The 2021 Madness. What's Next

The 2021 Madness. What’s Next?

The 2021 Madness. What's Next
The 2021 Madness. What’s Next

The past 2 years have been madness. I believe you saw how COVID-19 took the world by storm. Your company might have been left paralyzed, our governments scrambled and ordinary people that you know became separated from their loved ones.

Just as we think that things are becoming more stable, Omicron emerged. When will this ever end?

First thing first, for readers following Wealthdojo, I would like to thank you for all the support you have given by sharing my articles. It is really a pleasure.

As you know, it is a yearly tradition to write a reflection of the year so that we don’t miss the lessons we learnt (Read More: 2019 Reflection. 2020 Reflection). In this annual 2021’s reflection, I have a new epiphany.

What if things never really ends and these will continue forever?

History In Context

100 Years Of History And The Stock Market
100 Years Of History And The Stock Market

In the last 100 years, things were crazy. If you travel through time to the 1900s and tell someone that you can find all the information in the world in a 6 inch metal piece (smartphone), they will think that you are crazy.

Do you know what else is crazy? Imagine all of these happening just in the last 100 years.

  • 1.3 million Americans died while fighting nine major wars.
  • Four U.S. presidents were assassinated.
  • 675,000 Americans died in a single year from a flu pandemic (This wasn’t even COVID 19. 777,000 and counting died because of COVID-19)
  • 30 separate natural disasters killed at least 400 Americans each
  • 33 recessions lasted a cumulative 48 years.
  • The stock market fell more than 10% from a recent high at least 97 times.
  • Stocks lost a third of their value at least 12 times.
  • Annual inflation exceeded 7% in 20 separate years.

Every single time when we thought things are crazy, we bounced back as a human race to be where we are now. I believe things will be crazier from now on. (Maybe the Metaverse isn’t that crazy after all. More on the Metaverse in the points below.)

The Crazy Things That Happened in 2021

Let’s start with my pet peeve. Over 35% of all the American dollars ever printed by the U.S. government has been printed in 2020! These American dollars are given out for people like shopping vouchers. I cannot imagine how inflation will be like in the near future. This has raised food prices and (unintended so they say) impacted countries like Egypt, Libya, Syria, and Yemen where people are rioting in the streets for having nothing to eat.

We also saw terrible companies’ stock soar insanely high. Companies such as Gamestop (GME), AMC saw great gains. The worse part of it all is that I see speculators trying to rationalize those buys.

One of the biggest property developer in China, Evergrande is on the verge of collapse.

HDB is being sold for millions. Good Class Bungalows are being snapped up like hotcakes in Singapore.

NFT are now sold for millions with the current record of $69 million. Did I mentioned cryptocurrency already? Anyway, here’s the NFT that was sold.

Christies NFT Auction 69 Million
Christies NFT Auction 69 Million

Investing in 2021 is like going to NTUC before PM Lee gives his speech. There will be lot of people buying, stocking up on toilet paper and cup noodles. There will be fair share of people taking photos or videos of situations. It is funny, exciting and everyone will have a story to tell.

Please enjoy my reflections as I reflect on the 2021.

No One Gives a Damn About Long Term Investing Anymore

If they are, they are probably very seasoned investors or part of a Long Term Investing community.

It is not easy being a self directed long term investor. We live in a world of instant gratification. If you want food, just hit the Grab App and you will get it in 30 minutes. If you want a dress, just hit the Shopee App and you will get it in 2 to 3 days. If our internet connection is down for 15 mins, we behave like the world is over. In a world where things comes so easily, the virtue of patience becomes very hard.

The stock market is one where we see unique individuals. Some people treat it as a place to buy high quality companies. Others might treat it like a platform to instantly change their lives by putting all their savings in one company/coin. I don’t think there is right or wrong to this. I just wonder if they do get their intended results.

Social media changed the stock market completely. 🚀🚀🚀. Everyday, we are going to the moon. HODL. 🚀🚀🚀. It almost makes investing looks like it is easy money until it is not. Corrections happen and people suddenly becomes a “long term investor” again. Well.. at least until the correction is over.

AMC TO THE MOON
AMC TO THE MOON: I wonder how this Youtuber is doing now.

