Mar 23 Portfolio Update
Portfolio allocation as of Mar '23.
• SG Shares: CDG, DBS, SGX, Valuetronics
• SG Reits: Syfe Reit+, Digital Core Reit
• US Growth: BABA, INMD, PYPL, SHOP, TDOC, UPST
Random musings
This is slightly different from the “FIRE musings” section
that I usually include at the end of my monthly updates. I’ll be discussing the
topic of inheritance, which based on what I’ve seen, is definitely something rather
taboo among Singaporeans.
It might be obvious, but I would still like to highlight
that if you’re in your 50s or older today, and nearing retirement / have
retired, then obviously your main priority should be to ensure your
own retirement adequacy first, before even thinking about
leaving an inheritance for your kids.
Having said the above, I think the perspective I’m sharing
will still be controversial – perhaps some may agree with my point of view, but
I’m sure there will be a fair share of people who disagree. At the end of the
day, it’s your money, your call… if you’ve already made up your mind that you
want to spend all your money before you die (because you earned it), then by
all means do so!
For a start, I am single and I don’t have kids. These are
mainly my observations of how people perceive the utility of money and approach
the topic of inheritance, by sharing a few examples that I’ve come across in
recent years.
I think it would be good to set the context for this
discussion – people tend to use the word “rich” a little too broadly. “Rich”
can be further split into mass affluent, high net worth and ultra-high net
worth. The 3 examples I am sharing further below fall into each of these
categories.
For the purposes of this discussion, I think any inheritance
amount nearing or greater than SGD $1 million (including
owner-occupied residential property) would be relevant – broadly, people in the
“mass affluent” category and above. The reason I include owner-occupied
residential property is because we are discussing the topic of inheritance here
– so obviously when you pass on, the property you are occupying forms part of
the inheritance. I think this probably represents the top 20% to 30% of the
relevant age groups (people in their 50s and above), mainly because of the sky-high
property values in Singapore. But if you think about it, while $1 million and
above appears to be a large number, it may be more common than you think –
after including residential property, CPF accounts, equities, cash value of
insurance policies and savings.
I think this is most relatable, especially in the context of a couple in their 50s
or 60s thinking of bequesting their wealth when they eventually pass on.
Example:
$800k HDB flat – fully paid up, possibly purchased for much
less.
$500k CPF accounts at retirement age (combined; FRS + Medisave)
$400k investment portfolio (combined)
$200k cash value of insurance policies (combined)
$100k liquid cash / fixed deposits (combined)
Based on the above, that’s a combined net worth of SGD $2 million per couple,
or SGD $1 million per person. Obviously, some of that would be drawn down
(spent) during the retirement period, but even if the eventual “total net
worth” is halved, and given that people usually have 1 or 2 kids these days –
that’s still a sizeable sum of inheritance.
You might look at the above numbers and say:
1) That’s too low, I have more! Congrats, if you have kids, and
you believe in the idea of inheritance, then they are lucky.
2) That’s too high. As I’ve mentioned above, your priority
should be to work towards your own retirement adequacy first.
For those of you who fall in to category (1), you can adjust
the above numbers in the above example, based on your personal circumstances. I
think when people think of “inheritance”, probably the complex cases of the top
1% comes to mind – infighting among siblings for a larger share of the pie, long
drawn-out lawsuits and so on. My point
here is that the groups of people in the category of having SGD $1 million net
worth, including owner occupied residential property, is actually more common
than you might think. And people who fall into these groups should give
inheritance some serious thought as well.
We know that 20% of Singaporeans live in private condominiums
and landed properties, and the average price of an OCR condominium probably
goes for around SGD $1.5 million today. Additionally, with the top end of HDB
flats transacting for anywhere from $1 million to $1.5 million… I would think
these form a sizable group of Singaporeans, perhaps closer to 1 in 3 of the relevant
age groups.
This 1 in 3 could be your colleagues, your relatives, your
parents, or even yourself, who will be dealing with the “good” dilemma of
having to decide how to pass down the inheritance.
Let’s now look at the 3 examples.
The “Mass Affluent”
The first example is a Facebook post made by someone by the
name of Michael Chong, on the Seedly Facebook group. I saved this post when I
read it a few years ago, because I felt that the story represented what is
possible for a significant number of people in the mass affluent category.
https://www.facebook.com/groups/seedlyfinance/posts/2386572571634095/
To summarise what Michael had shared, their family was thinking
of selling their condominium and moving to a 4-room flat. Using the proceeds
from the sale, together with their existing investment holdings, they will
likely have around SGD 2.5m combined as a couple. Based on his projected
returns of 4% a year, will yield around SGD 100k/year or about $8k/month.
Presumably, this passive income will be enough to sustain their family
expenses. Additionally, he mentioned that he will still get CPF Life payouts
when they turn 65, potentially bringing the passive income to 10-12k/month for their
family of 4.
The two sections that stood out for me in the article were:
“If this goes well, the portfolio can give us about 8k in
passive income monthly, with some capital gain. My dream is to pass this on to
my children and grandchildren one day. Maybe my grandchildren will not have to
work a single day in their life, and can follow their passion.”
“I have also encouraged her to save and invest since she was
18, so she has about 6 years of experience. I have also taught my children
financial responsibility, so they are very thrifty too.”
I won’t interpret the “will not have to work a single day in
their life” too literally, but rather, I think the idea of allowing his
children or grandchildren to freely follow their passion sounds like a great
life to live. I also think the part about imparting frugality and managing money
is paramount, especially in the context of succession planning.
By selling their condo and buying a cheaper HDB flat, they
could use the proceeds, plus their current investment holdings, to create a
perpetual cash flow generating machine for themselves, their children and even
their grandchildren. Simply amazing.
