2023 Review, 2024 Preview And Bob

Time really flies like an arrow, and we are now nearing the end of a rather tumultuous year. Here I will share my views for the past year, my opinions of the coming year and an update on Bob’s portfolio.

2023 Review

 

2023 was a roller coaster ride.

 

The biggest news for the year was the announcement by the United States (U.S.) Federal Reserve (Feds) on the maintenance of current interest rate levels and the planned three rate cuts in 2024, which sent the markets rising. The S&P500 gained +22.46% year-to-date (YTD), but the Straits Times Index, though being lifted along, suffered a slight loss of -1.11% YTD.

 

Before the above news came out around a fortnight ago, the after-effects of interest rate hikes in 2022 and 2023 were clearly shown with the hammering down of real estate investment trusts (REITs), especially at overseas commercial properties and specifically those from the United States suffering the greatest blow. For us, the fall of the REITs asset class had provided a good opportunity to enter good quality ones that were being dragged down collectively, such as Frasers Centrepoint Trust.

 

During last year’s review, I had brought up the term “recession” and was pondering whether it would happen this year. So far, the United States (U.S.) and Singapore economies were still alright for the time being, though I must stress that there is usually a delay between a market and economic cycle, and a boom in the market may mean a bust in the economy at the same time.

 

Finally, we look at the YTD performance of HACK, IPAY and ICLN ETFs, which represented my next big things cybersecurity, electronic payments and clean energy respectively:

 

HACK: +38.09%¹

IPAY: +19.56%¹

ICLN: -19.59%¹

 

OK, let us go further a bit to six years and see how their performance fare from Jan 2018 to Nov 2023 using CAGR (compound annual growth rate), since it was at the end of 2017 (see here) that I had declared these three sectors to have potential:

 

HACK: 10.89%²

IPAY: 3.50%²

ICLN: 8.73%²

 

Factoring in inflation which was the talk of the town for the past two years or so, the actual CAGR for HACK, IPAY and ICLN were 6.81%², -0.30%² and 4.74%² respectively. Compared to counters that experienced a surge during that period (e.g., Nvidia, Tesla, etc.), these miniscule returns were nothing compared to them. However, as I had always said, investments are on a longer runway, i.e., at least 10 years, so probably we shall see later to see if I am correct.

 

2024 Preview

 

2023 had seen some geopolitical events, especially ongoing conflicts and potential flashpoints, and these would carry on into 2024, making headlines that could affect market sentiments. As mercenary as it sounds, these are buying opportunities to go into seemingly healthy counters that may be battered down by such news.

 

Lastly, I should not be forgetting the current elephant-sized trend in the room, which is artificial intelligence (AI). While AI has been around for a while, Chat GPT was the catalyst to spur the developmental race among the technological giants (between browsers, chipmakers, etc.), and this race would continue to persist in 2024 (okay, I am stating the obvious here…). 

 

Bob

 

As of 31 Dec 2023, Bob’s Bedokian Portfolio had grown to slightly above SGD 98K in value (excluding the cash component which is not shown) and gained a dividend amount of SGD 3,143.12 and USD 33.16. Overall, Bob’s portfolio was up 5.12% for 2023. Bob will rebalance on 2 Jan 2024 with another SGD 5,000 injection, so stay tuned to his portfolio.

 

Bonus Topic: Why So Many Articles In December?

 

If you had noticed, this is the 10^th article I had written for December 2023, and the number of articles I had contributed this month would have normally covered between three- and four-months’ average worth of posts. The reason? Let’s just say I had caught the writing bug and got a lot to share with you, that’s all (grin).

 

Depending on the duration of the bug, I may go back to the usual frequency in January as the new year would bring new challenges, and new stuff to do in my day job.

 

Happy 2024!

 

Disclosure

 

The Bedokian is vested in HACK, IPAY, ICLN and Frasers Centrepoint Trust.

