With the STI index dipping below 2,700 in recent days due to the oil rout and the stagnating Chinese economy along with its volatile stock market/casino, some investors are feeling jittery. However, there are others that are getting excited and greedy, as the stock market seems to be on sale.
Yeah, I still want an annualised 7% return from my portfolio!
In this bear market, I am also formulating a plan to utilise some of our cash reserves prudently to maximise my returns. However, it is even more important for us not to overcommit and put too much of our money in a falling stock market. After quarter-retirement, the last thing I want is to lose my sleep worrying about stock prices. Or worse, capitulating in a bear market and selling everything off cheaply.
Therefore, to better calculate the war chest I have for this bear market, I have decided to set aside an emergency fund, which is a U-Turn from my earlier stance on emergency funds. Please don’t throw brickbats at me, I am just adapting to the changing conditions as set out below.
- Both of us are earning much lower incomes as compared to 2 years ago and thus saving less. Previously, it could take us only slightly longer than 2 months to save up $10k. Now, it’s easily 4 months.
- Our current jobs are probably not as stable/secure. They are based on securing projects and clients and who knows, in a recession, they might cancel on us and we could be out of work and income?
So, it’s imperative for us to set aside an untouchable $100K. This amount is about two years of our annual expenses. In a really bad situation, we could probably stretch it over 2.5 years easily. Well, a 20% cut in expenses isn’t the end of the world.
Let’s see what this fund comprises of.
The $100K Emergency Fund
CPF OA – $40K (Ideal)
Current: $35K (Shortfall: $5K)
Since we carry the mortgage payment in our expenses, it’s only fair to include our CPF OA accounts as part of our emergency funds.
The worst thing to compound the misery of an emergency is to lose the roof over your head. Since our mortgage is around $1,000, having $40K inside those accounts should tide us over close to 4 years. Having not had CPF contributions for close to half a year, I would need to do a voluntary contribution soon to shore my account up.
SGD Cash – $20K (Ideal)
Current: $20K (Shortfall: $0)
At this point in time, after selling some equities off a few months ago, there’s quite a bit of cash sloshing around in our bank accounts. The Mrs is benefiting fully from OCBC 360’s high interest on the first $60K balance since she can jump through the different hoops.
SSBs – $20K (Ideal)
Current: $15K (Shortfall: $5K)
The Singapore Saving Bonds is a useful tool to park part of our emergency funds. The returns, if held over 10 years, are easily above 2.5%. If there’s no emergency (which is the most likely event), I can earn decent returns on my cash. Since it requires less than one month to liquidate (most probably 2 weeks), there shouldn’t be big liquidity concerns.
After participating in the first two issues, I am still waiting for one where the yield is above 2.63%.
Other Currencies – $20K (Ideal)
Current: $14K (Shortfall: $6K)
My idea of emergency is quite “broad” and it includes a potential scenario of war in Singapore, however remote the odds are. The preference is to have $10K in gold and silver and another $10K in major currencies of the world.
I have $2K of AUD, CAD and USD together with 2 50gram PAMP gold bars and 25 silver coins. If commodity prices continue to tumble, I might add a little more to reach my full allocation.
For the shortfalls, I would be setting aside SGD cash so that I would always be maintaining a $100K fund for some worst case scenarios. I promise not to touch this amount, even if the STI index falls below 2,000.
it is always good to set aside some emergency fund.
well, my husband very conservative type. he set aside a sum of cash( mid 5 figure) for our emergency fund.we usually keep it at FD. as my health not so good, who knows i may take NPL anytime.
this is different from war chest. this is the amount we will never use for investment.
then we also set aside current cash flow..around 10k in each account for our bill+ insurance+ saving.
this is also different from war chest and emergency fund account
Hi yeh,
It seems you are well protected in this bear market! All the best!
hello, just curious, does keeping $ at FD = emergency fund? emergency funds = can access it anytime right?
btw, take good care of your health. ask your husband to sayang you more 😛
Hi cherry,
I would classify emergency funds as those that you would “not touch for equity investments” no matter how low the market drops. Because, as the market tanks, while valuations get more and more attractive, the threats to employment also increases.
Ask my husband to sayang me more? You mean my wife? =)
This is one luxury many people don’t have. Even for those fully employed, most are not even saving at all.
Why so much as you are still having smaller incomes ? But it is seem market are not doing well that I heard even some “investment gurus” are putting their money in FD (I heard it from my barber who cut their hair)
Hi George,
I prefer to peg it against expenses as compared to incomes. 2 years is probably a little over prudent on my part but I guess that works for me at this stage.
do u mind if u can elaborate more on “investment gurus” are putting their money in FD?
i dun quite get what u mean.
Are you still in NSF reserve?
Can run during war?
Hi CW8888,
I am not sure if I am still in NSF reserve. But there’s lots of scenarios possibly playing out. What if the war is short and swift and we “surrender” and it ushers in a very miserable period. I guess that’s when alternative currencies might be useful.
Just ask those Vietnamese who “escaped” to the US.
Hi 15hww
Lp talked about the 3 legged chairs, i guess you are adding more legs to the chairs for extra safety 🙂 i think its prudent knowing whats your expenses like and how your income vary month to month.
Hi B,
I like the 3 legged chairs analogy. I guess emergency funds is part of allocation too!
a very interesting take on cpf oa as an emergency fund.
For 55 and above in their OA balance as emergency fund but still need 5 working days to withdraw.
Hi CW8888,
I don’t think 5 working days make a hell of a difference for most emergencies. But well, it’s not ALL. Maybe that’s also a reason why older folks prefer to keep some money under their pillow or biscuit tins.
Hi Kyith,
Issit? I thought it’s quite natural for us and those who use their CPF OA funds to pay their mortgages. But well, what do I know? I always thought it’s quite natural for husband and wife to share finances, but I only recently found out how rare that situation is. =p
Hi 15hww,
No matter how much ur e funds be it in Cpf OA or SSB or cash, I think u r moving forward. Like u mentioned ur thinking in 2013 n now did change.
Who cares about pple throwing anything, but I think u evolve in the right direction by doing the right thing last sep.
I use to think that I will hold every stocks until forever bcos of WB! After knowing myself over the years, I realise I m not WB.
So I m quite sceptical abt equities last yr and in view of the oil slide, already keep a lot of cash.
Prudent man prepares! N not to be negative, but still it’s ok to be confident paranoid… at least when things turn ugly, which in this crazy world we never know, then at least we are resilient. Just my thinking!
Hi Rolf,
You exited in the nick of time! Everybody has different situations and circumstances to contend with and if having more cash enables you to sleep better at night, why not? Just like there could be some people holding too much cash and their greed to earn higher returns result in them not sleeping well.
Good luck with your recent bank purchases!
Hi do you think it is a good idea to use all your cpf OA into housing? I am thinking of getting a flat but was thinking of part cash+part cpf to service the mortgage.
Hi Jean,
As the CPF OA is illiquid as compared to cash, most people use as much of their CPF as possible to service the mortgage.
However, if you do have a sum of cash lying around and is rather risk averse, using cash to service the mortgage means you are effectively getting a 2.5%/2.6% return on your cash, which is higher than fixed deposit rates.