So it’s that time of the year again where one faces nosey relatives that you haven’t seen in a year, stuff our faces with yummy Lunar New Year goodies which go straight to our waistline and watch endless reruns of 90s Hong Kong movies.

It’s also that time of the year where Feng Shui masters dish out pearls of wisdom for each of the twelve different Chinese zodiacs given the position of stars in the sky. Well, I’m not one for superstition so here are three things you can do which will improve your wealth (regardless of which zodiac you belong to).

Number 1: Start Saving

As the old adage goes, ‘We’re sitting in the shade today because someone planted a tree a long time ago.’ If you think about your future self, then you really should start saving today and trust me, your future self will thank you for it.

The problem for most people is that the present is easier to visualise than the future. Although most people would agree or even wish that they saved more, many people will never get down to it or just like making a resolution to exercise, they may only do it for a while before they fall back into their old habits.If you think about your future self, then you really should start saving today and trust me, your future self will thank you for it.The trick is to remove as many obstacles as possible and take steps so small that they feel almost imperceptible. I can think of some tricks to get a regular savings plan going.

First, automate it. Set up a separate bank account that automatically deducts the amount you wish to save each month when your income (or for Singaporean students, your allowance) comes in. Second, if you don’t save at all, then it’s best to start with an amount so small that you’ll hardly notice it. A good starting point may be 5% and after a year, raise it to 10%. In a few years, try to get to 25-30%. If you’re anything like us good Asians, you can hit 50%.*

The trick is to remove as many obstacles as possible and take steps so small that they feel almost imperceptible. I can think of some tricks to get a regular savings plan going. First, automate it. Step up a separate bank account that automatically deducts the amount you wish to save each month your income (or for Singaporean students, your allowance) comes in. Second, if you don’t save at all, then it’s best to start with an amount so small that you’ll hardly notice it. A good starting point may be 5% and after a year, raise it to 10%. In a few years, try to get to 25-30%. If you’re anything like us good Asians, you can hit 50%.*

Number 2: Spend Less

The bonus of having a higher savings rate? You’ll be able to retire earlier. Why? It’s simple, the more you save now means the more you can get by on less. This also means that given the same rate of return, you’ll need a smaller capital base on which to achieve the sum required to cover your annual expenses. Let’s go through an example.

Let’s say that you have an annual income of $60,000 and you save 50% of your income as compared to your poor cousin, B who saves only 10% of his income. This means that your annual expenses come up to $30,000 (50% of $60,000) versus B’s which come up to ($54,000). If both of you deem retirement as the point in time where your assets help you generate an income equal to the income you had before retirement** and the rate of return both of you are able to get is 5% per year, then you’ll only need a capital base of $600,000 versus B who needs $1,080,000.

This has wonderful implications as well because the earlier you realise that you don’t need an income from your job, the sooner you can start to do things that really matter- this may be the job that you’re currently in or it could be learning something new which means your boss saying goodbye to a jaded workhorse. Either way, it’s what we economics people like to call a Pareto-optimal outcome or in lay terms, win-win.

Number 3: Invest

Investing is both an art and a skill that used to be outside the domain of the regular person. Retail investors either went at it alone and hoped to do well or they placed their hopes in the hands of their broker and, later on as the years progressed, some fund manager. Typically, the broker made them broker (unless you were a big-wig client that got all the attention). The fund manager didn’t do much better than the market and more often than not, did worse after fees were paid.

Thankfully, John Bogle came up with the index fund and the idea has evolved to its current incarnation- the Exchange-Traded Fund (ETF), which gives retail investors a very, very accessible way to be invested in the market. While the ETF or the index fund is a reasonably good vehicle for obtaining returns promised by the market, the enemy that resides is within because us humans haven’t overcome the psychology that makes us pour more money when things seem to be going swimmingly well and running when things seem to be going terribly bad.

In fact, Professor Jeremy Siegel’s research has shown that if one had bought at the peak before the stock market crashed in the Great Depression and kept investing and averaging down during the great depression, an investor would have broke even in just 4-5 years rather than the 12 or so years that it took just by hanging on. The additional dividends bought at firesale prices more than helped to cushion the blow of buying at preposterously high prices.

While it’s important to have a feel of whether valuations are high or not, it’s more important to remember that it’s pure hubris to think that we can time the market. Let’s not forget that there are thousands of professionals paid good money to try and do that every day. Not all succeed. In fact, I tend to find that people who try to time the market end up mis-timing it so badly that they end up buying high and selling low. The typical thought process goes like this:

(When the market is rising): Markets are getting overheated. I’m going to stay on the sidelines.

(Markets keep going up): Crap! I think I’m missing the boat but the market is too high. I’m going to wait for the next correction.

(Markets keep going up before reaching a peak): Double crap! I got it totally wrong. I’m getting in now before it keeps going up.

(Markets dip slightly): Steady. Steady. It’s just a breather.

(Market dip further): Don’t worry, it’s just a correction. Valuations are cheap.

(Markets crash): Damn! I should have listened to myself a month ago. I’m getting out NOW!

Then the markets finally turn which make our poor market-timing investor buy at the peak (or thereabouts) and sell at the bottom. While the above can play out many times within the broader overall direction of the market, it clearly shows the dance with the devil while trying to time the market. So instead of playing the same game that everyone is playing, I rather play a less stressful game that focuses on sloth and lethargy.

There you have it. While the strategy will work better in some years that others, you’ll be sure that your wealth will increase over the years and, at least from the financial angle, life will be less stressful.

Notes:

* Ok, I’m joking. Not many people save 50% of their income and if you’re in a country that covers your healthcare needs, then you won’t need to save as much.

*We can debate about whether you need to replace 100% of your income before you retire but that’s really not the point here.

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