Saturday, July 31, 2010

With rising public housing costs, don't depend on children for retirement

Children cost a bomb to raise. Major bombshells like tertiary education fees can be easily settled by having them borrow from the bank, not from your own retirement fund. Most people think they are free from the problems of rising housing cost if they already own a house. Not so if you have children.

Going by present trends of rising public housing prices and stagnant middle-class wage growth, by the time our children get married and are ready to settle down, there is a reasonable risk that they may come back to us asking for money to pay for their first house. This is possible even after maxing out the loans that they can take from the bank.

Even if they do not ask for money, what is clear is that parents can no longer rely on their children for financial support in old age if their own children are to be burdened with heavy debts of their own. In fact, parents should be thankful if their children do not transfer part of the debt burden to them by asking for help.

For the good of everyone, children should be educated from young that they should not expect bail-outs from parents when they are old enough to fend for themselves. In fact, they should not only fend for themselves but take care of us as well. Meanwhile, with accelerating inflation in basic foodstuffs and negligible interests rates for our savings, we should not forget our own aged parents who are suffering from rising expenses while at the same time being punished by negligible interest rates in their savings account.
Raise their allowance to protect them from inflation and cut the children's tuition expenses if you have to. This is how I would set my financial priorities.

People who spend a fortune on their children but neglect their own parents are making a gross miscalculation. When their children grow up, they will copy and treat their own children and parents the same way. Then, who's the biggest losers?

Sunday, July 25, 2010

Preference shares

There was some discussion on preference shares on my favorite financial blog. Here are my thoughts regarding this topic.

Someone wrote: I read in Benjamin Graham's The Intelligent Investor that the best time to buy them is during market turmoil when prices are depressed. )

Yes, I remembered that Benjamin Graham did mention that preference shares are to be bought on a depressed basis. Preference shares have certain characteristics that make it even more necessary to buy them on a depressed price than common shares.

When bought at or above par value (SGD100 in Singapore's context), preference shares do not take part in the profitable growth of the company. The company can announce 50%-100% profit growth, but the price of the preference shares will move up only a little. If you bought the common shares, it is possible to earn capital appreciation of more than 20% with this kind of performance. To appreciate this point, compare the price charts of UOB shares and UOB 5.05% NCPS from Mar 2008 onwards.

However, if you bought on a depressed price well below par value, the preference shares do participate in the growth of the company until the price reaches par value (but rise slowly after this point). When you buy preference shares on a depressed price, you enjoy both higher dividend yield and capital appreciation if the company recovers.

The best reason for not buying preference shares at non-depressed levels (above par) is that they decline more in adversity but do not rise much in prosperity. The dividends from preference shares are discretionary, not obligatory as in the case for bonds. Discretionary expenses are usually the first to be cut when a company is struggling. Hence, when the company starts announcing poor financial results, the fear of dividend cuts can drive the price down significantly. In any case, it is most likely to fall below par value.

Look at the price chart of the bank preference shares in 2008 and early 2009 to appreciate this point. In investing, if the downside exceeds the upside, you don't invest.

Also, when the banks redeem the preference shares, they will redeem it at par. So, if you bought the preference shares above par, you suffer a guaranteed loss in principal upon redemption. The dividends can cover this loss provided you have at least held the preferences shares for some time and the bank did not redeem the shares. Please at least check the date from which the bank has the option for redemption. I would not buy a preference share above par near the redemption date.

Now that most preference shares are trading above par, I personally will not buy them. Unfortunately, I was not smart enough to buy them in 2008 and early 2009 on a depressed basis. So much for talk only.

October 2021 electricity bill for Singaporeans on Wholesale plan may be 4 times more than previous month. Keep things in perspective.

EDIT: For people on wholesale plan, you can switch back to SP Regulated tariff price at SP online portal any time you like, with about 1 wee...