Philipp: Welcome to another episode of In Your Best Interest. Every two weeks, we bring you new topics covering personal finance, investing, and entrepreneurship. I’m your host, Philipp Muedder, and today we will be chatting about the topic that has been requested by a lot of our listeners, and we're grateful for your feedback. It's about the importance of investing in our daily life.
So everyone knows that saving on a regular basis is important, and being located now for the last three years in Singapore, and two years before that, in India. The savings rate in this part of the world really surprised me. It tends to be very high, compared to countries like the US, where I used to live before. So the act of saving money actually is less of a problem here, which is a great place to start from. A great place to be in.
However, what is striking to me is that people tend to not necessarily invest their savings. Instead, they keep them in very low-interest checking accounts or savings accounts, and things like that. So the problem there is that inflation, and the topic I want to discuss today as well, really slowly starts eating into your savings. And it's like a dangerous enemy that every one of us has.
[02:00] So today, I actually invited a guest that has been on our show before, and he's a real expert when it comes to investing. So, I’m glad to have him back. His name is Freddy Lim, and most of him as a CIO and Co-founder of StashAway. Hey Freddy, it's nice to have you back on the show.
Freddy: Hey, Philipp, thanks for inviting me back. And you've been very kind to saying that I’m an investment expert. Thank you very much.
Philipp: I think you are, and I think a lot of the listeners would agree. So when I speak to people, they always mention your name. So for listeners who would like to learn more about Freddy’s background, I encourage you all to check out the first episode of the In Your Best Interest podcast. Where he shared with us his upbringing, first job, also he shared with us the best investment he's ever made. So if you want to learn more about that, about Freddy’s background.
I encourage you to check out Episode 1. We'll also be linking those in the show notes of this episode. But Freddy, let's get right into the topic of today's show. So the importance of investing in our daily lives. I already touched a bit on saving versus investing. But how about we dive a little bit deeper on that.
What is your opinion on saving versus investment, and where do you draw the line? In which buckets do you put saving versus investing and the importance of either of them.
Freddy: Well, I think they cannot be separated. In the sense that you've got to first have savings, and then you are able to invest those savings. Because otherwise doing investing in any other way other than savings, that means you have borrowed money, or you find other channels that invested money [04:00] that doesn't belong to you.
And so it really starts with saving first. But I would say this; just savings is not enough because it's like you're climbing a hill. And you're just climbing it; you could have used a bicycle to cycle upward faster, right? And you get a lot more help in the forms of return along the way over time. To help you save and make some return on it that gets you to your life goals faster. So that they do come together.
Philipp: No, that's a great point. If I drill a little bit more, you said savings alone is not enough, I wholeheartedly agree with that. And I want to get more into investing, and why it's important.
But from a savings standpoint, do you have a guideline that you use yourself when you first started out working. How much to save? Is there like a percentage that you always aimed for when you were younger? Or still, do?
Freddy: It really depends on the stage you are in. But I remember when I first came to the workforce, I do have a certain target. I was aiming to save 25% of my monthly income after taxes. So I budgeted for taxes. You don't get taxed yet. You sort of save extra, knowing that you're going to get taxed later. But what I’m saying is the excess above that; I was targeting to save 25% a month as a young man.
But I never thought about investing those savings back in those days. It's not like it's easy. Online brokerage accounts were still very new back in 2000. But today, there's a lot you can do. [06:00] And so yes, 25% was my target. It was random, not really based on my actual lifestyle. But that can change over time, as in your life you may get married; you may have certain changes in your lifestyle and needs.
Or certain family members to support, but the essential idea is to have your income. Don't spend more than your income, and you just try your best to squeeze in some savings. Well, that was the basic idea, and it's very traditional. You're just trying to use savings and time to get there.
Philipp: Yes, agreed on that. And I think 25 is a great number to start with. I always aim to have at least; I’m trying to get closer to 35. But again, as you said it, it's also very dependent on your life situation. And then some years you might be able to save more, you got a promotion. In some years, you have a child being born. That will have an impact on your cash flow on a short-term basis as well.