 

Disclaimer

1 – ETFDB.com, YTD as at 29 Dec 2023 (accessed 30 Dec 2023)

 

2 – Portfolio Visualizer, HACK, IPAY and ICLN between 1 Jan 2018 to 30 Nov 2023 (accessed 30 Dec 2023)

 

Be A Learner, Not A Copier

Picture credit: OpenClipart-Vectors from pixabay.com

There is a huge amount of content on the internet of investors, traders, financial gurus, etc., showing their portfolios and the invested counters. These people, who I will dub as “content creators” (understood that some investment greats like Warren Buffett do not use social media to show, but for simplicity in this blog post I will lump them together as there are people covering his trades as well). It is interesting to see what they have, their rationale behind in getting the securities and their views going forward (OK, it’s like my “Inside The Bedokian’s Portfolio” series).

Nevertheless, I have had heard of some investors and traders who, for some reasons, prefer to copy or follow the above people’s trades and counter selections without giving much thought, even though some of these content creators had explicitly stated not to imitate their portfolios. As I had emphasised before that individuals are different with one another, and this extends to the investment-oriented characteristics like risk tolerance, suitability of investment philosophies and methodologies, etc. The worst thing that could occur is that the entry price point may be different between the content creators and the copiers themselves, and the latter sometimes may find being caught at a higher price level.

The “some reasons”, based from my observations and conjectures, are due to two main roots: laziness and greed, and these two are intertwined. In other words, it is a “free rider” issue, where I could just copy the transactions from the best and just see my bucks rolling in without lifting a finger (save for using it to click the buy/sell button on the brokerage platform). We need to know that for some or most (not all) of the content creators had gone through a lot of analysis work and effort to come up with the final buy/sell call, and they are sharing for others to learn.

Which comes to the key point of this post, that is being a learner.

As I had stated in the first paragraph, I would like to know why they wanted to invest (or not to invest) in a counter, and how they came out with their conclusions. We need to dissect and digest their reasonings, and compare them with our points of view. At the same time, we are also learning from their points of view and we may get some takeaways such as brand new perspectives and/or new guidelines to amalgamate with our own. This is what we should be doing, not blindly follow what they are buying or selling. In fact, a few of our invested counters were the result of these content creators (and also discussions with other investors and traders).

And remember, learning is a never-ending process. You will be surprised that there are always new things to uncover, even though you think you had covered a particular topic, and this applies to all, not just in the realm of investing and trading.

CPF Interest Is Coming To Town

Come 31 December, the CPF interest will be credited to the respective accounts (Ordinary Account (OA), Special Account (SA) and Medisave Account (MA), for those below 55 years old), and for CPF enthusiasts this is the day worth looking forward to.

While I would not be delving into the intricacies of the CPF accounts’ interest rates and allocation, which are covered extensively by other blogs and of course, the information is readily available from the CPF website, for this blog post I will cover an important aspect pertaining to investing with CPF.

 

First, let us look at this diagram (Figure 1):

 

Fig.1: What if you have more than the Basic Healthcare Sum? (source: CPF) 

For information, the current year’s Basic Healthcare Sum (BHS) is SGD 68,500 and from 1 January 2024 it will be SGD 71,500. So, looking at the flow on the left side, if the 2023 MA interest is more than enough to cover until the BHS limit for 2024, some would be spilled over to SA. And if SA had hit the prevailing year’s full retirement sum (FRS), it would cascade further down to OA.

 

Yes, this meant that, as long as your MA and SA is at the prevailing BHS and FRS limits respectively, any contribution to MA would go straight to OA. The conclusion is thus, more dry powder for investments using OA.

 

I had shared about investing using CPF early this year (Part 1 and Part 2) and with our step-down time targeted, we are going slightly aggressive with CPF-OA investing.

 

Thus, the advice usually dispensed by CPF enthusiasts is to maximise the MA until BHS, so that extra monies will flow to SA to reach the prevailing FRS faster, and with FRS reached, for us, the pool of OA will become bigger for deployment.

 

Happy holidays to all.

 

Does The Bedokian Own Cryptocurrencies?

Photo credit: amhnasim from pixabay.com

Short answer, yes.

