WARNING: LONG POST
davidsim Wrote:My investment objectives are (in order of preference):
1. to generate an average of $13,000 per month from my investments annually (including property)
2. to achieve a nominal CAGR of 4% over the next 5 years
First of all is probably the question of insurance - are all family members (including yourself) adequately insured? If not, a serious illness may drain away all the wealth you have worked so hard to obtain. Make sure everyone has enough health and surgical insurance - for starters buy everyone the most expensive Shield plan with lifetime coverage.
After your family is adequately insured comes the question of investment returns.
Your goal is for $13,000 per month or $156k per year, against investable assets of $5.6m, a yield of 2.8%. This is certainly achievable in nominal terms.
davidsim Wrote:My eldest child should be working in slightly over 4 years and the total cash deficit I would incur over this period is about $65,000.
IMHO the simplest solution here is to simply put aside the $65k as it is only 1.5% of your investable assets. After 4 years your eldest child will not need your support, which means you don't have a deficit any more and should run a small surplus. If your child starts to contribute financially to the household then you will have a larger surplus. Plan the rest of your life using the remaining 98.5% of the assets.
The next question is probably whether your assets are appropriately allocated to begin with. Your investable assets exceed $5m, of which almost 50% is in the stock market. Yet you claim to be "quite clueless" about stocks.
This is extremely dangerous because poor stock picks can cause massive losses. The mitigating factor is that you have stuck to household names like DBS, UOB and Singtel. However some people would also consider SIA a household name, whereas I would not consider SIA suitable as a long-term holding for a conservative investor. Without a full disclosure of the portfolio it would be unwise to assume the portfolio consists only of companies with strong businesses and conservative balance sheets.
The following should be considered as an opinion only as I am not licensed to give financial advice.
1. Stocks
Consider selling the stock portfolio entirely and replacing it with an STI-tracking ETF e.g. the Nikko AM Singapore STI ETF. This guarantees you the index return less expenses, and the ETF pays dividends. If you want to do better by investing on your own, you can take your own sweet time to learn, with small amounts of money until you get comfortable. When it's clear that you can beat the index on a sustained basis, by all means take the plunge and do it all yourself.
Don't feel bad if you can't beat the index - many professionals can't either. There is no shame in investing in an ETF.
2. Property
Why is your property only yielding 2%? You should be able to earn at least 3.5% or even 4% on a gross basis, after expenses and taxes you should net about 3%. It is mostly GCBs that get 2%, but $2m suggests a large condo in an outlying area, a small condo in town or a small landed property. Either your rental is too low (raise it) or your property's valuation is too expensive (consider selling). Better still, if you can find a property that is clearly superior (better location for the same price etc), consider swapping properties so that you can get a better rental yield.
Also consider selling the property and using the cash to buy some REITs that own retail or healthcare assets. Industrial REITs usually have rapid depreciation (3% annual loss due to short lease) while hotel REITs have volatile payouts (room rates fluctuate a lot) so it may be better to avoid these 2 groups as long-term investments. Retail assets are usually long-lived (99 years or even freehold) and lend themselves well to asset enhancement (which can boost rents ahead of the market cycle). Healthcare assets are usually very stable as the hospitals can't easily leave, and medical bills are not correlated to the economy. However REITs have occasional cash calls to buy assets, so make sure you have a standby reserve i.e. don't spend all the cash payouts, keep some to fund the inevitable rights issues.
3. External Managers
If, after the above reorganisation of your assets, you can already reach your income goal, you're done. If you are open to using fund managers, talk to several to get an understanding of how they work. Make sure they can explain their strategy in terms YOU can understand. If you don't understand, walk away.
Most funds reinvest their dividends, so you won't get any cash payouts. Those that do pay will usually pay a very small dividend because the underlying investments don't pay that much themselves. Funds that promise a high payout e.g. 5% or more are usually making such payments out of capital instead of dividends/interest actually received from the underlying investments. Stay away from such funds as the payouts are not sustainable, eventually either the fund collapses or the payouts will be suspended.
Be aware that legitimate fund managers cannot time the market. That means that they cannot buy at the bottom, nor sell at the top. Neither can you. Well, maybe
once in your life, but that's about it. I always tell my clients that after I buy something, it will go down (because I didn't buy at the bottom) and after I sell something, it will go up (because I didn't sell at the top). But over the long term we do well enough, so far at least.
Follow the managers for a while before you invest, and start small if you do invest. You need to see whether they live up to their claims. If you are considering a boutique fund manager (who serves only accredited investors) make sure he has the bulk of his net worth invested in his own fund. If he doesn't eat his own cooking, why should you? Don't take his word for it - get a statement of his holdings from the fund administrator. Look at his background. Where did he get his money from? If he earned it from investing, that's a good sign. If he married into a rich family or inherited the money, maybe not. This all sounds like a lot of due diligence - and it is. The good managers will have no problems complying and will be happy to share their story. But there are other kinds of people around and this type of investigation will help weed them out.
4. Alternative Investments
Be especially careful of any offshore investments, because typically if things go sour it is extremely difficult to recover anything. MAS will not help for anything that is offshore. You will have to pay your own expenses to fly there, engage a lawyer etc.
A simple test is: if there is a problem, is there somebody local you can sue, and how much in assets can you seize if you win? If the answer is "nobody" or "$2 company" then stay away. And if somebody claims they have a $1m company in Singapore don't take their word for it - get the statements from their auditor.
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If all this sounds too complicated, the simplest route is to put aside the $65k shortfall and do nothing else. Once the eldest child starts work, there will be no shortfall. Problem solved.
As usual, YMMV.