I like how Singlife uses the community to spread information. It is definitely a cheap way to spend money. It gives me content to publish while it provides Singlife with multiple arms to disseminate information. However, there isn’t any referral scheme with this re-open. Instead, I guess that to stay sustainable, they have to reduce the interest rates for the first S$10k.
I received the email from their Marketing Communications team and it reads:
The Central Banks continue to keep interest rates low, Singlife has introduced a new way to be rewarded for spending and investing, earning up to 2.0% p.a. return on the first S$10,000 through the following campaigns:
The Save, Spend, Earn Campaign and,
The Grow 0.5% p.a. Bonus Return Campaign.
The catch here is up to 2.0% p.a. return. Beginning 1 July 2021, the Singlife Account will offer up to 2.0% p.a. return on the first S$10,000. The base crediting rates will be revised to 1.0% p.a. on the first S$10,000 and 0.5% p.a. return on the next S$90,000, customers will still have the opportunity to enjoy up to 1.0% p.a. bonus return.
So, sustainability of the business is a way forward. I’ll say that the interest rate has been semi-nerfed for valid reasons. On top of that, you can still gain 0.5% more by spending and another 0.5% if you invest with GROW. Personally, I wouldn’t put money with GROW but I will spend to make the interest up to 1.5% for the first S$10k.
This is not a sponsored post. This is purely my own opinion. If you like what you are seeing, do remember to check they out and do your diligence. There is no one size fits all investment strategy.
So I have been busy recently so I missed January 2021 performance update. There are just so many things to keep up with and with the pandemic still ongoing. There are just simply too many changes. At the same time working from home seems rather mundane these days. Humans as social creatures and so eventually, we cannot stay and work individually over a prolonged period of time. Plus, there are just that many telecommunications that you can make.
December through January 2021 has been interesting filled with US elections and more printing of money. In the market news, no matter the situation, a systematic approach about investing is quite important. Month on month, diversification has been really important. Slowly but surely, I’m actually feeling that Endowus and my investment goals do align pretty nicely on the investment portion.
The newly launched Cash Smart looks pretty decent. I might take a crack at that to put in some money consistently. Plus wow, if you use my referral code, you will get an addition $100 that will be added to your portion when you invest S$10k worth. So, it means referral bonus $20 for you and me (Check out my referral link at Endowus Referral Link + additional $100 for you. Only applicable for new customers of Endowus. The $100 is also available for you in the promotional LionGlobal All Seasons Fund (Growth) units after a 90 days holding period. Great news though for new investors.
Overall, portfolio is up 15.25% since May 2020 in SGD. As usual, in USD terms, due to no FX impact as the portfolio is USD ETFs, the performance will definitely be better especially when USD is already up 3-4% versus the SGD since start of the year in 2021. Of course, the reference will be SGD since I use SGD. This is the SRS/Cash portfolio which consists of my favourite Dimension Funds in a 40% bonds/60% equity. Overall from May 2020 to 9 Mar 2021, it is a 15% increase in absolute terms – Fantastic. From Jan 2021 to 9 Mar 2021, the fund was stable with just roughly 2%+ increase in portfolio. Not too bad, knowing markets were rather choppy and moving more negative on most days so far.
In Terms of YTD returns in 2021, I’m looking at 2.34%. I’m really like what I am seeing here. Definitely topping up if there are any corrections (By definition a correction is more than 10% drop in a single day)
For the CPF portfolio, it is also doing pretty well though not as well as my Dimension Fund portfolio. I’m still looking at 10.59% returns from May 2020 through to 9 Mar 2021.
In Terms of YTD returns in 2021, I’m looking at 0.29%. This is quite expected so not much of a surprise. I have no requirement to login daily to view my portfolio performance. Just a monthly review will be sufficient.
On a side note, the cash management accounts have started to report a decline. This is also expected since interest rate environment is here to stay for the long term.
Also, I would be looking at the new Smart Fund DIY portfolio which looks really interesting. I would definitely be looking this up as interest rates are still pretty low and I got some cash lying around.
Like every month, the pros once more:
Endowus is the first and only robo-advisor to be approved by the CPF board.
