Wisdom from older generations
My mum taught me, as my grandma taught her, to admire not
those who earn a lot of money, but those who can save money. In their
generation, they relied on their hard work to earn money, and savings to
accumulate wealth. They put money into fixed deposits to enjoy higher interest
rates and switched in and out of foreign currencies to benefit from currency
appreciation.
I always learned by observing and analysing, this is my
trait. My dad, who was very hardworking, taught me to “work more and talk less”
and to treasure time. Unfortunately, he was not successful in running his
business. In the 1990s, he operated a garment factory in Guangdong province and
his profits were always eroded by poor quality control and margin compression
by wholesalers. He relied on a manager to run the factory, because he
frequently travelled between China and Hong Kong, so he couldn't inspect everything.
My hardworking uncle and auntie were successful in running their business and
accumulating wealth. They engaged in wholesale of men's and women's wear and
retail in Hong Kong in the 1980s. They also invested in commercial properties
and bought about 10-15 shops in busy districts. They gave their high-performing
and hard-working staff 10% shares in each shop they operated. My family
experience taught me that although hard work is the foundation of success, it
is not enough. I understood that investing in people with sincerity and
fairness is crucial to the success of a business and investing in properties
can grow wealth.
Career advancement and business success are ways to grow wealth
In junior roles, salaries may barely cover the cost of
living, such as renting an apartment, paying utilities, buying meals and
clothes, transportation and entertaining. Climbing up the corporate ladder is a
way to enhance income. Another option is to freelance or create a side business
to generate extra income.
At the early stage of your career development, if you can
invest in your knowledge and skills and proactively take more responsibility,
you have a higher chance of being promoted. At a later stage, when there are
fewer roles at the top of the corporate ladder, it will be harder to move
further up. After gaining more industry knowledge and building internal and
external networks, some people start their side businesses. I have friends who
lost their main jobs or decided to quit at a later stage of their careers and
shifted their focus to their side businesses.
Pursuing career advancement or growing businesses will
generate income growth and probably wealth expansion. Of course, it is about
your values and what you pursue because different people have different needs,
some pursue a successful career or business, and some may only want to generate
cashflows to support their daily expenditures and/or fun activities.
My observations about climbing the corporate ladder
A proactive personality has more advantages in a workplace.
Those who succeeded in their careers usually have strong interpersonal skills.
For example, they are able to befriend top management and earn their trust. Top
management who wants to expand their power need subordinates that they trust
and can rely on.
Once you become the core of power, higher incomes should
follow. However, this approach has one drawback, because when the top
management changes, their subordinates change as well.
Whereas mine was a functional role rather than management;
my approach was to enhance knowledge and strive for personal improvement to
become a valuable member of the team. My ability and adaptability allowed me to
fit in well despite any management reshuffles and to find new employment if I
were laid off.
My 20 years in macro and equity research taught me
Timing is crucial in investment and the most difficult
parameter to predict. Understanding macroeconomics can provide valuable
insights for long-term investment success. Being a contrarian, whether
investing in stocks or real estate, can often lead to profitable outcomes. The
principle of 'buying low and selling high' is a rewarding strategy but it is
hard to get it right, as there are lots of push and pull factors affecting
market sentiment. For property markets, I analyse potential shifts in saving rates,
mortgage rates and rental yields to assess whether property prices are
attractive. For equity markets, I analyse the interest rates environment,
economic cycles, company profitability, potential growth factors and
valuations. Ideally, we want to enjoy discounts when demand is low and sell
when demand is high. We cannot make correct decisions every time; but after
analysing, hopefully, we make more accurate than wrong decisions and the
important one to be correct.
My wisdom and insight
I teach my children to manage themselves with
self-discipline before they can manage more things in life. A Chinese phrase 修身,
齊家, 治國, 平天下
means individuals need to manage themselves before they can manage family and a
country, and then conquer the world. To
manage themselves, I instil in them discipline to manage their health, time and
wealth.
Financial stability is one of the values that my husband and I value
the most. I believe it is crucial to be able to support myself and my family.
Everyone has experience of managing their money, sometimes successfully
sometimes not. Initially we aim to
generate positive cashflows each month. We try to control our spending to
ensure we have savings. To reduce expenditure, we differentiate between needs
and wants, choose cheaper alternatives, wait for discounts, and delay spending
especially when there is no urgency for the things that we want.
How to save?
It is simple: Monthly Saving = Monthly Income(s) minus
Monthly Expenditure. Accumulating wealth requires self-control and discipline.
During early stages of our career, accumulating wealth may pose a challenge.
