What will happen after 2022

What will happen after 2022?

I don’t think I have to repeat how bizarre is the world is right now. After contracting COVID19, I sat down (actually slept down most of the time) and thought long and hard about how financial events are shaping our economy now.

There are events in the world and many are definitely out of our control. However, some of the effects will be trickled down to be felt by us. I will be talking about my thought of the 3 most important financial events that will affect us, inflation, interest rates and wages.

Disclaimers: All thoughts are mine alone. Though I would love to hear yours in the comments section below.

What will happen after 2022
What will happen after 2022

Inflation

This is Singapore’s annual inflation rate over the past 25 years. As Singapore is only independent for 57 years, this data is what Singapore has been facing half the time. You can see for majority of the time, inflation was “well behaved” at 2%. The exception would be spike in 2008 (Financial Crisis) and for a period between 2011 to 2013.

Interestingly, inflation in 2011 to 2013 was cause by largely on account of sharp increases in car and house prices amid scarce supply.


Table 1: Inflation. Source: tradingeconomics.com

While headline inflation is forecast to come in at between 4.5 per cent and 5.5 per cent, while core inflation is projected to average between 2.5 per cent and 3.5 per cent. I will be concerned about core inflation which you can see on the chart below that it went up beyond 4% in 2008. We are definitely feeling the heat with food, electricity and gas prices have been increasing.

Singapore Core Inflation
Singapore Core Inflation

I predict (mainly because of the lack of data and research) that we will be having a inflation > 2% for at least another 2 years before it gets back the usual range. I don’t think prices will fall when inflation becomes lower. Hence, make it a point to preserve the value of your money. This is especially important if you are nearly retirement or at retirement.

Interest Rates

Singapore Housing Loan VS Fixed Deposit Trend
Graph 1: Singapore Housing Loan VS Fixed Deposit Trend

Interest rates affects various financial instruments and in the graph above. I’m hearing a lot of chatter on 4 things on the ground.

Housing Loan

When interest rates raise, housing loan rates also raises. As you can see above, the last 10 years we were living in a low interest rate environment. In the last few months, home loans are starting to move upwards to 3% (fixed rate). The implication of this is a cashflow drain.

Imagine you are servicing a 30 years housing loan of $800,000 at an interest of 1.1% previously. Your monthly mortgage works out to be $2610.

At 2%, your monthly mortgage is $2957. This is an increase of $347 monthly or $4164 annually.

At 3%, your monthly mortgage is $3373. This is an increase of $763 monthly or $9,156 annually.

Can you see why people are worried when rates increases to 3% now?

If you are looking into floating rates, Singapore is using SORA now. SORA is 0.8089% p.a. (as at 4 July 2022). A typical spread of banks would be between 0.8% to 1.2% depending on your relationship with them. I would expect the floating rates (including spread) will be between 2% to 4% in the next 2 years.

Fixed Deposits

Hurray to those of you who are cash rich. Guaranteed rates never look better. We are seeing fixed deposit rates increasing with UOB giving 2% for a 2 year lock in. Other banks are also stepping up their interest rates too.

Disclaimer: This is by no means a buy/sell recommendation

UOB Fixed Deposit July 2022
UOB Fixed Deposit July 2022

Even the Singapore Saving Bonds are giving average 3% returns in July 2022.

Singapore Saving Bonds July 2022
Singapore Saving Bonds July 2022

Looking at data, I’m concerned as the Housing Loans (15 Years) and Fixed Deposit (1 Year) are highly correlated (see graph 1). The average difference between housing loan and fixed deposit over the years is 3.3%. This means that if Fixed Deposit is 1%, there is a chance that the housing loan could go to 4.1%.

Insurance Participating Policies

Just a year ago, people were terribly concerned about insurance companies’ ability to fulfill their participating policies (think endowment policies) illustrated rates. (Read More: Participating Funds Singapore Moving Forward ; Should You Be Concerned About Dropping Illustrated Rates)

The industry has realigned expectations in July 2021. The upper illustration rate will be capped at 4.25 per cent a year, down from 4.75 per cent, and the lower illustration rate will be capped at 3 per cent a year, down from 3.25 per cent.

