Rate hikes and rate cuts

FED started raising interest rates from March 2022 to curb inflation. Rates were near zero, and the hikes bring it to above 5% over a period of 1.5 years.

During this period, banks enjoyed increased profits since they can loan out money for more interest earnings vs what they pay to depositors. This helped the 3 local banks that have large savings deposits.

At same time, REITs suffered as they had to set aside more money to cover higher intest payments for their loans as they refinance during this period, moving money to the banks coffers instead of paying out as dividends to unit holders.

So Uncle think its always good to balance a portfolio with REITs and Banks. When rates are high, dividends from REITs drop because the money goes to Banks. But dividends from banks goes up, so this goes back to you as investor.

I expect banks to lose some earnings as rates get cut gradually over next 1.5-2 years, while REITs will start to recover as they refinance loans with lower rates.

But I don't think rates will go back to pre-2022 days of near zero. So REITs won't go back to previous highs, while banks won't go back to earlier lower prices. But they will balance out.

End of day, as long as the dividends continue to come out from the portfolio at 5% rate, uncle very happy liao.

Comments

CPF balances 24 July 2024

I think for SA, my balance is considered "self-sustaining" as the 4% pa for SA could ensure my balance will continue to meet the FRS requirement every year until I reach 55. from CPF website, my SA balance already exceeds FRS for 2024. Every year, the FRS increases a little for inflation. E.g. the FRS for 2025 is 3.4% increase compared to 2024. But SA interest rate is 4%, so as long as you already reach FRS amount for current year, you will be fine I think, even if you stopped working (i.e. SA stops having contribution)

Income tax for YA2024

Lesser than previous years due to lower stock prices during vest date. Got lucky. Interest-free instalment for paying income tax spread over 12 months...about $5k per month. Quite a lot of cash outflow per month just to pay tax, but I think this is already low compared to most other countries

Getting comfortable without a salary from working

Not sure if I am there yet. Basically I am effectively drawing down my cash each month, primarily due to 2 things : mortgage and income tax mortgage (after CPF) is about $9k per month income tax is about $5k per month My investment cashflow covers all my other expenses, including utilities, groceries, handphone/internet bills, insurance, property taxes, condo maintenance fees, personal spending. With some input from wife who is still working, I am still out of pocket by almost $11k per month. She will continue to be able to save a decent sum per month and I'll let her grow that and managed it for her via safe investments. Am I comfortable? Not really. I will if I am not out of pocket per month. If I really stop working for good, the income tax amount will go to $0 after 2025. So only mortgage left We can pay off the mortgage but I think I said before, it doesn't make sense since it's our home and we will be locking the money up with little leeway to do other things. So I ...

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