Be financially well-prepared to seize opportunities

Be financially well-prepared to seize opportunities

By Lorna Tan

NAV TL;DR

If you don’t have time to read through the whole article, you can check out our short version below.

  • The COVID-19 crisis is a highly regressive event that could potentially widen the income gap.
  • Those with adequate savings are better positioned to weather through the crisis, which underscores the need to build up emergency savings.
  • Those who are financially better prepared have managed to capitalize on the market opportunities; They were able to who understand the importance of financial planning, have lower financial commitments and who have set aside enough emergency funds.

The COVID-19 pandemic has wreaked havoc and impacted the lives of many people globally. As we witness the spiral of misery exacerbated by fresh outbreaks, loss of jobs and a deep recession, let us not sink into hopelessness and despair.

Instead, there are valuable insights that we can distil from this crisis to help us plan for a more secure financial future. Let us focus on what we can control – like boosting our financial resilience by budgeting and investing prudently, and empowering ourselves with knowledge – and do them well.

Be financially well-prepared to seize opportunities

As Singapore continues its efforts in containing the pandemic and its economic repercussions, DBS notes that the impact on individuals’ income is far deeper and broad-based. Macroeconomic data does not reflect the full impact of the COVID-19 crisis on people’s income. So, to ascertain that, we leveraged our bank-wide database of 1.2 million retail customers to examine the effects of the pandemic on individuals’ financial wellness from March to May 2020.

The inaugural research paper Same Storm, Different Boat is part of a new series of research studies titled DBS NAV Financial Health that will be conducted on a regular basis. Here are 8 key highlights and financial planning tips from this study.

1. Deepening income divide

The pandemic has sharply outlined the differences between two income groups. The lower income group is facing threats to job security and sandwiched between the fall in income and inadequate savings, while the financially able are capitalizing on the opportunities from financial market corrections. The Covid-19 pandemic has deepened the income divide.

Tips: The impact of the pandemic is uneven. The more financial cushioning you have, the better you can sail through tough economic times. This highlights the importance of setting up a robust financial plan to achieve wellness.

2. Lower-income group is bearing the brunt

Among customers with more than 10% income decline, the impact on lower-income workers is more pronounced. The lower income earners ($2,999 & below) accounted for about 49% of customers that experienced a drop in pay checks. About 51% of them saw their incomes declining by more than 50%. In comparison, the impact on the higher income groups is considerably modest.

Tips: Besides having enough emergency savings to tide through possible retrenchments and income losses, start building passive income streams early and/or upskilling to find income opportunities via side hustles.

3. The middle-age group is the new vulnerable segment

Amongst the customers that saw more than 10% decline in income, as many as 79% are below age 55 and of which, those aged 35-44 are the worst affected. The income of 56% in this age group fell by more than 30%. This is partly due to the current policy measures which have focused on job losses (in the case of older workers) and the lower-income group. The middle age group also coincides with being sandwich class with more financial commitments such as having 2 sets of dependants.

Be financially well-prepared to seize opportunities

Tips: While financial planning is for everyone, those who are in the middle-age group will likely require more help in their financial planning since they would have multiple financial responsibilities, such as servicing insurance premiums, mortgage loan, and having to support parents and their children. In addition, they would also need to set aside money for their retirement.

4. Lack of adequate emergency cash

In May, 64% of customers who have experienced a significant fall in income had less than 3 months of emergency funds. In fact, a sizeable 42% had less than 1 month of emergency funds. Amongst those earning $2,999 and below, 33% has less than 3 months of emergency cash, and of which, 22% has less than 1 month of emergency funds.

Tips: Set aside enough emergency cash to cover at least 3 to 6 months of expenses, and more if you have dependants. Doing so will enable you and your family to tide over rough patches and avoid the need to liquidate your investments at an unfavourable time. In addition, monitor your discretionary expenses and pay bills in full every month.

5. Those with less savings face higher risks

Those harder hit by income declines have less savings. About 24% of customers hit by a sharper decline in income of 30% or more have less than 1 month of emergency funds; 14% of customers earning less than $2,999 and experiencing more than 30% decline in income, have less than 1 month of emergency funds.

