Sunday, 24 February 2019

The Debt Trap

A not so close friend recently approached me to borrow money. Having just finished collecting another debt, I asked him what his story was. He needed to pay some deposit and was out of options as he had slowly accumulated debt, rolling it off different credit cards and is approaching debt consolidation to stem the snowballing debt.

How did he get into this mess? It started off I guess when he paid for his home renovation using credit cards / lines. At first, he just paid the minimum sum.

So that's where the problem starts. Currently, the monthly interest rate on unpaid credit card / line balances works out to be about 2%. On a per annum basis, this equals 1.02^12-1 = 26.8%.

If his initial debt = 1070, and he makes payment of 70, 2% interest = 20 will accrue, so he would only have cleared off 50 of debt, and still owes 1020 next mth.

And his current debt level isnt just 1000. From what I gather, his outstanding debt is probably close to quite a few months of his salary. Even if he tries to use 10% of his gross take-home salary to clear the debt each month, he probably would be stuck in the debt trap for perhaps a good 7++ years. The banks would probably have made close to 2+ x the original principal over this time. (And I am just using agaration.)

This is scary, very very scary.

The good thing is he realized this issue and has approached credit counseling to consolidate the debt to tackle it.

I hope he gets through this.

Personally I have also fell into the debt issues when I first started work, but thankfully I realized it early and cleared it off within a year. Some years ago, I even slashed my credit card limit to 3,000 (about 50% of my gross take-home salary then). It was only when I travel for vacations I would request for a temporary limit increase. And even so, I would pay it off 100% when its due. If I had the stomach for sucb unnecessary interest expense, I would rather leave it in my budget or reserve.

Hope this has been a good read for you and you have some takeaways of your own.

Saturday, 22 December 2018

Reflecting on 2018

As we draw closer to the start of 2019, I thought it would be nice to reflect on lessons learnt and think of how I could improve on those in the coming year.

A) Increase ongoing annual savings by 10,000 over 3 years (2018-2020)

On track. Reduced recurring expenses by about 500 per year, and if I complete the course to quit smoking, that would probably bring cost reduction to 5,000 per year.

The other part of this was to increase passive income from interests and dividends, and I think this went a little lower than what I would have liked at about 1,500 YoY.

Overall, I think I won't change the 3 year plan but I will need to start planning out how I could obtain this goal for 2021 to 2023. My long term desire is to keep cost reduction efforts towards reducing wastage and unnecessary spending - instead the long term goal should be to grow passive income to defray expenses.

B) Preparing for rainy days

Somewhere there.

At the moment, I guess risk of retrenchment is moderate, and my sense of where the markets will go is... frankly anybody's guess.

My hunch is the real fun will start in 2020H2, and my free funds look pretty small. Hence, I have made some switches to stash some cash and strengthen the reserve buffers.

I have tweaked my OCBC savings goals to more of an envelope budgetting system to systematically allot money for different purposes. The three main buckets are Rewards, Rations, and Reserves.

I feel more relieved and at ease now that I have some sort of plans. Even though the coffers are less than what I would have wanted, but I believe its a step in the right direction.

C) Getting better at investing?

LOL, seriously I don't know.

At the end of H1, I was very disappointed with the returns on the SRS portfolio (I still am). I made the tough calls to exit some loss positions (I am glad I did, or the ytd returns would have been worse off by another 5%?)

I did a bit more homework since then, but I do feel its probably not enough. There was once I did quite a lot of read up on F&N and I was quite happy with the analysis I did over two hours. I would like to repeat this exercise for my investments which are than 5% of the total portfolio, before I undertake portfolio rebalancing.

On portfolio, I would still like to keep the no. of counters (other than SSBs) to 18 or less. Balancing between doing homework, and cash constraints, less counters forces me to reach for the better low hanging fruits. Where's the bad in that?

Here's to a great 2019!!
Taking Stock

Sunday, 26 August 2018

Random musing: How diversified should (my) portfolio be?

How diversified should a portfolio be? Its a question that I have thought about since 2017.

I believe the general consensus is to keep a portfolio really diversified by spreading out among perhaps 20 or more stocks / investments.

However, I made a conscious decision to reduce the number of counters in my combined portfolio earlier this year, to bring down the number (from around 23+) towards 18 counters, and so far I have managed it at about 18 to 20.

What was the driver for making this change?
As I was spreading out over too many counters, I kinda lost track and had no clue what I was buying, and why I was buying. I received the annual reports, and didn't really read through any of them. I realized it was bad, when I can't even tell myself what the business does, what its plans were, and what was any of the drivers for their price movements.

Bundled together with the prices dipping in H1 2018, and ever depressing portfolio returns, I decided it was enough.

I needed to do something, and make myself a better investor. At the minimum, I expect to be able to answer to myself that I know what my investments are doing, and to be able to explain rationally why I should buy or sell an investment. If I couldn't do so to a satisfactory level, that meant I was taking on way more (risk) than I can handle.

So was the change for better or worse?

1) Performance
Judging from the 2018 YTD results (from around -8% to less than -1%) of my portfolio, I would say its probably for the better. I started reading through the reports for some of the investments, I was able to start explaining to myself whether the investment made sense, whether it was a fit for my style and preferences, and think about whether I should sell, buy, or hold / wait. I believe I generally made better investment decisions, now using information and figures to back those thoughts I formed. I liked it, I felt more in control, now that I could justify my own decisions.

2) Time
I think I freed up time, which I can better allocate to do more research, and evaluation, which I believe will lead to better investment decisions in future. And time to start writing my thoughts in this blog, as a diary and reminder to myself.

3) Lower transaction costs in the long term
I believe that as I improve the overall quality of my investment decision, I no longer needed to "anyhow" / "no logic one" split my "bets". Moreover, with limited capital (which probably applies to most of us "mediocre" folks), it kinda made sense for me to use this constraint to my advantage... In fact, I rather like this constraint, as I now often tell myself, if I want to buy this, I have to sell something - so is there something objectively better for this counter as opposed to that other counter? This forces me to think about what each of the two options bring to the table, and really advocate for the "better" fit.

This would also probably reduce transaction costs in the long run with rational sizing and "needing" to make fewer transactions to buy / sell (some of which could be driven by "fear"). Long term wise I think I want to keep the overall transaction cost at about 0.6 to 0.7%.

So what is the "magic number" of counters / investments to hold?
I have yet to figure this out properly, but if I gauge that I only know about 75 to 80% of my investments well now, I should probably reduce trim it down further to about 15 counters, excluding index etfs.

But this is for me, because I now expect myself to be sufficiently knowledgable about my investments, rather than just buying or selling on hearsay, or trends. I am willing to accept concentrated risks on things I know about, than diluted risks of things I am ignorant of.

I guess then its time to start reading about the parts of my investments that I know little of, and decide which one isn't a good fit for my portfolio...

Hope you had a good read, and some food for thoughts.