Transcription
Is there something that Singaporeans don't think enough about? And it's the top mistake, and that is keeping things simple.
Tim Phillips is a personal finance content creator with over 15 years of finance experience, including roles at Schroders, The Motley Fool, and CGS International. He runs Tim Talks Money on Instagram, TikTok, and YouTube.
Now, what is the one mindset that we need to have to be financially independent?
Of people think they need to know everything before they start investing, so they overanalyze everything and they research everything, and maybe they don't ever feel it's the right time. But actually, just keeping things simple and starting is the most critical step because if you start and you can iterate from there, then you'll find out that simplicity is the best way to do it.
So, what is that one thing that we need to invest in?
All right, let's get down to it.
What is the biggest lie, you know, that Singaporeans tell ourselves about money?
In finance, I think the biggest lie is probably safety is in cash assets or in things that are typically considered conservative, right? So, anything like Singapore Savings Bonds, Singapore T-bills. From year to year, you're not losing money, but over 5 years, 10 years, 15 years, your money is getting eroded by inflation. So, there's always going to be something in the news that's going to make us think, "I can't invest because if I do, I will lose money." But the media and the news is built around pushing negativity to us. We aren't going to be clicking on to stories that tell how this company's doing well. When you see a lot of the negativity, a lot of the news, you think this isn't a good time to invest. So, I think that safety or that perceived safety in things that are conservative is, I'd say, maybe the biggest stumbling block for a lot of investors today.
What is that one mindset do you think, given your experience in or seeing how people work with money, right, to be financially independent?
Automate everything so that you take emotion out of the equation. I found that everyone makes bad decisions emotionally when they've done it before. And typically, when there's volatility in markets or when things are around you happening, there's a lot of noise telling you, "You need to do this, you need to do that." And what I tend to tell people is actually doing nothing tends to be the best thing for your portfolio. When you invest, the less effort you try and put into it or the less you're doing, actually, a lot of the times that the better outcome you're going to have. And it's one of those practices where it's not as though the more time you're putting into it, or if you're studying a language, you do that through a virus, you're going to master it eventually because you're going to get better. Investing doesn't work the same way. You're not going to become better, you're not going to get better returns. And actually, sometimes the more you analyze, the more you try and figure things out, times you're either going into the wrong places, you're spending too much time trading it, and you're missing out on the broader market gain. And so, for the basic investor who wants to build wealth, doing nothing tends to be a much better course of action.
So, is right now a good or a bad time?
It's always a good time to invest. The best time to invest was yesterday. The next best time is today. It's never a bad time to invest. I always say this to anyone. They say, "Oh, markets are hitting all-time highs. I shouldn't invest." And then I say, "That doesn't make a difference at all."
Yeah, the volatility, it, that's what I think gets people more uneasy about the situation. And that's understandable because you're thinking on a one or five-day basis or one-month basis. But you should be thinking about your wealth or your journey through wealth building as as a sort of 20-year, 30-year journey.
So, let's localize this a little bit more, right? Singaporeans, right? You know, do you actually feel that given the systems that we have, CPF, the Medisave, and things like that, are we actually financially literate, or are we just very good savers? Is what is the difference between, you know, saving money and building that long-term, that multi-decade?
Yeah, you really need three things to build wealth. You need a savings mindset, which is, I think, in Singapore is great. The second one is you need the ability to earn more money because without earning more money, higher income, you're not going to be able to invest more and then grow your wealth more. The third factor is you really need to invest. That's the whole point of growing wealth. You can't grow it with Singapore Savings Bonds or T-bills, you know, they're part of a portfolio for for your emergency fund and short-term needs, but they're not going to be able to grow your long-term wealth. And I'm not talking about putting your money into crypto and all these other...
Mhm, Bitcoin.
Yeah, yeah. The ability to build reliable wealth, really, you need to invest. And maybe there's a general mistrust or general unease to invest because of the product landscape that we have in Singapore. And this is something that is also not just unique to Singapore, but also in Asia, places like Hong Kong and Singapore.
Planners.
Yeah, financial planners and selling commission-based products. They're driven by the ability to earn commission, not...
