For the Average Singapore Investor: What should the Size of your Wealth/Retirement Fund be? What is the Rate of Return from your Wealth Machines?

For the Average Singapore Investor: What should the Size of your Wealth/Retirement Fund be? What is the Rate of Return from your Wealth Machines? Find Out how you can mathematically calculate your sums.

This concept was taken from either a book or a website, but unable to credit the exact source to due to unable to recall as it was quite a while back.

I will put it in a Singapore context/ SG context for more relevant understanding.

As an average investor, do we know how much a retirement sum is sufficient for us to go to retire comfortably through our golden years? Some of us may not be too sure, or may not have a valid retirement figure/sum to stand by. Below is a guideline to help you to figure out how much you need to have before you can probably call it quits at your miserable work and have the cashflow to do things/work that is much more meaningful to you. 

Eventually, at the end of this article, we will finally understand how much money is required in our Wealth Fund in order to achieve our Financial Independence (FI) through simple mathematical calculation in 2 steps.

The Size of Your Wealth Fund depends on a few factors:

- Your Annual Expenses

- Your Wealth Machine Rate of Return (ROR)

- Inflation Rate, e.g. 3% 

Wealth Machines could come in the form of:

- Fixed Deposit accounts

- Trading accounts

- Savings/ Endowments

- Properties

- Businesses

- Royalty

Step 1: Let's say that your retirement lifestyle requires $6,000 per month.

Therefore in one year, you will need $6,000 x 12 months = $72,000 per year.

Wealth Fund required in FI (to fund a $6k/mth lifestyle)

= Total amount required per year divided by Rate of Return to generate cash flow in FI

In this example, we shall take a decent average rate of return of 4% from our investments, also the risk-free rate if we were to put into Central Provident Fund (CPF) retirement account (https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-interest-rates).

Therefore,

Wealth Fund required in FI (to fund a $6k/mth lifestyle)

= $72,000/4%p.a.

= $1,800,000

Step 2: Rate of Return (ROR) of the Wealth Machine 

= ROR to generate cashflow in FI + ROR to keep up with inflation

= 4% + 3%

= 7% p.a.

A rough guideline would be, for every $1,000/month in returns/payout, you will need about $300,000 of assets in your investments to support that monthly income. 

Your assets should not exceed 15% in high volatility instruments, e.g. stocks.

The unpredictability of inflation ==> One can't really predict inflation as it is somewhat a function of the political climate. That is why the most appropriate instrument are those that does better in an inflationary scenario, such as TIPS in the US, which are inflation indexed bonds that track the level of inflation, and in Singapore context, it could be CPF, value of properties which moves with the inflation rate.

One word of caution: It is not about randomly finding any financial instruments and randomly investing. No it doesn't work that way. One needs to be careful with their investments and invest wisely. Be careful of mutual funds/hedge funds etc that charges high commissions and fees, which could eat into your capital and cause you to have losses instead of gains.

Investing the Right Way: Investing and choosing in the right stocks or right properties could further expedite your process in reaching your Financial Independence or Financial Freedom. 

If you are keen to know how to invest well in stocks and REITs, you might be interested to attend this free investing workshop http://bit.ly/1TCWyqg . 

If you have signed up for the workshop, do drop me a comment or message here, so that I can followup with you to ensure that your investments produce results. All the best in your investing journey! Cheers!

Value Investing in REITs by Attlee Hue Book Review and Summary

Value Investing in REITs by Attlee Hue Book Review and Summary

Value Investing in REITs book review:

Basically this book provides facts and figures comparison about REITs in Singapore. It will be good if you like numbers and understand how the various ratios relate to one another. Below is a summarised version which I find useful.

Summary of Value Investing in REITs book:

If I want maximum yield, I will go for REITs that generate highest yield at the expense of capital appreciation.
CapitaMall Trust and CapitaCommercial Trust, both have healthy capital appreciation and some yield.

Office REIT more cyclical and you will want a higher yield to compensate for this fluctuation.
Singapore retail REITs as being safest types of REITs. Industrial REITs are highly cyclical and you want higher yield to compensate for these cycles.

