Thursday, September 18, 2014

POSB Invest Saver 2.0: New and Improved? Example Included


POSB Invest Saver is the Regular Savings Plan (RSP) that is unique to POSB and DBS customers.

I have blogged about my take on the 3 different mainstream RSP plans: "RSP Warz: POSB vs OCBC vs Phillip". The quick summary about the 3 offerings is that your monthly investment amount ought to drive your decision. Low investment amounts should go to POSB, mid range amounts should go to OCBC, while higher investment amounts should go to Phillip.

Well, since then, some things have actually changed!

1. POSB Invest Saver now offers Nikko AM STI ETF and ABF Bond ETF




Now, THIS is what I really have been waiting for. Being able to diversify your portfolio by adding in the ABF Bond ETF is an excellent idea I feel. Investors are now able to make more cookie-cutter portfolios, like the traditional 60/40 portfio.

2. Partial Redemption of units now possible


One of the main gripes that I had concerning the POSB Invest Saver plan that I wrote about in my previous post was that they only offered redemption on your entire holdings. It was not possible to liquidate just portions of your holdings. Now it is possible!

Conclusion

POSB Invest Saver is now the CLEAR winner in this RSP War.

Pros:
- Easy to start (log into iBanking)
- Only 2 choices, but good choices and makes for easier decision making
- Ability to redeem partial amount of holdings
- Ease of changing monthly amount (just log into iBanking)

Cons:
- Highest transaction charges of the 3 RSP providers
- Inability to choose investment date or frequency
- Investment amount is in $100 chunks
- Inability to choose dividends to be reinvested
- Inability to add one-off capital injections (when you strike a windfall or get bonus)

Of the cons, I must admit that they are minor gripes. By fixing the other cons, administrative costs will probably skyrocket and transaction costs wouldn't be able to come down as well. Nothing is perfect. I have emailed them suggesting the last 3 changes though. If they do, I can honestly say that their product would be the best in the market. Even I would consider squirrelling away a small sum every month and treat it as an uncorrelated strategy.

I think that this POSB Invest Saver is the perfect plan for people looking for hassle-free long term investing. Couple this with cheap term insurance and you would have just created your own ILP with much lower costs and extremely high flexibility regarding investment allocation choice and even monthly investment amounts. ILPs horrible products and I do not like them.

This product does specifically well by catering to anyone who doesn't want to go learn the more complex details of how the stock market works, but understands that they should be investing their money to enhance their returns over a long-term period. The low quantum of outlay and the hassle-free process of signing up is really a good stepping stone to introduce those that want to start their investment journey without the stressful feeling like that any mistake they make is irreversible.

Who knows, perhaps with this RSP plan in force and slowly accumulating assets for you, you will build up a huge amount of financial assets that can realistically pay out 3% of it's value at retirement.

Bonus Examples

Imagine this:
You just turned 24 today.
You signed up for POSB Invest Saver.
You decide to contribute $100 to the STI ETF and $100 to the Bond ETF every month
When you are 30, you start contributing $200 a month to each ($400 a month total)
When you are 40, you start contributing $300 a month to each ($600 a month total)
When you are 50, you start contributing $400 a month to each ($800 a month total)
At 55, you stop and you look at the final value of your accumulated savings.
With a 50/50 allocation, the market went up 4% per annum.
Your total contribution of $190k is now worth $310k.
Doing absolutely nothing, you will receive about $9000 worth of dividends/coupons every year.
That works out to $750 worth of dividends/coupons every month.
You shit your pants.

You decide, "Hey, I'm 55, I still want to work until I'm 65".
You stop funding your POSB Invest Saver, but you leave your assets there.
At 65, you finally stop and you look at the final value of your accumulated savings.
Your total contribution of $190k is now worth $470k.
Doing absolutely nothing, you will receive about $14000 worth of dividends/coupons every year.
That works out to $1150 worth of dividends/coupons every month.
You shit your pants.

The End.

In the above example, I used 4% long term average rate of return. I also assumed 3% payout rate from final portfolio value at the end. The only flaw in my example is the reinvesting of dividends/coupons since they are paid out and not reinvested. However, this is just a plausible scenario of having saving up a decent amount can amass a very respectable nest egg.


Thoughts on POSB Invest Saver? Would tell your friends to explore this product if they asked you about investing?

16 comments:

  1. Hi GMGH,

    We might have different views on minimum wage, but that's ok because I knew its a matter of time before we find something in common. ;)

    I personally endorse this product and has managed to convince my siblings to use them for more than half a year. It's probably the best instrument for beginners who are finding their feet in the stock market.

    ReplyDelete
    Replies
    1. Hi Mr 15HWW!

      Different views help give different perspectives! Yes, I am really quite pleased with this product, especially with the addition of the bond ETF. I agree that this is probably the best instrument for beginners. If they allowed lump sum top-ups to be in addition to the monthly plan, I think they would strike gold on this!

      Curious question, did engaging in this product make your siblings more interested in finance and investing?

      Delete
    2. Hi GMGH,

      Hmm...

      They did get a little more interested but I don't know if that's exactly a good thing because my sister approached me regarding investing her CPF savings.

      More interested in getting higher returns can be a dangerous thing.

      Delete
  2. Hi, i actually think ocbc is better in the long run when one increases their investment amount. Also, ocbc bcip supports srs.
    - momo

    ReplyDelete
    Replies
    1. Hi momo,

      I agree, if the person can start investing at least $500 a month. However, I feel most people in their early years of working will also find it hard to put aside $300 voluntarily, let alone more than $500. The high quantum outlay would put them off.

