The Department of Statistics Singapore (SingStat) issued a press release and report on Key Household Income Trends 2016 recently. You can look at the summary of key trends in the press release and find the detail in the report. This is one of the most interesting data reports from SingStat that I have looked at. The other being the article on households’ spending by age group. It gives my wife and I a good idea of how our income and expense level compares to the rest of Singapore.

If you have been retrenched and are unemployed, none of the income statistics is going to matter to you. I wouldn’t recommend reading any online material about the key household income trends in 2016 because it’s going to make you feel worse about yourself. This is a benchmarking exercise for the employed and you have more immediate priorities. Focus on finding a full-time job (whether in your current or another industry) or becoming self-employed.

It’s important to note a few definitions from the onset:

• A resident employed household refers to a household headed by a Singapore citizen or permanent resident and with at least one working person
• Household income from work includes employer Central Provident Fund (CPF) contributions
• Median household income refers to the household income in the middle of the income distribution i.e. half of the households have higher income than the median household income and half have lower income than the median household income
• Average household income refers to the arithmetic mean of household income i.e. sum of all the household incomes in the country and divide by the number of them

The median household income is often viewed as a better central measure than average household income because the latter can be distorted by a small number of extremely large values.

Median monthly household income from work among resident employed households in 2016 is S$8,846

Average monthly household income from work among resident employed households in 2016 is S$11,589

Remember, this includes employer CPF contributions. If you look at this table from the report, both figures have been increasing for the past 7 years.

If you are wondering why the property and stock markets haven’t experienced a major crash for several years, you are staring at one of the main reasons. People are never going to sell their properties and stocks at low prices if they had a choice. Increasing household income gives them that choice and holding power. When this positive trend starts to reverse in the absence of any economic shock event, that’s when you start to worry a lot about your portfolio, job and state of the economy. For some, it’s also the time to consider making significant investments in the property and stock markets if you have sufficient cash holdings.

Where do we stand in general?

The combined monthly income of my wife and I currently exceeds both the 2016 median and average monthly household income from work among resident employed households. This confirms that we are still on the right track to achieve financial independence via the full-time employees route. Why do I say that? Because what we have come to realise is that pursuing financial freedom by investing using salary income is only going to be possible when you meet this half of the equation – your monthly household income from work must be higher than both the median and average. The other half of the equation consists of keeping your monthly household expenses below the median and average.

That’s the harsh reality of life. If you are not earning enough from your full-time job, you will have to supplement with a part-time job. No matter how much you cut your expenses, you will hit a base level at the point which any further reduction will result in a significant deterioration in your quality of life, satisfaction and happiness index. Your goal should be to stay above the median and average monthly household income from work every year for as long as you stay employed. Maybe this won’t happen at the beginning of your career when you are a fresh graduate but it’s definitely possible a few years into your career. If you find that this is not happening, stop daydreaming about early retirement and investing. Start finding additional sources of income or a higher paying job.

Differences in household income between housing type

This table in the report caught my eye.

Can you observe the differences in average monthly household income from work among resident employed households by housing type? Especially the jump from HDB to condominiums & other apartments and landed properties. That’s probably what is pulling up the general average monthly houshold income in the country. Since SingStat is providing such a breakdown and we stay in a condominium, let’s see how we compare to similar households staying in condominiums.

The combined monthly income of my wife and I is slightly above the 2016 average monthly household income from work among resident employed households staying in condominiums & other apartments of S$20,213. This means that there are many households earning the same or more than us, which is what we thought all along. There’s nothing special about our income levels and it’s not difficult to replicate as long as you work smart & hard in high-paying industries.

What’s the point of household income trends?

It’s a good guideline on how you are tracking with your household income compared to everyone else. Use it as checkpoints for your progress and to assist with your assessment of the strength & performance of the economy. This also helps to identify certain macro trends going forward that can impact your investing approach in the property and stock markets.

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.

Sitting inside the Parkway East Hospital at Telok Kurau now accompanying my wife for her executive health screening appointment. It’s a good thing this is covered by her employer. Just saw the costs and it would have come up to about S$500. One of the benefits of being employed that we don’t appreciate enough – the fact that our medical costs can be covered in such a manner already help to alleviate our living costs in Singapore. Since I will be here at the hospital for a while, I might as well write something on this blog.

