Looking on the bright side of the financial collapse

Looking on the bright side of the financial collapse
By Michael Lewis

One of life's rules is that there's bad in good and good in bad. The total collapse of the US financial system is no exception. Even in the midst of the current financial despair we can look around and identify many collateral benefits.
A lot of attractive office space seems to be opening up in midtown Manhattan, for instance, and the US government is now getting paid to borrow money. (And with T-bills yielding 0 per cent, they really ought to borrow a lot more of it, and quickly.) And so as Morgan Stanley chief executive officer John Mack blasts short-sellers for his problems, and Goldman Sachs CEO Lloyd Blankfein swans around pretending to be above this little panic, we ought to step back and enjoy the positives.
To wit:
We finally get to see what's inside these big Wall Street firms.
We've just witnessed the largest bankruptcy in US history and we know neither the inciting incident (though there is speculation that sovereign wealth funds decided to stop lending to Lehman Brothers Holdings Inc), nor the deep cause. But there's now a pile of assets and liabilities smouldering in New York awaiting inspection.
The assets include sub-prime mortgage-backed bonds and no doubt many other things that aren't worth as much as Lehman hoped they might be worth. But it's the liabilities that are most intriguing, as they include more than US$700 billion in notional derivatives contracts. Some of that is insurance sold by Lehman, against the risk of other companies defaulting.
The entire pile might be benign, but somehow I doubt it. We may well find out that Lehman Brothers, in liquidation, has a negative value of hundreds of billions of dollars. In that case the natural question will be: How much better could things be inside Morgan Stanley and Goldman Sachs, both of which were engaged in the same lines of business?
We are creating the financial leaders of tomorrow.
Remember when everyone believed in Alan Greenspan? When John McCain, running for US president in 2000, said that if Mr Greenspan died he'd have him stuffed and propped up against the wall at the Federal Reserve, where he'd remain chairman?
No sooner did Mr Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart. He's left not only a mess but a void.
No matter how well-educated we become in our financial affairs, we still need public officials to look up to, unthinkingly. And there's nothing like a government bailout to create new public-sector heroes. US Treasury Secretary Hank Paulson, 62, is probably too old; in any case, he's tarred by his association with both George Bush and Goldman Sachs. But 47-year-old Tim Geithner at the New York Fed is perfectly positioned to make Americans feel as if their financial system is in good hands for many years to come.
Getting the credit
I have no real idea if Mr Geithner knows what he's doing and he may not either. ('Bail out that one. No! Not that one - the other one!') It doesn't matter. He's in the middle of great events and should, by the end of them, know more about what happened than anyone.
Whatever happens to the US financial system someone is bound to get the credit for something even worse not happening and, as no one really understands what Mr Geithner does, he's the obvious choice.
Ordinary Americans get a lesson in low finance. It's been expensive but, then, so is kindergarten.
Americans' willingness to believe that we can hire some expert to tell us how to outperform markets is a big problem, with big consequences. It underpins Wall Street's brokerage operations, for instance, and leads to a lot more people giving out financial advice than should be giving out financial advice.
Thanks to the current panic many Americans have learned that the experts who advise them what to do with their savings are, at best, fools.
Merrill Lynch & Co, Morgan Stanley, Citigroup Inc and all the rest persuaded their most valuable customers to buy auction-rate bonds, telling them the securities were as good as cash. Those customers will now think twice before they listen to their brokers ever again. Many, I'm sure, are just waiting to get their money back from their brokers before they race for the exits and introduce themselves to Charles Schwab.
Bank of America Corp will soon discover that the relationship between Merrill Lynch and its customers isn't what it used to be, but Bank of America's loss is America's gain.
America has lots of new houses. Not all of them have people in them, sadly, but that's a minor detail. Even better, no one has had to pay for them, and probably never will.
I'm betting that the US government will soon have no choice but to take the final step and guarantee every bad mortgage loan ever made by Wall Street.
I can hear you thinking: Doesn't that mean the taxpayer foots the bill? That's so negative! Sure, one day some taxpayer will foot the bill but if the government does what it does best, and continues to borrow huge sums from foreigners, it doesn't have to be you or me.
Huge numbers of Wall Street executives will have the time to raise their children.
For years now Wall Street has been far too lucrative for a certain kind of energetic and ambitious person to justify anything but the most perfunctory personal life. Now that the market for his services has collapsed, he has time to go home and figure out which of the children roaming around the mansion are actually his.
In time, he will learn to love them and they him, and they will gain the benefit of his wisdom and experience. Perhaps one day they will put it to use as traders and investment bankers on the Wall Street of the future, where they will report to those exalted creatures of high finance: loan officers.
There, slowly, they can earn the money they will need to pay off the mortgages defaulted upon by their forebears. - Bloomberg
The writer is a Bloomberg News columnist and the author of 'The Blind Side'. The opinions expressed are his own.

