Alvin Soong’s Blog

What is so difficult about buying a stock when its price has fallen to an attractive level, and then selling it for a profit when its price moves up again? It may not be simple if you are a retiree who relies on income from your investments to get by. With so much market uncertainty, it does not seem prudent to put your nest egg in the stock market. There is a risk that you might lose part of it in a stock market correction.

But keeping the money in the bank is not exactly a great solution either. The paltry returns it earns will hardly cover your living expenses.

For a start, you have to rule out most of the popular trading strategies in recent years.

1. Following a momentum-oriented strategy in the current sluggish market conditions is clearly a bad idea. This strategy involves chasing after the most actively traded stocks - getting in or out of them quickly - in the hope of making a small profit. In a lacklustre market such as this, when stock market volume struggles to cross one billion shares daily, such a ploy can be dangerous. You can come to grief if you need to sell in a hurry as there may be insufficient buyers around to buy the shares you put up for sale.

2. Then there is the strategy advocating investors to buy into high-growth companies whose managements do not believe in paying out any dividends, preferring to reinvest the profit to expand the business instead. But as legendary investment guru Warren Buffett noted in his recent newsletter to shareholders of his firm Berkshire Hathaway, ‘dramatic growth’ does not always add up to high profit margins and returns on capital.

History is replete with examples of investors losing their shirts after making huge bets on the United States auto industry in the 1930s, or TV makers in the 1950s. It is better not to be suckered by sexy stories of high growth.

3. That leaves us with one other strategy - making bets on high-dividend-paying counters.
For years, there has been a mistaken belief among some investors that if a company has a high dividend payout, its management must have run out of ideas on how to make money for them. Otherwise, why return the cash to them?

But one can argue that dividend stocks are less likely to blow up in the face of an investor. This is because once growth has levelled off, a good business will have excess cash to pass on to shareholders.

A commitment to pay out a cash dividend also imposes a certain degree of discipline on managers and ensures they do not take foolhardy risks in expanding the company’s business. True, dividend stocks might not go up as much as ‘growth’ stocks in a stock rally, but in a bear market, they do not fall as much either.

With the future now looking uncertain, dividend stocks are regaining their lustre. What is interesting to note is that good dividend paymasters tend to be the more mature and stable companies - and they have a long-term track record for paying consistent dividends.

In picking dividend stocks, look for firms with solid businesses and a long history of making - or increasing - dividend payouts. I use two simple rules to evaluate them:

The dividend payout ratio should preferably not exceed 50 per cent of a company’s earnings. This is to ensure that the company has the ability to maintain the same payout, even if its business should suffer an unexpected downturn. You can get the dividend payout ratio from a company’s profit and loss accounts.

The debt-servicing ratio - the amount of cash flow used by a company to service the interest payment on its debts - should be low. The rationale is simple: There is no point getting a high dividend from a company that has to borrow heavily to pay it. Such a ploy by the company is unsustainable. You can track a company’s debts from the disclosures that it has to make on its outstanding loans in its annual report.
Because people are living much longer these days, they should consider putting some of their money into dividend plays to give them a steady return when they retire.

Unlike bonds, which have a fixed payout, or buying a property whose huge capital outlay makes it a risky investment, dividend stocks allow those who hold them to enjoy a regular payout and the prospect of their prices appreciating in value.

Summarised from Sunday Times 7th March 2010

This story is very real, extracted from Straits Times 7th March 2010. That is why most people would look into going to private instead of government hospitals

—————————————

Dad sick, but public hospital full
By Shuli Sudderuddin

When Mr B.K. Wee, 79, started to get bloated and experienced delirium on March 1, his family rushed him to a public hospital.

‘We were registered at about 11am and at 5pm, the staff were still unable to confirm if they had bed space,’ said his son, Mr Michael Wee, 45.

The latter, who works in management overseas, said the family had no choice but to opt for private care. They took the elder Mr Wee to Gleneagles Hospital.

He was admitted into a B2-equivalent ward and diagnosed with advanced-stage liver cancer.

A spokesman for the Parkway Group, which runs Gleneagles, said that post-Chinese New Year, there has been an increase in the volume of patients and admissions at Parkway hospitals.

‘We understand that there is a shortage of beds at the public hospitals. Some patients may have been admitted to our hospitals because the public hospitals are full. However, we do not track such numbers,’ she added.

The younger Mr Wee said private admission has led to some difficulties for his family, as his father has not yet been discharged.

He said: ‘Not only will we not benefit from subsidies, but he is also now classified as a private patient. I’ve done some calculations and our bills come up to five figures. As heartlanders, it’s difficult for us to afford this.

‘What about poorer families who need the medical care but can’t get a bed in a public hospital? This is a problem that is very real.’

8th March 2010 is International Women’s Day. The Tsao Foundation-TNS annual Ageing Preparedness Survey polled about 300 respondents in the second half of last year, on how prepared they are for their retirement. Half of the 300 were female. It found that compared with the 2008 survey, more women believe that retirement planning is important, are saving actively and are realising they may have to work beyond 60.

The survey also notes that income security is the topmost concern for a happy retirement.

