Monthly Archive for September, 2007

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 3^rd to 5^th 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!