If you’re not familiar with investing, then odds are you’ll default to the most common tactic: it’s called winning by not losing. This is a risk-averse approach, where you focus almost entirely on not losing money; but making money is relegated to a bit of an afterthought. As the old saying goes, a bird in hand is worth two in the bush, right? But here’s why cleaving too closely to such a tactic may not fare well; especially in an economy like this year’s:
The hidden risks of “winning by not losing”
We’re not about to say “winning by not losing” is entirely wrong. There are situations in life when it’s the smartest decision you can make (e.g., the best way to beat the jackpot machine is usually to not play it). But life is anything but simple, and there are risks that, ironically, come from being too risk-averse:
- Inflation-rate risk
- Falling for the “low cost” trap
- You can’t predict how hard life hits
1. Inflation-rate risk
Inflation-rate risk is the leading threat to the risk-averse. When your money isn’t growing, the rising cost of living can outpace your supposed safety margins.
Consider, for example, a medical bill for $5,000 in Singapore in the year 2002. By 2022, the bill for equivalent treatment would be $7,679.50.
That’s due to healthcare inflation, to the tune of 2.17 per cent per annum*.
Consider if you’re so risk averse, that you’ve held on to the money and not invested in those 20 years. You would have traded the possibility of some losses, for the certainty of loss due to inflation.
Even so, this scenario assumes a moderate and controlled rate of inflation. Singapore, like most developed countries, likes to target a core inflation rate of no higher than three per cent.
(We also can’t aim for no inflation, as that would mean our economy is stagnating).
However, there are periods when inflation runs rampant, and hits record highs. This happened in July 2022, for instance, when Singapore’s inflation rate hit a 14-year high. While authorities will usually take steps to rein in inflation, it can take time – and it can be bad news for non-investors.
Consider that, at an inflation rate of three to four per cent, your CPF monies are dangerously close to being stagnant: the CPF Special Account only grows at four per cent per annum, while the Ordinary Account grows at 2.5 per cent. The same applies to products like fixed deposits, where the rate of inflation may outpace the interest on the deposit.
There’s an added disadvantage with fixed products, in that you often can’t withdraw the money without some form of penalty.
This can trap you in a low-interest product, even as the inflation rate rises even higher (e.g., seeing your money locked up in a 10-year fixed deposit at 2.5 per cent, while the inflation rate is past three per cent).
As such, most investors don’t rely on low-risk, low-interest investments alone. Rather, most build a balanced portfolio of low risk, medium risk, and high risk assets together. A common aim is an overall rate of return that’s comfortably higher than core inflation: at least two per cent above inflation (i.e., five per cent in Singapore).
Do be aware of being so risk-averse, that you lose sight of inflation indirectly eating into your wealth.
*Compounded average annual rate for given years, according to MAS inflation calculator
2. Falling for the “low-cost” trap
Cheap investment options are not necessarily good investment options. Being too risk averse can sometimes blind you to this.
For example, the cheapest house on the market may seem like the safest buy, as you spend the least on it. But if it’s cheap because the location is terrible, or because its lease is running low, then it may sell at even less than you bought it for – thus turning the supposed “asset” into a liability.
The same can be true of financial products like insurance policies, unit trusts, or even REITs. While the costs of these funds do matter (expense ratios, management fees, commissions, etc.), it’s important not to be so hung up on the fees that you don’t notice the product’s performance. The cheapest fund, for instance, is not always the best performing fund.
Remember: paying low fees and losing money is worse than paying slightly higher fees, but actually making money.
As a final aside, remember there’s a difference between “cost” and “value.” Our goal in filtering through investment options is to find a low-cost asset with good value (i.e., an undervalued asset).
This is the reason it’s sometimes worth getting a good wealth manager, realtor, car salesperson, etc.
Because if all you want is the cheapest of anything, a five-second Google search will find that for you. The role of the middleman is to identify the cheapest asset, for its given value. That’s the service you’re really paying for.
3. You can’t predict how hard life hits
The allure of being risk-averse is the draw of feeling safe. Your money is in hand, and not disappearing into a sea of complex products, funds, charts, and confusing acronyms. We get that.
So why would a single-digit millionaire risk investing said million (or millions), rather than keeping it locked up in a vault?
Well apart from the good reason in point 1, let’s ask an important question:
How much does it cost to be safe from the dangers of life?
Is $1 million safe when chemotherapy costs $1,500 per cycle, not including other hospitalisation costs, and we have a family to look after?
Is $2 million safe if our income comes from a business, which is subject to the whims of the market and which leaves several staff members dependent on us for a living?
The same questions can be asked for $3 million, $4 million, etc., without a convincing answer. The simple fact is, we don’t know how hard life can hit us. We never know how much is enough to fully insulate us from what the future holds.
So while it’s great that we have our single-digit million, we shouldn’t grow complacent and decide there’s no more need to grow our savings; especially not when the rising cost of living is making healthcare and housing ever more expensive.
This isn’t to say everyone needs to be in full “greed is good” mode – there’s definitely a time to shift to a more defensive footing as we grow older. But all things should be done in moderation, and proper preparedness means we shouldn’t discount the need for wealth accumulation entirely.
We may need a little bit more than we have, to deal with our next disaster. If it doesn’t happen, great: we can enjoy the surplus or pass it down. If it does happen, we’ll be glad we weren’t caught resting on our proverbial laurels.
Winning by not losing is a viable tactic, as long as it’s not your only tactic
There are times when the economy is so volatile, winning by not losing is a fantastic tactic. However, it is only one tactic, and it can’t be applied in every situation. Being risk-averse at the wrong time can actually increase your risk – such as when you’re locked into a low-interest deposit, as home and healthcare prices start to race past your affordable limits.
If you suspect your investments are too defensive (or not defensive enough), do reach out to the right experts to review your case.
In the meantime, if you have any stories you’d love to share about this, or you want to reach out to us for more news and trends in the world of Single Digit Millionaires, do contact us