 

Some of you may have felt ironic as I had opined cryptocurrencies (or cryptos for short) to be highly speculative, and yet I had dipped my fingers into it.

 

So, what gives?

 

Speculation, for the most part, goes hand in hand with exuberance, which in turn suits one of the most basic human desires: greed. Cryptos, with stories of their meteoric rise, gave the opportunity to have a very quick growth in wealth and capital compared to other traditional asset classes and means of generating income (e.g., the 9-to-5 slog). It is this get-rich-quick outlet that attracted a lot of people and thus piling their monies into it, with some even on leveraged terms. As with most mania in history, however, the good times did not last long as the saying “what goes up must come down” went, it came crashing down in 2022, sparking the crypto winter as we knew it, exacerbated by news of crypto failures, frauds and hard regulatory actions.

 

Admittedly getting rich quick forms a small part of the rationale of why I went into cryptos, but on the big picture I foresee there is some usefulness in cryptos and more in the underlying technology that accompany them, which is blockchain. Some authorities around the world, while dissing cryptos as tools of money laundering, began to appreciate blockchain and its potential application on many functions. Therefore, another part of the rationale is to get some skin in the game and get a (frankly not so) early adopter entry.

 

Having said that much, I only have two cryptos in our portfolio: Bitcoin and Ether. The choice for these two were obvious; they were sitting at the top of global crypto market capitalization and their relative strengths to other cryptos.

 

Bitcoin (BTC), dubbed as the “grandfather of cryptos”, had established itself as a de facto standard for and became synonymous with the term cryptocurrency. Its planned finite supply has the advantage of being scarce, akin to the gold supply that could be dug from Earth, thus appealed as the digital form of the precious yellow metal. 

 

Ether (ETH), or (erroneously) called Ethereum, is the most famous among the alternate coins (altcoins, i.e., any other coin besides BTC), and unlike BTC, it has more applications than just serving as a currency, such as the ability to develop smart contracts for business processes. A very good example of smart contracts on Ethereum is the Non-Fungible Tokens (NFTs).

 

Despite BTC and ETH were launched in 2009 and 2015 respectively, their characteristics as investible assets were too early to call. There are still many non-believers and skeptics, and their recent rise was due to expectations of the approval of a spot BTC exchange traded fund by regulators, and the expectations of rate cuts by the Federal Reserve next year.

 

Now begs the question, what is the proportion of our portfolio in cryptos? It is not inside our Bedokian Portfolio, but in the trading portfolio instead, and overall constituted less than 1% of our portfolio multiverse.

So It Has Begun…

Last night’s speech by Jerome Powell, the chair of the United States Federal Reserve (Feds), had indicated the interest rates would be held steady and there would be at least three rate cuts in 2024.

The market’s response was instantaneous.

 

The S&P 500 jumped by 1.3% when Powell’s speech began at 2PM New York time. This morning, the Straits Times Index jumped by around 1% when it opened. It was a sea of green across most asset classes and counters in our portfolio. Nominally a reduction of interest rates would favour all asset classes apart from cash, which explains why even gold and bond funds went up.

 

While there is a sense of exuberance going on around, I would advise some caution and not be carried away in the wave. Markets tend to be forward looking, which means the reactions are based on a future potential set of events, ceteris paribus. We need to acknowledge that market and economic cycles are usually not synchronized with each other, having the scenario where stock indices are going up while workers are getting laid off. The effects of higher cost of leverage due to higher rates would probably be felt around now till next year as most loan covenants, which there was a term period attached, were recently finalized. Finally, the momentum for this upward trend would not last forever; a slow acceleration and eventually a slight pullback would be encountered, though I do not know when.

 

Regardless of my caution, it is good to stay invested throughout, in times of boom or bust. Stay diversified, stay calm.

Late In The Game: Dividends Are Cautionary?

A couple of months ago, there were debates in some discussion groups on whether reliance on dividends as an investment and/or retirement strategy is (picking the appropriate word) cautionary. The side which provided the caution cited several reasons, such as the companies may reduce the amount or change their dividend policies, and the obsession with yield over everything else clouded the judgement of total returns of a security, to name a few.

