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Price-Earnings Ratio

Price-Earnings Ratio

What is Price-Earnings Ratio?

When we look at investment pages or books, authors almost always look at the Price-Earnings Ratio (PER) as basis of their comparisons and decide whether to buy or sell a stock. So, what is this magical PER that they are talking about?

The price-to-earnings ratio (often abbreviated as PER or P/E ratio) is the ratio for valuing a company. It measures the current share price of a stock, relative to its earnings per-share (EPS). PER is also sometimes known as the price multiple or the earnings multiple.

Investors and analysts use PER to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

Simply put, PER shows the current price you must pay per unit of current earnings of a company. A higher PER may hence signal that a company is over-valued, meaning the company is not worth its current stock price and thus not optimal to purchase now. Alternatively, a higher PER may also signal high expectations of a company, thus investors are buying the shares now with hopes of the company performing better in the future, and hence its high share price.

 

Using Price-Earnings Ratio

From above, we can see that merely looking at the PER of a company tells you little about it. If a company has a PER of 10x, is the stock price of the company a bargain? Likewise, if its PER is instead 50x, is the stock price expensive? Instead, PER should be used as a comparison against a company’s historical PER, or the PER of a competitor from the same industry. Since PER standardizes companies of differing stock prices and earnings, we can then compare and see how a company’s earnings fared over time, and how does it compare with its competitors.

PER is commonly used because it provides a simplified process of determining whether the stock price of a company is fair i.e., not overvalued. Thus, investors typically look out for companies with low PER, as this signals that the company is undervalued (stock price trading lower relative to its actual value). Such companies are known as value stocks and this presents a bargain for investors to enter at a low price and make a profit when its price eventually corrects to its actual price.

Let’s look at an example. Two stocks in the same industry, Stock A is trading at $40 and Stock B at $30. If the industry average PER is 20, and Stock A has a PER of 20 and Stock B has a PER of 40, what can we make sense of the numbers? This signals to us that while Stock A has a higher absolute price, it is cheaper than Stock B because you pay less for every dollar of current earnings. However, you can also imply that Stock B has a higher PER than its competitor and the industry, and this might mean that investors have high expectations of future earnings of the stock.

 

Stock Pick

PER is a great and simple tool to help us make sense of a company’s relative position. Without it, the stock price of a company may seem like just an arbitrary number and we might not know how to proceed. Having said that, PER is not an all-encompassing magical formula to stock picking. From the above example, we can see that PER provides us with better clarity into the meaning of the numbers, however we will require more information before we make the final decision whether to buy a stock or not. Investors will still have to do further due diligence in analysing a company’s fundamentals before arriving to a sound decision.

 – Bronson (@bbbrnsn), Financial Services Consultant

In 2020, I Added Unit Trusts To My Investments, Here’s Why

In 2020, I Added Unit Trusts To My Investments, Here’s Why

By definition, a unit trust is a collective investment fund that is priced, bought, and sold in units that represent a mixture of the securities underlying the fund. In other words, your money is pooled with money from other investors and invested in a portfolio of assets according to the fund’s stated investment objective and investment approach.

It offers a cost-effective manner to access a diversified portfolio of investments, as opposed to DIY investing, where you would be buying individual shares and bonds to build your own portfolio. Diversification in a unit trust can happen across various countries, industries, asset classes, etc.

2020 saw the world ravaged by the COVID-19 pandemic. Its spread has left national economies and businesses counting the costs, as governments struggle with new lockdown measures to tackle the spread of the virus. In response, central banks in many countries have slashed interest rates. Bank interest rates have, in turn, been falling steadily.

Naturally, this left me pondering on alternatives for me to park my spare cash holdings to generate higher returns. This is where I started to do some personal research on investments, in turn figuring that I would begin by passively investing first. Cue unit trusts, where it has allowed me to capitalize on fund managers’ insights and knowledge.

A key feature about unit trusts is that they enable me to own a basket of assets in my preferred sector, region or risk appetite. Do you believe in China’s long runway for growth but cannot figure if you should buy Meituan, Alibaba, Tencent, Baidu or JD? Find an Amazon stock too expensive to own? Think that healthcare stocks are still worth a punt but do not know where to start? Unit trusts have all the answers.

Having said all of that, I have always advocated people to have a balance of active and passive investments. Actively investing alone would not be viable, and below are my few reasons why.

It comes with great responsibility as there is nobody to blame. From the weight of your financial planning decisions to the execution of your investment plans, all the responsibility lies on your shoulders.

