Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Tuesday 28 July 2020

Buy Stocks Like You Would Buy HDBs


If we treat stocks like how we treat our properties, maybe the average person would get better investment returns.

Instead, most people buy stocks on rumours and speculation instead of real analysis.

Here are a few things you should do before you buy a property or invest in a stock.

1. Do Your Analysis

Before you bought a new home, you would survey the floorplan, you would check out the neighbourhood, you would check if it is near parks, schools, food courts, bus stops, train stations, etc..

Do you ever just buy a house simply because you overheard a conversation from the kopitiam table next to you that the property is going to go up in value in the next 6 months?

You wouldn't!

You would do some research on that said property.

You would compare the prices of the property you are thinking of buying against the prices of properties in the same neighbourhood.

Do that with stocks that you are buying.

Are people using/buying the company's products/services?
What are the valuations of the company you are thinking of investing against its peers?
Is it cheaper or more expensive than its peers?

What growth potential does the company have that can make the stock price go higher or pay more dividends?

Do the research, determine if the stock is worth buying or not.
Don't invest blindly!

Recommended Read: The Best CPF LIFE Plan Is...

2. Understand What You Are Investing For

Are you investing for capital appreciation or dividends?

When you invest in a property, you can be investing to earn the capital appreciation (rising property price) or you can be investing to earn rental income.

If you ask a property investor, they will tell you that properties that are meant for renting will have characteristics that are different from properties that are meant for quick capital appreciation (property flipping).

Same applies for stocks. 
Are you going to be a capital appreciation or a dividend kind of investor?

If you are going to be a dividend kind of investor, what you want is a stable business, with strong cash flows, and a consistently growing dividend. 

If you are going to be a capital appreciation kind of investor, then you would look for businesses that have huge growth potential, reinvests a lot of its capital back into the business, etc.

What you don't want to do, is to be a dividend kind of investor, but invests in stocks that don't pay a dividend.

So, understand what kind of investor you want to be, and choose stocks based on what kind of investor that is.

Of course, you can be an investor that mixes both dividend and capital appreciation, in which case you would have very different criteria.

3. Invest For The Long-Term

Do you check your property price every day?
If not, why do you check stock prices every day?

If you check your property price every day and realised that your property price has fallen by 10%, do you feel so sad that you want to sell your property immediately?
If not, why do you do that for stocks?

If the property is still earning you rent, you probably won't sell even if the price fell by 10%.
Most likely, you will wait for the price to rise back up.

The same can be applied to stocks.
If it is still paying dividends (and that was what you were after), there is no need to sell the stock immediately even if its stock price fell by 10%.

4. Don't Over-Leverage

When buying a home, you try not to over-borrow and get yourself too deep into debts.
You try to calculate how much you can afford and how much you can rise, and borrow appropriately.


Source: Gannett

Same applies to stock investing.

Just because you can leverage and invest on borrowed money (margins), doesn't mean you should.

Don't take on unnecessary risks that you cannot afford.

Recommended Read: Why You Should Max Your CPF Retirement Sum Early

Conclusion

Know yourself, know your goals, know what you are looking for in an investment, and don't over-borrow!

What other similarities are there between buying properties and buying stocks?

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Friday 24 July 2020

The CPF Bond That You Cannot Liquidate


While most people consider CPF money not as theirs and ignores it as part of their retirement planning or investment portfolio, we tend to think that CPF compliments those 2 things!

We think that money in CPF is like money invested in Bonds (Terms & Conditions applied).

Even the CPF Board explains how your CPF monies are invested.
They are invested in Special Singapore Government BONDS.

Recommended Read: 5 Financial Things to do in your 20s

A standard retirement portfolio consists of bonds, stocks (equities), and cash.

In most cases, the goal is to try put as much money as possible inside your portfolio and withdraw as little as possible, allowing your money to grow over time to finance your retirement in the future.

