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A Path to Forever Financial Freedom

Author:   |   Latest post: Thu, 9 Aug 2018, 02:34 PM

 

Upping Your Game Level - With Margin Financing and CFD

Author:   |  Publish date: Thu, 9 Aug 2018, 02:34 PM   |  >> Read article in Blog website


In the spirit of supporting my good friend's Chris in his next upcoming talk on achieving financial independence with Reits, I have decided to do a blogpost on it which I've been wanting to do it but have very little time and interests in the past to do it.

If you still have not registered for Chris talk, you can register it here.

This is not a sponsored post or anything, so read as usual with your own pinch of salt.



Margin Financing or CFD

In layman terms, margin financing or CFD simply means leveraging by borrowing money to build your portfolio in the hope that you will reap greater rewards.

There's a few margin financing services out there you can find. 

Maybank is one of them with the better ones, offering at 2.88% for Reits and some other Grade A stocks that they define, at a maximum of 3.5x leverage level on the amount of cash pledged.

For me, I have an account opened for CFD with Cityindex the past couple of years, which currently offers at 3.2% and able to leverage a maximum of 10x (trust me, you won't want/need this much leverage).

Typically, most margin calls will happen at < 140% based on the margin ratio of the total value of your shares worth divided by the amount of loan that you are undertaking.

In this post, we'll try to find the sweet spot by going through a few examples.

Example 1 - Purchase Singtel @ $3.20 with 2.5x leverage @ 3.2% financing

Let's assume you find Singtel price today at $3.20 very enticing but yet you have only $10,000 worth of cash to utilize.

With the cash you have, you are only able to purchase a total of 3,100 Singtel shares. Assuming they maintained their current dividend payout at $0.175/share, your annual dividend received would have been at $542.

Now, if you decide to venture a bit of a risk and go for 2.5x leverage on the amount of cash pledged, that will enable you to leverage up to $25,000 as loan, you would be able to purchase worth of 10,900 Singtel shares. Assuming they maintained the current dividend payout of $0.175/share, your annual dividend received would have been at $1,907. After netting off the interest paid (3.2% x $25,000) of $800, you would still receive a net dividend amount of $1,107, which is almost double the amount if you did not do any form of leveraging.

This is assuming price stays constant throughout.

Small Correction Scenario

Let's give a bit of variation to make the case interesting.

Let's assume there is a small correction in the market and the share price of Singtel drops from $3.20 to $3.00, a drop of about 6.5%.

If you are buying on full cash, then it'll just be a temporary paper loss for you, unless you decide to cash out. If you think Singtel is worth higher than what the market perceives, then all you need to do is to hold on and wait for the rebound to take place.

However, if you are buying this on the margin scenario above, then your value of Singtel is now worth $32,700.

Since $32,700 / $25,000 = 131%, which is less than the <140% margin ratio, you would get a margin call to top up the difference back.

This is usually when investors are screwed, because they are either caught by surprise, do not have extra cash, or forced to sell off their holdings at the loss (no more paper loss at this point).

Example 2 - Purchase Singtel @ $3.20 with 1.5x leverage @ 3.2% financing

What happen if we lower down the leverage to 1.5x in this example.

This means, using $10,000 as pledged, we borrow a further $15,000 to purchase at 3.2% interest.

This would enable us to purchase 7,800 Singtel shares worth at $3.20.

Should a small correction happens and Singtel price drops to $3.00, your shares are now worth $23,400 and your margin ratio would be $23,400 / $15,000 = 1.56, giving you a nice cushion of buffer to allow rebounds to happen.

In this scenario, your Singtel share price would need to fall below $2.69 before you get your margin call and the need for top up.

Recession Scenario

In a recession type of scenario, it is likely that we will see Singtel breaks below $2.69 and thus you are likely to also face a margin call, which happens a lot during a major crisis in the past.

Using the GFC as a benchmark, we have seen Singtel drops as low as $1.99, which would mean your margin ratio would have been at $15,522 / $15,000 = 103%.

Example 3 - Purchase Singtel @ $3.20 with 0.8x leverage @ 3.2% financing

This is if you want to play very freaking safe but yet die die still wants to leverage on your capital.