100% trailer fees back to the consumer, not the fund management fee. This is really one of a kind I’ve seen so far.
They do have a decent team who makes sense when introducing their platform.
I believe all retail investor should try them out because of how they are trying to disrupt investing and make investing work for everyone.
Again, I will shamelessly thank all of you in advance for using my referral code.
Investing especially in spot market is a tough business. Most people cannot accept fluctuations in their portfolio. Autowealth is yet another solution for me. Just that this time around, this is for my kid to start out her investment journey when she can. Teaching financial literacy is something I would recommend to anyone.
Summary on my review on Autowealth:
(a) try out different more robo advisors to understand more about them and how they invest and
(b) segregate this fund for any other purpose other than the kid’s investment journey.
My take about the investing journey has been the same since day one. Don’t sweat the small things, the costs of robo are so low. We are talking about a 15-20 year horizon here so heck those low costs. You need to pay them to keep their lights running. For companies like Endowus and StashAway, these guys have the experience and passion and these translate into actions. I am satisfied on how they are prudent and still maintain the low fees.
In my previous performance to compare the performance, I discussed about the historical S&P 500 chart for the last 50 and 100 years. Markets will go up and each time it drops, just pick some up and let the robots do the work on balancing and re-balancing. As long as fees remains low, the portfolio will grow over time and over a longer period. It should remain in the black based on some backtesting.
Looking at the portfolio again in November, it still looks pretty nice ahead of the 15-20 years horizon. This is a portfolio which is set at roughly 40% equities and 60% bonds. The investment vehicles will be through ETFs. It does look like it can withstand long term peaks and troughs. What i really like is that i can switch between the SGD and USD currency performance portfolio as well as the impact on USD SGD forex on performance. I wouldn’t say this does as well as the portfolios but to be fair, markets were already slightly upwards and I would like to deploy funds out into the market in tranches over time.
As compared to October 2020, +5.66% absolute is decent in my view (that is +2.66% comparing to October) and this is as at 11 Dec 2020. If markets drop, the rule is to fund the account more. Do note that all of these will have USD exposure. Time versus DIY – it is really about what is important. I usually will want to see the ultimate end goal whenever I start anything.
For this month, I also tried to look at the impact of FX and without the weakening USD, performance in USD is actually 8.56% year to date. That is on course to double digits returns once more.
The impact of the USD FX exchange is actually affecting the performance by -3.1%. These FX risks are part and parcel of investing unless I just intend to invest into the Singapore Markets. However, it is just too boring to do so.
This is not a sponsored post. This is purely my own opinion after using their service and/or products. If you like what you are seeing, do remember to check they out and do your diligence. There is no one size fits all investment strategy.
If you like what I am sharing or if it resonates with you, do use my referral codes here at https://lifejourney.blog/contact/ for the services.
The pictures were taken from Auto Wealth website for this article. If you need a referral code, drop me a message and you can indicate my full name during registration. From there, both of us will get $20 each to supplement the fees.
The sound of Everest Gold is not exactly sound and safe at first notice but they are a new digital trading platform. You can trade gold digitally now, akin to a stock brokerage account. There are a number of articles out there from bloggers and online news that talks about Everest Gold.
Trying it out
To try it out, you do not need to put in any money. All you need is to use my referral code and your will be awarded 200k points which is approximately USD 20. These rewards can be used to subscribe for gold during their events.
No need for any transactions. Just make sure your details, bank accounts and everything is verified.
Referral is limited. Not sure if they will be bringing this back but in Oct 2020, the fee was 300k points which is approximately USD 40.
Use this link to find out more if you are interested at Everest Gold or use this referral code when you decide to sign up: TZLLE. Both of us will get more rewards for subscription.
A little dig up of the company. Everest Gold is a Singapore-based fintech gold trading form. The creation of such a service is to digitise gold trading and makes it easy for both beginner and expert investors. It is suitable for anyone who have interest in gold trading. I personally have also tested their customer service team and response is pretty decent.
Everest Gold uses 999.9 pure investment grade gold. 1kg bard are from a refiner in switzerland. You can also download them from an app and investing starts from 1 gram. From what it seems, anyone can trade and liquidate almost immediately. Physical gold assets can also be collected from their depositories by submission of a request in-app.