The “High Net Worth”
The second example was a recent Straits Times article that I
read. Mr Yong is the CEO of a marine engineering firm.
The part I would highlight is “The priority in my savings
plan is to buy a house for each of my children, so that they are not burdened
by mortgage loans in their adult life. With their own roof over their heads,
they can afford to take career risks and pursue their passions in life.”
Not much for me to elaborate on this, because I don’t think
the average person would have resources to give 4 houses to their 4 children.
But I think the broader takeaway here would be giving your children a leg up in
life, especially when they need it and when it matters most.
Oftentimes when I see comments on social media, the
prevailing thought among Singaporeans seem to be that assisting your kids
monetarily would “spoil” them or make them “soft”. I completely disagree with
this view. Undoubtedly, talent and hard work are paramount when it comes to
determining whether one can succeed or not. A talented and hardworking person
will do well in life. But when it comes to achieving greater things, such building
a trillion-dollar internet company? Wealth plays an important part too. For
intelligent and hard working kids, wealth supercharges their odds of success,
instead of hindering it.
Examples of how wealth breeds wealth – Bill Gates and Jeff
Bezos. Bill Gates was undoubtedly a computer whiz, but it was through his
wealthy parents that gave him access to the tools to fully develop his
potential (I’d recommend reading the book “Outliers” by Malcolm Gladwell on
this). Jeff Bezos was a Managing Director at a leading hedge fund before he
left to start Amazon. Yet, his parents still invested $300,000 (in 1993) to
help him get started. Even Donald Trump - claimed that his father gave him $1
million (in 1975) which he used to build his real estate company.
I wonder – if the parents of these people had decided
against helping their children out of fear of "making them soft",
would they have had the same level of success?
The ”Ultra-High Net Worth”
This article was written by Abigail Disney, from the Disney
family.
Although the intent of the article was to criticise the
ultra-rich for fervently trying to lower their tax obligations, one paragraph
sheds light on how families of dynastic wealth view their money:
“When you come into money as I did—young, scared, and not
very savvy about the world—you are taught certain precepts as though they are
gospel: Never spend the “corpus” (also known as the capital) you were left.
Steward your assets to leave even more to your children, and then teach them to
do the same.”
To me, this is perspective is simple and straightforward.
It’s not even a “secret” of the ultra-rich. Use your capital to create a
passive income machine, collect passive income into perpetuity, and keep your annual
expenses below your annual passive income. Re-invest the surplus which will
then increase your capital even further. Over the years, this snowball grows
larger and larger, and finally pass this down to the next generation. To quote
part of Patek Philippe’s slogan, “You merely look after it (this
perpetual passive income machine) for the next generation”.
My takeaway from the section above, is that while most people
are unlikely to amass more than 7-figures of net worth in their lifetimes, the
perspective of capital preservation isn’t exclusive to people who have hundreds
of millions or billions. If we apply this concept to a more “realistic”
scenario of Michael Chong (the first example above), we see that their SGD $2.5
million combined portfolio can provide comfortably for their family of 4 ($100k/year)
– building a perpetual stream of cashflows and eventually bequesting the
principal to his children.
Common themes:
1) Preserve the capital, spend only the interest / dividends
/ passive income. This creates a perpetual stream of cash flows and yet grows
the capital over the long term.
2) Impart their children with knowledge of managing the assets.
3) Let their children pursue their passions.
I think it’s easy to fall for cliches of “spoilt rich kids”.
There will be bad apples. But based on what I’ve seen, more often than not,
money itself does not result in negative outcomes.
Anecdotally, by and large, most of the “rich” friends I
know, are mostly hardworking, driven people, who go on to excel in their chosen
fields. They recognise their privilege, which affords them some inherent
advantages, but at the same time with the right upbringing and values, will
continue to be prudent stewards of their families’ wealth.
Thus, instead of seeing money as the root of evil, the
source of family feuds or something that makes children become “soft” or
“strawberries” … why not learn from some of the examples above, and think of
how to make the capital last for generations to come?
How this aligns with FIRE
To me, money is simply a tool. It is meant to buy me
freedom, to allow me to enjoy life (reasonably, within what I can afford). While
I don’t need multi-millions or billions, I think ideas discussed in the
examples above are actually in line with how I envision my financial situation
to look like, once I’ve achieved FIRE.
The idea of generating a perpetual stream of passive income,
keeping my expenses below this passive income, and re-investing the surplus to
continue to grow my capital, is exactly my plan. The idea of seeing money as a
tool which buys me the freedom to pursue my passions freely, strongly resonates
with me.
And taking a step back to consider how taxes in Singapore
incentivises us to accumulate wealth and capital. Let’s say Ronaldo comes to
play in the S-League. If a club is willing to pay him $40 million per year,
based on our current tax brackets, Ronaldo will probably have to pay around $9
million a year in taxes. $9 million of taxes a year is probably more
than what most people would earn in a lifetime. Let that sink in.
But compare that to families of dynastic wealth, with their
investments based in Singapore. A 4% per annum return on $1 billion of
investment holdings generates $40 million a year, which will be entirely
tax free! There are no dividend withholding taxes or capital gains
taxes in Singapore.
Accumulate wealth, create a perpetual stream of passive income,
and enjoy the fruits of your labour for many years to come.
While I don’t have a million dollars or more (yet), I am
working towards that. With the right money mindset, coupled with the values of
frugality and prudence, I’d say the odds of succeeding is more likely than not.
The best time to plant a tree was 20 years ago. The next best time is now.
Start planting that passive income tree today, that will bear
fruits for generations to come! And maybe, save this article for your
grandchildren. One day, they will be thankful you read this.
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