So I appreciate you sharing a little bit about your own experience there as well. So you said savings alone is not enough, let's talk about that a little bit more. We established here, especially in the Asian space, people do save tend to save quite a lot. But it's stuck in low interest-bearing accounts.
I don't know how many different financial plans I have done now, here, and I always see people with quite a large amount of cash sitting in checking and savings accounts. Earning literally 0.0%. And it's after [08:00] they did all the hard work of working, the hard work of saving, and then not able to deploy that money into more investments. What are some of the enemies that people face when they just keep their money in cash?
Freddy: Yes. Keeping it in cash in the bank certainly feels safe, and also, why not? That's deposit insurance, right? Up to a certain amount. However, the problem is we are then neglecting the fact that things get more expensive over time.
Inflation is the ultimate enemy for someone who just purely saves. And the better the economy does at times, the higher the inflation goes. And that really erodes the person who just holds cash. So I would say the greatest enemy is inflation.
Philipp: And inflation for people or listeners, who don't know too much about inflation. Can you go a little bit deeper there, to just explain to people what inflation is? Because to me, it's also when I first explain it to people, it's like the invisible enemy almost, right? Because you can't really see it. You don't feel it on a day-to-day basis.
Freddy: Well, you may not be aware of it because ten years ago you went here at this very place, buying chicken rice in Singapore, but you know that that price back then and today is very different.
Suppose it's $3 before; it's $5 now. Let's say, right? And that inflation creeps very slowly, and it's invisible until it becomes noticeable, then it's too late. Because then you realize oh, now it's five dollars, but this is ten years later now. Realising it now is late.
Freddy: So inflation is invisible in many [10:00] forms as well. And I’m not talking about the government measure of CPI and all these consumer baskets. I’m actually talking about inflation outside consumption. I mean you buying a property and it could get more expensive with time. Or the asset prices going up is itself a problem. Because it means that your money over time is unable to buy as many units of the underlying assets. Whether it's a property or stocks or a good company that's been growing for ten years. So inflation, people tend to think about it as consumer price inflation, what you consume, and they think about that. But actually, that is a very low measure. It's sort of biased downward. We know that in reality, there's a lot of invisible inflation going on elsewhere that makes things really expensive for you in many mysterious ways. You may be saving up for putting down payment for an apartment, but in three years’ time, the apartment has gone up 20%, then what happens.
So we do need some growth assets as well just to stay online with other forms of inflation. And of course, imported inflation is another one. Being in Singapore, we are a small, open economy. We do import food and agriculture products and raw materials from other places. So there could be a lot of sources for how we can incur inflation, why things would dilute our purchasing power if we don't do something about it.
Philipp: Yes. And again, I thank you for this explanation, Freddy. Because I think it's a very difficult concept to grasp. I know it's always in the news. But again, on a day-to-day basis, you don't notice. But I think it is always a good one for our listeners to try out. Talk to your grandparents or your parents, [12:00] and they will always have.
At least when I talked to my dad, he said, oh, we used to get this hamburger for 50 cents, and now it's $2.50, right? Or something like this. If you talk to some older people, I think it always gives you a very good incline on what inflation actually does. And for the people going to college now or recently gone to college, college tuition compared to some of the other inflation measures have been skyrocketing over the last 30, 40 years.
Freddy: I think college education is a great example. In the sense that you may be in Singapore, and you want to study somewhere in the US, And you find that the inflation is not from Singapore anymore, it's actually in US education has gone up a lot.
And if the US Dollar goes up further, that makes it even worse for you to afford it. In a way, the only way you can handle that risk is to be able to think about investing and globally.
Philipp: Yes, absolutely. And now, if we may move away from inflation, let's look at the counterpart of inflation. And the topic is investing. And with investing, one of the things you're trying to achieve is beat inflation, right Freddy? So on the opposite side of the coin, it's something called compound interest.
