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What should you invest in? Equities or Bonds?

What should you invest in? Equities or Bonds?

The answer depends on two major factors: how young/ old you currently are, and the riskiness of your job. To elaborate, it is good to understand some basic concepts:

There are basically two types of investment products, bonds and equities.

Company issue bonds, which is borrowings with a fixed rate of return (interest rate). Bond holders do not own the company, so do not get to vote in company decisions.
Company sell shares, which is equity to shareholders. Shareholders own parts of the company, so they get to vote in company decisions, as such, shareholders also undertake the risk the company takes.

Basically, it shows the simplified balance sheet of companies.

The revenue that company earns goes back to pay business expenses (eg. employee salaries, tax, etc), before paying for the interest owed to bondholders, leaving what is left as the profit.

The company can then choose to distribute part of the profit as dividends.

So in the 3 scenarios, they look like:

Normal economy – Revenue minus business expenses minus interests for bonds equals profit.
Boom – Revenue increases by quite a bit, minus business expenses which is more or less fixed, might increase a little bit, minus interests payable to bondholders which is the same, and leaves quite a lot of profit. Shareholders then get to share in the profit.
Recession – Revenue dropped by a lot, minus business expenses which is roughly the same, maybe drop a bit only because you can retrench some staff, but can’t retrench everyone, minus interests payable to bondholders which is the same, leaves very little as profit.

In the event the company goes bankrupt, it will have to pay the bondholders first, because in bonds, they owe money to bondholders. After that, any money left then goes on to paying the shareholders.

In the case of stocks and shares, share cycles typically lasts 8 to 10 years.

Total earning potential is the sum of your earnings from today until the day you retire. Given the above, which total earning potential scenario is higher?

When you first started work fresh out of university or
After working for some years and possibly earning at your peak?

The answer is obviously the former, where you first started your first job in your twenties. Why is this so?

Imagine that you retire tomorrow, your total earning potential will then be your salary today + your salary tomorrow.

This means when you first started work, you have a long earning timeframe until you potentially retire. While counterintuitively, when you are possibly earning at your peak after several years of working experience, you may not have a high total earning potential.

Diversification is then spreading your investments over a number of assets to reduce risk.

What this means is:

Age wise

When you are young – you behave like a bond (because if you get fired when you are young, it is easier to find a new job because your salary is still low, and got more time to accumulate wealth)
- So when you are young (bonds) – you should buy equities
When you are old – you behave like a share (because more risky, less time to accumulate wealth and see through the stock market cycle)
- So when you are old (equities) – you should buy bonds

Occupation wise

When you are in a low risk job (eg. government sector, teacher although I know thatnowadays the “iron rice bowl” is not as low risk as it usedto be) – you behave like a bond (less chance to get fired)
- So when you are in a low risk job (bonds) – you should buy equities
When you are in a high risk job (eg. private sector, banking) – you behave like an equity (more chance to get fired, but got potential to earn a lot in good times)
- So when you are in a high risk job (equity) – you should buy bonds

Image Credits: pixabay.com (License: CC0 Public Domain)

So there you have it. Depending on where you are in your career life cycle, and whether your career behaves like equity or bond, invest accordingly to achieve the desired diversification effect.

“Work hard, save up to invest, retire young.”

Reduce Your Debts Dramatically With The Debt Diet

Ellie Kay once said: “Getting out of debt is like going on a diet — it may sound simple, but it sure isn’t easy.”

Debt takes a toll on your relationships, your family, and your future. Just as being obese leads to physical and emotional challenges, debt has its own negative consequences too.

Inspired by Oprah Winfrey’s Debt Diet, three financial experts namely: David Bach, Jean Chatzky, and Glinda Bridgforth were sent to help several families to solve their monetary dilemmas. They shared debt elimination tips and suggested practical ways for people to increase their income and reduce their spending.

