Thursday, March 11, 2010

Land banking - more investors caught

An investor called me. She invested a large sum of money in a land banking project with the promise of 12.5% interest on maturity at the end of 6 months. On maturity, the company did not honor the promise to pay back the investment. They asked her to extend the investment by another 6 months.

She visited a section in Hardware zone and was horrified to learn that many other investors was caught in a similar situation. She refused to extend the investment but the company has not paid back her money, in spite of her repeated requests.

The investor said that she was deceived because the land banking company had a Singapore Quality class awarded by Spring Singapore. She thought that this classification indicate that the company can be trusted to honor its promise.

The land banking company is conducting more road shows and investment talks, and more investors would be caught in this type of investment.

Many investors had already complained to the Commercial Affairs Departments of similar investments during the past year. Apparently, the CAD had not acted on these complaints. During this time, more people are being caught in similar dubious investments. It seems that a few million dollars of investments are being collected each month.

I am really at a loss on how to help these investors who were deceived by these investments. I hope that the newspapers will write a story about it. It should be a crime for the company to take deposits with the promise to return the money with interest, when they do not have a banking licence. How can the Authority stand by and allow such operations to continue?

Tan Kin Lian

Investing in companies

Jack Bogle was the founder of the Vanguard Investment Group -  one of the two largest fund managers in America. Vanguard also pioneered the concept of the indexed funds - funds which are invested to mirror the stock market index, such as the S&P index and carry very low expense ratios.

He explained the difference between investing in stocks and investing in companies. The stock investor takes a short term view and trades on the price of the stocks. The investor in companies takes a long term view and looks at the profits earned and dividends distributed by the companies, and is not bothered with the daily price movement of the stocks.

It is difficult for an investor to pick the right companies to invest in. Jack Bogle advise them to invest in the indexed fund, which is invested in a large number of companies that represent the economy. For example, the S&P Index contains the top 500 companies in America that has operations around the world.

The Vanguard S&P funds have an expense ratio of about 0.3%. This is very low compared to an expense ratio of 2%t o 3% charged by many actively managed funds, including the unit trusts available in Singapore.

It may be difficult to find a fund that charges as low as Vanguard. But it is acceptable to invest in a fund with an expense ratio of 0.5% (such as the STI ETF). Here is the accumulated amount from investing $500 a month over 30 years:

Net yield of 5.5% (i.e. 6% - 0.5%), total of $459,517
Net yield of 3.5% (i.e 6% - 2.5%), total of $320,577

You give away 29% of your accumulated savings of $459,517 to get a reduced amount of $320,577 when you invest in a fund that has an expense ratio of 2% higher.

When you invest in companies, you should not bother about any the temporary y fluctuation in the share prices. Although the dividend may be cut during an economic recession, it will be restored when the economy recovers. You only need to make sure that your investments are well diversified, i.e. the fund is invested in many companies, so that any failure of a single company will have a small impact on the fund.

Tan Kin Lian

A tale of two neighboring countries

My friend lived in Canada and the United States. Although these two countries are similar in many aspects, they are quite different in their economic philosophy.

The Canadians pay higher taxes but are able to enjoy many social services provided free or highly subsidized by the state, such as health care, education and security. The Americans pay lower taxes but have to pay more for their private health care and also to take care of their security.

Although America claims to have lower taxes, they are not collecting sufficient tax to pay for their medicare, social security and unemployment benefits. This has resulted in their large budget. deficit.

Americans dislike the word "socialist". In Canada, socialism is considered to be desirable. He finds the Canadian system to be better for the people.

Tan Kin Lian

Interest charge on installment payment

I saw the following advertisements in the newspaper:

Acer netbook, cash price $599, weekly installment of $5.47 over 48 months
Toshiba notebook, cash price $939, weekly installment of $8.58 over 48 months

In both cases, the installment payment plan charges an interest rate of 0.7% per week, or 36% per annum. By paying cash, the consumer will save on interest rate of 36%.  The total amount payable over 4 years represent an additional 90% of the cash price.

If the consumer pays in cash, he would be able to get two netbooks or notebooks for the same amount payable.

Note: you can calculate the interest rate in this type of transaction by using the Excel function called Rate.

Tan Kin Lian