I find it so difficult to talk about investing now when their expectation is getting multi-baggers in the next few weeks. If it is not 100%, don’t even bother.

I wonder if people will be ever satisfied by buying and holding quality companies anymore. That being said, my own investment thesis is still investing and holding on to the quality companies in the long run.

Burn Outs Are Real

Do you remember holidays? Holidays are mostly overseas trips requiring you to pay buckets loads of money for you to take a photo over a scenic location. (Kinda look like this).

Burn Outs Are Real
Burn Outs Are Real

Jokes aside, I noticed the lack of holidays causing burns outs among my friends. Doctors, healthcare workers, teachers and people from all walks of lives are reported to have face anxiety, depression and burn outs in the pandemic. It is so hard to walk away from our work now and worse still, we can’t even go for a holiday.

I always thought that holidays were a temporary reset that we need in a driven society. There is always an email that you need to reply. There is always a whatsapp work group chat that you need to give attention to. You are constantly engaged. Although holidays are temporary relief much like Panadol, you might feel that at least it gives you the opportunity to disengage yourself from work and enjoy that moment.

*Important* If you find yourself constantly feeling helpless or trapped, having an increasing cynical outlook of life or lacking motivation, back pains, shoulder aches, gaining those extra pounds around your belly, those might be signs that you are experiencing a burn out. You might need some help. 

I’m not suggesting that I’m an expert to help with burn outs. Pandemic or not, I believe it is very important to take breaks or just a time to do nothing. I can tell you that it is not easy to do nothing. We have NOTHING in our culture that focuses on doing NOTHING. I grow up learning that I should not waste time and I was punished for wasting time.

Took me 5 years to learn that relaxing is not wasting time. This is so important that I’m going to bold and type this sentence again. RELAXING IS NOT A WASTE OF TIME.

Burn outs are real. Take breaks.

The Common Man Behaves Like Experts

Put a smart phone in the hands of ordinary man and they behave like experts. In my university days, I learnt about Bunning-Kruger Effect in Behavior Economics. Dunning-Kruger effect is generally reported as an irrational tendency among certain incompetent individuals systematically to overestimate their true level of competence.

Dunning-Kruger effect
Dunning-Kruger effect

An obvious example is ordinary man or woman becoming “experts” in vaccines overnight and being able to share certain theories. For companies like Moderna who aren’t even sure if their vaccines will work on the Omicron without new data, how can the common man be so sure?

I struggle with this a lot. It seems like everyone thinks there is a conspiracy theory everywhere and they are very convinced about their own theory. The trust in the government is tested regularly with every strain or every spike in COVID-19 cases. Though I feel annoyed when there are heighten restrictions on dining, I believe we are doing all we can to get through this.

Thinking deeply, I believe the struggle of this generation will be to find the right information. We have an overload of information and it is our duty to sleeve through all the noises. I see this in investment as well. There is probably someone you know who talks about Bitcoin and may be earning money if you know what you are doing.

For me, I placed high importance in finding places with right information.

Be Open Minded AND Keep your Eyes Open

I would like to finish off with this statement. I can’t help but feel that the world is constantly changing. Something that might have worked 5 years ago might be obsolete now.

Floppy discs, CDs, DVDs, MP3 players, the pager, overhead projectors, fax machine are just some technologies that once took the world by storm and are obsolete today. The world is changing and so should our minds.

Be open minded.

Be Open Minded
Be Open Minded

I’m currently learning about everything related to the Metaverse and recording them here. You can follow the page if you wish to be updated. I believe that this is an emerging trend and we are still early in the adoption of the technology.

It is also important to keep our eyes open. With the new shiny object in the room, there will be new scams, new rug pulls (I just learnt this term) and new ways to be cheated. Open your eyes and move. There is no guarantee that we will not be hurt but it is important to keep moving.

Final Thoughts

This is probably my last article for the year. Wishing all of you good health and may fortune favor the brave.

What about your reflections in 2021? Let me know in the comment below.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

Will NOV 2021 CPF Changes Affect me

Will Nov 2021 CPF Changes Affect me?