While we are primarily dividend investors, we agree with some of the points highlighted by the cautionary side. However, as with most issues in general, it depends on which facet we are looking at and the approaches to it, and it is mainly a case of theoretical/academic versus operational/practicality viewpoints.

 

While I would not be going through all the arguments, let us look at the two points that were brought up between the two camps, and my takes on them.

 

#1: The Fallacy Of Dividends

The first point was put forth in a paper¹, which stated that many investors view capital gains and dividends as separate variables rather as the same thing, i.e., total returns, and dividends are seen as free money. However, the share prices of the dividend-paying companies would reduce by the amount of dividends paid out.

 

Addressing the latter, it is true to an extent and this can be observed. The drop in accordance with the dividend payout is very pronounced on dividend ex-dates, ceteris paribus. However, we should not look at this alone as there are many factors dictating the rise and fall of the price of a counter. Also, there were instances where prices dropped after dividends were announced and rose after ex-dividend.

 

On total returns, I have been emphasizing they are made up of capital gains plus income (dividends), so as investors we need to fit this equation in our heads. Going a bit further, unlike capital gains where we need to sell the counter to realize it, the income component is realized all the time. The liquidity of the dividends gained could be deployed on other more productive securities and not just on the same one, thus overall on a portfolio level there could be more gains collectively than what the fallacy holds for individuals.

 

#2: Safe Withdrawal Rate Vs Dividends For Retirement

 

This next point which saw a lot of comments for and against is the safe withdrawal rate (SWR) versus dividend streams for retirement income. In summary, on one side SWR posited a drawdown of a certain percentage from one’s investment portfolio to provide an income, while the other supported using dividends only as an income stream.

 

SWR was formulated by a financial adviser named William Bengen in the 1990s², and from his analysis a 4% withdrawal rate was the sweet spot, though a higher or lower withdrawal rate could be employed depending on the comfort levels and income required for a retiree, and the prevalent market conditions on how the asset classes behave. In the eBook, I had provided a basic example of the 4% withdrawal rate at play³.

 

Despite the arguments, the main underpinning reason against SWR and the proposition for dividends was that the latter was more easily understood and to operationalize. People can see how much dividends they are getting and adjust their expectations of the amounts that could be obtained in the near future. For SWR, one would have to calculate the withdrawal amount based on perceived statistics such as inflation rates, and at the same time to determine which asset class(es) to drawdown the capital from, a daunting task for a retiree who did not have financial know-how.

 

Overall, I would like to bring additional opinions with regards to this dichotomy. Firstly, on the dividend stream, I had written a post on a way to manage this method (mentioned here), which it mitigates current year income by using last year’s and adjust one’s lifestyle accordingly. Secondly, there can be a compromise between the two, by employing the SWR with the withdrawal coming from dividends first and the shortfall from liquidating some of the capital.

 

Thirdly, and most important, is that we do not just rely on just one portfolio. Depending on one’s age, there are CPF Life, Supplementary Retirement Scheme (SRS, if one had started with investments), rental (for multiple-property owners or those who could spare a room or two), etc. in providing the streams, dubbed the income bucket strategy, which warranted a whole new write-up. Making the drawdown more robust, portfolio diversification by time (mentioned here)  may dampen the sequence of returns risk.

 

In conclusion, regardless of whether dividends are good or bad, in managing one’s portfolio, I would like to give this one-liner modified from a famous saying by Thomas Jefferson, the third President of the United States: 

 

“The price of (financial) freedom is eternal (portfolio) vigilance.”

 

 

1 – Hartzmark, Samuel M. and Solomon, David H. The Dividend Disconnect. 30 Jul 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876373 (accessed 7 Dec 2023)

 

2 – Bengen, William P. Determining Withdrawal Rates Using Historical Data. Financial Planning Association. Oct 1994. https://www.financialplanningassociation.org/sites/default/files/2021-04/MAR04%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf (accessed 7 Dec 2023)

 

3 – The Bedokian Portfolio (2^nd Ed), p142-143

My Child’s Education Endowment Policy

When our children were born, we heeded the advice from a colleague on purchasing an education endowment policy for them.