The previous rate change was in was in 2013, when the upper illustration rate cap was reduced from 5.25 per cent to 4.75 per cent a year. The lower illustration rate was reduced from 3.75 per cent to 3.25 per cent.

The main reason was because of the low interest decade that we were living in.

Now that interest rates are moving up, will insurance companies increase the rates in the participating policy again?

CPF Interest Rates

In a low interest environment, our CPF interest rates looks like an attractive place to reap guaranteed interest (we are leaving context aside for this statement).

Imagine if fixed deposit rates are nearing 3.5% or even 4%, I think it is very important to pause and think if people who continue contributing to their CPF (putting context aside for now) if the rates are near parity.

CPF may lose attractiveness (for a while). That being said, the CPF may change interest rates from time to time. Personally, I doubt that will happen. I am already very appreciative that CPF has kept rates the same despite the prolonged low interest environment.

 

Wages Inflation

Isn’t this something to be celebrated? Local wages grow by 7.8% in Q1, outpacing inflation. I believe that this is because there is a shortage of labor with travel restrictions. If you are looking for an opportunity, this is one of the best timing to seek a higher paying job.

 

Final Thoughts

Like I said from the start, these are some thoughts that I have jotted down and my own personal predictions for the future. I would love to hear your thoughts in the comments below.

Last but not least, do consider your own context before making your decision. Do reach out if you wish to discuss with me.

 

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

The Pros And Cons Of Dollar Cost Averaging

The Pros And Cons Of Dollar Cost Averaging

The Pros And Cons Of Dollar Cost Averaging
The Pros And Cons Of Dollar Cost Averaging

You might be thinking this is “another of those dollar cost averaging article”. I assure you that this is not. It is always during a Bear Market Survival that the topic of dollar cost averaging surfaces. Rarely, this topic is popular during a upward trending market.

Once a for all, I will discuss on the value of dollar cost averaging and what it can do in your portfolio. If you have been investing in China over the last year, you might think that dollar cost averaging is not working on China’s stocks? Read on and consider the pros and cons.

What is Dollar Cost Averaging (DCA)?

Dollar Cost Averaging is a popular investment method of investing equal amounts of money over a period of time. The opposite of this would be to invest a lump sum of money at once. I will leave you to read up about summary of DCA in this photo below.

Dollar Cost Averaging
Dollar Cost Averaging

Financial advisors are one group of people that preach about this because of the simplicity of the method. It is however, easier said than done as emotions might get better of us in the market.

One question you can ask yourself today ( 1st June 2022), are you still averaging down?

The Pros

  • Simple and systematic (if you set rules that continuously invest during ups and down): You don’t really “think” when you employ a DCA strategy. You simply trust the system and invest through the ups and downs. It will work BEST if it is via auto-transfer rather than manually transferring.
  • Downside protection: In a downward market, you will see a “bigger lost” if you do a lump sum strategy. For example, if the market corrected 20% in a month, your initial investment of $100,000 will be left with $80,000 (lost of $20,000). Now, if you do a DCA investing $10K per month, your initial investment will be left with $8,000 (lost of $2,000). You also have capital to continue investing at the “down” on the second month. For those that is retiring soon, this have great psychological benefits. I believe there is nobody that wants to lose 20% of their nest egg 6 months prior to retirement.

The Cons

  • FOMO (Fear of missing out): If this is an upward market, you risk missing out on the extra capital gains and compounding benefits. Using the same scenario as above, someone who invested $100,000 with a 20% run-up would make $20,000, while the investor DCA their first  $10k would’ve only made $2k.
  • Being too passive: DCA works best if the asset have a long term upward tread in nature. If the underlying investments are downward/sideways moving (take a look at the Japan market), DCA will not be the best strategy.

Final Thoughts

A big shout out to one of the most loyal reader of Wealthdojo Mr Sinkie. He sums up my thoughts on DCA in a single sentence. “DCA works best for assets that are volatile but have very long history of uptrend”. Thank you for being so patient and contributing to the blog. For those that are interested in his elaboration (I think you should), go over to Bear Market Survival Tips.

Looking forward to more people commenting on the blog.