We would like to share some things here to consider for a woman reviewing her financial needs. These differ from those of men because of a woman’s physical makeup and her family circumstances. Examples of such differences include:

a. Longer lifespan - women live longer than men, earn about 20 per cent less on average and retire younger.
b. They are more likely to work part-time and take time out to be caregivers.
c. Women also tend to suffer from more debilitating diseases in old age.

3 things to consider when planning for ladies financial planning:

1. Cover against critical and women-related illnesses
Financial experts highlight that women are more susceptible to critical illnesses. Besides, certain illnesses are more prevalent among females such as systemic lupus erythematosus (SLE), osteoporosis, arthritis and of course breast cancer.

So while health insurance is important to everyone, women should ensure they have sufficient coverage against certain illnesses while they are still healthy.

For some plans, female-related diseases and early cancers can also be covered, This is typically excluded in all hospitalisation plans as it is not deemed a medically necessary procedure to treat breast cancer. This is particularly important as expensive drugs like Herceptin for breast cancer and Avastin for ovarian cancers are sometimes prescribed for treatment, and these can be excluded from normal medical insurance claims

2. Cover for pre- and post-natal treatment and childbirth

By insuring against such risks before childbirth, parents have a safety net with cover for pregnancy-related conditions like stillbirth and miscarriage due to an accident. It also covers congenital conditions of a newborn and infant mortality. Some plans also cover optional maternity risk cover also includes hospital care for the infant if incubation or intensive care is required.

3. Disability income cover

There are two types of disability plans. The first is an occupational disability income policy that covers an individual’s income.

Women with good income should consider buying an occupational disability income cover. ‘This is to ensure that you will continue to receive a certain proportion of your monthly income stream should you fail to perform the duties of your job or related jobs on a prolonged basis, resulting from a health condition or disability. With more women working and contributing substantially to the household income, such policies will certainly provide peace of mind

Such covers are offered by insurers such as Aviva, GE and Manulife. GE’s Paysecure charges an annual premium of $1,192.50 for a 30-year-old female in an office job. This is based on a monthly benefit of $5,000. In the case of Manulife, the disability income cover is an optional rider. Mr Lim says the annual premium for a Manulife term plan with such a rider, for a sum assured of $1 million, is $2,024. This is based on a 30-year-old woman who opts for the cover to cease at age 55. The other is a severe disability plan for people over 40, and it aims to provide a rehabilitative income to cover the expenses on contracting severe old age disabilities.

The 2nd type of disability plan is long-term care policies. Companies that offer are Aviva and NTUC Income.

4. Adequate insurance protection

If you are a housewife, it is only prudent to make sure that your husband has put aside sufficient insurance coverage for your family’s financial needs if he dies prematurely or suffers from a disability. An economical way is to buy term insurance on your husband’s life as it covers huge sums for a small annual premium compared with other plans like whole life and endowment.

Another area often overlooked is mortgage insurance. If your house is not fully paid up, it is important to ensure the mortgage is adequately covered.

5. Managing investments proactively

Whether single or married, women should adopt a proactive attitude towards upgrading their financial know-how and managing their investments. Surveys show that women tend to be good savers and are more conservative in their approach to money. They should however increase their risk appetite for long term objectives

Let’s assume you leave $100,000 in a bank deposit now at an annual interest rate of 0.5 per cent. If inflation is 2 per cent, the sum will dwindle to $86,000 after 10 years. So safety need not always be the best thing. Inflation would have eaten away your principal. All investors look towards the mega trends of the future and invest in a portfolio of instruments that will ride on these trends.

Some of these will include Asian and emerging markets growth, commodities as a long-term hedge against inflation, and an allocation to physical gold. Investing in gold coins may be something that appeals to women investors… After all, she can leave them as a legacy to her children. More savvy female investors can do their own homework and select individual stocks, blue chips or real estate investment trusts that pay out regular dividends as viable investment alternatives.

6. Updating wills and nominations of beneficiaries

Know the contents of your husband’s will and make sure that he makes adequate provision, particularly if you are a housewife.

Married women should update their Central Provident Fund nominations as those done before marriage would have become void.

And if you become a widow, remember to update your will on your husband’s death so that your share of his estate will be distributed according to your wishes, says Ms Toh.

7. Professional help

If you have inherited wealth from your husband’s estate, it is vital that you appoint an independent corporate trustee rather than an individual.

Use a lasting power of attorney arrangement to direct the financial affairs and properties should you fall into dementia or suffer from other mental incapacities. This can also be done by setting up a living trust arrangement and designating professionals to handle the management of those assets in the event of disability or critical illnesses.

Such an arrangement will ensure a continuity of a comfortable lifestyle even after your husband is gone and you are too sick to take care of yourself during your retirement years.

—————————-
Summarised from various sources, include Straits Times and exerpts from AEPP certifications

From

Alvin Soong
Chartered Financial Consultant
B.Eng, Associate Estate Planning Practitioner
HP: 96667946
My Blog: www.skcagency.com/blog

I would be away to a cooler Taipei till 7th March 2010, with good reasons due to the feature in Business TImes 10th Feb 2010

Please right click below:
business-times-10-march-2010.pdf

I would be back from overseas to continue writing.

