The Halloween Season: Financial Fears and Pessimism Bias
Introduction
October is synonymous with the annual festival of Halloween which is commonly celebrated in Singapore. However, with global economic uncertainty on the rise and post-covid recovery, it is our financial insecurity rather than a ghost that most are afraid of. As October approaches, so does the end of the year and it is essential for families to confront any financial fears they have and turn weaknesses in their portfolio into strengths.
What is the Pessimism Bias?
Pessimism Bias refers to the tendency to overestimate the likelihood of negative events while underestimating the likelihood of positive events. In the context of financial management, this could mean overestimating the likelihood of financial instability while underestimating the ability to become financially prepared.
Case Study:
Singapore Scenario
Although COVID is finally starting to disappear within Singapore and the wider world, the impacts of economic recessions and the loss of employment are still prevalent. This makes it difficult for Singaporeans to thrive in an already expensive environment. Furthermore, the continuous spreading of cases of flu and covid variants has led to the illness of many Singaporean workers. This is not only unsustainable for the economy but also harmful to the income of household breadwinners. Additionally, inflation is also a prevalent issue in Singapore as prices have risen dramatically in recent years as well as tax rates.
The COVID-19 pandemic has significantly impacted the financial planning of Singaporeans, especially those aged 35-44, according to a study by Prudential Singapore. The study revealed that 54% of respondents would struggle to meet financial needs in case of unexpected illness or job loss. Nearly half reported worsening finances since the pandemic began, with substantial declines among those aged 35-54. The current environment of low interest rates and rising costs has further strained savings plans. The study also noted a shift in personal financial strategies, with increased online wealth management and portfolio diversification. An age divide in information sources was observed, with older individuals relying more on government sources like the Central Provident Fund, while younger ones equally valued advice from relatives and friends. The report emphasizes the need for enhanced financial literacy and support to help citizens understand the risks of outliving their assets and adapting to digital finance.
Key Takeaway: The COVID-19 pandemic has heightened Singaporeans’ financial fears and loss aversion, emphasizing the need for better financial literacy and adaptable strategies to manage rising costs, low interest rates, and the fear of outliving their savings.
Risk Management Strategies
1. Emergency Fund Creation
With global uncertainty and unemployment on the rise, it is important to keep an emergency fund at hand as a defense of last resort. According to Chase Bank, It is often recommended that the expenses needed for one to get by 3-6 months of living is set aside to ensure financial safety in the event of a loss of income sources.
2. Diversification of Income Sources
It is important to diversify income sources. If one is wealthy enough to invest their money for safe returns or buy financial instruments such as bonds, it is suggested that they do so to live off dividends. Furthermore, there should be multiple ways for an individual to earn a living if possible where if one source of income such as your primary employment is cut off, it will not lead to financial trouble.
3. Inflation Protection Through Strategic Investments
Invest in inflation-protective financial instruments or at least items that will not lose in value such as gold or ETFs. It is also fine to earn interest off bank deposits for Singaporeans if unsure or unable to use other methods as the interest rate for commercial banks in Singapore is often 3%+ or at least 2.5% while the inflation rate in Singapore as of 2024 is only 2.4% which means it is a safe way to protect your savings from inflationary repercussions.
4. Financial Literacy
Enhancing financial literacy can help Singaporeans better understand investment risks and returns, reducing emotional reactions to short-term market fluctuations. Reviewing educational initiatives by both the government and private institutions can help citizens make more informed decisions.
Wealth Management
1. Diversify Your Portfolio
Diversifying your portfolio helps reduce financial fears and pessimism bias by spreading investments across different assets. This limits the impact of any single underperforming investment, providing more stability and reducing overall risk. It allows you to balance potential gains and losses, making your financial strategy more secure in uncertain markets.
2. Long-Term Financial Planning
Long-term financial planning ensures stability by setting clear goals for the future. It helps you save for retirement, prepare for unexpected expenses, and make decisions that align with your financial objectives. This approach builds wealth and reduces the impact of short-term market changes.
3. Real Estate and REITs
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate, allowing investors to buy shares. It can be a practical way for everyday Singaporeans to invest in property without needing to buy entire buildings. By owning shares in REITs, you can earn regular dividends from rental income generated by properties like shopping malls, office spaces, and residential buildings. This offers a more affordable way to invest in the real estate market, with the added flexibility of being able to buy and sell shares on the stock exchange. It’s a way to grow your savings and potentially supplement your income over time.