If you guys need help, please reach out. I will be more than happy to have a conversation with you.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

Bear Market Survival Tips

Bear Market Survival Tips

I was hoping never to write this article because if you are here reading this, it could only means a few things.

  • We are in a bear market
  • You are in a long position with a possibility of being overleveraging
  • You don’t have a system that prepares you for this scenario

Whatever the reason you are here, I think it is quite certain that we are experience a market that is downward cha-cha.

Disclaimer: It is anybody’s guess where the market is going to be. This should not be taken as a buy/sell/hold recommendation. Please consider your own context or approach a financial advisor for advise.

Bear Market Survival Tips
Bear Market Survival Tips

Despite the fear, bear markets are nothing new. To put everyone on the same page, a bear market occurs when major stock indexes like the S&P 500 fall 20% or more from their most recent peak. They’ve occurred 12 times since 1946, which is on average once every 8 years. Most pullbacks above 20% have been associated with recessions. Hence, with the perfect long storm, politicians all over the world are most concerned about recessions.

On average, a bear market is around 9.5months. This would mean most of us will live to tell the tale assuming we are not shaken out of our position (mentally or by margin calls).

As I get more and more about how to invest in a bear market, I hope this article will be able to share with you some bear market survival tips to prepare yourself for the weeks to come.

Bear market survival tips

#1: Avoid making impulsive decisions

This makes the top of the list. Emotionally, people don’t like to be wrong (whether temporary or in the long run). Hence, when they see their portfolio in the red, many people have the temptation to “reset” their portfolio. This is detrimental to your wealth management journey and it is just a “quick fix” of escaping the mental strain.

Stay calm is the key in bear and highly volatile markets. If your time horizon is decades away, the best thing to do is to invest as if nothing has changed. Let me give you an example of a $1000 investment in the S&P 500 between 1/1/2009 and 12/31/2018 (the last market crash).

  • If you stayed invested the entire time, you’d have $2,775.
  • If you missed the 10 best-performing days during that period, your account value would be $1,722.
  • If you missed the 30 best-performing days in this 10-year period, you’d be left with $918.

I can’t emphasize how important it is to stay invested.

#2: Build your positions regularly over time

With dollar-cost-averaging (DCA), no thinking is really required. However, I recognized that it may not be easy. I saw friends who were excited about the recent bear market and have dollar cost average down the last few months.

However, they are all now NOT adding into new positions as the market is still going down. DCA is somewhat easy to say but not easy to execute consistently unless there is a system that is set up. Personally, I have averaged down on the China Market previously and it is still a bleeding position (Check out my latest SRS positions).

Time will tell. That being said, stay tune for my upcoming article: The pros and cons of dollar cost averaging.

#3: Change your strategy, diversify or play defensive

As a wealth manager, I realized risk management is something that I constantly address. If you’re still active in the markets and it is not working anymore, it might be time go passive with a lazy portfolio. If you find yourself taking too much risk, you might want to seek a more defensive portfolio.

Your current life stage might not allow you to take too much risk as compared to before. It is vital to re-assess your situation, your goals, your risk tolerance and discuss with a professional on your options.

#4: Go contrarian (Not recommended)

If you are a trader, you know better than to go against the trend. Consider taking a buy put options position to bet against a stock or ETF, this allows you to have a limited downside (as you are a buyer of the put option) and able to participate in the downward trending market.

WARNING: I have to emphasize that buying options is speculative. They may expire and be worthless if you do not have a game plan. If you are wondering what this is, do not do it. 

Final Thoughts

Stay strong. This may be the pivoting moment in your investment journey. There are so many resources you can turn to nowadays to prepare for a bear market. You can consider what Warren Buffett is doing amidst the noises.

Definitely reach out if you need help. I will be more than happy to have a conversation with you.

Otherwise, please watch out for my next article: The Pros and Cons of Dollar Cost Averaging. [Update: The article is out!]

 

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

There were only two things certain in life Death and Taxes

Individual Income Tax Season 2022

It is the time of the year again. Last year, I wrote about whether an individual is required to pay taxes and my opinion of effective income tax in Singapore. This year, I will simply comment on the latest happenings and what you should take note of.

