Top 10 expensive habits to cut out

Do you want to save money, but are struggling to work out how?

Read this list of top 10 expensive habits to cut back on. You’ll soon have a healthy and happy bank balance.

The gym
 
Gym memberships can set you back a lot and, although we all want to stay fit and look great, they’re not actually a necessity.

Avoid this massive monthly bill and exercise at home or outside instead.

You can go for a run in the park or do some sit-ups, push-ups and burpees in your garden.

You could also invest in some cheap exercise equipment, such as some free weights, some exercise bands, a kettle bell and a skipping rope.

If you enjoyed the social side to the gym you can still pop on your lycra and head to the odd exercise class.

Your nails 
 
If you love sexy talons or smart and primly polished nails you may need to do a DIY job to save money.

Salons charge lots of money for a relatively simple accessory and with some practise you can get the look you want for less.

If you want a professional look buy a book that gives you a step-by-step guide to nail art.

Eating out
 
It can be so easy to nip out to your favourite restaurant or call up your local take out and relax whilst others do the hard work.

Remember though that eating out costs a small fortune and can easily hike up your bills.

To save, prepare a batch of meals you love eating on your day off and freeze them.

Then when you’re hungry just pop one of your healthier meals in the oven for fast and cheap dining.

Your car
 
First comes the insurance, then comes the tax, then comes the fuel and on top of all that comes the garage costs; put simply, cars are ridiculously expensive.

Most people can’t imagine living without a car because they have become such a big part of most of our lives, but could you do without one?

If you use your car to commute check some lift-sharing websites, or if you use your car to socialise could you ride your bike or get a bus instead?

Although it’s a big change, ditching your car could save you thousands every year.

Coffee
 
Getting the odd pick-me-up coffee or tea from cafes is a great way to treat yourself and make your day a little brighter, but it should be kept as just that: a treat.

Buying drinks or snacks from coffee shops can become an expensive habit and it’s one that doesn’t give you many benefits.

If you miss your coffee that much, buy a decent instant coffee and make a flask up at home.

If you go to coffee shops for somewhere to sit or socialise find a new spot in the park.

Drinking

Without realising it, drinking can easily become a part of all of our lives.

We pick up a bottle of red on the way home or go for one or two cocktails after work; but remember it adds up.

Research recently found that the average American household spends $435 on alcohol per year – imagine what you could buy instead with that cash?

Facials
 
Everyone loves that polished and fresh feeling you get from indulging in a little facial.

But these beauty treatments cost big bucks and if you’re looking to save a little money it’s time you considered other alternatives.

Even if you’re not very practical you can make an inexpensive and highly effective facemask yourself. Some great mixes include manuka honey and aspirin or a simple natural yoghurt mask.

Going to the theatre
 
If you love going to the theatre then you’ll love deal websites that regularly offer discounted tickets.

Search for the best site by reading reviews and get yourself a deal.

Alternatively sign-up to ticket alerts and you should be told when tickets are on sale so you can get the best price before anyone else.

Haircuts
 
Want glossy locks but can’t afford the salon prices?

No worries, we’ll let you into a little-known secret: a grad student may be the answer.

When hairdressers are in their final years of college they need to practise on real models.

Although they can be a little nervous and it can take longer than normal, student hairdressers are excellent because they get graded on their cuts and they want to impress.

Plus the charges are minimal and will often be less than your cab fare home.

Happy days.

Starting a new hobby
 
Everyone enjoys the odd hobby, but starting a new one is expensive.

You need to buy the right tools, or the right kit or a new helmet.

Before you invest in the equipment make sure you really want to pursue this interest.

Then, once you’ve tried and tested the hobby for at least a month, shop around for the gear you need.

Ask other people in your area where you can get the best deals or if they are selling anything they no longer use.

You can also search for second hand items in shops or online.

We all know cash is hard to come buy, so it's important that we have enough to pay our bills, yet be able splurge a little to pamper ourselves.

In this consumer age, there are so many products and services begging for us to purchase them that we usually do, without thinking about whether we really need them.

And when we do purchase them, we may be paying more than we actually need to.

Workers to get pay increase of between 3% to 6% this year: Survey

Singapore workers can expect an average salary increase of between three to six per cent this year, according to the latest survey by multinational recruitment firm, Hays.

Based on a survey among employers here, 50 per cent say they will increase workers' salaries by three to six per cent at the next review. 23 per cent said the increase will be above six per cent.

21 per cent of employers gave an increase of six per cent. 28 per cent gave increases of less than three percent, while seven per cent did not increase workers' salaries.

However, 22 per cent of employers say the increase will be less than three per cent, while five per cent of employers do not expect to give any pay increases.


The 2012 Hays Salary Guide also found that 44 per cent of Singapore employers increased the salaries of their workers by three to six per cent last year.

As for bonuses, 54 per cent of employers say they intend to give more than 50 per cent of staff a bonus this year.

More employers however, are offering benefits to workers, with 81 per cent of employers doing so. This is up from 78 per cent the previous year.

The salary guide was based on a survey of over 900 employers.

When interviewed by the media, Mr Chris Mead, regional director of Hays in Singapore said a shortage of skilled workers in certain industries is still a problem.

In areas where there are skill shortages, 66 per cent of employers said they would employ a qualified foreign candidate.

Inflation eases in October but still above 5%

Inflation eased slightly in October, but continues to remain a high level, well above the 5 per cent mark.

The Consumer Price Index rose 5.4 per cent in October from last year, due mainly to higher accommodation costs, private road transport and food.

The Department of Statistics said that transport rose 10.5 per cent in October, compared with last year, while housing rose 9.9 per cent. Food was 3.5 per cent more expensive, said the Department of Statistics.

But, in an indication that inflation has already peaked, the pace of price increases has clearly slowed, with the CPI rising just 0.4 per cent in October, comapared with September.

New CPF savings scheme for parents with special needs children

SINGAPORE - A new Special Needs Savings Scheme (SNSS) to be implemented in early 2012 will allow parents to nominate their children to receive monthly payouts from their CPF accounts after they have passed on.

Under SNSS, parents can arrange for a monthly stream of income - of whose quantum they can decide starting from a minimum amount of $250 - to their special needs children after their death.

SNSS, which requires no administrative charge and no minimum balance during sign up, is useful for parents who do not have substantial savings outside of their CPFs.

