I seldom share on net worth as I am more interested in the topic of investment. However, given that I will be embarking on a new journey next year, I thought I should just make a note at this point of time and see things unravel in the next few years.
I have included CPF in the computation as I would have access to it in less than a decade. The computed value include the sum needed to set aside for FRS, so the net worth would drop by that amount when the time arrives. This time round I also decided to exclude my residence in the computation as I am unlikely to monetise her in the foreseeable future.
I am not giving the exact numbers as they are more important to me than to you. For the curious cats out there, you can sherlock past posts for a good guess.
For the younger readers, don’t worry that you are too far off from your goal. Your net worth will increase at a faster rate later as your earning power increases and compounding of investment becomes significant. It is not a one-way traffic for me though. Every couple of years, there will be a dip and normally that is due to a negative return in investment.
CPF is the steady boat that cushion the impact of negative return from investment. Including this year, I have 3 years of negative from my investment in my forties but the bigger dip only occurs this year. This is attributed to both a larger portfolio and loss this year. Having said that, unlike the 23% drop in investment, net worth decreases only by 8% this year.
While it feels as if a year of active income is wasted (working but net worth stagnates or decreases), it is important to zoom out to see the longer trend. Naysayers would use this year’s number to justify not investing in equities. However, looking at multi years trend, investing in equities appropriately will accelerate the growth of net worth. This is especially true for me in my forties as I took a substantial pay cut when I decided to move away from management role and went part-time. Despite the dip this year, the steep increase over the past few years means that my current net worth is the second highest in the short time I existed as a life form.
The fluctuation in net worth on a year-on-year basis is a necessary trade off to the alternative of not investing in equities. I can imagine that I will have a more linear increase in my net worth which probably feels more comforting if I did not invest in equities. However, the end value will definitely be substantially lower in the long run. Off my head, I estimate that my net worth would be at least a quarter lower if I have not invested in equities.
Asset allocation is boring and underrated. It is not just a mathematical exercise but appropriate allocation based on individuals’ risk appetite manages the expectation and reduces the unnecessary angst. A general rule of thumb to the percentage allocation in equities is 100 minus your age. Using myself as an example, I should have about 52% of my asset in equities. It is a good guide but not cast in stone. I never follow the rule in the past as I was confident on my cash flow from my active income. Without a regular income from next year, I have reduced my exposure to equities. Interestingly I am not too far off from the rule with about 47% of my asset in equities.
CPF has an important role to where I am financially. As seen from the above pie chart, it is about half my asset. Yes, I would like to have access to it now but that’s beyond my control. The good thing about not being able to access it for a long means it makes sense to invest a part of it in equities. Having a timeframe of more than 10 years to invest means the likelihood of getting a better return than 2.5% is high.
I am expecting my net worth to drop further next year. Passive income from dividend and interests should be about 60% to 70% of my expenses. Unless there is a change in Mr Market’s mood, my take is that next year would be a flattish year for equities. I am also mentally prepared for another year of negative return, though I am hopeful that things would turn positive in 2 to 3 years time.