Tuesday, August 29, 2017

Is Investing The Same As Gambling?

There are plenty of myths about investing, among which is the comparison between investing and gambling. Here’s why they are nothing like each other. There are plenty of misconceptions about investing, but the most overused comparison is between investing and gambling. This is far from correct, as the comparison finds only one element (risk), and declares the two to be similar. Here’s why proper investing is not like gambling.

The Confusion Between Investing, Speculating, and Gambling
There are two main types of investors in Singapore. There are investors who put their money on an asset for the long term, such as people who buy index funds and hold on for 15 to 20 years. Then there are traders: investors who aim to buy low and sell high, to see a return as quickly as possible. There’s also a third type of “investor”, who is more properly called a speculator. These types put money on small chances, such as funding a start-up, in the hopes that they will see big rewards. Intelligent speculators are aware that they’ll lose money most of the time, but all it takes is one big payoff to make it all worthwhile. Which of these are like gambling? The one that comes closest is speculating, but even then, none of them is truly like gambling. Here’s why:

    Proper investing skews the odds toward you in ways gambling never will
    Gambling is almost always a zero-sum game
    Investing is only like gambling if you treat it as such

Proper Investing Skews the Odds Toward You in Ways Gambling Never Will
A well-understood rule of gambling is that “the house always wins”. The longer you gamble – be it at a jackpot machine or a Poker table – the more you tend to lose to the casino. The odds have been calculated to skew things in their favour. With proper investing – especially long term investing in blue chips or index funds – the opposite is true. There is a historical precedent for stock prices and property prices to rise in the long run: while it may not be true next year, it will almost certainly be true over 15 or 20 years. For example, look at Singapore’s property asset prices since 1976: While this doesn’t completely remove the possibility of a loss, it does mean the odds are skewed in your favour. In a casino, time is on the casino’s side. But when you’re a long term investor, time is on your side instead.

Gambling is Almost Always a Zero-Sum Game
When you gamble, the outcome always involves a winner and a loser. For you to win, the casino – or another player – has to lose. This isn’t always the case when it comes to investing*. Say you invest in a property that’s worth S$1.2 million. By the time you’ve paid it off  25 years later, its value has appreciated to S$1.7 million. The extra S$500,000 isn’t a “loss” to other property investors – you haven’t taken it from them, it’s grown as a result of the overall economy/property market becoming more developed. The same goes for assets like stocks, which grow in value as the company develops. When you gamble however, the winner’s gains always come from the loser. For the casino to win, you have to lose, and vice versa. The problem with zero-sum games is that, in the long run, one player tends to walk away with almost everything, whereas the majority of players will walk away with a loss (observe the typical Poker table, or jackpot session). *Some forms of high-risk trading, such as options trading, may be zero-sum games. But these are not typically available to lay investors.

Investing is Only Like Gambling if You Treat it as Such
There is a way for investing to become gambling, and that’s if you treat it as such. If you decide to buy and sell stocks based on “intuition”, or superstitions (e.g. the stock price matches your car’s license plate), then it indeed becomes a form of gambling. What sets investing apart is that the odds can be in your favour, if you make reasoned decisions. This means properly diversifying your assets, learning to read the fundamentals of a company before buying its stock, and being disciplined enough to follow a system.

But What About Speculating?
Speculating is not like gambling, because it is even less predictable than gambling. When you gamble, the risks are known. For example, if you are playing Blackjack, you know the main risk is going over 21, or that the dealer will have a number higher than you. As such, you can develop systems to deal with those risks: if you draw an 18, you should stand. If you draw a nine, you need to hit, and so forth. When it comes to speculating, the real world introduces so many variables that such systems are hard to develop. The start-up you invest in may turn out to be a scam, the land you bought in Nicaragua may be re-zoned as a garbage dump, and your investments in a developing country may be void as a result of a civil war. You may know some of the probable risks, but there are too many others for you to account for all of them. While expert gamblers can tell you the odds of a round, such as “10 to 1” or “47 per cent”, most speculators honestly don’t know how their investments will turn out. Their “game” is governed by fewer rules, and encompasses too many possibilities. That’s why speculating is only ever done by investors who can afford the losses. A billionaire, for example, might place two per cent of her portfolio in a company that might create the next Facebook, or might go bust in two weeks with nothing to show for it.

