Power of compounding and consistent saving

Never underestimate the power of consistent saving and compounding. 1k a month with 5 percent return for 20 years yields close to 400K versus 240K of  capital investment.
400k gives you 20k annual income which is 1.5k per mth based on 5 percent return.
Together with CPF life which gives around 2k per mth, monthly income will be 3.5k. By the time we retired, we should aim to be debt free. Hence 3.5k is purely for our own expenses for food, clothing utilities etc which appears to be adequate based on my personal experience. How much you can eat per mth? You don’t buy clothes every month also? Public bus and mrt is relatively cheap. There will be adequate leftover for that yearly trip to overseas.

All the figures are nominal, if we assume 3 percent inflation over 25 years, our spending power will be halved. So the retirement income figures above will be essentially halved as well.

What does this means? Start saving now and aim to save more to Ensure adequate retirement income. Minimise debt and refrain from chasing the latest car or condo. Live below your means or at least don’t spend beyond your means. If you can save at least 1k cash per month, you can achieve the basic. Retirement life style. If u save more, you can do more.

Please plan early.... don’t forget hospital insurance such as MediShield life enhance coverage and life insurance policies. If you are the Passive person who is not interested in investing, a couple of endowment funds will help. They give around 3 percent return . So you need to save even more.

Unit Trust Portfolio Construction and Selection Philosophy

Unfortunately Singapore don’t have a good ETF investing platform that support monthly investment programme. The best alternative we have is invest via unit trust though we understand that majority of fund managers fail to beat the index over Long term due to higher management cost and lack of consistency in investment performance.
Hence we aim to minimise the performance GAP between unit trust and index fund via the following selection philosophy:
a) Long term track record
b) Low expense ratio than its peers
c) Beating index since inception and on a 3, 5, and 10 years basis. One year and shorter duration Performance poorer than index is acceptable. Historical performance is for reference and we know it’s not indicative of future performance l
d) Preferably no star manager and management by a team so performance of fund is not due to any individual. Returns will be more sustainable and consistent.

In terms of portfolio construction, Simple and fuss free is key. Core funds include
a) global equity
b) global bond
c) Asian equities

Weightage to be based on risk appetite and current equity market valuation. Global equity is made up of 50 percent us stocks which is overvalued hence weightage is Low to minimise risk. Overall we are 50 percent in bonds and around 15 percent in global equity with remaining 35 percent in Asian and emerging market equity which is relatively lower in valuatiOn. Together with DCA and periodic portfolio rebalancing to sell winners and buy losers, we aim to get a relatively less volatile returns of 4-5 percent on a Long term duration. This is based on long term equity return of 7 percent and bond return of 3 percent.

10 percent of the portfolio will also be reserved for tactical sector exposure which we felt price has been beaten up badly. For example, oil and energy and turkey equities. We will initiate small position via DCA and reduce risk due to poor market entry timing.

With current market conditions, we believe such conservative approach will give us better sleep at nights knowing that we will not be subjected to individual stock risk and instead will only be subjected to general market risk as a result of general economic performance or geopolitical issues. With this mechanical approach, we aim to remove and if not, reduce the amount of emotions in the investing operation to minimise the mistakes we made when the market corrects. Last thing you want is to sell Low when the market corrects and later miss out on the subsequent recovery.

1977 Berkshire Hathaway Letter Key takeaway

4 key notes in order of importance before making an investment in a business
1) We understand the business. Everyday business around us like grocery, telco, utilities etc. Improve with more reading or individual industry research to widen circle of competence
2) Favourable Long term prospects. No major headwinds or risk of being disrupted. GME is one mistake that violate this principle. Even I am not buying physical copies of games. Trend is internet download. This is one area which we can identify easily by reading more but at the same time environment changes so fast that even favourable prospects will worsen. Such as retail and shale oil etc. Safer to go with defensive business which is not cyclical.
3) Competent and honest management. Hard to gauge. Need to read more into company and management history
4) At attractive price. Long term returns are dependent on entry price (dividend or earning yields) and Long term growth rate. If purchased at a Low yield, need to depend on high growth rate to have high returns

To quote Ben Graham, stock is best seen from the perspective of a perpetual bond with growth like characteristics and price volatility. Future returns are strongly dependent on purchased yield .

Adopting these 4 criteria will help an investor stay calm during market turmoil and not sell out at price weakness and hopefully give the investor courage to buy more at the discounted price with the knowledge that the fundamentals of the company is still sound.

Quotes

Meaningful quotes gathered over the years. This post is LIVE and ON-GOING......

1. We like to work with people that we like, trust and admire : Buffet
2. I aspire to inspire before I expire: UNKNOWN
3. You can have anything but you can't have everything: UNKNOWN
4. You can get the timing right. You can get the price right. But you cannot get both the timing and price right easily: UNKNOWN
5. Price is what you pay. Value is what you get: Graham
6. Market is a voting machine in the short term but is a weighing machine in the long term
7. Always surround yourself with smart people if you are a leader. If as a leader, you are the smartest in the room, something is not right: UNKNOWN
8. Always look at the downside, the upside will take care of itself: UNKNOWN
9. Buying at the right price means half the battle won: GZG
10. Have a philosophy of investment and try to follow it: Schloss
11. If you are honest, hardworking, reasonably intelligent and have good common sense, you can do well in the investment field as long as you are not too greedy and don't get too emotional when things go against you: Schloss
12. https://www.inspiringquotes.us/author/5561-walter-schloss
13. 
    

Appropriate interest coverage level

Intelligent investor chapter 6 by Graham indicates that interest coverage for a well run and safe railroad company should be at least 5x based on earnings before tax. We can take reference and extend the same argument  to other defensive companies which generate stable cash flows and are not cyclical in nature. For example, REITs utilities supermarket transportation etc.
Companies that does not meet such criteria shall look deeper into their balance sheet and cash flow status history and confirm is it a once off or sustained situation into the future. If that is the case, there is great solvency and liquidity risk in terms of servicing the debts.
We should stay clear from such companies no matter how attractive the valuation is.

Investing philosophy: Understand where we are at the market cycle

Recently heard a podcast interviewing Oaktree capital investment chief Howard Marks who wrote a book about market cycle. It is important to know where we stand at current market. The easy money has been made in 2009. Currently we are near end of cycle where making money is tougher with rich valuation at various market. Upside is minimal and downside is plenty. Expected forward returns will be lower than historical average. It is important to manage risk at this point. Opportunity cost is market continue to rise but downside risk is protected and allow us to stay in the game should the market corrected in near or distant future.

Also value investing is suffering a Long run of underperformance compared to growth investing. It maybe demoralizing to see your strategy not performing, but it is important to maintain a consistent strategy and not flip to another strategy that chase the return. A System will not work in all market cycle. Key is to trust ur system that is backed by proven results.