When we self-manage our investments, it is easy to let our impulses and fears take control.

We may get excited with hot news from Seeking Alpha and choose to punt a hot stock. We may speculate beyond our own financial and emotional comfort level and make decisions that we will regret. We may also make mistakes that affect our confidence and discipline in investing consistently in the future.

Active investments require us to constantly monitor our portfolio. This can be a time consuming, expensive process. For most of us, time is a premium, and this is why I added unit trusts to my investments in 2020, where crucially, they have provided me with the time to pursue my other commitments in life while believing firmly in the acumen of fund managers to grow my money, for me.

– Ben Wong (@psychedsim), Financial Services Consultant

Why You Should Care About CareShield Life

Why You Should Care About CareShield Life

If you are a Singaporean or PR born in the year 1980 or later, CareShield Life is mandatory for you.

The first thing that comes to your mind might be “Huh what is this? Is it another insurance?”

You will automatically be covered by CareShield Life on 1st Oct 2020 or when you turn 30, whichever is later, regardless of pre-existing medical conditions and disability. Basically, CareShield Life is a long-term care insurance which provides financial protection against long-term care costs of Singaporeans in the event of severe disability. Since this is a mandatory policy, it’s better to have at least an idea of what is it about.

Being Disabled In Singapore

The impacts of being severely disabled would cause you to lose the ability to earn an income to support your loved ones and lifestyle. Definitely not an ideal situation to be in but all the more we should be prepared for it.

Let’s look at some statistics by MOH:

  • 1 in 2 healthy Singaporeans aged 65 and above could become severely disabled in their lifetime.
  • The median duration that Singaporeans could remain in severe disability is 4 years, and 3 in 10 Singaporeans could suffer for 10 years or more
  • The top 3 causes of severe disability are cancer, stroke and degenerative diseases
  • Singaporeans with a severe disability would need an average of $2,324 to cover daily living expenses

The definition of “severe disability” is the inability to independently perform at least 3 out of 6 Activities of Daily Living.

However, please note that severe disability insurance can be different from TPD (total permanent disability) insurance.

CareShield Life

CareShield Life is a step forward by the government to deal with the increasing needs of the long- term care of Singaporeans. Though mentioned that it is mandatory for Singaporeans born in 1980 or later, CareShield Life is not mandatory for Singaporeans and PRs born in 1979 or earlier.

CareShield Life is fully payable by CPF Medisave. Assuming the age of 30, annual premiums are $200 and $250 for males and females respectively. The premiums will increase at a rate of 2% a year for the first 5 years.

CareShield Life offers a monthly pay-out of $600 a month upon a severe disability for Singaporeans aged 30 and above. The pay-outs increase by 2% every year until 2025. From 2026 onwards, the rate of increment will be subjected to further review.

Upon a claim at any age, your pay-outs are locked in and will not increase. You would also stop paying premiums. Let’s use Tom and Harry who are both born in 1990 as an example, as shown
below.

CareShield Life VS ElderShield

Before 1 st October 2020, ElderShield was the older and less up to date version of a government provided severe disability insurance plan. Some have even dubbed CareShield Life as ElderShield 2.0!

Below is a table comparing CareShield Life and ElderShield.

All Singapore Citizens will receive up to S$250 over the first 5 years to help pay for the premiums of CareShield Life. Additional premium subsidies are also available for people with a monthly per capita
household income of:

There you have it! Yes, CareShield Life is another insurance plan. However, with its low premiums fully payable by CPF Medisave, lifetime coverage for disability and existing available government subsidies, CareShield Life is a complement to your existing financial portfolio. Hope you enjoyed the article and stay safe!

– Bryan Cheong, (@_bryancheong), Financial Services Consultant

30% of My Monthly Income Goes to Investments, Here’s Why

30% of My Monthly Income Goes to Investments, Here’s Why

The Potential of $1000

Think about the recent pay cheque or allowance that you’ve received, or for my non-married friends, the total amount of Ang Bao money that you’ve received during New Year.

How much was it? Let’s say that it amounts to $1000, then what do you plan to do with it?

5 years ago, in February 2016, if you invested $1000 in Apple, also known as a blue-chip stock due to its long history of sound financial performance, your $1000 investment would be worth over $4800 in present day. This is equivalent to an average yearly return of 36.85%. Imagine having an extra $4800 on hand, you could’ve been splurging on food,
apparels, games etc.