This article was first published in The Business Times on September 19, 2008.

Starting Kids on Managing Money

Starting kids on managing money Teach your kids good money management. -->

By Lorna Tan, Finance Correspondent

My son was nine when he popped this question: 'Who gets the house when you and Dad pass away, Mum?'
Startled, I retorted: 'I'm giving it to the church.'
In case my parish priest is reading this, I'm sorry, I lied. I wanted to avoid giving the boy the impression that he could depend on his parents financially for life. Better for him to stand on his own two feet and be responsible for himself when he grows up than to depend on handouts.
But what am I doing to ensure this?
The recent media reports highlighting the undesirable trend of younger Singaporeans facing credit woes were a wake-up call for me. It appears that most of these young adults are snared by materialism and a desire for the high life. With easy access to credit, they splash money on cars, branded goods, clubbing, gadgets and overseas holidays.
As a parent, I would be devastated if my kids became bankrupts through bad money management. In fact, it will be an irony because a large part of my job is to advocate in my articles the importance of financial literacy.
Like all parents, I want my children to be useful and upright people leading fulfilling lives. However, it is becoming evident that having reasonable levels of IQ (intelligence quotient) and EQ (emotional quotient) is no longer adequate to get through life successfully. We've neglected the importance of FQ (financial quotient).
Finally, Singaporeans are slowly waking up to the reality that it is not enough to 'study hard and earn money' but also how to save and invest it. This was why I decided to register my kids for a two-day financial literacy programme during the June school holidays. It was called the MoneyTree programme, conducted by home-grown firm Young Entrepreneurs' Secrets. It costs $680 to $880 per person, depending on the level.
My 15-year-old daughter was receptive to attending the programme but I had difficulty convincing my 14-year-old son to do so because he did not see the necessity for it. Neither did he want to give up two days of his precious vacation time. Frustrated, I ended up giving them $50 each as an incentive.
I sat through half of the first day's session and was impressed with what the children were put through.
In an informal classroom environment, some 14 children were taken through a series of key topics, including how the forces of demand and supply determine prices of goods, the types of income and their sources, managing money and prioritising expenditure.
To simulate the real-world environment, the children were provided 'play' currency and 'credit cards', which gave them a feel of the financial pitfalls that exist in the real world.
I found myself gritting my teeth when my son was the first among the participants to use his 'credit card' to pay for a transaction, without considering the interest-rate charges that would snowball. I was tempted to intervene but I quietly consoled myself that it was better for him to make mistakes now than learning them the costly way later in his adult life.
The youngsters were taught the importance of budgeting and 'paying yourself first' so as to prevent overspending. Another key lesson was to differentiate between needs and wants. 'It's not how much you make, it's how much you keep' was something that the trainers emphasised throughout the programme.
Useful takeaways from the programme include the importance of saving early to take advantage of the benefits of 'compound interest' and the 'Rule of 72'. The former refers to interest paid on both the principal and accumulated interest over time, while the latter shows how long it takes to double your money by dividing 72 with the expected interest rate.
For instance, if you invest $10,000 in an instrument that gives you an annual return of 6 per cent, that sum will double to $20,000 after 12 years.
In the same vein, the price of a burger will double to $8, 12 years from now, assuming it is currently sold at $4 and the annual inflation rate is 6 per cent.
On the second day, the children learnt more about bank savings and making their money work harder by having multiple income sources and investing in stocks and unit trusts, and the differences in risk and reward between saving and investing.
I hope the lessons my two kids gleaned from the two-day workshop will go a long way, but I'm aware that I, too, have a role to play in instilling good money habits in them. One method recommended by experts is to encourage the saving habit by matching the kids' savings. I should also hold back from giving in too easily to their demands when they badger me for gadgets and consumables like mobile phones.
Recently, I started involving them in my financial planning by giving them an idea of the various instruments I use to make my money work harder for me. By doing so, I hope they will understand the need to plan for their financial future early by inculcating good money-management skills and discipline.