Will NOV 2021 CPF Changes Affect me
Will NOV 2021 CPF Changes Affect me?

2nd Nov marks an important date for many of us. There are changes in the CPF act that will potentially affect us. Please view the original article here. I will help to interpret these changes to those that are affected and how these changes will affect them.

That is the lifeblood of Wealthdojo and I aim to share one Financial Tip a day from my Telegram Channel.

For Retirement Sum Scheme (RSS) Members

If you born before 1958 or have less than $60,000 in your Retirement Account (RA) at age 65, you are probably be in this category. RSS was the main payout scheme prior to the CPF Life.

For the RSS, it will allow you to receive a monthly payout until your retirement saving is depleted. If you continue to work and contribute to your Ordinary Account (OA) and Special Account (SA), the money will sit in your respective accounts. To continue to receive payouts, you will have to apply to transfer money from your OA and SA to RA.

With the new changes, OA and SA saving will be automatically transferred to the RA. There is no need to apply to transfer the money.

I believe this is to make it easier for money to be received by RSS members. Previously, the application might have been a cumbersome process.

For CPF Life Members

As compared to RSS, CPF Life allows you receive monthly payout no matter how long you live.

If you are already receiving your monthly payouts and wishes to contribute more to your RA for higher CPF Life payout, you will have to apply for it.

With the new changes, your new contribution to the RA will be automatically transferred. There is no need to apply to transfer the money.

For People Who Top Up Their CPF

From 1 Jan 2022, tax reliefs will be provided to the giver who tops up the account. The cap for tax reliefs will be set at $8,000 for top up to your Retirement Sum Top Up (RSTU) and voluntary contribution to Medisave Account (MA) for employees.

If you wish to contribute cash top up to your loved ones’ account, the tax relief will be $8,000. This will bring the total to be $16,000 a year.

The top up limit for Medisave will just depend on Basic Healthcare Sum (BHS) moving forward.

If you wish to reduce your taxes with tax reliefs, please be aware of the limits, run your numbers before contributing.

For People Making A Estate Claim From CPF

For un-nominated CPF-monies more than $10,000, all eligible beneficiaries must submit their information and supporting documents to the Public Trustee’s Office (PTO). This could be a long process.

For un-nominated CPF-monies less than $10,000, a beneficiary representative may be appointed to represent all eligible beneficiaries and make one consolidated claim for the dead CPF member’s un-nominated monies.

This representative must be an eligible beneficiary according to the rules of distribution under the Intestate Succession Act or the Administration of Muslim Law Act.

Preferably, you should do you CPF nomination. It is free and took less than 5 minutes for me.

Others

CPF will not retain unclaimed CPF monies after 6 months. No interest will be payable after that. I believe this is to encourage people to quickly claim from CPF.

 

Final Thoughts

Personally, I believe that the new changes are for the better. Certain policies are “smoother” and clearer. Hope it benefits you in the right way. Here’s a summary. In an event of a doubt, please refer back to the CPF Amendment Bill Highlights 2021 here.

Let me know what you think about the changes below.

If you wish to read more CPF, here are our top 5 most read articles.

3 Things To Know Before You Do CPF Shielding

Top 5 CPF Decisions To Be A CPF Millionaire

5 Things You Need To Know About Your CPF

CPF Accrued Interest Trap: Can You Downsize and Retire?

5 mistakes people make using their CPF

 

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

Financial Lessons From The Squid Game

Financial Lessons From The Squid Game

Financial Lessons From The Squid Game
Financial Lessons From The Squid Game

This show from Netflix needs no introduction. Amidst the games, the show highlighted the Korea Economy. One with highly-skewed income disparity, worsening household debt and survival of the fittest amid fierce competition.

South Korea is the 12th biggest economy in the world with a GDP of $1.6T. Singapore is trailing behind at 36th with a GDP of $364.2B. Though they are larger in GDP, it seems like the struggles they have with money is the same as Singapore or even worse.

While watching the show, I keep feeling that the characters behave very badly when it comes to money (or the lack of money). Just a few days after, I can’t help but think that it is an representation of what is happening in real life. (That’s probably why the show resonates to us on some level).