I do use this service and by signing up as a referrer, both you and I will get some benefits.
As with all investments, there are risks involved so please do your own diligence.
In my earlier posts, I talked about the need for an emergency fund and other than Singlife, which caps the 2.5% p.a. for the first S$10k. No other financial institutions have been able to match this super high interest yield for a pretty risk free approach .(Given that Singlife is under SDIC so the first S$75k is covered and safe) In recent months, we have seen some insurtech or alternative ways to put your money and entice people with relatively decent interest rates for your cash/emergency funds.
To recap, your emergency funds should have some level of liquidity so that you can utilise when necessary and not be penalised for doing so. This is by far my personal first rule. It is extremely interesting and exciting to see what might happen to the digital banking sector where there is a mixed bag of consortium lining up to be licensed to offer financial services. It looks like it is going to be something similar to what these insurtech is offering or even more innovation. (e.g. bundled products, higher interest rates or even offering curated financial products, robo-advisors and payment channels) It does seems exciting to see what new innovation these services can offer and retail customers will benefit from this digital drive.
Dash Easy Earn is a collaborative work between Dash (Singtel payment service) and Easy Earn (Tiq – An Insurance arm of Etiqa and a subsidiary of Maybank)
Let’s go for the Pros first:
a. Flexible no lock-in period hence no penalties for cancelling the plan.
b. First year interest rates stands at 2% p.a. (So this part is locked in and low interest rate environment is set to stay)
c. Relatively low barrier to entry. With S$2k minimally as maintenance amount that you keep, you get the interest accrued on a daily basis.
d. Capital Guaranteed.
e. Interest earned can be transfer to Dash Payment Service with no extra charge and they have a suite of deals and payments which you can use to pay your bills with. There is a $2 cashback for your first Singtel Dash transaction! Sign up with the referral code DASH-RYJKN or tap on this link https://appserver.dash.com.sg:443/mgm?DASH-RYJKN now
f. You can top up anytime to this account.
g. 105% of the account value is the sum assured should something happen to you.
Now for the Cons:
a. You need to download and register for yet another app. This is the Singtel Dash App. I mean, I really hate Singtel but I will not say no to free money.
b. You have to remember to maintain at lease S$2k in the EasyEarn Account.
c. 2% p.a. only applies for the first year and I believe that it will drop to 1.5 % p.a. thereafter. (From the terms and conditions: *Guaranteed 1.5% p.a. + 0.5% p.a. bonus for first policy year, available on a first come, first served basis) – Seems like there is sort of a cap to this.
d. There is a maximum amount to this. Once you have Topped Up to S$20k, that is the cap for every individual account. So there is this element of troublesome to remember and track for a 2% p.a. but if it suits you, then by all means go ahead.
e. Here is the key part to this which you will not hear it from Dash themselves. For any transaction that you transfer out via PayNow back to your own transact or savings account, there is a payment fee of S$0.70 per transaction. This is free if you transfer to Dash payment as described above for Pros point (e).
To some, the S$0.01 is money which they refuse to let go of but to others, not so much of a great deal. Don’t be penny wise pound foolish or you will never see the bigger picture. You will not gain anything by spending time and energy on pinching 1 cent. I personally know 8 out of 10 people does it and it annoys the hell out of me. If you have time to pinch 1 cent, I would rather you take that time to find ways to make $10 instead of ruining your own mood, wasting your time and fussing over the small things. I don’t get it and I still don’t today.
The User Interface
Here is how the screen looks like on the Dash EasyEarn App. You can see the Grow Money (New) in the Dash App which you can access and see your funds and interest. Do note that the interest are not accumulative though so it means that whatever you have in excess of S$20k earns no interest.
When you log in to EasyEarn, that is how the app looks like below.
Before I end off, I saw an interesting product which is on similar terms as Dash EasyEarn. They are from Tiq Insurance – meaning GIGANTIA but this works in their own Tiq App. (First year 1% + 1% p.a.) I’m not too sure why they have something similar to Dash EasyEarn. There can be a variety of reason. It could be that they have extra tranche of funds to offer customers or it could be that this is a longevity version of their product as compared to having inflexible Dash systems. I would explore Tiq option as well but let’s see what kind of proposition it makes to consumers.