By your best interest as a client.
What a lot of people do is maybe they commit to these plans and they realize they've overextended themselves in terms of how much they can commit each month. But because you've got a 10- or 20-year plan, you can't draw down. That really makes a lot of people feel trapped in that type of plan.
And they see it as an easy way...
Yes. To get into investing.
Yes. If a product is put in front of you a million times versus a product is put in you in front of you 10 times...
You're going to choose the one that's...
Going to choose the one that's been put in your front of you a million times because you think, "Okay, everyone's doing this. This is what the default is. You assume is this is good for us. This is right. This is the right way of doing things." So, I think that's one of the key things I've been trying to do with my work is just educate people and just just talk about these things more openly because now that I'm doing my own thing and I'm running my own business, I'm able to speak freely about this these types of products.
What are five everyday habits that's bleeding us dry?
Well, this is very subjective. Anyone has different spending habits, lifestyle habits. You need really need to go through your and audit your monthly spending and see what you spend on. Having my daily coffees that cost uh six or seven dollars, you know, it becomes an expensive habit and it's something that you can save money on. A lot of the times the biggest ones are going to be the usual suspects, right? Eating out, even if you go to a basic run-of-the-mill restaurant, it's it's going to be expensive. Second is travel. Everyone travels and I think with younger generations now, there's that propensity to spend more and just FOMO. So, I think there's a balance. Obviously, you should save and invest, but you also should be able to spend your money and enjoy your money. Beyond that, unavoidable ones like your housing or if you're sending your kids overseas later for education. Again, it's all very subjective, right? But you've got to have a target allocation in terms of saving, target allocation for investing. If you're literally saving nothing, then that's also not responsible. I think if you know what you value and then you focus more of that spending on there and cut everywhere else that you really think isn't worth it, then that for me will lead to a much more sustainable spending plan.
Now, Tim, you know, you have you know, in your career you have sat with people who have earned $5,000. You've sat with people who have earned $50,000, right? But both of them seem to always struggle and say, "I have no money." So, what's happening there?
Obviously, when you start to earn more money, the temptation is to just spend that extra and not really save. So, the lifestyle creep of things and lifestyle inflation, and I think you really need to rein in and resisting that whole keeping up with the Joneses, comparing yourself to friends and peers and family. Yeah, and social media. I think that that environment nowadays creates this dynamic where you're comparing yourself and this person's out in the Maldives enjoying themselves. So, I think that urge for instant gratification that comes up with social media now, that bleeds into the way we think about money, the way we spend our money, and that is not a good thing. So, it's really more a thought or a process of not caring what other people are doing, not caring what other people think of you. So, I think that is one of the biggest hurdles, especially for the younger generation coming up. It's hard to say, "Okay, I'm not going to spend that excess that I earn, and I'm not going to compare myself to peers and to family friends."
So, social media perpetuates that idea of spending money.
Yeah.
Right? Constantly, right? So, in terms of spending habits or money habits, money mindset, what would you say, between the millennials and the Gen Z, okay, what would you say is the primary difference?
I'd say with the Gen Z, it's it's a sort of a YOLO mentality, right? Boomers had a really great run in terms of asset inflation, thinking about housing, people buying properties in the '90s, '80s, '90s. And and basically just being a sure bet you're going to you're going to be able to make money on it. And best time in terms of asset gathering, and then also asset inflation and appreciation. And then obviously, we had that that really big run up in 2008 to 2020. Boomers at that that decade, 2010s, when big tech was roaring, markets were doing great, they just continued to invest and invest more and more. And so, I think that asset appreciation is really and asset gathering is really being inflated during that period. But for youngsters now, Gen Z who are young coming into the work work force, it's almost as though a lot of these things are out of reach. And so, I think it's a feeling of maybe hopelessness or "what's the point" effectively. Um whereas I think millennials maybe were still a bit more positive, but we're later in our career, so we're starting to earn more money, and we see the possibility of investing longer term. And so, I think the allure of going all in on some crypto coin or some meme stock, that's more exciting because there are cases out there where you can earn a thousand percent in a month or two thousand percent in two weeks, and that is exciting. That that allows you to think, "Okay, this is possible." And I think that's probably the biggest mindset difference. Um but I understand that gap, I would say, between millennials and Gen Z because everything's more competitive now as well. You you've got a degree from NUS or SMU or whatever, doesn't mean much in comparison to everyone else who has that degree. So, there's a lot of disruption and unease and with AI, it's all very uncertain. And every generation always thinks, "Oh, when we were young, this was better." Just from example, me watching the football in the Premier League. Like back in the day when you're watching the early 2000s...