Assuming you have $10,000 cash pledged as capital, and wants to borrow $8,000 as your loan, you would have 5,700 Singtel shares worth at $3.20.

Should GFC comes and your Singtel shares drop to $1.99, your shares are now worth $11,343 and your margin ratio are now worth 141%.

To me, this is the safe level, the same concept on how your Durex condom sells based on the probability level.

Of course, with 0.8x leverage, your reward is very much reduced too.



Pre-requisite Criteria

There's a few pre-requisite criteria you should have before you even want to venture into this sort of area.

First, you need to be selectively good in your stock picking.

If you suck in your selection of stocks in your current all cash portfolio, then likely is your suckness level will get multiplied in the leverage tool. If you suck in stocks selection, you'll lose out either way in your today's portfolio or in your leverage portfolio.

Second, you still need to ascertain a buy with some level of margin of safety.

The above example we used earlier is buying Singtel at the current today closing price of $3.20. If you had bought Singtel at a much higher price (say $3.90) using leverage, then likely not even 0.8x leverage will give you enough comfort.

If you use the 0.8x leverage method during the peak of the financial crisis, then likely your safety level is even higher than the Durex condom promise they can give you.

Third, my criteria is to buy companies that pays out at least 3.2% worth of dividend yield to minimally covers the interest track I am paying. This ties back to the type of stock I am interested in and also the valuation level based on the second point.

Last but not least, the mental needs to work together with you.

There'll be lots of shit stirred from the news and your friends and you just need to work out the maths to ensure this works out to your advantage.

After all, we are all leveraging already when we bought our home purchase right?

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Dividend Income Updates - Q3 FY2018

Author:   |  Publish date: Wed, 8 Aug 2018, 07:40 PM   |  >> Read article in Blog website


I am writing this dividend update in an attempt to compile my quarterly dividend performance for the year.

The theme for this year dividend income updates will be based on my understanding of the advantage of dividend investing and that is to compound dividends for as early as we can, for as long as we live.

Time is our friend for this very same purpose.

While some may argue that dividend is not everything there is to investing, as they can be easily trumped by other factors such as the larger capital loss, dividend has played a very important part in an investor's return over the long run and therefore should not be neglected.




Kyith, in his latest article, summed up quite nicely on how the flexibility and buffer of your dividend income will help you get towards the final designated financial independence. The common consensus argument I often hear is what happens if there are recessions and the companies you own cut their dividends, won't then investors be caught off-guard with the lesser amount of dividends received?

The answer to that is quite simple.

If you are worried about cases like that, it simply means you didn't know your strategy or companies well enough to make that decision. And if that is the reason why you decide to keep a lot of warchest therein, then by the time you figured it out, you would have lost a lot of opportunity costs on the dividends you would have been receiving if you stay invested. Still, if that is what kept you mentally safe, then it's also not wrong to do what you are comfortable with.

Therefore, my answer to that is, if the valuation of the company is good to buy and you have ascertained some margin of safety embedded inside your justification to buy, and it fits into the strategy you are going for, then just keep on buying, and keep getting that dividends every quarterly/semi-annually/annually.

We can't control the other parts we cannot control so don't bother too much about it.

Without further ado, here are the 3rd Quarter Dividend Income that the portfolio will be receiving:


CountersAmount (S$)Ex-DatePayable Date
Vicom3,809.00 13-Aug24-Aug
M13,900.00 7-Aug17-Aug
Fraser Logistics Trust1,272.00 16-May7-Aug
Singtel3,959.00 26-Jul13-Aug
Far East Hospitality Trust1,010.00 6-Aug14-Sep
Starhill Reit1,090.00 2-Aug29-Aug
Total 15,040.00


After tabulating the dividends for all my companies, the 3rd quarter dividend income came up to $15,040.

The annual dividend income so far covers 0.7x of the day to day expenses our household is incurring at the moment.




Together with the past dividends received, the portfolio has now accumulated $116,443 worth of dividends and I hope this number will keep on increasing over the next few quarters and years so it will one day become an integral part of my sustained income to live off my day to day expenses.