      Secondly, OCBC does not have the ABF ETF as an option yet, but I am quite certain that they will include it soon enough. Having 100% equity exposure is a bit too much volatility for most to handle.

      SRS contributions / investments are usually lump sum, so the strategy of DCA is not as applicable.

      Nonetheless, the difference between OCBC and POSB is marginal.

      Delete
  3. Hi GMGH,

    I'm the NSF who commented on your related post on 'RSP WARZ'.

    In this post you acknowledged that the "flaw in my example is the reinvesting of dividends/coupons since they are paid out and not reinvested."

    Doesn't this flaw essentially rebut your entire post and throw the entire thing out of the window? If you can't reinvest dividends, you cannot compound and the total contribution stays the same isn't it (ceteris paribus)?

    If this is the case what is an alternative to reinvestment, increase the contribution at one-off times?

    As you know I am only scratching the surface of the investing world, so I would like to know what your views are.

    Cheers

    ReplyDelete
    Replies
    1. Hi Mr NSF,

      Glad to see you around here reading up!

      Yes, it is a rather big flaw that the dividends are not compounded. If POSB allows a re-investment option, my numbers should be more accurate given my conditions stated!

      My example wasn't specifically regarding the POSB product, but rather how engaging in constant low dollar value saving and investing can snowball into a large ending figure for retirement, even with a low and conservative 4% rate of return.

      I did not include transaction costs, I only used simple end-of-year compounding (I think monthly compounded is more accurate) and I also did not factor in the dividend payout months. I could, but it would have made my example a lot more messy and complicated unnecessarily.

      When I talked to POSB about this re-investment issue, their solution is to purchase lots directly off the open market when I have additional lump-sum investments to make (ie. dividends to re-invest). That kind of defeats the purpose of automated and regular investing, doesn't it? Oh well.

      If it was me, the month after my dividends are paid out, I would increase my RSP value for the next month so that all my dividends would be re-invested, albeit a month later. After that, I would lower back down my RSP value to my normal amount. Quite silly, but doesn't seem like there is any alternative way unless they allow dividend re-investing or you want to purchase lots off the open market. (gotta deal with your broker, the charges, lumpy investments.... too much of a hassle I feel)

      Alternatively, you can use Phillip Share Builder since they allow dividend re-investment.

      Welcome to this world! It seems like a lot to take in at first, and it feels like there's so much more to learn the deeper you explore, but after a while it does get easier :)

      Delete
  4. Thanks for your reply, GMGH.

    Hmm, in that case I wonder what POSB could mean by saying 'Benefit from the effects of compounding - The earlier you invest, the greater your opportunity to grow your wealth.' under 'f' part 5 of their FAQ & Important Notice on their website http://www.posb.com.sg/personal/investments/trading-funds/invest-saver



    ReplyDelete
  5. Just to add on: Wait, what do you mean by monthly compounded? Doesn't compounding occur whenever dividends are paid out on an annual/biannual basis?

    ReplyDelete
  6. Oh wait...the compounding is due to the appreciation in value of the stock?

    ReplyDelete
    Replies
    1. Hi Mr NSF,

      I just assumed an increase in the returns just once time at the end of the year, on the entire amount invested throughout the year.

      However, in reality, the funds invested in January earns much more than the funds invested in December. A monthly compounding frequency instead of an annual compounding frequency will generate higher and more accurate forecast, however it is also more complicated to calculate.

      Yes, I think they are referring to the compounding of just capital gains then. The STI usually derives 4-5% of its returns from capital gains and 2-3% through dividends, so it is not entirely false marketing.

      Delete
  7. Hi ! I just started the POSB invest saver RSP. Thank you for the informative article . It is a great help to a novice like me. My only concern is that since POSB Invest Saver does not have the option to automatically re-invest your dividends , how do I re-invest my dividends manually ? Thank you and a reply is greatly appreciated . Cheers !

    ReplyDelete
    Replies
    1. Hi Louis,

      I am glad my article helped you understand how RSP products work, and the POSB one in particular. I must caution you that all equity investments, regardless on accumulation strategy, are prone to big swings in volatility. RSPs are a good way to steadily accumulate and build wealth if you don't get cold feet and abandon it, but they are still risky investments.

      As of now, there is no way to re-invest your dividends yet. I think POSB is trying to come up with a way for that soon. Until there, here is a solution that I would use if I was in your sitaution:

      I would accumulate and keep my dividends in my bank account until they have reached $100. The following month I would increase my contribution by $100, and the next month I would reduce it back to my original contribution amount.

      There are many paths to 1 destination, but to me, this is the path I would walk. I hope you find a path that suits you well. Good luck Louis.

      Delete
    2. Hey GMGH, thank you for your reply . I appreciate it very much.
      As I am in my early twenties, my time horizon is between 20-25 years . I believe that the effects of DCA and compounding will serve me well and build up a nest egg for my retirement. I will definitely take note of your insightful recommendation and keep it in mind. Cheers!

      Delete
  8. Hello GMGH,

    I'm stumbled upon your blog after researching through the more on ETFs, and actually am on the POSB Invest Saver as well currently. I'm not sure if you are aware of it, but it seems that we can set up an instruction to reinvest the dividends from this programme. I can't attach images in the comment box but here's the link to the sample via my Drive - https://drive.google.com/file/d/0B_f6F1veOr2OVDVRekl3TDhaWFU/view?usp=sharing

    Hope that helps!

    ReplyDelete
    Replies
    1. Hi Fitri,

      Thank you so much for pointing this out!

      I guess it is a new additional feature that they have decided to add in based on all the feedback that they have been getting. Having the option to re-invest dividends or to receive the payout really is very good for consumers :)

      Delete

Observe the house rules.