Thursday, October 31, 2013

Do You Really Need a Credit Card? [Guest Post]

Do you really need a credit card? The answer to this question would depend on your general attitude toward spending, saving, and debt. So in essence, the only person who can tell you whether or not you need a credit card is none other than you. There have been many people with tragic stories about how credit card debt have affected their lives negatively. The reason usually is that these individuals allowed themselves to be “controlled” by their credit cards instead of the other way around.It is important that you take some time to think things thoroughly before you make a decision. Read the following guidelines to help you decide on whether you really do need a credit card:

Why do I need a credit card? 

Credit cards are ideal for making emergency payments or large purchases that you would find easier to pay back on an instalment basis. Credit cards also offer convenience when booking flights or shopping for merchandise online. They are globally accepted and on top of that, offer insurance protection and some rewards. 

What are your own reasons for wanting a credit card? Do you intend to use it for shopping on eBay or Amazon? Do you want one because everybody says it’s how you build a credit history? Or do you just want one as a backup for emergencies? Determine how exactly a credit card can be beneficial to the kind of lifestyle you have.

How important is it to build a good credit score?

A good credit score improves your status in the eyes of lenders and financial institutions. In the event that you would apply for a house loan, car loan, or personal loan, your credit score would help them see how good of a borrower you are – whether or not you know how to repay debt. Credit card transactions definitely help boost your credit score – if you are a responsible payer. So unless you are absolutely sure you can responsibly pay back debts you incurred, it might be better that you do not get a credit card at all.

There are some other ways to build a good credit score aside from credit card transactions, such as getting someone with good credit standing co-sign for a loan. Applying for a secured credit card or being a supplementary card holder for someone else’s account can reflect positively on your score, too. Actually, even paying your utility bills on time have a positive impact on your credit score.

But if you look at it another way, you can still get a job, buy a house, rent a place, and pretty much live normally, given you know how to live within your means, without any credit history whatsoever.

Do I have sufficient savings?

For most households, a savings fund in the amount of about three times your monthly income is considered sufficient to cover emergency expenses and buy time to look for additional funds in case you need to. For emergencies, there are other options available such as personal loans, which, as compared to credit cards, come with lower interest rates and are payable over a reasonable period of time.

Credit card rewards: How much do I need them?

Credit card companies offer different kinds of rewards to card holders in exchange for regular usage, charging a certain amount on the card, and/or paying off on time. These rewards may either come in the form of cashbacks, travel miles, and free merchandise. But if you factor in annual fees, can you be sure that the rewards promised are worth it? If not, apply for a card that has no annual fee requirements. Or maybe get a debit card.

A lot of debit cards now offer rewards points for regular usage as well. This financial instrument is actually worth considering because with a debit card, you will not be forced to spend beyond your means, which is what you might end up doing if you get a credit card and end up mismanaging your finances.

This article is written by, the most comprehensive financial comparison service in Malaysia. Compare credit cards, broadband plan, and others at a competitive price.

*Reproduced with permissions. All rights reserved*

Tuesday, October 29, 2013

Race the dead Singapore 2013 - Singapore's first 5K zombie run

This post has nothing to do with finance or investment. I'm doing this post to showcase the creativity of young people in Singapore. This is for the young and also the young at heart. The run was successfully completed last weekend 26 & 27 Oct 2013 at Sentosa.

An introduction of what Race the dead is all about?
Race the dead is Singapore's first 5km zombie run. Runners will cross obstacles and have zombies at every corner of the race track. This reminds me of the series walking dead which i watch every Saturday on channel 5. When i first saw this series on tv, i thought the story line was really interesting. I do like all these action/thriller themed shows.

There are similar themed movies for example the recent World War Z and the older 28 days later. The storyline was that the whole earth was infected by a virus which turned humans into zombies. The zombies will continue to attack humans and when they get bitten, they will turn into zombies too. There were only a few humans left in the world. They have to survive the virus.

In case you haven't watch World War Z, here's the trailer of it:

Back to Race the dead Singapore. As far as i know, this event was organized by a group of young people in their 20s. I do admire their courage to organize such a race as its not easy to put everything together. From their website, they had Singtel as their main sponsor and other sponsors too. 

This is the official trailer:

So how did the run go? The video below shows the highlights of the race. The make up is really good which made the zombies look really real. The obstacles were quite interesting. 

Watch the video to find out more:

Overall, Singapore has quite a number of creative races this year. Another one that i can recall is the colour race where racers were sprayed different colours during the run. At the end, many of them were painted in different colours.

Race the dead is definitely one of the most creative races ever organized in Singapore.

P.S: This is a side track to my usual heavy finance and investment posts. Hope you enjoyed it! :p

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Sunday, October 27, 2013

How has the STI performed in 2013 so far?

It's already the end of October now. Only 2 more months to the end of this year. So how has the markets performed so far? 2012 was a good year with the STI up about 17%. How about this year so far? A chart tells the whole story

The first arrow shows the STI performance in 2012. The second arrow shows the performance in 2013 so far. The conclusion? The market has been flat. All the gains in the first half of 2013 were wiped out in just one month and till now, the market has been flat. 

My portfolio has been flat too except for the one US stock which i bought that doubled in value. For the SG market, the returns are very minimal except for the average 5%-6% dividends i'm getting. 

