Preserve wealth amid COVID-19

COVID-19 has upended the entire global economy and caused millions of people to lose their jobs. Over in Singapore, the Ministry of Trade and Industry (MTI) projected the GDP growth for 2020 to be -7.0 to -4.0 per cent. This is certainly a very frightening period of time in the modern day history. Against this backdrop, is it even possible for a retiree to preserve wealth amid COVID-19?

A retiree who is in his twilight years has a short runway and limited timeframe to build wealth. So at this phase of his life cycle, the strategy should be to preserve wealth instead  growing wealth through the stock market. The recent sharp corrections in the stock market should be a stark warning on how risky the stock market can be, especially for the seniors.

Furthermore, with no active income, it will be a challenge for a retiree to do capital injections into his investment portfolio. So when you reach retirement, it is important to protect your money and preserve wealth. This means that the seniors must look beyond the stock market to preserve wealth and ensure they have enough money to sustain till the end of life journey.

Maybank 2.05% Fixed Deposit

It seems that COVID-19 pandemic has rolled back the time. Once again, the US Federal Reserve has slashed interest rates to near zero, similar to what it did in 2008 in the aftermath of the Global Financial Crisis. Over in Singapore, banks have followed the trend and cut interest rates for saving deposits. Although “cash is king” during such uncertain time, parking all the cash in the bank may not be the best way to preserve wealth for the retirees.

Currently, Maybank Singapore is offering 2.05% per annum for three-year fixed deposit. This is one of the best fixed deposit rates in town. Although 2.05% per annum is nothing to shout about, it is quite a decent rate considering the abysmal saving rates offered by most banks. Considering that the 10-year average return for Singapore Savings Bond is at a low of 0.8%, the Maybank’s 2.05% per annum rate is certainly more attractive. So this is an option that a retiree may consider to preserve wealth.

Maybank Singapore is one of the members of the Deposit Insurance (DI). Thus, the fixed deposit accounts placed under Maybank are insured for up to $75,000 in aggregate per depositor.

Buy private property to preserve wealth

Despite the ravages of COVID-19, real estate remains one of the most viable ways to preserve wealth in Singapore as prices of new private homes dropped by a mere 1% in June 2020. If a once-in-a-century pandemic could not cause a severe correction in the prices of new private properties, it goes to show the resilience of the Singapore property market.

In comparison with REITs, real estate investments are generally much less liquid. It will take at least a few months to liquidate a property vis-à-vis encashing a REIT within a few days. However, bear in mind that having a second or more properties allow a retiree to collect monthly rentals, which could be a valuable source of passive income stream. If a retiree could not afford to buy a second property, then another feasible solution would be to rent out the spare bedrooms in their properties.

For a retiree looking at buying a private property to preserve wealth, it is important that the property appreciates in value over time. In the past, most home buyers would focus on new homes near MRT stations or city centre. However, with so many MRT stations being built and the government’s push for decentralization of the central business district, the game has changed.

Buying a private property in the new business hubs offers potential upside in value because of the opportunities for developments in the vicinity. Under the Master Plan, there are four exciting new business hubs – Changi, Jurong Lake District, Paya Lebar and Punggol.

However, buying a new project in the business hubs may be out of reach for many Singaporeans because of the current valuations. Thus, another option is to buy executive condominiums or resale condominiums in the suburban areas. My family opted to purchase The Terrace executive condominium in 2016.

Gold bullion

Gold bullion remains one of the best assets to preserve wealth. Amid the devastating outbreak of COVID-19, gold prices surge from USD1,522 per ounce in January 2020 to the current USD1,744 per ounce. During this time, BullionStar and other bullion dealers around the world experienced unprecedented demand for gold and other precious metals.

It remains to be seen whether gold price continue its momentum in 2020. But the macroeconomic condition certainly lend support for continued momentum in gold price. Global trade tensions have not reduced and there is not really light at end of tunnel in sight between US and China. The never-ending civil protests in Hong Kong will continue to fuel flight to safety among the wealthy in Hong Kong.

COVID-19 pandemic has caused global economies to plunge into deep recession. Because of this, the US Federal Reserve had implemented massive fiscal stimulus and slash interest rates to near zero. On looking back, the cut in interest rates could have led to the surge in gold price in 2009. This is because gold does not yield interest. Thus, a lower interest rate environment will have a bullish effect on gold price.

Long seen as a safe haven, gold bullion is viewed as the best asset to hold in times of uncertainties. In fact, gold price surged during the period of The Great Financial Crisis to reach a peak of USD1,900 per ounce in 2011. The euphoria in the yellow metal was largely driven by the chaos in the financial markets.

Will gold price smash to another new high? To this end, I don’t see why not as the world has not seen another alternative safe haven for financial assets. In 2016, the crash of China stock market, Brexit and the US Presidential Election saw gold price surging from USD1,100 to USD1,300 per ounce within a year. Therefore, it is only a matter of time that gold price is absolutely capable of staging another magnificent run.

Exchange Traded Funds (ETFs)

While I believe equities still offer the best returns over the long run, it is not wise for the retirees to concentrate their portfolio with stocks. The massive sell-offs in March 2020 would have caused significant losses for the elderly. At their age, they may not have enough time to recover from such losses. In this regard, Exchange Traded Funds (ETFs) may be suitable for retirees looking for low to moderate likelihood of loss of investment capitals.

Broadly speaking, ETFs is a type of collective investment scheme that pooled money from investors and invested according to the fund’s objective. In a way, it is similar to unit trust. However, the main difference between unit trust and exchange traded fund is that the former is actively managed by professionals while the latter passively track a specified index. Because of this, ETFs are open-ended investment funds and are traded on a stock exchange.

The interesting thing about ETF is that it replicates an index and do not try to outperform the underlying index. Take for example, if an ETF tracks the Straits Times Index (STI) which declines in value, the ETF would produce a return that reflects the drop in value.

There are several advantages in investing in exchange traded funds. Firstly, if you have limited capital but would like access to blue chips, then ETFs offer a low cost and simple way for you to own index stocks. For example Nikko AM Singapore STI ETF offers investors an opportunity to invest in the top 30 companies listed to SGX.

Secondly, retail investors do not need to spend their precious time doing research because ETFs will passively track the performance of the index. If the index increases, you make money. Conversely if the index plunged, you incurred paper losses. Very simple and straightforward.

Conclusion

There is no one-size-fits-all solution when it comes to wealth preservation for the retirees. It used to be the case that retirees can depend on blue chips and S-REITs for dividends and distributions respectively. But COVID-19 has proven that even the most defensive stocks will cut dividends or slash distributions in difficult times.

To mitigate loss of wealth, the retirees should diversify their wealth across different asset classes like gold, bonds, ETFs, properties and stocks. Primarily, the focus should be to preserve wealth rather than to build wealth. Till then, enjoy the ride.