This article was first published in The Straits Times on August 17, 2008.

Start saving to get on to the wealth track

WEALTH is often measured by a posh home, luxury car, several private bank accounts, and a fat salary.
But Paul Clitheroe, probably one of Australia's most visible spokesmen for financial literacy, says it is not how much you earn that makes you wealthy. It is how much you spend.
That is, frugality and a savings habit will help you get started on the wealth track. 'Globally no one understands that,' he rues.
He recounts that just the day before, he had a four-hour conversation with a bank chief executive earning a $3 million salary, and saving nothing. 'That's common. When he got home at night, doing his own budget was the last thing he wanted to think about. He spent the whole day doing the bank's budget. I could teach him nothing. Every good principle of money advice he knew. He will see a financial planner next week; he will know more than the financial planner.
'I told him - you're far better educated, but you have to shut up and listen. What the planner will do is to make you do the basics, a budget. You should be saving $1 million a year. Then he said - 'I got it! I thought the financial planner was a genius who is going to make me rich.' '
Mr Clitheroe was one of five founders of Australian financial advisory group ipac in 1983. The five friends pooled personal savings of a total of A$100,000 (S$127,000) to start ipac. In 2002, ipac was sold to AXA for about US$250 million. Today the group, which has an office in Singapore, manages more than US$14 billion in assets. Four of the founders remain active in the business.
Mr Clitheroe, who has written books, says: 'My role was always to be out in public to talk about the value of advice.' Between 1993 and 2002, he hosted a Money programme on Australian television, and has been chairman and chief commentator of Money Magazine since 1999. Currently, he is ipac executive director, and also chairman of the Australian government's Financial Literacy Foundation.
'What is financial literacy? Of every dollar I earn, I spend 80 cents and put aside 20 cents. You have financial literacy. The more educated people are, the more they earn, the less likely they are to save. The people in Singapore who most understand budgeting will be the poorest who wonder how they are going to buy rice tonight.
'They actually possess more financial literacy than many others put together. As a community like Singapore develops, the less people worry about how they will buy rice, we lose financial literacy.'
Mr Clitheroe says one of the great and persistent fallacies is that a financial adviser can make you wealthy. He tells aspiring entrepreneurs - who tend to be Asian - to take their savings, start a business, and return to see him in five years. Ipac's audience, instead, tends to be wage-earning executives.
'I don't believe financial advisers make people rich. People make themselves rich. The adviser's job is often a strategy to turn career earnings into wealth. But with a business owner, the time to save is likely to be when the business is sold, and that's a significant amount of money.'
People, he says, tend to chase 'false prophets' - in this case, the myth that an adviser can be a 'magic pill' to wealth. He recounts that earlier in the day, he exchanged pleasantries with a passing Australian couple here who recognised him. 'As they walked away, the question they asked was - Do you have a hot tip for us?
'What are the true hot tips? Be nice to your mother and don't stand on a canoe. That's valuable information,' he guffawed.
'It's like the diet industry. Would I prefer to eat chocolate doughnuts and eat a magic pill to keep slim? Give me the magic pill! Who is tricking us? If it looks too good to be true it will be.'
As Asians tend to be entrepreneurial, Mr Clitheroe say ipac's growth in Asia is likely to be slow. He shrugs off competition from private banks, however. 'When we sold ipac, I became a classic private bank customer. But a private bank is a money manager; they're not my life counsellor.' This is because a bank makes money from transactions, deposits and loans, and thus is more likely to churn clients' accounts.
Ipac charges a fee for advice, although this isn't common in the advisory market here. 'If you don't pay someone an annual retainer, how do they possibly give you trusted advice? I'm a very happy private bank customer, but the bank is transactional. My banker gets promoted every couple of years, and I get a new banker. In (ipac), clients that talked to me 25 years ago still talk to me. I have the same business cards with the same number. That's what I call a trusted advice model.'
He adds: 'We're not pretending this will be a dominant model in Asia; it won't be. But we feel very strongly it will be a powerful niche. Over time, most of our clients will come from other clients.'
Meanwhile, some of Mr Clitheroe's efforts goes towards getting employers in Australia to offer financial literacy courses to their staff. 'Around the world, employers say, that's not my problem. But the best argument for financial literacy is that it is in the interests of profitability and shareholders.'
Research in the US and Australia increasingly shows that financial stress in employees leads to lower productivity, absenteeism, demands for higher pay, and higher turnover as staff chase higher salaries elsewhere.
'I tell companies that building financial literacy through workplace training is not only a good statement about their role as a community citizen, it will make money for shareholders. The second I talk about making money, the conversation shifts dramatically.'
Some employers, he says, are concerned that staff who are financially comfortable will quit their jobs. 'Employers say, if they're broke, they'll need to work for me ... I say let's look at the research. People get bored with early retirement. Ten years ago the typical Australian retired at 55. But most went back to work at 57, and it's not due to money. It's the social contact they miss. Financially independent people are better employees. They go to work because they want to work.'

