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MONEY SMART How to Start Investing with Little Money and End Up with More!

C.H. Tan

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First Published 2011 Printed in Singapore Published By C.H Tan MoneySmart.CH@gmail.com ISBN 978-981-08-7580-0 Copyright © Tan Chin How Cover Design and Typeset: Rank Books (www.rankbooks.com) All rights Reserved. No part of this publication may be reproduced or copied in any form or by any means – graphics, electronic or mechanical, including photocopying, recording, taping or information retrieval systems – without written permission of the author. Conditions of Sale: This book is sold subject to the condition that it shall not by way of trade or otherwise be lent, resold, hired out or otherwise circulated without the publisher’s prior consent in any form of binding, or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. While every reasonable care is taken to ensure the accuracy of information printed, no responsibility can be accepted for any loss or inconvenience caused by any error or omission. The ideas, suggestions, general principles, examples and other information represented here are for reference and educational purpose only. This book is not in anyway intended to give investment advice or recommendations to trade stock or any other investment. The author or publisher shall not bear liability for any loss or expense whatsoever relating to any investment decisions made by the reader.

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Preface _________________________ I come from a poor family and my parents were hawkers. They did not know anything about investments. I remember what my parents told me when I was a young boy. They wanted me to study hard, get a good job and save. They would say to me, “Do not play with shares or you will get burnt”. I followed their advice and did not play with shares until well into my adulthood when my third child arrived. My investment experience started when my third child was born 10 years ago when I was working in Hong Kong, a free wheeling and dealing culture. I was curious about my colleagues making money from shares. I was a novice and just followed tips from my friends and colleagues without much consideration. I was trying to plan for my family’s future. It was then that I began to read up books on investment and financial planning. Most of the books that I read were written from an academic point of view and therefore, very theoretical rather than practical.

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MONEY SMART How to Start Investing with Little Money and End Up with More!

I was searching “high and low” for financial knowledge from financial and investment books in the bookstores, internet and newspaper articles. After sometime, I stopped reading because partly I was busy and partly I could not understand as much from these theoretical books as I would like. I could not see that there is a fundamental difference between “playing” the stocks and investment planning. I can still remember very vividly the very first stock that I bought was Hong Kong and Shanghai Bank (HSBC), when I opened my trading account. This was a blue chip that was recommended by my colleague and broker and it paid a fairly good dividend. My heart was pumping very fast as this was the first time I spent a five figure sum on a stock. My mind was blank and yet excited. Before I knew, I was hooked on monitoring the Hang Seng Index and the HSBC stock price every moment, every day whenever I was free in the following few months. That was in the year 2000. I was also gathering more tips on which stocks to buy and other investment strategies.

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Preface

Before long, the internet bubble burst and stocks were spiraling downwards. The stocks that I had bought and held were not spared either and the stock prices headed south. Soon after, this was followed by the SARS epidemic in Hong Kong and Singapore in 2003. It was very depressing and I was searching for answers. I was wondering what went wrong with my investments (stocks and property) and will I ever be able to grow my investments as the future looked bleak. With this experience, came a period of self-learning and reliance. I trusted no one as what the analysts predicted in the stock and property market did not come true for my investments. I was very disappointed and started to read extensively to increase my financial knowledge and literacy. I was determined to succeed on my own. I begin to see the synergy between investments in stocks and finance planning. This is how I became better in my investments and I have not looked back since. I want to share with you, the reader about my personal experience in planning and managing my personal finance and investments. I find that there are NOT too many successful people who are willing to share the secrets of their investment success. V


MONEY SMART How to Start Investing with Little Money and End Up with More!

I also find that there are not too many books that deal with the practical aspects of personal finance and investments. Most of the finance books either give too generic or sometimes too technical and excessive account about personal finance. I find these books irrelevant and unfocused.

“My success, part of it certainly, is that I have focused in on a few things.�

- Bill Gates Moreover, you need not know everything in finance and investment to be successful. What you need is to know about 20% of the financial knowledge (something that interests you); and understand at least 80% of these concepts well enough, you will become successful. Look around you and you will notice that most successful people are only very good in one thing or two and at most three to four. Seldom do you find them very good in everything. Take for instance Mr. Dennis Wee, a self-made millionaire property expert who knows the property market very well. Thus, this book is not meant to be comprehensive but focuses on the topics I know best. VI


Preface

To answer the question as to why I dabble in stocks despite my parents’ advice about “playing� with shares, investment is by no means gaming. It requires knowledge, discipline and the passion for what you believe in. It must be part of total financial planning and not be treated as a gamble. It can be turned into a hobby that you can develop, which at the same time helps you build a small stream of income for your retirement nest. I sincerely hope that this book will enlighten and help others in their future and long-term financial and investment planning. I would like to thank our wonderful Father in heaven who has given me the courage and inspiration to write this book. It is for the purpose of rebuilding His Church that I am inspired to write this book which for many years I have put off and not been able to do so. Finally, I would also like to dedicate this book to my wife, Pauline and my three lovely children, Sherah, Gerald and Terril who have been very supportive of everything that I do. I hope they will one day acquire the skills that I hope to impart to them so that they will become financially independent and successful in managing their finances.