Whenever we touch on the topic of CPF, also known as Central Provident Fund (Pension Fund – The Europeans and Americans call it), people get kind of edgy and upset. What I do observe is that mostly a certain group of people is really anti CPF. The first group is those who are anti-government, not fueling anything here but just a general consensus. The second group is the retirees or about to retire folks who didn’t have a decent education (At that point in time, it wasn’t necessary to have the paper qualifications) and the last group is the self-proclaimed Warren Buffet who claims to beat the market.
The Central Provident Fund
The CPF in my opinion, is something of a great system. There are certainly flaws to it but in my view it is the perfect, AAA grade, higher yield returns that can supplement all our retirement fund. There are certain risks but There are no investment tool has no risk in reality. I finally conclude that as a result of these 3 group of people, these are the reason why so many people dislike the CPF system.
The AAA rating
a. Unfortunately, it is a complex system – You need to read up and understand how it works to appreciate the system
b. Inflation rate is here to stay hence the increase in the minimum sum yearly
c. No one is taking your money away.
d. No. There is no crystal ball. Statistically, it is proven that you can never win 100% of the time. Anyone who have tried or attempted to invest their monies will know that there is no clear strategy out there but a lot of hard work so you will not be able to beat the benchmark all the time.
e. Good quality investments and yields are hard to find these days. Perhaps it is a reality check and time to reflect about strategies as well as accepting facts and the markets
Understanding what CPF is about
When I first explored CPF, it was when I was out of school into my first job. At that time, CPF seems like a Goliath – You think you know but eventually, you slowly find out stuff which you never know before and for a long period of time I put off reading up more about them. It was many years back that I started reading financial blogs and it became like a ritual. I’ll do that almost any other day.
Back in those days, there were less bloggers so you will still need to dig deep to find out how stuff works. Then came Technology advancements, social media and super apps/content apps. I also discovered a few more bloggers who actively shared about CPF. One one those whom I follow really closely is 1M65. His is a well-known blogger for CPF and he developed his own strategies around what the CPF has been doing for many years.
1M65 is really about having a million in your CPF by 65 years old. Depending on how you look at it, he is preaching a 4M65 these days and base on his concept – I do think that is possible if you start really young. Anyway, his idea about have these sum of money is really to get you thinking about your own retirement early, not just when you are in your mid stage or even late stage of your life cycle.
Everyone is different
Most importantly, everyone is different. There is no need to look at it in the form of a showboat or saying that it is impossible. Being open and understanding how these people are doing do help yourself to be ready for retirement – You are doing your next generation a favour so that they will not fall into the sandwich class or fall in the same cycle again and again. Of course, teaching the value of money to the next generation is something that needs to be worked on as well. It’s not like they were given a sum of money to deal with in life.
Some people actually worked two jobs or even saved excessively so that they can put all their money into retirement. Again, lifejourney preaches about having your own quality of life. If you need to feel like you have to give up everything just to be thrifty (It is a really thin line to term it as miserly), then you would most likely have to re-think your strategy.
The Practical Approach
There are a lot of concepts that you can read about but most of them come from a theory. Personally, I don’t really like to dissect those as they are so technical and heavy. Most importantly, it is extremely boring to put them down in words and executing them is really the best way to practice
As 1M65 says, you can hate who or whatever but don’t hate free money. Initially, it sounded like a money grubber statement but eventually I came to realise that, it is really free money. If you have no plans to be an entrepreneur, there is a few things you have to take note of in CPF. Yes, I am sorry but everything has to start from the basics.