Before anything else, here are the “signs” that you need to go to participate in the Debt Diet:

1. You depend on your credit card to pay for your living expenses.

2. You rely on overtime pay to make monthly expenses meet.

3. You utilize your credit card/s to pay for items that you used to pay for in cash (e.g., groceries or clothing).

4. You use your emergency savings to pay for your bills.

5. You borrow money from your family and friends to pay your bills.

6. You delay paying one bill in order to pay an overdue one.

7. You utilize credit card A to pay bills for credit card B.

8. You can only pay the minimum amount due on your accounts.

If most of the “signs” point to YES, you may employ the following steps of the Debt Diet:

1. Determine how much debt you have and what it is costing you.

2. Monitor your spending and look for ways to make extra money (e.g., by giving up certain expenses).

3. By understanding how credit cards work, use your credit card/s to your advantage.

4. Stop spending on unnecessary things.

5. Make a strategic monthly spending plan.

6. Determine ways to increase your income and identify the steps you need to achieve it.

7. Prioritize your debts.

8. Do your best to know yourself and your spending behaviors.

Image Credits: pixabay.com (License: CC0 Public Domain)

Sources: 1 & 2

Is AirAsia Flying Private?

Budget airlines enabled people of all walks of life to travel at their convenience.

If I asked you to name five budget airlines in Asia, it is no surprise that AirAsia will come to mind. Since its inception in 2001, AirAsia has become one of the biggest budget airlines in Asia with over 170 airbus jets serving nearby countries such as India and Philippines.

Taking the feeble regional aviation market and the struggling Malaysian economy into consideration, Tony Fernandes may find it hard to take AirAsia private due to the large funding needs. According to the analysts they would need approximately US$800 Million to make the budget airlines into private based on the 25% premium.

It is important to note that AirAsia’s sales are immensely translated in local currencies while its costs are mostly in U.S. dollars. This poses a problem since the floundering Malaysian Ringgit led to the lost of 17% this year. Also, as of June 2015, AirAsia had a net debt of 10.5 Billion Ringgit (US$2.4 Billion). Nonetheless, there are some investors who are willing to bet on Malaysia’s recovery and cheaper oil prices.

Fernandes had reliably backed AirAsia’s finances ever since. Last June, he said that the airlines could simply raise a billion U.S. dollars by creating sales and lease back of aircrafts. Furthermore, AirAsia’s valuations are more affordable than its smaller competitions. According to Thomson Reuters data, the budget airlines is trading at less than six times its expected earnings for the next year, while Philippines’ Cebu Pacific Airlines is trading at more than seven times.

This brings us back to the viable question of whether or not AirAsia is flying fancy any time soon. Let me conclude with the statement released by an analyst named Jian Bo Gan:

“The founders may not have the financial muscle to launch a privatization bid on their own, so a consortium together with another airline or PE fund is more likely.”

Image Credits: pixabay.com (License: CC0 Public Domain)

Sources: 1 & 2

Work Smart: 4 Passive Income Strategies to Try

How many hours do you work in a day? Eight hours? Nine hours? More than that? We Singaporeans are normally tied to our jobs in the hopes we can earn some good income. But do you know there’s a way to work smart—that is, earn additional income with little to no effort? I am talking about passive income.

What is passive income?

There are two kinds of income: active and passive. Active income is the one you earn if you use resources such as time, talent, and even money. Your wages are a form of active income, and so are the commissions, bonuses, and allowances, to name a few.

On the other hand, passive income is how many get richer since it doesn’t require the same amount of effort and resources from you. In fact, many require only a minimum investment—that’s it! You just wait for your money to grow.

But where exactly can you get passive income?

1. Savings Account

Remember when finance experts tell you that it’s better to place your money in the bank than under your bed or anywhere else in the home? Well, here’s the reason why: it’s the quickest and easiest way to start earning passively. A typical savings account is interest bearing, the rate of which can differ among banks, so do your research well. But the more you put money in there, the bigger the interest income is.

Bank savings are also safe, investment wise, especially since these institutions are regulated and protected by insurance. However, it also offers the lowest return, which may not be enough to beat inflation. Needless to say, it’s a great start.

2. Real Estate

As a small country, Singapore has a very limited but highly valuable resource: land. So when something is scarce but the demand is high, you have a pretty good leverage. Properties can be either sold or rented.