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Thursday, August 24, 2017

Why Singaporeans Are Angry About Not Owning Their HDB Flats

When you buy an HDB apartment, do you own your flat, or are you merely leasing it for 99 years?
There has been an ongoing debate the past few weeks, over whether or not Singaporeans “own” their HDB flats. Some of it is due to confusion over terms used in documents (e.g. where the term “tenant” is used instead of “owner”). But it stokes an old worry among Singaporeans, that they don’t “truly own” their flats. Why does this matter? It’s as much psychological as well as practical:

Do Singaporeans Own Their Flats?
HDB has stated, many times, that Singaporeans who buy their flats do own them. However, it would be more accurate to say that HDB has provided a definition of what ownership means, by HDB’s standards. HDB has said that Singaporeans own their flats because they can sell them, rent them out, and do other things that owners would be able to do. However detractors argue that there’s no real ownership, due to the 99-year lease, and the many restrictions that don’t apply to private property. For example, you can rent out a whole private property immediately, whereas you have to wait for the Minimum Occupancy Period (MOP, currently, 5 years) for a HDB flat. There are also neighbourhood and block quotas that have to be considered, when renting out to foreigners. Ultimately, it comes down to a definition debate: do you own something if there’s a lease, and there are restrictions? So while there’s no clear answer there – it’s strictly a matter of perspective – it’s important to look at why the issue of ownership means so much to Singaporeans. After all, if you have a roof over your head, it’s affordable, and it generally appreciates in price, what’s the difference? Well, here’s why it’s a sticking point:

    There’s increasing worry about the 99-year “timebomb”
    There are estate planning issues
    The right to make money off your flat
    Psychological and political factors

1. There’s Increasing Worry About the 99-year “Timebomb”
This is the biggest bone of contention for most Singaporeans. HDB flats have leases that expire after 99 years, after which they are returned to the government. To be fair, this isn’t specific to HDB flats or even Singapore. Many private properties also have 99-year leases (commercial properties typically have 60-year leases), and these types of leases are used in some other countries as well. That said, there’s a worry that when your flat’s lease runs out, you may be too broke to afford a new one. And of course, you may find it hard to sell your flat once there are 30 years or less on the lease (buyers can’t use their CPF to buy it from you). The government has stated, quite clearly, that we can’t always count on the Selective En-Bloc Redevelopment Scheme (SERS). There is a very real possibility that our flats will slip into their last 30 years, be impossible to sell, and then see us booted out to find a new house. To some Singaporeans, that means the S$1,800 to S$3,000+ they pay every month (a typical range for HDB flat loan repayments) is nothing more than rent.

2. There Are Estate Planning Issues
While Singaporeans can, of course, leave their flat to their children/grandchildren, there are many restrictions to consider. For example, the beneficiaries may be forced to sell the flat, if they currently already own private property. In a broad sense, this is because HDB flats are meant to provide housing, not to act as investments. But it remains a sore point among some Singaporeans, who feel they should be able to leave such a legacy, when they’ve spent 25 to 35 years of their lives paying for it. Which leads to…

3. The Right to Make Money Off Your Flat
Ask some Singaporeans, and they’ll tell you true ownership of a property means they can use it how they please – that includes using their flat to make money. If they have to work under stringent restrictions, such as controls on how and who the flat can be sold/rented to, then they aren’t really owners. To be fair, HDB flats are sold at subsidised prices (due to the various housing grants). Many would argue that HDB restrictions are justified, given that the aim is to provide affordable housing, and not an appreciating asset. But then – detractors will argue – don’t call it ownership. It’s (indirectly) a form of renting from the government.

4. Psychological and Political Factors
There’s a great sense of relief in fully owning a house, from which you can’t be kicked out (such as with freehold property). Many people will never feel the comfort of home ownership, unless it happens on those terms – they want a house that will stay in the family for generation unto generation. Politically, this is about denying the government its bragging rights. Currently, Singapore has the second-highest rate of home ownership in the world (above 90%). However, if we were to redefine HDB ownership as a type of leasing scheme from the government, that accomplishment would be a fraud, and have no choice but to be struck off.

Either Way, These Debates Miss the Main Point
Singaporeans certainly have a long conversation ahead, on whether we really own our HDB flats. But this mainly semantic or academic issue needs to give way to a broader one: Singaporeans in possession of older flats may need to start budgeting, especially if they’d be retired when their flat lease runs out. They need to plan without the expectation of SERs, and stockpile enough savings that they can afford another house (even if the flat they are living in goes back to the government without a single cent paid).

