8 lessons the coronavirus teaches us about personal finance

It has been more than 1 week since Phase 2 started. A lot of Singaporeans have gone about doing their usual activities. I have taken some time to reflect about the current pandemic situation, which has definitely not ended, and decided to pen down some of my thoughts. As we understand the virus better (and it’s devastating long-lasting effects…), we also need to stay alert and continue our lives, no matter how “normal” it is.

Risk and Reward

With any kind of investment that involves risk (bonds, stocks, ETFs, robo advisors, etc), there will be a corresponding level of reward related to it. One clear example is how our government has decided to lift up some of our restrictions slightly, which marked the transition of Phase 2. This is not because we had 0 cases, in fact we still have around 200 new cases daily. This is because there is a calculated risk. With the lifting of certain restrictions, it will allow for some form of reward. Our economy is rewarded as retailers are opening up again. Singaporeans are rewarded because we get to meet our friends. Although traffic is still muted, it has shown us that nothing is predictable, especially in the stock market. When there is reward, there will be risk, and it applies to our personal finance.

Opportunity Cost

I never thought that the phrase I learnt from Economics in school would have become so useful and crucial in every aspect of our lives. This coronavirus has presented us with 3 kinds of options.

Firstly, we can choose to ignore the virus and allow the virus to spread. After some time, the majority of the population will contract the virus and herd immunity will kick in. However, the opportunity cost is that we are potentially shrinking our workforce, given how contagious this disease is. Moreover, the virus has shown to be able to mutate. This will render the strategy useless.

Secondly, we can force a lockdown and temporarily shut down an economy. This is what many countries have done. Although it is the option that most governments have chosen, it has shown massive negative repercussions on our economy. The opportunity cost is that we are limiting our social interaction, which can limit productivity as well as stunt economic growth.

Lastly, we can create a vaccine. This is a solution that will take a lot of time. Moreover, we do not know of the long-term side effects of a vaccine. It is just impossible to test it out given our very short time frame.

As you can see from the 3 viable options I presented, there is opportunity cost to every option. So think again if you want to take that gap year, because you might be losing 1 year of potentially higher salary and work experience in the future.

Power of diversification

There are many “truisms” in investing. One of the most popular ones would be “diversification is the only free lunch in this world”.

Who knew that a coronavirus would hit the markets so heavily such that we faced the fastest drop since The Great Depression in 1929? If you have bought in on 23 March (lowest point), consider yourself lucky. But hindsight is always 20/20, and it’s almost impossible to time the market amidst bearish sentiments.

However, diversification can really help you in that. You might argue that a diversified index fund like the S&P 500 Index also dropped significantly. However, the market rally has been decent and if you are a well-diversified investor, you are probably hovering around a neutral/positive point in your portfolio right now.

No one can predict the future. What was thought to be a V-shaped recovery seems to be not completely true as well. The situation has been termed by CNBC as the “kangaroo market”.

FYI: Bull is a rising market because bulls charge with their horns pointed upwards. Bear is a falling market because bears swipe with their paws downwards. Whereas kangaroos just hop around, up and down, which is where the stock market is at currently. Up and Down. Personal finance jargon.

We are really transitioning into a digital age, and it has never been as obvious

This is why diversification is important. If you were heavy in Real Estate equities or Energy equities, this pandemic has shown you that the world is transforming and progressing towards digitalisation. The move is so great that the largest firms in the NASDAQ index (Facebook, Alphabet, Amazon, Apple, Microsoft) have welcomed the recent rally and “carried” the stock market to hit all time highs (ATH).

Lifelong learning is an important trait that everyone should possess

Lifelong learning is one of Stephen Covey’s 7 Habits. (The book is great.)

Jobs are no longer stable. Tech unicorns like AirBnb which was planned to IPO this year cut 25% of their workforce. Closer to home, GoJek has recently laid off some employees as well. Even with Jerome Powell and his money printer, no amount of liquidity can mitigate the employers from cutting costs. This is why we should keep our skills up-to-date. Thankfully, our government is aware of that and provides many grants for us, Singaporeans.

Check out the SkillsFuture program if you are above 25 and the CITREP+ program from IMDA. Personally, I am taking a course on it and it is quite awesome that we get 100% subsidies (depending on your classification) from the government.

What was stable once may collapse at any time

Your big name companies can collapse and this pandemic has seen many companies file for bankruptcy, GNC being one of the biggest names. Just like how Nokia and Blackberry fell out of relevance in the smartphone market due to the lack of innovation, this pandemic has accelerated our path towards digitalisation.

Don’t invest just because the firm is “too big to fail”. Nothing is “too big to fail”. Diversify. Understand your investments. Read the annual reports. If you can’t, stick to a fuss-free way of passive index investing.

We need to save for stormy days, not just rainy days

Our world is so connected now. There has been no virus that has spread so quickly throughout the whole world, and it is just proof of how connected we are as mankind as compared to the past. This is why when a major economy fails, it can lead to many repercussions for smaller economies like us.

“When America sneezes, the World catches a cold”

More “truisms”

Save your money for stormy days, not just minor rainy days. 6 months of your income or 12 months of your expenditure, at least, whichever is higher. Of course, if you have more dependents (children/family to take care of), you will need a larger emergency fund. Stash them in a high-interest savings account, the best one right now is Singlife. This is one of the fundamentals of personal finance.

Money is not everything

This pandemic has made us realise that money isn’t everything. Just imagine, even if you are a billionaire right now, you probably will still be scared to travel and visit the world at the peak of the pandemic. Yes, this situation is rare. But it is times like these which make us realise that money isn’t that important. Sure it can help your financial struggles. But it sure doesn’t buy happiness.

Use this time to appreciate the time you have with your family. With Phase 2 and the gradual reopening, talk to your friends and show some concern. Personal finance, after all, isn’t everything.

Bonus Lesson: Wash your hands

Who knew a simple act of hand-washing could be so crucial. Wow, what a time to be alive. Sing a happy birthday song while you scrub the soap thoroughly throughout your fingers. 

Stay safe, stay healthy, stay invested.

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