Let's recap. The wiped off were mostly due to the fall in REITs. I've blog about the REITs phenomenon where almost all the reits fall at the same time here. This is due to the fact that the Federal reserve may end QE soon and cause interest rates to rise.

I still keep to my believe that interest rates will definitely rise in the future. No matter how long they delay the end of QE, it will still end. It is a matter of time. Property is still hot in Singapore. Reits were also hot in the market. This will end soon. Very soon indeed. Even our minister says property prices will not keep going up. Have you prepared yourself for what is about to happen? 

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Wednesday, October 23, 2013

4 things you should know before investing into bonds

I'm sure all of us have heard of bonds one way or another before. Either from the financial advisors who recommend you to buy a balanced bond fund or the bank personnel who told you that bonds are safe and give you a higher return than a savings deposit.

Before you invest into bonds, you must know the answers to these 4 questions:
1) What is a bond?
2) How does it work?
3) What are the types of bonds and their risk?
4) When is the right time for buying bonds?

What is a bond?
A bond is essentially a debt instrument. Government issue bonds so that they can borrow money from the public. The government is taking a loan from the bond investors. If you invest in that government bond, it means the government owes you money. You are lending money to the government.

How does a bond work?
Some terms that you must know before you invest in bonds.

1) Term to maturity/tenure: This is the number of years before the bond matures.

There are different term to maturity of bonds. They can come in 2 years, 5 years, 10 years 20 years etc. One important thing to know is bond price and yields move in the opposite direction. The yield here represents the market yield which is the current market interest rates. If market interest rates increase, bond prices decrease and vice versa.

Another thing to note is the longer the tenure of the bond, the more volatile it is to interest rates movement. Let me explain this further. Let’s say you buy a 2 year bond at $100 and market interest rate moves up by 1%, your bond price will go down to $90. However, if you buy a 20 year bond at $100 and market interest rate moves up by the same 1% also, your bond price will go down even lower to $70. This calculation is just an example and does not reflect the actual valuation of bonds. This volatility can be proven mathematically and is taught in finance courses in the university. Remember, the longer term the bond, the more volatile it is in response to interest rates.

2) Face Value: This is the money you will get back when the bond reaches maturity

Bonds face value can be priced at $100 and $1000. This is the exact amount you will receive when the bond matures regardless of what price you bought it at. If you bought the bond at $102, you will still receive $100 at maturity. If you bought the bond at $98, you will also receive $100 at maturity. If the current bond price is below the face value, it is selling at a discount. If it is above the face value, it is selling at a premium.

3) Coupons: This is the payment you will receive every year. Coupons are mostly paid semi-annually.

This is similar to dividends from stocks. Coupons are in percentages. They are fixed payments paid to bond holders. The coupon rate will be fixed throughout the bond tenure.

Types of bonds and their risk
We’ve discussed on government bonds which is one of the types of bonds. Another popular bond is corporate bonds. These are bonds issued by companies who want to raise capital. For example if Capitamall wants to build a new shopping centre, it can raise capital through issuing of bonds.

So what are the risk involved for bonds? There are many types of risk. The first one is default risk. This means the government or company which issued the bond goes bankrupt and cannot repay its loan. Therefore, when they default, bond holders will not be able to get back their money. Government bonds are known to be default free meaning that the likelihood of a government going bankrupt is non-existent. However, through the European crisis, we know that Greece almost went bankrupt along with other big countries. Countries defaulting on their debt may happen in the near future. For corporate bonds, there is certainly default risks. A company can go bankrupt any time so do take note of this risk when investing in corporate bonds.

Another risk is exchange rate risk. This applies when you invest in a bond denominated in a foreign currency. For example if you’re living in Singapore and invest in US government bonds, then you are subjected to exchange rate risk. If the US dollar goes down, the money you get back when you sell the bond will be considerably lower.

Finally, there is price risk. Bonds are traded in the market just like stocks. They can be bought and sold in the bond market. In Singapore, you can buy bonds from SGX itself. If you decide to sell the bond before maturity, you may lose money. The bond price may have already dropped in price. If the price has gone up, then it'll be good for you.

When is the right time for buying bonds?
This is an answer we all want to know. Is it a good time to buy bonds now? When should we invest in it? The right way to approach this question is by asking yourself how long are you going to hold the bond for? If you intend to hold it all the way till maturity, then you will get back the guaranteed face value. If not, you'll have to take into consideration the price movement of the bond.

As discussed earlier, bond prices will move down when interest rates rises. If you expect interest rates to rise now, then you should not be investing into bonds. News like the federal reserve will end the QE stimulus soon will cause bond prices to fall significantly due to interest rates rising. This is why i don't recommend investing into bonds at the current moment. Interest rates are at record low and the only way for it to go is up. There is limited downside left for interest rates. When that happens, bond prices will start to fall. This is also applicable if you buy a fund or unit trust that has bonds as one of it components. The fund price will be affected by the bond price.

We've discussed about the 4 things you should know before investing into bonds. I hope it has been beneficial for you and you will be able to make wise decisions on when is a good time to invest in it. With this knowledge, we can certainly avoid unnecessary loses due to our own ignorance. In this case, knowledge is power and ignorance is definitely not bliss.

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Saturday, October 19, 2013

Lower secondary students to learn about financial literacy from next year

Financial education is coming to schools in Singapore!!