However, most of us wouldn’t have this extra $4800 and why you ask? The us 5 years ago would’ve just probably took to our family’s advice to save the $1000 in our banks, or perhaps spent it away on other luxuries. In many households, saving is still perceived as a virtue but no put things into perspective, the $1000 from 5 years ago would only be worth a staggering $1051 in present day. This is based on the assumption of a 1% yearly interest from the bank. Naturally, the additional $51 may or may not be substantial to you, but from the example above, we now better understand the potential of $1000.

So, Should I Start Investing?

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case” – Robert Allen

Before one begins his journey to invest, it is of paramount importance for him to answer a few key questions, which I like to call the 5W1Hs of investments.

Why?

Why are we investing? To obtain $XX by Age X? For our savings to hedge against inflation?

What is our purpose?

Who?

Who are we investing for? Ourselves? Our descendants? Our parents?

What/Where?

What are we investing in? Where are these companies situated in? Are we familiar with these assets and are they professionally managed?

When?

When is the best time to invest so as to maximize our returns based on our goals?

How/How much?

How and how much do we invest? Through a personal brokerage account? Through a robo-advisor? How much should I set aside for my investments?
For my aspiring investors out there, I hope that the 5W1H framework gives you a heads-up on some of the many pointers one should consider before investing their hard-earned money.

“An investment in knowledge pays the best interest” – Benjamin Franklin

Learning how to grow one’s money is an essential skill in the 21 st century. Are you ready to kickstart your very first investment?

– Javier Liu (@lkatjavier), Financial Services Consultant

A Simple Introduction to Taxes

A Simple Introduction to Taxes

Ever wondered how do you reduce your income tax? Well, the size of your tax bill is dependent on your income, expenditure, and deductions from 1 January 2021 to 31 December 2021. As the year has just begun, here are some ways to reduce your tax bill for the Year of Assessment 2022 (YA 2022).

With the implementation of the new Personal Income Tax Relief Cap in recent years, the policy “New In Year Of Assessment 2018: Personal Income Tax Relief Cap Of $80,000” limits the total amount of personal reliefs an individual can claim to $80,000 per YA. If the cap is already reached, taking further steps to boost personal reliefs will not reduce your tax bill.

This cap only applies to personal reliefs. Allowable expenses include Employment Expenses or Cost of Renting Out Your Property, donations, and other tax reliefs, and they do not fall under this cap. You can make use of IRAS’ income tax calculator to check if you will be affected by this cap, though according to IRAS, the “vast majority of taxpayers are unaffected by the relief cap”.

You might think that you should always max out as many deductions as you possibly can, but if doing so does not change your tax bracket significantly, you might decide that the effort and opportunity cost of taking certain actions may not be worth it.

Here are the basics of calculating your income tax in Singapore.

Firstly, assessable income. This refers to the total income you earn, and compromises of mainly our salaries. It also includes income received from part-time or freelance jobs, as well as rental income from properties. Do note that dividends from shares are not taxable and there is also no capital gains tax to pay.
The table below is a non-exhaustive list of what are the taxable and non-taxable items:


Next up would be chargeable income. This refers to the total amount that you would be taxed after deducting personal reliefs from your assessable income. As your chargeable income increases, you can expect your income tax payable as a percentage of your total income to increase.

To summarise, the formula is [taxable income] – [tax reliefs] = [chargeable income].

That sums up part 1! Stay tuned to find out what comes next on how you can reduce your taxable income!

– Gideon Boey (@gideonboey), Financial Services Consultant

Why CI Coverage Was The First Insurance I Bought For Myself

Why CI Coverage Was The First Insurance I Bought For Myself

Having Critical Illness (CI) coverage is one of the most important coverage to me because of the huge financial risk that it will pose to the people I love when I am ill and without an income/rendered jobless.

Many believe that if anything unfortunate were to happen, they would have enough to sustain both themselves and their loved ones. However, why risk throwing your life savings into something that could have been prevented simply by having an insurance coverage?

My mum was diagnosed with Stage 3 Colon Cancer when I was just 7 years old. I had just migrated to Singapore that year and being so young, I remember asking my dad everyday why mummy wasn’t coming home again today?

From a dual income to a single income, my dad had to support the family in terms of food, education for my brother and I, and the hefty housing loan. My dad also had to take time off work to take care of my mum in the hospital, accompanying her for operations, treatments, and therapies. At the age of 9, my brother took on the responsibility of taking care of me, my meals, and making sure I reached home safely every single day.