The tree that you are standing down under today for the shade is there today because someone once planted a seed 10 years ago.

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How Do You Negotiate Your Next Pay Rise?

Author:   |  Publish date: Fri, 3 Aug 2018, 08:51 PM   |  >> Read article in Blog website


As a minor retail investor like myself, income has always been an important determinant over the years as part of our capital size on top of the other factors such as savings rate and capital allocation.

It is therefore important that we do equally well in our human capital ability and measure it the same way we did for our investment return as an investor.

One way to measure this is through our active income growth rate, i.e the ability to grow our income in the form of sidelines or salary increase either through progression or promotion or pay increase in the next corporate role change.

On this article, let's explore the latter on the pay increase strategy.

Negotiating your pay rise is always an art more than a science.

There are no gospel formula attached to it as long as you know how to play within the boundary of your range.



For one, timing is everything in asking for a pay raise.

When asking for a pay rise in an organization you worked in, it is important that you articulate well what you've accomplished over the past year and make a convincing story to your employer why you are a treasure to the organization. 

Ultimately, negotiating a pay rise is primarily about determining your own intrinsic market value, the same way investors like to appraise the intrinsic value of a company. If you think that the organization is under valuing you as an employee, then it doesn't hurt to bring your case to the table and ask for a pay raise. The worst thing it can happen to you is that you'll get a formal rejection and life will go back to the normal. It is however a different story if you don't have any good accomplishment to sell but yet demand a pay raise. That's just the same as daylight robbery.

During the negotiation process over the course, it is also important that we keep in mind the theory of BATNA. By its own definition, BATNA allows us to keep the most advantageous alternative course of action that we can buffer in case negotiations fail. The key for BATNA is not to have it as a safety net but rather a point of leverage in negotiations. For example, if you are in sales and over the last few rounds of tender, you manage to bring in significant amount of revenues to the company, then the advantageous force tends to side more towards you. You can then use this as a leverage in your negotiation process.

The key message I want to drive here is you need some good accomplishment first, then talk about pay raise. If your current organization doesn't value you, some others will eventually do.

Keep on searching for that treasure.

What About Your Next Corporate Jump?

There are a lot of theories that say jumping to your next corporate change is the faster way for a pay rise.

There is some truth in it.

If we take a rough guide, many of us would demand some sort of pay rise in our next corporate change, which typically ranges between as low as 5% and as high as 20%, depending on your role and the organization's financial means.

The best timing for your next corporate jump is to change within 3-4 months after you get your promotion jump at your current organization (and of course after getting your sweet bonus). That will enable the double multiplier effect to take place within the span of a few months. 

The next best alternative is whenever you are mentally ready.

There are also ways on how you can maximize your remuneration package negotiation.

When negotiating for your remuneration package, it is important that you ask for a pay rise increase from your base pay, without the components of a variable bonus package, instead of the total remuneration. This is because companies often entice new employees with the companies' high variable bonuses but one which is discretionary in nature and hence could change quickly over time. Thus, if you are looking at it from the total package view and you think you are better off but in fact the company performance is poor the following year, then you might be worse off in the end.

If you are negotiating for an overseas posting, it is also important that you consider the aspects of housing/transportation costs and also the difference in tax treatment, assuming your role is localized. Often, companies will engage tax difference by preparing the tax equalization computation so you are not worse off by the higher tax treatment overseas.

How much you are earning often commensurate with the amount of responsibility you might be undertaking so do consider the kind of level that fits you.

Often, people have this misunderstanding that correlates the amount you are getting with the amount of work life balance you are living.

That is also not entirely the case.

You can be earning lower but have a lower work life balance than someone who's earning higher than you but a better work life balance too.

The Tai-Chi power has been well known for decades from big bosses top down.

Lower or higher salary - You still suck it up in the organization.

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Far East Hospitality Trust - Q2 FY18 Results & Thoughts

Author:   |  Publish date: Tue, 31 Jul 2018, 02:35 PM   |  >> Read article in Blog website


Far East Hospitality Trust (FEHT) announced their Q2 FY18 results which was very much under expectations as we saw topline increases 10.2% year on year and DPU increases by 4.1%.