It's fantastic.
It's fantastic. And then now I don't get that excited by it. So, I think there are the there are those differences between how we view the past and the nostalgia aspect of things. And maybe that bleeds into you know, your current...
Here.
Yeah, your current way of thinking as well.
Right. So, now we're going to try something out. So, let's just imagine there's a family, like a person who's earned five who earned $5,000.
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Okay, so we we have these different areas. So, visually we hope to show audiences where do you think the biggest um money is being spent. So, now you have some options. So, here's $5,000.
Okay. Actually, this is the wrong way to do it. This is... Can I Can I do it the way that I I would I would expect it? Okay, so what is left is... This is what is left. This is what should be left. What you need to figure out first is how much are you going to save and how much are you going to invest? Obviously, you have your CPF deductions. So, okay, so maybe this is 5,000 after your CPF.
[music]
So, how much do you want to save and how much do you want to invest? And typically, I always say start small and reasonable. So, aim for 10% if you can. Don't start going in 20%, 25% that you can do it because maybe that doesn't allow it. So, unrealistic, right? So, say start with 10%. So, 10% of of the 5,000 you you you got $500, okay? So, you automate the whole process of...
[music]
Investing, of saving. So, it doesn't even be part of your bank account where you can save spend it. So, you put it away immediately. Whether that $500 goes a couple hundred goes to some emergency fund and and then maybe 300 goes to investing, or 300 goes to an emergency fund to build it up, which I always say before you invest, you need an emergency fund, you need adequate protection, so insurance...
[music]
And no debt. High interest debt, credit card debt, not not housing debt. So, put that away first, then you decide, "Okay, now this is left for this."
Right.
So, I think be realistic first about what you can first off save. Um...
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And so, whether it's 10% let's say 500 here. Put that away and then decide within that saving investing part what is emergency fund and cash like assets, whether that's Singapore saving...
[music]
Bonds, or T-bills, or high-yield savings account, and then a couple hundred in in monthly investments or whatever it is. That's done, right? So, that's taken out of your account maybe the day after you get paid.
Mhm.
And then you've got the rest for whatever you need. So, rent...
[music]
Um or HDB hopefully is being limited to so sort of 20 to 25% or 20 to 30% that range. You don't want to spend more than 30% really on on your rent, right? So, say you're say you're doing uh sort of 20% and it's a a thousand, okay? We'll be conserved, we'll be I say generous or maybe I should say 30% or maybe like 1,500. So, say, you know, you've got 2 3 4 5 6 7. Say 1,500 there, transport, so...
[music]
That's 2,000. So, you've got 3,000 left and then I think family commitments, you should try and at least 5 to 10% or whatever.
Yeah, kids stuff.
School fees, classes, enrichment, lifestyle. Lifestyle is for yourself, right? Couple. Okay, lifestyle for yourself. Yeah, travel. Transport, I'm hoping they don't own a car. You could take Grab premiums every day and it'd be still be cheaper, right? So, I did that video and a lot of people get very emotional and upset about it.
New car like a Honda Vezel in Singapore doesn't just cost $180,000. It costs you over $450,000 in lost wealth. But I'm just running the numbers. I'm just doing the cost analysis, cost-benefit analysis, running the numbers, looking at the data, right? Is a car something that if you don't have, are you going to be malnourished? Are you going to not be able to live your life? No. That's how I think about it. So, run the numbers, run the math, do the math. Don't take on more debt just to have this car because everyone else has a car. But I understand because I have kids myself, so I understand with kids it does make it a lot easier. So, I'm not saying you shouldn't definitely have a car. I'm just saying think about the the practicalities of it and what you can save. And then if could you put that money towards something else? That's how I think about it. I'd be saying a car's a car's expenses can be easily a thousand dollars a month. It would be putting a lot of money...