This article was first published by The Business Times on Aug 6, 2008.

When ' GOOD' debts turn 'BAD' things get ugly

When 'good' debts turn 'bad', things get ugly
By Alok Kumar
Today's uncertain economic outlook calls for consumers to think about what they actually need to spend to maintain the lifestyle they are accustomed to, and to carefully assess if they have the financial flexibility to cope with any change in circumstances.
Although consumers may start thinking about spending on big ticket items like holidays, home improvement and car purchases to take advantage of the strength of the Singapore dollar before prices increase further or to enjoy current low interest rates, consumers should still exercise prudence in their spending.
A recent survey by GE Money Singapore revealed that 66 per cent of respondents felt that the uncertain economic climate has made them more cautious when considering a loan.
If a loan is required, one needs to evaluate the loan that one is taking.
Debt can be a complex issue and it is thus necessary for consumers to be able to differentiate between 'good' and 'bad' debt.
'Good' debt essentially helps one make purchases for items or essentials that one may not have enough savings for at the moment, but can well afford in the long run. It is essentially debt that can create value.
When used intelligently, debt can be positive and even be of assistance in building wealth. Examples of 'good' debt can broadly be divided into three areas.
These include loans taken to purchase assets such as property that may appreciate in value; for activities or items that are beneficial such as education to enhance one's qualifications that will likely increase one's earning ability and long-term returns; loans for business ventures for which business owners need cash that they do not have at the moment to fund or expand their facilities, with the aim of getting better returns in terms of business profits.
In addition, debt, if used prudently, can often be leveraged to one's advantage in certain circumstances. For example, one of the most common uses of loans applies to the purchase of cars.
We often see cars as depreciating assets but very often, it is a necessity or a mode of transport that gets one to work to earn a living.
While some consumers may be able to pay for their cars upfront or even pay for a property with existing cash without taking a loan, most will prefer to leverage debt so that they can free up cash for other purposes that may yield greater benefits in their opinion.
Depending on the individual's unique circumstances, the 'freed-up' cash can be used as emergency reserves to prepare for a rainy day.
Or, it may be used by savvy investors who can generate returns in excess of the interest rate they pay on their car loans. For example, there are also some small business owners who find it cheaper to take a car loan, and use the available cash to finance business needs, and hence gain better returns.
For instance, take a car loan quantum of $100,000 with a flat interest rate of 2.5 per cent (effective interest rate of about 4.61 per cent per annum).
A business owner who can afford to pay cash for the car might take full financing at these rates and use the cash to finance his business needs instead, considering that current business loans have an interest around 9 to 13 per cent per annum, effectively leveraging debt to his advantage.
A debt is considered 'bad' when a person has to stretch himself beyond his means, overspends and as a result, is unable to settle his loan repayments.
As a general rule of thumb, most financial experts recommend that an individual's total personal debt should not exceed 36 per cent of gross income.
Besides the debt-income ratio, keep in mind that a person can fall into a debt trap through the accumulation of late payment and interest charges as well.
For example, the concept of 'bad' debt often comes into play when discussing the purchase of discretionary items using high-interest credit cards and not having the ability to pay off the credit card bill in full.
The discretionary item, especially if purchased without considering one's financial situation, continues to lose value, while the amount one paid for it continues to increase.
Exacerbating the 'bad' debt factor, some consumers may be tempted into applying for in-store credit cards for the savings offers that range from 10 per cent to 20 per cent off the cost of purchases upon signing up immediately.
What people often do not realise is how much of that savings may be destroyed by the high interest rate, sometimes as high as 24 per cent per annum, on the card if they fail to pay for these items immediately.
Penalty charges for late credit card payment can also be incurred and amount to additional expenses on top of the higher interest rates.
Be careful to avoid turning 'good' debt into 'bad' debt by considering factors such as other existing monthly payment obligations, both fixed (eg housing, car, insurance) and variable (eg food, clothing) as well as possible shifts in the economic climate, to ensure that you are comfortable with the monthly repayments, and prevent unnecessary late payment charges.
Of course, even after careful planning, there may be instances when consumers need to make adjustments to their cash flow, or would require a loan.
Consumers appreciate and look for flexibility when considering a loan. In the GE Money consumer survey, 95 per cent of respondents stated that flexibility was an important or very important consideration when taking a loan.
Yet, more than half viewed their current personal loans as restrictive and felt imprisoned by the inflexibility presented by current industry offerings.
There are in fact, flexible personal loans in the market that cater to the consumers' needs for repayment flexibility. For example, personal loans that offer flexible repayment options including payment holidays and the option to pay interest only at the start of the loan, etc.
These payment features help individuals manage changing financial circumstances, by allowing customers to allocate cash to where it is needed most, without incurring heavy penalties for taking a break from the loan payment.
In fact, the GE Money survey showed that 43 per cent of consumers appreciated flexibility at the start of the loan, the time when they are usually strapped for cash, while 43 per cent felt that it was important to have flexibility to deal with unexpected events that can possibly take place midway through a loan's term.
Ultimately, a loan can help an individual, and can be a positive affair when taken responsibly. Consumers need to consider what is needed to leverage debt to their advantage and to prevent 'bad' debts.
Consumers need to build a good credit history that not only shows accountability and maturity about the individual, but will help the individual obtain other future loan facilities when needed.
Exercising financial responsibility and prudence when it comes to taking a loan will help individuals take steps towards building a better future for themselves and their families, and facilitate their future requirements at different stages of life.
The writer is chief marketing officer of GE Money, Singapore.
This article was first published in The Business Times on 4 July 2008.

