I hate to write a blog post using someone's misery as a starting point. However, I think the case of the Singaporean businessman who lost SGD26 million in 3 days at RWS casino can be converted into a good social cause. His predicament can serve as a useful lesson and reminder to Singaporeans on the danger of gambling. Dear Sir, your misery will not be in vain if this is of any consolation to you. I am sorry.
A businessman without proper risk management is subjected to high risk of failure when bad luck strikes. The gambler was a successful businessman who built up and grew his company over a few decades. So, he probably is armed with the proper risk management concepts. Had he applied his business training to gambling, he would not have sustained the heavy losses. This tells us something about the nature of gambling. There is something about human nature and our basic instincts that drive us to self-destruction once gambling become an addiction. An intelligent well-trained mind is no protection against this vice.
I have stepped into a casino only once and am no authority on it. Read on if you are still interested.
In all the games, the casino always has a winning edge. This is not surprising, otherwise the more visitors the casino receive, the more money it will lose. Although the odds of losing is higher for the gamblers, it does not mean that the gamblers will surely lose on every visit. However, every gambler must surely lose eventually if they play long enough with the odds against them. The mathematical law of large numbers guarantees that.
This is why the casinos intentionally set their house edge low. The purpose of the low house edge is to offer gamblers some hope of winning, thereby enticing them to play more and lose. If the house edge is too high, the gamblers will simply walk away or play less. Then, the law of large numbers cannot work its magic for the casino. You have to let the gamblers win sometimes to keep coming back. Mathematics ensures that gamblers will eventually lose with 100% certainty as long as they keep coming back.
The SGD100 tax that deters Singaporeans from visiting the casinos actually work against them once they are inside the casino. Once you pay SGD100, you will be tempted to stay longer to fully utilize that SGD100. The longer you stay, the more you play, the surer you will lose. The law of large numbers guarantees your loss.
Being a retail investor, I have given some thought to sizing one's bet. When your winnings odds are high, you bet big. When your winning odds are smaller, you bet smaller. In both cases, your winnings odds must be positive to your favor. If your winnings odds are negative against you, the optimal betting size is zero. If the odds are against you, you don't bet. In other words, you should never ever visit the casino. If you love money, please don't.
Even in the unlikely event that you make money from your casino visits, you will lose out in other ways. Your career prospects will be negatively impacted. No boss feels comfortable with an employee who likes gambling. Your boss will consider you a risk to the company if he learns of your regular visits to the casino. Will you embezzle company funds? Will you receive kickbacks from the suppliers? Even if your job has little contact with money (like my engineering job), your boss will still be worried that your performance will be affected by the distractions - distracted by the worries from the losses or distracted by the easy winnings and the greed to make even more. Either way, productivity suffers. All bosses hate that.
Some people think they can become professional gamblers and beat the casinos, drawing inspiration from the MIT card-counters. Making money in this way is possible in the short-term but not sustainable in the long-term. The casinos can simply bar you from entering once you become a consistent winner. Then, all your long hours of training become wasted. The odds of getting rewarded by working hard at your day job and doing something useful is higher than training hard to become a professional gambler.
If you have to visit the casino, set a pre-determined amount that you will lose. Once this amount is lost, leave the casino. The time to set this amount is before you enter the casino, not after. Once inside, one may be too carried away by the beautiful faces and colorful lights to make proper risk-management decisions. By following this practice, the casino becomes a place of entertainment minus the harmful social effects. At the same time, our fellow countrymen working at the casinos can keep their jobs. Treat the gambling losses as entertainment expenses. If you are lucky, you might even get paid for the entertainment.
As for myself, my personal policy is to avoid the casino totally. Some people think they are disciplined enough never to become addicted. They think they can keep their gambling trips as a source of entertainment only. It is like telling yourself I will try drugs just for the sake of experiencing new things but I will not get addicted to it. In the first place, why take the chance? Is there a meaningful gain in exchange for the risk? Hence, I do not even want to give myself a chance to get tempted by getting near to the casino. If smarter and more successful people like the SGD26m businessman have succumbed to this vice, what more for mere mortals like me?
Sunday, August 22, 2010
Saturday, August 14, 2010
Paying off credit card debts is the best investment you can make
If you have credit card debts on hand, the best investment you can make is to pay off the debts. Guaranteed!
The typical annual interest rate for credit cards is around 20%. If you pay off this high-interest debt, it is as good as making a sure-win investment gain of 20%. Even Warren Buffett cannot guarantee you such a performance.