Dollars, yeah.
That's a thousand dollars there. So, you've got a thousand, thousand, two thousand, five. You've got two thousand, five hundred left, all right? So, I would say...
They travel every June holiday.
Food for a family of four is definitely going to be fifteen hundred, I'd say at least. So...
[music]
One, two, three...
A month.
Five, yeah, six, seven. Oh my goodness. Oh, we don't have much left.
[laughter]
I would do that. Oh, so two thousand, one thousand, five. You've got fifteen hundred.
[music]
Okay, let's say eight hundred for food then. I still think that's probably not enough. You're like talking about three meals a day and then you're talking about just eating generally with a family of four. It's a lot, right?
And this is excluding the deliveries.
Yeah, it's excluding deliveries. This is just food, right? Family commitments, lifestyle...
So, this would be like your tuition...
Tuition,
You know, maybe giving your elderly parents some money.
Yeah, I mean the lifestyle for me would not It wouldn't come into it. I personally wouldn't try and prioritize family and not my lifestyle. Yeah, and then it becomes very difficult to to apportion, right? So, it really needs to be intentional about how much you're spending. So, another eight hundred here.
You're running out of money.
Yeah, nine. Put nine here, I'd say, and then just put three here and you got to save up for a few months for for you to be able to do something...
To the Maldives.
Maldives, definitely, definitely not.
So, what's...
[laughter]
Left, Tim?
I would say that's the whole point. There shouldn't be anything left because you've already done this. But, the point is this is what's left. This, your life. This should be done first. So, even if it's 5%, even if it's 3%, save something. Because I think a lot of us go through life thinking this.
Doing it the other way around.
Doing the other way around, thinking, "Okay, I'm going to spend everything and then at the end of the month, whatever's left up, then I'll save." That's the mentality. And then, inevitably, life gets in the way and you're not going to do that. And you're going to end up thinking, "I don't have any money left." But, just take the whole decision-making process out of your hands and just do this first and then you'll see, "Okay, at least I've saved this." And then you're going to have a much better overview of really what you're spending, how much of a budget you have, because after this is done, this is what's left, this is what you can spend.
That's non-negotiable.
Non-negotiable. And I always say, yes, start out small. If you're on 3,000 a month, obviously, it's difficult. It's not going to be easy to do this. So, do it do it small. You've still got your CPF as well. If you think, "Okay, I can continue to ramp that up. Every year I get a pay rise, I can ramp it up another 2 3% per year towards...
[music]
Getting to 20% in your in your 30s." So, I think it's all about consistency, discipline, but also giving yourself or celebrating those wins. But, being realistic about it where again, you're not eating instant noodles and you're not staying in and never enjoying life. So, find that balance, but be able to save it and just ramp it...
[music]
Up slowly over time. So, I think I always say, whatever it is, if you're on 3,000, if you're on 30,000, do this first, then figure this out. So, I always say, your emergency fund should be 6 months to 12 months of your crucial day-to-day monthly expenses with that are necessary. And that should be 6 to 12 months in something like Singapore Savings Bonds or a high-yield savings account, right? Something that's liquid, easy to to attain if you need to. And that allows you to not sell your investments because if you're going to sell your investments when you need it, the odds are you're going to be selling at the worst possible time, when it's at a loss, or it's fallen, or the market's down. And you don't want to do that. You want to leave your investments to compound over time.
When someone says to them that they are unable to invest, so it seems like, [clears throat] you know, do you think that here, looking at all of this, and you mentioned the car?
Yeah.
And of course...
Well, it depends on I don't want to blanket assume on everyone's as- assumption I reasons behind getting a car. There will be people who really prioritize their time. So, that's that's fine. So, I'm not saying it's wrong. I'm just saying, look at the the numbers, understand whether it works for you. If that is something that you think works, it's a luxury. It's not a necessity. I see.
Especially in Singapore.
Yeah, especially in Singapore.