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Contents Preface..................................................... III Introduction............................................ 1 Financial Planning.................................. 7 Investment Management........................ 43 Property as an Asset............................... 55 Unit Trusts ..............................................109 Stocks ......................................................127 Building Good Money Habits ................139 Conclusion ..............................................147

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Introduction _________________________ “Opportunities  multiply  as  they  are   seized.”   -­‐  Sun  Tzu   As I was growing up, I had hardly any or very little exposure to financial planning or Investment. All I knew was to save as much as possible the weekly allowance my parents gave me. Besides the 5 Cs - Career, Car, Credit card, Condominium and Club membership, there were other life goals: to get married and have children. The most exciting memory when I started work after graduation was the very first pay cheque I collected. It was $1400 and I gave my parents $800 for household expenses as they were retired while I saved the rest. I was saving to get married in 2 years, as my parents could not afford to pay for my wedding and related expenses.

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MONEY SMART How to Start Investing with Little Money and End Up with More!

All my precious savings from childhood till then were used up for one of life’s most important milestone - marriage. I had no place of my own and so my wife and I stayed with my parents after we got married. We practically started from ground zero !! We have big dreams and goals – the very first goal was to have a place of our own and eventually upgrading to a terrace house. The property market in Singapore was hot in the late 1980s and early 1990s. New property launches were the rage and property speculation was quite rampant. There was this new property launch near my parents place called Emerald Park, a 99year leasehold private condominium; a 1000 plus square feet 2 room was going for about $400,000. To book a unit, one had to put a deposit of 10% of the property price i.e. $40,000. We did not have that kind of money back then and interest rate was going at 6% per annum. It was beyond our reach. We then decided to apply for an HDB flat instead. At that point on, I realized that with our salaries and savings then, even if we get annual increase in salaries of 3-5%, we will be priced out of the private property market and we may not able to retire. 2


Introduction

It is rather frustrating. I am sure some of us must be feeling the same right now with our present property boom; an HDB maisonette at Bishan can fetch close to $900,000 !! It was then that I discovered the power of the time value of money. It is all about recognizing your goals and seizing the opportunities that present themselves in different ways to you. I was very fortunate as I was able to get a 5-room HDB in a mature estate on our application on our second try. It was in a central location and was therefore a good hedge against inflation. I was also very thankful that after working for 7 years, an excellent job opportunity happened to knock on my door. It was a job based in Hong Kong that offered an attractive salary albeit on a term contract. I was reluctant to uproot as it meant leaving my wife who was pregnant with our second child and my 3-year-old daughter in Singapore. It was also not financially viable for my wife who was holding a local job to quit and join me given 1-year term contract. After much consideration and support from my wife, I decided to take a leap of faith, step out of my comfort zone and venture over to Hong Kong to bring us one step closer to our financial goals. There is never a best time to take on new challenges and opportunities. You just have to seize the day. 3


MONEY SMART How to Start Investing with Little Money and End Up with More!

I must say it was truly an eye-opener and I did not regret the decision at all. The year that I went over to Hong Kong was in 1996 and was the year of transition of Hong Kong from the British rule to China in 1997. That was also the year the Asian financial crisis occurred as I remembered some of my friends advising me not to go over to Hong Kong even though the pay was much higher as they said that when China took back Hong Kong, the Hong Kong dollar would be converted to Reminbi with a devaluation and thus lower pay. However, that did not happen. On the contrary, the Asian currencies went into a tailspin instead with the Singapore dollar depreciating by as much as 20-25% against the Hong Kong dollar as the Hong Kong dollar was pegged to the US dollar (which was not affected). It was also in Hong Kong that I could save for my family’s future, as the pay was high even though the standard and cost of living was higher than Singapore. Taking up this opportunity opened up more doors for me as I became more exposed to the financial markets in Hong Kong and could explore and think about what to do with my savings.

