A commentary on leveraging REITs with loans

I recently took a look at another blogger that utilized Maybank's 2.88 percent yield loan to leverage on REITs. The idea, in essence, was borrowing cash using the yield loan mentioned above to obtain dividend yields from REITs that will allow one to pay back this loan while accumulating the remainder as fine, hard cash. This blogger had loans in the hundreds of thousands (good lord) making use of this strategy.

Using Mapletree North Asia REIT as an example, one could get a dividend yield of 6.7%, pay off the 2.88%, and be left with a "free" 3.82% yield on your loan amount. That is in essence, making money work for you when you don't even have money.

In theory, that sounds like a fun and dandy idea, so I actually had a discussion with others about this.

Firstly, we have to find out the logic of why a bank like Maybank would be willing to loan out their money for you to leverage, instead of just buying these REITs themselves.

Most banks are regulated in ways such that they are unable to convert all the liquid cash they have into assets, due to certain financial regulations, that while differing in each countries, tend to set a certain percentage of debt to their equity in the form of a capital adequacy ratio. In essence, they are prevented from essentially throwing all their cash into REITs, so it would make sense for them to just loan it out to us poor souls, and just kill us with interest.

Benefit of leveraging in this context

Let's face it. That 3.82% yield is pretty good, considering that it is based off money that you don't own, and the leveraged amount could be 2 times larger than your initial capital ( had a call with maybank but honestly forgot what was the minimum margin ratio required).

If the REIT one purchases appreciates in capital gain, it can also be quickly sold off for extra cash on top of the "free "3.82%".

Now, what are the risks then?

Risk(s) of leveraging REITs

Firstly, 2.88% is pretty high. The potential upside may not necessarily be justified by the risk one takes when entering these positions.

Maybank, and other institutions that provide this service, retain the right to select what REITs they will allow you to purchase with the leveraged loan. This also means that at any time, if they find that the REIT no longer fulfills the criteria for their AAA rating ...
They will just remove it. What this means is that the financial institution now has the right to ask for their money back. In the event that you can't cough up the cash, it will either use the cash that you have to hold in the margin account (per the ratio) or if you are using other equities (other REITS as an example) to leverage off on, to pay for the outstanding balance. This will be on top of you holding a sub-AAA rating REIT, which would most likely be due to it suffering from some management issues.

Essentially, what this means is that one takes on the risks in two ways : the risk of the REIT's capital value dropping, and also being forced to sell/liquidate equities and cash to maintain the margin call.

Not a fun thing to happen.

Which brings us back to the other blogger. I noticed that he hasn't been posting for awhile now, and got curious about some of his/her holdings. Some of the REITs he has bought has depreciated nearly 50% or more in value. The margin calls triggered were probably not fun.

Conclusion
The main essence of this is that in investing, unless one goes for the Singapore savings bond, there is no risk-free option.  It is more about taking risk proportionate to one's expected returns.

If one wishes to utilize this, it would be prudent to look at the safest REITs, instead of just the ones that have the highest yield. Also, the amount leveraged should never be a large sum.

On the topic of failing

More a personal thought than any.

I recently have been going through some difficulties at work and also in my personal life. It was not fun to check on my stocks and see a huge drop either. Sometimes it feels like my goals are not being achieved as much as I want them to be.

Such is life though. Last year, I had a cute little nephew joining the family. Today, my brother in law sent a video of him trying to stand up and walk. He would take a few steps and proceed to fall flat on his face. With my brother-in-law's encouragement, my nephew smiled, picked himself up and continued trying again, taking a few more steps every single time, and finally walked to his dad.

What happened to failing and trying again. Isn't that how we learn?

I need to remind myself of that, both in my life's journey and my financial goals, to learn from my mistakes and to be better.

Reminder to buy the boring ones

Stocks can be exciting. Who would not want to buy Amazon and watch it climb with its stellar growth? Autonomous vehicles, so exciting (yes I am shooting my own foot here.) Netflix and chill anyone?

