Are You Asset-Rich And Cash-Poor?

2dRWtoRAccording to the Straits Times many Singaporeans risk retiring income-poor. It’s not that we are going to be poor. After all, our total wealth is more than twice the annual economic output of the country, so we are definitely not destitute. However, the money that we have put aside may not be enough to sustain us when we decide to stop working.

So what has gone wrong?

According to Manulife Asset Management, Singaporeans are generally quite well off. We have a household wealth of around S$250,000. However, three-fifths of that wealth is tied up in property or idling in low-interest bank deposits.

So the problem is not that we don’t have money but rather that the money has not been allocated to the right places. Consequently, our investments may not generate sufficient income that would allow us to live in comfort.

The reason why we shun asset classes such as shares is because of our aversion to volatility. We dislike the idea of seeing the value of our investments rise and fall. (Actually we don’t mind it rising but we don’t like the idea of it falling!).

But here’s the thing. Let’s say you invest S$10,000 in a portfolio of shares that paid you S$400 in dividends in the first year. That would be a 4% yield on your investment. The following year, the payout rises to $420, which would equate to a dividend yield of 4.2% on your initial investment.

Let’s now fast-forward another eight years. Your investment is now paying out $620 a year in dividends, which represents a 6.2% yield on your investment of S$10,000.

But here’s the question: What was the value of the S$10,000 investment on a day-by-day, week-by-week or month-by-month basis investment over the ten years?

Do you know? Do you even care?

Most probably the value of your investment will have fluctuated over the ten-year period. It might even have dipped below S$10,000.

Its movements probably reflect the prevailing mood of market as the shares reacts to both good and bad news. When the news is bright the value might rise. But when the news is disappointing, the value might fall.

Nevertheless, the underlying or intrinsic value of the investment has probably not changed at all. If anything, it may have risen given that the dividend payout has grown.

Truth is, the value of shares can rise and fall for no apparent reason. Warren Buffett once said that in the short term the stock market is a voting machine. But in the long term it is a weighing machine. So if you are worried about stock market volatility, learn to ignore the price that you paid for your shares and focus on its value. That’s what I do.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.