It might be inspiring to learn how rich Singaporeans built their fortune, but the financial advice that works for them may be completely wrong for you.
There’s a lot of financial advice flying around Singapore right now. Some of it is even accurate – assuming you already have a six digit figure in your bank account, or want to turn money into less money.
The fact is, what works for some people won’t work for others. The investment methods of a multi-millionaire can break a median wage earner, and what’s wise for the average Joe could be a waste of money for richer people.
Here are some bits of advice that aren’t healthy unless you’re rich:
1. Invest in Unregulated, Exotic Assets Like Art, Wine, or Jewellery
This is not as dubious as it sounds. These assets do have value, in that they have a low correlation to stock and bond markets. In other words, when stock or bond prices are crashing, rare art or wine may still hold its value. It’s a form of diversification.
Unfortunately, these assets work far better for the rich than for the average person because they require large amounts of capital. Art investments, for example, often start at S$50,000. For an investor with $10 million in the bank, this is not a significant sum. The investor could put twice that amount into an art collection, and it would only account for about one per cent of said bank account.
Should his $50,000 art investment fall in value by 10 per cent (a S$5,000 loss), it would be a trivial loss to him.
But to the average person, who have perhaps S$100,000 after a decade of scrimping, S$50,000 accounts for half of everything they’ve saved. A 10 per cent drop in value would cause significant pain (would you consider it irrelevant if you lost $5,000 right now?). In the event that something goes wrong, such as the art being damaged, the financial damage could take years to repair.
Simply put, the wealthy can tolerate losses that the average person cannot. Exotic investments work for the wealthy, because many of these investments are volatile, and can deliver unexpectedly huge rewards. When a work of art shoots up to 10 times its value, the aforementioned wealthy investor only risked one per cent of his wealth to reap those rewards. If the investment fails, the loss is no big deal.
But when the investment accounts for half of your wealth, or can break you if it fails, it is simply not something you can afford. So no matter how many incredible stories you hear about art, stamps, wine, or other exotic assets, remember it’s something to aspire to. Don’t jump into it right away – focus on building your wealth first, and one day it might be a good deal for you too.
As a rule of thumb, it is not safe to invest more than five per cent of your wealth in high risk ventures of any sort. If you only have $10,000 to your name, you can afford to put maybe $500 into something risky.
2. Property is the Best Investment, So Buy a Second House As Soon As You Can
Property is indeed a great investment…if you have sufficient holding power. When you purchase a property, the interest rate on the property loan fluctuates. There are no perpetual, fixed interest rates in Singapore. This means that monthly repayments can go up quite unexpectedly, and you have to be able to cope with it.
Some investors may claim you will be renting out the house, which will more than cover the cost of repayments. But there is no guarantee of this. At the current time, for example, rental prices in Singapore have fallen by 9.1 per cent since 2013, while property loan rates have risen significantly.
This is not to say the strategy or buying to rent out does not work; it means that aspiring landlords need to have sufficient wealth to handle vacancies, or periods when rental income is insufficient to cover monthly repayments.
If the monthly repayments become too much, you will be forced to sell. But what if the property market happens to be in a downturn, such as the present? Recently a St. Regis Residences penthouse, which was bought in 2007, sold for a record loss of $15.8 million. So it is not true that, whenever you sell your property, you will make a profit.
You have to be able to sell the property when the market is doing well, or at least not during a downturn. This means you must have the funds to keep paying the property taxes*, mortgage, and maintenance until the market improves. If you don’t have the funds to do that, it could mean selling at a loss.
All in, property is a great asset to the wealthy but can be a serious liability if you’re over-leveraged. Just because you are in a position to (barely) afford a second house, it doesn’t mean you should rush out and buy one. But if you have several million in the bank, then even a downturn is just an opportunity for you to buy cheap.
* Remember that there is an Additional Buyers Stamp Duty (ABSD) of seven per cent on your second home, if you are a Singaporean citizen. This means a $1 million condo will cost you an additional $70,000. Will you still make a profit when you sell the house, after paying property loan interests and this hefty tax?
3. Follow Your Passion and the Money Will Follow
You should certainly quit your job to follow your passion, if you have enough money to survive for a year or two without it. We are not being cynical, and suggesting your passion will never make money (although as a matter of fact, some passions are less lucrative than others). Rather, it is that passion is difficult to maintain under financial stress.
Following your passion, and building a viable business around it, require drive and inspiration. The question is, how inspired will you be when you’re down to the last 80 cents in your bank account, and haven’t had lunch in two days? If following your passion requires you to think creatively, or be upbeat and sell, can you maintain those qualities while stressed out about missing mortgage payments?
The fact is, most people can’t. That’s why the ones who strike out to start their own business, follow their passions, etc. have a better chance of succeeding when they already have a source of wealth. Poverty depletes energy. Few people can focus on creating a great painting, coding an incredible app, or delivering a moving speech when they are pressed by financial troubles.
This doesn’t mean that you can’t follow your passions if you’re not a millionaire. It just means that if you don’t have the money, you can’t start following your passions right now. At the very least, build up enough savings to last you a year or two. Give your passions the best possible chance to survive and succeed.
And if you do have a lot of money, by all means follow your passions. That’s (a) the point of having money, and (b) when a wealthy person turns their passion into a business, a lot of people buy into it; they will relate it to your success.
Accurate Financial Advice is Never General
The key thing to remember is that there’s no “one size fits all” approach to personal finance. What works for someone else may not work for you, and that’s doubly true when they’re in an income bracket several levels above or below you.
If you are earning a median wage right now (around S$3,700) a month, you can be sure that some forms of financial advice you’ll get (eg. invest in REITs) are good for you, but ridiculous for someone earning S$1,200 a month.
Just remember it works both ways. The personal finance approaches devised for the rich, which get so much media attention, may be the same approaches that utterly destroy your savings.
Get a proper wealth manager to look at your situation, and dispense advice. Whether you choose to pay them and keep them on later is up to you. But it still beats looking at the rich and trying to imitate them.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.