Finance Smiths

Personal finance apprentices-in-training

Progress update on financial goals

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It’s time for a progress update on our financial goals for 2016.

1. ETF portfolio to reach S$40,000 by 31 Dec 2016

We have been buying the Singapore and International ETFs regularly over the past few months and the rebound in the stock markets in Mar and Apr have helped us as well. It’s been growing at about S$3,000 every month since the Jan balance of S$20,000. The ETF portfolio looks on track to hit S$40,000 if we can keep this up.

However, I must admit that we have been buying less ETFs given the recent rally in the global stock markets. To be honest, we probably didn’t buy the ETFs aggressively enough during the bear market in Jan and Feb. Having to buy the ETFs during the current bull market is not ideal.

2. Share portfolio to reach S$120,000 by 31 Dec 2016

Since we have switched to an ETF investing strategy in Mar, most of the growth so far has been coming from the recent rally in the Singapore stock market. It was growing at about S$5,000 every month since the Jan balance of S$100,000 but this is expected to slow significantly. We have not added any new stocks but have been averaging down on our existing stocks when opportunities come up.

Unless a bear market surfaces again during the rest of the year, we will probably not make any major purchases of stocks. We have been exploring the idea of dividend reinvestment plans to grow the share portfolio, especially for the REITs, but we have yet to come to a decision on them. In any case, we anticipate the Share portfolio to each S$120,000 by year end.

3. Other portfolio to reach S$150,000 by 31 Dec 2016

I realised we haven’t set a goal for our Other portfolio and the aim is for this to reach S$150,000 by year end. We contribute about S$200 each month to our wholesale life policies and this grows slowly over time since the returns are low.

Our investment cash holdings have been increasing as we have been investing less in the markets. The bond holdings have not changed since mid 2015 and they are not likely to increase unless there are high quality corporate bond issues we can invest in later in the year. We still seem to be on track at this time.

4. Dividend income to reach S$5,000 by 31 Dec 2016

We are expecting quite a bit of dividend income in Apr and May but doubt we will get to S$5,000 by year end. The dividend yield of ETFs is lower than shares and our switch to an ETF investing strategy should probably result in lower dividend income growth.

We have also been experiencing dividend cuts with some of the shares (e.g. oil & gas industry) and this goal is not looking good unless we make some major investments in Q2 and Q3 of 2016.

5. Interest income to reach S$5,000 by 31 Dec 2016

Our strategy to maximise interest income from bank accounts and hold corporate bonds is working out fine. The interest income is exceeding the dividend income by quite a bit for now although we do not anticipate significant growth in interest income.

If that happens, it might actually mean we are holding too much cash and more work is needed on the asset allocations. We should meet this goal but it might take until the end of the year for interest income to exceed S$5,000.

6. Net worth to reach S$100,000 by 31 Dec 2016

Generally, our net worth is increasing positively with each month from paying down our mortgage, tax & credit card debt. Although market gyrations do impact our net worth negatively at times, it has continued to trend upwards due to our current monthly savings rate of about 40%. We should be able to meet the goal of our net worth reaching S$100,000 by year end provided nothing major happens.

Why I prefer not to have a recession

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I liked my post on the net worth update but have to admit the method of calculation is almost always going to be up for debate. In my view, our net worth is an arbitrary figure to begin with and I am generally more concerned with the direction it is headed over time. As long as our net worth trends upwards positively with each month, I’m okay with that and the absolute figures don’t matter to us as much.

Global Financial Crisis and European Debt Crisis

However, the net worth update post did get me thinking about whether our asset portfolio & income can withstand a recession given the liabilities & expenses we have. Although we graduated in 2009 right after the Global Financial Crisis of 2007/2008, we were able to find jobs in Australia eventually and there was minimal impact on a very small investment portfolio. The European Debt Crisis of 2010/2011 had more impact on a then slightly bigger investment portfolio compared to 2009. However, it didn’t impact Australia’s economy as much and we were able to retain our jobs.

Overall, the resulting recessions from the Global Financial Crisis and European Debt Crisis did impact our jobs and might have slowed our career and salary progressions. However, we were young with no debt obligations and other than not taking the opportunities to grow our investment portfolio, there was minimal impact to our assets. We also had sufficient income to manage our expenses with savings leftover and life went on.

Oil Crisis

Now that our assets, liabilities, income and expenses have grown over time, I have no way of knowing how well we can withstand a crisis and recession. You could argue that we are now in the middle of an Oil Crisis of 2015/2016. Given how the MAS unexpectedly eased its monetary policy to try to jumpstart growth in Singapore, the risk of a recession has probably already increased to warrant such an action.