My mum did purchase insurance for herself just a year before her diagnosis, but it was a very small basic coverage $15,000 because she did not know the importance of insurance. That period of time was really hard for my family, and without a good amount of insurance pay out, she had to cut short her recuperation period.

We always tell ourselves that “We’re still young, we’re healthy, nothing will happen.” But CI strikes when one least expects it and it can happen to anyone in this world, regardless of how healthy you think your habits are.

When I first joined the industry in 2018, I knew right away that CI coverage was the most important insurance that I needed. This is because I want to be sure that if such unfortunate events do happen, I am prepared for it and I can focus on the road to recovery instead of worrying about the consequences that it might bring to the people around me.

– Sherill Gan (@sherillgan), Financial Services Consultant

The A.R.T of Risk Management

The A.R.T of Risk Management

Risk comes in many different forms. Be it slipping on a wet surface or having the risk of contracting an unknown disease. In order to better classify and assess our risks, we use the A.R.T of Risk Management. A.R.T stands for Avoid, Retain, and Transfer, the 3 ways we can properly address the different types of risk.

Avoiding Risk
The surest way to prevent any loss or risk is to assess whether a particular action has any potential to put us in a disadvantageous situation with very little upside. Examples of such risks include investing your life savings into unstable shares which could go south at any time. However, this is a risk that can be avoided because it is within your control and it is your decision whether or not you are willing to invest in the shares. Additionally, risks such as illnesses or natural disasters cannot be completely avoided.

Retaining Risk
Health associated risks such as diabetes and high cholesterol can be managed by eating comfort food in moderation and exercising more often, which lowers our risk of getting diagnosed. Another example would include managing the risk of being retrenched – by having an emergency fund which is equivalent to 6 to 8 months of your average monthly expenses.

Transferring Risk
Falling critically ill or getting into an accident are risks that cannot be controlled nor retained and they usually result in dire financial consequences. For example, the estimated cost of cancer treatment in Singapore can potentially exceed S$100k – S$200k depending on how severe the condition is. Additionally, the medical inflation rate in Singapore from 2017 to 2018 is very high at 10.1%, which sets to increase the already high costs of healthcare in Singapore to increase much more in the future!

Many of us grew up knowing that health related risks are the most expensive, but not many people can put an exact number to it and better plan for these circumstances.

Health related risks are also the most expensive but there is a way to transfer these risks to third party companies such as insurance companies. Insurance companies are there to help cover financially devastating situations.

Now that you know the A.R.T of Risk Management, do ensure that you are properly covered to prevent any undesirable situations from happening. Stay safe and most importantly, stay protected!

– Kenny Ng (@kennyngmh), Financial Services Consultant

Building Healthy Financial Habits As A Student

Building Healthy Financial Habits As A Student

Managing your financial assets well as a student is a good habit to begin with as you ease into the adult life. Without proper management, having a high income does not necessarily mean that you will always be financially healthy. Although managing personal finances may sound complicated and daunting, it will not be if we start building healthy financial habits early.

1) You need to understand your cash flow
It is important to understand your current spending patterns to plan for a proper budget. Spend some time to pen down both your cash inflow and outflow, allowing you to better allocate your finances. To ease the process, there are many expense-tracking mobile apps available to track your spending. Make it a habit to record down your expenses after every transaction. (Examples of recommended apps: Monny, Seedly, Spendee)

Examples of cash inflow and outflow:

After understanding your cash flow, set a self-enforced budget plan to stick to. However, a few questions to ask yourself include: “Is my outflow more than my inflow?” “What are some areas that I can improve on?” Always ensure that your cash inflow exceeds your outflow in order to set aside savings.

Also, areas to improve on can include things such as further reducing phone bills by searching for alternatives that may be more cost-effective or choosing to share subscriptions with friends. With your budgeting plan in place, you will then be able to think about your medium to long-term financial goals, which are plans for yourself in the next 2-3 years.

2) Separate your wants and your needs
“Don’t miss the annual 12-12 sale, add to cart now! *cue Lazada and Shopee advertisement*

Sales used to happen once in a long while, such as the Great Singapore Sales, but now it happens almost every month and during any festive occasions. With the multiple promotions and the convenience of shopping on the go, it can be very tempting to spend our money on things that we want, but do not need.

Therefore, it is important to adhere to your budget plan strictly. Write down a list of things that you need to make good use of the sales without buying unnecessary items.