Back in 2003, we had purchased a 20-year policy term. The savings amount was SGD 995.55, with the accompanying riders of SGD 73.78, bringing the total annual premium to SGD 1,069.33. The premium payment would stop at year 17, after which in years 18, 19 and 20, the guaranteed portion (cash survival benefit) of SGD 15,000 would be paid out SGD 6,000, SGD 6,000 and SGD 3,000, respectively, with year 20 saw the additional payout of the non-guaranteed component.

 

In totality, the amount of premiums paid was SGD 1,069.33 x 17 = SGD 18,178.61, while the total guaranteed and non-guaranteed amount was SGD 26,558.48. This represented a value return of SGD 8,379.87, which in very simplistic annualized return (i.e., taking the paid value and end value for calculation), it would be 1.91%. However, if we only focus the savings portion and treat the riders as costs, the annualized would be 2.28%. Note that we did not reinvest the first two SGD 6,000 back into the policy.

 

As I had emphasized on the word simplistic, the annualized return would be different as it was not a lump sum payment in the beginning but rather periodic across the policy life. As endowments were better off being seen through in its entirety, hence it was fair to treat the calculations from a lump sum perspective instead.

 

Was It A Good Deal?

 

The question of whether the policy was a good deal is dependent on how and when one sees it. Hence, it is one of those “it depends” answer that I love to dispense.

 

The year was 2003, and as I had shared before, I was in the ignorant zone on investments and stuff, and endowment plans were one of my better-known tools on growing wealth. It was a form of forced savings, which was good, and the returns of the policies were attractive as compared to the usual bank savings account. Looking back, based on statistics from the Monetary Authority of Singapore, annual savings accounts and 12-month fixed deposit accounts were never above 1% between 2003 and 2020, thus from this angle it was a good deal.

 

Of course, at present we have attractive interest rates and the availability of Singapore Savings Bond (SSB), so the 1.91% or 2.28% looked like a not-so-good deal now. With fixed deposits we could project one year in the future, and with SSB could look 10 years ahead, but for a 20-year plan, what would the returns be like? To be honest and fair, I did not sign up for any endowments recently and thus unable to see what the annualized would be like for comparison.

 

Speaking of projected returns, from the original benefits illustration of my child’s policy, the annualized return was quite close to the actual (SGD 996 x 17 savings paid and SGD 28,090 guaranteed and non-guaranteed payout) which was 2.27%, so in this viewpoint it was a good deal.

 

Finally, if we match it with investments on certain equities, returns wise endowments would lose out by a mile (1.91%/2.28% vs. S&P500’s 8% to 10%), but we do need to factor the volatility and risks that comes with them. Depending on the insurance firm and subjected to a limit, endowment policies are covered by the Policy Owner’s Protection (PPF) under the Singapore Deposit Insurance Corporation Limited (SDIC), so there is a safety net of sorts. Risk and returns go hand-in hand.

 

What To Do With The Payout?

 

As there was no immediate use of the funds, it would be injected into our Bedokian Portfolio allocated under our child’s contribution. We had deployed some of it to our equities buy (the first SGD 12,000 paid out in the previous two years were vested) and are planning to deposit the remainder into the coming SSB tranche in December 2023 to slightly rebalance our bond component.

 

And to add, we are servicing one more education plan policy. More of that in a few years’ time.

39% Dividend Yield?

Apologies for the clickbaity title, but it’s true (for now). And 39% is an understatement; not counting the 30% withholding taxes (I guess you may know where this counter is listed at), the current yield is sitting at around 56%¹.

Introducing KLIP

 

So, what is this marvellous counter?

 

It is the KraneShares China Internet & Covered Call Strategy ETF (ticker: KLIP), listed on the NYSEARCA.

 

Incepted early this year, KLIP is an income-focused ETF that provides a monthly dividend to investors by writing options on its own sister ETF, the KraneShares CSI China Internet ETF (ticker: KWEB).