My View on CPF
a. My biggest take on CPF is to compound the interest. The more you have, the greater the growth. The younger you fill up your CPF account to accumulate interest, the faster and bigger your pension fund will grow.
bi. If you are below 55 years of age – Your first $60k in CPF will gain an extra 1% p.a. (This is capped at S$20k in your OA) The current base Ordinary Account (OA) is 2.5% (3-month average of major local banks’interest rates, whichever is higher)
bii. For most people, the next S$40k will most likely be in your Special Account (SA). For others who are still building your SA, that will be whatever that is in your MediSave Account (MA). The base rate for your SA and MA is at the current floor of 4% p.a. (which is also the 12 month average yield of 10-year Singapore Gov Securities – 10YSGS)
Your CPF interest is computed monthly based on the lowest balance for the month. This means that for interests paid out on your CPF accounts in Year 2020, the interest amount is based on what was captured monthly, compounded and only paid out to you in full before 1st Jan of 2021.(This is subjected to changes if you have transactions every month)
c. As much as possible, you have to try your best to hit the minimum sum as early as you can. (Combined OA and SA) Once you manage to do that, you do not need to worry about the annual increase in minimum sum that is subjected to inflation.
Don’t lose faith if you have not or still very far from this. Everyone starts from $0. Let the small actions and do up your checklist one by one in order to build the financial confidence. Everyone is different – it is the end goal that matters.
d. Depending on your circumstances, you can choose to invest your CPF OA money after the S$20k accumulation. Similar to cash, have a long term goal and build your portfolio. Good companies and investment ideas doesn’t come easy. You have to make sure what you invest is more calculated risk. There is a risk to everything.
Don’t be affected by market noise. My tip is to buy when there is a price drop if the investment moat for the company still makes sense. (but always do your own diligence) You can also have different pockets of funds so that when there are opportunities or if there is a correction, you can be ready to enter the market. The rule is to always stay invested.
In Summary, CPF is not the perfect solution but a supplement of your retirement goals. In this aspect, we are responsible for our own money and retirement. No one else will take care of your money as much as you will do. Only you will know your own financial situation. The question is to ask to meet these financial goals is that if you can cut back on your lavish lifestyle or even saving more to add to your pool of funds. No one can coerce you to do what you do not wish to.
This is not a sponsored post. This is purely my own opinion about CPF and retirement. If you like what you are seeing, do remember to check them out and do your diligence. There is no one size fits all investment strategy as usual
Something interesting came in my way last week. I managed to speak with the General Manager of Wellnex (Link here if you are interested to find out – https://www.wellnex-singapore.com/) and My-insurer. (Link here – https://www.my-insurer.net/) They are in the field of Insurtech field – Insurance Technology. (Something that works differently as compared to the traditional agents who sells you an insurance) I’ll say that they are more of a 99.co or property guru in Insurance style but with a tad more zest as all interactions and details are done digitally so it is as good as meeting the customer face to face. Given current Covid situation, I’m not sure if I want to meet anyone face to face for a 2-3 hour chat about personal finance.
It isn’t a sponsored post. I’m very strict with the way things are being done regarding a sponsored post. As the way it is, I’m happy to write and type whatever my views are and trash whatever I find is trashy. In any case, my-insurer has a separate wellnex platform – which is more of a deals, news, more information kind of portal where businesses and writers can create and post articles.
The Wellnex Interface
Sometime last week, i received an email from them stating that they have achieved the Trust-mark for Data Protection so you can be sure that there is a standard or ISO for dealing and protection the data that you store with them. I’ll say that is a good job considering that they hold key to agents and customer data.
What I really do like about them is that, they have no requirement for me to have at least one post per week or anything of that sort. There isn’t a fee that they pay to me or I need to pay them for using their application to post articles as they wish to stay neutral and free from conflict of interest. That is respectable for a business who work on that ethics. Not many companies are true to what they preach.
Help one another / Refer a good deal
If you own a company or wish to share some deals, do reach out to these folks out there. Perhaps, they can add more marketing value for space or reach or impressions as the marketing guys call it. After all, the idea is to get what you have out there so people know and talks about it.
The whole idea that I wish to do is to create a space where people enjoy reading articles about finance. Perhaps, get them excited about finding out what is out there. What is the current trend? Sometimes, even finding a good deal or good idea will come back. Though I did not start out as early as so many other bloggers did, it is never too late.
Eventually, finding out and working together as online bloggers is something I wish to build in the community. I started out reading financial blogs for many years. In the process, I procrastinated about building one as it takes up too much time. However, the circuit breaker forced me to take on something that I have put off for many years. I hope I will grow my project to a sizable one in the near future.