If you prefer to let the credit card debts to rollover, please go back to school and study compound interest. At 20% compound interest, even a tiny amount of debt can wreak severe damage to your pocket over time. Don't believe? Use a spreadsheet and calculate the amounts you will have to pay over the years. This is the best way to appreciate the power of compounding.
A good understanding of compound interest has convinced me to avoid all high-interest loans like unsecured personal credit lines and credit card debts. On the other hand, I have been encouraged to save and invest hard to reap the power of compounding to my favor.
The typical annual interest rate for credit cards is around 20%. If you pay off this high-interest debt, it is as good as making a sure-win investment gain of 20%. Even Warren Buffett cannot guarantee you such a performance.
If you prefer to let the credit card debts to rollover, please go back to school and study compound interest. At 20% compound interest, even a tiny amount of debt can wreak severe damage to your pocket over time. Don't believe? Use a spreadsheet and calculate the amounts you will have to pay over the years. This is the best way to appreciate the power of compounding.
A good understanding of compound interest has convinced me to avoid all high-interest loans like unsecured personal credit lines and credit card debts. On the other hand, I have been encouraged to save and invest hard to reap the power of compounding to my favor.
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?
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.
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.
Sunday, April 18, 2010
Safer ways of building retirement nest egg
Whenever the topic of building a comfortable retirement nest egg turns up, investing is almost always mentioned. Personally, I would not put investing at the top of the list of recommendations to build retirement fund to the general public. It will be a disaster if your investment gets wiped out just when you are about to retire. In fact, this did happen and the person got so aggrieved that he suggested that CPF funds be banned for investment.
There are less risky ways which I highly recommend to achieve financial independence. They are slower but surer. However, they will not make you very rich but will allow you to retire with dignity and avoid becoming a burden to society. The methods are as follows;
1. Saving money
Unlike investing where luck plays a role (at least in the short-term), saving money is within anyone's control. A middle-income person with financial discipline should be able to set aside at least 10% of their salary per month. Assuming there is no extended period of unemployment, the person should be able to accumulate a respectable nest-egg by the time he retires. My next series of posts will be on saving.
2. Using insurance for protection
Saving money alone is not enough as an unexpected disaster can take them away. You can lead a frugal lifestyle and save lots of money. However, without insurance protection, you can still be bankrupted by unexpected disasters like medical illnesses or accidents that hits you with a huge bill and disables you from earning an income for an extended period of time.
Therefore, it is prudent to buy insurance to transfer such risks away.
3. Work hard at your job and be good at it
For the majority of us, our major source of income comes from our job. Not many of us can have investment income that exceed our salary. Hence, it makes sense to concentrate your efforts on doing a good job in your career rather than dream of the day when you can shake leg and solely depend on your passive investment income.
Many people have said that one cannot get rich being a salary worker. That depends on who you are talking to. Fund managers, bankers, proprietary traders will disagree. People who work in the highly competitive consumer electronics sector (like me) whose profit margins get squeezed and major companies moving out to China every year will agree. The lesson learnt is to join the right industry. The right industry is the one with the highest median salary.
Speaking from experience, I have seen mediocre people working in the right industry getting paid more than smart people working in a bad industry. If someone is in the right place at the right time, he can work less hard and be less smart and yet earn much more than someone who works very hard and is very smart.
Choosing the right industry is a matter of luck. My advice to fresh graduates is not to choose a job simply because it pays well and end up becoming miserable. I believe it is more important to choose a job suited to your personality and natural abilities so that you can perform well and even come to love it.
4. Arm yourself with financial knowledge to protect against the financial sharks
In a modern economy in which financial services have become dominant, it is important to be financially literate to protect yourselves against the financial sharks who work in this industry. The compensation of Wall-Street kind of jobs is so out of whack with reality that I have to wonder about the source of their income. One income source is the financially illiterate suckers that they prey upon. You can do the right things financially all your life - saving hard and working hard. Without adequate financial knowledge, one commission-minded financial adviser intent on sucking you dry will succeed in persuading you to part with your hard-earned nest-egg. Remember the Lehman Brothers Minibonds?
Sunday, April 11, 2010
Financial literacy is the most effective shield against financial sharks
During the heights of the financial crisis of 2008, a recurring conversational topic were the financial sharks who got rich out of preying on the hard-earned savings of ignorant consumers.
I got some heat when I defended the young relationship managers hired by the banks to meet aggressive sales quota. I did not like the way people called them immoral and greedy. Abhorrent their behavior may be, how they behaved is similar to how the average person would have behaved given the same set of carrots and sticks.