START EARLY, and TIME IS ON YOUR SIDE

Start early, and time is on your side
It's embarrassing to say this because it makes me seem money-minded, but I sleep with my financial calculator at my side.
The reason is very simple.
I enjoy playing with figures, and one of my favourite bedtime activities is punching different permutations of numbers into my calculator to work out the number of years it will take for me to fill up my pot of gold, which to me means financial independence.
PAY YOURSELF FIRST
When you sit down to sort out your bills, the first cheque you write should be to yourself. Work out what you can realistically save every month and pay that 'bill' first by depositing the money in the bank or investing it. Then, and only then, pay your other bills. Start with a modest sum and stick to it. Set aside more when your income goes up. If you get a bonus, sock part of it away.
It never fails to amaze me that it is possible to grow a modest sum into a sizeable one simply through the power of compounding.
For instance, do you know that $68 a month invested for annual returns of 8 per cent over 30 years will generate a sum of $102,020? But if your investment horizon is shorter, say, 10 years, you will need a larger monthly sum of $554 invested at the same rate of 8 per cent to generate $102,020.
Consider this: If you start saving at the age of 20, putting away $2,000 a year until you reach 30, and you continue to stay invested without any further input of cash till you turn 63, you will have nearly the same amount of money socked away as a person who also saves $2,000 every year but starts a decade later, between the ages of 30 and 62.
To illustrate this, let's assume Mr A started a yearly investment of $2,000 at age 20 and stayed invested for 10 years, at a rate of return of 6 per cent. Then, from age 30 to 63, he allowed his investment to continue growing at 6 per cent without any further annual inputs of $2,000. At age 63, his investment would total about $191,150.
In contrast, take the case of Mr B, who embarked on a yearly investment of $2,000 only when he turned 30. He must continue putting in $2,000 a year all the way till he turns 62 before the total value of his investment grows to about $192,690.
A handy and easy tool that illustrates the effects of compounding is the Rule of 72.
To work out how long it would take for your investment to double in value, divide 72 by the expected percentage return. With a return of, say, 9 per cent a year, to double your money, you would need eight years, that is, 72 divided by nine.
This means that if you invest $10,000 in an instrument that gives you an annual return of 6 per cent, that sum would double to $20,000 after 12 years.
I've concluded that to make compounding work for you, two things have to be present: a good savings discipline and a long investment time horizon.
Set up a saving routine and stick to it
Let's look at the first one. Without the discipline to save, there can be no surplus for investments.
Not long ago, I ran into a former colleague who complained that she was unable to save every month, after settling her bills and paying for entertainment. It was clear to me what the problem was: She was paying others before she paid herself. Being disciplined about saving includes learning to 'pay yourself first'.
It is not that difficult to make savings your priority. Decide how much you can realistically save by taking into account your monthly liabilities. Start with a modest sum and stick to it. Increase this portion when your income goes up. Don't spend all your year-end bonuses.
Over the years, I have found that most people have trouble saving for the long term. They might be disciplined at the beginning and save for a short time, but then, they throw caution to the wind by blowing all their hard-earned savings away on some big-ticket purchase such as a holiday or a car.
I have money automatically channelled from my pay and deposited into regular savings plans so I have no access to it. After all, if I don't see it, I'm much less likely to spend it.
Financial experts typically advise clients to save 20 per cent of their pay. Learn to distinguish between needs and wants, limit expenditure on depreciating assets such as consumables and live beneath your means. Don't give in to compulsive buying habits and make it a habit to question every purchase.
Start as early as you can
The second factor required to make compounding work for you is a long-time horizon. This refers to the amount of time you have before you actually need to cash in your investments.
Generally, if you have less than one year, your investments should be kept liquid, in savings and money market funds. If you have a medium- to long-term horizon of five to 10 years, your money should be kept in a mix of cash, lower-volatility instruments such as fixed income, and equities.
If you have an even longer horizon, you have enough time on your side to ride out the volatility of investing in equities, so more of your investments could be channelled there, depending on your risk appetite.
This is why it's just good sense to start saving early as well as regularly. In fact, get started as soon as you get a job because you will have more time on your side. Check out regular saving schemes, which include savings plans offered by banks as well as insurance plans. Many unit trusts also let you make regular savings plan contributions from as little as $100 to $200 a month.
We work hard for our money, so let's make sure our money works just as hard for us. Focus on the long term and make time your best ally.
This article was first published in The Sunday Times on May 25, 2008

