Monday, December 29, 2008

Financial Resolutions for 2009

As 2008 draws to a close, the curtain is about to fall on one of the worst years in terms of economic growth and stock market performance. While economies around the world have been battered by one piece of bad news after another, individuals also have to contend with strange fluctuations such as high inflation in 1H 2008, then sagging economic indicators and widespread retrenchment in 2H 2008, flowing into 2009. These have the effect of making one feel extremely jittery, gloomy and pessimistic. That would aptly describe my feelings and emotions as we start to usher in a new year, and can be summarized in one succinct word - PESSIMISM.

I guess with all the "damage" that's been done to people's wealth on a global scale, I of course was not spared the carnage either. Suffice to say that the feeling is like trying to collect raindrops in a cup to fill the cup up, only to realize (after one year) that the cup actually had a hole at the bottom and the water was slowly draining away; thus the cup could never really get full ! Throughout 2008, I was quite intent on building my wealth and to ensure I kept expenses and my liabilities under control, but somehow the entire year felt like my wealth was draining away, slowly but surely. I kind of get the feeling that instead of advancing in terms of getting wealthier, I was actually retarding. Granted, most people would have felt this way in 2008 as the global financial maelstrom wiped out most traces of wealth accumulation in terms of equities investing and also fund performance.

Entering the new year with a somewhat heavy heart, I had already listed down some financial resolutions for the New Year which I hope (somehow) can be fulfilled. Perhaps some of these will sound familiar to you as well, dear reader.

1) Continue to save 40-50% of my take-home salary and build up my savings. This should continue to be done because of the recession and the threat of losing one's job anytime. With a comfortable savings "egg", this money can then be chanelled into worthwhile investments should opportunities arise.

2) Look out for good bargains in the stock market, and adhere to value investing guidelines and margin of safety principles. For 2008 I pumped in a total of about S$80K into equities as there were many bargains, but of course the cons of investing in a bear market is that somehow you feel that your money is disappearing into some sort of black hole. The key is to remain focused, keep up with my companies and adopt a long-term view. I would expect decent returns in about 4-5 years time, but definitely not in the immediate term. In the meantime, I shall steel my nerves and continue to invest whatever spare cash I have.

3) Perform better money management and do more budgeting for household essentials, in effect "tightening the purse" more whenever I can. This is due to the ongoing recession and economic crisis which is creating uncertainty with respect to jobs. A dollar saved could be an extra dollar available for emergencies in future.

4) Continue to use public transport and avoid committing to a car. Somehow 2008 was a year whereby I heard of many friends purchasing cars - this could be because of the sudden dip in COE close to year-end and also because many friends started having kids, and so they felt that a car would be necessary for mobility and convenience. Since I do not have children yet, there is no necessity for me to get a car which would impose an unncessary burden to my finances and crimp my ability to build wealth for 2009. Even if I have a kid, I will assess if a car is 100% necessary as I have seen many parents coping with young children on buses and MRT. Worse case scenario, there's always the taxi.

5) Continue to ensure adequate insurance coverage for me and my wife. Insurance is a very important form of protection against death and disability and my insurance also includes a savings plan which helps me to compound my money over the years, while making it available for withdrawals should the need arise (for emergency). Hence, I have ensured that I have reserved sufficient funds to pay all my insurance premiums.

6) Continue to seek ways to improve passive income sources. I am glad to say that my dividend income for 2008 hit about S$6K, thus this is about S$500 per month which is fairly decent. However, I hope that this can be at least sustained in 2009,if not then I hope the drop is not too drastic as I know the recession will make companies conserve more cash. I am exploring other ways of obtaining passive income such as rental or monetising my blog further, but these are all very preliminary. At most, I will seek out potential tutoring opportunities and use that as an alternative form of income (not passive but what the heck).

With the above resolutions in place, I hope that I can survive 2009 without the sinking feeling that I am getting no more richer than when I had started out the year.

In 2 days time, I will write my year-end summary and thoughts for 2008 with respect to my investment decisions, as well as give a brief summary of my investment portfolio and the companies I own. It will of course not look pretty, but I intend to make it a learning experience so that I can become a better investor, and enter 2009 with an improved value mindset to be able to tackle the unprecedented challenges to the value investing concept. Stay tuned for that !


Ricky said...

Agreed, this year is a year where nothing is safe. Not equities, not unit trust, not money markets, not commodities, not options, not properties and not even FFD! On hindsight, it would have been better if i've left everything in SGD in the tin box. But then it was a great learning experience. Bad thing is, the experience is still on-going! Hopefully 2009 will be a better year.
Here's wishing everyone a Happy New Year!