Well, having said that, you know, there's another aspect that Singaporeans do love, credit cards, credit card miles. So, what can you tell us about that? And maybe while we are on that, about credit rating, because that's not spoken about a lot here in Singapore.
A lot of people might say, "Oh, I'm only going to get a debit card because it allows me to spend what I have."
Mhm.
It comes down to the discipline that you impose on yourself to say, "I'm only going to spend what I can pay back at the end of the month with this credit card bill." So, it's an interest-free loan for 30 days or whatever it is after your credit card statement comes in. Then you just pay back what you pay what you spent. And some people will pay the minimum. That's obviously not the right thing to do because then you've got the rest. So, then it becomes 25% interest annually. So, pay your credit card back full on time. And that will allow you to have a good credit rating.
What is a credit rating for those who have absolutely no clue?
It it just assesses your creditworthiness in terms of your ability to to pay back your credit card. If you have too many credit cards, it can also maybe potentially be a negative if you if you applied for so many in a short time, or if you canceled a lot as well. The key thing is to be able to pay back your credit card on time.
Don't have too many credit cards if you're too young. Scale up as you go on. If you can pay back your bills on time, you haven't got any overdue balances or put it on a recurring auto payment where it gets withdrawn, yeah. It gets withdrawn from your account so you don't need to think about it. So, I think these kinds of things that allows you to build up a a more reliable credit score. But, I've always said when you're spending on a credit card, you should have the same mentality as a debit card. You just spend what you have. You don't spend what you what you don't have. But, effectively, the golden rule is you shouldn't really be earning less than 4 miles per dollar rule. A lot of these banks will have specialized cards which give you 4 miles per dollar, and then there's the general which gives you anything from 1.1 to 1.4s. But, if you want to be more serious about it, you really need to be focused on the 4 miles per dollar cards, and that's where you can spend what you normally spend, but then you're going to get three times the miles over time.
So, 4 miles per dollar.
Don't take any less. That's my rule.
Okay.
[laughter]
How would you explain to me what are stocks, bonds, and ETFs?
ETFs are really the delivery mechanism for you to be able to invest into these assets. So, stocks and bonds are different types of assets. Stocks is really a public shareholding that you would see on any stock exchange, whether you buy an Apple or a Microsoft, McDonald's. You have a shareholding in that company. So, the right to the profits that they generate as a shareholder. Equities and stocks, they are more volatile, but they have better returns over the long term. That's really the general gist of it. Obviously, equities over time, there are great companies that rise and great companies maybe don't do as well. But, all the the better companies will continue to rise up. And so, an ETF effectively gives you the ability to buy into those companies as a basket form. So, you're buying maybe 500 stocks like the S&P 500, or you're buying a few thousand stocks globally. Bonds is really much more fixed, so they give you a fixed coupon.
Mhm.
And it's basically they're issuing uh they're issuing debt, and then you buy that debt. Yeah, so whether it's a company issuing debt or whether it's a government issuing debt, and there are different tiers. So, there's investment grade. Singapore's government has the AAA credit rating, so the the best credit rating in the world is only about I think nine or 10 countries in the world that have that credit rating, and Singapore is one of them. So, that's why Singapore's yields and what you can get from Singapore government debt is not very high, right? Bonds are generally less volatile, but much lower but lower return. And so, typically you'd build a portfolio with stocks, bonds, and maybe nowadays you might think about commodities or alternatives like gold. So, I've always said you have those three components really within a portfolio, and the ETF is the delivery mechanism that allows you to access those those assets. Before it wasn't as widely available in ETF, we would have to go through funds or or it's known as unit trusts in Singapore. And those are typically very expensive, and they try to beat the stock market index. Don't want to get too technical, but it's basically the best companies within whether it's a country or a globe. There's Singapore at the Straits Times Index. In the US, you have the S&P 500 Index, and ETFs generally track these indexes of the best companies. And that's really what you want. You want exposure to the best companies in the world. And so, ETFs allow you to do that, whether that's through stocks or bonds or just a single asset like gold. But you really need to take on a bit of risk, and but it's much safer to invest into a basket like an ETF than it is to in just one stock. If you're investing into one stock, you are taking on a lot of risk in also how that company does. But if you have a basket, you're spreading out your risk, so you're not as exposed to just how well one company is doing. So, I've evolved over the years as well as in terms of how I invest.