Dispelling 10 money myths

AMID the backdrop of a beleaguered stock market and challenging economic conditions, it is even more imperative that you manage your wealth well. More often than not, our wallets are lighter than they should be because of unsound beliefs in how to amass and grow our wealth such as the following:
You cannot lose money with high grade bonds
With the stock market is facing more challenges today, investing in the safety of good grade bonds seems like an excellent idea. But nothing can be further from the truth. In fact, investing in long-duration bonds or 'long bonds' may be one of the greatest investment mistakes of the next decade.
This is because bonds are effectively IOUs issued by corporate bodies or governments to raise money. They pay a fixed rate of interest over a fixed term, say 10 years. But while the income may be fixed, the price is not. A bond holding bought one year ago, for instance, is likely to be worth a lot less now if interest rates start to surge. In fact, the longer the duration of the bond, the sharper will be the drop in its value when interest rates go up.
You can time the market
A client asked me recently whether it is true that many unit trust investors lose money. There is some truth in this but it is not entirely accurate.
Let us compare the following: The annualised return for the S&P 500 over the last 20 years, with dividend invested, is about 11 per cent a year. Meanwhile, the average investor of unit trusts, investing in S&P 500 companies, earns only 6 per cent a year during the same period. As for the average direct stock investor, he earns a meagre 3 per cent a year during that time.
The only plausible explanation for such great discrepancies is poor timing, which just goes to show that timing the market accurately is an almost impossible task. Most investors are in fact consistently worse off due to the poor timing of their investment.
Bluechip stocks are low risk
Remember previously local hot favourites like ACCS, Citiraya and China Aviation Oil? Their rise was meteoric but their fall from grace was equally spectacular. Over in Europe, shares of Northern Rock Bank of the UK are almost worthless. In the US, the collapses of Enron, Worldcom, and more recently the plunge in Bear Stearns' share price from US$160 to US$10 is still fresh in our minds. Many top Wall Street banks are now scrambling to raise cash to beef up their depleted reserves from the sub-prime write-offs.
Much of the stockmarket losses may well take more than a generation to recover. For example, the US stock market hit a peak in 1967 and did not cross that mark until 15 years later in 1982. The Japanese stock market reached its secular peak in 1989. Even today, the Nikkei is trading at less than one-third of its historical high. Many global technology funds are also trading at less than 50 per cent of their all time highs from 2000.
I will start saving when I have enough money
It is never too early to cultivate the good habit of saving, because the sooner you start, the longer the period your money gets to grow. This is my general advice to people of all ages, but young people in their 20s and 30s should take special heed as they tend to overspend.
Despite our grand new year resolutions to start saving more, many seem to always fall behind their planned saving schedules. It is best that you put money aside in a systematic manner through an insurance plan, a regular savings plan or a recurring investment programme. Start with an amount you feel comfortable with and gradually step it up when you gain more confidence in setting aside the committed amount.
I am too young for life insurance
You may be young, but you are not immortal. As soon as there is someone who depends on you financially, you will need life insurance. That may be a partner whom you share a mortgage with, a spouse, or children - anyone who would struggle for money as a result of your death.
Statistics show that you are five times more likely to suffer a critical illness than you are to die before age 65, as heart attacks and cancer are becoming more survivable than ever before. In fact, most people who contract multiple sclerosis are aged between 20 and 40, and half of all testicular cancer cases show up in men under 40. As such, all Singaporeans should make sure that they have adequate critical illness cover in their life insurance programme.
There is no need to teach children about finance
Ignorance and money are a dangerous combination, so it is very important to help your children understand the value of money. Parents should start discussing the concept of money with their children once they start saying they want something. For a start, you can begin by teaching them that they get things only when they earn them.
As your children get older, you can introduce them to the concept of stocks. You could buy them some Singapore Airlines (SIA) shares and tell them that when they fly on an SIA plane that they partly own the plane and the company, so if SIA makes money, they will too.
This way, they will understand from a young age the importance of saving and investing wisely, so they will be able to take better care of you when you get old.
I am changing my car because the new car is better for my cash flow
This is one of the silliest notions I keep hearing over and over again from clients. To be fair to the salesman, we, the buyer, want to believe him. Our ability to exercise good judgment is often obscured by our innate desire for that flashy piece of metal. We figure that life is going to be much easier when we are the object of envy among friends, colleagues and relatives.