We recommend Indexing for equities, read more about equities-indexing HERE


CPF fits into this criteria nicely - money only in, rarely out!

You can look at your Special Account like it is part of your Bond Portfolio!

1. Pays You Interest
Think of your Special Account as a bond you bought that pays you interest annually.

Even better, think of it as a long-term bond! - one that starts when you start working and ends when you reach your retirement age (kind of like a 40-year bond).

2. Pays You A High Interest
Bonds today pay little/low interest! - you are lucky if you found one paying you 3%!

Fortunately, CPF SA pays a minimum of 4%!

It comes with a bonus +2% interest too (terms & conditions applied).

Recommended Read: You Should Not Choose the CPF LIFE Basic Plan

3. High Credit Rating
The money inside is "backed" by the Singapore government!
It is the few remaining AAA rated countries left in the world.

That is essentially risk-free!
It is hard to find a high interest-paying risk-free rate of returns these days!

4. Fits Your Retirement Goal
To achieve the amount required for your retirement, not only is the returns you get important, but also the discipline to keep the money inside your nest!

It is preferable to have more money going in and less money going out of your retirement portfolio.

CPF is able to do just that - it is almost literally a one-way traffic!

5. The Disadvantage Of This "Bond"
You cannot withdraw money out from your CPF - unlike a normal bond where you can sell it for cash.

That is the drawback of getting a higher interest from a "bond".

But, since it is for your retirement goal, you really shouldn't mind the problem of not being able to withdraw it out.

6. Allows More Allocation To Stocks
Because the money in your CPF forms part of your bond portfolio, you can allocate less of your cash money into bonds and more into stocks, which allows you to earn a better rate of return.

Recommended Read: Answering the 2 Common CPF "Complaints"

Conclusion
If you are planning your retirement portfolio, you can consider setting your CPF SA balance as your "bond allocation".

It would allow you to capture a higher overall rate of return at lower volatility & risk.

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Wednesday 15 July 2020

Why You Should Max Your CPF Retirement Sum Early


Today, we are going to present to you a controversial idea.

That controversial idea will help you hit the CPF Retirement Sum faster, earlier, and easier.

That idea is, to top up your CPF Special Account (SA) to the prevailing year's CPF Retirement Sum ASAP, even if you are below 55.

Top Up My CPF SA?!

Before you go "you are crazy!", hear us out first.

So, CPF has revealed in advance the next few years' Retirement Sum.
Source: CPF

Based on the figures above, we can see that the Retirement Sum increases by about 3% per year.

Your CPF SA pays you an interest of 4%, +1% additional interest on the first $60,000 balance.

If the CPF Retirement Sum keeps increasing at the 3% rate while CPF keeps paying you a 4% interest rate, your CPF balance will grow faster than the rate the Retirement Sum is increasing.

That's like CPF is paying you to hit your Retirement Sum early.

That makes reaching your CPF Retirement Sum a lot easier.
We'll show you why.

Recommended Read: The 4% Shortfall In Your CPF Retirement Fund

Retirement Sum Estimator Example

Assuming that you are born in 1985, you will reach 55 years old in 2040.
The estimated CPF Retirement Sum for your cohort is $327,800.

That seems daunting, like a far and never reachable goal.
But it is a lot more manageable if you break it down.

Assuming you contribute $2,000 into your CPF SA every year till 55 years old, via work contribution + your own Retirement Sum Top Up (RSTU).


Suddenly, if you managed to save $121,439.54 in your CPF SA by 2020 year-end, you will be able to hit your cohort's Full Retirement Sum by the time you reach 55 years old.

$121439.54 + (20 years x $2,000) = $161,439.54.

By contributing a total of $161,439.54, you will be able to hit your cohort's retirement sum of $327,800.

If you top-up more money into your SA earlier, you will be able to hit your cohort's retirement sum even earlier.

Recommended Read: Is CPF A Scam?

Retirement Sum Estimator

Interested in finding out the CPF Retirement Sum for your cohort?