3) Save up!
Lastly, what should you do with the extra cash after setting aside your budget? Having an emergency fund is of utmost importance and this acts as a buffer to keep you out of debt, whilst protecting your everyday lifestyle. It is recommended to have at least 3 to 6 months of expenses set aside as your emergency fund.

It will definitely take time and a lot of self-discipline to develop all of these financial habits, but it will pay off in the long run. By starting early as a student, it serves as a good foundation for yourself before you start working. As your priority changes along with having new goals and commitments, always remember to review your financial situation periodically. Set new budgeting rules for yourself or adjust the amount of emergency fund required!

– Zhang Ruo Lin (@ruolinzz), Financial Services Consultant

I Recommend Getting ECI Coverage For Yourself Early, Here’s Why

I Recommend Getting ECI Coverage For Yourself Early, Here’s Why

“You should be covered for critical illness!”, they all say, and there is good reason for that. What if you are one of the unfortunate ones who have to face the hardships of dealing with an unexpected illness? Statistically, 1 in 4 Singaporeans may develop cancer in their lifetime. Life comes at you unexpectedly and therefore, it is important to be covered for Early Critical Illness (ECI).

You should be covered for critical illness. Being covered ensures that you will not face any unforeseen risks or adverse financial situations. However, being covered for just “Critical Illness” is not sufficient especially in this new era that we are in. With advanced medical technology and a higher awareness for regular health screenings, it is now possible to detect critical illnesses at its early stages and in some cases, even before it even develops to a level where it is irreversible.

In a scenario where one is diagnosed with early stages of thyroid cancer, one would think that just being covered for critical illness is enough. However, the claim will not be able to go through because the critical stage of cancer is not reached. In this case, the current critical illness policy only covers major critical illness thus to receive a pay out, one would need to be diagnosed with a severe or terminal stage of critical illness.

Let’s look at how much a hospital bill costs. We have seen real claims reach amounts of $100,000 just for treatments. With the current compulsory co-insurance structure imbedded into most Integrated Shield Plans, that could be a $5,000 out of your pocket expenses already.

Would you be able to work while you are undergoing regular treatments in the hospital? Would you want to work? Would you want to worry about feeding your family, paying for your mortgage so that you and your family would still have a house to live in?

Or would you rather be fully focused on the road to recovery? Every person I know who is battling or has beaten ECI has never said that they didn’t need that extra pay out. Not one ever regretted getting covered for ECI when they were healthy.

To those who are reading this, know that this is coming from someone who experienced first-hand how critical illness can affect you and your loved ones. I would hate to have you experience what I have. Consult your financial advisor to work out a strategy to get yourself sufficiently covered. There are many options out there that would most definitely fit your needs and your budget.

Don’t wait till it’s too late, get yourself sufficiently covered for ECI today.

– Aisyah (@ai3yah), Financial Services Consultant

How My Personal Accident Coverage Saved Me Almost A Thousand Dollars

How My Personal Accident Coverage Saved Me Almost A Thousand Dollars

In the early weeks of January 2021, I found myself at the TCM clinic nursing an injured finger. The swelling had caused my finger joint to double in size. The cause? A casual basketball match with my colleagues.

That’s the frightening thing about accidents, it always happens unexpectedly. I had just added a personal accident coverage to my portfolio and little did I know, it came in handy so quickly.

A simple visit to the TCM easily set me back more than $200. Weeks passed and I was still experiencing pain and numbness, causing me to go for follow-up visits to further assess the severity of my injury. The X-rays and medication cost me an additional $600. Accidents cause financial strains no matter how small the situation is. Imagine having just a few minor injuries, it will set you back both financially and your everyday life. That is why having a personal accident coverage is important.

Working in a high-risk environment or being quite accident prone might be good considerations for getting started too. Personal accident coverages have always been traditionally used to provide major financial assistance in the event of partial and permanent disability as well. Consider transferring all these serious risks to ease potential financial burdens. The best part? You can get started for less than a dollar per day.

A lot of our elders have said that you can die in Singapore, but you can never get sick. It’s just way too expensive. It’s the same for injuries. Personal accident coverage has evolved over the years too and now includes medical reimbursement for Dengue Fever and even food poisoning, making it ever more relevant in our portfolio.

Starting off with a small coverage for yourself can help in large ways! Many a times when we tell ourselves ‘it wouldn’t happen’, it might actually happen and those are the times when you need it the most.

– Wong Lu Ping (@w.luping), Financial Services Consultant