Saturday, July 25, 2015

SBB or Fixed Deposits?

After reading the Straits Times article yesterday and Kyith's post on Investment Moats, I just wanted to share my thoughts on this.

Here are the 2 data sources, 1 from the ST and 1 from FSM.



As you can see from the FD promos, for 1 year maturity, rates ranges from 1.45% up to 1.8%. Comparatively, to hold an SGS and get similar yield to that requires 4 years.

Knowing this is one thing, but how do you apply this knowledge to decide if you should put your money into a fixed deposit or SBB? This is just my personal train of thought, so I could be wrong.


Of course this table is rather simplistic, but it highlights I think the 2 key factors that affect the quantitative aspect of these 2 products, the returns.

A lot of things could happen in 4 years. Interest rates could go up. People who have fixed deposits would be able to roll into higher rates and reap higher returns. Of course interest rates could also drop down (below zero maybe? Haha) and then fixed deposits would have to be rolled into lower rates making the SSB a better choice.

In short, if you think interest rates will rise, fixed deposits would be better. If you think interest rates will fall, SSBs would be better. If you think that nothing is going to happen, then timeframe will be the decision maker.

Qualitatively, of course the 2 products are rather different. Fixed deposits have higher minimum capital requirements and penalty for early redemption, but they are easy to start and have high maximum ceilings, SSBs start from only $500 and early redemption will come with accrued interest, but they are more complex to start since they require a CDP account and some knowledge of the auction process. The maximum amount is also only $100,000, which is much lower compared to fixed deposits. (Haha, I'm saying it as if it's a small amount!)

However, I think that both Fixed Deposits and SSBs should be used as "Cash Management" tools and it is not a substitute for long-term investing. "Investing" in fixed deposits or SSBs is not a good idea if you ask me. You need to assess your own personal situation, future life events and financial goals to know if you should put your money in cash alternatives, stick it in CPF or use it to invest more aggressively.

I think that money kept in FDs or SSBs should be semi-liquid, meaning that it can be liquidated within a month in case of emergency or a near-term expense. While SSBs liquidation follows a monthly schedule, FDs are quicker to liquidate and this should be a main consideration between choosing between FDs or SSBs. Money that is earmarked to be spent within a few years shouldn't go into investments that have capital risks, so these sort of monies ought to be placed in a FD or an SSB, in my opinion.

I know the usual wisdom is to keep 12 months of expenses in cash / money markets / fixed deposits for quick redemption, however I would like to propose an alternative to this.

Perhaps 2 months of expenses can be kept in cash / money markets or a minimum amount of $10,000 in a FD (since fixed deposits usually require a minimum sum), then the remainder could be kept in SSBs.

Since this "emergency fund" will always be in cash or substitutes, splitting between the 2 ensures you have ample liquidity for the first months of an emergency from breaking the fixed deposit while your later months will be covered after your have placed a redemption order for your SSBs. However, should nothing happen, your SSB amount would be steadily generating higher returns than a FD after the initial few years.

Personally, my emergency fund is with OCBC earning 2.25%, which is much higher than both the SSB and Fixed Deposits. However, if your emergency fund is larger than $60k, then by all means consider these for the excess monies. But just because the SSB and FDs exist does not mean you should put your money there.

I always like this saying that I heard at work recently. "Can it be done? Cannnnnnnnn. Should it be done? Maybe not. Can do doesn't mean should do." 

Now, the next big question is, when should an SSB be redeemed and rolled into another SSB with a higher yield curve? This is a complicated question, but I will try to tackle it in the months to come!

6 comments:

  1. theoractially you can redeem a ssb and 2 months later purchase a ssb at a higher ladder.

    ReplyDelete
    Replies
    1. Apply for redemption is 1st month.
      Receive the money and apply for the next one in the 2nd month.
      Receive the new bond issue at the start of the 3rd month.

      I'm still scratching my head how one would know if they should roll over their SSB into a new bond issue if rates are moving up. Any thoughts on that Kyith?

      Delete
  2. i like simple things so I will keep it simple. for a small capital & flexibility go for SSB, for large capital & inflexibility go for FD. anything in between use a sliding scale & use them partially. for small fries like us we should not try to predict the future i.e interest rate fluctuation too much. it complicates situation but does not lead to much higher return. not a perfect solution but practical

    ReplyDelete
    Replies
    1. Hi GP, I think you are right. Simple strategies are easier to follow through.

      Small amounts - go with SSB
      Long duration - go with SSB

      Big amount or short duration, I think up to preference.

      Delete
  3. Howzabout money market fund? Perhaps an alternative as well.

    ReplyDelete
    Replies
    1. Hi Lizardo, you are right a MMF can be an alternative. However, with the Phillip MMF only returning 0.55% last year, I'm not so sure how useful it would be to anyone.

      Simply having a CIMB StarSaver account can get 0.5% immediately and even 0.8% with a monthly $100 increase in balance. I don't think MMFs are attractive enough at this moment.

      Delete

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