During an investment discussion, one of my acquaintances had asked an interesting question, which is:
“You have been updating about which counter you had bought into, and you seldom sell any. Where did you get the capital from?”
Here are the capital sources:
Capital Source #1: Cash Injections
If you had read the makeup of The Bedokian Portfolio, there is a small portion (earmarked 5% for our case) dedicated to cash. This amount is purely used for investing, and it is not mingled with our normal savings and emergency funds. This is the major capital source especially for our portfolio build with disposal income.
So, what are the tributaries contributing to this cash portion? On a regular basis there are two: from the portfolio itself (dividends from equities, distributions from real estate investment trusts, coupons from bonds and interest from cash in banks) and monthly contributions from our salaries. This is typical for most people who have an investment plan and portfolio in place.
As the portfolio grows over time thanks to capital gains and compounding, so does the yield amount, which is fed into the cash part. A 5% cash yield on a $10,000 portfolio is $500, but a 5% cash yield on a $100,000 one is $5,000, and $5,000 could purchase more securities than $500. Add this to your regular contribution, which may have increased thanks to rise in salaries, you would have a larger cash pool to invest with.
There are further exceptions unique to us, such as liquidating our past investment-linked plans, endowment funds and a matured child education endowment policy, and they greatly increased our cash injections.
Capital Source #2: CPF-OA And SRS
The next capital source for us is our CPF, specifically the CPF Ordinary Account (CPF-OA). Since we had finished our mortgage payments and had hit our prevailing Full Retirement Sum, the door for investing the CPF-OA had opened. The main aim of investing in CPF-OA is to have better returns than the current 2.5% rate, though with some added risk. The use of CPF-OA as a capital source comes with limitations, such as the choice of securities and the amount used.
35% of the investible CPF-OA savings can be used for individual local securities and selected exchange traded funds (known as the “35% stock limit”), and a larger amount is allowed for professionally managed products. We invested using funds from these two sub-pools in the CPF-OA, though not to the limit, giving us some spare capital for future allocation.
For our SRS, though miniscule as compared to our CPF, it is still a source of capital that can be deployed, if necessary, though for now it is used on a robo-advisory portfolio.
Conclusion
My acquaintance was a bit surprised and felt “awakened” by the answer, because it is obvious yet hidden in plain sight. I am glad that he had learnt something new, and I hope you had some takeaways, too.
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