Disclaimer: Please refer to IRAS Website whenever in doubt.

There were only two things certain in life Death and Taxes
There were only two things certain in life Death and Taxes

Year Of Assessment 2022

The filing for YOA2022 have started on 1st March 2022. We will have until 18 April 2022 (*very important date*) to e-File our income taxes.

How To Reduce My Income Taxes Effective Income Tax Rates
How To Reduce My Income Taxes Effective Income Tax Rates (From YA 2017 to YA 2023)

Income tax rates will remain the same until YA2023. Thereafter, there will be changes for people earning > $320,000 as highlighted in the Budget 2022.

This year, it is stated that 7 out of 10 taxpayers in Singapore will not be required to file a tax return as there have been initiatives to simplify tax filings. This includes No-Filing Services (NFS) and Auto-inclusion Schemes. Partnerships whose revenue of up to $200K will only need a 2 line statement as compared to 4 line previously.

It is worth noting that you can make changes to your income or reliefs by making an amendment on the IRAS portal 30 days from date of tax bill. Any excess taxes can be refunded by PayNow.

Final Thoughts

Think about your Netflix subscription and you are buying their library of movies. I consider individual income tax as a subscription that I pay to stay in my country. I’m paying for my safety, the public goods and mainly the comfort to live in Singapore even if the perfect storm is coming.

I like the progressive income taxes system in Singapore but I’m like most of you, it is not fun paying taxes.

I wish you the best in your financial journey. Hope to hear from some of you. I will be arranging for a CPF webinar in the weeks ahead. Please leave a comment below if you wish to be updated on the details of the webinar.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

4 Things From Singapore Budget 2022 That Will Affect You and Me

4 Things From Singapore Budget 2022 That Will Affect You and Me

On Feb 18, 2022, Finance Minister Lawrence Wong delivered the Singapore Budget 2022 in Parliament. The topics were broad ranging as it addresses the economy, helping businesses and green initiatives. The focus which I saw was mainly into healthcare, retirement and funding them.

In this article, I will talk about 4 main things from the Singapore Budget 2022 that will affect ordinary people like you and me. In addition, I will talk about the possible impact in a limited context.

4 Things From Singapore Budget 2022 That Will Affect You and Me
4 Things From Singapore Budget 2022 That Will Affect You and Me

#1: GST for You and Me

Singapore will raise Good and Service Tax (GST) from 7% to 9% in 2 stages in 2023 and 2024.

*Groan*

This might be dreadful news for everyone. GST is basically a tax on all goods and service in Singapore. Think of your coffee at Breadtalk, the iPhone you buy from Singtel or the massage at the parlor. We might not “see” GST very often as most shops would have already incorporated GST into their final prices. When GST increase, this will inevitably be passed to consumers like us. It is more important than ever to plan more for our retirement.

Positively thinking, the GST in 2022 is still 7%. If you have any bigger expenditure (Read more: How To Save On Big Ticket Purchases) that you require, you can consider doing so in 2022. These could be things like renovation, buying a laptop etc.

On a side note, this might boost the Singapore economy in 2022.

#2: Vouchers for You and Me

The Assurance Package first announced in 2020 by then Finance Minister Heng Swee Kiat has been topped up to be $6.6B by current Finance Minister Lawrence Wong. The main intention is to help support lower and middle income household in the increase in GST (maintain standard of living) even after the package ends.

Singapore Budget 2022 Assurance Package Vouchers
Singapore Budget 2022 Assurance Package Vouchers

The Straits Times actually did a beautiful summary on the vouchers that could be received. For a more detailed look at how much specially you will be getting, the Ministry of Finance page is the place to go.

I can safely say that the minimum that a Singaporean age 21 and above will get at least $700 from 2023 to 2027.

#3: CPF Retirement for You and Me

CPF Retirement Sums Raised

The first impact on CPF retirement is that our retirement sums will be raised by 3.5% per year for the next 5 cohorts that will be turning 2023 to 2027. There have been no mention if this will be reduced after that. It would be good to note that it was previously increasing at 3% per year.

