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What is the TED Spread?

Published on 1 August, 2009 in grossary and investor education. 0 Comments Tags: .

I came across this term.

“Also encouraging is the recent performance of the TED spread – which indicates a thawing in the credit freeze.”  – Dollardex, Have we already hit bottom?

What is the TED spread?

Turns out Wikipedia has an entry on it. (What can’t you find on Wikipedia?)

TED spread is difference between the interest rates on interbank loans and short-term U.S. government debt (“T-bills”).

Blank look? Me too.

The spread is a measure of the presumed risk in lending to banks. The wider the spread, the greater the risk. The reason being that if the rate on the loans is getting further from the government loan (debt), people are sensing more risk and thus demanding more interest.

Alternatives to Waiting for an Annuity payment

Published on 15 October, 2007 in investing insight and investor education. 1 Comment

about-invest-insight.jpgRecently I have been looking at insurance plans that insure for the loss of employment income. What these plans do is pay you x amount of dollars for every year that you cannot have employment due to the accident that you suffered. Of course, these plans also require regular payments to be made to them while the insured is employed and is usually recommended for employees whose main asset is their ability to work.

When an accident does happen and the conditions are satisfied for a payout, the payout is usually on a monthly basis and hence works somewhat like an annuity which as defined on the U.S. Securities and Exchange Commission’s website is ‘a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date’. Of course, there are also other insurance plans which provide periodic payments upon the satisfaction of certain conditions.

What I wanted to know is whether there is the flexibility to obtain a lump sum payment instead of waiting for the monthly/ annual handout from the insurance company?

I was introduced to this company Settlement Capital that provides liquidity to owners and holders of periodic payments resulting from structured settlements, annuities and even lottery winnings (lottery winnings in the US is typically paid over a certain number of years rather than a one time payment). There are also a couple of other competitors that have emerged in this niche market. What companies like Settlement Capital do is that they buy the annuity payments from the holders of insurance or lottery winnings so that these people can have a lump sum upfront.

If one is interested, they can ask for a free quote and find out how much of the future payments are being discounted in these settlement transactions. However, should there be any emergency need for money or the holders of these annuities are confident of obtaining a higher rate of return elsewhere through receiving the lump sum upfront (versus waiting for 20 years and considering the impact of inflation), then it will make sense to explore this early settlement option.

Getting Ready to Invest and Taking Control of your Finances

Published on 18 September, 2007 in investing insight and investor education. 0 Comments
  1. Do something about the money in the savings account
    The Consumer Price Index increases at 2.1% in July for Singapore (you may refer to http://www.singstat.gov.sg) and CONTRAST this with the 0.25% interest rate for a savings account (http://www.dbs.com.sg/ratesonline/dddd.html). This means that you will have to earn 1.76% more income in order to meet the same basic needs (rather than earning the same to consume the same).
  2. Know how much money you have now
    First, calculate how much money you have. That is, if you have a credit card loan, pay it off first. If you have a mortgage loan, bear in mind that if you do not intend to pay it off now (assuming you can) then you have to be earning more on your investment to justify not paying if off now. For Singaporeans, the concessionary loan rate from the housing board is 2.6%, which 0.1% above the prevailing provident fund interest rate.Second, include what fairly liquid investments you have. That is, do you have some fixed deposits or some bonds? Include all these as they will make up part of your portfolio (which may be reallocated later).
  3. Know how much money you will need
    Determine how much money you will need. Savings rate ought to be 10% of your income but we know from above that money needs to be grown at a rate faster than putting in your savings account in order to keep up with inflation. Furthermore, there is a limit to working life and you have to plan for retirement including being realistic about the lifestyle you want. And do not forget that housing, insurance and children all cost money. There are many retirement calculators out there to help you with this, just Google! (http://www.bloomberg.com/invest/calculators/retire.html)!
  4. Find your required rate of return
    Determine how much return your money needs to     make. The earlier you intend to retire, the higher the rate of return which you may have been SHOCKED at how high it will need to be if you have done Step 3 above and dabbled in the retirement calculator. For instance, the difference between retiring at age 48 versus 62 demands a 13% points higher!
  5. Allocate your portfolio
    Determine how your assets should be allocated.     So now you know that the 0.25% interest on savings just WILL NOT get you to your retirement. There are a few considerations in portfolio planning, as below:

    1. When do you need the money?
      For emergency funds, it is safe to buffer 6 months worth of living expenses. This amount can be kept in savings account, fixed deposits or money market funds.
      For money that you will need within 3 years, you can put it into fixed income assets that guarantee principal with interest.
      For money that you need from the 3rd to 5th year, you can put them into bonds or non stock-based mutual funds.
      Money that is not required within 5 years can be put into stocks as the share market shows an upward trend if viewed over a long period of time.
    2. Balancing with the rate of return (i.e. your risk tolerance level)
      If say all your money is meant for retirement, then you can actually hold everything in stocks except for your emergency fund. But is that too risky for you?
      If you prefer lower risk investments (and willing to take a lower return), then how should you allocate your assets?
      You can search for asset allocation tools that will give a rough estimate. Here’s one that I like after doing some search:http://www.forbes.com/tools/calculator/asset_alloc.jhtml – this tool is useful to visualize your mix of assets to achieve your desired rate of return. For instance, to achieve a rate of return of about 20%, you will need to invest about 70% in stocks (given my assumptions of 0.25% for cash in savings, 2.5% for government bonds and 11.5% for stocks).
      If you can take a lower rate of return, say 16%, you can reduce your stock holdings to 60% of your portfolio.