And it's called, what did Albert Einstein call it? The eighth wonder of the world, I think. So can you maybe explain a little bit about now what is compound interest, what does it mean to the people? And how can they use that to their advantage?
Freddy: Right. My favourite quote from my favourite person ever is that Einstein, the physicist. Not as an investor, [14:00] say that the power of compounding is the eighth wonder in the world. He's obviously referring to the expanding universe because it does expand at a certain rate per unit of time.
And even more and more time, the universe is getting further apart. So this is very scientific, but I personally believe that it applies the same in investing. Because if you are just focused on investing your savings, you stick it there, you don't try to time the market; you just stay with your plans. I tend to see feedback from people who've done that. People who are older than us, and they spent three decades building up their portfolios.
They basically compound, just with time, the diversified portfolio grows with the economies. Mind you; I’m talking about a diversified portfolio that's very broad-based, right? And it grows along with global trends, global growth. And with time, they compound. Now the same can be said for fees, sorry fees, or inflation. They are the same. You invest in a high-fee product, or you don't invest, you get eroded by inflation. Every year, if inflation is 2%, you get eroded 2% a year.
Philipp: Even though you think you’re being safe in a savings account, right? That's the other thing.
Freddy: That's right. The erosion also compounds with time, right? Because every year you're losing purchasing power a couple of percentage points, and then you're going to keep losing that. And I’m just doing a back of the envelope math here.
If it's a 2% inflation a year over 30 years, you will be eroded by a whopping 45% per dollar. Let me try to get this right. 1.02 to the power of 30, right? And then invert that. Yes, a dollar is only worth 55 cents in 30 years. At a 2% inflation rate, [16:00] which is not a lot, you think.
Philipp: No. And I think countries are aiming for right about that 2% to 2.5%, right?
Freddy: Yes. And so I would say compound interest. Actually, the second line of the quote from Einstein is that he who understands compound interest earns it. He who does not pays it. So, in this case, the saver pays it through inflation, eroding the dollars. And the investor gains it through growth over time.
Philipp: Yes. I think it's a great quote; I like to use it in some of my seminars as well because it really hits home. You can make the argument for inflation; you can also make the argument against high-interest debt. It works the same way. But because you want to put yourself in a position where you start earning income. And that's where I wanted to go to actually next is, you cannot earn income forever. So at some point, you're getting older, you worked for it 30, 40 years of your life. You have paid some into pensions. In some countries where our listeners are, they might not have pensions available, or at least not defined benefit plans. So these people need to save, they need to put money away, and one way to do that is starting to invest. And this is where compound interest comes in again. Because you cannot work forever. At some point, you're getting older. You can't do the job that you used to anymore, or you want to enjoy life a little bit more. How can investing here help you, Freddy?
Freddy: Well, look, it is true, and I personally have been through that phase. [18:00] As you grow older and more senior in your industry or position. There's an old saying that if you are not up, you're out. There's no such thing as I love my work; I want to be in this position, this exact position forever. If you are not up, you're out. And the requirement for a senior person over time gets bigger.
Your leadership, growing the business, making new initiatives. So it is difficult; what I’m trying to say is it is difficult to stay in your position; it gets harder and harder over time. And you may not be hirable even if you are very competent, just by the fact that you're the more expensive part of the workforce. It makes it hard for you to be hirable in the labour market. The options are going to be more narrow.
So you definitely need to have diversified sources of income. And there are many ways of doing it, and in the past, people do it by directly investing in properties. They use the savings to pay for the mortgage. That's a form of investment, but today the property cycle has really changed. It's not as high-yielding as before in terms of rental yield. It does cost money to just buy property, right? Stamp duties.
Philipp: Yes with the downpayment.
Freddy: Yes, down payment, it's not an easy endeavour. But today we are very fortunate to be in the world wherein the case of property; you don't have a million dollars; you can still spend five hundred dollars buy a unit in the REITs ETF or even the REIT. It's very democratized now in the stock exchange. Even in Singapore, with this ample of a very solid REIT provider with a strong long-term track record.
