Just like managing a football team, managing your wealth properly requires a good team of players in 3 departments – defence, midfield and forwards.
In a game of football, let’s imagine if we have a team with a great goalkeeper and defenders but without strong forwards, will we be able to win? Well, the best possible result may perhaps be just a draw. In reality, when it comes to managing wealth, many people have made the mistake of being too conservative.
A dangerous thought which they have is keeping all of their savings in their bank accounts, assuming it is the most reliable way to make their money grow. However, they have forgotten the fact that bank interest rates can never keep up with the pace of inflation. Over a long period, the savings of these people will diminish in terms of purchasing power.
On another hand, can a football team do without a dependable goalkeeper and defence? The answer is certainly no. When facing the fierce attacks of an opponent, a team with a weak defence will be in shambles and suffer terribly. Similarly, without proper insurance cover to protect our wealth, if any disaster strikes, a rich man can very quickly become a poor man. Therefore, just like managing a football team, managing your wealth properly requires a good team of players in 3 departments – defence, midfield and forwards. With this analogy, let’s look at these 3 departments in wealth management.
1. Defence: Emergency Fund & Insurance
As the saying “Saving for a rainy day” goes, we should aim to keep an emergency fund of 3 to 6 times of our monthly expenses. This sum of cash will come in handy when events like a salary cut or retrenchment happens. For this emergency fund, we can save our money in bank savings accounts, fixed deposits or money market funds.
At the same time, we should also purchase insurance. For instance, hospitalisation insurance covers your medical bills in case of an accident or critical illness. Surgical fees can amount to over tens of thousands of dollars, and treatment for long-term illnesses such as kidney dialysis can cost more than $20,000 annually. With adequate protection, it gives you a peace of mind that unforeseen circumstances are prepared for. To understand your insurance needs, you can refer to an earlier post here.
2. Midfield: Endowment and Moderate Risk Investments for the Mid-Term
A strong midfielder has to be able to support the forwards and help out in defence. You can think of putting your money in investment instruments with moderate risks, such as savings endowment policies and balanced funds which invests in a mix of fixed-income (bonds) and equity, some with a larger portion in bonds. Alternatively, you can set aside a pre-determined amount to invest every month in global funds. This strategy of dollar cost averaging can help your money grow in the mid-term.
3. Forwards: High Yield Investments
With a solid defence and reliable midfield, if you have a surplus of cash and wish to grow it, you can put your money in investments with high returns and high risks. Such investments include real estate, stocks, currencies or sector funds. For those of you who actively keeps an eye on the stock market, you should have a super-sub forward – an opportunity fund. Every crisis comes with an opportunity. Whenever there is a global stock market recession, we are presented with an opportunity to buy stocks at very low prices, like it were the Great Singapore Sale. If you had bought DBS shares in early 2009 when the price was $7 per share, you can sell them off at $16 per share now and earn a huge profit.
Here’s to your financial success by managing your money just like a football team, or for the matter, any other team sports which requires a defence, midfield and forwards.