The people at the financial institutions are the ones who are best armed with knowledge to teach financial literacy. However, the unfortunate reality is that they have the least incentives to teach financial literacy but every motivation to spread financial ignorance and even disinformation. When you think about the financial products they sell, maximum profit is made from the ignorance of consumers. It is hard to sell high commission products to a financially literate person. The most lucrative customer (or sucker) is a rich, ignorant and greedy one. Hence, it is small wonder the retirees are an unspoken favorite target group of the financial sharks.
Ignorance is something all of us can improve on. You do not need to be highly intelligent to conquer it. Conquering it can at least protect the public from making basic financial mistakes like chalking up high credit-card debts to legalized loan-sharks. This is a fast route to bankruptcy. School teachers should use credit-card debts as an example to teach compound interest. This simple act might have saved some of their students from credit-card bankruptcy when they grow up.
It is more effective to work on one's ignorance than to blame "immoral" bankers who are being business-like in maximizing profits.
Another group that often gets the blame during the discussions are the regulators. On hindsight, deregulating the financial sector by Alan Greenspan and expecting the banks to self-regulate was a mistake. In my humble opinion (pardon me if you know better as I do not have a financial background), the mistake made was in expecting that it was in the interests of banks to self-regulate and not commit financial suicide. Actually, it was in the interest of the bankers to take excessive risks, earn excessive bonuses while the dancing carries on, then when the dancing stops, get taxpayers to pick up the tab and eject with a golden parachute (another round of excessive bonus). It was the smartest way to play the game and this is what you would expect when the brightest minds in the world move into the financial sector. This was clearly a case in which the free market fails. Regulators do have an important role to play in situations when the free market fails. Therefore, the solution to the financial crisis must come from the regulators, not bankers. More regulation, not less regulation.
Some victims of the Lehman Minibonds debacle insisted that the regulators should have protected them from the financial sharks. For practical reasons, I do not think it is wise for the public to depend on more regulation for protection.
There are powerful forces set against the regulators to legislate financial reforms. With the money that the financial services industry can muster, they can exert enormous political pressure on the regulators. Given the important role that bankers play in the economy, they will know powerful friends in high places. With their money, they might even have senior politicians in their pocket. They have many trump cards to play with. You can be sure they will play their cards very well as the excessive bonuses doled out will attract the finest minds in the world. Because of the much higher compensation, the regulators are up against superior minds. These problems are not as serious in Singapore as the civil service is known to be relatively corruption-free, fairly well-paid and therefore attracts its fair share of the bright minds in the country.
However, excerpts of this video (scroll to 0:56:34) show that even the most powerful, smartest politician of America with kind intentions to do good for her country has to eventually bow to the political might the financial sharks possess. The politician in context was none other than Mrs Hillary Clinton.
Certain hiring practices of the financial industry (in US) can "corrupt" even the best regulatory system designed with best practices to be incorruptible. By hiring regulators and paying them ridiculous sums of money to leave the job, bankers have carved out a most lucrative career path for the regulators. Existing regulators, consumed with envy and jealousy of the new-found wealth of their former colleagues, will see the bankers as their future bosses. Immense riches shall come to them once they too have successfully made the jump. They have to be careful not to set regulations that hurt the bank's profits because it is not in their interests to hurt their own future profits. In fact, it is in their interests to remove current regulations that crimp their future bosses' profits. If this can happen in the US, it can happen in Singapore some day because human nature is the same everywhere. Can the people safely depend on their regulators to set policies that protect them?
Hence, the most effective shield the public can use to protect against the financial sharks is to count on themselves in acquiring financial literacy. One of our own regulators, the CPF board, has commendably been doing this job as a service to the public. Please visit their financial literacy website http://www.imsavvy.sg.
Another good site which I highly recommend is http://tankinlian.blogspot.com which requires no introduction for Singaporeans. He is a rare breed who speaks out for people at the expense of his own interest without fear of offending powerful forces related to the financial industry.
I got some heat when I defended the young relationship managers hired by the banks to meet aggressive sales quota. I did not like the way people called them immoral and greedy. Abhorrent their behavior may be, how they behaved is similar to how the average person would have behaved given the same set of carrots and sticks.
The people at the financial institutions are the ones who are best armed with knowledge to teach financial literacy. However, the unfortunate reality is that they have the least incentives to teach financial literacy but every motivation to spread financial ignorance and even disinformation. When you think about the financial products they sell, maximum profit is made from the ignorance of consumers. It is hard to sell high commission products to a financially literate person. The most lucrative customer (or sucker) is a rich, ignorant and greedy one. Hence, it is small wonder the retirees are an unspoken favorite target group of the financial sharks.