So there's no excuse not to invest. You can own a fraction of ownership of a real estate investment trust, where you gain exposure to say property, [20:00] and it saves you the pain of down payment and stamp duties and getting a bank loan. So it's very democratic, it's super exciting. And this is as an example, right? And it gets better now, where I mean that's why StashAway exists.
We are one of those who try to bring you the world, global diversified investing on our platform. Up to 38 asset classes with up to 40 plus thousand securities that investors can curate from their portfolios. And that means that at a fraction of the cost before, it's just with a click of a button, people now can just invest any amount. It's super exciting that people now that it's possible to gain financial independence by doing something about it.
Freddy: I think investing has been made much easier than before, much more diversified, much more sophisticated, much lower fees.
Philipp: Yes. The barrier of entry is just so much lower. And I wanted to get to that point actually very shortly. But you mentioned one interesting fact, and that is you want people to have diversified income streams. Because in today's world and I see it with my friends and family members etc. The life cycle of people staying with one company is significantly reduced from 20 years ago.
I still remember my dad's age, like people in their early 60s in Germany. Most of them spent their entire career at one of the big, large German conglomerates. But never left. They have very good jobs; they use their pensions at those companies. But nowadays, the life cycle of companies also [22:00] going in and out of the S&P 500 even is significantly shorter. So companies are getting disrupted more often or whole industries even. So having a diversified passive income stream outside of your day-to-day job, I feel is becoming so much more important.
And you mentioned already that real estate can be one of them. You might have your rental properties, or it's easier to get into things such as REITs or diversified portfolios. And I think some of the other ones, and maybe you have some more too. It's like hey, a lot of people nowadays they have the energy, and through the use of the internet, a lot of people are setting up side hustles, so to speak. To diversify. And I think that that's a very good start if you want to start creating, which is also an investment in itself. You're investing in your future by creating these different streams to get to a point where you become more financially free.
Freddy: Yes. And the act of investing is everywhere, whether you are aware of it or not. Whether you're buying a property, a second home, or whether you are doing a side business, it's all an act of investing.
But what I’m saying is that you don't have to today be the one to open the side coffee shop while having a day job; I mean, it's actually not an easy thing to run the business. But today, it's very democratised that anyone now with any amount can have a super diversified portfolio that's very global, that's multi-asset. I think that's one of the big things today. You can invest to maximise gains, and there are no minimum barriers.
Philipp: Yes. And you did make a good point that I wanted to actually get back to before. Is that a lot of people, when I speak [24:00] to them at some of the seminars or just friends and family. They tend to say that they are overwhelmed by investing. So again yourself, myself, right? We've been dealing with investments for quite a few years now. And we're interested in it, on top of that. And it's part of our job. But the research, the sheer amount of choices available in the markets and not wanting to make mistakes with their savings. On top of working their daily job. So what are some of the guidelines you can pass on to them?
Because I feel this is exactly the disconnect between people, they save, but they don't find the time, they don't have the resources. They don't trust the sales guy, and that's why they don't invest at all, which is a bigger mistake. As we know, and hopefully, our listeners have gathered today.
Freddy: Well, I would step back, and if I think about step one, it would be to go back to a piece of blank paper and sit down with your other half, or get a friend or get a financial advisor, whoever that is, right? And sit down and look at your income and your expenditure, and how much savings you have.
And then start planning. The first step of that is, do you have a sufficient amount of cash to as a rainy day fund, right? In case anything happens. Or for some reason, you're not working anymore; you have some buffer. I think that is number one. Anything above that buffer that you have planned for then becomes your investable savings. That's the part that you can start thinking about investment.
And this is a very important part. Because the last thing you want is to invest the money that you actually need. And then the day-to-day movement in the [26:00] market, right? So it happens today’s market is not doing very well.