Interested in finding out how much you should have in CPF by what year to hit your CPF Retirement Sum?

We have actually made this calculator public.
You can find the calculator via the link below.

Click here to try the Retirement Sum Estimator

Try it out and let us know what you think of it.
It would be even better if you have any suggestions for us to improve the calculator.

Recommended Read: Free $8+ With Google Pay

Promos & Referrals
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Thursday 9 July 2020

The Hidden Taxes In Singapore


In the recent rally speech by Senior Minister Tharman Shanmugaratnam, he said that the median income Singaporeans paid 0% to 2% in income taxes.

There were sceptics who questioned how true that was on social media.
So we decided to run the numbers to check it.

Singaporean's Median Income

The median income for full-time Singaporeans in 2019 is $3,900.

That translate to about $50,700 annual salary (+13th month bonus).
Less 20% CPF contribution, the annual chargeable income is $40,560.

That translates to about $589.20 in chargeable income tax, which is about 1.2% of the total $50,700 salary.

The above chargeable income tax excludes other sources of tax relief like donations or parent or child relief, which would lower the tax bill even more.

So... I guess SM Tharman is not lying when he said that the median Singaporeans pays less than 2% in income tax? 🤷‍♂️🤷‍♀️

Cherry-Picking Tax Policies?
Of course, that's kind of like cherry-picking on the tax issue.
"Pick the one we scored best and show it to the public".

So at Investment Stab, we decided to dig deeper and find out what is the overall tax rate Singaporeans pay in Singapore.

Recommended Read: The Best CPF LIFE Plan Is...


The "Social Security" Portion
In most countries, social security is their CPF.
And in this scenario, we are only calculating employee's contribution.

You can think of social security as a retirement tax.
"I contribute a portion of my pay to the Government. In return, when I am old and retired, the Government will pay me a monthly payout until I pass away."

In Singapore, well that's 20% of our salary although we would consider it to be 0%.

20% is the actual figure most Singaporeans contribute every month when they are young.

The problem is as Singaporeans, we tend to max out or use up that 20% for housing.
Whereas in other countries, they actually cannot use their social security money for housing - they have to pay cash.

So, if you are using all 20% of your CPF contribution for housing, technically you paid 0% in retirement tax.

If you use anything less than the full 20% for housing, then your retirement tax will be whatever that you did not use.

If you did not buy a house or did not pay for your house with your CPF, then your retirement tax can be considered as 20%.

So one would have paid between 0% to 20% in "retirement tax".

Source: Wikimedia

The GST Portion
Monthly Income:                    $3,900
     Less CPF Contribution:     $(780)
Monthly Take-Home Pay:      $3,120

Assuming you spent every cent of your take-home pay, you would have paid $218.40 (7% GST) or $280.8 (9% GST).

Since GST have not increased yet, we will just assume one pays 7% in GST.

$218.40 / $3,900 = 5.6%.

Bonus calculation: $280.8 / $3,900 = 7.2%

So a median income Singaporean would pay about 5.6% per year in GST.

Recommended Read: SM Tharman on Personal Finance

The Property Tax Portion
We assumed that with a spouse that earns the same median income, both would get a 5-room HDB flat.

Based on 2019 4th quarter data:

Highest 5-room flat property tax area: Bukit Merah
Rental: $2,800 per month.
Estimated Annual Value: $33,600
Estimated Property Tax: $1,024

Lowest 5-room flat property tax area: Woodlands.
Rental: $1,800 per month
Estimated Annual Value: $21,600
Estimated Property Tax: $544

If the taxes are split evenly between the couples, each couple is liable for $272 to $512 in property taxes.

$272 / $50,700 = 0.5%
$512 / $50,700 = 1.0%

That translates to about 0.5% to 1% in property taxes paid by each spouse respectively.

So there are no additional taxes payable by Singaporeans on these items.

