The Apple Men

I caught the second run of The Pillowman by the Singapore Repertory Theatre at the DBS Arts Centre last night and it was LE-GEN-DA-RY! Here's a piece of advice of all of you, anywhere in the world, if The Pillowman is playing at your local theatre, catch it! If you do not enjoy it, you will never ever get a full refund from me but you can always come back here and vent your anger on me =)

The Apple Men is one of the many short stories told in the play (I will not reveal its content here, watch the play yourself!) and the story reminded me of how my economics professor loved to use apples for his economic analogies. He used apples to explain most macroeconomic theories and predictably used apples in his assignments as well. As one of his apple-fied students, I will apply my apples to illustrate the omni-present Inflation.
It goes by more names than one (or two). Some call it the 'time value of money', others call it 'erosion of savings' or just how 'things get more and more expensive as the days go by' (that makes it three and a really long third name).

The recent price hikes of oil, gold and rice have kept inflation in the news for a prolonged period and yet some people still do not adequately grasp the essence of it. Allow me to take you to Apple World to stare inflation in the eye and walk away the winner.

Imagine a world without money and people buy and sell with apples (red or green doesn't matter but if you insist, I would prefer you to imagine pink apples). Suppose you earned 1 apple today and decided to save it instead of buying a jug of Beer (which costs 1 apple).

Come next year, you lose your job and you take out your apple to drink your blues away. However, by this time your apple is half rotten and a jug of Beer costs 2 apples now.

Back in our world (where apples become half rotten in less than a week and beer costs more than any number of apples), our money 'rots' and the amount of Beer each dollar can purchase gets lesser and lesser. Not to mention the fact that prices will go up (this is worthy of another lengthy discussion but a slight increase of prices is actually healthy for the economy). Now I am not encouraging you to spend all your money before it 'rots' but to take into account which investments can give you a return that is over and above the prevailing 'rotting' rate or more commonly known as the inflation rate.

This would differ from country to country but here in Singapore, any return less than 3-4% is definitely below the inflation rate. That is to say that your money will rot faster than your investment earns. The lesson to learn from this is to pick the right investments to let your money work harder instead of letting it rot away.

For fresh graduates who are still amassing your savings, use the money to watch The Pillowman before it rots away.

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Inflation and interest rates
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20,000 BC

The past 2 weeks have been frantic as I scrambled around Singapore getting my clients to invest their Central Provident Fund (CPF) before the 20,000 BC rule kicks in on April 1st. Once the 20,000 Be Cashed-into-government-coffers rule starts, one may not invest the first $20,000 of both the Ordinary Account and the Special Account.

Now I should probably mention that this post concerns Singaporeans and Permanent Residents of our wonderful republic and you should probably give it a miss if you have never heard of CPF (alternatively you can stay around and be amazed at the intricacy of the CPF scheme).

I will not go into the specifics and details and other boring stuff that I usually steer clear of but you can access them here: http://mycpf.cpf.gov.sg/
Instead this post is about what and how you stand to lose out after this rule kicks in or better known as opportunity costs.

Now what are the implications of 20,000 BC? For a fresh graduate, it could take 3 years or more to amass $20,000 in a single account before the spillover can be invested (assuming an annual income of $30,000).
The key to note is that the interest rates paid out by the CPF Board hardly hedges against inflation. The current rules in place already restrict investors to investments that charge minimal management fees and are generally less risky. At American International Assurance (AIA), funds labeled 'Adventurous' are mostly not allowed under the CPF Investment Scheme (CPFIS).

Yes, there are risks in investing but as a young graduate with more than 30 years of investment time horizon (before I reach 55), I am definitely missing out the chance to maximize my returns once my funds are locked in. The annualized yield of the AIA investment funds of the past 5 years averages at about 20%.

Alas the 1st of April draws nigh. If you have not invested your CPF yet, its probably too late to do it anyway (if you have less than $20,000 in your Ordinary Account or Special Account). The lesson to learn from this is that we should always be on the lookout for changes to investment regulations and financial tools to help us minimize our opportunity costs and maximize our returns.


This post reflects the author's views and is in no way representative of AIA or the CPF Board. Read more ...