So, speaking of risk, you know, everyone does want higher higher returns but very very low risk, right?
So, this is another thing that I have to dispel when people come to me. "I want 20% returns, I don't want any risk." Doesn't exist.
Does it? The dream dream doesn't exist.
It's a complete unicorn. It doesn't exist.
Right. Okay.
The average of equity markets is 8 to 10%. Right? There's a decent amount of risk involved generating that return. You want low risk, go into Singapore Savings Bonds, go into T-bills. That's why they give you 2%, 1.4%, whatever it is. That's because there's effectively nearly no risk.
Yes.
I think the key thing for me is when I talk about ETFs as well is I think it gives everyone a better more level playing ground to deal with volatility. They're going to be able to deal with it better if the market goes down 5, 10% versus if you have a stock and it goes down 60 or 70%. You're going to get wiped out. There are rarely instances where the market is going to fall 50, 60%. I mean, it might happen once in a century, but it's not something that happens, you know, year-to-year. So, I think that level of volatility with market ETFs is all obviously a lot less. You don't have that volatility, but that's offset by the fact that it's not going to give you 3,000% in a year. So, you have to take that trade-off. The way I talk about investing is the most reliable way to build consistent wealth consistently doing it versus sitting in cash or going yolo into into some meme stocks. It's a starting point. If you want to go off and buy some individual stocks as well, you can do that in in different parts if you're interested, but I think your core should really be that ETF portfolio where you you build it as a foundation because it's got the history and the data behind it.
So, what is a good age to actually think about this?
When you first start getting an income, that's probably the best time to think about it. Young people now, there is definitely a lot more availability and choice and cost is a lot lower than it used to be. So, I think that's great, but there's also a lot more noise in terms of, "You should invest in this crypto or this..."
Right. Bitcoin.
Yeah, and there's a lot more temptation on other other trades. And so, it's hard to say, "Okay, hey, this is something that reliably gives you 8, 10%." That's boring. You have to accept it is not exciting. But, you might think you're a genius because you've got you made a thousand percent on a stock in a year or two years, right? But can you do that consistently every year for the next 20 years? The answer is no. So, most people can't even professional managers can't do it, you know? I think it's all about consistency, understanding it, automating it, being hands-off, and and being stress-free. And you can find this middle ground, which I think is exactly what I've talked about is the ETF route. So, if you want to be conservative, map out 7%. If you want to be a bit more bullish, you think, "Okay, I can I can do better, maybe 10%." There are all these compound interest calculators out there, you know, that you can just put the numbers in and figure out, "Okay, what would I have saved after 10 years, 20 years, if I'm averaging this?" So, you know, it starts to compound beyond that, and that's the beauty of of investing into something that is that is reliable and consistent.
You spoke a lot about volatility, Tim, because of the volatility of the market and all this risk involved. So, what exactly is that?
Typically, in the true market sense of the term, risk equals volatility. So, but I don't agree with that because that's actually the traditional perception of risk. Sometimes you see this where people have like 60% of their portfolio in one company. It's good if it's doing well, but then is it going to continue doing well for the next 10 or 20 years? And you've got a lot of risk in that. So, typically, risk for me is positioning, is position sizing. If you've got too much of your portfolio in one position or two positions, that's just way too much risk that I would be comfortable with. As someone had said previously, volatility is basically the price of admission. If you want 8 to 10% a year, you've got to accept that the movements in the markets, that that will happen. So, the key thing is how does it look? How does a chart look over five years, 10 years, 20 years? Typically, it'll be up and to the right for the market. But it's not going to be a straight line. There are going to be dips. There are going to be downs. But it's all about the consistency and staying invested.
And also the media presents a very deep. you know, this is will this affect the stock?
