I haven’t posted anything new in 2 weeks. Work picked up and the past 2 weekends were packed with family and friends meetups for lunches and dinners. Typical life of a working couple without kids. We spend most of the week at work during the day and with each other at night before scheduling all the catching up sessions over the weekend. This is on top of trying to find time during the week to exercise since we lead such a sedentary lifestyle in the office.
Anyway, I was able to update my Google + profile and Facebook page with the latest posts for 2017. I have been quite lazy with this and decided I should at least keep my social profiles up-to-date if I can’t create new content. This includes my Twitter profile and Facebook profile as well. Alright, enough with the self-promotion. It’s time to write about something I have observed on the link between working and ETF investing as a full-time employee.
Market cycle approach to working and ETF investing
Not going to state the obvious that your salary income is going to be the main driver of your investment capital and earnings. This is going to apply to you unless you are entrepreneurial, self-employed with business income or you can rely on your family for financial support. The performance of most industries are going to depend on market conditions, which will affect the pay, bonus and work environment of the job you are in. This also impacts the value of and earnings from your investment portfolio.
The relationship is simple. You work at a firm in an industry that everyone else invests in and you are vested in while spending on tangible and non-tangible items. And the same applies for the other person that works at another firm in a different industry with his/her own spending habits. It’s a nice, big and round circle called the economy. The level of yours and many others participation in it gives rise to what we call market conditions, which in turn drives the market cycles.
It’s important to recognise that as a full-time employee who does ETF investing. You are now vested in the economy much more closely than you can imagine. People refer to this as the “rat race” and are constantly looking for ways to exit. You are going to suffer if you think like that. Every day at work will be a constant test of your patience and a countdown to the day you can stop. That’s why early retirement has become the hot topic for millennials. Our generation is now thinking of how to stop working full-time despite spending the least number of years at our jobs.
This creates a wide range of behaviours, attitudes, values and outcomes that makes for the most amazing spectrum of people you will meet. Where are we on this range? As working professionals with above average pay and spending, we are probably part of the largest group. The one with the most conventional route to possible early retirement. If you are part of this group, then what I’m going to write about next might interest you.
We are trying to find a more holistic way to think about and strategise the link between our jobs and ETF investing through flat, bull & bear markets and economic recessions, booms & depressions. This is how we are and will be applying the market cycle approach to working and ETF investing. We will only know whether it works after a decade, which is a long enough timeframe for the results to show and still gives us time to completely change our approach for the 10 years after that if necessary.
Flat market and economic recession
This is where we are and have been for a while in Singapore. Layoffs start off slow and gradually pick up. The equity markets trade within a certain range and stay flat for a while. Forget about pay increases and performance bonuses during this time. Focus on keeping your job, which will get increasingly more difficult. Not a good time to make a career move to a different industry but possible to move within the same industry for better pay, bonus and work environment. Also possible to make a mid-career change if you have nothing to lose.
This is actually the best time for dollar-cost averaging into ETFs if you can retain your job. Even with a consistent salary income, you are not going to take high investment risks. In a job protection psychological state, how do you expect yourself to have the high risk high reward investment assessment mindset? But you should diversify your sources of income and the distributions from ETFs help with this. Remember, most other industries are stagnant as well but flat company earnings that are causing the flat markets still result in dividends being paid.
It’s essential that you increase your cash savings during this time as well. Both as a buffer for loss of salary income if retrenchment occurs and as investment capital in the event of a market crash. In our case, we make automatic investments of S$1,800 into Singapore equity and bond ETFs while saving S$2,000 of cash every month. The amounts may be bigger or smaller for you but keep the ratio even if you can. Don’t stay out of or over-invest in the markets because nobody knows what’s going to happen. Get yourself ready for the next event.
Bull market and economic boom
Surprise surprise. A bull market and economic boom happens. You would think a flat market and economic recession usually leads to a bear market and economic depression. What if the low probability event happens? Your investment portfolio value and distributions rise due to better performance and company earnings resulting in higher dividends paid. Your job prospects improve and this is the best time to make the career move. Go for the higher salary, performance bonus, increased job scope or better job position. You can even consider a mid-career change since it’s still possible to make the reversal if things don’t work out.
By the time you recognise you are in a bull market, it’s too late to make any significant changes to your ETF investing strategy. Minor adjustments should suffice. Our plan is to reduce the automatic investments from S$1,800 to S$1,500 and increase the cash savings from S$2,000 to S$3,000 every month. Don’t let your rising portfolio value fool you because there’s nothing to be happy about in a bull market. You are dollar-cost averaging upwards and that’s almost never a good thing when it comes to ETFs. Again, don’t stay out of or over-invest in the markets because you might miss out on investment gains and distributions.
Bear market and economic depression
Let’s say the high probability event happens and everything takes a turn for the worst. You are most likely going to lose your job here. This is the time to activate the cash savings you have been building up. Start drawing them down for your monthly expenses and investments. You can’t build any cash savings but do not stop investing into ETFs. Our plan is to make manual investments of S$1,200 in addition to the automatic investments of S$1,800 and reduce the cash savings from S$2,000 to S$0 every month.
Your portfolio value will drop drastically as the cash savings disappear and your investment losses increase. Do not panic. You will have the worst psychological state at this stage so don’t keep looking at your portfolio because you might end up selling everything. Just focus on finding another job. This is how automatic investing can be useful. You can make a one-time transaction to increase the monthly investment amount and don’t do anything else until you find a job.
What happens if you don’t lose your job during the bear market and economic depression? You are now presented with an opportunity to build wealth quickly and exponentially. Everything that happened previously described above only serves to build wealth slowly and linearly. Because you continue to have salary income, you can make much more monthly investments. We plan to make manual investments of S$3,200 in addition to the automatic investments of S$1,800 and maintain the cash savings at S$2,000 every month.
Both your portfolio value and cash savings will remain flat as you prop them up with your salary income. Keep going until they eventually start to grow and show positive returns. This is when you can start changing your approach to either of the two above.
Importance of cash savings in the market cycle approach
Don’t think of cash savings as a drag on your investment portfolio. Besides, you usually think like that only in a bull market because you are looking at the higher returns from your equities and wondering about the opportunity costs of holding cash. Just remember that it’s an insurance policy against irrational behaviour. It buys you peace of mind and stability to execute your investing strategy under stress and pressure.