My Decade-Long Journey To Five Million

(EDIT: Originally this is a navigable Java applet–I removed it because it’s not working reliably enough.)

(Click here if you’d like to download the image.)

November 6th, 2008 | Tags: CFA, exam | Category: CFA, Level 1 | Leave a comment

I absolutely love salary.sg. They just launched their latest annual salary comparison tool here! Somehow, it’s like the whole Singapore is getting richer, compared to the year before. 

I found that I should increase my basic salary by about 4.4% if I want to keep my position in the rat race, compared to 2007. How the race never ends! Since I didn’t get a 4.4% increase in my salary, my position in the rat race has worsened

(Having said that, note that the report for 2008 is based on people’s income in 2007, which was something like a booming year in Singapore. I suspect the next year’s salary tool–which is gonna be based on Singaporeans’ income in 2008–will be lower somehow…)

November 4th, 2008 | Tags: Salary | Category: Salary, Wealth | Leave a comment

Grace Cheng has shown me the way. She’s a 28-year old Singaporean, who has found the way to be travelling round the globe for a year while still doing her work. 

IT WAS a trip around the world many dream about but few accomplish.

 

But foreign-exchange trader Grace Cheng and her husband did it - with a twist.

 

“We achieved our dream of travelling the world without missing a single day of work,” said the National University of Singapore marine-biology graduate, who has been trading currencies online for five years.

 

While travelling, she could manage her New York-based finance site, DailyMarkets.com, thanks to the Internet.

 

Cheng, 28, a Singaporean, and her Spanish husband, Mr Pedro Pla, 27, spent close to a year - from September last year to August this year - touring five continents and 14 countries.

THAT is what I’ve always wanted to do. Man, how awesome is that? Grace Cheng rocks. Read more about their travel here.

November 3rd, 2008 | Tags: trading retirement goals | Category: Goal Setting, Retirement, Trading | Leave a comment

This will be a living, growing document. So far the notes for Reading 5 and 6 have been completed. See it here, and let me know what you think!

October 26th, 2008 | Tags: CFA, exam, finance | Category: CFA, Level 1 | Comments (10)

I’ve posted the plan that I’ll use to prepare for the CFA Level 1 Exam in June 2009 here. This plan will be updated daily. At the end, I’m hoping to record how much time I will have spent preparing for this exam–it’d be interesting to see whether it gets anywhere near the 250 hours figure–my guess is it’s probably gonna be a lot higher. 

The Excel sheet (well, Zoho sheet) is part of my overall strategy: it’s smart enough to expand or shrink the plan, depending on whether I underestimate or overestimate the time it takes to finish an activity. That way, as I update the plan, I always get immediate feedback on how the update is going to affect my schedule.

October 15th, 2008 | Tags: CFA, exam, finance | Category: CFA, Level 1 | Comments (2)

WRONG.

If we’re talking about living a good, comfortable life, sure, past a certain amount, it’s not about how much money you make, but more about what you do with that money, and managing your expectation. 

But if we’re talking about becoming a millionaire, then it’s a whole another discussion altogether. This whole “it’s not about how much money you make” thing just doesn’t cut it anymore when what we’re talking about is becoming a millionaire.

Becoming a millionaire means that we’re dealing with a hard, objectively measurable number, and with it comes the assumption that we’re talking about becoming a millionaire rather soon(ish).

Sure, we’ve all heard about personal finance authors doing the “save X% of your income for 40 years invested at Y%” thing. Hey, given 40 years, it doesn’t take a Warren Buffett to be a millionaire. And in 40 years, 1 million dollars will worth a lot less. (Try plugging in the value of 1 million in 1968 and see how much it’s worth today.) 

But if what we’re talking about is becoming a millionaire and retire in your 40s or 50s, this whole “what you earn doesn’t matter” bit is just wrong. Especially if you’re a 30-something like me, and only have about a decade or so to reach the status. 

It’s like this: if what you want to have is a nice, pleasant drive, what car you have probably doesn’t really matter as long as it’s decent, clean, well-maintained… whatever.

But if you’re racing to a defined finish line, saying “what you earn doesn’t matter, what matters is what you do with it” is like saying that in a race, it doesn’t matter whether you’re driving a Renault 4 or a Dodge Viper, because, after all, if the Dodge Viper is running with 3 flat tires, the Renault 4 will still do better… right? (If it sounds absurd and silly, it’s because it is.)

Let’s put it this way: if you are smart with your money and personal finance, making double of what you make now will bring you there twice as fast. As simple as that. And you don’t become suddenly stupid with your money just because your income doubles, correct?