Nevertheless, setting financial goals, no matter big or small, and cultivating
good spending habits to ensure positive cash flows is essential.
The below four scenarios generate different outcomes about
savings, I adopted the last one to save money. My goal was to accumulate money,
to invest and to generate passive incomes.
▪ Negative cashflows make it impossible to grow your wealth. I know people who love spending; the more they earn, the
more they spend. Instead of accumulating wealth, they are accumulating their
liability. If one has put their life into debt financing, it could become
extremely stressful when they lose their job. I learned an idiom from my
parents "Save for the rainy days".
▪ Positive cashflows with a fixed amount of savings. Some people increase their spending along with their
salary increment. Assuming they save a fixed amount of money no matter how much
they earn. It is not an excellent way to accumulate wealth, but at least they
accumulate some money over time. Theoretically, if they save GBP200 per month,
they can save GBP2,400 in a year and then GBP24,000 after ten years.
▪ Positive cashflows with a fixed percentage of savings. Some people aim at saving a certain percentage of salary no
matter how much they earn. Assuming they save 20% of their salary when they
earn GBP2,000 per month, they save GBP400, while when their income increases to
GBP3,000, they save GBP600.
▪ Positive cashflows with a limited increment in spending. Some people prefer controlling expenditure increments despite
their rising income. They are more determined to save money along their surging
income profile. It is more target-oriented in terms of wealth accumulation.
Different people have different approaches to spending and saving, determined by priorities, needs and constraints. The below chart demonstrates the wealth accumulations under different scenarios to help visualise their difference in magnitudes. Of course, the last scenario gives the best result.
Identifying your values
For most people, pursuing income growth is about improving
their quality of life while wealth expansion is an additional consideration. Fortunately, my values align with my husband’s - our
common goal was to improve our lifestyle via our income growth, and we decided
to go for saving and generating passive income to achieve financial stability. This
approach bore fruit so nowadays I can spend more time with my children, focus
on my passions and pursue a meaningful life.
Some prefer paying a premium for luxury products, going to
Michelin-starred restaurants and staying in 5-star hotels when travelling. We
did that occasionally but could not when our salary was low. Indeed, I quickly
found that acquiring things brings only short-term joy and is not
fulfilling. One must recognise one's values and prioritise what is
important to them. My husband and I love travelling and prefer accumulating
experiences rather than possessions. We look for reasonably priced hotels and
splash out on good food. I am not keen on buying expensive products but love
collecting souvenirs from places, such as postcards, magnets, ceramics, tiny
cups and coins. I enjoy new adventures, taking photos and making albums.
Delay spending
In this materialistic world, there are so many temptations.
Advertising and marketing aim to attract your money to services and products.
To avoid impulse buying, I tend to delay spending to see if the desire
disappears. Delay also serves a practical purpose - if the product is seasonal,
it may be offered at a discount, which is another way of saving money.
Choose for cheaper alternatives
When my daughter was in Year 4, she once asked for a Beat
wireless headphone her best friend had that cost GBP300. Instead, I got her a Sony
wired headphone for GBP20. She concluded that the sound was quite good. It's
worth exploring cheaper alternatives to teach our children to shop around,
economize and search for value and quality beyond famous but frequently
overpriced brands.
Another example, people like buying coffee maybe from
Starbucks or Costa which cost around GBP4 per cup. If one buys a can of coffee
powder which cost around GBP6 which may be able to consume for 20 days.
Assuming one buy coffee for 20 days each month, they can save (GBP4 x 20 –
GBP6) x 12 = GBP888 in a year, which is enough to finance a short trip to
Europe. A two-way BA ticket to Europe may only cost GBP100 to GBP200 during
non-peak season. Of course, it is a matter of values and personal preference, individuals
may prioritize saving money over travelling. If one considers this a social
event, then the cost of a coffee is irrelevant. However, some people may not
prioritize social events or may not need them frequently or even be very
selective about who to network with.
Don’t gamble
Gambling can undermine one’s financial stability and can be
addictive. Individuals must exercise self-control while gambling. Treating
gambling as a game by spending a tiny portion of your wealth for fun and
excitement is acceptable. We should never gamble a large part of our wealth or
even borrow money to gamble.
Opt for multiple income sources
If time allows and opportunities arise, it is worth engaging
in freelancing or part-time jobs. Some people may enjoy pursuing their passions
such as teaching piano or dancing as their part time job. It is worth
remembering that our life is not just about money, and a healthy and happy life
is about striking a balance between work and rest and allowing space for
quality time.
