Why the best time to build buffers is when everyone is confident

[SINGAPORE] We have just come through a genuinely good decade for equities.

Markets climbed, corrections have come and gone quickly, and property prices in Singapore have largely rewarded anyone who bought and held.

I understand why this breeds confidence. What concerns me is that I am seeing that confidence tip into something closer to overconfidence among investors, and honestly, among some advisers too.

I am seeing it show up in properties – residential and commercial – where younger buyers are willing to stretch for bigger loans, sometimes for their own stay, sometimes purely as an investment, betting that prices will keep climbing the way they largely have.

The second is financial markets, in which people borrow specifically to invest.

What ties these together is a belief I hear increasingly often, that markets only go up, and that nothing can seriously go wrong. It is an understandable belief, because for the better part of 10 years, it has been largely true.

Part of what worries me is the backdrop against which this confidence has grown.

We are living through a period with more geopolitical fault lines than I have seen in a long time: the war in the Middle East and the disruption it has caused to oil and shipping routes through the Strait of Hormuz; the ongoing Russia-Ukraine war and its effect on energy and food prices; and a broader environment of tariff disputes and trade tension between major economies.

Any one of these, on its own, might be absorbed by markets as a temporary shock.

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But we have already seen how they can quickly ripple into inflation, how inflation forces central banks to tighten credit by raising rates, and how this can slow economic growth which can lead to job losses.

All these can come together at the same time, which was what happened in the global financial crisis of 2007 to 2008.

In September 2008 and the months that ensued, financial markets collapsed with no visible signs of recovery for a long stretch.

It was a market event that became a full economic crisis, with job losses and households watching their debt mount at the exact moment their income disappeared.

I remember sitting across a gentleman in my office during that period, and he was in tears.

He owned several properties, had lost his job and simply could not service the loans on all of them anymore. To make matters worse, property prices and the financial markets tumbled, and his banks were calling him to top up his loans.

He had to sell at a loss at the worst possible time. It was not just his financial position that suffered. His whole family carried that stress. This was just one of the many stories I witnessed.

Stay invested long enough to capture returns

Do not get me wrong. I still believe that equities markets will do well in the long run, but you need to have the ability to stay invested long enough to capture the returns.

But staying invested works only if you are not forced to sell to pay for your expenses or service your debt, while prices are down.

For those of us who have advised clients through the global financial crisis, we learnt two things: humility and sufficiency.

The humility to not be overly confident to think that markets will continue to go up in a straight line without pausing, because they do. And when they did, we should have sufficient financial ability to withstand the unexpected, so that can still be invested when markets recover.

In ikigai literature, there is a concept called yutori, a Japanese word that translates to room in your mind, space or leeway.

It means having a relaxed state of mind, with time and mental space to spare. It acts as a sub-theory of ikigai, providing the psychological balance and calm needed to appreciate life without rushing. Yutori reduces pressure, supports well-being and allows you to live more intentionally.

The global financial crisis has taught us the importance of having financial yutori.

To have financial yutori, there are four simple numbers to anchor yourself to.

First, your total debt servicing ratio. The Monetary Authority of Singapore caps this at 55 per cent of your gross monthly income for property loans, but I think that ceiling is too generous.

I would encourage people to keep it well below that, ideally under 40 per cent. That gives you a real buffer if interest rates rise or your income takes a hit, rather than being stretched right up against the regulatory limit.

Second, look at your balance sheet, not just your monthly cash flow.

While I know that the maximum loan-to-value limit in Singapore is 75 per cent for both bank and HDB loans, if this is your first loan, to have yutori, I recommend that your total liabilities should not exceed 50 per cent of your total assets.

Third, for any non-mortgage debt such as car loans, personal loans, credit lines used for investing, keep those repayments under 15 per cent of your net income.

In fact, except for car loans, I would not encourage you to take other loans, because they are non-essential.

Finally, build an emergency fund, ideally six to 12 months of expenses, sitting in cash. This will help you tie through periods of income loss.

Having financial yutori

But having financial yutori is more than the numbers. It is a mindset that that tells you that you do not have to spend just because you can. The word meekness means power under control; I encourage you to have financial meekness.

After a short technical reset in July, August saw both the S&P 500 and MSCI World Index climb by about 3 per cent.

At the time of writing, both indices’ year-to-date returns are around 14 per cent. Every now and then, you hear or read of properties being transacted at new record prices.

The best time to build your financial yutori is when everything seems rosy and everyone is confident. This is money wisdom.

The writer is CEO of Providend, South-east Asia’s first fee-only independent wealth advisory firm