So I had lots of time to reflect on business and life because I have been trying to stay in and avoid crowds. This COVID-19 virus has opened my eyes to a number of issues surfacing with growing unemployment, businesses unable to operate and market crashing. Here are my takeaways.
1. Financial prudence & a healthy cash reserve
When I became self-employed in end 2018, I minimized my overseas travel significantly. Prior to that, I can travel as much as 2-3 trips to Europe in a year on top of my Asian travel. This doesn't mean that running my own practice suddenly made me a pauper, but it's simply financial prudence. Starting up is always the hardest phase and regardless of income streaming in, you need to build up a cash reserve to fend for period like now.
Back when I wrote this article, I recall getting questioned if I was overly cautious. 6 months of expenses is sufficient some said. Some even challenged if someone is earning $20K/month should they also set aside $120K worth of emergency funds? Well I feel vindicated now because businesses are expected to remain slow till year end. Some people are asked to leave their jobs and many have gone on no-pay leave or pay-cuts. Did you know that I've a number of friends in various affected industries in mid-management that have voluntarily gone on no pay leave? 1 top-tier or mid-tier management sacrifice can save a few lower income jobs. Do you think people will be so generous and sacrifice if they do not have savings? Cynics might say they have no choice, but I know the friends I know really care. I also like to add that most banks have a priority segment. These segments have minimum entry levels of $100,000 and most a minimum of $250,000. There are a lot of rising affluent in these segments especially the $100,000 mark. So my answer is yes, high income and low income earners also need to save their emergency funds.
Frankly, if I didn't have my 6 months reserve, I doubt I'd throw my letter and leave my comforts of a predictable income. I wouldn't want to sugarcoat the process of starting a business. The first 6 months were the toughest and most uncertain. What having a reserve taught me though was the ability to function rationally and make well considered decisions. For example, I might be banging every door, chasing everyone outside train stations and shopping malls with survey forms everyday if I had no savings and not sufficient income to pay my bills. Certainly I would not have exhibited the patience to start this social media endeavor that has since enabled me to work through word of mouth and also service people who are indeed looking for help in the financial planning space. Even now, where we are highly encouraged to minimize face to face exposure, I've the luxury to contemplate if I want to use this period to prepare and build other aspects of my business like maybe explore rolling out videos or publishing a book.
To begin with, if as a financial advisor talking about money management, I've no reserves set aside, it's weird right?
So how should we approach financial prudence in a practical manner?
For starters, I think the beginning of financial prudence is about spending within reasonable means. I think the trouble with a lot of people who don't have these emergency funds set aside is they tend to over-pamper themselves when they haven't earned this luxury yet. A second hand car, a first hand 1.2CC car or a first hand 1.5CC luxury car does the same function but they don't cost the same. So I'd say, 1 approach is cut back on your spending and save that money. Oh yes, I don't mean cut back on your everyday luxury (like bubble tea) and then take that money to blow it all on a 2 week holiday at year end. Emergency funds is all about only utilizing it when all your usual forms of financing has failed because something unexpected like a Coronavirus happened, not because you accidentally bought something you like and overspent. Put this savings in a bank account where you cut up the atm card, don't set up an internet banking account and make it as inaccessible as you need to in order to get your emergency funds in order.
If you are like me who hates compromising on spending then the alternative is to increase your income. There's a reason why I take great pleasure in studying how we can increase income because I believe there's only so much we can cut in expenses without becoming unhappy.
Why do you think I keep writing articles on ideas to increase income? Having more disposable income gives you more breathing space to save.
So there's only 2 ways to focus on increasing income. You either become so good at what you do, your immediate employer decides you are worth more and you get to ask for pay increment or you do something outside your work to get more money. In my case, I invests a lot in other skills sets like trading derivatives that allows me to earn some money even if I end up in quarantine for any unfortunate reason. Of course, you need to have sufficient financial soundness to start. This form of investment also makes me better at my job because I can have more constructive conversations with a wider spectrum of clients.