Invest in knowledge and skills
The most important investment in ourselves is enriching our
knowledge and skills to equip ourselves better for our career development but
also create satisfaction, sense of empowerment and boost confidence. New skills
enhance expertise and should result in higher salaries. Changing jobs after accumulating a few years
of experience is a smart way to create a big jump in salary. Making yourself
indispensable to a company is a good way of ensuring remuneration increases. I
obtained an offer from an US house before the Lehman Crisis and my company kept
me by giving me a decent pay rise and guaranteed bonus.
Purchasing properties – a good long-term investment
I advocate purchasing at least one property for lifetime
residence and mortgage for around 20 to 25 years to align with your working
horizon. Therefore, once you are retired, you don’t need to pay any rent. If
your finance allows, adding the second and third or even more properties can be
a way to generate passive incomes for your retirement.
Housing prices capture long-term inflation as building costs
including labour and materials keep rising. Except if the economy dips into
recession, owning a property should be able to generate an inflation-linked
rise.
A lifetime residence
Indeed, long-term renting is not a wise choice, home
ownership should be one of the priorities in life. The rental cost is dominant
in households’ monthly expenditure. If one gets a stable job, and after
accumulating enough money for a down payment, purchasing a home with a mortgage
similar to rental expenditure is worth considering. Property ownership also
enables reverse mortgages to generate cashflows to finance daily expenditures
when one retires.
Generating passive income
If financial resources allow growing wealth by purchasing a
second or third property is worth considering. The property can be rented, and
rental income can cover mortgage payments. This is a way to generate passive
income after retirement. For property investment, there are two considerations:
1) interest rates and economic cycles and 2) location. The PMT function in
Excel can help with a sensitivity analysis under different interest rates
scenarios, allowing to gauge the level of mortgage payments if interest rates
rise.
Avoiding over-leveraging
In 2023, during the interest rate hikes in the UK,
residential mortgage rates rose to about 6% while commercial mortgage rates surged
to around 9%. This resulted in negative cashflows for investors whose rental
incomes could no longer cover mortgages. Some were forced to sell. To recall, when
the Asian Crisis impacted Hong Kong, property prices plunged and many
homeowners who paid only around 10% down payments found themselves in negative
equity or went bankrupt. After the Asian Crisis, most Hong Kong banks require
potential home buyers to pay at least 30% down payment and do a stress test.
This shows that to sustain their holdings property investors must not overly
leverage, especially during unpredictable market downturns.
Unfavourable policies
In some countries, government policies are inclined to protect
tenants making buy-to-let less attractive. The government aims to help tenants,
but this has two drawbacks; 1) property owners become more selective in
choosing tenants, and 2) investors reduce investment in the property market,
which leads to a shortage of rental properties and drives rents up and boost up
inflation.
Timing matters - beware of the economic and interest rate cycle
Ideally, holding one property as main residence is key. From
the investment perspective, holding properties is better than holding cash in
the long run to hedge against long-term inflation. I advocate learning about
economic and interest rates cycles. Knowing when to switch from properties to
cash and from cash to properties by comparing rental yields with mortgage rates
is beneficial. My husband and I purchased our first property after SARS
impacted Hong Kong in 2003 and the sentiment and the economy were sluggish. By
doing macro analysis for over twenty years, I was aware of the “Great Unwind”
scenario, I expected a sharp rise in interest rates after tremendous level of
quantitative easing. Therefore, we basically did not leverage, and I also
advised some friends to reduce their mortgage amount.
Purchasing a home or investing in property often requires
borrowing from banks, which ties buyers to interest rate fluctuations.
Understanding the potential impact of interest rate hikes on mortgage payments
is crucial to avoid overwhelming financial burdens. Bear in mind, a wrong
decision can reverse wealth expansion into wealth shrinkage or even bankruptcy.
Location also matters
Location is a critical criterion in purchasing properties.
Let’s take Cambridge as an example. It is one of the most expensive places in
the UK, with about half of the population holding a degree vs 29% national
average. Corporations choose to base their operations in Cambridge to work with
the university and attract talents, therefore, job creation drives population
increases and consequently demand for properties. Areas near schools rated
outstanding by Ofsted also guarantee demand because parents always choose to
live within catchment areas of quality schools. A negative factor to watch out
for is flooding risk. It is worth studying the flooding risk report for the
property location provided by the builders and the government.
Investment in capital market
There are many ways to invest our money in the financial
market. For example, we can allocate 20% of our liquid assets to equities,
active funds, ETFs (Exchange Traded Funds) and REITs (Real Estate Investment
Funds) to generate capital gain, 50% in fixed deposits and fixed incomes to
generate yield returns, and reserve 30% cash for daily expenditures and
unexpected cash flow needs. We can seek expert to help in asset allocation.