The situation for this group - lower wage workers with little savings - is exceptionally dire. They are heavily reliant on their salary to meet their monthly cash flow needs. A sharp decline in salary would inflict significant stress on their livelihoods.

Tips: Set up a budget to crystalize your money flows. Identify your needs and wants and aim to reduce unnecessary spend over time while seeking income opportunities via upskilling.

6. The well prepared are capitalizing on market opportunities

These are individuals who are in the best position to seize investment opportunities that present themselves only during a crisis.

Here are their 3 main characteristics:
6a. The more you earn, the more likely you will invest
The propensity to invest rises with income level. Those earning above $10,000 invest significantly more. This group has the highest percentage of investors at 12.2% for retail customers and 15.8% for NAV Planner users.

6b. Higher savings equates to higher propensity to invest
DBS research shows that higher income earners invest more. For those who have invested via DBS, there is a positive correlation between the level of emergency funds and income. For example, 54% of our customers in the income bracket of more than $10,000 have more than 3 months emergency funds; compared to just 24% in the less than $3,000 income bracket.

6c. Your life stage affects investment decisions
This is true across all income brackets. The 25 to 35 age group has a higher tendency to invest likely because of their lower financial commitments. It could also be that millennials are more financially savvy and have embarked on their financial journey at a younger age.

Be financially well-prepared to seize opportunities

The 35 to 54 age group suffers a dip in their ability to investment, partly because they are at a life stage where financial commitments are highest – marriage, mortgage loan, car loan, insurance and children's education.

The inclination to invest jumps for the 55-64 age band. This is likely due to lower financial commitments as both mortgage repayments and children's education support end. Another reason is their access to CPF savings which are likely ploughed back into investments.

Tips: The financially well prepared are the ones who understand the importance of financial planning, earn comfortably above the median salary, have lower financial commitments and have built up enough emergency funds to enable them to weather through the crisis and the flexibility to capitalize on market opportunities.

7. Debunks the myth that retail investors are inactive relative to institutional investors and tend to "buy high sell low"

Retail investors saw the plunge in stock prices as a buying opportunity. In the first 6 months of 2002, retail investors likely outperformed the institutions, buying as the stock market plunged in March and trading the market swings in 2Q20.

The Singapore stock market's weekly institutional and retail funds flow showed that retail investors traded the stock market volatility much more successfully than institutional investors, by buying the dips and selling the bounces. So how did the institutions and retail investors perform year-to-date? DBS research indicated that retail investors outperformed the institutional investors and the benchmark Straits Times Index (STI). The retail investor base was down by 8.2%, outperforming the institutions (-15%) by 6.8 percentage-points and the STI (-17.8%) by 9.6 percentage points.

Tips: A crisis is not all bad news. Opportunities are available to those who are prepared to seize them. Empower yourself with the investment knowledge so that you perform due diligence, ask the right questions, understand your actions and make informed decisions.

8. Don’t waste a good crisis

There had been 5 economic recessions since Singapore's independence including the current pandemic. The duration between recessions ranged from 2.5 to 12 years. The average Singaporean can expect to experience 3 to 5 major recessions throughout their 40-year employment stint from age 25 to 65.

For a person in the age band 55 to 64 that has the highest propensity to invest, the current pandemic would be their fourth or fifth recessions. DBS believes it is this group, especially those in the income bracket in excess of $10,000, who have most likely bought stocks from March till May 2020. The best investment opportunities often present themselves during an economic crisis.

The average post-recession bull market recovery was a solid 141% return over a 381-day period. The stock market behaviour in the past 4 recessions is on the side of the investors who stay invested, assuming one has the holding power to ride out any remaining near-term price uncertainty and sit through a potential recovery over the next 12 months or beyond.

Tips: Investing requires discipline, an understanding of your behavioural biases and holding power. It is important to only invest idle funds so that you do not need to liquidate your investments prematurely due to cashflow issues. Adopt a long-term and diversified investment approach to reap the benefits that come with the power of compounding.

Digital advisory tool NAV Planner is an enabler for both first timers and savvy retail investors to better navigate their journey to achieve financial freedom. It helps you monitor your cashflows, identify gaps and offers customised tips and access to investments, as well map out your future retirement income streams, using your finances within and outside DBS, and in government schemes like CPF and Supplementary Retirement Scheme.

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