CPF interest rates will continue to be paid on the funds nominated to SNSS nominees, and the extra 1 per cent interest will be paid on the first $60,000 of the combined balance of the nominated monies and the child's own savings.

To start the scheme, a participating parent's CPF savings upon his death must be sufficient to support a year's worth of payouts - in other words, a balance of $3,000 for a monthly payout of $250. Otherwise, the deceased parent's CPF savings will be disbursed as a lump sum.

To be eligible for the scheme, the parent, and child with disabilities have to be Singaporeans or Permanent Residents. The child has to be attending or has attended a Special Education (SPED) school, or who requires assistance in at least one Activity of Daily Living (ADL) - which includes dressing, feeding, going to the toilet, and moving about.

SNSS will complement the existing Special Needs Trust Company (SNTC), which is a trust arrangement and care plan set up by parents. SNTC requires a minimum of $5,000 cash upon start-up.

Parents can top up the trust account any time with cash or nominate the trust they set up under SNTC as a beneficiary of their insurance policies or CPF savings.

Gold’s Safe Haven Status in Question After 3.5% Sell-Off This Week

Despite its reputation as a safe place to hide from the chaos roiling global markets, gold has hardly been a bastion of strength. The yellow metal suffered a tough week falling 3.5% to close out at $1,725.10 an ounce. The price tumbled 3% on Thursday alone, actually outpacing the decline in U.S. stocks. For a traditional safe haven, the recent action has been concerning for those invested in the precious metal.

The question on the minds of gold bugs everywhere is whether this a flashing yellow light or another chance to buy the dip?

"Gold is being a save haven," insists Alix Steel, crack reporter for TheStreet.com. The metal is "going down less than the rest of the market; this is exactly what we saw in 2008," she says. During the financial crisis gold fell 20% in a few weeks then rallied up 40% for the year. Steel, who always comes prepared, also cites the following:

*ETF Demand was up 58% in Q3, despite the well-publicized selling by struggling hedge fund manager John Paulson

*Total gold investment was up 6%

*Demand for gold bars and coins rose 29%

*Central banks bought over 140 tons during Q3


The last point is critical as central bank buying around the world has been a pillar of the bullish gold case throughout the entire rally.


Steel says she hasn't heard any indications from her impressive list of sources that Emerging market central banks are doing any selling. Not only that but total buying could be as high as 450 tons for the year compared to net selling just three years ago.

Steel's conclusion is that adding gold to your holdings prudently is still a good idea provided buyers don't get too rattled by likely volatility. "Keep in mind when stocks get pummeled, commodities get pummeled, and gold will get hurt along the way," she says. But the bet is that gold just won't stay down as long.

Steel says the miners are also picking up steam lately. She points specifically to Randgold (GOLD), a stock showing strength despite the fact that the company missed Q3 earnings estimates in almost every way a company can possibly disappoint. She also likes Newmont Mining (NEM) despite dropping production because of the company's "juicy sexy dividend."

Regardless of my respect for Steel, not all the dividends nor earnings misses in a row could get me to make a bullish case for mining stocks. Gold will never change. Indeed, not changing is much of the investment thesis for gold. The miners are run by people who tend to screw up at inconvenient times.
Are you buying the metals, the miners, or staying away from both?

Let us know in the comment section below.

Rising property prices boost Singapore households' wealth

Singapore's households are at their wealthiest, boosted by rising property prices, a report released by the Monetary Authority of Singapore (MAS) stated on Friday.

Household wealth stood at a record high of $1.471 trillion in the three months to September, up 8.6 per cent from $1.354 trillion in the same period in 2010, said the central bank.

Property made up about 50.2 per cent of the household assets, while cash, Central Provident Fund balances, stocks and shares, as well as insurance, formed the other half of households' assets.

Companies and banks were also in the pink of health, with good profits, a strong base of funding and healthy balance sheets.

Insurance a crucial building block

With markets swinging about as they do these days, it is natural for some investors to focus on spotting winners and try to pick the perfect entry and exit points. But growing your wealth is more than just a function of maximising stock returns in the shortest time possible. Managing outflows, especially unexpected ones, and steady wealth accumulation over the long term, are equally important to the planning and pursuit of any significant financial goal.

The increased market volatility that we are experiencing is reason for many investors to fret over their portfolios. Yet, while prudent management of these monies is essential, it would be a mistake to overlook a more basic building block for growing wealth. As much as you would hate to see the value of your portfolio fall by 20 per cent, the hospital bill resulting from an unexpected major illness or the loss of income due to an accident-caused disability can severely disrupt your financial goals.

For instance, you may have to liquidate your investments to pay for treatment and other basic needs. This is why it is critical to ensure that you have some basic insurance in place, which will allow you to continue working towards your investment goals even if something catastrophic happens to you.



Strengthen the backline

A simple term policy is an affordable way to begin. Those in their 20s, who have just started work, may find this option most palatable as desired cover can be obtained inexpensively. For some, a term plan may act as a liability cancellation policy so that the family is not saddled with the burden of repaying the outstanding mortgage on the family home in the case of the policyholder's demise.

While term plans can be bought with additional cover for critical and terminal illnesses, conventional whole life policies provide greater flexibility, offering optional protection for eventualities like disability and loss of income. These additional covers, called riders, can be added and removed at will.

Whole life plans may be constructed so that payments are accelerated during your working life to allow you to enjoy premium-free cover after retirement. Perhaps, the biggest advantage that whole life plans have over term plans is that they can serve also as a tool for wealth accumulation. Part of the higher premiums collected in whole life plans are invested in the insurer's participation fund, resulting in steady returns that can be cashed out as needed.

Consumers should note that whole life policies are designed to accumulate value over the long-term, so the cost of surrendering the policy early, particularly in the first few years, is very high as premiums mostly go towards paying for the cost of insurance.



Sure and steady progress

There are insurance products that go further towards the goal of wealth accumulation. Endowment policies may not be new, but unlike the 30-year tenures of old, durations these days can be much shorter if you haven't the patience or if you have started your retirement planning late.

Endowment plans are gaining wider acceptance here as more Singaporeans realise the place of steady, low-risk investments when it comes to their retirement savings. In deciding on an endowment plan, it is usually helpful to link it to an objective, which will help determine what the most appropriate tenure is. For example, a 25-year-old executive may find a 10-year plan appropriate if he is planning to use the payout to help pay for a condominium at age 35.