To avoid going down the slippery slope, I decided to consolidate the lessons we can learn from this so that we will NEVER have a situation like this EVER.

Hope you enjoy the read.

Spoiler Alerts: Please do not read this as it contains spoilers on the show. We invite you to come back after you finish the series.

 

We Have Emotions

Financial Lessons From The Squid Game Emotion Greed Fear
Financial Lessons From The Squid Game Emotion Greed Fear (Source: Distractify)

I feel that this is something that isn’t acknowledged much in the financial world. It is often thought that most financial decision can be made logically easily. The basic assumption in most economic literature is that humans are rational in nature. However, behaviour economics proven time over time that this couldn’t be more wrong.

Starbucks Behaviour Economics Financial Lessons
Starbucks Behaviour Economics Financial Lessons (Source: S-Retech)

Consider this, you walk into Starbucks (or any other coffee places) to get your daily small dose of coffee. After looking at the prices, most people end up getting the big cup not because they wanted it but because it is a “much better price” than the medium. If you have also chosen the big cup, congratulations, you have experienced the Decoy Effect.

The Decoy Effects explains how an inclusion of an inferior 3rd choice (medium cup) will affect your consideration of between the initial 2 choices (large and small). When there is a decoy alternative, most people makes decision based less on what suits their needs and what we considered as a more beneficial alternative. This results in people spending more as a result at Starbucks.

This is just one of the many cognitive bias that we experience.

This is why it is not easy to invest in the long run, buying term and invest the rest is bad advice or why buy low and sell high is useless advice. I’m not denying that those are rational. It is logical. But we are humans. We experience fear, greed, anger, denial, lost, guilt, shame, hope, envy etc.

These makes it very tough to be rational in a body where we feel so much. Today, most people only focus on the rational side which makes it tough to have a good conversation on finances. I hope that more and more people can come to acknowledgement with their emotions in future.

You Can Win With The Right Strategy

Financial Lessons From The Squid Game Right Strategy
Financial Lessons From The Squid Game Right Strategy

In this very epic game of tug of war, strength is very important. In the team of 10 people, the protagonist team have 3 ladies, 1 weak elderly and 6 men. They faces off a stronger team consisting of all men.

While it feels like the protagonists team have a clear disadvantage in this game, the weak elderly share his wisdom and experience on how to strategize and win against teams that are bigger and stronger than them.

The protagonists team barely escape death by execute the strategy and winning against a team far stronger than them.

In the financial world, you can consider the 10 people the resources that we have. Some of my peers have rich parents, some are left properties under their names, some have good networks and have parents financially independent. But, they may not be financially as well off.

I also have friends who have siblings who depend on them, a study loan, parents who believes that children is the ultimate retirement plan. In spite of this, some of them do succeed in their financial goals by having a right strategy and executing it well.

Having a strong 10 people/resource is important. It is as important as having the right strategy and executing it well.

Learn From Others Mistakes

Financial Lessons From The Squid Game Learning From Mistakes
Financial Lessons From The Squid Game Learning From Mistakes

In another nerve wreaking game called the glass stepping game, participants are made to cross a glass bridge. Participants are presented 2 choices. Stepping on the right choice would mean safety, stepping on the wrong one would meant death. In any event the participant chooses the wrong one and dies, the one after him/her can choose the right one and proceed with the game.

In this game, it is awful being the first one.

In the financial world, money was first originated some where as early as 5000 B.C., in which tons of literature has already been written. One of the classics of financial books is The Richest Man in Babylon. Many important clues have been record and it is up to us to follow that roadmap presented to us.

Another way is to learn from the people around us. If our parents have achieve a certain level of financial freedom, we can learn from it. If our parents have not achieve any, we can also learn from that too.

In whichever case, there is always something to learn.

People Can Behave Badly When It Comes To Money

Financial Lessons From The Squid Game Bad Behaviour
Financial Lessons From The Squid Game Bad Behaviour

In the final game of the series, Squid game, the 2 protagonists face off in a brutal, savage and barbaric fight. As their lives and the prize money was on the line, they really had a lot to fight for.

I was reminded of estate planning stories and divorce stories that were shared during my recent IBF Certification for Private Banking. Most of the stories were very unfortunate. In almost all cases, humans behaves very badly when it comes to money issues.