Ignorance is something all of us can improve on. You do not need to be highly intelligent to conquer it. Conquering it can at least protect the public from making basic financial mistakes like chalking up high credit-card debts to legalized loan-sharks. This is a fast route to bankruptcy. School teachers should use credit-card debts as an example to teach compound interest. This simple act might have saved some of their students from credit-card bankruptcy when they grow up.
It is more effective to work on one's ignorance than to blame "immoral" bankers who are being business-like in maximizing profits.
Another group that often gets the blame during the discussions are the regulators. On hindsight, deregulating the financial sector by Alan Greenspan and expecting the banks to self-regulate was a mistake. In my humble opinion (pardon me if you know better as I do not have a financial background), the mistake made was in expecting that it was in the interests of banks to self-regulate and not commit financial suicide. Actually, it was in the interest of the bankers to take excessive risks, earn excessive bonuses while the dancing carries on, then when the dancing stops, get taxpayers to pick up the tab and eject with a golden parachute (another round of excessive bonus). It was the smartest way to play the game and this is what you would expect when the brightest minds in the world move into the financial sector. This was clearly a case in which the free market fails. Regulators do have an important role to play in situations when the free market fails. Therefore, the solution to the financial crisis must come from the regulators, not bankers. More regulation, not less regulation.
Some victims of the Lehman Minibonds debacle insisted that the regulators should have protected them from the financial sharks. For practical reasons, I do not think it is wise for the public to depend on more regulation for protection.
There are powerful forces set against the regulators to legislate financial reforms. With the money that the financial services industry can muster, they can exert enormous political pressure on the regulators. Given the important role that bankers play in the economy, they will know powerful friends in high places. With their money, they might even have senior politicians in their pocket. They have many trump cards to play with. You can be sure they will play their cards very well as the excessive bonuses doled out will attract the finest minds in the world. Because of the much higher compensation, the regulators are up against superior minds. These problems are not as serious in Singapore as the civil service is known to be relatively corruption-free, fairly well-paid and therefore attracts its fair share of the bright minds in the country.
However, excerpts of this video (scroll to 0:56:34) show that even the most powerful, smartest politician of America with kind intentions to do good for her country has to eventually bow to the political might the financial sharks possess. The politician in context was none other than Mrs Hillary Clinton.
Certain hiring practices of the financial industry (in US) can "corrupt" even the best regulatory system designed with best practices to be incorruptible. By hiring regulators and paying them ridiculous sums of money to leave the job, bankers have carved out a most lucrative career path for the regulators. Existing regulators, consumed with envy and jealousy of the new-found wealth of their former colleagues, will see the bankers as their future bosses. Immense riches shall come to them once they too have successfully made the jump. They have to be careful not to set regulations that hurt the bank's profits because it is not in their interests to hurt their own future profits. In fact, it is in their interests to remove current regulations that crimp their future bosses' profits. If this can happen in the US, it can happen in Singapore some day because human nature is the same everywhere. Can the people safely depend on their regulators to set policies that protect them?
Hence, the most effective shield the public can use to protect against the financial sharks is to count on themselves in acquiring financial literacy. One of our own regulators, the CPF board, has commendably been doing this job as a service to the public. Please visit their financial literacy website http://www.imsavvy.sg.
Another good site which I highly recommend is http://tankinlian.blogspot.com which requires no introduction for Singaporeans. He is a rare breed who speaks out for people at the expense of his own interest without fear of offending powerful forces related to the financial industry.
Sunday, April 4, 2010
Importance of emergency cash reserves
I have a policy of keeping sufficient cash reserves to meet life's misfortunes. The common risks in life that I can think of are unemployment, medical illnesses, accidents. Risks such as medical illnesses and accidents can be transferred away through insurance. Insurance premiums are fixed costs, so they make financial planning easier as they bring more certainty to the specific risks. This helps one to reduce the size of the cash reserves to be set aside. Generally, when the risks are more uncertain, one has to set aside a larger cash buffer for protection.
In the event of unemployment, I set aside 6 months worth of cash to meet expenses which cannot be avoided. This includes basic living expenses, debt payments and parents' allowances. Although my parents will probably refuse to accept any money should I become unemployed, I think it is a good policy to set aside this money anyway. Children have a greater chance of becoming filial when they grow up when the parents exhibit similar behavior themselves. Therefore, undisrupted payment of parents' allowances despite adversity is a good policy of securing one's retirement in old age because it nurtures filial children who provide retirement support.