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Introduction

In 1997, I completed my term contract and was promoted with further employment extension. That was when we decided to relocate the entire family to Hong Kong to join me. It was not easy being married and living apart from each other for one and a half years even though the family communicated on the phone almost every night and I commuted once every other month between Singapore and Hong Kong. We were saving and planning on how to make our money work harder for us. That was also the year, 2000 when my third child was born in Hong Kong. Stock market and property euphoria did grip us. With the bursting of the internet bubble, SARS and property market crash, it had brought us down to earth. That was also the time that I realized that I needed to do my homework and increase my financial and investment literacy if I am going to increase my wealth and provide a bright future for my family. I guessed it was a blessing in disguise that these crises happened. It taught me to be prudent and yet be an opportunist. Do not follow the herd, be a contrarian. Invest when market sentiment is the worst; be it in property, stocks or unit trusts but remember to do one’s homework and must have holding power, as my subsequent chapters will elaborate. 5


MONEY SMART How to Start Investing with Little Money and End Up with More!

In my 10 years of investment experience, I have witnessed three major crises; the bursting of the internet bubble in 2000, the SARS in Hong Kong and Singapore in 2003 and the Global financial meltdown in 2008-2009. They have taught me valuable lessons and have also presented many investment opportunities. The time-tried way of “seizing the opportunities�, regardless of whether it is work or investments has never failed me. The following chapters focus on what I know. Besides being an opportunist, one has to set financial goals; understand the importance of setting an emergency fund; having adequate insurance cover and the basics of buying a property, stocks and unit trust. It is also important to develop good habits for one to be successful in financial planning and investment. Here’s wishing you a happy and fruitful reading !

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Chapter One Financial Planning _________________________

“Before  you  can  really  start  setting   financial  goals,  you  need  to  determine   where  you  stand  financially.”   -­‐ David  Bach Financial columnist and author of personal finance books  

    To succeed in whatever we do, we need to have a good game plan or strategy. This is the same as a soccer game whereby you are the coach (planner) and you give specific instructions to your players (instruments of investments e.g. property, stocks) to achieve victory (financial wealth and freedom). It is no different when it comes to any other tasks or financial investments.

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MONEY SMART How to Start Investing with Little Money and End Up with More!

Financial Planning A Comprehensive financial planning includes (but is not limited to) the following components:•

Retirement planning Planning for the amount of money one needs to save from now to retirement so as to fund one’s living expenses and life style during one’s retirement years. Typically, not many people plan for retirement in great detail, given the fact that many believe it is still very far in the future. However, it is only through detailed planning while one is still young that one's golden years can be spent in greater comfort and peace of mind. The benefits of performing a retirement planning exercise is that it will give you a clear picture of your financial situation: (a) the amount of money you need to save to fund any shortfalls; (b) the time horizon; and (c) the real rate of return required

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Chapter One Financial Planning

*Be REALISTIC and PRIORITISE your goals. Most people do not have the means to achieve all goals at the same time. Thus, it is useful to indicate the priority level from 1-5 so you are able to allocate your source of fund accordingly. Let me give a case illustration on a priority of Emergency fund:Priority 1: Emergency Fund Let’s say Mr. Lim earns $6,000 per month His monthly expenditure is $4,000 per month He saves the rest of the $2,000 per month Generally an emergency fund caters to 312 months of monthly expenditure in the event he is retrenched or unable to work. 3-12 months = 3 X $4,000 to 12 X $4,000= $12,000-$48,000. Since Mr. Lim saves only $2,000 per month it will take him: (12,000-48,000)/2,000= 6-24 months to save his emergency fund.

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MONEY SMART How to Start Investing with Little Money and End Up with More!

1.2 Assessing your Cash Flow position To help you understand your sources of fund in Table 1, you need to have accurate information about your finances. Without a good picture of your financial standing, your goals may not be achievable. Table 2: Income and Expenditure Statement

Sources of Income • Salaries • Bonuses Insurance Annuities Investment Income • Interest Received • Dividend Received • Rents Received • Sales of Shares Other Income Total Income

Husband

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Wife

Total $


Chapter Three Property As An Asset _________________________

“Don’t  wait  to  buy  real  estate.  Buy  real   estate  and  wait.”   - Robert G. Allen

Financial writer and real estate investor

As mentioned, real estate normally makes up a big part of tangible assets in an investment portfolio because of the high capital involved. However, regardless of whether the property is for self dwelling or investment, it is important for us to discuss how we can prepare ourselves when an acquisition opportunity is presented to us.

1. Considerations for Selecting a Property The following makes a few of the critical criteria in my humble opinion an excellent investment proposition/dream home. 55


MONEY SMART How to Start Investing with Little Money and End Up with More!

1.1 Location Location is the most important factor in the selection of a property. The attraction of location of a property is the convenience it offers to the dwellers or the tenants. •

Ideally, it should be in a prime or popular district such as 9, 10, 11 and 15.

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Close to amenities such as the market; hawker centre; Mass Rapid Transit and public transport; reputable schools; shopping centers; parks and exclusive neighborhoods.