So NOW we are ready to get started to figure out what we should actually invest in!

Stock Trading: An Essential for the Middle Income Earner

Published on 19 May, 2007 in investing sites, investor education and online investing. 0 Comments Tags: , , , .

A few friends turning 30 are considering whether to change jobs, get married or have children. When I quiz them on how much savings they have, the reply is somewhere from $20,000 to $120,000. The common characteristic among them is that they are apprehensive about investing and 70% of their portfolio is not invested.

Thinking whether their work-save-and not take risk principle will be sufficient for their retirement, considering inflation, I went back to do a simple calculation. Assuming an annual income of $60,000, savings rate of 30% and a life expectancy of 90, it’s shocking that to retire at 45, their investments will have to be earning 23.5% which is far higher than the best interest rate on savings!

Retirement Age 45 55 62

Investment in treasury bills is about 2-5% while higher risk investments like bonds, equities or options can fetch a higher return. With at least 15 more income-earning years, it is worth exploring higher risk investments such as stock trading.

ETF (Exchange-Traded Fund) is a possible start for the novice. ETFs generally carry no sales charge with low management fee of below 1%. It is a starting point because it is well-diversified and normally tracks the prices of stocks that together form a high market capitalization.

After understanding better the movements in the stock market, it is then recommended to allocate a sum of money that one can afford to lose in individual stocks. There are various good online trading stock sites that are user-friendly and offer investor advice. Another option for those who have a higher risk appetite is to go into options trading. Options are available for equities, ETFs and indexes, for instance the OEX Option (S&P 100), QQQ Option (NASDAQ 100) and SPX (S&P 500). The OEX Option for instance consist of the top 100 blue-chip stocks from diverse industry groups (OEX is the ticker symbol for the Standard & Poor’s 100 Index traded at the Chicago Board Options Exchange ). There are also several websites that provide trading signals for those interested in option trading, such as OEX Options that provide at least a trading signal per day and a good list of option-related articles.

Inflation, Stagflation and Investment

Published on 19 October, 2006 in investor education. 0 Comments Tags: , , , , , .

Last week we talk about fundamental analysis. One of the factors analysed by fundamental analyst is economic factor.

Two words frequently encountered in economic reports these days are Inflation and Stagflation. What exactly do they mean?

Very often when we read reports and analysis, the US market is mentioned. The US market exerts no small amount of influence on other markets, especially those in Asia that depended on export to the US.

The danger of Inflation in US is highly anticipated. Inflation is the sustained increase in the average level of prices of a basket of goods and services. Do you see oil prices going up? How about transportation, groceries? Many believes that the consistently high oil price will trigger an inflation.

Some forecasted that we may even see stagflation in 2007. Stagflation = inflation + slowing economic growth. This was what happened during the 1970s, when world oil prices rose dramatically.

How does all these affect investing? Read on to find out.

Continue reading ‘Inflation, Stagflation and Investment’

A visit to Economic class and Fundamental Analysis

Published on 12 October, 2006 in investing insight and investor education. 0 Comments Tags: , , , .

Beside looking at Technical Analysis which looks at the trend of past events to forecast future events, long term investors may also want to look at Fundamental Analysis.

In many books and papers, Fundamental analysis is often presented as an direct opponent of Technical analysis. Typically the introduction would focus on the drawback of one method and highlight why the favored method is better.

Do not be confused. It need not be this way.

Fundamental analysis can co-exisit prefectly with Technical analysis. I often use both of them in my investment analysis. Oftentime while looking at the chart, I would also look at how the fundamental factors like the economy and market looks like.

In order to use them however, you would need to understand how each of them is applicable and to use them to the fullest effect.

I did some introduction to Technical Analysis and now let me do the same with Fundamental Analysis.

Continue reading ‘A visit to Economic class and Fundamental Analysis’

Investing and Time

Published on 7 September, 2006 in investing insight and investor education. 0 Comments Tags: , , .

Time and MoneyThe Time I referring to here is the amount of time on hand, not the period of time commonly spoken of in investing.

What I am trying to get at here is that in order to be successful in investing, one not only need to invest money but also invest time as well.

Regardless of the form of investment – whether stocks, shares, bond, unit trust, options, futures, commodities and what have you, time is required to understand the basics and learn the details.

There is no shortcut to investing. So what happen when you have limited time?

My experience taught me 3 things.

  • Educate yourself
  • Get to know yourself
  • Set aside time

Continue reading ‘Investing and Time’

The long term in the Straits Time Index

Published on 9 August, 2006 in investing insight and investor education. 0 Comments Tags: , , , , , .

A lot had been said of the value of by and hold in the long term. Many investment book in the market talk about the US market, so the example commonly encountered is the Dow Jones Industrial Average (DJIA).

Take a look at this long term chart:

Dow Jones Industrial Average monthly trend since 1920s

The continuous long term up trend is easy to see. Despite some major interruptions the buy and hold strategy offered excellent rewards over the years. (If one had brought during the peak of 1930, it would have taken over 25 years to recover the initial capital),

How about the Singapore market? Take a look at the Strait Times Index (STI).

Continue reading ‘The long term in the Straits Time Index’