The Great Covid Reminder that life is short

One of the more surprising outcomes of the Covid pandemic is the “Great Resignation”, and also what many are now referring to as the “Great Reshuffle”.

Both are driven by the same phenomenon i.e. the record number of individuals who are changing jobs or leaving the job market altogether. In the US, resignations have been above four million a month for over a year. And in Singapore, a survey¹ in July found that 51 percent of Singapore-based employees are planning to quit their jobs in the next 12 months.

Most human resource experts agree that, while not directly linked to the pandemic, this trend is spurred on by pandemic-era experiences that have caused individuals to take mid-career breaks, spend more time with their families, pursue more leisure activities, be better rewarded for their work, and generally aim for more fulfilling lives.

Financial journeys are also changing

Alongside this shift in life priorities, individuals are also having to reassess their financial goals. Many want sufficient funds to buy a new home and retire comfortably. At the same time, they also want to be able to increase their emergency cash reserves and pay off existing loans.

However, it is clear that these financial objectives do not necessarily align with each other. A good example of this is a recent survey² of 1,000 Singapore residents who had recently resigned or intended to resign. Despite this decision, nearly half of them were unprepared for retirement and one in five expect to have to delay their retirement plans.

Multiple financial goals require multiple portfolios

It has always been the case that individuals have multiple, and sometimes conflicting, financial goals. But the list is getting longer and more varied, especially among early and mid-career professionals, given higher incomes and changing values.

This means the need for careful financial planning is more important than ever. To juggle across a number of financial goals, it is useful to regard each one independently. This means aligning each goal to a distinct savings and investments portfolio.

But without the right tools, creating and maintaining multiple portfolios for multiple goals can be a daunting task. In most cases, individuals simply opt to aggregate their goals into a one-size-fits-all portfolio.

Portfolio design underpinned by financial needs

However, such an approach is far from optimal. Rather, every goal and hence every portfolio should be underpinned by clearly-defined financial needs. In particular, an investor's target return, risk budget and time horizon are key considerations.

When setting these, it is useful to bear the following in mind:

• Keep your target returns realistic.
  It is easy to over-estimate returns especially when you have ambitious goals. Different asset classes have different return and risk characteristics. Typically, the higher the return, the higher the risk. Also note that, each of your portfolios, regardless of your goals, should be well-diversified across several asset classes. As such, your portfolio's expected return and risk will be a blend of its component asset classes.
  
  Capital Market Assumptions (CMAs) are estimates of an asset class's long-term return and risk profile. While they do not apply to short term returns, CMAs can serve as a useful guide to understand how different asset classes can be expected to perform over the long term.
  
  

  Here are some of UOBAM's USD-denominated 10-year capital market assumptions

  

  Source: UOB Asset Management, data as of August 2022, valid through 4Q2022. Estimates are for the 10-year period from 4Q2022 to 4Q2032, returns annualized.The capital market assumptions are estimates and for illustration purposes only. Any projection or forecast is not necessarily indicative of the future or likely performance.
  
  Note: Asia HY: Asia High Yield; Asia x Jp: Asia ex Japan

• Understand your risk appetite. One way to achieve higher returns is to dial up a portfolio's risk budget. It may be tempting for example to opt for portfolios with a high concentration of risker assets for example emerging market equities or high yield bonds. However, by doing so, your portfolio also has a higher chance of underperforming if markets do not unfold as expected.
• Know your time horizon. The longer your investments holding period, the more likely you are to ride out shorter term volatility and achieve normalised returns. It is crucial therefore that you accurately identify the time frame for each of your goals. Here is an example of how time frames can affect your portfolio allocation.

  

  The above portfolio allocations are for illustration purposes only.

Don't let limited capital put you off

You may think that investing in multiple portfolios requires you to lay down a lot of capital upfront. In fact, given current market volatility, it makes sense to start relatively small and to top up your capital on a regular basis, for example monthly or quarterly.

This is a common investment technique called dollar cost averaging and it ensures that when markets are weak, you are securing more assets, because you are buying them at a discount. When markets are strong and prices are high, you are buying fewer assets because you are buying them at a premium. Ultimately, your average cost per unit is lower than if you timed the market wrongly, which is easy to do.

Again, capital top-ups every month across multiple portfolios is highly challenging unless you have the right tools.

Maintain multiple pockets of wealth

The UOBAM Invest App recognises the need for today's multi-faceted individuals to pursue multiple goals. By using the platform, you can intelligently divide your capital into distinct pockets to service your many goals. You can also set up a plan that allows you to top up different amounts for your different portfolios.

This ultimately changes your approach to wealth growth: from one that is focused on market movements based on a single risk profile and no particular time frame, to one that is focused on achieving different financial objectives, based on different returns expectations, risk appetites, and time periods.

¹Human Resources Director, “51% of Singaporeans could quit their jobs the next 12 months”, July 2022.
²Prudential Singapore, “Prudential poll: The Great Resignation sees 1 in 5 Singapore residents delaying retirement by 6 years”, June 2022.