The media is communicating a story behind the stock maybe in the short term. Where is Apple going to go in 3 or 6 months? As an investor, your concern is really where market's going in 5, 10, 15 years. And is Apple going to be such a big part of that journey? Maybe not. So, you don't have to really concern yourself with "Is it doing great?" Yeah, how is this going to impact the company over the short, medium, long term? But, if you're an ETF investor, you're a passive investor, you don't really have to care that much about it. Then again, people writing the stories just like myself and anyone else. No one knows where Apple's headed. We we can't say with any certainty. It's all speculation and guesstimation at this point.
Actually, what is happening to our money when it sits in the bank, Tim?
The false sense of security that I talked about earlier, it's basically your purchasing power over time is going to go down because if your interest rate on your savings, say is 2% and inflation in Singapore is 3%, that means your money is losing 1%...
Mhm.
...per year. But, that's the numbers that you see the Singapore Statistics Bureau come out with. But, maybe real life feels a lot more than 3%, whether it's your kids' extracurricular class or whatever they're taking on. Maybe the bills are going to go up and maybe medical expenses are going to go up higher than 3%. You really need to just continue to grow your money above inflation. And the best way reliably long term is through equities, is stocks. And then they they deliver sort of 8 to 10% annual over time average. You know, every not every year you're going to get that. Every some years you're going to get 18, 19%, some years you might get negative five or 10. So, you really need to think about it as an average and not get fixated on that one-year return or that two-year return. It's about the 20-year, five, 10, multi-decade, multi-decade return.
Right. And now we come into this other thing which is quite common. I think all of us have heard of this before, investment-linked policies. Could you explain to us what is it? And oh my, should we be buying into it?
Let me first off say no, definitely not. You should definitely not be buying into it. So, it's an investment. You're buying an insurance policy. That's the unfortunate reality is I'm buying this and I'm paying these premiums and I'm going to get a level of protection, right?
Mhm.
And what they don't tell you is what are you paying on the fee side of things? They can eat maybe sort of 30 to 40% of your returns.
Mhm.
That means it gets taken out of your units, but you don't see it. There is the investment component which I'll I'll explain first. It's basically okay, you invest into this ILP, they will suggest funds for you to invest in. What funds are they suggesting? It will be a very expensive fund that's actively managed and they will be trying to beat an index or market. They'll typically charge 1.5 to 2% per year. And how much does a low-cost ETF which can effectively do the same thing...
Mhm.
...usually charge? About 0.2%, maybe even lower, 0.15%. Again, it compounds. So, they take it out of your overall assets, how much you have invested every year. So, if you have 10,000 at the beginning, they take 1.5% of that. If you have 100,000 after 10 years, they take 1.5% of that. Obviously, that eats a lot of your returns, but beyond that, these funds typically can't beat an ETF anyway. They They have active managers which over 15, 20 years they took proof they can't do it. 90% can't beat them. So, that's already bad. Um and then on the insurance side, what you have is just not enough protection. So, I always say to everyone who has this option presented to them, you don't need to be an advanced math person to just do the basic math. Understand what that 1.5% is doing to your capital over time. It's destroying it. So, instead of maybe growing at 8% over 10 or 20 years, it's growing at 6.5% or 6%. So, people always say, "Oh, but it's still I'm still growing." Yeah. That's not the point. The thing is you've got to understand what you're giving to the company that's selling it to you. It's not allowing you to grow the wealth that you should be entitled to the rate that you should be entitled to. As I've said this previously, complexity in investing is high fees in disguise. But even in the private banking space, private wealth space, there's a lot of very complex products that are actually just terrible products. They're very bad products. But because they're presented in a very complex fashion, it makes you think, "This is a really interesting. I'm I must be missing something or this is good."
Is that complexity intentional?
Sometimes I think the people who are even selling these ILPs don't even know. You know, I don't think they understand exactly how it works. Yes, so I just don't think it's a good product because there's just too much complexity wrapped in it. So, that kind of a complexity, I think, allows fees to really drag down your returns. And so, simplicity in investing, it almost seems too silly. It's almost you can't wrap your head around, "Why would I be making money on on something so simple?" Um, can I make that money in an ETF? And the answer is totally 100% yes, you can. But it doesn't benefit whoever's selling it to you to to sell you an ETF. So, late Charlie Munger, who is a great associate of of uh Warren Buffett, he had a great quote. He said, "Show me the incentive and I will show you the outcome." And that's exactly how it works with ILPs and a lot of other products in the space in Singapore. And the outcome tends to be not great for the client, but the outcome for the the selling agent tends to be pretty good, right? Um and I'm not saying people who sell it is is they're they're it's they're bad people, unethical people, because it's totally driven by the incentives. So, I think it's product-centric, I would say, in Singapore and and also in Hong Kong and other places in Asia. And it's not really solution-oriented. It's more about selling the products first.