For investors who prefer the convenience of an all-in-one solution, investment-linked policies cover both wealth protection and accumulation needs. You get to decide the balance between protection and investment, and you get more say about how your money is invested. Potential returns are higher, as you may choose to invest in unit trusts that adopt a more aggressive stance than the insurer's typically conservative participation fund. But along with that is a higher chance of incurring losses should your investment strategy prove unsound or unbalanced.



Pass it on

Finally, insurance can help in legacy planning. A universal life plan is a single premium policy that can help you pass on wealth to your children, with a guaranteed rate of return on the money invested. If you plan to leave S$3 million to your children, you can take out a universal life plan with a sum assured of S$3 million for a fraction of the amount. The sum assured of the universal life plan is guaranteed, so you can be assured that your children will receive the bequest you intended for them even if you pass on early.

If you choose to manage and invest your funds on your own instead of buying a universal life plan, there is a risk that your bequest to your loved ones will fall short of the S$3 million you intended for them, as the amount will be dependent on the market value of your investments when the bequest is made.

There is no denying the allure of taking a punt on the market, but neglect not the basic foundations of financial planning. Insurance is a crucial building block in achieving your financial goals and with recent innovations, it can even offer solutions for more advanced needs.



Shrikant Bhat is head of wealth management at Citibank Singapore.

Proceed with care in Asian investments

Q: Asian markets are at extremely cheap levels now. Do you think it is a good time for investors to enter this market? 

A: Using the MSCI Asia ex-Japan Index as a gauge, Asian markets are indeed at very attractive valuations. From a price-to-earnings perspective, the market is currently at its lows compared to the last 35 years. Further, from the angle of price-to-book ratio, Asia is also well below its long-term average of 1.8x at current levels.

Despite the cheap valuation, it may be too soon to jump back into a high beta market like Asia: the global headwinds stemming from the crisis in Europe, as well as the slowdown in the US and China, have shown few signs of easing.

However, it is also advisable for investors to maintain a balanced and diversified portfolio during these volatile times. Although risk aversion remains intact, investors interested in gaining exposure to the Asian equity market can consider the defensive sectors. These sectors may help manage downside risk of a portfolio.

Additionally, defensive companies are less sensitive to economic cycles as they produce items that are needed by consumers irrespective of economic circumstances. Another enticing aspect will be that of sustainable dividends which may help ease downward pressure from the market by adding a premium over steady income.

Investors can also consider dollar cost averaging (DCA) to gain exposure to Asian markets. This is a disciplined and convenient approach where investors reduce the need to time the market. In addition, it may help reduce investment costs and boost potential returns when the market turns for the better.

The foundation of successful investing remains educating and familiarising oneself with the various aspects of the market. Investors should also conduct due diligence to back each investment decision. It is also advisable to speak to a qualified financial adviser to truly understand the risk before investing in the market.

Caught in a lower income trap

MADAM Koh Ting Guat’s bedridden husband needs to be hooked up to an oxygen
machine to help him breathe.

She changes the ventilator tubes once a week, instead of the prescribed every
three days. That way, she reckons, the $5 pack of 50 tubes will last longer.

Such cutting of corners is not out of meanness but a lack of means.

A year ago, they were getting by as a middle-income family. She earns $2,800
a month as a shipping executive and her husband made $1,500 as a salesman.

But life threw them a curveball when he suffered a stroke, leaving him bedridden.

These days, the family makes do on her salary, with little left after paying for
their two sons’ school expenses, her husband’s medical bills, the wages of a Filipino
caregiver, utilities, transport and food.

The family has fallen into that sandwich class of low-middle income Singaporeans
who keep Acting Minister for Community Development, Youth and Sports
Chan Chun Sing awake at night.

In a media interview last week, he said that this group tend to be in jobs that are
vulnerable to being lost in the churn of economic cycles. They also tend to have
little savings to cushion the impact.

He identified them as being in the 11th to 20th percentile in terms of resident
household income, making an average of $2,681 a month. These are headed by a citizen or permanent resident, and with at least one working person.

Another set of figures, measuring individual incomes of Singaporeans, is sobering.

A joint report by the Manpower Ministry and the Department of Statistics
showed that monthly real incomes of Singaporeans at the 20th percentile grew 0.3
per cent over the decade – almost zero per cent a year.

In contrast, those in the middle saw real monthly incomes rise 1.2 per cent a
year over the same period, or 11.3 per cent over the decade.

Who are in this low-middle income group and how can they be helped?

Figures culled from various agencies show them to be mainly made up of large
families with school-going children, with the parents aged between 40 and 50. One
parent may have been recently retrenched, or they may be burdened by
heavy medical bills or in some cases, marital woes have added to their troubles.

Some may benefit from the Workfare Income Supplement Scheme, if they are
aged 35 and above and have gross monthly incomes of $1,700 or less, among other
conditions.

But apart from Ministry of Community Development, Youth and Sports
(MCYS) programmes to help with childcare costs and taking care of elderly parents,
little other help is available as they fall outside social assistance nets.

Government schemes such as Com- Care Transitions and the Work Support
Programme disqualify households with incomes above $1,500.

Those in the 1st to 10th percentile – with average monthly household incomes
of $1,400 – would qualify for benefits such as cash grants and utilities vouchers
under these programmes.

The “at risk” group in the 11th to 20th percentile, Mr Chan pointed out, form a
significant portion of the bottom third of the population. About 377,400 employed
residents aged 15 years and above earn between $2,000 and $2,999, according to labour statistics last year.

And, the minister feels, this group’s meagre savings – not more than a few
thousand dollars usually – mean they are on a dangerous keel in an increasingly uncertain global economy where a recession might be around the corner.

“You think I have savings now? If strike lottery tomorrow, yes,” said Madam
Koh.

She is thinking of taking on a second job to supplement her income. In the
meantime, scrimping and saving is all she can do. She is cutting back even on treatments for her husband.

Acupuncture treatments, for example, have been cut from thrice to twice weekly, saving $100.

“If a downturn really happens, I might have to sell this flat and move in with my
parents in Pasir Ris,” said Madam Koh of their four-room Sengkang flat.

Like many in their bracket, she and herhusband have only secondary education.
Singaporeans in this rung hold jobs such as technicians, security guards and in the service industry.