PanzerGrenadier said...

Hi Musicwhiz

Hard to find anyone who has not suffered any paper losses unless their portfolio was so well hedged or so exotic as not to be hit by the global financial crisis.

The funny thing is that my dividend income for 2008 was higher than my capital gains (losses!). :)

So the moral of the story for me in 2008 is still to be focussed on dividend yielding blue chips, to have some diversification and above all, to value people and relationships over money and things.

Be well and prosper.

Musicwhiz said...

Hi Ricky,

Yes, all asset classes suffered significant declines for 2008, so it's a year where literally nothing was spared (except perhaps gold ?). You are right about it being a good learning experience, I think it's a great lesson for all of us ! To see Mr. Market in action, being exuberant in 2007 and then manic-depressive in 2008 is a great illustration of how relevant Benjamin Graham's teachings are.

Hope 2009 will be a year which can provide more clarity with regards to the economic situation. With so much liquidity slushing around, I wonder where all the cash is going to go ?

Happy New Year to you too !


Musicwhiz said...

Yo Panzer !

You are so right man, everyone's portfolio got hit in 2008. But there are those who locked in the losses by selling, others who lost a lot through Minobonds saga or companies which collapsed, as well as those sitting on unrealized losses hoping for share prices to recover. I tend to see things from a different perspective - purchase more when prices are low to average down, and take a longer-term view. I see no reason to sell when Mr. Market is being depressive and offering me a low price for my stake in the company.

My dividend income was surprisingly high (in my context) for 2008, as a result of my shipping trust and also Boustead and newly acquired Tat Hong. I am just glad I purchased companies which paid decent dividends, and my overall dividend yield for 2008 is about 5%. Thus far I had no capital gains or losses realized for 2008, and this should probably go on into 2009 as I slowly build up my core long-term portfolio.

And yes, value people and relationships first and foremost !

You have a good year too !


Anonymous said...

Hi Musicwhiz,
let's write off 2008 then and concentrate on not making the same mistakes twice in 2009. In which I include not having a stop loss in place for all shares one owns, including those which may look like long term "gems" - The cases of FSL and Pac Andes clearly show that no matter how strongly one believes in a certain company or its business model/dividend yield/decent "fundamentals", in a bear market these things are pretty much worth nothing. In my view, any investment that loses 50 or more percent within a given year has been a failure from the outset, no matter how strong the initial arguments were to pile in. Even under a long term view, sometimes one has to bite the bullet and sell (... if only half the position, to re-purchase later).
However, I would like to comment on one other issue you mentioned in your post: buying a car. I find it very encouraging that you still consider refraining from such a purchase. Surely apart from housing, owning a car is one of the most expensive items in a monthly budget if one is honest about the true cost- i.e. not just fuel, but also maintenance, insurance, taxes, ERP and parking fees, and ,most importantly, loss of value over time. "Investing" in a diminishing "asset" like a car is no investment at all - in fact, if you add up all the costs, it is far cheaper to hire a cab for each and every trip you need to make. At the end of the day, it all boils down to whether you'd like to spends hundreds to possibly thousands a month on bit of convenience and/or on impressing your neighbors and colleagues. When looked at in this light, the decision is pretty clear - no need to buy a car in a city state with a (mostly) well-built public transport system. Save the money and spend it on more useful things later.

Musicwhiz said...

Hi Andrew,

Thanks for visiting and commenting.

I agree that we should review mistakes of 2008 and try not to repeat them in 2009, but I don't quite agree with having stop loss in place, especially a mechanical one. One must review the business industry and fundamentals to ensure the business can still continue to function and generate cash flows; thus the bear market is just a temporary "insanity" for Mr. Market to price such companies lowly (sometimes even below book value). One can make use of this by purchasing even more shares and adopting a long-term view of the business. You say bite the bullet and sell only to repurchase cheaper later, but this is hindsight bias working. Worse still, if the "cheaper" never comes, won't it be a little too late to regret your decision ?

As for the car, yes it is one of the most expensive "toys" one can own in Singapore, but this seems to be an increasingly popular and accepted item for a middle-income family to own. The costs can be anything from $800 to $1,200 a month, depending on the make/model of the car, and this can create a serious dent to anyone's long-term wealth accumulation goals. But of course there is social pressure to conform and when you see cousins or friends driving around, sometimes you are reminded of what you do not have. However, since I know my salary is probably lower than theirs and I can do fine with public transport, there is not much use in envying. Should the need arise in future for me to own a car, I will then start to consider one and do my sums accordingly.

But for now, there is no desire to own such an expensive piece of metal.