In all seriousness though, I have to remember one of Peter Lynch's adage here. One must remember that many a time, the most boring companies are the ones that can earn the most. I am looking into my portfolio again to see if there are better and more boring stocks to buy. Excitement into stocks tend to drive up prices, whereas the sheer boredom of what a company sell can often times be perfect; Boring companies are honestly what earns money a lot of the time, and still keep on the down low while doing so. One then can swoop in and hopefully get a ten bagger.

I have to remind myself of that too.

October Updates

The past few days has been a terror in terms of the swift downslide of stock value. My portfolio was hit pretty hard, especially with the foreign exposure from Alibaba, one of my favorite stocks.

Alibaba had dropped from a high of $210 to an astonishing low of $143 yesterday, causing the overall portfolio of my stocks to drop significantly. I wouldn't deny that it stopped me in my tracks for awhile.

However, I remembered the old adage to buy when others are fearful, and looked into Alibaba again. While there have been some changes that might affect its rockstar growth, the stock value at such a low gives a great opportunity to enter into it again. I have increased my shareholdings there by 33%, and will buy perhaps even more once I have more holdings. Should there be an even bigger downturn, I will take the opportunity to load up on Alibaba for the rest of this year, as previously mentioned.

Other consideration for purchases are adding into Fraser's, and into Design Studios. I still believe that Design Studio is a great play going forward, but I would rather add more into Alibaba at the moment.

Cheers.

September Update

September marks the 1.5 years I committed to this journey to retire young.

So far, the returns have been sub-par for the year, what with the recent fall in Alibaba and Daimler shares that has affected my portfolio significantly. The bear market in Hongkong now is something I am looking to see if I can enter at some cheap valuations, what with the volatility now coming in from the Tariff War.

However, I had also entered more into Alibaba, nearly doubling the amount I had put in last year. I intend to continue adding to Alibaba at least up till the end of the year. While this addition has cost me some short term-growth, I foresee this as a 10 year play, and will continue adding into this share as time goes on.

My other considerations is to start looking at S-reits that I can enter into going forward, to provide some steady dividends in the meantime.

In this case, I am moving my portfolio to certain non-dividend shares overseas and dividing yielding shares locally. I will make an update on the portfolio page soon.

I am also contemplating purchasing some Singapore Savings Bonds with the rainy-day portion of my savings, utilizing the DBS Vickers account I am planning to set up soon. This will be with the intention of triggering the higher returns from DBS Multiplier.

I have overspent slightly for the past 2 months and have been looking to see where I can make adjustments on my expenditure as well.

Cheers and good luck in your retirement journey.

5 good reasons to invest in stocks outside of Singapore

I noticed across many Singapore investing blogs are that they tend to only purchase SGX stocks. I tend to agree with some of the points put across, such as the lack of taxes, and also the need to account for foreign exchange rates when purchasing stocks overseas.

I do not, however, think that this should be an impediment towards purchasing great stocks that can be bought everywhere. It is already very easy to purchase foreign stocks, as I have mentioned in my post.

Let's take a good look at some reasons why it is great to purchase stocks overseas.

#1: Exposure to GREAT companies

Lets look at the current state of SGX now. While SGX does hold a respectable number of companies, even many overseas (Australia and China comes to mind), the sheer number of companies available may often mean that there is lower chances of finding a great quality stock. While we may have some companies such as Comfort Delgro in the past that was able to provide consistent and great returns in the past, the current state of Singapore's economy as a mature country has led to lower rates of returns going on further. It is not to say that Singaporean companies, or companies in SGX are doing badly; it is just that sometimes, the grass is legitimately greener on the other side. Why give up one tree for the whole forest, when you could possibly buy the whole damn thing. 

#2: The IPhones, the Mcdonalds', and good ol' Uncle Google

The honest truth about living in Singapore is that we are the epitome of Globalisation. So many of the things we utilize, from the phone that we use to the food that we eat, all come from multiple countries all over the world. Starbucks are plentiful, and Uniqlo is where we go to buy great and affordable clothes. 

