A Chat with Bingyang: Asset allocation when the market is bleeding
We all understand the importance of having a well diversified portfolio to tide us over the downs and ups of the market. However, are we able to maintain a clear head when all we see in our portfolio is red?
Bingyang, founder of Life First Advisory (LFA), believes that it is crucial to have proper asset allocation to survive market downturns. We sat down to speak with him on his views on cash liquidity when the market bleeds.
Multiplied importance of cash
“Everyone is an investment genius in a bull market, which was the case in the last few years.”, Bingyang shared.
However, he cautions that it is not realistic to keep maintaining the perception that one is good at investment as markets go up and down.
Good investors are those who can manage their emotions, ignore media noise and unverified peer pressure, and stay on their investment path in both good and bad times. “It is during a market downturn that we are reminded about the importance of having money when we need it.”
“The same $100k can mean very different things to you at different times.”
The benefits of liquid cash and disposable income is perhaps most felt when it’s most needed. When you require money urgently, having $100k readily available to be withdrawn from the bank gives you an immediate peace of mind as compared to having to evaluate what to cash in from your list of assets. By cashing in before you are ready, you are also subjecting your assets to a lower-than-expected Return On Investment (ROI).
Seeing red.
Take for example, you are suddenly in need of money due to an unexpected serious illness or disability. In the current market condition with almost everything seeing red, and the Dow down by 880 points as inflation hits a 40 year high, you will be forced to make a painful decision of selling off your assets at below their original value.
Bingyang shared another scenario to demonstrate the importance of liquid cash. If your child needs to further his studies in University, and your assets are tied up in the markets, what would you do?
Will you be able to pay for your child’s education?
Will you ask him to postpone school for a couple of years because you have to wait for markets to recover?
Investors are unlikely to say that to their child.
Too much cash is bad
“At the same time, good investors typically do not have too much cash lying around, uninvested.”, Bingyang said.
Covid-19 has taught us the importance of savings, but holding too much cash is still bad. As the cash devalues, you are also incurring opportunity costs by not paying off loans (increasing liabilities) and losing out on potential investment growth (increasing assets).
It’s important to save money, but too much savings is bad.
“By not investing at all, you’ll be committing financial suicide.” Bingyang added as he proceeded to paint out a scenario in which an individual does not invest, and instead relies solely on savings.
Let’s say you save 10% of your income and spend the remainder 90%. Assuming that your annual income is X, you save 0.1X and spend 0.9X.
For simplicity, let us assume that you got a job at 25 years old and will work for the next 35 years until you are 60 years old. In the process, you will accumulate 3.5X.
Chart depicting savings and expenditure at different life stages.
Retiring at age 60, you have only 3.5X to last you through your next 20 golden years.
Of course, longevity is a multiplier of risks. General wisdom tells us that we should always add at least seven years to the average life expectancy, which is currently 84 years old. For simplicity, let us plan for up till 90 years of age. This means that for very dollar that we make from age 30 to 60, we should save 50 cents to last us for 30 years from age 60 to 90.
Bingyang also recommends for higher income individuals to plan until they are at least 99 years old.
Assuming your income and spending remain the same, and ignoring inflation, your 3.5X will last you only 4 years. In this case, how can you live the remainder of your retirement?
“I’ve seen so many good people struggle in their later years as they try to play catch up before retirement.”, Bingyang added.
Safeguard your life milestones
Investments and savings always need to be delicately balanced. This balance also changes according to your life stages.
If you want to know how to safeguard your children's education and other important life goals, have a chat with Bing Yang. He will be able to address your concerns and come up with an action plan to best ensure that.
Because here at Life First Advisory, your Life comes First.
Interested to learn more from him? Follow Bingyang on Facebook, Instagram, or LinkedIn for wealth management insights.