From year 2014 onwards, secondary 1 and 2 students will be taught money management skills to help them form the right attitudes towards spending and saving early in life, said Deputy Prime Minister Tharman Shanmugaratnam. -As reported on The Straits Times

This is an encouraging move by our government. MOE has made a bold step to introduce financial literacy classes for our students. I've always thought how good it would be if our education system will have financial education courses. Now it's becoming a reality. Many financially savvy people, including financial bloggers, have over the years step up to write on topics such as financial management and investing etc. There are articles proposing that financial education should be introduced to schools and taught to students at a young age. Introducing this to Secondary 1 and 2 students would be a good age to start.

I'm happy that financial education is finally introduced to our mainstream education system :)

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Thursday, October 17, 2013

What are Singaporeans queuing up for?

Is our country overly populated that everyone is queuing up one way or another? Or is it Singaporeans just love to join in the queue?

Queue for Toto or 4D?

Queue to get tickets for Universal Studios Singapore?

Queue for Taxi?

And even queuing up for MRT

How about queuing for singing bone hello kitty at MacDonald?

Queue for Hawker food?

Queue for Gong Cha bubble tea?

and queue for Lao Ban soya bean curd

How about if you want to invest in stocks do you need to queue? NO. Just have to click buy on your computer screen. 

But people rather queue at banks to invest.

Are you part of the queuing population? Queuing up is part of our lifestyle indeed.

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Sunday, October 13, 2013

Learn how to trade Options

By now, readers of my blog will know that i'm an investor and i invest for the medium to long term. I still do trade short term sometimes but mainly in CFDs only. This post is about options trading. Since i do not really trade options, it'll be more appropriate if you can learn from an options trader in Singapore itself. I've got the chance to know this young guy called Neo Pok Chow. He created a site called Options Rising Star to teach others about options trading.

Below is a excerpt of his blog post on Long Call options:

Long Call
In this post, I’ll be going through what a call is, in greater details. Yes, we are getting technical here. Our feet are just getting wet in this big ocean. So stay close with me alright!

Today, I will be introducing to you something called the “Risk Profile”. Specifically, this is the risk profile of a single long call option(meaning you buy a call).

But first! What’s a risk profile?
A risk profile is a graph that shows you how the position you have on looks like. It presents the risk that you have, all into a graph. It shows you the-

Profit/Loss(P/L), represented by the y-axis(vertical).

Price of Underlying, represented by the x-axis(horizontal).

Profit Potential and Risk to the Downside(Loss), represented by the graph itself.

Breakeven, represented by the intersection between the graph and the x-axis. Breakeven is the point at which your position has no win nor losses.

I am introducing this to you at this early stage so you can get a visual and actually see how the position looks like. This introduction will also open your eyes as to the.......

To read the full post, click here

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Saturday, October 12, 2013

Think your pay is too low?

Just recently, I've had the chance to talk to some of my colleagues and classmates who come from other countries. There must be a reason why they choose to come to Singapore. Here are a few reasons I got from them:

They are from coutries like malaysia, vietnam and Philippines.

1) They think that the SGD currency is stronger and hence ita better to work in Singapore earning SGD.

When they convert back to their local currency, its really quite a lot.

2) They heard about how safe Singapore is.

3) The pay here is definitely higher.

4) It is quite easy to find a job here and get a work permit/pass.

These are the few reasons I found out. I went on to probe futher on how much is the salary in their home country for a degree holder.

For Malaysia, it is about MYR3000. This is about half of what we get in Singapore.

For Philippines,  it is only about S$1000. I can't remember how much it is valued in their local currency.

For Vietnam, this may shock you. It is 5000000VND. How much is it if you convert to SGD? It is only $295/month.

Well, we can say that the things in their country is cheaper. Not like Singapore where everything is expensive. However, the last time I went to Vietnam, I remembered their food prices have gone up quite a lot. It was reported that their inflation rate may exceed 8% in 2013.

In Philippines,  I heard from my colleague that it is very hard to get a job there. There are many university graduates but no jobs created for them.

Many come to Singapore in search for a better future. Mostly for the jobs and higher salary. Maybe Singapore is not so bad after all. But of course, we'll always want improvement. Things can always change for the better. Do you want higher pay and more expensive prices or lower pay and cheaper prices? How about higher pay and cheaper prices which many people wish to have? I think this will only happen in a fantasy world. The economy does not work that way.

Think your pay is too low? Think again. We're far more fortunate in our small island city.

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Thursday, October 10, 2013

The hot topic of National Service (NS) - Why cannot monetize NS?

Recently, there have been numerous discussions on NS. A committee has been formed to strengthen NS and gather feedbacks from the public. As a guy who has served my 2 years NS and still serving as an nsmen for the next few years, I feel I have to give my views on this. There is always an urge to talk about issues like this.

The debate sparked off in the online blogging world and facebook also. It was posted by a blogger called Alvin Lim on his blog The post was on a singaporean who gave up his citizenship and move to London. This interview was done by BBC. This was his exact words from the interview:

I was born and bred in Singapore but moved to the UK when I was 21 and eventually naturalised as a British citizen after seven years here - I am 37 today. I left Singapore because I had no faith in the government there. Singaporean males were discriminated against by the government because of the compulsory national service and many years of reservist obligations afterwards. That is compounded by the fact that the Singapore government is actively wooing skilled migrants to Singapore. Their "foreign talent" programme gives these migrants all kinds of advantages that locals are not entitled to. I gave two years and four months of my life to serve in the army and my reward is to be treated like a second-class citizen. I wasn't prepared to fight the system, so I simply left and settled in the UK instead. Alex Liang, London

The blog post on has garnered over 100000 views in one weekend and has 350 comments as of now. It has been shared on facebook over 8000 times.