The moment a new car is out of the showroom, its resale value would already be much lower. Also, you would have to take a huge loss when you sell off your old vehicle. Lower maintenance cost of a new car is largely an illusion, as most Japanese or European cars are made to last for at least 10 years without major problem. Although the monthly loan financing of the new car may be lower, this is usually because you are stretching your loan repayment period and you have also ignored the par value of your current car in your calculation.
Nevertheless, this remains largely a lifestyle decision, and if your income can support it, it is really no great sin to spend some money for that extra attention. To me, I am too much of a miser to consider it.
I should pay off my mortgage as soon as possible
Liquidity should be the No 1 consideration in any prudent investment. Many Singaporeans believe that home equity (defined as the excess of your property valuation over your remaining mortgage) is a convenient nest egg which they can tap when they are in financial trouble. But the opposite is true instead.
You see, banks are income lenders, not collateral lenders. They associate assets with liens, but their first requirement is that you must show your ability to repay your loan. The irony is that you almost have to prove that you don't need the money before they loan it to you.
But note that what I am advocating is not piling up excessive debt but the proper management and utility of debt to enhance your wealth. In fact, most people do not realise that mortgage interest can be used to offset their rental income in their income tax computation, thus reducing their effective borrowing cost of a rental property.
A shortage of land in Singapore means property prices cannot fall
It is true that land may be scarce in Singapore but it is mathematically impossible for residential prices to appreciate faster than income over long periods of time. Think about it. If home prices go up more than income over time, nobody would be able to buy a place to live in, apart from inheriting one.
Other common property-related myths include:
Prime properties never fall in price.
During the last property market correction in Singapore from 2001 to 2005, property across the entire spectrum of the market was affected, regardless of whether it was high or low-end. Remember, there is a difference between high prices and increasing prices. Prices may be high, but they may not be increasing.
House prices do not fall to zero like stock prices, so it is safer to invest in real estate.
It is true that house prices do not fall to zero, but your equity in a house can easily fall to zero and even below that. It just takes a fall of 30 per cent to completely wipe out people who only have 25 per cent equity in their house. This means that house price crashes may actually be worse than stock crashes. Singaporeans should take note especially since most of their retirement funds are locked in their property, and the money may be leveraged.
I do not know why I always overspend
The cause may appear unclear initially but actually the following are some of the common reasons why people spend beyond their means:
Buying happiness: This is an easy trap to fall into, since most advertisements go to great lengths to associate a product with happiness. They lead you to purchase things by persuading you that doing so will make your life better. While the purchase itself may give you pleasure, the feeling is fleeting. You will end up having to purchase something else to find more 'happiness'.
Keeping up with the Joneses: Spending to bolster your image is dangerous. In many cases, the Joneses are doing exactly the same thing to keep up with you.
Embarrassment: Often it is hard to admit to friends that you do not have the money to take part in certain activities, so you play along instead and pay for things that you cannot afford. These could be anything ranging from a weekly dinner at a fancy restaurant to regular golfing sessions.
Lack of patience: Some people want instant gratification. When they see something they fancy, they want it immediately, regardless of whether they can really afford it.
Laziness: Instead of doing some research, looking for deals and spending their money wisely, they often pay too much for things. When bargaining, a sure-fire technique is to ask dispassionately, 'What is the lowest you can go?', even if you feel that the price is already very good and you really want that item. Often, the seller will give you a better offer.
Hopeless optimism: Many people spend with the expectation that they will earn more money soon as a result of a pay rise or bonus. But if the bonus or raise does not work out as expected, there will be a lot of debt to account for.
Charge and charge: Some people who do not have the cash in hand see credit cards as real money. This, of course, can get them into a lot of financial trouble.
These are just a few reasons behind overspending - some people may be motivated by a combination of several reasons. Whatever your reasons, understanding the motivating forces behind overspending can help you address the issue and get a new 'lease of life', financially speaking.
This article was first published in The Business Times on May 14, 2008