The management fee of active funds is relatively high, and
it might eat into returns if the fund manager cannot generate substantial
outperformance. Therefore, the exchanged-listed index-tracking ETFs and REITs
with relatively low management fees are popular. The former tracks the key
indices which comprise the portfolios of big caps and can capture the market
performance. The latter holds a real estate portfolio which generates steady
dividends from their rental incomes. Investing in the capital markets is not
easy and investors must learn about the forward-looking macro economy and the
potential industrial and company profitability.
Gain insights from famous investors
My husband and I invest in a portfolio of global equities
(US, UK and Hong Kong), but timing is critical. Sometimes, I track some famous
investors and try to gain insights from their actions. For example, Warren
Buffet has recently sold half of his equity portfolio and is holding ample
cash. Michael Burry, who predicted the housing crash in 2008, reduced his
exposure to consumer discretionary, financials, energy and industrials in the
US while increasing his holdings of a few technology stocks in China. The
shifts in their portfolio exposure are a result of concerns over the expensive
valuations of US equities and recession risks.
Investing in the capital market has risks and even
professional investors cannot get it right all the time. It is important to
diversify, anticipate changes in the market, dare to cut losses before dramatic
market corrections and be able to hold under a crisis scenario.
Don’t leverage
I strongly recommend retail investors not to leverage their
investments as there is a chance for a compulsory loss cutting during a
dramatic downturn, and investors without enough money to top up their funds
would be forced to cut losses. Investors without leverage can keep their
equities portfolio of quality companies even in a market downturn if they have
good holding power. As mentioned previously, if investors invest only around
20% of their liquid assets in equities, even when a crisis comes, it will not
affect their living.
Derivatives products
Derivatives products are complicated for retail investors.
Understanding how those instruments work is difficult for investors without
financial knowledge background. To profit from options trading, one needs to
correctly predict the market or stock direction, magnitude and timing.
Structured products such as accumulator or decumulators have an asymmetric
risk-reward profile. Investors expose themselves to limited upside but
unlimited downside risks, especially when the market goes against their
direction dramatically. I believe retail investors should avoid structured
products especially if they don’t understand the risk as some of the products
are leveraged which can mean losses of more than their principle.
Lending money to others
People with good credibility can borrow money from banks so
they don't need to rely on friends or family. As a rule of thumb, lend only
what you can afford to lose. For friends you are keen to help, consider lending
what you can easily earn back from your salary even if they cannot return their
money in the short term. If you don’t have the money, don’t be their
guarantor.
Insurance – hedge against tail-risk
There are saving plans by insurance companies that allow you
to accumulate money. You should also consider purchasing life and crucial
illness insurance to hedge against the tail risk especially if you are the
breadwinner of the family. You must hedge against a scenario when you lose your
ability to work due to health issues or accidents.
Cash is king when interest rates are high
Holding cash is sensible when interest rates are high, and
decent income can be generated via fixed deposits, but one must reserve enough
cash for covering monthly expenses.
Manage wealth
To be a responsible adult, especially if we have family and
children, we must manage our money and wealth properly. According to my mum and
grandma’s wisdom, those who make huge amounts of money do not necessarily save
a lot. Managing money and wealth wisely is a crucial concept that we need to
instil to the next generation. Compared to the UK, Hong Kong's lower taxation
and higher incomes allow individuals to earn and save more, facilitating wealth
expansion. However, Hong Kong also has a higher cost of living, higher property
prices and more demanding work culture. Saving money and accumulating wealth
requires self-discipline and investment knowledge.
Financial coach
Financial coaches can support people in improving their
financial situation, setting feasible savings goals and achieving wealth
accumulation. My MSc Finance qualification, over 20 years’ experience in
investment allows me to share knowledge and support my coachees in setting
financial goals.
Tips to young people
While accumulating wealth, we must avoid losing sight of
other life aspects. Pursuing knowledge and personal growth, career
advancement and business development are all important and can deliver
fulfilment. To save money, self-discipline against temptation is critical. To
grow wealth via investing in property and capital markets requires an
understanding of macroeconomics, economic and interest rate cycles, and company
profitability and valuations. It is a learning journey filled with ups and
downs; it is important to enjoy the process.
Readers can also refer to my articles “Best Personal
Investment – Enriching knowledge” and “My Professional Journey: Growth and
Challenges” which share my insights into pursuing personal growth and climbing
the corporate ladder.
Winner Lee
Life Coach, Mentor, Writer
The original article was published on LinkedIn on October 28, 2024.
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