I would say most guys will complain about NS in one way or another. How we lag behind others because of the 2 years NS. We would often compare ourselves against girls who have started working and earning much more than our NS allowance. Most girls would have been halfway through their university education when we finish serving the 2 years. Me and my army mates used to think how we're paid less than a bangala construction worker. The things we do in army sometimes are called sai kang which means shit work literally. Cleaning up the store, carrying heavy equipments, doing area cleaning. I think we're doing both the work of a construction worker and of a cleaner but paid much lesser than any of them.

Now, with more foreigners in our workforce, Singaporean men are unhappy also because of our reservist liabilities and RT trainings. All these takes up our time and we're affected in our performance at work. These are just some of the additional responsibilities we have to bear. Sometimes I do feel overloaded as I have to work from 8am-6pm, juggle with my part time studies twice a week attending lessons from 7pm-10pm and still have to be a part time soldier defending the nation. NS for Singaporeans and jobs for foreigners? You must have heard this before.

One slogan throughout the various discussions on NS caught my attention.It is the phrase that we should not monetize NS. The reason given is NS will lose its value if it is monetized. Aren't regulars paid well with big one time incentives when they sign on? So does this mean those who serve NS as regulars will not value NS more than conscripted NSFs who are only paid a small allowance? It seems quite weird to me that we cannot put monetary value on NS when we're in fact doing it already.

It came out yesterday on channel news asia that a proposal was made to let first generation PR serve NS also. It was commented that "we should not let first generation PR serve the same 2 years as Singaporeans as serving ns is a privilege that belongs to Singaporeans only. We should only let PRs serve on a voluntary basis." Singaporeans have to be forced but PRs have a choice? I guess if first generation PRs have to be forced to serve NS also, many will not want to apply for PR anymore.

Anyway, if you think this NS discussion is hot only now, think again. In actual fact it has been widely discussed more than 30 years ago. There is an elderly blogger who was enlisted into army in the late 1960s. These are the exact quote from his blog,

This post was posted back in 2006.

There's an interesting discussion going on about NS and foreign talents at Mr Wang Bakes Good Karma: Rethinking NS - Part 1 Strange that after 35 years, the issues are exactly the same. When I was balloted out and had my NS disrupted and joined the University of Spore in 1971, I was surrounded by mostly Malaysians in the U. (I was in the Engineering Faculty, and thus very few Spore girls). The kind of sentiments, resentment etc. were exactly the same as those expressed by many of Mr Wang's readers. Reminds me of the words of a song, "Some things will never change, that's just the way it is." Anyway, I did not participate in the discussion because I sense the generation gap is too big. Maybe some of you would like to go there join the discussion.

35 years ago its malaysians overcrowding our local universities. 35 years later, it became another country. I don't even have to mention the country and I'm sure you'd already know which country it is.

In his post, he mentioned another blogger called Mr Wang. Mr Wang wrote on some suggestions to improve the sentiments of NS and it was said to have been sent to the defence minister back then. When i read through, i'm surprised that some of the things have indeed changed compared to last time. Let me share it here.

1) Increase NSFs' pay
To my knowledge, i know NSF's pay have been adjusted up a couple of times. The current recruit pay is already more than $400. I do not know the exact figure but it is definitely higher than last time. Are people happy about it? I would say not really because we will compare against the pay in the job market out there. Most NSF are educated and if you're a diploma holder, the starting pay is about $1800. Even if Mindef increases to $1000 it is still low compared to outside. Is there financial loss? Definitely. Let's do the maths. If you earn $1800 as a diploma holder, in 2 years you will earn $43200. The NS pay if on average is $550 for NSF non commanders, you'll get $13200. The loss of potential income is 30k. I think that is a fair bit of money and can be used to pay for university course fees or down payment for housing loans for those who get married. No wonder few Singaporeans can get married and have children early.

2) NS for University Admission
This suggestion was to encourage universities to recognise NSFs achievements in military training as a bonus point for university admission. The argument was that CCAs and other leadership achievements are recognised for admissions. Why not military achievements? I'm not sure if this has been implemented yet but from what i know i think maybe not. The only university I know that recognises NS as work experience is unisim part time courses.

3) Insurance Benefits
It was said that in the event that a NSF dies during training, the compensation to the family member is only a few thousand dollars. It was suggested that SAF should buy life, disability and personal accident insurance for NSFs. This has been done already. We now have the famous Aviva insurance which we're familiar with. The payout is at least $100,000 if a NSF dies during training. However, not exactly SAF buys for us. Its heavily subsidised so NSF pays about $10 plus per month for it.

4) Making NS a Worthwhile Experience
It was suggested to put NSF into vocations that is related to their qualifications so that they get relevant work experience through NS. In this way, they can get higher pay when they go out to work after NS. For my case, i got a vocation related to my diploma. Many of my friends who were in the same course as me ended up as the same vocation as me. I guess Mindef has already taken into consideration this when they put soldiers into different vocations. This is a good thing. However, from my experience, companies outside still don't recognise NS as work experience. Even when my vocation is related to my qualification, i did not get a head start in my career. My job was related to what i learned in NS. I did not get a higher pay than other female employees also. The case that guys will get a higher pay compared to girls because of NS did not apply to me at all. I'm not sure about you?