In Singapore, we have our CPF. It's like we look at it as like forced savings and then yeah. And then we have Medisave, HDB loans, and everything. So, you have these government systems in place that help us live that life. Is that a pro or a con? And what does that mean that we should be doing outside of that?
Right. No, I definitely think it's a pro. I I think the system here is is super supportive, super generous. CPF Life is one of those systems that is really underappreciated in terms of how generous it is because it is very generous and it is very comprehensive. So, I think that's definitely a pro, but there is more reluctance to go outside of that. I think for you to grow your wealth through your 30s, 40s, 50s, you need to come out of that CPF comfort zone, I would say, and think about, "Okay, how am I going to grow the my cash investments?" And I think with anything, I think if you're looking at investment income, or even nowadays, everyone's taking on side hustles, right? So, you're not just relying on one source of income. And it's the same thing post-retirement. You want to have income from your investments in cash. You hopefully want to have income from from other places. And so, I think for most Singaporeans coming out of that CPF thought, it's more about educating ourselves about what to avoid. And I think that will allow you to make better decisions.
Mhm.
Because at the end of the day, it's not difficult. As I've always said, it's simple, but it's not easy. You've got to put in some time to learn a bit about it, understand how it works. But it's not within it's not out of the reach of anyone. So, whatever industry you're in, you can learn about it and you can do it well. And I think that's the...
Misconception.
Misconception. The barrier to invest now is so low that anybody can do it. And it's super low cost, super easy. So, I think that's the key. I mean, going back to your original question, it's really just educating yourself and being aware of the landscape. But the second part is avoiding the bad things, avoiding the things that can destroy your wealth, whether it's ILPs, whether it's just bad products, whether it's meme stocks, whether it's some random crypto coin you came across. That kind of stuff destroys wealth. And that will yeah.
Goes back to what you said about automation. So, actually, your CPF in MediSave is an automation.
You should actually follow your CPF contribution. It comes out without you even like thinking about it.
Linking it. You don't even think that the money is going in.
Yeah. And so, take that same approach to your cash allocation with investing and saving your emergency fund. And that will just make your life a lot less stressful. I think a lot of Singaporeans actually just use their CPF as a bond allocation, which is which I think is responsible because the rates are so generous again, 2.5% and 4% in your SA is unheard of in other areas of bonds. And then and then you can use that on later on in life for your CPF Life premium. Whether it's your enhanced retirement or full retirement. And then that allows you to maybe take on a bit more risk in your cash in your investment.
One last question before we go. What is the worst wealth advice that you've ever received or you've heard someone receive?
There's so many so many terrible ones. One I've heard recently is, "I'm selling it because it's an all-time high."
What does that actually mean?
So, I'm selling all my investments because everything's high, right? So, I don't know, the market's too uncertain and so I've got to sell everything. I mean, there's always a reason to sell, whether it's uncertainty, whether it's all-time high and you think, "Oh, it's going to crash." And these types of things, they interrupt the compounding process. If you're talking about just behaviors, I think the the one thing is just selling out of your investments because the market feels uncertain, the market feels too volatile. Typically, 3 months, 6 months later, 99% likely you're going to regret it because the markets will probably hit new highs or things. So, people sell out or they do this, but they don't need the money. So, typically when you draw down your investments or post-retirement or whatever, you need the money and that's fine. You need it to live or you need to pay for your kids' education or you're doing something, that's fine. And it's really all down to you being disciplined about it. Generally, the worst outcomes with money and investments come from emotional decision-making. That's how I would frame it in short is emotions equals bad outcomes.
[laughter]
So, don't make financial decisions...
On based on emotion.
Never good.
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