SingSaver.com.sgSingapore's #1 personal finance comparison platform by transaction volume, provides consumers with timely money insights and aggregates the latest credit card offers and up-to-date personal loan deals.

Tuesday, August 22, 2017

Why Singaporeans Should Not Rush To Buy Bitcoin Right Now

Now that bitcoin is valued at US$4,000, some Singaporeans are wondering if it’s worth investing in bitcoin. Here are some things to know first.
Bitcoin has steadily raised in value this past year and hit the US$4,000 mark last week. This has led some Singaporeans to question if bitcoin, or any other cryptocurrencies, are the “thing to get into”. After all, endowment plans look boring at 5% per annum, while Bitcoin has quadrupled its value over the year. But here are some things to know first:

What Caused the Recent Surge in Bitcoin Value?
In a word, North Korea. Due to fears of nuclear tests and possible war in the Korean peninsula, stock markets are in a panic (stock markets like to find something to panic about every few years, and they’ve decided this event is it). When there are fears of global instability – such as would be caused by the outbreak of war in Korea – investors flee to safe haven assets and alternatives. Gold and the Japanese yen are two such safe-haven assets, and gold is also at a two-year peak. One aspect of Bitcoin is that it’s often touted to be a fixed “store of value”, such as gold. The idea is that, as there’s a finite number of them (there’s an intended cap of 21 million bitcoins), their value won’t crash like fiat currencies (such as the US dollar). And, of course, Bitcoin is not tied to the fate of any one country, as no government issues it. This may add to the impression of “safety”. But this is as much a drawback as it is a benefit – as no government backs Bitcoin, that can make it hard to use as payment outside of niche markets.

Before you rush to buy it yourself, here are some key things to consider:
    It may be too late to buy bitcoin now
    Cryptocurrencies are a form of speculation
    Cryptocurrencies can be hard to spend or liquidate

It May Be Too Late to Buy Bitcoin Now
If you decide to buy bitcoin right now, after hearing about the big surge, you’d be buying high. The price of bitcoin may already have peaked (it had to happen before the news covered it, obviously), so anyone who buys right now are taking a dangerous bet. 

Despite bitcoin being at its highest ever recorded value, you’re counting on it to go even higher. That outcome is based on a volatile geopolitical issue: it depends on how North Korea reacts to current tensions. If North Korea does back down – or agree to do so due to concessions – then bitcoin values (like gold and the Japanese yen) can wind down just as quickly as they spiked.

Cryptocurrencies are a Form of Speculation
As the Monetary Authority of Singapore (MAS) has warned, cryptocurrencies such as bitcoin remain a speculative investment. Bitcoin is volatile, and has gone through several spikes and crashes. When these happen, the price movements in bitcoin don’t happen in small increments. Their value follows a whipsaw pattern, and it’s not uncommon to see losses or gains happen in increments of 20 per cent or more. While big gains are possible, it’s equally possible to lose much more than you initially invested. That makes bitcoin appropriate only if you’re looking for a high-risk alternative to complement your portfolio; it’s definitely not something to stake your life savings or retirement fund on.
Cryptocurrencies Can Be Hard to Spend or Liquidate
The main worry with bitcoin – and other cryptocurrencies – is the collapse of secondary markets. If things look bad, few investors will be ready to buy (even if they are, it will be at an extortionate price). When this happens, there are few avenues to exchange your Bitcoin for cash. One of the long term issues with bitcoin has been its lack of use in mainstream markets: you can’t go ezbuy or Carousell and start buying things with it or spend it in your grocery store. This results in a situation where, if bitcoin crashes, your only solution is to (1) sell it for dirt cheap to the few people willing to buy, or (2) hold on to it and hope it recovers, risking the loss of your entire investment if it never does. In any case, this means that money committed to bitcoin is likely to stay that way. You can’t cash it out without risking a loss – so make sure you have other savings on hand before you buy into it.

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Friday, August 18, 2017

Is Game Of Throne's 'Iron Bank' A Veiled Criticism Of The IMF?

The Iron Bank of Braavos is the most powerful financial institution in the Game of Thrones. It controls the fate of nations, just like the real-world International Monetary Fund (IMF). In the Game of Thrones series, the Iron Bank of Braavos is the world’s most powerful financial institution. As the only “multinational” bank in its fictional setting, the Iron Bank controls the fate of powerful individuals and nations alike. This will all sound familiar to some people. These criticisms echo real world fears of the International Monetary Fund (IMF).