 

I had written how covered call ETFs work and vested in one of them, but to put in summary covered calls, though having a limited upside due to its nature, works well in times of market volatility. The past years had seen the Chinese technology and internet-related firms going through a roller coaster, partially in due to the sector’s regulatory crackdown and semi-conductor sanctions, etc., so in a way it plays into KLIP’s strategy.

 

Listed on 12 Jan 2023, KLIP’s price to date is down by about 33%, but with dividends propping it up, a Singaporean investor vested from the beginning would have a net gain of around 2.7% after taking in withholding taxes and without dividend reinvestment. From the fund fact sheet², the total annual fund operating expense sits at 0.95%, which is relatively high as compared to RYLD’s 0.6%. The ETF’s net assets are around USD 120 million.

Let us compare with the sectoral equivalent Global X Nasdaq 100 Covered Call ETF (ticker: QYLD), in terms of performance over the same period (i.e., from 12 Jan 2023); QYLD price was up by 3.3%, a current yield of 7.7% (30% withholding taxes applied) and an overall gain of 10.3%³. Despite the lower yield, QYLD had performed better than KLIP; these are two dimensions from which dividend investors must understand: Firstly, total returns included capital gains and income derived. Secondly, yield is a ratio of dividends over price, and a higher yield does not imply higher dividend amounts.

 

However, it would be unfair to compare these two as such, due to QYLD’s longer history (incepted on 11 Dec 2013), and how the technology and internet sectors (and the overall economy) of China would fare in the future.

 

The Bedokian’s Thoughts

 

If you had noticed, this blog post is not written under the “Inside The Bedokian’s Portfolio” series, which means I have yet initiated a position and I am keeping watch on this. Understandably, KLIP is attractive with a high yield. One could imagine that the counter could get “freehold status” (i.e., common speech amongst dividend investors of the distributions paying off the initial capital amount) in three years. Comparatively, it is one of the highest yielding covered call ETFs I had encountered.

 

However, over the past 11 months, both price and dividends were undulating, thus the “freehold” concept would be very dependent on one’s entry price and the subsequent yield derived. This point, from another angle, makes it tricky to capture higher yield at a given entry price and dividend income. Being less than a year old, the track record runway is considered short. 

 

Granted that a lot of covered call ETFs did not surpass their listing launch price, the Bedokian’s approach to them is to enter them on a “nibbling” basis and to obtain the yield to either reinvest back onto the ETFs or as dry powder for other U.S. counters. Being derivative in nature, such ETFs are placed inside our trading portfolio instead.

 

1 – Current yield is based on the total monthly dividend payouts between Jan and Nov 2023 of USD 9.336 divided by the price of USD 16.63 as of 1 Dec 2023. Dividend reinvestment not considered. Sourced from Yahoo Finance.

 

2 – KraneShares China Internet & Covered Call Strategy ETF fact sheet. 31 Oct 2023. https://kraneshares.com/resources/factsheet/2023_11_15_klip_factsheet.pdf (accessed 3 Dec 2023)

 

3 – Current yield is based on the total monthly dividend payout between Jan and Nov 2023 of USD 1.877 divided by the price of USD 17.07 as of 1 Dec 2023. Closing price of QYLD as of 12 Jan 2023 was USD 16.52. Dividend reinvestment not considered. Sourced from Yahoo Finance.

ZIRP Is An Anomaly

For the United States (U.S.) federal funds interest rate, the period between 2009 and early 2022 (besides a short period between 2017 and early 2020) was known as the zero-interest rate period, or ZIRP, as a response to and result of one of the biggest financial events known as the Great Recession. Although “zero” was not technically correct, the rates were hovering near the zero line (see Fig. 1), thus I guess that was why it gave the acronym. During this period, debt was cheap, and with it fuelled huge purchases of assets and accelerated growth of capital.

We see this happening here in Singapore, too, especially on the property front. As the U.S. interest rates are positively correlated to Singapore’s (see Fig. 2), our average overnight interest rate (equivalent to the U.S. federal funds rate) was also near zero at around the same time, we had seen a huge demand for local properties simultaneously.