I'm glad that i've served my 2 years and i would say its a good experience for me. Many good friendships made indeed. However, after 2 years, i'm still subjected to NS duties for another 10 years. Need to pass IPPT every year. Need to notify for overseas trip. Go for reservist once a year. Report for ops manning once in awhile. Most guys would agree that IPPT is the killer. Cannot pass it then have to go for 20 RT trainings. I heard during reservist that the passing rate for IPPT is only 50%. You'll know from the crowded RT sessions every week.

The government is trying to recognise nsmen efforts currently. We've received NS45 vouchers, payments to cpf account at different stages of ns cycle etc. NS will still be here for as long as we live. The same complains will still surface out in every generations. What I know is our NS life is much better than those who've enlisted in the early days. What we hate is the regimentation and the feeling of having to be forced to do things we don't like. Being forced is never a good feeling. No matter how much it has improved, regimentation is still there. I have friends who are being called up for reservist at a short notice. Sometimes only 2 weeks notice and they have to cancel their pre-planned overseas trip without any refund. So far no such incidents for me as i get my notifications of call ups 6 months ahead. Some units may have lapses in their system. 

Kids become rebellious and leave home when they are being forced too much. Singaporeans leave the country because they are being forced to serve ns. There will never be the love of a home with regimentation being imposed. This is why Singaporeans feel less belonged in this country. The Singapore spirit is slowly fading away......

I hope the strengthen ns review ongoing now can address these issues to their best effort. They should look at the online feedbacks too. Most people express their true feelings on the online world.

Tuesday, October 8, 2013

How MAS conducts its monetary policy in Singapore?


Central banks around the world use monetary policy to gear the domestic economy into a certain direction. Monetary policy helps a country to combat inflationary pressures and also increase growth in the economy. Monetary policy is therefore defined as the action of a central bank, that determines the rate and growth of the money supply which in turn affects the interest rates.

Many countries in the world, including United States and China, adopt an interest rate policy where central banks increase or decrease interest rates or change the amount of minimum bank reserve requirement rate.
However, in the case of Singapore, its monetary policy stance is different from that of other major economies around the world. This has given Singapore the name of an: “unique monetary policy system”

Singapore’s Monetary Policy

Before we discuss on the recent direction of monetary policy in Singapore, let’s look at how Singapore manages its monetary policy to get a better understanding. In simple terms, Singapore adopts an exchange rate policy instead of an interest rate policy. This has been the case since 1981. The primarily objective of this policy is to maintain price stability and sustainable economic growth.

There are a few key features of the Singapore’s exchange rate policy:

Trade-weighted exchange rate

Firstly, the value of SGD has to be measured against something. Rather than using one single currency as a benchmark like what Hong Kong is doing, the MAS uses a basket of currencies of our major trading partners. It is trade weighted such that the currencies of our larger trading partners’ bears more weight and make up a more integral part of the index. This is reviewed periodically and the weight may be changed as out trade pattern changes. This means the SGD is measured against a basket of currencies and not one single currency.

Managed float regime and the S$NEER

Secondly, unlike most countries which adopt either a float or fixed exchange rate regime, Singapore’s policy is a hybrid of both. The Singapore dollar (SGD) is allowed to float freely, and the MAS will monitor the strength of the currency based on the S$NEER. The S$NEER is the Singapore Dollar Nominal Effective Exchange Rate which comprises of a basket of currencies as discussed earlier.

Every year in April and October, the Monetary Authority of Singapore will release a statement on the current economic trend in Singapore and the direction of its monetary policy. This is released on a bi-monthly basis. In the statement report, MAS will indicate its action on the S$NEER policy band.

MAS focus on three aspects of the band
a) The slope of the band
b) The width of the band
c) The level the band is centred

Within the band, the SGD is subjected to day to day fluctuations just like any other currency. Businesses from overseas can buy or sell SGD to pay local companies for goods required. Institutions can buy or sell the currency to hedge against future movements. Speculators and traders can trade it freely in the Forex market. This freedom is essential for an open economy like ours to flourish.

However, once the SGD is deemed to be trading beyond the band, MAS will step in to buy or sell SGD to maintain its trajectory within the S$NEER band.  What MAS is doing is essentially modulating the strength of the SGD against the $SNEER.

The band prevents the currency from becoming too strong, making exports more expensive to foreign countries or too weak, which will lead to decreasing purchasing power in the domestic country. The width of the band determines how much volatility or movement the SGD can manoeuvre in. By narrowing the band, the SGD will have less room to manoeuvre before MAS intervenes.

The slope of the band gives an indication of how aggressive the MAS want its policy to be over the next six months. By increasing the slope of the band, SGD can appreciate at a faster pace.

Why is Singapore different? Neither fixed nor float (Managed Float)

Singapore is a small and open economy. If the currency were to float freely, MAS would not have the flexibility to deal with shocks and thus not able to maintain the purchasing power of the SGD. A floating system would cause the SGD to be too volatile in the short run leading to undesirable consequences.
If we have a fixed currency regime, the SGD will be pegged to a single foreign currency. This has consequences with it as the business cycle of both economies may be different. For example in the case of Hong Kong which was peg to the USD, they experienced an asset price bubble in the 1990s when its economy was growing rapidly but there was a economic slowdown in the US leading to lower interest rates.
A fixed exchange rate would not allow the MAS to adjust the value of the SGD to counter shocks from abroad. During the Asian financial crisis, regional currencies depreciated sharply against the USD. The SGD depreciated against the USD also but by much lesser. In fact, the SGD appreciated moderately in trade weighted terms as MAS had the flexibility to allow the NEER to rise above its policy band.