THE POWER OF COMPOUNDING IN INVESTING

The power of compounding in investing
Time could help regular-savings-plan investors chalk up a considerable sum of returns.
Clearly, the initial investment sum plays an important role in the sum of returns. Let's say you invest $100,000, assuming an investment return of 20%, you would get $120,000 in total. The sum would diminish to $12,000 if you had invested only $10,000 at the same rate of return. So some people may have an illusion that investment only work well for people who invest large sums of money.
Well, not exactly. Even if you invest a relatively smaller amount, you could make a very good return by utilising the power of compounding. What you need to have on your side is TIME; or simply to invest early. Let's illustrate how much $100,000 would grow at steady rates of return over different periods as shown in Table 1.
Assuming a long term rate of 2% per annum, the initial amount of $100,000 would grow to $ 122,000 in 10 years, and $181,000 in 30 years' time. However, if you chose to just invest into fixed deposits at this point of time, you would probably expect a lower rate to be used for compounding. The current fixed deposit rates from three largest local bank ranges from 1.4% to 1.5% per annum as at 20 February 2008. If you chose to invest in a diversified balanced portfolio with a 40% weighting in fixed income funds and 60% weighting in global equity funds, you would probably expect returns from 5% to 7% per annum over the longer term.
Thus, if an investor chose to invest in a diversified portfolio with an average rate of return of 7%, the investment could grow at a faster pace. Assuming a rate of return of 7%, in 10 years, the investment will grow to $197,000 and to $761,100 in 30 years' time.
You may wonder, "What if I am good at building an aggressive equity portfolio and I invest early?" Assuming an annualised return of 12% - in 10-year's time you would have made $311,000, which is 3.1 times of the original investment amount. The sum balloons to almost 30 times the original amount in the span of 30 years. A great value investor like Warren Buffet generated annualised returns of 21.4% in the past 42 years (since 1966). With the power of compounding, the investment grew tremendously to 336 times the original amount in 30 years.

Source: Fundsupermart.com compilations, all figures rounded off to the nearest thousands
The table above illustrates that fixed deposit may look safe but would entail substantial "opportunity cost" of giving up investment. As long as you invest early and pick the right asset class or portfolio, even a decent annualised return of 7% would bring you a long way. Investing for the long term also helps investors to tide over short-term volatility in equity markets. Long-term value investors are less-likely to exhibit too much fear during volatile times unlike many ordinary stock investors who just look into momentum investing.
Other than investing a lump sum for the long term, investors may also choose to invest regularly by using the Regular Savings Plan. This investment strategy is suitable for long-term investors to make use of the power of compounding. by Kelvin Yip