These are just solely opinions of mine. Different people have different needs, requirement, financial situation and views. For me, this is what I would do if I would like to build my blog. The main aim to to get more viewership and subscribers to keep the lights running.
Due to the current covid-19 pandemic, we have seen quite a change in the world’s economic situation. Central banks around the world have reduced interest rates to an extremely low level. In finance, or what we call an emergency fund – has to always be liquid. It is well known to keep 3 – 6 months of funds for a rainy day. As for the amount to keep, it really depends on everyone’s personal situation. I would say, it depends on how much you spend and how willing one will be able to adjust to change their lifestyle. Given the current situation, it may be better to keep up to 9 or 12 months of emergency funds. Again, it depends very much on every individual’s finance situation.
Reduction of interest in “High Yield”saving accounts
Recently, we have seen the banks reducing the interest rates of deposit accounts or “high yield” saving accounts. It is only a matter of time when everyone else will reduce that interest amount so it is important to always keep funds liquid. You will never know what happens so it is important to stick to the rules – Keep your liquid funds liquid. A couple of months back, I found an interesting channel to keep some funds for a pretty high yield of 2.5% pa.
Of course, there are plenty of choices out there to choose from but today we shall talk a little more about an “alternative” choice as compared to a bank. Let’s throw Fixed Deposits out of the equation as well as they are close nothing at this point in time.
This is Singlife account. The interest of 2.5% p.a. is capped for the first $10,000 that you fund the account and the next $90,000 will be on 1.0% p.a. Any amount more than $100,000 will earn no interests thus this account will be suitable for anyone who wishes to keep a small sum of funds with Singlife and the hassle of having another account.
As indicated on their website, the Singlife Account is an insurance savings plan and it is neither a bank savings account nor fixed deposit. Each person is only entitled to one Singlife Account policy.) Singlife is also known as an Insurance Technology company that is licensed by MAS.
This is a really good channel to keep funds in however just take note that the 2.5% p.a. is not guaranteed and can be changed anytime. I think that this is fair given how flexible the funds can be taken out at will. In a most recent post, the news state that Singlife has raised 100 million funds in new AUM.
Below are some of the pointers that I felt is compelling enough to sign up for an account as the pros outweighs the cons at this moment and I am going to discuss more about why we should just get an account online:
First, Singlife is an insurance savings plan coupled with insurance and interest features. Fund placed with Singlife will be capital guaranteed so there will not be any hidden fees.
Second, you can earn up up to 2.5% p.a. for the first $10,000 with minimum funding of $500 to start earning this interest amount.
Third, there is insurance benefits – 105% of the account value and retrenchment benefits.
Fourth, the Singlife debit card is complementary and works like a normal debit card.
Fifth, No Lock-In. No contracts. Funds can be withdrawn anytime with no cost and minimum term.
Sixth, application is easy. Works only on an app and you can use SingPass to register easily.
Seven, funds are covered by SDIC so your funds are safe and protected for up to S$75k if there are any bank run on deposits.
In Summary, this can be a good tool for transition of better interest accounts or a medium terms solutions to parking your own funds.
There are not many bad points out there but to name a few and mainly only due to requirements and how cumbersome it can turn out to be.
First, they are relatively the new boys in town. In terms of branding and knowing who Singlife is needs to be worked on.
Second, since they are an alternative choice, traditional and conservative folks will just monitor or give it a pass
Third, the threshold of up to S$10k for 2.5%p.a. may not be appealing for some folks out there.
Fourth, having yet another digital wallet or account is going to be slightly more cumbersome. Hence this might deter more sign ups.
The other choice is to go to Tiq or Dash Easy Earn. The interest option is slightly lower but you can’t avoid opening yet another account.
The whole idea here is to share what are the different options and alternative available to park your funds. If this works for one person, it might not for the other. There isn’t a one size fits all solution but there are plenty of solutions out there. We just have to dig deeper and find out more about them. Then, we also question about the time spent to research and the effort to track different apps and accounts. It really depends on every individual. To some it might be creating more issues but to others, these solutions may be gems.
I find that these solutions are a good option for the younger group of graduates and those who have just started to find employment. You have to start somewhere so this is one avenue to do so.