As an investment, as long as the property is in a prime district and close to amenities, it will fetch higher rentals due to higher demand (if the property is rented out), or command a premium on the resale market. It will also likely appreciate with time because of dwindling limited supply.

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Chapter Four Unit Trusts _________________________    

“I've  found  that  when  the  market's  going   down  and  you  buy  funds  wisely,  at  some   point  in  the  future  you  will  be  happy.  You   won't  get  there  by  reading  'Now  is  the  time   to  buy’.”   -­‐ Peter Lynch Research Consultant at Fidelity Investment

A unit trust is a type of "pooled" investment managed by a professional manager. What this means is that an investor puts his money with other investors' into a pool; the collective amount is then invested to buy a range of shares managed by a professional fund manager. Independent trustees oversee unit trusts to ensure the management of assets is in line with explicit fund objectives. This affords investors protection.

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MONEY SMART How to Start Investing with Little Money and End Up with More!

In Singapore, fund managers have to send unitholders a statement every quarter, so you'll always have a fair idea of what your units are worth. An investor can make informed future decisions about managers, asset allocation, and other investment factors once they have an accurate and thorough evaluation of a fund's performance. 1. Advantages of Investing in Unit Trusts: a. Small investors enjoy economies of scale Each investor can gain access to and own a much wider number of stocks than if he had tried to buy them individually with a small sum of initial investment. •

There is a cost advantage To buy all the shares in a typical unit trust portfolio would be very costly.

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Spread of Risk and Diversification On the other hand, just to buy shares in a handful of companies would expose an investor to another level of risk entirely i.e. without diversification. 110


Chapter Four Unit Trusts

The more companies a Unit Trust invests in, the less the performance of each one will affect the whole. Thus, one of the main fears of stock market investment - that you risk losing all your money investing in one stock – is much diminished. Usually, a unit trust will hold many stocks and is diversified across different industries as well as countries, Even if it is invested in a particular industry, the fund will hold stocks diversified across companies in the industry. A well diversified unit trust is much less risky than putting all your investments in one country or industry. b. Better accessibility Unit trusts may also invest in areas that an individual may find hard to access, usually because of unfamiliarity, liquidity, size or legislation. They also offer opportunities to approach investing in new ways such as sector or theme funds (e.g. green energy). 111


MONEY SMART How to Start Investing with Little Money and End Up with More!

c. Convenience and liquidity Fund prices are quoted daily in the websites and newspapers. There are no restrictions on how long an investment has to be held before units can be sold. Units are created or cancelled depending on demand. Thus, investors can easily buy extra units or sell down their holdings piecemeal. They don't have to depend on other buyers in order to sell their units. If you want to sell, the manager has to buy the units back. d. Professional Management and Research Capability The money that investors “pooled� in a unit trust is managed by professionals who decide where to invest it. These portfolio managers usually make their decisions based on extensive in-house research and analysis on the financial performance of individual companies. The economic climate is dynamic and as economic conditions change, the managers may adjust the mix of the investments to adopt either a more defensive or aggressive position. 112


Chapter Four Unit Trusts

2.

Disadvantages of Investing in Unit Trusts a. Sales Charge There is a sales charge of between 1.75 to 5% of the total invested amount that is charged when purchasing a unit trust (front-end fee) or when selling (back-end fee ) which is significantly more than a 0.25 to 0.5% commission charge on purchase of an individual stock. However, competition is keen and sales charge has decreased recently. Unit trusts purchased via internet such as FundSupermart charges 0.75% for Fixed Income Funds and 1%-1.5% for Equity Fund depending on the amount you invest with them. b. Management Charge There is usually a 1% to 1.5% or even up to 3% management charge which is deducted from value of the fund’s asset annually (“lost� in the annual report), even when the unit trust is not performing well as compared to no charge when holding a handful of individual stocks when purchased individually. 113


MONEY SMART How to Start Investing with Little Money and End Up with More!

3. Tips to Consider when Choosing Unit Trusts Among other things, we need to consider various aspects of a fund such as the strengths and weaknesses of the overall structure of the fund; past track record of returns matched the risk taken; the returns compared to its own category of similar asset mix; manager’s impact achieved through security selection; and the impact of timing the market by the manager. The following details the above considerations. a. Positioning of Fund A unit trust is evaluated based on its ability to position its funds correctly and accurately so that its investment objectives are achieved. What this means is that a well-positioned unit trust is one that achieves a return-risk profile consistent with its investment objective, e.g. An equity fund that is invested in a single-country such as China is usually targeted for higher return and assume a higher risk profile as compared to a bond fund e.g. United Global Bond SGD that targets low to moderate return that assumes low to moderate risk profile. 114


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