Sunday, May 26, 2024

What a beneficiary can do with inherited sums from a departed loved one

Recently, a friend has lost a loved one and has questions about what to do with sums of money left by that loved one. I wanted to write an article explaining my thoughts on what to do if you have a windfall from a departing loved one. 

Before I begin, I want to share that, as human beings, we would usually not treat inherited wealth as earned wealth, so I think the insights from behavioural finance experts on mental accounting may not be helpful when we are still grieving the departure of our loved ones. Even after more than five years after my dad was gone, I still segregate his sums in a separate account and would only use the capital for medical reasons. The dividends are also reinvested most of the time. 

The most important thing I would not do is pass the sums to a banker or financial advisor. As this involves AUM or commissioned sales, it would be tantamount to allowing the FA to inherit the wealth, so all my solutions I will discuss involve the DIY handling of sums of money.

Here are some of my considerations :

a) Singapore Savings Bonds (SSBs)

The most basic answer right now would be SSBs. This is the closest thing to a riskless investment and guarantees that capital can be preserved. SSBs yield 3.28% for the first 3 years, which is slightly higher than the inflation rate of 2.7%. However, it is still being determined whether it can continually beat inflation as the years go by. Finally, you can only have a maximum of $200,000 SSBs in your CDP account. Payouts occur every April and October when stocks generally do not pay dividends. 

b) Globally diversified ETFs with a discount broker

A more savvy solution is to do what most savvy retail investors do: put it with a discount broker and then buy a diversified pool of ETFs from different asset classes. The expense ratio can be meager, at below 0.3% per year (unless it's commodities). You can optimise on taxes by buying accumulating funds and UCITS ETFs on the London Stock Exchange.

I backtested a portfolio that invests 25% in stocks, REITs, bonds, and ETFs. Average returns exceed 7%, with a low standard deviation of around 12-14%. However, this asset allocation must be rebalanced annually, so there's an administrative overhead.

The biggest issue with this approach is that it is emotionally less satisfying as you need to liquidate to spend the sums. There may be a sense of unease with inherited sums, but spending about 2.5% of the prevailing amounts yearly should adequately preserve wealth and even allow payouts to grow over time. 

c) Local dividend stocks

Performing some factor selection of local dividend stocks may only slightly underperform the ETF suggestion and even result in a higher standard deviation. Still, Singapore markets have already gone through some terribly wrong days and are cheaper than foreign markets. Picking 20 blue chips with the highest yields and then cheery picking 10 with the lowest volatility can generate returns of over 8% for the past 10 years with single-digit standard deviations.

While the historical data looks good, this strategy's real strength is its emotional appeal. The more diversified your dividend portfolio is, the higher the frequency of payouts. If you are willing to pay a fee for higher trading costs, stocks in the CDP system can even be paid directly to your bank account at 5.30pm on a payout day.

This is particularly good for grieving individuals as it feels like your loved one is always looking after you and sending you money to buy a meal at the restaurant. I suspect this is one of the reasons for 1M65's hilarious outburst that SGX is all about Kiasu and Kiasi investors who will not take a risk on innovative tech counters. As such, I actually think Mr Loo Night would be right, but we dividend investors would like things to stay this way!

The downside I noticed about this strategy is that it is, after all, focused on high-yielding stocks of a single country, so the strategy can have its bad days. You can occasionally have drawdowns that are very large compared to the ETF strategy. 

As for me, I did not have to convert my father's holdings into dividend counters because I had been doing it with his blessing for decades while he was still alive. He transitioned from asset to cash-rich, while I did the opposite as I took on a mortgage loan for my executive condominium. These days, even closer relatives remarked how much I now looked like my dad as I reached my 50s.

Right now, I can share some of my thoughts because I collect rentals from a shophouse my father bought when I was a JC student in JB every few months. This shophouse supported me when I was getting my first degree. The ringgit has weakened immensely, so after all my diabetic meds and my mum's blood pressure meds, there's only so much left to buy relatives a treat in KSL

I always tell my uncles and aunties not to thank me as the money came from my dad's savvy moves when he was younger. 

My dad would have been 82 years old next Friday.

I hope he would approve of my actions as a steward.

