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.