What does RevPar mean in the reports?
It stands for hotel revenue per available room.

Healthcare REITs like FirstREIT and Parkway Life REIT, have long-term leases but low capital appreciation.

Value Investors usually pay for REIT at price less than NAV.

Property Yield = Net Property Income x 100% / Property Valuation

A REIT may report a loss but this loss is really a book value loss, therefore it could still distribute returns to Unitholders.

Attlee will not invest in REITs with gearing more than 50%. The additional yield cannot be worth the risk.
If the gearing ratio (aka Debt to Equity Ratio) is more than 35%, check the credit rating of the REIT. Under Property Fund Guidelines of the CIS Code, aggregate leverage should not exceed 35% of the deposited property without a credit rating. This is because the total assets of the REIT may have depreciated resulting in the gearing exceeding 35%. Under this circumstance, the REIT need not obtain a credit rating but must cease any further borrowings.

Some of the credit agencies include Moody's, S&P and Fitch.

REIT Manager Pedigree
All REIT Managers in Singapore are incorporated companies. These manager companies themselves have their board of directors and shareholders. Not all the manager companies have the same parental pedigree. It is often helpful to find out who their shareholders are. You draw much comfort if the managers are owned by a substantial entity like Temasek or Capitaland or City Development. Often these same shareholders of the manager are also the largest unitholders of the REIT. This is not unexpected because often the REIT was formed in the first place by these companies moving their property assets into the REIT and then listing them.

In a financial crisis where the REIT has to raise funds to pay down its loans, a REIT manager financially well supported by a strong shareholder or a "big brother" can underwrite the rights issue. If the controlling unitholder of a REIT is a financially weak player, the REIT would be unlikely to undertake a rights issue.

It is better in the long run to opt for a REIT with a high property yield. As an inflation hedge, the larger the portfolio size, the closer the capital gains will track the inflation rate affecting the economy as a whole.

Before reaching any quick conclusion on gearing alone to consider other relevant indicators associated with the level of borrowing. This includes the credit rating, interest cover, amount of short term loan (due within the year), whether any loans are in default and even blended average cost of debt. Interest cover is how many times the earnings of the company for the year exceeds the interest payable for that year.

Avoid REITs whose REIT manager are not well-known. The challenge for REIT investors is not to identify REITs that will not come down when the market does since this is not possible. It is rather to identify REITs that will recover its price when the market eventually gets over the cycle and in the meantime continue to pay a consistent yield to its investors.

Investors Returns on the REITs = Distributions for the year (aka Dividends) / Value of REIT (aka Share Price of REIT)

Price Earnings Ratio (PE Ratio) are not used as valuation, because earnings of a REIT are often distorted by the annual property revaluations.

Value Investors Quick Tips
- Singapore retail REITs as being safest types of REITs.
- Value Investors usually pay for REIT at price less than NAV.
- Refrain from investing in REITs with gearing more than 50%.
- It is better in the long run to opt for a REIT with a high property yield
- Price Earnings Ratio (PE Ratio) are not used as valuation.
- Other factors to consider other than Gearing (aka Debt/Equity Ratio), are credit rating, interest cover, amount of short term loan, any default loan.
- Use Property Yields and Return on Equity (ROE) for comparisons if the numbers are fairly consistent.

How Singapore became a rich & successful country & how you can learn from it, apply to yourself & become rich & successful too!

How Singapore became a rich & successful country & how you can learn from it, apply to yourself & become rich & successful too! 

The Short Singapore Reserves Story

We know that the Singapore government reserves have about $500 billion from foreign reserves managed by MAS & Temasek portfolio (obtained from MOF website http://203.211.150.164/cms-mof/reserves.aspx). But this amount still does not include government funds managed by GIC (not revealed). But we hearsay that it's probably about $1 trillion...well it could be more, but we don't know since it's undisclosed. Even so, the government is taking only about $79.9 billion for expenses in FY2015 (obtained from http://www.straitstimes.com/news/singapore/more-singapore-stories/story/singapore-budget-2015-parliament-passes-record-799-billi). Probably about 8% or less of its total assets, & part of these expenses will contribute to even more returns for Singapore, e.g. Changi Airport development. Looking at GIC & Temasek portfolio returns, which are at between 7%-15% pa returns. Singapore is very conservative & basically spending only its interests earned on its assets. 