(Image courtesy of Jeff Belmonte @ flickr)

October 14th, 2008 | Tags: Goal Setting, Wealth | Category: Goal Setting, Saving, Wealth | Leave a comment

See the APAC Salary Survey by Morgan McKinley here. 

The one for Singapore specifically, can be downloaded here.

It’s nice to see some upside potential there… although depending on how things go, everything can become moot anyway in the next 1 year or so. Sigh! 

For now I’m just thankful to have my job.

October 13th, 2008 | Tags: Career, Salary | Category: Career | Leave a comment

Since the last update, there have been a few changes:

1. The business has been going slowly unfortunately. Load at work has been unbelievable.
2. Thanks to the economy, I think it’s quite realistic to say that my target of getting a 6-month bonus for 2008 ain’t gonna happen
3. The market has been so volatile, I’ve decided to wait with some money ready on the side–taken from the safety net. I’m planning to build back the safety net to around 80k by February 2009.
4. I’ve registered myself for CFA Level 1 Exam in June 2009!
5. I’m in discussions for other potential income streams. Hoping they all go well and provide more security for my family in this uncertain times.

Uncertain times

October 12th, 2008 | Tags: goals, Wealth | Category: Goal Setting, Saving, Wealth | Comments (1)

What does Lehman Brothers‘ bankruptcy have to do with wiping a huge part of Hong Kong and Singapore retirees’ life savings? Some of them may have never heard of this Lehman Brothers thing in their entire lives. For all they know, they just got sold these “safe” products that give slightly higher returns of 5% by their sweet-talking Relationship Managers. Poor aunties and uncles.

I really doubt these investors would have relinquished their life savings for buying these things if they had really known how these credit linked notes actually work. In fact, I won’t be surprised if the Relationship Managers didn’t fully understand these products either! It’s hard to parse through all those jargons by reading the prospectuses to find out what these things actually do.

So how does these things work, really? Read on and find out!

In the beginning, there were bonds

Bonds, Credit Default Swap (CDS), and Credit Linked Note (CLN) are closely related to one another, so let’s begin by a short recap of bonds first. 

What are bonds really? Why do the U.S. Treasury (and other countries’ equivalents) and corporates issue them? The short and somewhat simplistic answer is they do that to borrow money that they probably can’t borrow from banks otherwise.  

When an average person’s income is not enough to cover her expenses, she’ll probably borrow some money through various means, such as credit cards, personal loans, etc. 

But when it’s the U.S. government we’re talking about, then we have a rather ginormous problem called budget deficit, which, for 2008, is projected to be somewhere around US$400 billion. Borrowing US$400bn from banks is kinda… hard.

So the U.S. Treasury has to raise money in other ways, one of which is to sell bonds, notes, and bills to the public. (Bonds, notes, and bills are principally the same. They only differ in terms of maturity and the way the interest is paid.) 

When you buy these U.S. Treasury notes, you’re lending your money to the U.S. government for a predetermined amount of time. In return, the U.S. government agrees to pay you a fixed interest every 6 months as long as you’re holding the notes, and return to you–or whoever is holding the notes by then, since the notes can be resold–the face value of the notes when it’s payback time. (I said return the “face value” instead of “your money”, because the actual price of of the notes fluctuates–the amount you paid to get the notes can be different from the face value.)

Now, the interest that we get out of lending the U.S. government our money is not very high. This is because it’s virtually risk-free: the probability that the U.S. government will not pay our money back is very small.

On the other hand, corporate bonds pay higher interest, since, unlike the U.S. government, corporations come and go all the time. There’s a higher risk of us not getting back the money we’re lending them. Obviously the riskier the bonds are, the higher the interest has to be, or else nobody would bother to take on the risk of lending them the money in the first place. The bonds with the highest returns are even called junk bonds to reflect how risky these things are!

(By the way, who gets to decide how risky these corporate bonds are, exactly? It’s usually done by third party credit rating agencies, the most well-known of which are Moody’s and Standard and Poor’s. They rate these bonds, starting from the highest AAA/Aaa (the least risk), to C or even D–meaning bankruptcy is very likely.) 

Credit Default Swap

So the conclusion is that we can get higher returns on the money we’re lending… in exchange for the higher probability of us losing that money.

How do we typically protect ourselves against an unfortunate event that may or may not occur? Typically, we buy insurance, right? We buy insurance policies from insurance companies, and pay them premiums, so that they will compensate us when the unfortunate events covered by the plans actually occur. 