The results is in line with my expectations when I blogged about them about 3 months ago which you can find here.

If you have attended my recent talk in the Investors Exchange, you would also notice that this is an example of the 6+4 = 10% strategy type, where 6% is their current yield and 4% is their inorganic + organic growth potential.



In terms of the portfolio performance, hotels segment outperformed as we see a rebound of the Revpar, which is a function of the ADR multiplied by the Occupancy rate, both increases to a strong 6.9% year on year from $134 to $143. Given the recent hotel segment results from OUEHT and FHT, I am rather worried if we'll see a rebound happening in this quarter as their Revpar results have flattened but it proves otherwise for FEHT.

Unfortunately, the service residences segment continue to disappoint as we see Revpar dropped 4.5% from $177 to $168 as corporate demand continued to be sluggish. I'm pretty sure we haven't seen the bottom yet so we might see more drop in this segment over the next few quarters.

There is also new contribution in the Q2 portfolio as Oasia Downtown contributed positively to the performance with a pro-forma 4% higher to the NPI so that's the inorganic growth I was talking about.

All in all, pretty decent performance.

If we annualized the DPU, we'll get a 6% yield based on 1.01 cents x 4 which was still very low to me given their hospitality nature so we'll have to see if the organic growth can come back strongly over the next few quarters otherwise their high gearing would limit their growth in terms of M&A opportunity.

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What Should Your Networth Be At 20s, 30s, 40s, 50s, 60s

Author:   |  Publish date: Mon, 30 Jul 2018, 10:42 PM   |  >> Read article in Blog website


This is something that I think a lot of people are benchmarking their networth to.

Often, I receive email asking if they've done good enough by accumulating $X at the age of Y. To be honest, any answer you may get is going to be arbitrary at best because every single permutations depend on many mutual factors that are very relative.

What Constitutes Networth?




Networth, by its own definition, is very personal.

To me, in the local context, networth should consists of all liquid funds including cash, bonds, stocks and gold and also includes retirement social security such as cpf and any endowment plan that have yet to mature.

I have excluded property used for own stay for both the equity and liability portion because I believe the value portion of the asset will always be more than the liability, hence making it positive in the event of a liquidation. Also it is likely that owning a house will be factored in as survival asset because everyone needs a roof over their head to live, unless one is subscribing to the rental model asset light strategy.

What Should Your Networth Be At 20s

Your main goal in the 20s is to get your networth up to a positive number as fast as possible.

At your 20s, your networth is likely at the mercy of your current state of war and fiscal responsibility and the big dark horse determinant is how much your parents contributions add to your circumstances.

For example, if you are lucky enough to have parents that help fund your university, you are likely to start your adult year on a positive note given your student loans are non-existence.

There are also some who started working as soon as they finish their polytechnic and started to contribute positively to their networth at an earlier stage as compared to those who only completed their studies at the age of 25. There are some who also earns a higher salary by having a fast track route to career ladder than the others.

Usually, at this age, this is accompanied by a lot of massive other bombs such as getting married, a new home, renovation loan, car loans, dog loans etc.

Hence, to be able to end your 20s with a positive number is so far a good enough redemption.

What Should Your Networth Be At 30s

Your 30s is where you really want to speed things up.

There will be many financially demanding decisions you have to make, in particular if you decide to start a family but this is usually the stage where you just finished your 20s on a strong note, enjoy greater job security, command a higher salary and physically at the peak of your life.

Everyone at this stage should be cruising along the best decades of your life and the only thing that could sabotage the result is through your very own aspirational reckless spending.

In my opinion, this is where you ramp up your production of higher income, higher saving, lower reckless spending and higher investment return.

At the end of your 30s, you should have minimally a range of between $100k to $250k in your networth.

What Should Your Networth Be At 40s

At your 40s, this is where things start to slow down a little bit because you just had a fully driven F1 race at your 30s and your health starts to decline because you cannot "chiong" as hard as you were in your 30s.

If you have a family, your children would be at a stage where they are getting to be independent so a lot less worry on that part.

If you are lucky enough, you'd probably start thinking of your longer term future retirement plans and what and how should you transition from a phase of rising dragon to a phase of falling tiger.