A old example happened in 2013 when a Singapore based couple committed “financial suicide”. Both have spend SGD$1.7 million on legal costs – just to decide where the divorce should be heard as well as litigation costs linked to the child. You can find the article from multimedia stations from NLB Libraries. It is written in The Straits Times dated Friday, 2 Aug 2013 by Senior Law Correspondent K.C. Vijayan.

Divorce Case Financial Suicide
Divorce Case Financial Suicide

In a more recent example, siblings are suing their elder brother over 2 properties worth SGD$3.1 million. As the estate planning was not poorly set up, it has resulted in a messy inheritance battle of which relationship will be ruined. Though it is not known what the legal costs are, I believe their relationship will never be the same again.

The Financial Journey

Financial Lessons From The Squid Game The Journey
Financial Lessons From The Squid Game The Journey

In the most iconic game called Green Light, Red Light, participants win by making their way towards the end of the line in a given time limit. They can only move when it is Green Light (when the doll is not facing them) and they have to stop any movement during Red Light (when the doll is facing them).

At the start, the participants don’t really understand what to do. 2 brave souls started the journey but ended up dead. This causes panic to everyone and people scrambled towards the “exit”. Unfortunately, they were all shot dead.

The cooler headed participants began their journey again. Unfortunately, some tripped either because they were moving too fast or just unlucky to bump into themselves. They died in their attempt to reach the end.

As some participants crossed the line and won the game, there were others that couldn’t cross the line and died as well.

In this game, it closely symbolizes our journey with money. In a given period of time (working years), we want to reach the end (retirement). Some people panic when they see others lost money in the investment and ran towards the exit (panic selling). Some people overleverage (move too fast), some people suffers from critical illness (bump into themselves), some people start too late (couldn’t reach the end). In all these cases, it resulted in people having a less than ideal lifestyle.

Final Thoughts

Overall, this show was a dark, ghastful and yet awfully realistic in showcasing the behaviour of humans put in those desperate situations.

I recommend watching a comedy after the show.

What other financial lessons have you learn from this show? Let me know in the comments below.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

Why Dollar Cost Averaging is Not Working On China's Stocks

Why Dollar Cost Averaging is Not Working On China’s Stocks?

Why Dollar Cost Averaging is Not Working On China's Stocks
Why Dollar Cost Averaging is Not Working On China’s Stocks… yet.

The last 2 weeks was a bumpy one for China’s stocks. Technology companies ranging from Alibaba, Tencent, Didi and all the way to the educational sector pretty much spooked investors all over the world. There was massive selling and it seemed to have paused after JD reported good earnings.

Some of these company’s valuation are getting attractive once again as prices corrected in the last 2 weeks. This wasn’t music to the ears for those that are already invested. On the ground, I heard of many investors who took this opportunity to average down (buying at lower prices to lower the average prices). However, some investors seemed to have cracked under pressure and started asking why dollar cost averaging is not working.

Today, this article seeks to explain why dollar cost averaging is not working on China’s stocks… yet.

What is Dollar Cost Averaging (DCA)?

You probably have heard of this term Dollar Cost Averaging (DCA) from a friendly Financial Services Consultant as he was talking about investment. This strategy was made popular to retail investors as a way to invest by reducing the impact on volatility (the ups and downs) in the stock market.

“Time in the market, not timing the market”. This quote always serves as a reminder that investing (not speculation) is about being in the market and not timing the market. (Read More: Why Buy Low And Sell High Is Useless Advice).

Dollar Cost Averaging
Dollar Cost Averaging (Source)

The power of dollar cost averaging is making volatility your friend by buying at regular intervals. It is your objective to own as many shares as possible. In the above example, you are invest $1000 for 6 months.

Month #1: Share Price $10. You will be able to buy 100 shares ($1000/10 = 100)

Month #2: Share Price $13. You will be able to buy 77 shares now ($1000/13 ≈ 77). You have 177 (100+77) shares now. The total capital is $2000. The total value of your shares $2301 (177*$13). At this moment, you are profiting $301.

