Investing Can Reduce The Wealth Divide
An imbalance between rich and poor is the oldest and most fatal ailment of all republics.
— Plutarch
You may have seen the news recently that a digital artwork (in the form of a JPEG picture file) sold for over S$90M. In fact, the artwork was bought by a tech entrepreneur based in Singapore. A few thoughts come to mind:
Could non-fungible tokens herald the new way that assets will be purchased?
Are crypto-assets in a bubble?
Who would pay nearly S$100M for a picture? In a digital form no less.
(1): We can’t say for sure as it requires a prediction of the behaviour of individuals in accepting a new way of doing things. We have seen time and time again that predictions, no matter how well-intentioned or backed by seemingly logical information, continuously fail to come true more often than not.
(2): We reserve our judgement at this time. As proponents of valuation theory based on empirical evidence, there is insufficient data at the moment to make an assessment of the true value of digital assets.
(3): Individuals who invested in assets and had sufficient savings to buffer them during the economic uncertainty of 2020 have benefited greatly. There is evidence that the COVID-19 pandemic disproportionately affected the lower-income earners, with the wealthy getting even richer. Data from the Ministry of Manpower showed that the COVID-19 pandemic significantly shook up low-paying jobs with economists calling this a “highly regressive event”.
The chart below shows the growth of the average household’s net wealth in Singapore (The System of National Accounts defines the household sector to include all households, including foreigners. The household sector also includes unincorporated enterprises such as sole proprietorships), comprising the most common assets such as residential property, currency and deposits, securities, insurance and CPF.
Some interesting points to highlight:
Household wealth shrank slightly during the 1997 Asian Financial Crisis and 2008 Global Financial Crisis but has continued to march upward steadily driven by the significant rise in property values and deposits.
Surprisingly, not many local households invested their wealth in shares and securities with the percentage staying quite constant at around 8% of assets. Property, being large and illiquid, forms the greatest portion at around 42% with deposits at 21%.
In contrast, US households (shown in the chart below), especially those in the upper percentile of the wealth bracket, own a much higher percentage in listed assets such as stocks and mutual funds (unit trusts). Given the phenomenal rise in the value of listed assets despite the turbulence of global markets over the past decade or more, the wealthy would have benefited from allocating their capital in such a manner.
A diagram showing the growth of $1 invested in global stocks and Singapore stocks is shown below. Global stocks represented by the MSCI All Country World Index have grown by more than 600% despite the many crises the world has gone through for the past 25 years. The Singapore market, despite its insipid performance over the years would at least have generated a return of nearly 300% on your investment.
It is surprising then, that majority of Singaporean households prefer to let their money sit in deposits earning close to 0%, instead of achieving a higher return from the markets. So why don’t more people invest in the stock market? It is possible that many do not have access to proper investment advice or that they have had a poor investment experience in the past. After all, MAS has yet to institute fiduciary financial advice as part of local regulations and investors are prone to chase the highest yielding assets at the wrong times.
Another possibility, which our local newspapers exacerbate, is that there is no shortage of articles about how property investments can pay off handsomely — practically every local weekend invest section in the news features someone who has made a lot of money from property. In contrast, there is hardly any informative article that properly guides a person who may be starting out in the stock market.
Property values are now extremely expensive, especially for the younger generation, and could turn out to be a contentious issue in the future. A simple breakdown is shown in this article. In short, apart from HDB apartments, you would have to earn above the median income before even considering any other property type. So, without having to fork out a huge outlay, how does one start building up sufficient assets for the future?
Capital markets (listed stocks and bonds) are the best way for someone to gain access to investment returns (albeit, at a certain level of risk) with a small outlay. There are various simple and systematic solutions that help you set aside a small portion of money every month and invest it in thousands of securities around the world. The data and evidence (like the chart above) shows that as long as you commit for the long-term, your money has the ability to grow significantly despite the volatility you may face along the way.
Markets can democratise investment returns, even to those who are in the lower income bracket. You may not be able to pay $100M for an artwork in the future, but you should be able to save enough for a rainy day or your retirement with the right system and solutions.