Currently, the real estate market in the country is grim, but it’s also cyclical. In fact, you can use this to your advantage by buying a property when it’s still cheap. But remember, real estate is the hardest investment to liquidate. It can take months or even years before properties turn into cash unlike the other passive income options.

Meanwhile, if you don’t want to own a property, you can still invest through real estate investment trusts (REIT).

3. Stocks

Fancy owning some of the biggest companies in Singapore? Try your hand at investing in the stock market. Stocks come in two forms: common and preferred. Some of the stocks also give you dividends, which means you earn a profit from a sale or buy, plus get income from simply owning the stock.

So far, more than 600 companies are part of the Singapore Stock Exchange (SGX). As a start, place your money on blue chips, of which there are 30 of them. They are more expensive than the other stocks, but you’re assured of the company’s stability and reputation.

4. Mutual Funds

What if you don’t like to work personally with stock? Or perhaps you want to access other forms of investment but don’t know how? Then perhaps mutual fund is for you.

It works like a financial pool: people contribute to a certain fund, and an experienced fund manager with deep knowledge and understanding of markets determine where the money is going to be invested. Depending on the fund you’ve chosen, the manager can put it in many investment choices including real estate and bonds.

Hold Up!

Passive income is great for earning a side income, but it wouldn’t be if you allowed your other financial choices to ruin its good impact on you. A perfectly good example is unwise spending complemented by poor credit card features. A simple but powerful way to also protect passive income is to select the best credit card deals in Singapore.

(This article is brought to you by SingSaver.com.sg)

Which Would You Choose: Money Or Passion?

“Let your passion serve as your energy source to keep you going.”

– Psychology Of Love, Money, & Life

As you may have noticed, I am a firm believer of following what you love in work and in life. Dedicating your life in search for that one thing you love and value the most is paramount. Even Philosopher Dan Dennett claims that it is the secret to unlocking happiness.

If I were asked to choose between money or passion, I would choose the latter. However, reality entails that some people fail in the process of pursuing their passion.

Let me start by discussing the benefits of following your passion…

1. DESIRE IS IMPORTANT IN VENTURING THE UNKNOWN

In venturing the unknown, it is important to do something head on with your desire. You can either be doing something you are passionate about or do something that will logically lead to the work you love. Only then will you be able to give your 100% without feeling like work is forced upon you. Furthermore, you will be more motivated to work for longer hours.

2. COMING UP WITH BETTER IDEAS

Your passion will ignite your creativity and resourcefulness. You can freely pour yourself to you work and come up with better ideas.

3. PASSION AIDS IN NEW OBSTACLES

When you are trying to attempt something new or face new obstacles in work, you do not want to give up easily. Well, passion aids in that as it acts as your motivation to keep you in your career path.

4. PASSION BREEDS FULFILLMENT

Passion will certainly give you a sense of fulfillment. In fact, research showed that people who make regular progress toward something they care about reported not only being fulfilled but also satisfied.

With its bountiful benefits, why do some people fail in the pursuit of their passion?

1. THEY FOLLOW WRONG ADVICE

Some people listen to the “so-called experts” that sells strategies to get rich quick. But let us face it, if money is your passion, you would have to work for it. There is easy way to get the pot of gold!

2. THEY DO NOT HAVE REALISTIC PLANS

To be successful while following your passion, you need to develop a well-researched realistic plan that covers all bases. You must understand what your “meaningful work” requires physically, emotionally, and financially.

3. THEY LACK COMMITMENT

Some people who quit their jobs to pursue what they love may not realize the amount of time and effort it requires. So when bad things happen, they lack the commitment and hard work to continue on.

4. THEY LACK KNOWLEDGE ON MONEY MANAGEMENT

If you cannot afford to do something you are passionate about then, you better contemplate on your decision. Before doing so, make sure that you can attend to your basic needs such as food and shelter (as seen on Maslow’s Hierarchy of Needs). To be financially successful, you need to appreciate and love money too, not just for the sake of making them.

Image Credits: pixabay.com (License: CC0 Public Domain)

After knowing all these, analyze the Pros and Cons and evaluate your situation while keeping in mind the cost of living comfortably in Singapore.

Sources: 1, 2 & 3

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