21 July 2005

Perhaps Mr Wang Has Been Impulsive

Analytics88 earnestly claims that he did not send me hate mail. Very well. Mr Wang the Magnanimous shall give him the benefit of the doubt. And temporarily put away his Ridsect spray. The financial discussion shall continue. But first, a quick summary.

KiddyBoy posed this question, requesting Mr Wang's comments:
"I have a friend, just married and lives in a lovely but huge HDB flat. Just two of them. Price of flat stunned me, almost 300K. Friend tells me loan is for 30 years (no choice leh, he says), and by my quick calculation, total interest payment can buy a Subaru WRX (My dream car!) at today's prices."
Mr Wang pointed out by making prepayments from time to time, the term of the housing loan can be shortened and the aggregate amount of interest paid would be reduced:
"A 30-year housing loan need not actually be repaid over the full 30 years. Along the way, you can make prepayments. This means that if you have extra cash, you can prepay part of the loan ahead of time. Thus you can repay the full loan sooner than 30 years. By prepaying part of the principal loan amount, you also reduce the interest you have to pay each month."
(By the way, if you have a HDB loan, you can make prepayments as and when you like, and there is no prepayment fee or penalty). Lay is worried about future contingencies such as unemployment and medical emergencies:
"All is well if you have your job for life and your pay goes up in a straight line and you are healthy. However, my reasoning tells me that it is good to leave some flexibility to reschedule the loan when a shock (illness, retrenchment) occurs. What does Mr Wang and the other blog readers think?"
Mr Wang then talked about the importance of having emergency reserves:

"I agree with you that it is not safe to assume that you have your job for life; will steadily earn more and more as the years go by; and will remain healthy indefinitely etc.However, this actually means that you cannot seek to pay off your housing loan so aggressively.

For example, if each month you put as much money as you can towards repaying the loan, you shorten the life of the loan but you also make it impossible for yourself to build any emergency reserves. You can aim to repay a 30-year loan in 20 years, but if you stretch yourself too hard, then you are in deep trouble if, in Year 5 or 6, you become unemployed and you can't even meet next month's mortgage payment or even next month's water bill (because you never had any savings - you'd thrown all your money into repaying the housing loan as fast as possible).

That is why I prefer the prepayment strategy. You prepay as and when you have more than enough, and you only prepay the amount that you're comfortable with. For example, if you got a big bonus in December, then you can prepay in January using your bonus."

Analytics88 the Cockroach says that Mr Wang has "bad judgment", "stale analysis", should "watch his words", has made a "retarded reponse", is "obviously not the smartest pencil in the box", is "short-sighted and self-righteous", is a "chimp" and is "not in the same league" [with what, Mr Wang does not know. Intelligent cockroaches perhaps].

Anyway, Analytics88's alternative strategy is:
"One should use the prepayment funds and invest in instruments yielding 6%. That gives you a spread of 4% beating any prepayment options hands down."
Commenting on Analytics88 strategy, Singaporean said:
"There are no risk-free instruments that pays 6%. The closest to risk-free in Singapore is the Singapore Government Bonds, and the yields are barely 4%. Buy into US Treasuries, and you take on forex risks, and even then, you dont get 6% yield.

Even corporate bonds issued by LTA or HDB, dont pay you 6%, and you better be rich enough to fork out 100k a pop. And yet they are immensely popular. I wonder which morons who are so rich would subscribe to such bonds at 4.25% when 6% opportunities are everywhere.

Yes, you can do better than 2.5% with ease with cash. But 6% is unrealistic without taking on excessive risk. With CPF, with all the fees agent banks charge and government regulations, you'd be hard pressed to break-even, let alone profit.

So, enlighten us, Analytics88, where can we find an instrument that guarantees 6% returns at such a low risk that we can bet our house on it?

And what makes you think the HDB loan rates will stay forever at 2.5%? If you take a bank loan and property prices crash and send you into negative equity, will the bank force sell your property if you fail to top up with cash?"
With bated breath, Mr Wang awaits Analytics88's answer.

"That wasn't the best move, Mr Wang.
He's a cockroach, for cryin' out loud. I would've used the Ridsect. Or an old slipper.
Hell, pluck out the legs and feed him to the fishes."


singaporean said...


DBS Shenton Global Advantage? You might as well say Berkshire Hathaway, far longer history, far better track record, far bigger fund.

Every fund manager, including DBSAM and Warren Buffett will tell you this:

"Past performance is no guarantee of future results."

You cherry-pick one best performing fund, and you suggest everybody to maximise their home loans to bet on this?

Hindsight is 6/6, and people fail to see the risks until shit happens.

Just ask the holders of DBS Rainbow Equity-Linked deposit, the one with CAO as one of the linked equity.

Or the genuises at LTCM.

Analytics88, why dont you put your REAL NAME down so that we can hold you to your words in a few years time?

One anonymous coward to another anonymous coward:

we should be the last people to accuse anybody of cowardice.

Gilbert Koh aka Mr Wang said...


Okay lah, okay lah, Mr Analytics88, you're very, very clever, so much cleverer than Mr Wang. Now please go now and put ALL your money into DBS Shenton Global, for the next 25 years. Just remember that:

past performance is no guarantee of future performance;

DBSAM's equities "star manager" just quit a few months ago;

just like the DBSAM equities "star manager" before him suddenly & unexpectedly quit in 2004;

(they can't even keep their fixed income staff - HC Lim from the Fixed Income side also just quit);

don't forget that over 25 years, any "star managers" you put your faith into are also going to come and go and join and leave your favourite funds;

do take the time to think about allocation across different asset classes (equities; bonds; REITs; cash; MM instruments, you know?);

educate yourself on how and why most actively-managed funds lose out to a no-frills, fuss-free index fund over the middle to long term;

recall that just as there will be periods when growth beats value; there will also be periods when value beats growth;

do watch out for per-transaction fees if you use an agent bank to invest your CPF OA in your Shenton Global;

note that currently the fund isn't very big, and that this raises concerns about the expense ratio;

and do read this interesting book - Fooled By Randomness , the next time you try to pick a winning fund, ok?

Mr Wang wishes you all the best!

singaporean said...

Mr Analytics88,

in your infinite wisdom, you failed to notice Shenton Global Advantage is not a CPF approved fund either.

And can you define leverage to me again? Taking money meant for your home loan to fund a risky investment is not leverage?

Leverage, however you define it, is not the reason why LTCM. LTCM failed because they ignored the systematic risks in their trading as being too unlikely, too six sigma. Like you perhaps, except you havent won any Nobel Prize yet, have you?

I am an anoymous coward, and so are you, Analytics88. So until you prove yourself to be better than an anonymous coward, you have no right to accuse anybody of cowardice.

singaporean said...

Come to think of it, I do have an idea on how to make the excess CPF OA funds work harder, almost riskless, instead of prepayment:

Transfer them to the SA. The SA pays 4% interest, and when shit hits the fan, the SA funds can be used to pay for the home loan. If the home loan rate moves, so will the SA rate. How foolproof is that? An alternative is your Medisave account which also pays 4%.

There are of course, some opportunity costs involved if you are to buy another property or if you have children needing a tuition fee loan in local university.

If I have to try my luck with risky equities (with just 35% of my OA), I would rather trust myself. Afterall, I bought SPC at $2 last year. I am my own star manager. ;)