Singapore Budget 2022 CPF Retirement
Singapore Budget 2022 CPF Retirement

This means that more have to be put inside of CPF so that you will be able to have a higher monthly payout at 65. However, this will also mean that you will likely draw out less at age 55. (Read More: 3 Key Changes To CPF Policies From 2022).

It is also worth noting that 8 out of 10 active CPF members aged 55 in 2027 will be expected to hit their BRS securing a basic level of retirement in any case.

CPF Contribution Rates Raised

The second impact on CPF will be of contribution rates for employers and employees will continue to be increased. The first increase has started from 1 Jan 2022. The next increase will be in 2023. This will also mean that more will go into CPF.

It is worth noting that if a CPF member have already hit the FRS, you will be able to withdraw the excess out as cash. Therefore, increase in contribution rate (by the employer) is generally seen as a good sign.

Singapore Budget 2022 CPF Contribution
Singapore Budget 2022 CPF Contribution

#4: Taxes for You and Me

If you are affected by some of these tax, congratulations! You might be the top 1% income earners in Singapore. In the budget 2022, there will be 3 main taxes namely, income tax, property tax and luxury car taxes.

Income Tax

This change will come in for year of assessment 2024. This means that it will be for income earned between 1 Jan 2023 to 31 Dec 2023. There will be 2 additional upper bands.

For chargeable income from $500K to $1M, it will be taxed at 23%.

For chargeable income from $1M and above, it will be taxed at 24%.

Singapore Budget 2022 Effective Income Taxes
Singapore Budget 2022 Effective Income Taxes

In the grand scheme of things, our effective income taxes are still reasonable as compared to many other countries. I believe this will affect the top 1% of us. (Read More: Income Tax Deductible 2021)

Property Taxes

To understand property taxes, there are 2 concepts that you need to know. One is Annual Value (AV) and the other is whether the owner is staying in the property. As the latter is quite clear, I will explain AV.

AV: Estimated gross annual rent of the property if it were to be rented out.

This number is decided by IRAS and there is nothing much you can really do about it. You can find the AV of your property on the IRAS portal. Looking at the photo below, you can have a rough sense by looking at the AV compared with the type of property.

Singapore Budget 2022 Property Taxes
Singapore Budget 2022 Property Taxes

Property taxes will be raised in 2 phrases namely in 2023 and 2024.

Singapore Budget 2022 Property Tax Non Owner Occupied Rates
Singapore Budget 2022 Property Tax Non Owner Occupied Rates
Singapore Budget 2022 Property Tax Owner Occupied Rates
Singapore Budget 2022 Property Tax Owner Occupied Rates

I believe impact will be felt for Non Owner occupied of AV > $45,000 with tax rates increasing from the current 14% to 28% in 2024. These would most likely be an investment property that are collecting rent.

For Owner occupied of AV > $55,000, the tax rates will increase from the current 4% to 10% in 2024. According to Lawrence Wong, this will affect 7% of owner-occupied residential properties. I believe this will be a combination of landed property owners (5% according to Department of Statistics in 2021) and some condominiums owners in central areas (2% of residential properties owners by subtraction). It will not affect most of us.

This is be seen as a form of wealth tax.

Luxury Car Taxes

An additional registration fee (ARF) tier has been created for cars, taxis and goods-cum-passenger vehicles with open market values (OMV) exceeding $80,000.

This will only affect Porsche Cayenne, Lamborghini Urus and Bentley Continental GT, and it will also affect several other makes such as Ferrari, McLaren, Aston Martin, Rolls-Royce and Mercedes-Maybach as well as top-end models in a number of other brands.

I believe this will not impact most people on the ground.

The top 6 luxury car brands in Singapore sold 216 cars in 2019. If demand remains the same, only a extremely small proportion of people will be affected by this. This is definitely a wealth tax.

Singapore Budget 2022 Car Taxes Bentley Continental GT
Singapore Budget 2022 Car Taxes Bentley Continental GT: Seen any of these around?

Conclusion

The budget comprises more than just the above 4. The 4 points above just show how the Singapore Budget 2022 will directly impact you and me.

I wish you the best in your financial journey. Hope to hear from some of you.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.