Month #3: Share Price $6. You will be able to buy 167 shares now ($1000/6 ≈ 167). You have 344 (100+77+167) shares now. The total capital is $3000. The total value of your shares $2064 (344*$6).  At this moment, you are losing $939. Most people starts to open their warchest now.

Month #4: Share Price $10.98. You will be able to buy 91 shares now ($1000/10.98 ≈ 91). You have 435 (100+77+167+91) shares now. The total capital is $4000. The total value of your shares $4776.30 (435*$10.98). At this moment, you are profiting $776.30 again. You are happy again.

Month #5: Share Price $7. You will be able to buy 143 shares ($1000/7≈143). You have 578 (100+77+167+91+143) shares now. The total capital is $5000. The total value of your shares $4046 (578*7). At this moment, you are losing $954 again. Some people start to freak out and wonder why dollar cost averaging is not working. In the case of China, the chart has been one direction downwards and “the moment” in the time for losses are prolonged.

This is the reason why people feel that dollar cost averaging is not working… yet.

Month #6: Share Price $10. You buy 100 shares. In total, you would have 678 shares. Total capital $6000. The total value of your shares $6780. You are profiting again.

You are making volatility your friend

Dollar cost averaging works when there are ups and downs. Currently, as the Chinese market is down, you will feel that it is not working. When the market recovers, DCA will suddenly “work again”. At this point, you will often hear people start talking about their investment gains.

“Time in the market, not timing the market”. 

I had to copy the quote again. Remember that investing (not speculation) is about buying shares of the companies/funds/assets you want through time. Dollar Cost Averaging is just one way that you can consider to invest.

Final Thoughts

You are not alone in this journey. I believe that there are many who have invested in the Chinese market because of good valuation. Of course, there will be non believers of Chinese market because of their tight regulations. At the end of the day, it is about investing with the strategy that you are most comfortable with.

You can buy stock tips. But you can never buy conviction.

Ask yourself if the asset allocation strategy fits your profile. Engage a professional to finetune the strategy. Lastly, do start. With every crisis, comes an opportunity.

With every crisis comes an opportunity
With every crisis comes an opportunity

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

Why Buy Term And Invest The Rest Is Bad Advice

Why Buy Term And Invest The Rest Is Bad Advice

Why Buy Term And Invest The Rest Is Bad Advice Ferrari Joke
Why Buy Term And Invest The Rest Is Bad Advice: Ferrari Joke

Most of you might have read this joke before. Personally, I think it is easy to give a “good advice” like “stop smoking, invest the money and you will get a Ferrari in 15 years”. Realistically, is that true? I discovered that most people do not take context or circumstances into account before giving  “good advice”. This “good advice” might serve as no practical value at all if it is not applicable to the person.

In the financial world, we have many “good advice” around. In this article, I hope to debunk one “good advice”: “Buy Term And Invest The Rest”.

Speaking about advice: I’m a financial planner and here are 3 pieces of money advice no one ever wants to hear.

 

What is ‘Buy Term And Invest The Rest”?

John (imaginary figure) wants to plan for his financial journey. He read a few articles online and discovered that there are many people recommending “Buy Term And Invest The Rest”.

Buy Term: He can consider buying a Term policies for his insurance needs. A Term policy’s regular premium are generally cheaper than Whole Life Policies or an Investment Linked Policies (ILP) that serves his insurance needs (broadly speaking).

Invest The Rest: Because his regular premiums are generally cheaper, he now has more budget to invest in the stock market. He wants to invest in low cost ETFs (exchange traded funds) to reduce any fees. With low charges, this will take care of his wealth accumulation needs.

This sounds great. Personally, I think this is a great advice and a possible strategy for John to consider in his investment journey.

 

Then Why Do I Think It is “Bad Advice”?

Why Buy Term And Invest The Rest Is Bad Advice
Why Buy Term And Invest The Rest Is Bad Advice

This very simplistic advice often do more harm than good. One example that I would like to draw reference is giving advice to someone to lose weight. The secret to losing weight is very “simple”. All you need to do is just “Eat Healthy Food, Eat Less, Exercise More”. Yet, adult obesity rates in the USA (2017) is a shocking 42.4%. If people already knows this secret, then why are there still so many people who are obese?

