Sunday, November 29, 2009

What is a retirement plan ?

Responses to my article have started on I have tried my level best to respond to the feedback but I think the point on retirement plan is worthy of mention in this blog.

Retirement means a lot of things to many people.

Some people think that it's time to travel. Others think that it's time to stop work and start smelling the roses. To some folks, it is a time to spend the rest of their lives minding their grandchildren.

Reality is that many Singaporeans are unprepared for retirement. Many have too little cash assets and have to struggle along with the $300 from the CPF Board along with some allowance from their children.

In a research article by Moshe Milevsky and Chris Robinson entitled "A sustainable spending rate without simulation". A retiree should be spending no more than (Average return - Variance of returns + Constant inversely proportional to median future lifetime). In English, if you have an equity portfolio returning 9% and a variance of 4%, you should not be using more than 5% of your principle capital every year.

I would like to offer my definition for financial independence, which I think would make a better proxy than a retirement plan:

Financial independence is a state whereby your investment/passive/royalty income exceeds your personal expenses.

When your passive income exceeds your expenses, you are doing fine because you may be able to starve off job loss for years without eating into your principal capital. To ensure that retirement is possible, simply spend within your dividend yields and reinvest part of it such that you can live on about 4-5% of your capital every year.

But at the end of the day, retirement is not the point, you can be fully prepared to retire but a good life design to me is one where you can do something that you enjoy EVEN MORE INTENSIVELY. To many other people, it may be more time with grandchildren, but to me, it can be work.

Good investment management does not automatically earn you your happiness. It earns you the freedom to decide what you want to do with your life. And with that freedom, you can even choose to retire, not to retire, or even work harder.

That choice is yours.

Me and my money article out today.

Nov 29, 2009
me & my money
Investment strategy pays dividends
Savvy investor gets $24,000 a year in dividends and that covers his basic needs
By Lorna Tan, Senior Correspondent

Mr Ng Wai Chung is a senior associate in IT governance at Singapore Mercantile Exchange. He invests almost his entire salary in stocks, which he monitors daily. He and his wife, quantity surveyor Pang Yoke Loo, live with his parents. -- ST PHOTO: JOYCE FANG

Imagine having a payout from your investments that more than covers your monthly expenses.

Canny investor Ng Wai Chung is in this happy position at the age of 34.

Mr Ng, a senior IT manager - and an author of investment books - achieved this a year ago. But rather than retire, he stays in full-time employment.

His investment income stream is the result of a plan he set in motion three years ago. That was when he decided to sell his investments in unit trusts and buy stocks that pay high dividends.

'Today, I am able to yield about $24,000 a year on my investment portfolio, enough to cover my expenses in most months," he said.

This enviable portfolio consists of real estate investment trusts (Reits) and shares that yield high dividends, such as mainboard-listed Singapore Press Holdings (SPH). Dividends are the portions of profits which a company distributes to shareholders.

Mr Ng has an engineering degree and a master's in Applied Finance from the National University of Singapore (NUS). He obtained the latter part-time while working.

The senior associate in IT governance at commodity and futures exchange Singapore Mercantile Exchange has published three books on finance: Growing Your Tree Of Prosperity (2005), followed by Harvesting The Fruits Of Prosperity (2007), and this year, Sowing The Seeds Of Prosperity. They are available in bookshops.

Mr Ng is married to quantity surveyor Pang Yoke Loo, 31. They have no children.

Q: Are you a spender or saver?

Very much a saver. In most months, my expenses are paid fully from my investment income, which arrives every quarter in the form of dividends. However, I dip into my work income for discretionary expenses, such as a trip to Korea. I can save up to 100 per cent of my salary in some months.

Q: How much do you charge to your credit cards every month?

I have only one credit card. I use it to save money by making purchases over the Internet. Normally, my credit card charges do not exceed $500 monthly. I try and pay the bill even before I receive the statement. I withdraw about $400 from the ATM about twice or three times a month.

Q: What financial planning have you done for yourself?

I invest 80 per cent to 100 per cent of my take-home pay directly in the stock market.

I had about $130,000 in my stock portfolio early this year; this has grown to $250,000 from capital gains as well as monthly cash injections from my savings. I have about 20 counters.

About half my portfolio consists of business trusts like Cityspring Infrastructure and Hyflux Water, or shipping trusts such as First Shipping and Pacific Shipping which, on average, give dividend yields of about 10 per cent. The rest are Reits like Suntec and Cambridge, which give me similar yields.

With the economic recovery, I'm focused on channelling my income into income stocks like SPH and Singapore Post, which will give me about 7 per cent yields. I have also invested about $30,000 of my Central Provident Fund savings in stocks such as M1, StarHub, Lippo Mapletree Reit and Cambridge Reit.

Q: Moneywise, what were your growing-up years like?

My financial habits were shaped mostly by my years as a kid hanging out in my parents' pet shop at Shaw Centre in the 1980s. Life was hard. My parents were at the mercy of the landlord and the consumer. As an adult, I crave job and income security. I am very averse to debt.

Q: How did you get interested in investing?

In my final year at NUS, I picked up Robert Kiyosaki's book Rich Dad, Poor Dad. This spurred me to pursue financial programmes like the Chartered Financial Analyst. Armed with investment know-ledge, I took to writing books to present my financial ideas from the perspective of a non-commission agent.

When I stock-pick, I find out first how much in dividends have been paid out over the past year. I used to aim for 10 per cent but have now lowered this to 6 per cent to 8 per cent. I check if there are any red flags raised by auditors. The free cashflow (operating cashflow minus capital expenditure) must exceed dividends declared. This ensures a company can sustain the dividends. Once the yield drops to, say, 4 per cent, I switch to a better counter. I monitor my portfolio daily.

Q: What property do you own?

I am an only child; I live with my parents in Woodlands - my dad picked up a single-storey semi-detached house in the early 1970s for $70,000. The current value is estimated to be $1.6 million. I do not own any property.

Q: What's the most extravagant thing you have bought?

My iRex Digital Reader 1000S which allows me to download electronic books for easy storage and reading. It cost $1,400. I save 60 per cent to 70 per cent compared to buying the actual books.

Q: What's your retirement plan?

None, if I can help it. Work is a function of ability, and not one's state of financial independence. My personal expectation is to increase my investment income by about $6,000 a year for each year of gainful employment. The rest largely depends on whether I can continue to remain employed and whether my health will allow it.

Q: Home is now...

The semi-detached house in Woodlands.

Q: I drive...

Sometimes I drive my wife's recently purchased weekend car, a white Hyundai Avante.


Book spurred interest in money management

'In my final year at NUS, I picked up Robert Kiyosaki's book Rich Dad, Poor Dad. This spurred me to pursue financial programmes like the Chartered Financial Analyst. Armed with investment knowledge, I took to writing books to present my financial ideas from the perspective of a non-commission agent.'



Q: What has been your worst investment to date?

I had a very painful experience investing in McArthurcook Properties Securities Fund. I accumulated about 108,000 shares through 2007 and last year, and its yield was initially about 30 per cent. The price plummeted to 16 cents, from $1, when the recession hit. And last year, it stopped declaring dividends altogether. I exited in October last year at a loss of about $40,000.

Greed and my obsession for yields created an aversion to letting go of this. I learnt that I should not let my stubbornness get the better of me.

Q: And your best investment?

At the bottom of the market some time last year, I invested about $5,000 in Capital Retail China Trust at 60 cents per share. It had a dividend yield approaching 15 per cent. I have since doubled my money as the price is now $1.18. Most of my high-yielding counters have been doing well since December last year. My entire portfolio has almost doubled in size since early this year.