The investment mechanisms that we could adopt – e.g. Dollar Cost Averaging through Robo-Advisors or RSP (Regular Savings Plan) into Mutual Funds vs Tranching into Markets. There are pros and cons to each, depending on one’s personality, and your expectations of markets.
  • Investment types will also be discussed – stocks, bonds, ETFs, Mutual Funds; and which platforms one should use for trading or investing in them as a Singapore tax resident.
  • How to optimise the use of national schemes available to us as Singaporeans – SRS, CPFIS
  • I would also review some of the interesting developments in the Fintech space for investors, as I personally feel that the Investment process could be made a lot more customized and seamless for the retail investor, especially as Millennials and Gen Zs are often rightly characterized as digital natives accustomed to the sleek UX that big tech provides.

How often will you write?

I will try to do one post every week, at least until the “Circuit Breaker” is over. After that, it will move to a more sustainable cadence, as I believe in publishing quality content, and that requires a corresponding level of time investment. Ultimately, it pays to invest, and I hope to be able to share with you why, as this blog develops.

Happy Mother’s Day, and thanks for being here.

L.