WARM Regards to all.
Alvin Soong

There are eight things to consider when taking out a loan:

1 A need or a want?

Before taking a loan, ask yourself if the item or service is meant to satisfy a need or a want.
Is it just for consumption or it would be better to save for it rather than to pay a ‘premium’ price (that is, the interest cost of borrowing). For instance, don’t borrow to pay for a vacation or a new kitchen appliance. Take time to consider if there is an alternative to borrowing now or borrow a smaller amount instead. Better still, don’t buy it at all if it is unnecessary.

However, if the purchase is for investment purposes, then perhaps it is okay to get a loan. This could be for renovations that add value to your home, or enhancing your future income earning ability via training and education.

2 Interest cost of borrowing

Consumers should be aware of the type of interest rate that is stated in the loan agreement or marketing material.Compare with the other rates in the market

Some loans use the annual percentage rate (APR), which reflects the actual interest cost of borrowing, while others refer to the simple interest rate. Shop around for the lowest APR. The APR is interest calculated based on the declining principal balance over the tenure of the loan. As the borrower makes monthly repayments, the principal is reduced every month, so the interest payable on the principal also reduces each month.

The simple interest rate is calculated by applying a flat rate on the original principal amount for the entire loan tenure.

Sometimes a loan comes with a zero per cent interest cost if it’s paid via a credit card. Make sure you pay off the debt before the interest starts to build up. If you miss a payment, you may be automatically bumped up to the highest annual interest rate of 24 per cent.

3 Current debt service ratio

Before taking the loan, calculate your debt service ratio. It is the percentage of your monthly income needed to service long-term liabilities. It provides a useful guide to how much of your take-home pay - that is gross pay less 20 per cent employee CPF contribution and personal income taxes - is used to pay debts.

Debt payments are monthly expenses like mortgage, car loans, personal loans or even credit card debts. A healthy debt servicing ratio - debt divided by income - should be 35 per cent or less.

If one already has a high amount of outstanding debt to service, it is best to pay down existing debt first before incurring more. And even if your debt service ratio is less than 35 per cent, it is prudent to consider if you have surplus funds to take on another loan repayment after paying monthly living expenses.

Make sure you know your cash inflow and outflow before taking on another loan.

4 Loan tenure

It is worth considering the optimal loan tenure as it affects monthly repayments and interest paid. Generally a longer loan tenure means smaller monthly repayments but a shorter loan tenure may lead to lower interest paid

When deciding on a loan tenure, consider your monthly commitments and take the appropriate loan tenure based on your monthly cash flow.

5 Early payment options

Not all loans allow customers to settle early, so read and understand the terms and conditions of the loan before signing up. An early settlement fee is usually imposed if a loan is paid off early. Home loan customers are urged to look beyond interest rates and consider factors such as the lock-in period and penalty fees.

Another potential cost is the loan cancellation fee. An investor who buys a property on speculation and then applies for a loan might be hit with a cancellation fee if the property is sold before the loan is disbursed. Cancellation fees can range between 0.75per cent and 1.5per cent of the loan amount, and can be quite substantial. For example, if the loan amount is $1million, the cancellation fee works out to $15,000.

6 Late payment fees

Most loans stipulate late payment fees. These are over and above the interest charged for late payment, so go through the terms and conditions of loan agreements thoroughly to ensure you understand them clearly.

Pay special attention to fees incurred for late payment. For instance, credit cards typically charge a one-time administrative fee of $50 to $80 for late payment. This is besides the 24per cent interest charged on the sum that is rolled over.

So keep track of the payment dates and remember to pay before the due date. Try to have fewer loans or credit facilities and avoid having multiple sources of credit. In order not to incur interest and penalty fees, pay your outstanding credit in full.

7 Payment flexibility

Avoid defaulting on loan repayments as it will hurt your credit history. However, a typical loan tenure is for at least a year, and sometimes it is hard to predict what will happen so far into the future.

You might hit cash flow difficulties at some point, so it is worth looking for loans that offer some payment flexibility and provide rewards for prompt payment.

For those who can’t meet their monthly payments, experts suggest that they approach their lender first for assistance to restructure a loan. Financial institutions will usually review such requests on a case by case basis. A responsible lender will work with its customers to provide a solution.

8 Other loan terms and conditions

Make sure you understand the key fees and charges stipulated by a loan agreement. This makes you aware of what to expect when a loan is taken and reduces any surprises after it has commenced.

If you are acting as a guarantor for a loan, be clear about the terms and conditions of the agreement, especially those related to your obligations as a guarantor. This means that even if you are willing to act as a guarantor, you should also consider your own ability to make repayments in case the principal borrower fails to repay. When when the borrower defaulted on his loan, the financier can pursue legal action against both people, borrower and the gaurantor

9. Loans Reference
Lastly, if unsure, it is always good to refer to experts to give you consultation. For those who are looking into SME loans for example, could refer to a business loan expert or a financial consultant who has reference to this aspects.

Partial Extractions and summarised from Sunday Times 28th Feb 2010