Sunday, May 19, 2024

Better alternatives to Early Retirement


I had much to think about this weekend because we just had a secondary school reunion. I did not intend to attend the event initially because I didn't know how to pitch my "lifestyle choice" within such a short timeframe. I need to use mathematics to explain how I could foot off the pedal 10 years ago, and it might get as awkward as the last family gathering I had. But because my cohort over-ordered table tickets and folks talked about sharing the cost of unsold seats, I threw my hat into the ring because I was free that evening. I should catch up with my secondary school classmates entering their 50s this year. 

As it turns out, quite a few folks follow me on this blog, CNA's Money Mind, and my material on YouTube, so there's no need to explain it to them. Still, folks in their 50s are now contemplating whether they can just stop work, so I had to tell them not to do anything rash unless their investments exceed 300 multiplied by their monthly expenses. Even so, I told them about the awkwardness and the loss of personal identity I faced when I gave up on regular employment, and even turning myself into a lawyer did not fully solve that issue. 

But I did not prescribe too many specifics. My classmates are successful in the corporate world but stuck with the skillsets they have honed over the years. If they need to get out, I suggest they find something passionate about first. 

This brings me full circle to what I am currently doing with my life.

I'm actually doing some kind of reverse FIRE. 

In the past, I struggled hard to get my passive income to exceed my expenses with some legroom so that I could do something else with my life instead of just accepting what my workplace offered me. But I stayed on for 7 years after financial independence because I enjoyed my work. It took a stint out of the public sector work to make me throw in the towel, and by then, my dividends had exceeded my take-home pay. 

As business is terrible, I'm struggling to do the opposite.

I'm seeking part-time gig opportunities to supplement my business income and live on my earned income. This number is below my family expenses, including mortgage payments, so I must use up a small part of my passive income to keep everything sustainable.

Of course, I have set some ground rules for my work. 
  • It has to work where, psychologically, the positives of work outweigh the negatives. 
  • It should also not touch weekday office hours because I consider my daily afternoon nap and swim one of the biggest positives in my life. 
As it stands, this is a challenging goal. 

If I succeed, I can pay all my expenses with passive or active income. My active income will only be earned at night or over weekends, and my engagement with clients and stakeholders must be positive and make me look forward to doing the work.

So, I think I might be able to make this arrangement work if interest rates start going down before the end of the year and I add another gig to my current list of engagements. 

If rates stay higher and longer, I might have to bite the bullet and start selling my weekday time to meet my objective.

But I will miss the afternoon naps if I do that.

Wednesday, May 08, 2024

Deeper thoughts about FIRE


I just wrote a basic article on FIRE on the Dr Wealth website. You can read it here.

This article allows me to share miscellaneous thoughts on the topic that might not be appropriate for a primer on the movement.

a) Why did FIRE splinter into so many variants?

I had the same questions when I first read about Barista and Coast FIRE - both movements do not eschew the working world altogether, so they are short-cuts at best and half-baked ideas at worst. But I'm convinced that very few folks will complete the journey over time. FIRE influencers are overwhelmingly Tech or Finance professionals, and the MBTI personality type that dominates the movement is a rare INTJ type that is less than 5% of the human population.

So, some kind of moderation to create a form of FIRE for ordinary humans is inevitable. Even my challenge to ask my students to set aside $24,000 to generate an average of $100 a month in dividend income is quite challenging to some. 

b) Does FIRE threaten the financial industry?

If FIRE does not threaten the livelihoods of commissioned FAs, we are not doing FIRE correctly because we can save 2-3% in fees when we invest directly using a low-cost broker. I think the financial industry understands this point, and I'm detecting many "dog whistles" to that effect. 

An increasingly common strategy is to ask whether people make personal sacrifices regarding FIRE. Talking about some folks' relationships or appearance is also a low blow. Another approach is to "forgive" and "give permission" to others to start saving later in life. More complicated strategies will pick on a person's inheritance. 

It's all an attempt to convince folks not to start, but it ignores how much freedom a person can achieve with even $100 in passive income a month. 

c) Does FIRE threaten policymakers?

If done correctly, policymakers should actually promote FIRE. A severe practitioner will have to work really hard and maybe hold multiple jobs to get a credible portfolio running before they reach the age of retrenchment. 