Taxes We Don't Have
We don't have capital gains tax, dividend tax, estate (aka inheritance) tax.

So there are no additional taxes payable by Singaporeans on these items.

Source: Flickr

Total Tax Rate
If we sum up the total taxes the median income Singaporean earner pays, it works out to be...

Income Tax:               1.2%
GST:                           5.6%
Retirement Tax:  0% - 20%
Property Tax:  0.5% - 1.0% 

Total Tax Rate: 7.3% to 27.8%

Based on an annual income of $50,700, the median income earner would pay between $3,701.10 to $14,094.60 in taxes annually.

We expect the number to be nearer to the lower end as most Singaporeans would use their CPF contribution for housing, which would greatly reduce the "retirement tax contribution" part.

Of course, we did not include property tax, stamp duty, COE & road tax (if you own a car), and a bunch of other taxes.
These taxes are either harder to calculate, may or may not apply to everyone, or are generally a one-time tax.

But what we have listed are the general taxes most countries' citizens pay.

Is the tax rate for the median income Singaporean earner within the range you find acceptable?
Let us know in the comments below 😉✌

Let us know if we miss any other big taxes that you think should be included in the list of taxes we pay in general.

Recommended Read: Answering the 2 Common CPF "Complaints"

Promos & Referrals
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Friday 3 July 2020

SM Tharman on Personal Finance


With GE2020 around the corner, we thought it would be nice to jot people's memory on a rally speech Senior Minister Tharman Shanmugaratnam once gave on budgeting.

In GE2015, Senior Minister Tharman gave a rally speech about how important prudent budgeting is for the country.

We felt that his points were not only suitable for managing the country's finance, but also for everyone's personal finance!

As such, we will be elaborating how it can be used for our personal benefits.

Video Link:



Start from 27
:27 if you aren't interested in the whole 37 minutes speech.

First 4 Minutes of video: Prudent Budgeting & Asset Management.
Next 3 Minutes of video: Explaining CPF returns.

We will be talking about the first 4 minutes in this post

Video's First 4 Minutes

In the video, Senior Minister Tharman mentioned that in Singapore.

1) We've had more than 30 years of the budget surplus being saved away in reserves.

2) We sold the land for money and kept the money also in reserves.

3) The reserves are then invested, which allows us to draw continuously on the reserves every year by using the income on reserves.

4) Half the returns generated from the investments are used to spend for many different purposes (education, infrastructure, medical etc).

5) The other half is kept away in reserves, re-invested to create future cash in-flows.

Recommended Read: You Should Not Choose the CPF LIFE Basic Plan

Translating to Individual Personal Finance

Translating this to a personal level.

1) When we are working, we should always save away a portion of our income (a budget surplus).

2) If we have additional income (ang baos, bonus, etc), try to save most of it also.

3) Your savings should be invested. 
Only then, will it be able to generate income every year, allowing you to draw on it continuously.

4) You can choose to spend half of your annual returns from investment on things you need or want (an overseas trip, a new laptop, renovating your house etc).

5) The other half of your annual returns should be saved and re-invested to generate even more income in the future

Our View:

1) We think that if you are young, if and when possible, try to re-invest as much of your annual investment returns back and draw it only when you are older/retired. 
Grow your future income while you still have a stable monthly income. 
Although this is rarely possible (it is always tempting to spend, I totally agree!), try to save and invest as much as you can.

2) Singapore saved vast reserves and invested them, thus have huge annual investment incomes that can be spent for many different purposes. 
You too can do that for your future. 
Save and Invest Continuously! 
IF you end up spending only your annual investment returns for retirement, you can pass your "vast reserves" to your kids. 
If they too follow this prudent budgeting, they can add their savings to your "reserves", benefiting them and their future generations even more!

Recommended Read: Answering the 2 Common CPF "Complaints"

Promos & Referrals
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We hope you could help us fill in a short survey of 8 questions (4 of them are MCQs) so that we can help tailor our content to you.
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Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?
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