The Strategy 

Simply put, Singapore has a big mother goose (reserves & assets), that lays golden eggs (its interests & returns earned), but the government only spends the interest, & contribute the excess back to the mother goose. As long as one doesn't kill the mother goose or slowly eat up the assets, the golden eggs will keep coming. 

Thus, my goal is to build my mother goose assets & only eat the golden eggs. That way I'll never have to worry about not having another paycheck, & that's when I'll be financially free. Yeah!

The Reality 

Sadly, some of my friends & colleagues around me does not have growing assets. They live from paycheck to paycheck, which is very risky. Thus it seems to me, that they are far from being able to achieve their financial freedom. There would be those who make more money than me, but they probably not be able retire earlier than me due to their poor spending habits. On the other side, I do know of people who earn more than me, and invest better & more strategically than I do. These are the people who I prefer to mix with & learn more from. 

The Takeaways

It definitely takes discipline to live humbly & conservatively at the beginning and practise delayed gratification, this is so that one can grow their assets sooner, & eventually never have to worry about not having the next paycheck for the rest of your life. 

When talking about financial planning, insurance planning & investing, I do have much interests in it. I have picked up some skills and strategies in these areas over the years. It's important to me because it concerns my future. Just like how the government manages Singapore's reserves. 

Logical Reasons To Show You Why You Can Still Put Your Retirement Savings into The Stock Market & Not Fear for it to be Wiped Out

Logical Reasons To Show You Why You Can Still Put Your Retirement Savings into The Stock Market & Not Fear for it to be Wiped Out

The article is written by Teh Hooi Ling, an ex-The Straits Times newspaper writer, author was a multi-award winning investment columnist in Singapore who is now a partner in Aggregate Asset Management, manager of a no-management fee Asia value fund. There were some calculations done to prove to you that by entering at market tops, even after major crisis, as long as you do not cash out the entire portfolio at the market bottom, chances are you would see your portfolio recover back up, and probably giving you even more returns. The Straits Times Index (STI) was used as a proxy for how an all-equities portfolio would have performed. I have re-blog it here below. 

The below information are credited to http://www.thestar.com.my/Business/Business-News/2014/04/26/Safe-instruments-for-retirement-myth/ 

In the field of investment, one wisdom often purveyed is that of life-cycle investing. The theory goes that young people should be more aggressive in their investments, i.e. they should allocate a higher proportion of their portfolios to equities for long-term compounding effect to take place. But as a person nears retirement age, the person should cut exposure to equities and hold more portfolios in bonds and cash.

This makes intuitive sense. Equity prices are more volatile than fixed income instruments, and unlike the latter, there is no assurance of regular pay-outs from equities. As such, it would be “safer” for retirees, who are dependent on their life savings for their daily expenses, to park their money in a less volatile portfolio. What if the retirees had their entire life savings in equities, and saw their portfolio diminish to less than half during the global financial crisis in 2008? That would be a nightmare scenario, wouldn’t it?

This scenario is likely to be most vivid when the stock market crash is at its worst. At that point, we see in our minds retirees with their wealth halved compared to the pre-crisis level. “Poor things!” we’d think. “That’s why retirees shouldn’t put all their nest eggs in the stock market.”

But do you know that the market recovers even from the worst of crises. As long as the retirees don’t panic and cash out the entire portfolio at the bottom of the market, there is a good chance that they would see their portfolio recover.

We did a stress test on an all-equities portfolio at each of the previous market peaks in the Singapore market going as far back as 1973. Let’s assume that there were seven retirees.