Top of their wish-lists: financial help from the Government when they hit dire
straits, or utility and transport vouchers, especially if a downturn occurs.

For Mr S. Ahmad, 55, his household is “already in a recession”.

A diabetic, he was a freelance travel agent earning about $1,000 a month until
June last year, when his right foot suddenly became swollen. He has been going for operations and follow-up treatment since. After insurance claims and government subsidies, he still has had to paymore than $10,000 in medical bills.

Now, his 25-year-old son, an optometrist earning about $2,500 monthly, is the
family’s sole breadwinner.

Adding further strain on Mr Ahmad’s finances are a $680 monthly housing loan instalment and another two young children who are still in school.

And as Mr Ahmad did not have the $1,000 advance to pay for a machine to
vacuum the pus from his foot last year, the infection spread upwards to his knee.

More medical treatments, bills and stress followed.

“I just have to borrow money from friends, what can I do?” he said resignedly in an interview in his Pasir Ris flat.

“I’m just living by the day.”

His 53-year-old housewife may resort to making kueh and selling it from home to raise funds, he said.

Another Singaporean trying to make ends meet is Mr Haron Ajit, 51.

He was a logistics supervisor until he suffered a stroke in June. His 21-year-old daughter is now the family’s sole breadwinner,earning about $2,500 from her nursing job. He has two sons – one in Secondary 4 and the other in Primary 1.

Mr Haron said: “We’re financially very tight now because of my condition.”

Apart from help to deal with medical expenses, social workers say some in the
low-middle income group also seek assistance for family problems like divorce, or after they lose their jobs.

Mr Hindran Maniam, a counsellor at Rotary Family Service Centre in Clementi,said: “They ask for counselling for problems like family violence, taking care of elderly parents, or communication issues with children.”

One middle-income wife, for instance,went for counselling at Fei Yue Family
Service Centre in Yew Tee after she discovered her husband had an affair. She was contemplating divorce, but was held back by fear that it would affect the household income.

Retrenchments are not a problem yet but Ms Florence Lim, the director of Covenant
Family Service Centre in Hougang,expects such cases to surface if the global economy drags Singapore down.

Industry veterans say the best way to help the low-middle income group is to raise
the upper limit for ComCare programmes to about $2,000 to $2,500.

This would open up qualifying for more benefits such as medical assistance,rental and utilities vouchers, and monthly cash grants.

Ms Lim, a social worker for three decades,said: “Why not also look at their net income after Central Provident Fund deductions,rather than gross household income,in deciding eligibility?”

This would widen the pool of those eligible,especially with rising living costs.

The Government could give slightly smaller ComCare subsidies to the low-middle income bracket compared to those at the bottom rung, Ms Rachel Lee, head of Fei Yue Family Service Centre and a social worker for 19 years, mooted.

Getting these workers to upgrade their skills so they can get jobs that are less susceptible to being wiped out by economic cycles was another popular suggestion,
but there are problems with that route.

“These people need money from work. Who’s going to feed their families when they go for training for those few months?” said Ms Lim.

She said CDCs do give a few hundred dollars a month to help these individuals during say the quantum should be higher.

Short-term assistance for about threemonths to help them tide over a difficult situation would also work well, said North East District Mayor Teo Ser Luck.

Mr Teo, whose district has been helping residents who do not qualify for Com-Care through its local scheme, said: “You have to be there when they need you.

That’s what this safety net is about – covering the cracks.”

Long-Term Investing Works!

We hear the phrase all the time: "Invest over the long term! Don't punt in the stock market!" Is that really a wise investment?


THE CHANCE FOR A POSITIVE RETURN IS HIGHER

---

We started with a familiar market again - the Straits Times Index. Our period: 25 years starting from the year 1976 and ending in the year 2000. This period included the 1979 Oil Shock, the 1986 Singapore recession, the 1997 Asian Currency crisis, and other world events which had an impact to a certain degree on Singapore, which is so exposed to external influences.

We first took a tally of all the positive growth periods in the Straits Times Index on a 1-year basis. There were 15 out of 25 years in which the Straits Times Index had positive growth. This means that if you had randomly picked the start of any year from 1976 to 2000 to buy into the Straits Times Index and you had a holding period of 1 year, you would have had a 60% chance of coming out ahead.

We then tried the same experiment on a holding period of 3 years. The result was that out of twenty-three 3-year periods, eighteen of these were gains. So, if you had invested in the Straits Times Index at the start of any year from 1976 to 2000 with a time horizon of 3 years, you would have had a 78.26% chance of coming out ahead (quite a large improvement over 60% isn't it?).
We also experimented with 5 and 10-year holding periods. Take a look at the results in the following chart.

Chart 1

Source: S&P Micropal

As you can see, when you extend the holding period to 10 years, there is a 100% chance that you would have made money. The question now is, does this apply only to the Singapore stock market? What if we were to try the same experiment on other stock markets? Well, we did, on six other stock markets:

USA (represented by S&P 500)
Technology (represented by NASDAQ)
Europe (represented by MSCI Europe)
Taiwan (represented by the Taiwan Weighted Index)
Hong Kong (represented by Hang Seng)
Japan (represented by the Nikkei 225 Index)
World (represented by the MSCI World USD)

Chart 2

Source: S&P Micropal

LONGER HOLDING PERIODS BETTER
As can be seen, the increasing percentages of positive periods for all the stock markets would seem to suggest that, at least historically, the longer your holding period, the greater the possibility of making money from an investment in one of the above equity markets.

In fact, in six of the markets shown above, you would have made money 100% of the time if your holding period were 10 years.

At this point, some may ask: "I can come out just 5% ahead after holding a Singapore fund for 10 years. That is a far cry from the 21.89% I would gain even if I were to keep it in a fixed deposit giving me 2% per annum!" That could be the case. After all, investing in equity markets are always riskier than investing in fixed income instruments.

So, we now choose to be more strict in our analysis. Instead of just having a positive gain, we choose to take the periods where the annualised gain (or average gain per year) is more than 4%. This is pretty reasonable since even the CPF special account can only promise 4% per year.

If an investment grew by 4% per year, after 3 years, it would have grown 12.49%. After 5 years, it would have grown 21.67%, and after 10 years, it would have grown 48%. This is because of the miracle of compounding (we won't go into that today as that isn't the focus of our study).

