Finance Smiths

Personal finance apprentices-in-training

Should we change our asset allocation?

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We are planning a trip to Italy in Oct 2016 and should be flying into Florence and out from Rome. The last time we travelled to Italy was in Jun 2008 and it was part of a three week Europe trip. We really enjoyed our time in Italy and can’t believe it’s another 8 years before we go back!

This time round, we should be visiting the other areas such as Tuscany and Amalfi Coast instead of the major cities. It gives us something to look forward to so we can get through the next few months of work!

Anyway, after my end of Jun 2016 financial update, I started thinking about our asset allocation. At this stage, it consists of the following asset types in decreasing order by % value:

  • Domestic Real Estate (Singapore Apartment) – 25%
  • Domestic Equity (Singapore Shares and ETFs) – 20%
  • Domestic Cash (SGD) – 20%
  • Domestic Fixed Income (Singapore Bonds, Retirement Funds, Wholesale Life Policies) – 20%
  • Foreign Cash (AUD, USD, GBP and EUR) – 10%
  • Foreign Equity (Foreign Shares and ETFs) – 5%

The Portfolios & Asset Allocation page on my blog only captures a portion of our total assets but not the entire amount. Besides, I only just worked our % asset allocation above and have never considered it from the perspective of asset classes distribution before.

After doing the calculation, I realise a significant portion of our total assets is tied to the domestic markets. I guess this is normal in the initial stage of any wealth-building journey as you first accumulate assets in your country of living before you start thinking about investing overseas. In fact, our 15% of foreign markets exposure is mainly due to us having lived & worked in Australia for a few years and in a small way our recent efforts to invest in ETFs listed on the LSE.

What’s interesting for me is whether there is a need for us to diversify our asset classes and between domestic & foreign markets further? For a working couple like us that has only built up a bit of wealth, I’m not sure whether this is something we should even be considering now given how the current asset class distribution seems to address our needs sufficiently.

I was thinking about foreign real estate but it might cause an overexposure to real estate since we already own REITs in addition to the apartment in Singapore. With interest rates expected to increase in the future, I might only consider adding more real estate exposure then.

If we are to include other asset classes, what exactly should we be looking at? I could invest directly into gold and silver, which I presume is a form of alternative investments. To be honest, I have only ever considered investing in a Gold ETF and even decided against that. I have always hesitated against investing in precious metals due to my lack of knowledge but this might be a good opportunity and time to do so.

Another option is private equity/fund investments but we don’t have that kind of capital. Investing into crowdfunding for SMEs is a more possible option. However, I worry about the risks involved when investing through crowdfunding platforms such as the much higher possibility of the company defaulting on its payment.

Perhaps we can contribute capital directly into small businesses set up by friends or family that have potential for growth but that’s provided I can even find such opportunities. Alternatively, we can set up a small business and invest in ourselves but I have yet to come up with any ideas.

Or we can just wait for a robo-advisor to set up shop in Singapore and invest in an alternative investments portfolio managed by them. I still have no idea why it’s taking such a long time for robo-advisors to come to Singapore especially when we are trying to be a Fintech hub.

This might be a premature discussion in our current situation and the best way forward for now is probably to build up our foreign markets asset exposure while adjusting the allocations. However, I reckon at some point in time in our future if we can continue to grow our asset portfolio, this issue will surface again. Hopefully I will have a better idea then!

Three Day Work Week?

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It’s a public holiday tomorrow and it’s a nice feeling to have a day off after working two days. I’m writing this post on the bus home while my wife is out having drinks with her colleagues. Random thought – If she is going be out late tonight, I might drop by my parent’s place to visit them since I didn’t see them last weekend.

Anyway, this got me thinking about how great it would be not having to work a full week of five days. You just have more energy to do other stuff since you don’t feel as wiped out by mid week. In fact, the ideal arrangement is that we can work a three day week. Either Mon, Wed and Fri so we won’t have to go to work two days in a row or Mon to Wed so we always have a long weekend to go travelling.

Wouldn’t that be fantastic? Now we just have to find those jobs that allow for such an arrangement. The truth is that we like the professional and social engagement that office work offers especially when we have colleagues that we get along with. Self-employment seems to be quite isolating and I’m not sure whether we are suitable for it. But we don’t see ourselves working full-time five days a week as well and not working at all is only possible if we find something interesting to keep ourselves busy with.

Maybe the solution really is to have a three day work week. Sufficient engagement with the outside world to keep ourselves up to date and sufficient downtime to develop hobbies and enjoy leisure activities together as a couple or family if we decide to have children. The other reason for this coming up is that my manager has just returned from maternity leave and negotiated a three day work week at reduced pay. So it is possible!

The purpose of this post was really just to pen down this idea of a reduced work week while taking the bus home. At some point in time, our asset portfolio would reach what I call a critical size whereby the dividends and interest would form the investment contributions instead of savings from our monthly salaries. By then, we should be okay with a lower pay since the salary only needs to cover the expenses while the asset portfolio will keep growing by itself.

