Economic challenges
On March 4, President Donald Trump threatened to impose 25% tariffs on imports from Canada and Mexico and 10% on imports from China. This move could trigger retaliatory tariffs, increase global inflation, and, worst case, start a trade war, further complicating financial planning.
In Singapore, the average inflation rate over the past 30 years (1993 to 2023) has been 1.73%. The Monetary Authority of Singapore (MAS) has forecast an economic slowdown this year, with MAS core inflation expected to remain below 2%. Additionally, interest rates on bank deposits are expected to decrease, with the three-month Singapore Overnight Rate Average (3M Sora) projected to drop from 3.3% last year to about 2.5% by the end of this year. Given these factors, the need for investment strategies to outpace inflation and preserve wealth has never been more critical.
To navigate these financial uncertainties, individuals must adopt structured financial habits that prioritise disciplined saving and smart investment choices.
The 50/30/20 rule for financial stability
Financial institutions and banks in Singapore commonly recommend the 50/30/20 rule for budgeting. The rule suggests spending 50% of income on needs such as bills, rent payments and utility expenses, 30% on wants such as shopping, entertainment and vacation expenses, and 20% on savings such as emergency funds, investments and long-term goals.
See also: People aged 25-44 invest just 15%–17% of salary: DBS
Wage growth and inflation considerations
Table 1 is taken from the Ministry of Manpower Singapore; it highlights the annual wage change % from 2013 to 2023 in both nominal and real. The real rate takes into account the Consumer Price Index (CPI), which is a proxy for inflation in the respective years. It can be observed that between 2020 and 2023, the real annual wage change is below the 10-year average of 2.5%, with 2022 experiencing a –1% real wage change despite a nominal wage increase of 5.1%. This underscores the importance of investing to counteract inflation’s erosive impact on purchasing power.
Power of compounding
In Table 2, consider an individual earning an average starting salary of $4,000, with a yearly wage increment of 2.5%, a promotion every three years resulting in a 10% salary increase every three years (for 15 years) and a career spanning 45 years. Assuming he saves 20% of his salary annually and earns a 2.75% rate of return (equivalent to the 30-year Singapore government bond yield and commonly used as a benchmark risk-free rate), this would be his accumulated savings.
See also: Temasek Trust-backed MoneyOwl stirs up funds space
Impact of savings rate and investment returns
Financial outcomes vary based on saving rates and returns, which differ based on individual needs, spending habits and financial instruments. Considering the above-mentioned scenario as the base case, how will varying saving rates and rate of return affect the total savings?
With reference to Table 3, even with lower saving rates of 10%–15%, paired with a 5%–7% rate of return, savings can still be higher than in our base scenario. Notice how for every percentage rate of return increase, the end value increases exponentially? This emphasises the power of compounding over time and highlights the importance of asset allocation.
Risk vs return: A balanced approach
In finance, there is a common saying: “No risk, no return,” which applies to investing. A 2.75% rate of return assumes investments solely in 30-year Singapore government bonds, which are among the “safest” assets. However, higher returns can be achieved by incorporating other financial instruments, such as stocks and exchange-traded funds (ETFs), into a diversified portfolio.
For instance, the S&P 500 delivered an average annual return of 13.31% between 2013 to 2023. ETFs such as VOO and SPX offer cost-effective exposure to the S&P 500 without requiring substantial capital or incurring high fees. Though past performance does not guarantee future results, the S&P 500’s track record and the ETF’s constant rebalancing make it a compelling investment option. Table 4 demonstrates how individuals can optimise their returns while managing risk based on their portfolio allocation to an S&P 500 ETF and 30-year Singapore government bonds.
Aligning investments with risk tolerance and objectives
There is no one-size-fits-all approach to how much risk an investor should take for higher returns, as it depends on factors such as investment horizon (the estimated duration of the investment), investment objectives (such as capital appreciation, generating income, preserving wealth) and the ability to withstand market volatility.
For more stories about where money flows, click here for Capital Section
Based on historical S&P 500 performance, there were periods of economic downturn, such as 2000–2009, when total return was –6%. However, over a longer time horizon, 94 years, the S&P 500 averaged an annual return of 9%. This illustrates that time in the market tends to be more rewarding than attempting to time market fluctuations. Market cycles of booms and recessions are inevitable, and investors should build strategies that account for these fluctuations rather than reacting emotionally to short-term volatility.
Lastly, the ability to endure market fluctuations is crucial. Even seasoned investors may struggle with emotional biases, such as selling assets prematurely in a downturn or taking excessive profits during early market upswings. Investigating investor behaviour has revealed a common pattern of premature profit-taking in bull markets and panic selling during bear markets. A well-structured allocation strategy rewards patience and long-term discipline over reactionary decision-making.
In conclusion, with potential trade wars and economic uncertainties affecting inflation and interest rates, strategic financial planning is more important than ever. A well-structured approach, including disciplined savings, balanced asset allocation, and a focus on long-term growth, can help individuals safeguard their wealth and achieve financial independence. By tailoring their investment strategies based on risk parameters, objectives and personal profiles, investors can optimise their savings and confidently navigate the ever-changing financial landscape.
Hei Tung Sam is a senior dealer, contract for differences, at PhillipCapital