WHAT IF WE USE A STRICTER CRITERION

We also analysed the Straits Times Index with a stricter criterion. We counted periods where the returns were over 4% per year, over 12.5% for 3 years and more, over 22% for 5 years and more, and over 48% for 5 years and above. These would then be counted as a percentage against the total possible 1-year, 3-year, 5-year and 10-year periods over the last 25 years. The results are shown in Chart 3.

Once again, you can see that the rising trend over longer holding periods does not change. Also, even taking into account that our criterion is now far stricter, when you extend the holding period to 10 years, the probability that you would have gained a compounded 4% per year was 93.75%. Thirteen out of fifteen 10-year periods saw a gain of more than 93.75%, where the Singapore Straits Times index was concerned.

Just as with our initial analysis, we extended this to cover the six stock markets and the world index mentioned in Chart 2. The results are shown in Chart 4.

Charts 3 and 4

Source: S&P Micropal

SAME TREND IN OTHER STOCK MARKETS
The same rising trend can be seen for every stock market that we measured. For six of these stock markets, there was a higher than 90% probability that if you had invested in the stock market index at the beginning of any year since 1976, with a 10-year horizon, you would have made better than 4% per year. If you wanted to time the markets (meaning that you jumped into a market with all your money, then jumped out again after 1 year to hop into another market), then from a statistical point of view, your chances of making better than 4% per year would be significantly less and your transaction costs would be higher as well. We did not try to see if a shorter holding period of 6 months or less would give better results - we suspect that they won't.

One more interesting conclusion you might arrive from looking at Charts 4 and 2 is that the US stock market represented by the S&P 500 Index is a less volatile stock market than others. It had a 100% probability of having a 5-year gain, and also has one of the highest probabilities of having an average compounded 4% gain over the various periods measured. We believe that this is due to its low reliance on external fund flows. Most of the capital that make up the stocks in the US market are from US investors. Even during downtrends, US investors are not outward looking preferring to hold cash, or shift to bonds. This results in a more stable market environment where there are fewer drops, or spikes. As we mentioned in our previous article "Do Top Performing Markets Always Shine," there are times when other stock markets may outperform the US stock market. However, these stock markets may also be more volatile.

LIMITATIONS

These analyses are statistical in nature and have their underlying limitations. The two main limitations would be analysing past performance data (which are not a guarantee for future returns), and not taking into account transaction costs.

Nevertheless, this is balanced by two considerations. Regarding the limitation of looking at past data, the figures taken were from an extremely long period of 25 years, during which there were quite a few wars (especially in Middle East), there was a global oil shock, and recession. So, if you are a believer that history repeats itself, then you will also come to the same conclusion: Long-term investing works far better than short-term punting.

The limitation of transaction costs is balanced by the fact that we were measuring only the indices and not active funds that invested in these markets (most of the funds in Singapore do not have such long histories). If you choose a good fund manager, one that is able to outperform the market index he invests in over the long run, you will not only be able to cover any possible transaction costs, you may even have gains better than the market index.

In conclusion, we first state that our objective here was not to find the best stock market to invest in. We recognise that each stock market has its peculiarities, and some have historically been more volatile than others. However, based on our analyses, we can at least discover a common trend among stock markets regardless of their size, volatility and other attributes. This common trend is: Long-term investing has a higher statistical chance of giving returns than short term investing.
 

Dollar Cost Averaging Method

The Regular Savings Plan (RSP) utilizes the dollar cost averaging (DCA) concept of investing which is the practice of investing a fixed amount of money regularly regardless of market conditions. In the case of RSP, the investments take place monthly. This article helps investor understand the benefits of DCA and what considerations that an investor has to make in executing a dollar cost averaging plan.

The Regular Savings Plan (RSP) utilizes the dollar cost averaging (DCA) concept of investing which is the practice of investing a fixed amount of money regularly regardless of market conditions. In the case of RSP, the investments take place monthly. This article helps investor understand the benefits of DCA and what considerations that an investor has to make in executing a dollar cost averaging plan.

Benefits of Dollar Cost Averaging 

For many investors, market timing of buying low and selling high is almost an impossible task especially when fear and greed typically lead investors to do the opposite of buying high and selling low. The main benefit of DCA is that it takes the guesswork and emotion out of investing. 

By investing a fixed amount on a monthly basis, RSP ensures that you accumulate more units when prices are low but lesser when prices of units are high. A lot of stress is avoided as the investor does not have to decide whether the fund is expensive or not and whether the market condition is suitable to invest. 

Table 1 shows a hypothetical example of how more units are acquired when prices are low and vice versa assuming that an investor invests $100 every month. Chart 1 is the graphical presentation.

Table 1

	Investment amount ($)	*Price ($)	Units Acquired
January	100	1.00	100.00
February	100	1.14	87.72
March	100	0.90	111.11
April	100	1.03	97.09
May	100	0.95	105.26
June	100	0.89	112.36
July	100	1.08	92.59
August	100	1.19	84.03
September	100	0.85	117.65
October	100	0.98	102.04
November	100	1.17	85.47
December	100	0.83	120.48

* Prices are randomly generated

Source: iFAST Compilations

Chart 1

Many investors procrastinate in investing, preferring to accumulate a large sum of money before deciding where to invest. The temptation of spending the sum meant for investments could also derail longer-term financial goals. By deducting a fixed sum of money from the bank account and placing them into funds, RSP also instills discipline in investing. 

This helps investors steadily move towards their financial goals. Moreover, with investors now starting young, many may not have the luxury of investing a large lump sum. RSP becomes a practical method of "invest-as-you-earn".

Lump sum investing would be better for investors with long investment horizon 

DCA is a strategy that works well in a market environment that is volatile, experiencing both upswings and downswings but ends at a level that is close to the initial level. However, historical data shows that most stock markets do exhibit an uptrend over the long term. 

This means that for investors who have a large sum of money to start their investments with and coupled with a long term investment horizon, they would be better off investing the money right away (refer to " Long-Term Investing Works").

Although lump sum investing works better than DCA assuming that stock markets continue their long-term uptrend, investors are often paralyzed with fear in times of heightened volatility such that they put off investing. These investors can consider DCA in such times to start their investments. 

By breaking the lump sum into smaller parts, investors can view it as a chance to average down their costs when markets move down. On the other hand, if the markets move up subsequently, investors would have already invested part of their money. 

The main benefit of DCA in times of heightened volatility is that it helps investors overcome the fear of investing in turbulent markets.

