Personal finance is a personal topic and circumstances can different for everyone, so it was nice to listen to what others went through during this tumultuous year and what they had to say about managing their money.
In a recent live webinar with Endowus, we discussed some of the best and worst money moves this year.
In a quick sentiment poll, 69% felt that the greatest money management problem in 2020 they faced was low interest rates, compared to job security (19%), cancelling of plans (6%) and having nothing to spend on (6%).
Low interest rates
We have seen interest rates on bank deposits being cut multiple times this year, making it difficult for savers and investors to find a return on their monies. Personally, this was also a problem seeing that interest rates around the world are plummeting close to zero to induce borrowing and spending to stimulate the economy.
With interest rates remaining low, investors are buying into riskier assets (e.g. stocks), chase yields through products (e.g. SingLife, Etiqa’s ELASTIQ) or contributing more to their CPF and SRS (yielding 2.5%-4% p.a. or obtaining tax relief respectively).
It’s inevitable that cash management products are also getting popular. Endowus Cash Smart, StashAway Simple, DIY solutions from FSM One, POEMs are also great alternatives to earning a higher interest rate through cash-like investments.
I wrote an article earlier this year on cash management products which illustrate some of their benefits and risks and overall, they are a solid and safe way to put your idle cash to work.
Money management mistakes in 2020
Dinesh from Dollars & Sense said that his biggest money mistake in 2020 was not having enough cash to take advantage of market drawdowns. His strategy was to dollar cost average into a falling market of at least a 10% drop.
But this year’s market crash in March saw huge drops from its highs and unfortunately there was insufficient cash to buy at the market lows.
I echo Dinesh’s thoughts, and I think one of my mistakes was also adding positions too early during the crash and also not adding enough at the bottom of the crash.
I also spent a lot on transaction fees trading during the volatile period, which came up to a couple of hundred dollars over a few months. On hindsight, it might have been better to just buy and hold over the year, which would not only cost less but also allowed me to participate in the market recovery fully.
Peter from The InvestQuest talked about his regrets on accumulating too much air miles, which he thinks are a depreciating asset as they do not earn interest and there’s a risk of devaluation, since airlines can easily change the program terms over time.
Market recap 2020
Sam gave an insightful run down on the financial markets this year.
It was interesting to note that bonds also fell in prices during the March crash in a unique circumstance where there was a global liquidity shortage in US dollars resulting in the selling of the liquid US treasuries, disrupting even the safest asset class.
Prices fell, yields rose and spreads widened, leading to a one of the biggest disruptions in fixed income in history. Since then, quantitative easing, asset purchases from the Fed helped to stabilise the market.
Even though this year’s market correction was the 5th largest in history, it was also the fastest bear market and market recovery to a new high in history, which didn’t give investors enough time to react to do things that we could’ve done.
Despite the numerous corrections that we thought was the end of the world with major corrections of close to 50%, they were usually rather short, and the right thing to do was not to sell into them but to hold, which eventually led to a newer high given how markets tend to trend upwards.
Investment regrets in 2020
For some of us, this was probably the first market crash we have seen in our lifetime, after more than a decade of market growth. When polled, more than half of the audience said that their biggest investment regret in 2020 was not buying in the market low, or not having enough war chest to buy at lows.
Echoing most of these thoughts, especially for Dinesh, he said that he had already invested most of his money while the crash came, leaving him with insufficient capital to take advantage of lower prices.
Following your investment strategy is also key and having sometimes a coach or financial advisor alongside you can help with managing some of the psychological stresses when it comes to managing your money during a crash.
For Peter, he was thinking during the March sell off that the best time to invest is when there are forced sellers in the market – which he learnt it through work experience. Looking at how past recessions in Singapore had played out, which took an average of 9 to 14 months before it bottoms, he took a more patient approach to investing during a sell down.
However, in retrospect, the recovery came too fast before he could deploy his investment capital completely.
For me, watching the market crash happening so quickly right in front of my eyes was an eye opener. Having a strategic asset allocation that’s suitable for you is important, as I found that having a 100% equity portfolio during the crisis might not be the best option to get a good night sleep.
I found myself rebalancing into a more risk averse asset allocation after a better understanding of my risk tolerance.
On readers’ minds
We also talked what’s on readers’ minds and what are some of the conversations being discussed online.
For one, finding yields on cash has been a popular topic, and the low interest rate environment has created a proliferation of products and services to help investors manage cash with a lower risk profile.
Peter sees insurance savings plans as a good option to park cash for a 1%-2% rate of return which is in excess of what any fixed deposit or bank deposit is providing.
For example, the SingLife account pays 2% p.a. on the first $10,000 with deposits and withdrawals reflected within hours.
Personally, 1%-2% annual returns are not worth considering especially for funds that are needed in the near term or when the economic stimulus from governments are slowly devaluing the value of fiat currencies.
Readers are also looking to diversify beyond Singapore’s shores, with more eyes looking at how to invest globally through robo platforms or DIY solutions. Especially in the case of Singapore – where we are an open and export driven economy – investing globally allows you to capture investment opportunities such as growth, technology and ESG themes.
Lastly, there’s also resurgence in interest in digital currencies with Bitcoin making new highs this year and institutional adoption.
Most people still don’t fully understand its underlying technology and potential applications. Although it’s relatively early and we are pretty much still in a speculative stage, there are already numerous interesting applications being built such has decentralised lending platforms which accept cryptocurrencies as collateral for a dollar-pegged loan – all without a central counterpart.
I think the next ten years will be very interesting for digital currencies. As it matures into a new asset class with digital custody solutions built for the digital native generation, we will see growing interest, institutional ownership and regulatory clarity to fuel the market to greater heights.