This is not a sponsored post and purely my own opinion that I am writing about in my thoughts. If you like what you are seeing, do remember to check they out and do your diligence. Don’t be too fixated with what is the best.
For an extended period now, the Marine, Oil & Gas industry is going through trying times for some time now. Going forward, it is going to be difficult to say what is next for them and many other industries
We know that bad times don’t last so are the bankers/relationship managers just out there to sell investment products for their own benefit? During good market cycles, when the company books are looking great, bonds are being issues to help provide the working capital for these companies. The moment the cash-flow stops, the banks stop lending or restructuring. Quite a tough and sad moment though.
I discussed about bonds/debts a few posts back and talked about public/private financing in the capital markets. What most companies did was to find some banks to finance their working capital with contracts and assumption of a stable cash flow and they would pay off interest to bondholders over a period of time. What the lead banks provided are in turn offered out to retail/institutional/HNWI to take on a portion of the bond. Most of the time, financing is offered in terms of Loanable Value.
Let’s use this example: I buy Bond S.Limited on point of purchase for the initial offering at Par Price (100.00). The bank who syndicate this capital raising and offer a portion to other parties so as to diversify the risk. When “Sophisticated” investors take on these investments I offer a 60% Loanable value.
It means that for every $1 worth of S.Limited bonds. The bank will be willing to finance you $0.60. All you need is $0.40 worth of cash. On each reinvestment amount, you get another 60% in loanable term.
a. When the real problem surface
When S.Limited announces that they may have issues repaying bondholders, then the same banks who finances the bond syndication would deemed these investments as not so valuable now and decides to tell you that you can’t lend anymore from the $0.60 previously as what they have valued the investment at so you have to make back the full amount in a few days’ time.
b. The real liquidity and Loanable value changes dynamically
I would think that this is as good as lenders telling the company that they will stop lending. To raise $0.60 from elsewhere isn’t really a problem for most people but how about $600,000 or $6,000,000 which I really doubt many of us have that kind of cash waiting around somewhere.
Mathematically, it can be easily understood. (Not really isn’t it looking at this complicated piece of calculation table) This is basically a long form of maximising the full loanable amount and then re-investing them back into the same investments and over again:
With $1, the bank can loan you up to $2.50 presumably that you reinvest them into the same bond. Total investments become $3.50 (e.g. Nett of loans, $3.5 – $2.5 = $1). The Nett portfolio value still remains the same but that comes with plenty of risks:
1. You leave no buffer for any mark to market movement 2. You become concentrated into one single asset class and one company 3. Loans means you have to service the interests on a regular basis so with increase in interest rates, that brings your return lesser though you have taken more risks 4. In times of liquidity and crisis, most likely you will not be able to sell your holdings as fast 5. When you hit a margin call, you most likely have to top-up your cash balances as soon as possible or that would become a sell-out eventually at the current price.
On the flip side,
1. You maximize fully what leverage can bring you. 2. Yield is increased because of the leverage factor. 3. Returns will eventually increase with a higher risk taken.
What is your investment profile?
Again, it brings us back to basics again. That high risk taker with a long horizon? The conservative investor that is skeptical? I am not surprised that there are high risk takers who doesn’t mind this scheme. Then again, if you know the risks you are taking then take it like a man.
I’ve met and known people who are so egoist about their aggressive investments ideas. When shit his the fence, they do point the finger on others. Unfortunately, they know the risks that comes with. When it comes to money, humans behave differently.
There are businesses who keeps increasing their loan size at every maturity. When you look at the cash flow, they are paying out more than 100% from what they make. It is similar to spending more money than what you make. In this aspect, it seems like the company wanted to:
1. Keep investors happy that they are receiving the dividends 2. Ensure that their stock price on the exchange stays stable 3. Waiting out for the bad cycle to ride through and business to pick up again.
Extending Debt result
1. The money paid out have to be taken from somewhere and most of the time it is from a bond and restructured many times most likely 2. Anyone who digs deeper into the company details will know the state of their company 3. The cycle may not ever recover for the company to be relevant anymore
It is important to be thrifty and know how much you can afford to spend. Does looking rich or being rich matter more to you?