Fig. 1: 25-year United States Fed Funds Interest Rate (source: Trading Economics)

 

Fig. 2: 25-year Singapore Average Overnight Interest Rate (source: Trading Economics)

 

For some Millennial (born 1981-1996), Generation Z (born 1997-2012) and late-blooming Generation X (born 1965-1980, like myself) investors, the ZIRP was the time when they had started their investment journeys. Due to the relatively extended period of ZIRP, the sense of it being a given was naturally entrenched in some of their investment philosophies.

 

However, if one studies the history of markets and economies, we know there are things called cycles, and with this ZIRP could not last long. In fact, ZIRP lasting this long was deemed an anomaly, since rates had not gone that low for the past 50 years. Interest rate has a role to play in the whole scheme of things, and it is the go-to tool to combat an overheated economy and the related phenomenon called inflation. We saw this happening when inflation started to go up hard in early 2022, attributed to major factors like the post-COVID19 supply crunch and the long ZIRP, and the U.S. Federal Reserve came down on it hard with spiking interest rates.

 

REITs

 

One asset class that was particularly hard hit by rising rates is real estate investment trusts (REITs). If remembered correctly, when rates were going up (known as quantitative tightening back then) in 2017, REITs, being leveraged, displayed a downward trend known as “taper tantrum” emerged, as it was seen the cost of debt would be going up. While rates stabilized sometime in 2019, REITs had gotten used to it and prices went back up to their valued norms.

 

The rates rise in 2017 could be seen as a precursor of what would happen if they went up again. Still, for 2022, the effects were more pronounced because of the rapid acceleration of rates increase and there was a return to ZIRP at the onset of COVID19. REITs that were highly leveraged were caught out, and with the added effects of risk premium compression, they got battered.

 

High Interest Rates Are An Anomaly, Too

 

Viewing from the other side of the coin, a high interest rate would not be sustainable in the long run. Due to the shock of the near-vertical climb, most were literally and figuratively caught with their pants down, as the market and economic models were still at ZIRP mode.

 

The next obvious question is, how high interest rates are supposed to be? Looking back at Fig. 1, rates were the same, if not higher, pre-2008. In all fairness, going back to that norm 15 years ago would be hard to swallow as of now, and this means “high” is more relative than fixed at a certain percentage.

 

We must understand that one of the functions of the Federal Reserve is to conduct monetary policy, and raising and lowering rates is a tool used to carry it out. They do not change the interest numbers on a whim, but rather based the decision on the latest economic data and reports presented. In other words, and as what famous fund manager Peter Lynch had mentioned, no one can predict interest rates, not even the Federal Reserve themselves.

 

Combining what was said in the last two paragraphs, interest rates would be normalized depending on the economic conditions of the time, and the rate percentage would be adjusted in relative to the last one. In summary, though staying at present levels is the norm back in 2007, it is deemed too high as of now. If reversion to the mean is followed, it would go down, eventually, to an average level.

 

Lock-Up Savings Accounts: An Idea To Stash Your Emergency Fund?

In response to the prevalence of online scams, the three major local banks DBS, OCBC and UOB had introduced lock-up savings accounts, where you could park your monies safely and they could only be withdrawn via physical means (either in person over-the-counter and/or ATMs – automated teller machines). 

Since the roll-out was just a couple of days ago, you could find out more from the respective banks (click DBS , OCBC , UOB).

 

Whilst reading up on the lock-up accounts, an idea sprang up: why not use them for starting up an emergency fund?

 

The gist is simple; the idea of the emergency fund is to tide over unexpected situations in life, such as sickness, unemployment of just about anything that would eat into your money. The advantages are two-fold: there is a behavioral disincentive in touching the fund, thus it is protected against frivolous spending, and the lock-down can also protect against scammers wiping clean your monies. 

 

However, as sometimes spillovers from the set quotas in the emergency fund are used to fuel investments and/or other savings, it would be a slight hassle to do the non-digital way of withdrawing. But hey, at least one could experience nostalgia by learning how to use an ATM and/or encountering the goings-on within the bank branch.