Preparation for a recession

Not like it matters or will change anything but I prefer not to have a recession. Every time it happens, I have come to realise that the main risk is to our jobs and salary income i.e. cash flow. Although our asset portfolio has increased significantly, the dividend & interest income is no where near replacing our salary income.

We have taken action to prepare for a possible recession by increasing our cash on hand and to hedge against the event of job loss. We have also increased the cash component of our investment portfolio to allow us to take advantage of falls in the stock market and maybe even the property market.  We have cash holdings in Australia that we don’t disclose on this blog and even in our Google Sheet. This is our lifeline cash funds – not for emergency or spending. It’s for starting a new life in Australia if we don’t make it in Singapore. Now you know how seriously we take the threat of a recession.

Are we ready for a recession?

Despite preparing for a recession, I don’t actually know what will happen if it occurs and how severe it will be. What I have come to realise is that when something bad happens, everything else can go south at once. There are many things I have learnt from reading personal finance blogs in other countries. This Canadian blogger (Bridget Eastgaard at Money After Graduation) has a great post on the things she has learnt from Alberta’s recession. It seems like the Oil Crisis of 2015/2016 has already caused a recession in other countries like Canada. Go have a read about what’s it like to be in a recession and the far-reaching impacts it can have.

A recession can be an opportunity if you prepare for it. The way we have done it is to reduce our liabilities, increase the bond component of our investment portfolio and raise our cash holdings. I don’t see how we can recession-proof the equity component of our investment portfolio other than to accumulate more ETFs and shares if it happens.

This still doesn’t mean I would like a recession to occur. I can see how everything can go wrong at once e.g. being laid off without salary income, watching our stock portfolio & property values freefall and still have to deal with monthly expenses. Don’t underestimate how long you can be out of a job and running out of money while losing everything it took years to build might be something you never fully recover from. The big problem with a crisis and recession is how the after effects can structurally change a country’s economy. This can present a significant risk even in the recovery because can you be sure you won’t be left behind?

It’s easy enough to convince ourselves that my wife and I are still relatively young and can recover from a recession even if it is severe. We have done some stress testing of our net worth and cash flow under various scenarios to see how we can survive a recession.

I have come to realise that we are underestimating our reliance on the salary income from our jobs to manage our expenses. Even with our increased cash holdings, drawing them down to manage our expenses without any inflow of cash from salary income is going to hurt. This is not forgetting our dividend & interest income will go down as well due to dividend cuts and us no longer meeting the bank account requirements to earn the higher interest. Coupled with declining investment portfolio and property values, this is going to send our net worth down the drain no matter how we calculate it.

Ultimately, we will only know whether we are ready when it happens. We have gone through enough while working & living in Australia to know we can depend on each other in bad times. Our next big test will come soon enough and we are as ready as we can ever be.

Net Worth Update

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As I write more posts on this blog, I start to realise that the content becomes more relevant and applicable the more honest I get with our personal finance numbers. It’s one thing to write about how to save more, how to spend less and how to invest more but if I don’t actually write about the actual impact of these strategies on our net worth, it’s difficult even for myself to see if they work.

I doubt we will ever fully disclose our net worth but I have already been providing snap shots of our portfolios & asset allocation and dividend & interest income. The only main piece missing from the blog is our liabilities and without these figures, it’s not possible to calculate our net worth. In the spirit of additional disclosure, I have now included a net worth page.

It summarises our assets held as investment, retirement and cash. More importantly, it shows the following liabilities.

Mortgage

I mentioned in my previous posts that we don’t view our apartment as an asset since it does not generate any income. However, we do view our mortgage as a liability since we have to make monthly principal and interest payments. The issue is that just disclosing our mortgage as a liability without the apartment value as an asset causes the net worth figure to become overly negative and it loses accuracy as a result.

To improve the accuracy of our net worth figure, I have used an amount for the mortgage that is calculated by taking 50% of the market value of the apartment minus 100% of the principal value of the housing loan. In a way, I have budgeted for a 50% drop in the housing market prices. It’s a conservative approach but I rather understate than overstate our net worth.

Credit Cards

This shows the billed and unbilled amounts charged to all of our credit cards at the point of updating the net worth page. Although we pay off the full amounts of our monthly credit card bills, all outstanding unpaid amounts should still be disclosed as liabilities. Given how we charge most of our spending to credit cards, this amount is a good estimate of our monthly expenses on transport, telco, groceries, dining, entertainment and travel.

Tax

We pay our income and property taxes to IRAS using the 12 interest-free monthly instalments plan. It improves our cash flow position but sits as a liability on our balance sheet consequently. This amount should reduce over the year but increase once we file our taxes at the end of each year.