Now that we have explained the benefits of DCA, the following steps would help the investor execute the method of DCA through RSP.

Actions to take for RSP

• Decide on the monthly amount that can be sustainable over the investment horizon

• Select the funds to invest into, making sure that portfolio is diversified.

• Rebalance your funds at least annually to ensure that your portfolio remains diversified

• Wait for your investments to reap rewards. 

Emotions Hinder Good Decision Making

You think you can outsmart everyone else, you believe in exciting investment stories, you trust your investment decisions to be logical. How do we know? We’re humans too.

Besides fundamentals (e.g., earnings growth and valuations), stock markets are driven by investors’ emotions. Their emotions pervade all manner of good and bad financial news, enveloping market performance in messy layers of ‘noise’. As a result, good news doesn’t necessarily mean positive performance, and bad news doesn’t necessarily mean negative performance.

Alas, a self-respecting investor will not admit that he can’t see beyond his arm’s reach in such situations.

The Seven Sins

James Montier, the author of Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance, summarised common human biases into the “Seven Sins” of money management:

1. Evidence shows that investors are bad at forecasting, even though it could be an integral part of their investment process;
2. Investors cannot seem to have enough information, even though more information might not lead to better investment decisions;
3. Investors overrate meetings with management because management themselves are probably biased;
4. Investors think they can outsmart everyone else;
5. Investors tend towards having a short-term horizon;
6. Investors ignore the boring facts in favour of new and exciting stories, which are further enhanced to suit investors’ biases;
7. Investors tend to believe, rather than be naturally skeptical.

Hardwired For Poor Decision Making

Montier also stated that in decision making the brain defaults naturally to an “emotional system”. People tend to focus on short-term gratification, leading to quick and easy decisions. Also, people tend to dislike social exclusion behaviour, preferring to follow the herd instead. This emotional system, he claims, exerts less energy compared to objective thinking.

Despite our beliefs that we are logical and rational decision makers, we are hardwired for poor decision making.

Is There A Way Out Of Behavioural Pitfalls When Investing?

Yes, and one such way out is the Dollar Cost Averaging (DCA) method. It is a method that sticks to a strict investment schedule regardless of how the markets are performing. It is very mechanical and there are no emotions involved. 

In Conclusion

Having emotions per se isn’t a bad thing but not many people can remain calm and collected when the stakes are high in decision making. However, recognising that emotions are an innate weakness when it comes to decision making is as good as taking the first step towards successful investing.

The Magic Of Compounding

Compound interest, a vital component of regular investing, can help you achieve your financial goals, such as becoming a millionaire, retiring comfortably or being financially independent.

When you were a kid, perhaps one of your friends asked you the following trick question: "Would you rather have $10,000 per day for 30 days or a penny that doubled in value every day for 30 days?" Today, we know to choose the doubling penny, because at the end of 30 days, we'd have about $5 million versus the $300,000 we'd have if we chose $10,000 per day.
Compound interest is often called the eighth wonder of the world, because it seems to possess magical powers, like turning a penny into $5 million. The great part about compound interest is that it applies to money, and it helps us to achieve our financial goals, such as becoming a millionaire, retiring comfortably, or being financially independent.

The components of compound interest

A dollar invested at a 10% return will be worth $1.10 in a year. Invest that $1.10 and get 10% again, and you'll end up with $1.21 two years from your original investment. The first year earned you only $0.10, but the second generated $0.11. This is compounding at its most basic level: gains begetting more gains. Increase the amounts and the time involved, and the benefits of compounding become much more pronounced.Compound interest can be calculated with the following formula:

FV = PV (1 + i)^N

FV = Future Value (the amount you will have in the future)

PV = Present Value (the amount you have today)

i = Interest (your rate of return or interest rate earned)

N = Number of Years (the length of time you invest)

Who wants to be a millionaire?

As a fun way to learn about compound interest, let's examine a few different ways to become a millionaire. First we'll look at a couple of investors and how they have chosen to accumulate $1 million.

1. Jack saves $25,000 per year for 40 years.

2. Jeff starts with $1 and doubles his money each year for 20 years.

While most would love to be able to save $25,000 every year like Jack, this is too difficult for most of us. If we earn an average of $50,000 per year, we would have to save 50% of our salary!

In the second example, Jeff uses compound interest, invests only $1, and earns 100% on his money for 20 consecutive years. The magic of compound interest has made it easy for Jeff to earn his $1 million and to do it in only half the time as Jack. However, Jeff's example is also a little unrealistic since very few investments can earn 100% in any given year, much less for 20 consecutive years.

TIP: A simple way to know the time it takes for money to double is to use the rule of 72. For example, if you wanted to know how many years it would take for an investment earning 12% to double, simply divide 72 by 12, and the answer would be approximately six years. The reverse is also true. If you wanted to know what interest rate you would have to earn to double your money in five years, then divide 72 by five, and the answer is about 15%.

Time is on your side

Between the two extremes of Jeff and Jack, there are realistic situations in which compound interest helps the average individual. One of the key concepts about compounding is this: The earlier you start, the better off you'll be. So what are you waiting for?

Let's consider the case of two other investors, Luke and Walt, who'd also like to become millionaires. Say Luke put $2,000 per year into the market between the ages of 24 and 30, that he earned a 12% after-tax return and that he continued to earn 12% per year until he retired at age 65. Walt also put in $2,000 per year, earned the same return, but waited until he was 30 to start and continued to invest $2,000 per year until he retired at age 65. In the end, both would end up with about $1 million.

However, Luke had to invest only $12,000 (i.e., $2,000 for six years), while Walt had to invest $72,000 ($2,000 for 36 years), or six times the amount that Walt invested, just for waiting an additional six years to start investing.

Clearly, investing early can be at least as important as the actual amount invested over a lifetime. Therefore, to truly benefit from the magic of compounding, it's important to start investing early. We can't stress this fact enough! After all, it's not just how much money you start with that counts, it's also how much time you allow that money to work for you.

In our first example, Jack had to save $25,000 a year for 40 years to reach $1 million without the benefit of compound interest. Luke and Walt, however, were each able to become millionaires by saving only $12,000 and $72,000, respectively, in relatively modest $2,000 increments. Luke and Walt earned $988,000 and $928,000, respectively, thanks to compound interest. Gains beget gains, which beget even larger gains. This is again the magic of compound interest.