Each retired with S$1mil and decided to put the entire sum into the stock market. The bull markets at the time of their retirement gave them confidence that the stock market was a good place to keep their savings. So each of them plonked their S$1mil into the market on the last day of 1972, 1981 1983, 1989, 1996, 1999 and 2007. And each wanted to withdraw 5% from that S$1mil, or S$50,000 a year, to pay for their living expenses.

As it turned out, the years that the seven retirees put their money into the market were the years of market peaks. Soon after, major crashes or market corrections took place.

Can the S$1mil equities portfolio last them till today?

Financial crisis

Well, six out of the seven portfolios did. The initial S$1mil portfolios were worth between S$738,000 and S$3.2mil as at end-2013. For the person who retired at end-1981 with S$1mil invested entirely in the Singapore stock market, her portfolio as at the end of last year was worth S$3.2mil. This was after she withdrew S$50,000 a year for the last 32 years for a total of S$1.6mil from the portfolio.

As for the person who retired on the eve of the Asian financial crisis, her portfolio as at end of last year was worth S$1.5mil. And in the intervening years, she had taken out S$850,000 to spend.

From the table above, you can see that the two who retired on the eve of the two most recent market crashes – the dotcom bubble burst in 2000 and the global financial crisis in 2008 – still had S$738,000 and S$758,000 in their portfolios respectively.

At 5% withdrawal rate, the lowest the six retirees’ portfolios ever fell to was S$417,000. That was for the person who retired at the peak of the dotcom bubble. But as long as there is still money in the market, there is a chance of recovery.

The only retiree whose portfolio didn’t survive was the one who put her money into the market during the massive 1973 bubble in the Singapore market. At that time, according to data from Thomson Datastream, the Singapore index was trading at a price-earnings ratio of 35 times.

It was the time when OCBC was trading at S$50 a share and Metro was at S$26. In other words, there was a massive bubble in the Singapore market at that time.

At a 5% withdrawal rate, her money was depleted by end-1983. But if she had reduced her withdrawal rate to 3%, i.e. take out S$30,000 instead of S$50,000 a year to spend, she would have survived the numerous crashes that followed and she would still have an equities portfolio of S$848,000 as at end of last year.

For the above calculations, we use the Thomson Datastream calculated Straits Times Index as a proxy for how an all-equities portfolio would have performed. Dividends are added to the portfolio. No transaction costs are taken into account. The portfolios are valued once a year on Dec 31, and withdrawals are done on that day as well.

I couldn’t find Malaysian market data that go as far back. But investors here will be happy to note that over the long term, the Malaysian equities market tend to outperform the Singapore market. So the results above are applicable to Malaysia, with an even greater buffer. And if one is able to construct a portfolio of stocks that can outperform the market index over time, then there is an even greater margin of safety.

So what are the main takeaways from the above study?

Chances of an all-equities portfolio being wiped out at a withdrawal rate of 5% a year is minimal under normal market conditions. The exception is when someone buys into the market at the peak of a massive bubble, as was the case in 1973. (For readers who would like to stress-test their retirement funds over various cycles in the US going as far back as 1871, you can go check out the website <www.firecalc.com>.)

Rough ride

Another noteworthy point is that as long as the portfolio is not decimated, and so long as the money stays invested in the market, there is a good chance of recovery given time. But admittedly, the ride can be quite rough at times. The portfolio can plunge by half in a year. The key is to hang on tight.

So the upshot is that one who has S$1mil can safely withdraw S$50,000 a year to fund one’s retirement for as long as one lives, and still leaves an estate for one’s children if one puts the entire sum in the equities market.

Time to say goodbye to perpetuals, annuities and bonds – which usually form the core of a retirement portfolio!

But there is one very important caveat here. The equities portfolio must be made up of a diversified basket of stocks of real businesses, and purchased at cheap or fair prices which are not likely to result in a significant permanent loss of capital. Buying into speculative stocks which have scant business prospects and at way overvalued prices, is a sure-fire way for one to outlive that S$1mil in the shortest possible time.

The author was a multi-award winning investment columnist in Singapore who is now a partner in Aggregate Asset Management, manager of a no-management fee Asia value fund.