Singaporeans have a love of certain illiquid assets, chief among these being our homes. As our population ages, this could result in some prickly issues: consider, for instance, about a 70-year old retiree with no income, who insists on not selling a $5 million landed home. Single digit millionaires are especially prone to falling into this category: they may have a net worth of a million dollars, but have little to nothing in actual cash. Let’s take a look at the issues involved, and how to manage them:
What are the main challenges of being asset rich, and cash poor?
Some of the main problems you’ll run into are:
- Liquidity issues during a crisis
- Greater inclination toward loans (and hence interest repayments)
- Opportunity costs and lack of diversification
1. Liquidity issues during a crisis
Certain assets, such as housing, jewellery, art and watch collections, etc. are difficult to liquidate in a short time. Unlike a stock, which can be sold at market value in two trading days, selling a house or an art collection is a process that involves marketing, negotiations, possibly auctions, etc. It takes months to convert the asset to cash.
There is a way to quickly liquidate such assets, but that almost invariably means steep losses; if you want to sell your house within a week, you’ll probably be paying a property agent more (as they need to spend more on marketing, and drop other sales to prioritise you), and face low-ballers who sense your desperation.
Likewise, other assets like art collections, vintage cars, etc. probably can’t be sold on short notice without losses.
2. Greater inclination toward loans (and hence interest repayments)
If you’re asset rich and cash poor, there’s a greater tendency toward using loans. When you’ve lost your job and need cash for groceries right now, you probably aren’t going to sell your house, car, or Rolex to pay for it (at least, not in the immediate sense).
More often, people in this situation use personal loans, credit cards, etc. or other forms of high-interest, unsecured lending to tide them over; whilst hoping they can slowly liquidate their assets at better prices.
Personal loans can be up to nine per cent per annum, whilst credit card loans can reach up to 28 per cent. This leads to a lot of cash being squandered on interest; and if the liquidated assets sell for less than expected, the interest payments indirectly compound your overall losses.
3. Opportunity costs and lack of diversification
If all your money is locked up in a single asset, like gold, crypto, property, etc., that leaves you unable to invest in other assets like unit trusts, stocks, bonds, and so forth. This prevents you from taking advantage of other markets during an upturn, whilst also limiting the diversification in your portfolio.
Once you put too much into a single illiquid asset, you’re essentially making a huge, one-way bet; and this could make your risk level deceptively high, even if the asset in question is usually considered safe (e.g., residential property in Singapore).
How do you deal with this without surrendering your assets?
The most obvious way to balance things out is to sell the illiquid asset over a reasonable time frame, and then rebalance your portfolio. But this isn’t always practical or desirable – you may not want to part with your fine art collection or house. So as an alternative, you can consider the following:
- Collateralise your assets, and park the money in other investments
- Focus on income-generation to balance out liquidity issues
- Enhance insurance coverage
1. Collateralise your assets, and park the money in other investments
One example of this is cash-out refinancing. This is when you take out a loan against the appreciated value of your property. For example:
If you bought a home for $1.5 million and it’s now worth $2 million, you might cash-out and borrow 50 per cent of the value (a $1 million loan) at a low interest rate, as it’s a secured loan (the rate will probably be close to existing mortgage rates). The $1 million can be re-invested elsewhere, such as your own business.
In an emergency, a cash-out refi can also be used to settle bills, without having to sell your house. Note that, because your property is the collateral, the interest rate would be far lower than an unsecured personal loan.
This can sometimes be done with other assets as well, especially if you qualify for private banking services. Some private banks, for instance, may grant you a lower-interest loan if you use assets such as gold or fine art as collateral (although the rates may differ between banks, and not everyone qualifies for this level of service).
2. Focus on income-generation to balance out liquidity issues
If the bulk of your wealth is tied up in one or two capital-intensive assets, consider focusing the rest of your portfolio on income generation. You could, for instance, use annuities or perpetual income bonds (perps) to ensure regular pay-outs for life. This will allow you to handle day-to-day costs, without having to sell any assets.
Some assets, such as real estate, have an inherent capacity to do this. If you own multiple properties, for instance, you could rent out some of these to generate income (or even rent out rooms, if you just have one property).
At the simplest level, you could channel more into your CPF for higher CPF Life payouts, in your twilight years. This creates a secured income stream, which could mitigate the need to sell off your treasured assets over time.
3. Enhance insurance coverage
By raising your health insurance coverage, you can ensure you aren’t cash-strapped when you’re hospitalised; and many life insurance policies can provide a substantial payout if you’re permanently disabled (they don’t just pay out to beneficiaries if you die).
Likewise, critical illness coverage can provide a lump sum payout in the event of terminal illness, like late stage cancer; for higher premiums, you could get payouts even for earlier stages.
All of these policies can minimise the risk of having to sell off your assets, when the worst happens. At the very least, even if the payouts aren’t sufficient, they can buy you time to slowly sell off your assets at a better price.
If you feel you’re in an asset rich, cash poor situation, where your net worth is impressive but your bank account is always dangerously low, reach out to us on Single Digit Millionaire for help.
