Manage Your Wealth Like a Football Team

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.

footballA 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.

How is “Safe” Actually Dangerous? And Vice Versa…

Some people may feel that investing in equity markets is dangerous. This is true when you do it for the short term and focus on a single country market. However, if you have a globally diversified portfolio and are able to invest for the long term, you will be able to enhance your returns with a low level of risk.

Here’s a simple question – Do you think the world’s economy will be larger 20 years from now than it is today? More likely than not, the answer is yes. The world’s population will be larger in 20 years, which will lead to more people using/wanting goods and services provided by companies. With an increase in overall demand, companies will be producing more and generating more profits. With greater profits, stock prices and stock markets will rise. The MSCI World stock market index shown below reflects how our economy grows with time.

Credit: Wikipedia
Credit: Wikipedia

Population growth is not the only driver. Human beings are also always demanding a better standard of living. For example in Singapore, we “upgrade” from a HDB flat to a condominium; we drive a small car and “upgrade” to a larger one. As markets like China, Thailand and even Vietnam open up and grow economically, their people will have higher incomes. They will start with demanding basic consumer goods and as their incomes grow, they will want to buy more and better products.

You may ask – If I put all my money in Thailand today, can I expect a definite profit in 20 years’ time? That is harder to predict although there are many good reasons to believe that Thailand will continue to grow. Many countries have faced extended periods of decline before (e.g. Japan in the 1990s). This is why you need to have a well-diversified portfolio across different regions and countries around the globe.

Our annual inflation rates in Singapore for the past 3 years have been fluctuating from 1.5% to 5.4%. This is precisely why it is risky to leave your money in “safer” instruments such as fixed deposits (often yields below 2% annually), because it might be worth less than the amount you would have to pay for your daily needs over time.

Everyone should know the difference between gambling and investing. A trip to casino can be fun but approach stock market in the same way and you will find yourself in trouble. Like a turbulent flight, volatility is uncomfortable and it is easy for anyone to bail out at the first wobble. However, if you are currently in your 20s or 30s, youth is the single huge advantage for you to ride out the ups and downs in the long term. Successful investing requires one to embrace volatility, not fear it.

But if you keep your money in fixed deposits or other “safe” instruments, you do not know if the returns will keep pace with inflation over the long term and that will be a real danger.

3 Mistakes in Retirement Planning

retirementIt is common for young working adults to delay saving for retirement as they feel that they still have a long time before this stage in life.

Suppose you are 25 years old now and intend to retire at age 65. Given the average life expectancy of Singaporeans of 85 years old, you would have about 40 years to accumulate wealth and live the remaining 20 years without a working income.

Among the younger Singaporean parents now, most are only having 1 or 2 children. Due to the fact that the standard of living will increase in future, it is getting harder for our children to survive and take care of us when we turn old. It is not sensible to depend on our government too. Hence, the best way is to prepare now on our own, so that we can enjoy our old age without worries. Here are 3 mistakes you should avoid when planning for your retirement:

1. Saving too little

saving too little

Many people save around $100-200 per month. This is not sufficient if we want to retire at 65, and live a decent lifestyle (eg. travel once a year and eat out once a week). If you save $200/month at 6% growth per year, you would only have $400,000 in 40 years’ time. Naturally, if you intend to retire earlier at say 55, you have less number of years to save and need to thus save more.

2. Starting too late

When we are in our 20s, we save for marriage and our first house. In our 30s, we save for our children’s education. It is only when our children are much older, we begin to start saving for retirement. By this time, we are likely to be in 50s. Even if we begin at 40s, to meet our financial goal, we may need to turn to investments with higher yield. By not managing these higher risk investments properly, we may even lose our savings.

3. Playing it too safe or too risky

If we keep our money in the bank, the low interests paid are grossly insufficient to help us beat inflation. Hence, the purchasing power of your money is actually shrinking. On the other hand, if you do not know how to invest and just plunge into the stock market, you are likely to lose a lot of money. Depending on their risk appetite, there are different forms of investments which are suitable for each individual. The 3 most common forms in Singapore are shown in the following table:

Holding period Investment (low to high risk) Expected returns Risk of Loss
1 year Fixed deposit 1% Very low
5-10 years Bonds 3-5% Very low
17-25 years Stocks 7-15% Very low

For these 3 types of investments, the risk of loss can be minimised with their respective holding period. The riskier the investment, the longer the holding period required, and naturally you can expect higher returns. For younger people, there is an advantage with stocks because they have a longer time horizon to invest before retirement. Hence, it is also important for you to know which stage of life you are at, understand your purpose of saving & investing and select a product which fits your risk appetite.

At age 25, retirement may seem to be something so much later in future. But the later you start saving for it, the greater the amount you need to save. As an article from Lifehack suggests, one of the top 10 regrets (Point 8 in article) in life among people who are about to die is not saving more for retirement. Remember the saying, “You are the young person that can take care of yourself at old age”.