At the steepest incline railway in the world at Blue Mountains, Australia, we (passengers) had a choice on whether we wanted the ride to be gentler, or more exciting. Some went for Cliffhanger! Same idea goes for investing I guess, since different people have different risk appetite.
Singapore Savings Bonds, a topic I had briefly touched on a little while back, definitely falls under the “safe” region. My rather unspectacular blog posts must have attracted somebody’s kind attention and I had the good fortune to meet a couple of the big names in our vibrant community in an gathering organized by the Monetary Authority of Singapore. I mean, seriously? These bloggers are the ones that I have had to rely on for my own financial education! Of course I had to accept the invitation! (*ahem* with the intention of getting free coffee)
With extensive media coverage and so many blog posts on Singapore Savings Bonds (SSBs) on the WHATs and the HOWs, I was almost tempted not to blog about it. Perhaps let me pitch in with fragments of the random thoughts that I have. Warning – no deep analysis required.
Small Penalty For Redemption
True, there is no monetary penalty for redemption. However, your money invested in SSBs will be unaccessible for up a maximum duration of one month because money is only returned at the start of the following month upon redemption. This will be a key consideration when putting emergency funds etc into SSBs as it is not considered perfect liquidity to me. However, it would be a perfect place to put your funds if they are medium-term goals that don’t necessarily have a time-critical start date. Money for wedding, home/renovation, future studies and kids are some typical scenarios I can think of.
Why Start SSBs?
An interesting perspective on SSBs chose to focus on why the government doing this? Need the money, is it?
The official FAQ states that the money raised from issuing Savings Bonds cannot be spent and will be invested. To think about it, not entirely a bad deal huh? SSBs is a potential source of “cheap funds”, which can then be invested for better returns. “Sovereign wealth fund borrows money from citizens for index investing” would make for an interesting headline – just kidding! With essentially an infinite time horizon to make money, unlike folks like you and me, time is perhaps an advantage that the government enjoys.
During our kopi session last Friday, we spent a fair bit of time on this topic as well. My humble view is that SSBs is an extremely low risk tool to expose and educate the public regarding the existence of decent financial products instead of putting their cash in biscuit tins or low-interest savings accounts. With a bit luck, it might just spur on more people to develop an active interest in financial literacy.
Really Huge Cap
I believe most of us were taken by surprise by the large cap of $100,000. The general vibe I got during the discussion was that the cap is gonna be really small. I guess this goes a long way in giving an additional option to retirees with a huge stash of cash. I feel that the very people SSBs are supposed to help and benefit may not even know of SSBs’ existence, let alone use it. Send brochures to every household, I say.
More CDP Accounts
To participate in SSBs, one of the requirements is to have a CDP account. Needless to say, we are going to see plenty of CDP accounts created, and many would be tempted to create a brokerage account at the same time even if they don’t intend to trade yet – might as well, huh? Slick move.
Interest Payments Are Not Taxed
In-line with the key theme of simplicity, Singapore Savings Bonds interest payment is exempt from tax. One less thing to worry about, one more reason to entice people to participate.
At the moment, you will only be able to buy Savings Bonds using cash. I was initially puzzled when people questioned if it will be possible to buy SSBs using CPF. Isn’t CPF giving a better interest rate now?
The word “now” is the key, since you would never know what the interest rates of SSBs would be like in future. Been stuck in low interest rate enviroment for too long. Interest rates are expected to increase, after all, and the current low rates can probably be seen as the minimum risk-free rate to expect.
Role Of SSBs In Index Investing
Is SSBs relevant to Index Investing? I am not exactly sure whether SSBs will have a place in my Bogleheads portfolio at the moment. Give me a little bit of time to think about it – if it’s worth posting, you’ll see it. It is totally possible to use SSBs in place of the cash component of the Permanent Portfolio though!