Exchange rate as monetary policy
In a monograph published by the MAS in 2001 titled Singapore’s Exchange Rate policy, the central bank recognizes that in order to manage the currency, it will have to relinquish control over the interest rates of the country.

“The choice of exchange rates as the immediate target of monetary policy implies that MAS has given up control over domestic interest rates (and money supply). In the context of free capital movement, interest rates are largely determined by foreign interest rates and investor expectations of the future movement of the Singapore dollar.” (MAS – Singapore’s Exchange Rate policy 2001, pp.2)

This exchange rate policy has been proven effective over the years. The SGD has appreciated against its major trading partners currencies. This indicates a strong economy with high productivity growth and high savings rate. (MAS – Singapore’s Exchange Rate policy 2001, pp.3)

Comparing the interest rates of the US and Singapore, Singapore’s domestic interbank rate have been relatively lower than that of the US interest rates since the 1980s (as shown in chart 1 and 2 below) reflecting market expectations of an appreciation of the S$.

Chart 1: Singapore Interbank Rate

Chart 2: United States Interest Rates

In fact, a study by MAS indicates that exchange rate is the most effective way to keep inflation low. It was shown that exchange rate has a greater leverage effect than interest rates on the Singapore economy. Therefore, the appreciation of the SGD has a greater impact on GDP, exports and CPI as compared to interest rates.

Singapore’s Monetary Policy Direction

After discussing on how Singapore’s monetary policy is conducted, we now have a better understanding of how MAS governs its policy. We can now look at the recent developments in the Singapore economy and how MAS has implemented its policy with regards to the economic conditions in 2011 and 2012. Has the policy being implemented been effective in the recent past few years? Let’s discuss this in detail

As we know, the main objective of the central bank policy is to maintain price stability and sustainable growth. In recent years, many citizens in Singapore have been voicing concerns about higher cost of living especially on transportation and housing cost.

Economic conditions in Singapore

2011 was a tough year for the global economy. The debt crisis in Europe and the fear of US not being able to raise its debt ceiling caused a loss of confidence in the markets. Major stock market indices declined. The straits times index (STI) also declined from a high of 3300 to a low of 2520 in October 2011.

Singapore’s purchasing managers index (PMI), also declined to 49.2. The PMI is an indicator of the economic health of the manufacturing sector. A reading of more than 50 indicates an expansion while a reading below 50 indicates a contraction. (Cited: In this case, Singapore’s export was badly affected by the slow growth in US and the crisis in Europe as most of our exports are to that region.

To regain confidence back into the economy, the US Federal Reserve launched 3 rounds of quantitative easing (QE) as seen in the timeline below. This will drive interest rates down in the US. As interest rates go down, many people could borrow more money easily resulting in an increase in spending causing prices to go up. Especially in many Asian countries including Singapore, hot money flow from the US increased the risk of inflation.

With the low interest rates environment globally, Singapore’s 3 month interbank rate also went to a low of below 0.5%. Liquidity in Singapore banks increased as money flowed in from abroad. Loans were easy to secure and coupled with low interest rates, inflation started to climb.

Forecasting a higher inflation ahead, MAS increased the slope of the S$NEER policy band in 2011. By increasing the slope of the S$NEER policy band, the Sing Dollar is able to appreciate at a faster pace. The appreciation of the S$ dollar will make it more expensive for foreigners to buy Singapore’s assets and at the same time increase export prices thus slowing down the economy and bringing down inflation.

MAS Monetary policy direction 2012

April 2012

Over the last six months, the S$NEER was trading along the lower half of the band. As seen in the diagram below, the drop in the S$NEER towards the end of 2011 was due to the uncertainty in the global economy. It has since appreciated from January 2012 as fear of a global recession subsides. The economy started to recover in 2012.

The IMF and ECB have implemented many measures to contain the debt crisis in the Euro Zone. Bailout packages have been handed out to prevent the troubled European countries from defaulting. In the US, policy makers have put in effort to create jobs and business sentiments have improved. Japan has since slowly recovered from the earthquake and trade disruptions have been restored.

With the improved sentiments and most of the risks being contained, Singapore’s economy expanded 9.9% in Q1 2012 as compared to the contraction of 2.5% in the last quarter of 2011. This improvement in the global economy was somewhat unexpected.

As the economic conditions improved, core inflationary pressures persisted. MAS core inflation continued to rise from 2.4% in Q4 2011 to 3.2%. This was mainly due to higher wage costs causing the increase in prices passed down to consumers. Meanwhile, CPI headline inflation moderated from 5.5% in Q4 2011 to 4.7%. This decrease was due to the smaller increase in COE premiums.

With inflation continue to be high and the global economy recovering, MAS has decided to increase the slope of the policy band slightly with no change to the level it is centred. MAS will also narrow the width of the policy band

October 2012

The S$NEER has appreciated to the upper side of the policy band as the uncertainty in US and Europe gradually subsides.

In Singapore, growth slowed in Q3 of 2012 with GDP declining by 1.5% as compared to the marginal growth of 0.2% in Q2 2012. Exports continue to take the hit as manufacturing continue to slump. This is partly due to the austerity measures being imposed on European countries. However, these austerity measures have helped to reduce the risks of a severe global economic recession if the Euro zone were to breakdown.