This will be the penultimate stage to financial independence because the last stage would be for the dividends and interest to cover our expenses as well. Just something for us to look forward to while having a mid week break!

End of Jun 2016 Financial Update

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I have just updated my net worth, portfolios, dividend & interest income and savings rate pages for end of June 2016. Since the first half of the year is now over, this financial update is a good way to see how we are tracking with our goals that were set earlier in the year. This will be set out in order of how these pages appear in my blog for easier reference.

Net Worth

The goal is to reach S$100,000 by 31 Dec 2016. As at 30 Jun 2016, our net worth is S$98,408 and it should exceed S$100,000 by 31 Jul 2016. This is due to a combination of monthly payments to reduce the mortgage debt, cash savings, additional investments in ETFs & shares and contributions to CPF.

We have understated our net worth by using a net mortgage debt calculation based on 50% of the value of our apartment and 100% of the housing loan liability. Unless our apartment starts generating rental income, we are not likely to increase the percentage of its value in our net worth calculation. However, this does mean that our net worth figure is not as accurate when compared to the proper or textbook method of calculation.

We prefer for any increase in our net worth to be largely tied to having more liquid assets in our portfolio and less to do with the value of the apartment (an illiquid asset). There’s no point in having a high net worth if we don’t actually have much liquid funds to tap into.

This is why our net worth figure also indicates our liquidity position and gives us an idea of how much liquid assets we have to redeploy when a significant event occurs. As long as our net worth figure trends upwards, that means we are managing both our BS and P&L in the right manner.

ETF Portfolio

The goal is to reach S$40,000 by 31 Dec 2016. As at 30 Jun 2016, the value of our ETF portfolio is S$44,377. This is mainly due to us investing quite a bit in the ETFs after the markets sell-off from Brexit.

We are happy to see that the change in focus of our investing strategy to ETFs is starting to take effect. However, we have decided to reset the goal to reach S$50,000 by 31 Dec 2016. Always good to keep pushing ourselves to aim higher.

Share Portfolio

The goal is to reach S$120,000 by 31 Dec 2016. As at 30 Jun 2016, the value of our Share portfolio is S$115,788. We averaged down on some of our stocks due to price weaknesses and this accounted for most of the growth in the Share portfolio.

We seem on track to meet our goal but don’t plan on increasing the value of our Share Portfolio much going forward. If anything, our belief in ETFs has grown from the recent market volatility and find them to be a more effective financial instrument for wealth generation.

Other Portfolio

The goal is to reach S$150,000 by 31 Dec 2016. As at 30 Jun 2016, the value of our Other Portfolio is S$147,800. Cash savings has largely contributed to this increase from the previous month as we have not subscribed to any corporate bonds recently and wholesale life policies’ surrender values grow really slowly. We might actually hit the target by 31 Jul 2016.

Retirement Fund and Cash On Hand

No goal was set for the 2016 year because they are functions of the monthly mandatory contributions to our CPF and cash savings. As long as we are employed, this asset component continues to grow and we are happy not to attach any targets to them. Our main aim is really just to stay employed until we figure out how to be self-employed (if ever) and try not to lose our jobs before that.

Dividend Income

The goal is to reach S$5,000 by 31 Dec 2016. As at 30 Jun 2016, we have received S$2,631 of dividend income. This is more than 50% of the target by half year and we should hit it by end of the year given how we have invested a bit after the ex-dividend dates in 2016 of some of the ETFs and shares.

Interest Income

The goal is to reach S$5,000 by 31 Dec 2016. As at 30 Jun 2016, we have received S$3,098 of interest income. We don’t think there should be any issues in meeting the target by the end of the year. However, we are concerned that we are earning more interest income than dividend income.

This means we have too much cash on hand and might not have allocated our asset portfolio efficiently. It’s a nice problem to have but we still have to work on a solution. We are tempted to start investing even larger amounts of cash but the run-ups in the equity markets over the past few years is making us hesitate.

Savings Rate

No goal was set for the 2016 year because I only recently started tracking our savings rate on my blog. The good news is that the savings rate has been increasing slightly with each month. We have started to make small adjustments to our spending habits to try and lower the monthly expenses. It’s difficult to make significant changes to our lifestyle at one time but we are taking baby steps towards it. Taking less cabs, having one less coffee/drink, eat out less etc.

Overall, we are satisfied with the way things have gone financially for the first half of this year. Work has been tough and who knows what’s going to happen in the next half of the year. But we have also enjoyed our time off by going on vacations, meeting family and friends etc.

We have also started exercising more now, especially my wife who has been running after work on weekdays, and it always helps with our moods and stress levels. It can be overwhelming to deal with our personal, professional and financial lives at times but we try to manage them in the best way we can.