2. You need a balance of predictable income and fluctuating income to retire well
The financial community in Singapore seems to be sharing this article quite a bit. The question of whether will a market crisis set your financial freedom/retirement dreams back.
So apparently this article is about the FIRE (financial independence retire early) movement. The article highlighted how some peoples' retirement plans are messed up now because their portfolios are down 30%-40%. This article may be overly sensationalized because my understanding of FIRE touches on mathematically working out how much they would need in terms of passive income or lump sum that covers their expenses before they retire. So those who apply the concept properly would have already worked out how much buffer they need to weather through crisis prior to retirement. If you retire before 40, you have to minimally expect to weather 3 - 4 crisis during your lifetime. Anyone who thinks they would be exempted from it and exclude it from their FIRE considerations is honestly naive.
So during my first job as a personal banker, I met this man who told me that he had to push back his retirement by 4 years because his original retirement was planned to happen in 2008 and the bulk of his savings were in the stock market. So going through this COVID-19 market crisis, and seeing such articles, I'm reminded of this story.
Just like an emergency fund, retirement planning should always be a combination of predictable income and fluctuating income. Ultimately, you will panic and worry if your sole source of resources swings up and down 30-50% when you are dependent on it. Perhaps it's due to my work in risk management, I tend to consider the downside risk first over the potential upside. Anything with 100% no guarantees like the stock market will definitely promise a greater upside but with an uncapped downside.
So what's the downside risk in retirement planning? Your fixed expenses. Regardless if today is a COVID-19 crisis or a Lehman Brothers crisis, you need to pay for your utilities, your food, your transport, your hospitalisation plan, property maintenance and taxes. So rain or shine, crisis or not, you need something predictable to cover these costs. One way to secure your future might be ensuring that your fixed non-negotiable expenses are covered by instruments like your deposit accounts, CPF payouts, annuities, retirement plans or a combination of a few of these. Only when the downside risk is settled, I would consider risk asset classes. Ultimately, instruments with higher risks are expected to give bigger pay-offs which in turn will provide more options for a better quality retirement.
Why is securing the downside so important during retirement?
There are a lot of perks investing in the stock markets such as easy to put in money and to take them out. If you invests in the right companies their value can appreciate quite significantly. You also enjoy pretty attractive dividends for certain counters and if you buy enough, you get decent income... the cost to enjoying these benefits however is the market swings. Good times, stock markets go up and naturally during a recession, it comes down. When you don't exit in time, your funds stuck in a crisis can nose-dive by 30-50% or more. Rationally, if you are a seasoned investor, we know that market crashes have historically proven to be temporary. However, if this is your retirement fund and you see it reducing by large percentages daily, weekly or monthly, you might somehow cave in to emotions and liquidate your position essentially realising the losses.
When this happens...
You suddenly have less resources during your retirement
You probably have no more additional time to re-allocate your resources to generate a decent predictable income stream for yourself
So you end up in a neither here nor there situation. Even if you don't withdraw, I believe you will have long periods of sleepless nights. Going by 2008 crisis, the drop lasted for 18 months. Would you want to put yourself through that mental torture when you should be enjoying your retirement?
Wouldn't it be nice if all your necessary expenses are taken care of and the funds exposed to market volatility is simply your 'play' fund? This way, when markets are dropping, you can remain indifferent and still remain stress free.
Summary
In short, Coronavirus has given me some insights about money management and it'll serve as a good guide to advising my clients in future. Ultimately, this is the first actual recessionary crisis I'm personally experiencing. I was still in school during the Subprime Crisis.
Two key takeaways:
Have a strong emergency reserve
Have a mix of predictable and fluctuating income during your retirement
A relevant article: 5 Retirement Strategies Common in Singapore
If you want to get started on your retirement planning, do speak with a trusted advisor. Alternatively, you can drop me a message if you would like me to help you with it.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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