Now, what happens when the unfortunate event is not death or critical illness, but a company (whose bonds we own) is filing for bankruptcy? Are there insurance policies for this kind of thing? Sure there are. And here’s how it works. Let’s say we’re buying this policy from an imaginary insurance company called GIA. The policy would be something like this:

1. I buy 10 million dollar’s worth of 5-year Namhel Sisters corporate bonds, in effect lending them my money. 
2. If over during that 5-year period a credit event happens, say, by Namhel Sisters filing for bankruptcy, I want GIA to compensate me for any resulting loss. GIA can do this either by (a) buying my Namhel Sisters bonds (which after Namhel Sisters’s bankruptcy will of course be a lot less valuable than 10 million) for 10 million, or (b) write me a cheque to pay for the difference between 10 million and the post-credit event value of the bonds. 
3. To compensate GIA for taking on this risk, I will pay GIA annual insurance premiums of 1% of the value of the bonds, that is, US$100k every year, for 5 years.

Namhel Sisters in this agreement is called a reference entity. See the diagram below for a depiction of this arrangement.

Credit Default Swap: Some Kind of Insurance, Really

So this is the Credit Default Swap (CDS). Profitable for the insurance seller when the reference entity is doing fine, but potentially disastrous if the insurance seller has sold a lot of protection policies, and suddenly the reference entity goes bankrupt. (For the Lehman Brothers’ bankruptcy case alone, the payouts these insurance sellers will have to make are estimated at around US$350 billion.)

There are three important differences between CDS and “normal” insurance, however:

1. You don’t have to own the bond to buy a CDS on it. You can buy a CDS without owning the bond, effectively placing a bet on whether the bond will fail or not. (In the “normal” insurance world, this is like buying life insurance policy on a guy whom you think will die rather soon, so you can collect if he actually dies.) This way, CDS gives people a relatively cheap way of betting on any credit event. In effect, credit default swaps became the world’s largest unregulated casino. The market size is estimated at around US$55 trillion.
2. Anybody can sell CDS. Consider this. At the time of this writing, my net worth is close to half a million Singapore dollars. Would you buy from me if I try to sell you life insurance, insuring you for S$200k if you die? You’ll think that I’m crazy, right? Yet this is what many small, unregulated, offshore hedge funds, with not enough cash to pay up if credit events do happen, are selling. And big banks like Citibank are actually buying! 
3. Unlike deaths or critical illnesses, credit events affect one another. Generally speaking, people die independently of one another. That is, if my neighbour dies (I hope not, I love my neighbour), it doesn’t make it any more likely for me to die too. But if a company goes bankrupt because an industry sector isn’t doing well, does it make it more likely for others in the same sector to go bankrupt as well? You betcha! AIG did the mistake of thinking that CDS are just like insurance, so it sold a LOT of these. Look where it is now.

This whole multitrillion-dollars CDS thing is like a huge, scary domino effect, and nobody knows when it ends. Who insures the insurer? What happens when the insurer’s insurer goes bankrupt? The chain reaction goes like that and more than a few think that it’ll go nuclear.

But anyway. Sorry. I wanted to write this to discuss how Lehman Brothers’ bankruptcy depleted the life savings of retirees in Singapore and Hong Kong. To find out how, we must discuss the third financial vehicle: the Credit Linked Note.

Credit Linked Note: where the insurer uses YOUR money to pay up

Credit Linked Note (CLN) is very much like the CDS. The difference is that the money that the insurer needs to pay up in case of a credit event comes from the so-called investors. So, expanding from our CDS example above:

Credit Linked Note: where aunties and uncles help insuring Leh..., er, Namhel Sisters.

So, as you can see, there’s no difference, really. The only addition to the picture is the investors, who buys the Credit Linked Notes issued by the insurance seller to raise money. If a credit event occurs, the investors’ money will be used to compensate the insurance buyer. 

Similarly, in the case of DBS High Notes 5 (pdf) in Singapore, DBS promises higher interest to people who bought the product. However, if a credit event occurs (which it did), then the investors will lose some or even all of their money, because DBS will use that money to compensate whoever buys the CDS (insurance) it was selling, with Lehman Brothers as one of the reference entities. 

Conclusion

Personally, I understand that higher returns obviously require higher risks. But did these uncles and aunties know what they were getting into? Would they commit their life savings to it if they knew that they could lose up to 100% of their investment? 

And most importantly, did the salespeople/relationship managers even know these products themselves? CDS and CLN are actually quite straightforward, but I haven’t been impressed with the level of financial knowledge of the relationship managers I’ve met so far.

(Images–except for the Word drawings–courtesy of manitou2121 @ flickr, sachab @ flickr, and Malkav @ flickr)

October 6th, 2008 | Tags: Business, derivatives, financial crisis | Category: Business | Leave a comment