Amid the uncertainty and the low economic growth in US and Europe, MAS core inflation averaged 2.3% compared to 3.1% in Q1 2012. CPI All-Items inflation also moderated from 5.3% in Q2 2012 to 3.9%.
With slower growth expected and inflation moderating, MAS has decided to maintain its policy of a modest and gradual appreciation of the S$NEER policy band. There will be no change to the slope, width and the level it is centred.

Has MAS policy been effective?
Let’s look at the overview of inflation and GDP growth rate in Singapore for the past 3 years.

Inflation rate peaked in later half of 2011 and has since moderated downwards to around the 4% level. It is currently at a low of 2-3%. The S$ appreciation has helped to maintain price stability amid hot money inflows and also low interest rates globally.

However, Singapore’s GDP growth rate has declined from 2010 due to uncertainty in the global economic conditions. This proved to be a challenge to MAS policy as the appreciation of the S$ may continue to stagnate growth in the Singapore’s economy or even possibly cause Singapore to go into a recession.

MAS other policy tools

Besides using exchange rate as monetary policy to stabilize the economy, MAS has other tools also. One such tool is restricting the loan to value percentage and tenure of the loan. As discussed earlier, housing and private transportation prices are the two main contributors to the high inflation in Singapore. If these two components can be lowered, inflation will go down to more sustainable levels. MAS have implemented measures to restrict loans on housing and cars so as to further bring down the inflation level.

Two such examples are discussed below:
In 2011, a 50 year mortgage loan was introduced by one of the big banks in Singapore. MAS stepped in to restrict the maximum loan tenure to 35 years as long tenure loans will fuel the increase in property prices. This was also done to ensure prudent lending in case of an increase in interest rates that may lead to adverse effects.

In February 2012, MAS stepped in to restrict the maximum loan to value (LTV) of cars to 50%. In addition, the maximum loan tenure will also be capped at 5 years. After this announcement, certificate of entitlement (COE) prices decreased the following month.

The past 3 years has been a challenge to MAS policy makers as Singapore faced a unique phenomenon called stagflation. With relatively higher inflation and slower growth at the same time, any appreciation or depreciation of the S$ will create negative effects in the economy. MAS has therefore maintained a neutral stance in its latest policy statement in April 2013 with no change to its S$NEER policy band.
In Singapore, consumers are still feeling the higher costs of living pressures and increasingly higher cost in housing prices. The future ahead is challenging to the government as well as to the central bank. Singapore will continue to experience slower growth in 2013 as various policies are already in place to reduce the price level in the economy. Once inflation is more sustainable, growth in the economy can be at a healthier level.
The latest cooling measures to restrict loans for cars and curbs on the property market will bring down the inflation level in Singapore as these two categories contribute significantly to the CPI. This will make the Singapore economy more sustainable and MAS policies more effective in the long run.

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Sunday, October 6, 2013

Is investing in unit trust a good idea?

Many people say they invest their money. When i ask most of them, they would say they have investments in bank products, unit trust or investment linked policies. When i probe further and ask why did they invest in it, they would say because my financial advisor recommended it to me. Or they would say that guy in the bank asked me to buy it saying the returns are higher.

What is a common sales pitch from insurance agents?

You would be familiar with this phrase:

"Why put your money in the bank when you can earn a higher return if you invest in this product?"

Sounds familiar? I've heard it countless of times.

There is nothing wrong with this sales pitch. The problem is that most people do not have enough knowledge of a product before putting their money in it. They choose to trust the professional advise from the advisers. Many people bought into Lehman brothers mini bonds and investment advisers told everyone that bonds are safe so you don't have to worry. But not many people know the mini bonds are derivatives of sub prime mortgages which is of very high risk. Not all bonds are safe. Especially corporate bonds issued by investment banks or companies have default risks. This means that once they get into trouble, most likely you will not be able to get your money back.

This is where the problem lies. I've heard my friends cancel their insurance policies because they could not afford it any longer. They committed too much of their money to paying for insurance policies. This would not have happened if they know how much of their income they should allocate for insurance? I would say 10% of your income is a fair value.

Do you buy unit trust or funds from your advisers? How many of them have profits and how many have losses? If you buy from advisers, the sales charges are generally high at 2-3%. This is an important point to take note as you are already -3% in your fund at the point you bought it. If yours is a balanced fund that has an estimated annual return of 2-3%, then at the end of that year you would have only broke even. Balanced fund consist of bonds and stocks. You are investing in both products at the same time.

The question is do you know what is a bond and what are stocks? How do they work? What causes a bond price to go up or down? These are the questions that you should ask your adviser. If he/she can't give you a satisfactory answer, then don't invest in it.

Personally, i do not invest in unit trust. Most unit trust funds do not outperform the market. When we say outperform the market, we mean the stock market index. Therefore, we should at least benchmark our investment returns against the performance of the Straits Times Index(STI) if you're in Singapore. The STI has an annualised return of about 9% for the past 10 years. If your investment has not generated this kind of return, you're better off just investing in the index itself. Read Investing Basics - Low Cost Index Fund investing (Passive Investing) to know more about Philips securities share builder plan to invest in STI ETF and check out POSB invest saver. Both offer you the chance to invest in the index.