Remember the series I started about the things I wished we knew when we first started investing? There’s already been 3 posts if you are interested to have a read from the beginning:

• How much can you afford to invest each month?
• What is your investing personality (Part 1)?
• What is your investing personality (Part 2)?

This post will be about a fundamental question that any new investor should ask himself – Why are you investing? It’s not an easy one to answer as you move through the different phases of your life and your needs & wants change. But it’s important that you consider it at the time and phase you are about to start investing. It will influence the financial goals you set and shape the entry & exit investing approach & strategy to meet those goals. Let’s start with some questions that we asked ourselves over the past several years to help us with this.

How long are you planning to have a job and work full-time?

Full-time jobs in most sectors and industries have become more demanding and stressful. Look around you and the reasons are not difficult to spot:

• Technological advances with email, mobile, laptop, applications, etc have blurred the lines between work and personal life
• Higher service & turnaround expectations from internal & external stakeholders & clients
• Stagnating wages but increased workload as firms try to reduce costs
• Shorter job lifecyles and constantly changing job environments

In addition, living costs have gone up and it’s becoming increasingly difficult to sustain yourself just on salary income. Which results in you possibly taking another part-time job to supplement your income. This combination of factors means a greater likelihood of you burning out at a younger age. I’m seeing more of my peers and juniors taking sabbaticals despite all of us only working for less than 10 years. But I have noticed a strong push towards self-employment and entrepreneurship because of it. Not a bad outcome.

Ask yourself this no matter how many days, months and years you have spent at your full-time job. How long do you plan to continue with it? It’s different for everyone. Take my sister as an example. She works as a teacher and plan to do that for the foreseeable future. Her pay is decent but is not expected to increase significantly unless she takes on leadership roles. But she’s okay with that. So her reason for investing is to supplement her salary income for now and build a late retirement portfolio for when she eventually stops working. Plus my sister manages her expenses much better than me.

This impacts the selection of financial assets she will invest in and her investing approach & strategy. Doesn’t need to take significant risks with her capital as she is not looking to grow her investment portfolio exponentially. Also doesn’t need to go into high yield dividend stocks since her salary income is relatively stable.

As you can see, my sister’s investor profile is different from us. Our pay is higher but more unstable. And we have plans to stop working full-time 10 years later so our investment portfolio has a shorter time horizon to grow but will need to generate more income. Plus it becomes more of an early retirement portfolio. Hence, we take more risks with our capital and selection of financial assets.

Are you investing for capital gain or income?

My dad and I went for one of those investing seminars together a long time ago. We got asked this question – Are you investing for capital gain or income? My dad’s reply was capital gain and mine was income. He was looking to double or triple his portfolio from capital gains while I was looking for my portfolio to generate sustainable income every month. Goes to show how your investment aims can differ right from the onset and have a significant impact on the returns you generate.

I remembered that incident and question vividly because that was right before my dad made the disastrous venture into FX trading. Come to think of it. It probably happened 7 years ago in my final year at university. He ended up losing his investment capital within the span of a few months and swore off investing in financial assets after that. I went on to build an investment portfolio whereby both the capital and income are growing slowly but surely.

Maybe it was because he was at the tail end of his career and was looking for a quick way to grow his retirement portfolio. While I was at the beginning and took a long-term view to my portfolio. Either way, think about your investment aims carefully. Be realistic, cautious and don’t over-estimate your ability to achieve it.

How much time do you have to invest?

As my wife and I get busier with work, we try to balance it with our personal and family commitments. But it’s a never ending struggle to make as many things as you can work. Since we have plans to start our own family and have kids, I can imagine this to become even more challenging. And you know what we realised. Time, not money or anything else, is our most precious commodity.

We have a limited currency of this commodity to spend everyday and we use most of it on dealing with everyone around us. We end up having so little of it to spend on ourselves. How do you expect us to dedicate our time to become good at investing when we are so busy trying to be better versions of ourselves in every other way.

Which is why we automate our investing and will be using robo-advisors. There are so many other things we would rather focus on than to let our time be consumed by reading, researching & analysing financial news, updates and reports. That’s not to say this is not important but it’s just not our priority for now. So the question is – How much time do you have?