It is a simple truth that the SGX just does not have the level of exposure to possible great stocks that we would want, because as investors it would make good sense to buy what we know, and Singaporeans end up knowing more about some foreign products than even local ones. Why not invest in those stocks?

#3: Not putting your eggs all in one basket

I would not be putting the case on here about diversification by buying other countries' stocks exactly, as many people who have taken basic finance lessons will know; diversification is more about buying shares in such a way that industry/company specific risks are reduced. Systematic risks, such as ones that shock a country, may be difficult/impossible to diversify away. Singapore's economy is heavily tied to the current state of trade all around the world. Our economy is heavily affected whenever there is a recession in some of the bigger countries (US, China, etc), due to our heavy trade links and our exposure as a financial and export-based economy. Just buying a US stock, a Chinese stock alone, will not constitute as proper diversification.

My logic for buying shares in other countries, is a simple one. As personal investors, many of us work in Singaporean companies that have our salaries, bonuses and etc tied to the success of this country. We would not want a possible fall in our earned income to go down together with our passive income. It is at this simple junction that we might end up depending on our passive income more, and it would be better if this income came from somewhere other than the Singaporean economy, and also countries that we are not exactly fully dependent on.

#4: Liquidity

The Singaporean market is a great example of great discipline. Purchasing stocks in Singapore can oftentimes take longer, just due to the fact that waiting for a good price for your stocks may take a long while. The upside of this is low volatility. The downside is the sheer difficulty at times in having to wait for a good time to enter the market. Many markets overseas do not have this issue. While still a reason, I must substantiate that as a value investor that this might actually justify buying more Sg stocks, because low volatility might just be a factor for sound business.

#5: Where are the news?

Oftentimes, one would find difficulty in finding news about Singaporean stocks. This might inhibit research and oftentimes leave one unable to make a particular decision about a stock. The great thing about overseas stocks, especially those in the US (just google it) and China (just baidu it) are that there are a lot of news, and sometimes I will read through other anaylsts' or business news that will give me insight that I might have missed otherwise. 

Cheers everyone, and have a great weekend.

P.s. Leave some comments on what you might be curious about, or what I could put up a blog on. Also if my posts can be made more entertaining,insightful or even about the length. 

One decent reason to get Singapore Savings Bond

Now, as many travelling on the mrt has seen, there is the presence of Singapore Savings Bonds advertisements being tossed out around. This got me interested on the topic of whether it was worth it to bid on them. The interests rates are as shown below.

Source: http://www.sgs.gov.sg/savingsbonds/Your-SSB/This-months-bond.aspx

At first glance, of course, the returns are barely enough to cover the average inflation rate of Singapore. Nevertheless, this is a risk-free investment, and can be ideal to use your rainy day funds/savings and invest it in the manner I will explain below.

DBS multiplier comes straight to mind as a great way to combine the returns from both sides (DBS and SSB) . What am i talking about here?

As some may know, DBS Multiplier gets higher interest rates the more categories of transactions one does , namely your salary entering through the account, house loans from DBS/POSB, insurance payments from DBS/POSB, credit card usage ($1 is sufficient to trigger the category) and most importantly, if you INVEST through DBS/POSB.

Let's assume you want the most bang for your buck. Naturally, I would say sticking to SC (refer to previous posts) for investing might still be a good choice to a certain extent, as I believe the transaction costs are still the lowest there.

However, if you wish for a double-pronged method for investing, one can actually "trigger" another category for DBS multiplier by actually obtaining the SSB from the CDP account if one has one with DBS/POSB. In essence, you will be obtaining the interest for buying the SSB bond, while still triggering a higher return for your DBS multiplier. I think that is a win win, especially considering how relatively liquid retrieving this money from SSB/DBS multiplier can be. Meanwhile, I can still be obtaining the sweet low cost investing from Standard Chartered too.

Cheers people, and onwards to investing towards a brighte future.

Disclaimer: I am not associated with any of the banks, nor am I associated with the Singapore Government in anyway (other than paying them taxes. Boo.)