When investing, only invest in something you know. If you are clueless about it, then seek advise and find out more. Do not commit into anything unless after careful considerations. Some products have lock in periods and will have penalty if you terminate it early. Having the knowledge will save you from unnecessary problems in the future.

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Friday, October 4, 2013

Singapore Millionaires park their cars in their living rooms

This is an amazing video of how Singapore Millionaires can park their cars in their living room. The condominium is right at the heart of orchard which is called Hamilton Scotts.

Well, you may not be able to afford one apartment even if you have 1 Million dollars. Last checked the price of one single apartment at 2756 sqft is 9 Million dollars. WOW!! Will you live like this if you're a millionaire?

Tuesday, October 1, 2013

Understanding Financial Statements (Part 2) - The Balance Sheet

The balance sheet records the companies assets, liabilities and equity. Assets is what the company owns and liabilities are what it owes. Equity represents the value of money that shareholders have invested in the company and it is calculated by taking Assets minus Liabilities.

The balance sheet is important in our analysis of a company as it reflects the financial position of a company. The levels of debt and the amount of cash the company has can be seen in the balance sheet. Let's go through the various entries in the balance sheet one by one.

The Balance Sheet

You can access a sample of the balance sheet here. This is Singtel's balance sheet which is the company we used to analyse the income statement in part 1 before.

Current Assets
The first portion of the balance sheet list the current assets. These assets are likely to be used up or converted into cash within one business cycle.

Below shows the entries listed as current assets:

Cash and Equivalents
This doesn't just refer to real cash on hand that the company puts in its safe deposits. It includes money market funds which can be liquidated quickly and short term investments like bonds. These are investment that are less than a year.

Accounts Receivables
These are payments the company expects to receive which it hasn't collected yet. In the previous part 1, we discussed on sales which was one of the entries in the income statement. Companies can record as sales even when payment has not been received. Check if accounts receivables is rising faster than sales?  If it is, it may mean that the company is letting more customers take up loan to buy their products or services. There may be a chance that the payments will not be received in full.

Inventory includes raw materials for goods, partially finished products and also finished products that have not been sold. In essence, it includes all the goods from pre production to post production. This is especially important for manufacturing and retail firms. If there are too many goods stored at the warehouse, it may be difficult to sell when recession comes. The firm will suffer heavy a heavy loss as a result. We have to see what goods the company produce. For construction firms, raw materials like steel and aluminium can be kept for a long time and sold for cash in the future. However, for retail firms, the clothing that is stored in the warehouse may not be able to sell at a high price as the fashion trend has already changed after some time.

Non Current Assets
Next is the non current assets. Sometimes they are called fixed assets. These are long term assets which is not expected to be converted to cash within one year or one reporting period.

Below shows the entries in the non current asset rows:

Property, Plant and Equipment
These are the assets which the firms has which includes buildings, factories, furnitures, equipment etc.

Long term Investments
These are investment in longer term bonds or stocks of other companies. The value recorded might worth less or more than the actual market value. Look into the notes to financial statements and see what investments are in this account. After knowing what are the exact investments, you can then decide how to view the amount recorded.

Goodwill/Intangible Assets
Goodwill is used in mergers and acquisitions. If a company pays more than the book value to acquire another company, the difference is recorded as goodwill. This amount can change significantly at times. It does not reflect the actual physical assets in the firm.

Current Liabilities
Liabilities are what the company owes. Current liabilities are what the company is expected to pay within a year.

Below shows the entries under current liabilities:

Accounts Payable
These are what the company owes to others which are expected to be paid within a year.

Short Term Borrowings
These are loans the company take which have to be repaid within a year. It could be short term loans from the bank. It could also be long term debt which is due within the next year.

Non Current Liabilities
Non Current liabilities are debts which are owed for more than a year. There are different entries inside but the most important one is long term debt. These are money the company has borrowed usually by issuing bonds or sometimes from a bank.

Stockholder's Equity
It is also called common equity as recorded in the balance sheet. This is the total assets minus the total liabilities. It represents part of the company owned by shareholders.

Retained Earnings
This is the most important in the stockholder's equity entry. This is the amount of capital the company has generated over its lifetime, minus dividends and stock buybacks. Each year the company makes a profit and doesn't pay it all out in dividends, retained earnings will increase. If a company has lost money overtime, retained earnings can turn negative and renamed as accumulated deficit on the balance sheet.

Why is the balance sheet important?
Companies which have lots of cash and little debt can be more resilient during a crisis than companies who have little cash. Do watch out for companies who have high levels of debt as they can crumble down in an instant when trouble arises.

When looking at current assets and current liabilities, it is generally better for companies who have more current assets than current liabilities. Current liabilities are what a company needs to repay within a year. If there is not enough current assets to cover the amount of liabilities, a company may not be able to continue its operations in the next financial year. This is also known as the current ratio which is current assets divided by current liabilities. A current ratio of more than 1 indicates that the company is healthy. A value of less than 1 is not a good sign and most of the time auditors will flag it out.

We have completed the 2nd of the 3 financial statements found in a company's financial report. In the first part, the income statement shows us how much money the company has made. In the balance sheet, it shows us what is the value of the company in terms of its equity. In the last and final statement, which is the cashflow statement, it records the cash that is flowing in the company. It is a more accurate statement than the income statement as it removes the unnecessary non cash items like depreciation and records the real cash items. We'll look into it in the next part.

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