Why is compound interest important to investing?

In addition to the amount you invest and an early start, the rate of return you earn from investing is also crucial. The higher the rate, the more money you'll have later. Let's assume that Luke from our previous example had two sisters who, at age 24, also began saving $2,000 a year for six years. But unlike Luke, who earned 12%, sister Charlotte earned only 8%, while sister Rose did not make good investment decisions and earned only 4%.

When they all retired at age 65, Luke would have $1,074,968, Charlotte would have $253,025, and Rose would have only $56,620. Even though Luke earned only 8 percentage points more per year on his investments, or $160 per year more on the initial $2,000 investment, he would end up with about 20 times more money than Rose.

Clearly, a few percentage points in investment returns or interest rates can mean a huge
difference in your future wealth. Therefore, while stocks may be a riskier investment in the short run, in the long run the rewards can certainly outweigh the risks.

The bottom line

Compound interest can help you attain your goals in life. In order to use it most effectively, you should start investing early, invest as much as possible, and attempt to earn a reasonable rate of return.

'Are You Ready?' - Understanding & Starting Cash Flow Management

We all heard how important managing cash flow is. In business, if cash flow management is not up to par, it'll lead to bankruptcy even though it has a strong balance sheet and income statement. Cash flow is the life blood of business, and so it is also the life blood of individuals. It is really just about tracking each drop of cash that comes in and out of your bank account so that you know where the cash flows to at the end of each month or each accounting period that you decide.

 

How to begin, one may ask. I think the very first thing you need to do is to begin tracking the cash that flows out of your pocket every day for a month. If you can have the discipline to do so for around 4 months, you'll get a good picture of what your baseline expenses are. Baseline expenses are what you have to spend on things that are necessary, like food, housing loans, pocket money for kids and parents, bills and so on. Those are the fixed expenses, as opposed to discretionary spending like the occasional gadgets, a new TV or a holiday trip. Discretionary spending is, well, discretionary, so they are variable by nature. It doesn't occur every month, or at least, they shouldn't.

 

If you sum up your variable, discretionary expenses with the fixed, baseline expenses, you'll get the total expenses for that particular month. It sounds easy, but it requires a lot of discipline to actually track and record every transaction you make. Try it, and see if you can last a week. I think everyone can have the discipline to do this, it's just whether you are properly motivated or not. If you don't see the point of doing so, then you won't be motivated to do it. As for me, I've been tracking my expenses of 3-4 year now. I started off wanting to do it for 1 month only, but it gets kind of fun knowing exactly where my cash flows to at the end of the month, so I carried on doing so. Now, I can tell you a very good estimate of how much I spend per month.

 

That figure is one of the aims of tracking your expenses. If you know how much you earn per month, and you know how much you spend per month, you can tell if you have positive or negative cashflow. Positive cashflow occurs when you take in more money than when you spend them i.e. cash inflow is greater than cash outflow. Negative cashflow, on the other hand, occurs when you spend more money than what you take in i.e. cash outflow is greater than cash inflow. It is obviously better to have months in a year where you have positive cashflow.

 

The only way in which you can have a positive cashflow is to spend less than what you earn monthly. There are no two ways about this. Assuming that you have positive cashflow, so where do the difference between the cash inflow and cash outflow go to? It becomes your savings! It is only when you are disciplined enough to control your expenses below your earnings that you are able to save up every month from your take home pay. If your expenses are 50% of your earnings, then you will save 50% every month. If you spend 80% of your earnings, then you will save only 20% every month. What you do not spend is yours to keep, so try to keep at least 10% of your monthly take home income. If you manage to do that, for every $1 that you earn, 10 cents will be yours to keep!

 

It's important to have a healthy saving habit. This cash is important to kick start a lot of programs that are beneficial to you downstream. Without this stream of cash that comes upstream, you will have to work forever just so that you can live each month paycheck to paycheck. The good thing about savings is that you can use this to do 3 important things: Emergency funds, Insurance and Investment. The first, emergency funds are used to deal with immediate life changes like retrenchment, medical fees (the initial cash component that is not paid immediately by insurance) or a punctured tire. The second, insurance, is meant for protection against the loss of life, limb, health conditions and the ability to carry on making an income that generates the cash inflow in the first place. The last, investment, is meant to grow your savings into a bigger sum so that you can achieve the financial goals of your life.

 

Investing with your CPF

YOUNG adults already in the workforce will no doubt be familiar with their CPF (Central Provident Fund) accounts, into which a portion of their monthly salary is automatically squirrelled away, along with a percentage contribution from their employers.

Having surveyed the gamut of asset classes and investment vehicles over the last few months, the Young Investors' Forum takes a look this week at how young working adults can think about investing their CPF savings for the future.

While the prospect of retirement may still be far from the minds of energetic go-getters just scaling the lower rungs of their career ladders, it is only prudent to start preparing for that future today.

Know your CPF

The government bills the CPF as a 'comprehensive social security plan'. Meant to provide working Singaporeans financial security in their old age, the scheme covers retirement, healthcare, home ownership, family protection and asset enhancement.

These aims are met by mandatory monthly sums of money working Singaporeans and their employers channel into each individual's three CPF accounts:

• The Ordinary Account (OA), which is where the bulk of your monthly contribution goes if you're under 35, and stores monies which can be used to buy property and insurance policies, make financial investments or pay for your own or your children's education.


• The Special Account (SA) is to accumulate funds for old age and contingencies, which can be used to invest in retirement-related financial products.


• The Medisave Account's (MA) savings are meant for hospitalisation expenses and approved medical insurance plans.

While entrepreneurs and the self-employed need not contribute to the Ordinary and Special Accounts, they must contribute to the Medisave Account if their yearly net trade income exceeds $6,000.

Without you choosing to invest, CPF savings in all these accounts will earn interest. Funds in the OA earn an interest rate based on the 12-month fixed deposit and month-end savings rates at major local banks, but the CPF Act guarantees a minimum risk-free interest of 2.5 per cent.

For the Special, Medisave (SMA) and Retirement Accounts, which earn an interest rate equal to the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus one per cent, the government announced last September that it would keep an interest rate floor of 4 per cent till this December.

Also, the first $60,000 you have across your CPF accounts - with up to $20,000 coming from your OA - earns an extra one per cent interest.