This is because everyone’s circumstances and context is different! Duh.

Do you know that price of healthier food is around 2X of unhealthy food? For a person who is living from paycheck from paycheck, how would he/she be able to afford this new diet?

Do you know 95% of diets fail? For a person who has been on a donut diet for most of his/her life, would it be easy to follow this diet?

The conversation today is not about diet. By using the example of weight lost, I hope to be emphasize that everyone is different. This same advice could work for someone with a certain set of mindset and circumstances (maybe he is rich, having a 6 hours work week and a can-do mindset). But not for everyone.

 

So Why Is Buy Term and Invest the Rest “bad advice”?

Frankly, this advice works. But it only works with a given set of circumstances and context. You can consider this advice if you resonate with the following.

Balanced/Adventurous Risk Profile

I have the privilege of speaking to many people in my career. I have came across some partners and clients who are risk adverse in nature. They do not enjoy fluctuations in their asset prices nor do they like to see losses in their assets. Their favorite asset classes are typically fixed deposits, endowment or bonds. A stock portfolio may not be very suitable for this person’s character. Imagine if you force this individual to buy the ARK K ETF, I willing to bet that he/she will not be able to sleep well at night.

Long Holding Period

In theory, we should all be like Warren Buffett who has an “infinite” holding period. Buy term, invest the rest works ONLY if the person invest the rest and continues to invest the rest. However, this is something we don’t see practically.

A simple question to ask yourself or your friends would be this: when was the last time you sold a stock?

The average holding period of US stocks is 5.5 months. The average holding period for SGX stocks is 10 months. ETFs are slightly better. The average holding period for ETF is 6 years. If statistics shows that an average someone is only willing to hold for that short a period, then wouldn’t you be “investing the rest” temporarily? Will this help you achieve your financial goals?

I do acknowledge that there is a combination of factors that contribute to the short holding period. One example is cheap transactional cost. This seemingly good benefit actually destroyed wealth all around the world. In the past, transaction costs to trade was relatively higher that people are more willing to do it only when necessary. Because of the cheap transactional cost now, people are entering and exiting the market as if they are buying groceries in the market. Where did the long term investing go?

But my favourite is the “fear of market crash”. From 2008 until 2020, there have been thousands if not millions of articles/youtubers/gurus world wide calling for market crashes every single year. This keeps people from “investing the rest” into the stock market because they are afraid the market will crash every other month (read this again). Missing the five best days when you’re otherwise fully invested drops your overall return by 35%! Missing the best 10 days will more than halve your long-term returns. Research has again shown that not fully invested will have disastrous effects in the long run. Are you really investing in the long run?

Strong Emotional Stability (in the market)

Investing in the market is not easy. It does not matter if it is a passive strategy or an active one. Imagine if you open your brokerage account one day to see your robo-investing strategy lost 20% of your capital, will you feel afraid and fear that it will continue to drop?

I know there are some who will feel excited. However, I doubt this will apply to the general population.

Investment/Financial Planning Knowledge

When you buy term and invest the rest, there is a strong assumption that you know very specifically the kind of coverage you want and the structure for your insurance needs. At the same time, it also suggests that you know enough about stocks or ETFs to invest appropriately for the long run.

I do acknowledge that there are indeed talented individuals out there that really can do it. They don’t spend hours, they spend decades of their lives to master their financial planning.

Are you spending enough time to acquire these knowledge?

So What Is A Better Advice?

An advice is only good when an individual is able to act upon it in his unique circumstances and context. The best advice are often discovered through brainstorming, asking and answering good questions and also working with someone who is good at doing that.

Just like the best companies in the world hire the best minds in their strategy department, you should also “hire” the best minds to help you in your financial journey.

“Buy term and invest the rest” is a great strategy. However, it only works for a very specific group of individuals. You may or may not be suitable for this strategy. Remember, everyone is different.

 

Final Thoughts

I believe it is more important to focus on your priorities and your financial needs instead. It would be wise to rethink if these heavily blogged strategies (buy term and invest the rest) can serve you in your financial needs in your unique circumstances and context.

 

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.