At the end of your 40s, you should have generated a networth range of between $300k to $450k minimally.

What Should Your Networth Be At 50s, 60s

Ideally, at this age range, it would be nice to have the options of whether to retire or continue to work leisurely in a workplace where they called their second home.

This should be a moment of treasuring relationship more than anything else because everything else in life is arbitrary when you've seen everything out there.

You should be completely free of debt by this stage and start to drawdown on the networth you've been accumulating all these years with your hard work.

At the end of your 50s, 60s, your networth should be north of $500k and enough to last you a lifetime of drawdown expenses.

What Is Required From You?

It seems a hell lot of daunting task for beginners out there to see an amount worth of 6 digits but all it takes is really some simple basic savings technique, an amateur investment skills and a lot of determination.

All you need to do at the age of 25 is to put aside $500/month into an investment that yields you a rate of return of 5% and slowly increase the capital injection gradually as your income increases over the years. We keep doing this until we reach the age of 50 and that's where it gets optional on whether you'd still like to inject more funds or leave your investments run on auto mode.


AgeAnnual ContributionRate of ReturnNet Worth
2560005%6,300
2660005%12,915
2760005%19,861
2860005%27,154
2960005%34,811
30120005%49,152
31120005%64,210
32120005%80,020
33120005%96,621
34120005%114,052
35120005%132,355
36120005%151,573
37120005%171,751
38120005%192,939
39120005%215,186
40120005%238,545
41120005%263,072
42120005%288,826
43120005%315,867
44120005%344,260
45120005%374,073
46120005%405,377
47120005%438,246
48120005%472,758
49120005%508,996
5005%534,446
5105%561,168
5205%589,227
5305%618,688
5405%649,623
5505%682,104
5605%716,209
5705%752,019
5805%789,620
5905%829,101
6005%870,556

Depending on how much you need as a household, you can then play around with the amount at your leisure but with the same ratio that your household needs.

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Some Updates So Far

Author:   |  Publish date: Fri, 27 Jul 2018, 09:28 PM   |  >> Read article in Blog website


I just wanted to document a few updates so far that are happening right now.

I tendered my resignation from my current company which I've been working for 6 years now to take on a new role outside the Group. The decision has not been easy to make mostly due to the great knit connection I have with some of the people there. Over the years, we've been bonded and through a lot and many of our lives activities surround the same group of people that I spent much time with.

Still, I thought if there was a day I would leave my current organization it would be during this period. Obviously, there are certain things that I cannot say too much here but I think the time is ripe. Apart from the social companion, there's nothing else in the company that would allow me to progress further.



Am I Retiring Yet?

I played some naughty thoughts in my mind and was contemplating close on this but there's two years more to go since the very first day I started this whole FI objective thing and I wanted to close in on that promise.

I left to join another corporation which is one of the biggest company in Singapore by market cap which I think would expand my horizon further. Being in this new industry, I think it'll also help in my investment checklist in the future learning more on this industry which is a very important one.

I'm pretty sure though that this will be the last leg towards my drive to corporate working. A few years from now will see me either going downhill or scaling down to freelance or part time work because age is also catching up and I want to make the best of my time.

What Does It Mean For This Blog?

For a start, I'll be extremely busy for the first 3 months since it's quarterly reporting season and also budgeting season so I probably will stop writing for a while to focus on my new role.

There might also be some regulatory restriction on writing my personal opinion on company prospecting so this is something I will also have to clarify with my new employer.

One thing that's almost sure is I will definitely almost scale down on my public appearance with this new role until I get the above approval sorted out but it won't be fast. First thing first, I think i will need time to settle down in the new company.

What Happen To My Investment?

It'll be a lot more passive now than ever.

I am still not a big fan of investing in index so it'll continue to be a combination of equities and reits and the strategy employed will continue to be dividend investing.

My portfolio doesn't have a lot of companies so it'll be easy to follow their development with just a few companies which I am already rather familiar with.

I am still cautiously optimistic the portfolio will reach its objective by the end of this year so pillow stocks pillow strategy remains.

That's about the updates I have right now so meanwhile happy weekend ahead!


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