Hence, one possible way to grow your CPF savings is to transfer monies from your OA into your SA, to take advantage of the higher interest rate that uninvested savings in the SA earn. But such a move is irreversible, as fund transfers in the opposite direction are not allowed.

CPF Investment Scheme

As long as you are at least 18 years old, are not bankrupt and have more than $20,000 in your OA or more than $40,000 in your SA, you can tap the CPF Investment Scheme (CPFIS) to grow that 'retirement nest egg'.

The CPF Board runs two separate investment schemes for the OA and the SA, allowing for your CPF savings to be put to work via a wide range of instruments, in the hope of reaping a return above the prevailing interest rate.

The ultimate aim, of course, is still to accumulate wealth for retirement, so any profits made from these investments are still subject to the standard CPF withdrawal rules.

If losses are incurred on your CPF investments, you need not top up the accounts from which the investments were made, but your retirement savings would have shrunk.

Financial planners posit that, as a rule of thumb, a person needs about 70 per cent of his last annual income to keep up his current lifestyle in retirement. CPF savings are meant to cover basic retirement needs and may not meet a person's other lifestyle needs - one key motivation for private savings and investments.

Also worth considering before you decide to start investing your CPF savings are any financial obligations that would require payment from a CPF account. For instance, whether you need to use your OA to make monthly housing payments will help you decide how much of your savings you are willing to channel into investments.

Getting started
 
The CPFIS's range of investment options include fixed deposits, bonds, annuities, endowment insurance policies, investment-linked insurance products, unit trusts and exchange traded funds (ETFs).

What is available to you under the CPFIS-OA and the CPFIS-SA differ, since the two accounts are meant to help accumulate savings for different purposes.

So, while OA funds can be invested in fund management accounts, shares, property funds, corporate bonds and gold or gold products, SA savings cannot.

Other restrictions you should be aware of before investing your CPF savings include the fact that you may only invest in unit trusts, exchange traded funds and fund management accounts approved by the CPF Board.

And CPF savings can only be used to purchase common shares, Reits and corporate bonds issued by companies incorporated in Singapore and traded on the Singapore Exchange (SGX).

Also, you can put a maximum of only 35 per cent of your investible savings into shares, Reits and corporate bonds, while the cap on gold (including gold ETFs and other gold products) is 10 per cent.


More details on restrictions and possible charges you may incur from the CPFIS and the other financial intermediaries are available at www.cpf.gov.sg, where you can also calculate how much of your investible CPF savings you have at the moment.

If you intend to use funds from your OA, you will need to apply for a CPF Investment Account with any one of the CPFIS agent banks: DBS, OCBC and UOB. Do note that you can have only one CPF Investment Account at any one time.

Such an account is not needed if you intend to invest from your SA, in which case you can approach investment product providers directly.

Naturally, all the usual caution urged with regard to investing in general will apply to investments made using your CPF savings too.

Any investor must consider his investment time horizon, asset allocation, the risks and returns of each product, and diversification across his portfolio, before committing to an investment - even ones made under the CPFIS.

'No one can guarantee that investments under the CPF Investment Scheme will always be profitable,' the CPF Board states on its website.

'CPF members have to decide for themselves how to invest their savings, and what risks to accept, and exercise prudence and care in investing their CPF savings to ensure their financial well-being after retirement.'

'If they are not confident of investing on their own, they should leave their money in their CPF account which earns interest and is risk-free,' it adds.

How to teach kids about money

Teaching children about money is no child's play.

Children must be battle-equipped on how to manage money as they grow up and it's up to the parents to provide them the necessary tools.

Using the allowance system to teach your kids about money is one way to go.

The upside




The fact is there are many benefits for parents who "pay " allowance to their children.

"When it's our money, our kids want to buy everything in sight, without even a care in the world of how much money we had to put out for them," says Abby Lim, a retail manager for a textile store.

"But when it comes out of their own allowance, they think twice before buying," she adds.

She says parents provide for necessities such as food, basic clothing and school supplies, whereas the allowance will be mainly for the "extras" the kids want.

"These extras can be from toys, video games, movie tickets, fast food or anything which are not a necessity, but a nourishment to their childhood," she says.

"Basically we are not stopping them from buying toys, we are teaching them the concept of budgeting at an early age through allowance," she adds.

She says that it's normal for kids to make mistakes and deplete their allowance in an instant after getting the money.

"This is a learning process for the kids, as they soon realise that money is not infinite, that when it comes out of their own pockets, they become much more selective about their purchases," says Lim.

Figure it out




New parents have to figure out how much to give their children.

Lim says the amount should be large enough to allow the children to experiment. In her case, she gave her two children a weekly allowance of $10 each, but as they entered secondary school, she decided to give each $50 a month.


"From the beginning, I would advise my kids the amount should last them throughout the given month. I would refuse to restore their allowance until the beginning of a new month. This gives them a sense of responsibility," she says.

She says as the children get older, the amount should be raised as well of not more than 10 per cent a year.

Haslinda Hj Luqman, a 35-year-old mum who runs a home-based food and bakery business, believes setting the amount based on what she expects her children to do with their allowance is much more effective as opposed to determining the amount according to their age or following what other parents do on how much they give their kids.

"As parents, we should also help decide for our children how their allowance is utilised," she says.

Haslinda's 14-year-old son gets $100 a month. Her son uses the money to pay for food during recess in school, whereas the rest would be spent on things such as eating out, fashion accessories or movie tickets.

She says she would be by his side when he's making spending decisions, to guide him and to see whether any of his purchases is worth it or unnecessary. "As they grow up, they will have to take on more responsibility for their spending habits as their allowance is increased, so it's crucial for us to monitor their spendings to guide them towards smart spending," she adds.

The savings drill





You can't save money if you don't have money to begin with. The allowance system is also ideal to drill the savings habit on children.

Haslinda says the best thing about the allowance system is that it enables her son to see very clearly that when he delays gratification, he could save enough to afford pricier items such as sports gear and video games.

"Sometimes, we reward them the things they want based on their school performances, but it's also rewarding to give them that sense of independence as they learn to save their money for a certain period of time and allow them to experience the thrill of getting that slightly expensive item from their own efforts," she says.

She says her son has also learned to spend more prudently in the process.

"This is good practice. They will get the hang of it and as they get older, they know from their own experiences that saving is a better way to go than loaning in the long run," she adds.