And you need the money, and you're selling on the low. Hence, hurting yourself, right? The power of compounding takes time. It relies on the averages, and to realize that you need to stay invested. So only invest the money that you can invest. So first have I don't know, I would suggest 12 months of living expenses in cash.
Philipp: That's what we have as well, yes.
Freddy: And then anything else is easier to talk to because you free yourself from this nervousness. You already have a one-year buffer. And when you invested those amounts above it, you are less likely to be very over-reactive to near-term events. So, that would be the first thing.
Philipp: No, for sure. And then let's say our users have done that. They're now overwhelmed by the choice of investments. And yes, I think for Singapore, you already made a good point. Like there's people like us at StashAway who can help you weed through a lot of this and a lot of these problems.
But for people that are listening, that are not necessarily from Singapore. What do you suggest should be their first steps when they look at investments in general? Like right now, in 2020, Tesla is the hot new thing that's being pushed, right? Or is that something they should invest in? Or where should they start? Let's say they live in a different country where StashAway, for example, is not existing.
Freddy: Actually, the answer is not about what is out there that you should invest in. It's not about what is the hottest thing to invest in. But it's about first what is your risk level that is suitable for you. And you don't even know [28:00] what you're going to invest in yet, but before you invest, this is the first question.
What is the risk level for me? And the way we think about it, and the industry thinks about it is that in an extreme event, if you lose X% in any given year. If you're fine with it, that's your risk level. So, for example, in the extreme event, something happened. Like this year, during COVID-19, let's say you lose 20% on your portfolio; is that a number that would irk you so much that you would overreact? Meditate on that, I mean, have a good think about it. And if you're okay with 20%, then that is the risk level you're comfortable with. But if you're more conservative, and 6.5% is more reasonable for you, right? Then you belong to a lower risk profile. And then there are people, who just invest 100% of their net worth in Bitcoin, and they belong to the category of 80% in the extremity, their risk is really 80%, and they're okay with it. So everybody has a different number, but you've got to pin down that number for yourself. What is that risk level first, before you invest?
Philipp: Great advice, I think. Because most people look at return first, right? They said, hey, I want to get 20% a year. And then pick the investments from there, and then looking backwards at what has done well, and what has not done well. I think this is great. Freddy, before we wrap it up, and I truly am thankful that you came on and explained a lot of these concepts and why it's important. Are there any, I don't know, podcasts or books that you may have that our listeners would have something to learn from in this topic that we talked about today? [30:00]
Freddy: Yes. There are a couple of pretty good books. Some belong to the classics, so let me try to remember it. I think the book ''Money'' by Anthony Robbins.
Philipp: Yes, I was going to mention that.
Freddy: Yes. It's a very good one, but it's a very big book. So you can select the chapters, then you can take it in stages. But the easier one to digest is the one that predates this one, I think, by Robert Kiyosaki ''Rich Dad, Poor Dad.'' If you want to go even more ancient times, ''The richest man in Babylon'' is they're all similar concepts; it's just different ways of describing the same principles. These three books would be the same, and you can just pick one for financial planning. I think planning is half the battle before you invest.
Philipp: Yes, absolutely agree. And I think all three books; I’ve read all three of them. I read them all well, just getting out of college, starting to save. And they've been a godsend. So any listener, I suggest you pick one of the three up. I agree with Freddy; they're great books, they're written in very plain English, very easy to understand. And they really also underscore all the points we've made today. So again, Freddy, thank you very much for being on the show again. We always appreciate you here. I can tell for myself and the listeners, and of course, I’m sure we'll have you on again in the future. Otherwise, Freddy, have a great day, okay?
Freddy: Wow, thanks. I look forward to our next conversation.
Philipp: Thank you.
In this episode, Freddy and Philipp discuss how investing your savings can help you achieve financial freedom, or a comfortable retirement. They also talk about why inflation is a saver’s worst enemy, the impact of compounding over time, and how it’s easier than ever to start investing today.
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