As a person grows older, I think 6 months worth of cash will not be sufficient for protection. For the average worker, it is harder to find a job if he gets retrenched at an older age and even when he does, a pay cut is almost inevitable. Therefore, he should set aside at least 10-15 months worth of funds as he grows older depending on how confident he is in finding new sources of income soon.
Besides unemployment, there are other risks in life that cannot be insured away. One risk that presents particular headache to me is parents' and parents'-in-law medical bills as they near the end of their lives. It is very hard to estimate how much this will cost because it depends on how they die. If they were to die a slow death, organ by organ, the doctors will eat up my nest-egg. Because of the uncertainty, one has to set aside an out-sized amount. It is a burden that one has to carry to avoid the regret and guilt of causing the old folks' deaths by denying them medical care. The younger generations of Singaporeans will have to bear even heavier burdens as parents have fewer kids and their life expectancy lengthens. It is incumbent on every parent to start preparing for their retirement to prevent such issues from souring family relationships.
On top of the cash reserves that I set aside for the above considerations, I added another 10%-15% as a margin of safety to meet life's unknown or even unexpectable risks. I think this is reasonable because no one can think of all the possible risks ahead.
Those who invests in the stock market may be tempted to put the emergency cash reserves into it. Indeed, I was tempted when I started out in the stock market. Thankfully, I did not. Like most amateurs, I lost money. However, at no time did I put my family finances in danger because the cash reserves were untouched. An advantage of having ample cash backup is the psychological support it provides which gave me a cool head while others in the same predicament were losing theirs. This is very important in investing as the right psychology plays a big role in success. An investor who becomes disheartened by losses will not be able to recover his losses when the bull market returns.
Some newbie investor will ask "what if they do not have such a cash reserve"? Then, don't invest. My order of priority is to first, buy insurance for protection, then save hard to build up a sufficient cash reserve and finally, invest the rest which represents money that can be lost 100% without danger to the family's finances.
In the event of unemployment, I set aside 6 months worth of cash to meet expenses which cannot be avoided. This includes basic living expenses, debt payments and parents' allowances. Although my parents will probably refuse to accept any money should I become unemployed, I think it is a good policy to set aside this money anyway. Children have a greater chance of becoming filial when they grow up when the parents exhibit similar behavior themselves. Therefore, undisrupted payment of parents' allowances despite adversity is a good policy of securing one's retirement in old age because it nurtures filial children who provide retirement support.
As a person grows older, I think 6 months worth of cash will not be sufficient for protection. For the average worker, it is harder to find a job if he gets retrenched at an older age and even when he does, a pay cut is almost inevitable. Therefore, he should set aside at least 10-15 months worth of funds as he grows older depending on how confident he is in finding new sources of income soon.
Besides unemployment, there are other risks in life that cannot be insured away. One risk that presents particular headache to me is parents' and parents'-in-law medical bills as they near the end of their lives. It is very hard to estimate how much this will cost because it depends on how they die. If they were to die a slow death, organ by organ, the doctors will eat up my nest-egg. Because of the uncertainty, one has to set aside an out-sized amount. It is a burden that one has to carry to avoid the regret and guilt of causing the old folks' deaths by denying them medical care. The younger generations of Singaporeans will have to bear even heavier burdens as parents have fewer kids and their life expectancy lengthens. It is incumbent on every parent to start preparing for their retirement to prevent such issues from souring family relationships.
On top of the cash reserves that I set aside for the above considerations, I added another 10%-15% as a margin of safety to meet life's unknown or even unexpectable risks. I think this is reasonable because no one can think of all the possible risks ahead.
Those who invests in the stock market may be tempted to put the emergency cash reserves into it. Indeed, I was tempted when I started out in the stock market. Thankfully, I did not. Like most amateurs, I lost money. However, at no time did I put my family finances in danger because the cash reserves were untouched. An advantage of having ample cash backup is the psychological support it provides which gave me a cool head while others in the same predicament were losing theirs. This is very important in investing as the right psychology plays a big role in success. An investor who becomes disheartened by losses will not be able to recover his losses when the bull market returns.
Some newbie investor will ask "what if they do not have such a cash reserve"? Then, don't invest. My order of priority is to first, buy insurance for protection, then save hard to build up a sufficient cash reserve and finally, invest the rest which represents money that can be lost 100% without danger to the family's finances.
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