What is the Iron Bank of Braavos?
In the Game of Thrones (GOT) series, the Iron Bank is an ancient financial institution. It’s founded by a group of traders, who used to hide their wealth in an abandoned iron mine (hence the name). As the bank grew in power, it gained the ability to finance entire kingdoms. In particular, the kingdom of Westeros is deeply in debt to them. As far back as the first season, Eddard Stark is shocked to hear the kingdom of Westeros owes three million gold dragons to the Iron Bank (and the same amount to House Lannister). In season three, Tyrion Lannister points out that the Iron Bank likes to finance a kingdom’s enemies, when said kingdom doesn’t repay its debts. True enough, the Iron Bank secretly backs Stannis Baratheon, who attempts to claim the throne for himself. A common saying of the Iron Bank is that “the Iron Bank will have its due”. Many rulers are both dependent on it, and afraid of it at the same time.

What is the International Monetary Fund (IMF)?
The IMF is a financial organisation dedicated to economic stability around the world. Founded in 1944, the IMF currently has 189 member countries, and its roles include fostering free trade, fueling economic growth, and reducing poverty around the world. One of the central roles of the IMF is loaning money to countries in distress. During the Greek Financial Crisis, for example, the IMF played a role just as vital as the European Union (EU). Unfortunately, the IMF has just as many critics as it has supporters. It’s often accused of interfering in local politics and having an inordinate degree of influence in how countries are run.

The Iron Bank Seems to Be a Veiled Reference to the Ugliest Sides of the IMF
The “Iron Bank” metaphor isn’t restricted to the IMF. It’s also partly inspired by the Italian city states in the later Renaissance, where banking was born. But it does seem to be a caricature of all the accusations often hurled at the IMF. These accusations, in the real world, pivot around how the IMF can influence the development of local politics, and hijack a country’s sovereignty. 

In a recent bailout to Egypt in 2016, for example, the IMF attached austerity measures – conditions such as slashing certain forms of social support – in order to bring the national budget back in line. These measures can significantly alter the lives of citizens. Cost cutting can mean that citizens suffer slashed pensions, see their housing subsidies dry up, receive fewer education grants, and so forth. But these are conditions the IMF can indeed impose, as the price of its loan. 

The behaviour of the Iron Bank in the GOT series embodies everything critics fear about the IMF. When the Iron Throne of Westeros seems unable to repay its debt, the Iron Bank goes on a programme of what – in our real world – would be called “regime change”: they fund Stannis Baratheon, a challenger to the throne. Despite being a complete outsider, the Iron Bank is able to influence Westeros better than even the kingdom’s own people (and many of its lords). The Iron Bank also has a tendency to maximise its leverage, by calling in due loans at the worst times. After Tywin Lannister’s death, the Iron Bank calls in a tenth of the amount they’re owed, which is twice the amount of money that the kingdom actually has. However, the Iron Bank should have realised the kingdom would be in no position to pay, precisely because of the chaos following Tywin’s death. This is another criticism commonly levelled at the IMF. Their loans are virtually impossible to repay (by design or bad management), because of the nature of countries that borrow heavily. Countries that tend to be mired in debt – such as during the rebuilding from a war, or from a collapsing economy – are the ones that need big loans from the IMF. Countries that are well-developed seldom need the IMF, and are often the ones contributing to it. Yet this perpetuates a system where vulnerable or developing countries are perpetually stuck in debt; and they have to live in fear of the debt being called in, if don’t listen to the IMF, or its major contributors. Notice that once Cersei repays the debt, the Iron Bank immediately offers another loan. But why would they? Westeros is ravaged by war, winter is coming, and there’s a big risk they wouldn’t be able to repay it. 

There’s only two possible reasons the Iron Bank would extend such an offer: short-sightedness on their part, a desire to hold Westeros in control with their wealth, or even a combination of the two. This mirrors the dual accusations often hurled at the IMF, which either paints them as incompetent, or as political manipulators.

The Real World IMF is Not So Simplistic
Volumes can, and have, been written about whether the IMF is a boon to societies. For all its faults, the IMF has done a lot to help developing and disaster-struck nations. The Iron Bank seems to be based on only the darkest and most negative stereotypes affixed to the IMF, along with snide references to the nature of banking (the Iron Bank was founded by slaves, and now in turn enslaves others through money). Perhaps Cersei should follow up on that idea of Westeros having its own bank.