There are certainly worse movements that are gaining more traction, such as the idea of lying flat.

d) What can policymakers do to make FIRE less attractive? 

Actually, policymakers threatened by this movement can take welcome steps to make FIRE less attractive in Singapore society. 

I can imagine myself continuing working on a statutory board today if some really toxic managers did not exist because I liked IT work, and I have no issues going to work even with a passive income of $20k+ a month. I'd like to hang out with friends in the office, too. 

If you want to blunt the impact of FIRE, we need to take further steps to make Barista FIRE a reality. More work from home, flexible work arrangements and a four-day workweek are a good start. I don't think you can remove the assholes from the government offices or any corporate HQ overnight, but creating a means to minimise contact with these people and creating outcome-based work objectives will help immensely. For me, the potential for AI is to require less middle managers so assholes will be stuck in individual contributor roles. 

Suppose a double-first from Cambridge prefers a life as debating coach rather than a path to say, the Admin Service, I'm not really interested in his choice of FIRE - I want to know specifically what kind of Ministry culture will drive him to freelance instead of becoming an Elite.  

e) Are there viable alternatives to FIRE?

Every successive generation of folks will reach adulthood and get their shit together at a much older age. They will also become more individualistic. This is a common trend from Boomers all the way to Gen Alpha. 

I'm seeing younger Millenials and Gen Z taking up a gap year after years of work to travel or do whatever they want. This is a viable alternative as they effectively separate their retirements into multiple parts and enjoy small bits of it when they are young. 

My generation will not do this because it can taint our resumes. 

But HR will be unable to do anything if every young Singaporean aspires to this lifestyle. Just like the CCP will note able to do much if every young person in China starts to lie flat. 

I actually love what young people are doing here when it comes to lifestyle design, I welcome credible alternatives to FIRE and love hearing about them. If done collective as a population, the working world can become a much better place even for older folks like me. 

Thursday, May 02, 2024

Strengthening the case for dividends investing


Interestingly, folks are still publishing books on dividend investing since most of the top-performing stocks in the US are tech stocks that give tiny payouts to investors. Daniel Peris is one of those rare authors who are still trying their best to push dividend investing in the US despite multiple decades of very ho-hum performance.

First, he admits that dividend investors have become underdogs in the US. He has, in fact, placed his bets that with higher interest rates, a new trend will emerge where US companies will eventually clarify their dividend policies and increase payouts to appease investors in the future. This is an incredible leap of faith, but he has great arguments for this.

When arguing for investing based on dividends, the first hurdle is Modigliani and Miller's Dividend Irrelevance Theory, which, over the years, has generated enough influence to get company bosses to dispense with dividend payouts entirely. Furthermore,  tax authorities who apply a different rate to dividends and capital gains taxation make this worse. Peris found academic arguments to counter M&M, citing the stability of dividends as a reason why it remains a good factor and putting M&M within the context of a different economic era where free cash flow is often negative.  

With the big argument out of the way, it's easier to understand why dividends have underperformed. A stock that returns dividends to shareholders retains lower earnings and would appreciate in price less than a stock that keeps its dividends or performs a buyback despite the same business performance. But there's a lot of pressure for growth investors to stay vested, as the lack of dividends means more volatility and a nasty drawdown if the growth thesis fails later. 

At the end of the book, I suspect that Peris is nostalgic. He wants the stock markets to return to an era where investors place their assets on well-run businesses and companies. In this current era, speculators bet on technology trends that push the markets higher and higher, allowing ridiculous PE ratios to take root in the US.

This is the same fantasy in the hot Japanese Anime Frieren. 

Frieren, possibly the best anime of late, invokes the same fantasies, where Fern uses only the basic offensive magics to defeat all the mages of this era. I had to make this reference as I just completed watching this series with my son. 

Strangely, the Singapore market is precisely what Peris desires. In Singapore, you find our local public companies being carefully focused on a good dividend policy and selling stocks at current PEs of less than 10. If you attend AGMs, that's what the boomer uncle investors really want. 

They just want to get paid and eat an excellent buffet simultaneously.

I am currently testing a few screens based on the book. There is some outperformance, but Sharpe ratios are around 0.5 at best. 

Always good to have a lab to test assertions.