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Net Interest Income – How I Avoid the Largest Fees of All

Updated: Feb 7

I have been asked to write a ‘Investing for Beginners’ article for the longest time…even before I began Money Maverick.

A reason for reluctance is because I’ve seen very little to suggest that most people, including my clients, do not invest at all.

Much more that has bothered me, or what I was keen on writing – is about the psychology of the behavior of present investors.

Examples are the willingness to take

i) low interest in exchange for liquidity, or

ii) just generally significantly inferior investments for liquidity and lower fees.

It’s always boggled me how willing people are to go into 2% guaranteed instruments when they know full well how much more they could make if they committed to long term investing.

Despite an adversity for high fees – there is no fee that would have been larger than the opportunity cost of a high probability returns that’s 3, 4, 6 times what they’re making – and compounded.

If you wanted to become rich like a Financial Institution – it’s not enough to invest like them.

You have to behave like them.

You’d probably ask yourself:

- What do you mean by behaving like a rich Financial Institution?

- Why would I risk my hard-earned savings to what may feel like gambling?

- Why would I lock in those hard-earned savings for years, even decades?

If you’re:

1) An investor with limited experience. You’ve only tried things that you’ve heard about or been recommended by friends, or –

2) Gaining interest through capital guaranteed products only, or –

3) A complete beginner – and you want to understand why you should put your hard earned savings at risk at all.

Please, read on.

Net Interest Income

As an investor, I’ve always wondered what makes ‘Financials’ such an aggressive, profitable equities category. For context, there are 10 main sectors for stock investing that all stocks tend to fall under.

Two categories – ‘Healthcare’ and ‘Consumer Staples’ – e.g. McDonalds, Coke, Johnson and Johnsons – tend to be considered more defensive stocks, since you’ll still need to eat and take meds if you’re sick regardless of Financial Meltdowns.

(And obviously a ton of sub-categories, but).

But ‘Financials’ is an aggressive category.

Banks have the highest capitalization in the STI ETF.

You can see it through its profitability and its capitalization – especially here in Singapore, because OCBC, DBS and UOB are your largest stocks and also have a high history of profitability. They make money and have ‘blue-chip’ elements, so to speak.


The majority of a Bank’s profits come from this concept called ‘Net Interest Income’.

Net Interest Income. Other banks typically have similar, or even higher weightages in how much they profit from it.

Net Interest Income is what the bank makes from interest revenue and subtracting its interest expenses. To put in an easy example:

If a bank has a portfolio of $10 billion earning an average of 8% interest, the bank's interest revenue will be $80 million.

The bank has outstanding customer deposits of $20 billion earning 2% interest, then its interest expense will be $40 million.

The bank will be generating $40 million in net interest income ($50 million in interest revenue minus $24 million in interest expense).

So a bank could...

1) Borrow your money

2) Invest it

3) Gains 12% from the market (for example)

4) Gives you back your money when you ask for it at a 2% rate.

That’s a lot you paid in ‘fees’, all because you wanted the ability to take out your monies whenever you want.

And you could apply this concept for anything that is an inferior investment to what you could be accessing.

Can we Mimic ‘Net Interest Income’ in our Financial Lives?

On paper, the answer is very much yes. The evidence for success is pretty wide.

Net Interest Income is typically derived from long term Loans and Securities – so if you look at your mortgage or your future mortgage plans, you rarely see tenures that are shorter than 15 years.

For those DIY insistent, even the SNP500 has had tangible 5 year results.

Retail SNP500 ETF

Just don’t expect the same for the STI ETF.

Classic STI ETF.

SEE ALSO: The STI ETF is NOT for beginners... No matter what the Internet says

Unfortunately, the evidence for failure is also pretty huge.

Dalbar defined nine of the irrational investment behavior biases, and the biggest of those problems for individuals are the herding effect and loss aversion.

Those two behaviors tend to function together, compounding investor mistakes.

As markets decline, there is a slow realization that “this drop” is something more than a “buy the dip” opportunity.

As losses mount, the anxiety of loss begins to mount until individuals seek to “avert further loss” by selling.

This is likely due to a tremendous lack of context.

For example, some of the funds I listed above would have U-Shaped periods where a lump sum would basically go three years without making money, declining for over 14 months before struggling back up with occasional signs of sharp decline again.

Most people who have invested into a fund with zero context wouldn't have known this or prepared themselves mentally for it.

With no context, most investors – especially as part of a herd – would have a hard time dealing with seeing their hard earned savings dropping across weeks and months at a time, with their hopes continually dashed.


From the following - it is clear that the easiest way to make money from investing is to look at the long-term.

Across long enough time periods - most sectors and geographies do not lack for investment returns at all.

While fees continue to be overly emphasized in importance, the reality of most people’s inability to derive value from the market is through poor financial behaviour - such as the inability to separate from herd mentalities, or to understand the context.

Even a dollar cost averaged, 6.5% return actually looks quite wild.

SEE ALSO: How My 5.2% Investment COMPLETELY Destroyed Another's 6.5% by almost $300,000

Without context, guidance and an explicit knowledge of the market, most investors under-perform the market due to their own mismanagement of expectations with poor investment behavior.

Money Maverick

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Dalbar, 2013 - via MarketWatch:

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