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Monday, August 7, 2017

Your Attitude Towards Money Needs To Change When You're 35 Years Old

As you move to the later stages of life, you need to react differently towards windfalls and financial crises. Here’s how your money attitudes will change by age 35. Age plays a significant role in personal finance. It’s not just a matter of how many dollars you have. There’s a deep emotional and psychological change in the way you react to receiving windfalls, encountering financial crises, and managing debt. In order to cope with it, your mentality toward money – from saving to investing – will have to change when you reach age 35.

You Need a Different Attitude Toward Debt
When you’re in your 20s, a lot of the debt you encounter is small enough to be paid off at one go. A typical example is credit card debt. If you tighten your belt and budget for four to six months, it’s usually possible to pay off even a maxed out a credit card. Most credit cards are capped at two to four times your monthly income. When you are 35 and older however, you will start to gain debts that can’t be paid off this way. An example would be your home loan, which typically takes 25 years to pay. A car loan has a tenure of five to seven years, and university fees (perhaps for your children) can run up to five years. These loan amounts are in the hundreds of thousands, possibly over a million in the case of private property. You can no longer rely on the old method of “budget for a few months and get rid of it”. Your financial planning has to change. As you can’t “go on a saving spree” to settle these debts, you need to treat them as fixed expenses. One method is to save enough to service these debts for six months. For example, if your home loan costs S$4,000 a month, you might go on a tight budget until you’ve saved up six months of the mortgage (S$24,000). After that, the money could go into investing for your retirement instead. But you must accept that the debt is a fact of life, and adapt your long term spending to its presence.
You Need Stronger Internal Controls Over Your Money
Consider that, among the jackpot addicts in Singapore, nine out of 10 are in their 40s. You might assume that, at the age of 35 or above, we would be more financially mature; but that’s where a new issue crops up. At the peak of adulthood, society assumes you’re mature enough to handle money. Also, as you’re nearing the peak of your earning power, it becomes easier to get larger loans. Banks hesitate to give a S$10,000 loan to a 20-year-old with a part-time job. However, the average 35 year old can get a personal loan approved in 15 minutes. This access to credit is accompanied by another dangerous factor: as society assumes you’re mature, fewer people will stick their nose into your spending. In your 20s, your parents or close relatives probably still keep one eye open: if they notice you’re getting addicted to gambling, or see the repeated letters from the banks, they may stage an intervention. When you’re 35 or older however, they may just leave you to your own devices. Overall, there’s less external control on your money – no one is managing your allowance, nagging you to save, or refusing you five digit loans. But this means you need to evolve strong internal controls to deal with it. Financial prudence has to become a fully ingrained habit, as all the controls are in your own head.
Your Attitude Towards Windfalls Have to Change
In your 20s, you have more opportunity to have fun with windfalls. If you unexpectedly come into money, you can treat yourself to a shopping spree or holiday. But from 35 onward, that will probably have to change. Remember what we said in point 1, about long term debts? You’d be better off using your windfall to ensure you have emergency savings, in order to keep servicing these debts during emergencies. Besides long term debt, having dependents will require you to change priorities. You can expect most windfalls to go into what the children want, rather than what you prefer. This does take getting used to: unlike your younger days, you won’t feel the significant (temporary) jump in your lifestyle from unexpected money. Instead, you’ll have to learn to take comfort in a sense of greater security.
Unexpected Costs Tend to Be Larger
As you move to the later stages of life, unexpected costs tend to be larger. In your 20s, and unexpected cost might be a broken laptop that costs you S$1,600. At 35, an unexpected cost could be your elderly parent developing a health condition, which will cost S$2,000 a month for the rest of their life. In the event that you lose your job, you can’t simply go home to mope until you find a new one. Mum and dad probably don’t run the house anymore, so your home will have (1) an empty fridge, and (2) no one to pay the mortgage or utility bills. Everything is now on your shoulders, and the world won’t give you a break to recover. You’re either prepared for unexpected costs, or you’re sunk. From 35 onward, there is no safety net but what you can build for yourself. This means the measures you took before – such as having a few hundred dollars stuck in a drawer for “emergencies” – are not going to cut it. You need to have a proper savings plan, money in different places (from savings bonds to fixed deposits), and comprehensive insurance plans.
Don’t Wait Til You’re 35 to Get Started
Most Singaporeans learn all this the hard way, but you don’t have to. You can start cultivating good money habits before age 30 so that practices like saving your windfalls are ingrained in you as a 20-something. The sooner you start adapting to it, the less painful the shift will be when the time comes.

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