Starting off

The impetus for creating this blog was a startling realisation that I had pretty much been doing it all wrong (despite thinking that I was doing, at least, "quite okay").

I had been diligent in managing my finances, and I regularly read articles from various websites (such as Investment Moats, IFA.sg, SG Budget Babe and many more), so I knew the basics - spend within your means, save for a rainy day, invest and let compounding do its magic. I also kept abreast of the latest bank account and credit card offerings, with a keen eye on maximizing every dollar saved as well as every dollar spent.

I also started trading stocks quite early, initially only on the SGX, and subsequently branching out to the US market. As I went along, I graduated from using DBS Vickers, to Standard Chartered (lower fees), to TDAmeritrade Asia, and eventually to Interactive Brokers. I made some good buys, and these returned anything from 10 to 20 percent. I was pleased, and I felt that if I could do this year after year, the compounding effect of 10 percent CAGR would give me a comfortable nest egg in no time.

The key missing piece in the puzzle: capital allocation.

When I joined the workforce, OCBC had just launched the OCBC360 savings account. Coupled with the OCBC365 credit card that offered between 5 to 7 percent cashback for dining, OCBC's products were very attractive. I think the OCBC360 interest rate capped out at 3.25% (upon meeting certain conditions), and was applicable up to the first $50k. I remember thinking to myself that $1,625 in annual interest was pretty good, with zero risk.

Subsequently, UOB launched the UOB One account, Bank of China had the SmartSaver account, and DBS revised their Multiplier account. As OCBC pulled back some of the benefits of OCBC360, it became a delicate dance of trying to figure out which among this new generation of higher-interest bank account packages was most suitable for me. I ended up using all of these 4 banks' offerings at different points in time. After all, since this higher interest was "free money", why leave it in a regular account offering a measly 0.05% interest rate, right?

As adult life became real, so too did "old people" stuff like retirement planning and all. It was a frequent conversation topic, sometimes among peers/colleagues, and frequently at family gatherings. Who doesn't go through a Chinese New Year period without some conversation about optimising CPF or getting the best loan rates*? We all have that relative who will lecture at end about how CPF OA's 2.5% risk-free interest rate is very good, and therefore we "young persons" shouldn't all be like Roy and diss the CPF all the time...

*Footnote: Bear in mind that if these are older relatives, they are likely to be speaking from a very different viewpoint, since they are likely to be homeowners who benefited from the great run-up of property prices in the two decades preceding 2015.

Amidst such a backdrop, I developed a certain mindset towards my investment goals. In a nutshell:

• CPF 2.5% risk-free interest rate is pretty good
• Therefore, 2.x% interest rate offered by some of the new-generation savings accounts is quite good too
• Must max out the limit of such accounts
• And hey, this cash will also serve as "emergency fund" right? Kill two birds with one stone! 

I also thought I was doing pretty good, because with leftover cash, I invested in stocks on a regular basis (in line with all the advice for young adults), and I was getting 10 to 20 percent returns on some of those investments!

Recently, I put everything together in order to get a better sense of my portfolio allocation, between cash, stocks and bonds. I was quite shocked at the resulting pie chart:

Because of how favourable I viewed the higher-interest accounts, I unknowingly ended up with almost two-thirds of my portfolio (excluding CPF, since there are relatively strict restrictions on use of CPF funds) in cash and equivalents. Sure, a fair bit of that was earning 2.x% interest, but in the broader sense, this was way more cash-heavy than I thought I was, and than I needed to be.

Just to illustrate with a simple example:

Assume a total portfolio size of $100k, and $20k in stocks while the remainder in cash.
Say this person is an astute investor, and achieves 15% return on the stock component ($3k). In the meantime, the other $80k is earning 1% interest ($0.8k). In overall terms, the total weighted growth of the portfolio is $3.8k out of $100k, or only 3.8%.

3.8% return is okay, but it is certainly not comparable to 15%. Anyone achieving 15% returns tends to get a bit dizzy, but fails to recognise that this is not an overall portfolio performance. And hence the importance of capital allocation.

I'm still figuring out my next steps, but I have learnt a few key lessons which I thought useful to share:

1. Ask if 2.5% is really a satisfactory rate of return. Comparing this rate against the typical bank account interest rate of 0.05% or short term fixed deposit rates is misleading - don't be fooled by the red herring. Look at the 2.5% figure against inflation instead. I'd say for a young adult, 2.5% is not satisfactory, even though it is risk-free. The CPF SA rate of 4% is more satisfactory, but the SA comes with severely-curtailed flexibility.
2. Be aware of the tendency to want to "maximise" the balances on higher-interest accounts. Today, OCBC360 offers the higher interest rate on up to $70k balance. Does it really make sense to max out this $70k? If OCBC increased the figure to $150k, would it make sense to want to park such a large amount of cash there, assuming you had it?
3. Impose discipline on your emergency funds. Estimating how much emergency funds you need is not straightforward, precisely because it is supposed to cater to the "unknown unknowns".  Most of us will feel that more is better, and may also think that any excess emergency funds can be redeployed in the future (e.g. for property, car or education expenses). Avoid this, because each dollar of excess emergency funds set aside is a dollar not invested. Set a target, for example, a fixed amount say $20k, or six months of income, or six months of expenditure. Large expenses like property, car or education expenses should be planned for, and should not be mixed with the emergency funds.
4. Put together your portfolio composition. Action can only occur after Awareness. I daresay most people don't have a good picture of their overall composition, even though they might have a rough sense of the balances in their bank accounts/broker accounts. This step isn't easy - I only just did this, after spending a few years saving and investing. And look what I discovered - what I thought I was doing was quite different from what I was actually doing.