Saturday, 26 October 2013

How to tell(simplistically) if the market is expensive?

Both Dow Jones and S&P500 has hit and continue to stay at new high, questions have been asking if one is still able to invest in this market.
One of the quick way would be to look at the CAPE ration as a quick guide to determine which market one can invest. Cyclically-adjusted price-earnings(CAPE) ratio was introduced by Graham and Dodd, latter on also used by Robert Shiller. Cambria Quantitative Research's Mebane Faber extended the used of the ratio to measure global markets. Below is a chart which shows how the world markets ranks from cheapest to expensive.
From the chart, it seems that most of the European countries are fairly cheap. In the middle, we have few from Asia. At the top end, to name a few, there is the US, Indonesia and Malaysia. Malaysia came as a surprise to me though ... ...

Tuesday, 15 October 2013

Should you be worried about Oct 17 - US debt ceiling ?

Thanks to the media and internet, by now most of us know that US will run out of money this week if the Republicans and Democrats cannot reach an agreement to raise the borrowing limit coming 17 Oct. And if this happens or is going to happen, shouldnt there be a lot of fear in the market.

One of the indicator known as the 'fear' indicator, VIX(^VIX) is commonly used as a guide to determine the sentiment of the investors or the volatility of the market. Looking at the chart below, the indicator is below 20 now, meaning that there is not much of fear now, business as usual. The last time that it hits 40 was in Aug 2011 period where there were lots of news about US and Europe being in a prolong recession and also at the same time, Standard and Poor's downgraded the US credit rating.

In that case, we still have a long way to go from the current 16 to 40.

Source: Yahoo Finance

Saturday, 12 October 2013

Financial roadmap(III)

In this post, let's look at the typical financial preparation one can adopt for the 40s. At this phase, hopefully one has become wiser financially by learning from other people's mistake and try not to make the same mistake. For some of us, we were fortunate to experience the Asia financial crisis, high interest rate, dot com bubble, 911 incident, SARs and the last financial meltdown happened from the US. 'Fortunate' because there will be very few of us(the lucky ones) who would have the GUTS to have taken advantage of those situation and attain financial freedom thereafter. One small note which I was shocked when I spoke with my colleagues, the younger ones(below 30), they thought that the low interest rates is a norm. And this is probably the reason why we have cyclic downturn as people forget.

Savings. At this phase, most of us would have reached the peak of our career, income would have also risen over the years. However, you might not be able to save more due to growing family and other commitments such as car and new property, at least still try and save 10% of your income. Continue the saving plan for the kids education, this can also be in the form of Index ETF investment.

Investment. Your index ETF portfolio should have grown to a sizeable amount at this phase, continue investing and rebalancing. This is a mechanical way of buying low and selling high. For the adventurous ones, you might have also started your stock portfolio in your late 30s.
Continue your SRS contribution to take advantage of tax savings.

Retirement planning. One should also start planning for retirement financially. For this part of the equation, it is important to watch your debts and live below your means. With the investment strategy from the above, one should be on the comfortable start to retirement planning. Watching debts is critical as most of the time it is this that slows this part down.

Unfortunate events. In life nothing is certain. In this phase, we will be vulnerable in our job as companies restructure or move out of Singapore to a cheaper location, or that we are deem too expensive and can be replace by cheaper resource. If that ever happens, and this is the reason why in part I and II, the earlier you have started savings and investing, the more prepared you will be and lesser stress when it happens. I have seen colleagues shed tears when it happened to them, cause they have a young family or have just committed to a new property/car. My grandma always tell us when we were young to always be prepared for rainy days, it will come some day.

Continuous learning. Apart from learning skills for your job, it is also important to take up new ones such as investments, blogging, expanding networking, etc. This is not so much of helping you to get promoted in your job but rather for you to exit the corporate world if needed.

Related posts:

Tuesday, 1 October 2013

Financial roadmap(II)

In financial roadmap(I), we looked at the typical financial situation for the 20s to 30. Here, let's look at the 30s to 40. In this phase, there are many exciting life events that will happen here, such as first job promotion, getting married, and in Singaporean mindset, this follows with the commitment to a residential property(actually, this one normally come first before marriage :)), maybe starting a family, then follow by excuse to buy car, etc.  As you can see, the life events here requires huge chunk of financial commitment as well. 

Savings. Remember in my previous post, a lot of the focus was on savings and aggressively building up the fund. Here is the reason why, because there are so much expenses at this phase. Now, if you apply, rule 72 for a 6% to 7% return, your $54,000 would have grown to close to $80k. This amount comes in handy for your wedding, honeymoon, or HDB renovation.
Continue to save, if you can't do 30%, at least 20% of your income and also continue your ETF investment as well. For those who have kids, it is also time to start planning and saving for their education as well. 

The action that we take in each of the phase, actually determines how easy or difficult financially your next phase of life going to be.

Debts. Due to these life events, the temptation to over-commit and over spent here will be even stronger. A lot of times, our financial outlay is bigger here for weddings, honeymoon, housing renovations, car, etc. I am not saying that we shouldn't pamper ourselves with these once in a lifetime events, but do constantly remind yourself that you have a budget to follow.
Becareful with credit cards, it can be a useful tool if you use it wisely, otherwise, credit card debts will cause a major setback to you financial goals. Think about it, does it make sense to pay 24% card interest when you are only getting 7% from your investment returns.

Insurance. Most of us would have started our family here. As you are the breadwinner, do ensure that you have enough coverage in the event if the worst happens. Do remember to also include medical shield plans for your kids. As to whether, you should or should not buy life insurance for your kids, this has been a hot debate for 2 different group of people for a long time. One group feels that since they don't bring any earnings to the household, then there is no need to insure them for life. The other group will argued that since they are young and free from sickness, it is better to insure them for life and premium is typically lower. I don't have an opinion on this as long as your kids are insured for medical.
Most of us forget our aged parents, in their time, medishield was probably non-existence, so do remember to insure them. The recent medishield life is a good initiative from the government to include all Singaporeans. 

Tax. In the late 30s, for some of the folks whose income may have grown a fair bit, do consider topping up the CPF of your loved ones to enjoy up to $7000 tax relief. Another scheme, Supplementary Retirement Scheme(SRS), also allows you to save on your tax as well. For more information, do refer to CPF and IRAS website.

Emergency fund. At some point in this phase, you might also want to start an emergency fund which  can last for 9 to 12 months. One of such use is when you got layoff and not able to get employed immediately.

Charity. Don't forget about helping the less fortunate.

Related post: Financial roadmap(I)