A friend presented me a profile of his friend. He asked if his friend needs to invest and, if so, what should the investments be?
Frankly, I do not have all the information to make a proper profile. However, the good news, based on this information and with some inferences based on his life-style, he probably does not need to invest at all till the end of his life. While he may not be extremely rich, he has been quite lucky in his career life. A few things why I say this is:
- He was able to work from 1970s till last year in 2020 when he hit his 70. Frankly, I do not know how many people in such an uncertain gig economy are able to spend almost 5 decades working without any disruption. From the 70s until today, Singapore had undergone runaway inflation in the 70s, recession in 80s, boom in the early 90s followed by the asian financial crisis in the late 90s, terrorists attack on New York WTC buildings followed by the SARs and US recession in the early 2000, global financial crisis in 2008/2009. It was only at this time during the Covid-19 pandemic that he was given the pink slip, and even that, it had already way passed the statutory retirement age.
- Home has been a HDB flat bought in the early 80s. He bought it at $33k, a fraction (approximately 5%-10%) of what people are paying today for the same BTO flat-type. Within a period of 10 years, he completely paid off his housing loan. Whatever he contributed to his CPF, thereafter, went directly to his CPF without any ‘leakage’ to pay the housing loan.
- The wife is still working and does not need to depend on him. Furthermore, the only child is already doing her final year in the university. It is not going to take that long for her to complete her education . Very soon, whatever he has now would be at his complete disposal.
In short, the combination of the above factors should be able to see him through to enjoy his retirement quite comfortably. But this type of scenario is unlikely to happen for the Gen X, the Millennials and the Gen Z, who are now much younger than him.
But he is not at his optimal point
Unfortunately, he is not at the most optimal financial situation. He has preserved too much liquidity for his future needs. The cash that he has now is not working hard for him. It sits idle in the bank, too much for too long. Given his age, he should be be able to draw on the CPF. Even if he were to invest nearly all his cash, his liquidity is still comfortable as he is now able to enjoy the monthly payout from the CPF. After all, he is generally thrifty and healthy, and, it is expected that the CPF payout should be sufficient for his daily needs.
The fact that he has no stock investment did not surprise me at all. These were the baby-boomers who had gone through the tumultuous times during the 50s, 60s and 70s. Keeping a huge liquidity has always been the best security for them since young. Furthermore, the bank interest rates then were generally higher than the inflation rate, except for a few inflationary spikes in those years. When these people were in their prime, Singapore was undergoing a period of huge economic leap. The fixed deposit rates could reach as high as 11%-12%, beating the inflation rate flat. In other words, the friend does not need to invest at all to make money work for him. All he needed to do was to go around to look for the best fixed deposit rate in town to make money work for him.
Another factor that possibly discouraged the working class from investing in stocks was inconvenience. In the 70s and 80s, most of the shares were still in script form. To buy or sell shares, they had to sign over or to present the scripts to the broking house that they trade with within a stipulated number of trading days. It was not easy for a working employee to travel to broking houses, which were mainly located in the downtown area. Travelling on public transports then was quite cumbersome in those days.
Yet another factor could be that those were the years when illegal gambling were rampant. Anything that deals with money transactions without any exchange of physical goods is considered to be a form gambling by the conservative class. It is, therefore, not unthinkable that investing in stocks is considered as a form of gambling. These are the people who always keep a distance from stock investing and would never touch them.
Into the new millennium
But that all changed as we got into the new millennium. The bank interest rate was generally depressed. Today, it is no longer possible to earn a decent passive income through bank fixed deposits alone. The best indication of such extremely low interest environment is that for the past 20 years or so, the CPF has never adjusted its ordinary account rate of 2.5%. The global financial crisis had made it worse as the FED was aggressively pushing down the already low interest rate to near zero to bailout the economy. Hot on the heels were the European banks. Several European banks were, in effect, having negative interest rates. This means depositors literally have to pay the bank to safe-keep their deposits and the banks have to reward borrowers to borrow. When things got stabilized, FED mounted a series of interest hike in 2015 to 2018. But before the higher interest rate could gain traction, out came the Covid-19 and, FED had to reduce the interest rate to almost zero again. To sum it all, one cannot really gain anything from bank deposits in the past 20 years. Even a small inflation of 1%-2% would have wiped of a huge chunk of our wealth over this period. The friend has been extremely lucky in that he was having a job until last year. The salary that went into his account every month had obscured the losing battle that he actually had with the gradual decline in the real value of his bank deposits. All this seemed to have, either gone undetected or just simply over-looked, right from the time his child was born until today when she is almost a 21-year old adult.
It’s a common story
It is certainly fortunate that this friend had been in the job for almost 5 decades without disruption. And, equally importantly, the most basic and, probably the most expensive investment of having a home for most of us now, was so cheap at that time. (Imagine his home at that time could have been bought with just 1000 DBS bank shares today!) The unfortunate thing was he never learn about investment to grow his wealth. His comfort zone continued to confine within realms of cash, bank deposits and, at most, in insurance.
My intuition tells me that this person could actually be looking to grow (or at least to preserve) his wealth. He probably knew of his situation especially during this time when he no longer has an active income. His ego might have stepped in the way to prevent him from picking up the necessary knowledge. In fact, he does not need to be an extremely good investor or taking excessive risk. Just being an average investor investing in income instruments such as reits would provide him a better overall return than he is now with the money in the bank.
The last time I heard was that the friend was still actively searching for a job although he has not been exactly active. It could be that his insecurity, despite his reasonably comfortable financial situation, could have gotten better of him. In fact, his focus now should be how to better manage his liquidity to derive passive income as well as end of life needs and legacy planning. The next thing to focus is on the area of health and medicare. This is the biggest uncertainty going forward. Based on the fact that his dad passed away in his 90s, he still has some 20 years to go.
In fact, he is not the first one in that age group whom I had come across. One of my students was a retiring nurse in a government hospital, who suddenly find herself in such a situation as well. She suddenly felt the insecurity of not having an active income, and had since started to search actively for investing opportunities. I hope she has not been overly aggressive in looking for investing opportunities to make up for the lost time. Investing without proper financial knowledge could put one in a very vulnerable position.
Despite that there are many people who are asset rich and cash poor, there are also pockets of people who are cash rich but asset poor. These people, unfortunately, are perfect targets of financial scammers looking for unsuspecting victims. The fundamental fact is, their financial knowledge is confined mainly to only cash, deposits and insurance.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.