The more I experiment and try out different ways to achieve financial freedom, the more I learn about real concepts of financial management of my own money.

Moving from One Asset Class to Another

As you live within your means, you start to have savings. Most personal finance books advise you to keep some buffer or emergency funds enough for 3 to 6 months of expenses or income. The additional savings you should invest in fixed deposits, mutual funds, stocks and shares or other asset classes that fit your risk-reward profile.

Different asset classes have different liquidity. Liquidity refers to how easy it is to sell your assets and convert it to cash. Sounds simple but can be fraught with challenges as I found out now that I’m selling most of my equity portfolio into the currently rising market to move into property investment.

Why am I moving most of my net-worth out of equities at this point in time?

Reasons for Going Out of Equities

I have been selling some of my share holdings when they are at reasonably high prices relative to the troughs experienced during the crash in August to November 2008 time when subprime and the global financial crisis reared its ugly head.

I’m moving from a ratio of 80% equities : 20% cash to progressively almost 0% equities : 100% cash mainly because I’m now scouting for completed properties for investment. The downpayment for an investment property sucks up a lot of cash

1) Property market

I am relatively bullish about the property market in the long term, i.e. to invest for the next 15-20 years and even beyond. Singapore is still a place that has limited land and space for living and giving our Government’s continued approach of “grow GDP at all costs” plus lax foreign immigration policy, I see the drivers for residential property demand to be intact.

Property valuations rise and fall and sometimes also sharply depending on sentiment and overall economic outlook. But at the end of the day, with a long enough investment horizon and with sufficient holding power, it is a decent hedge against inflation and provides slightly more predictable cash flows if you are not into flipping for quick capital gains.

As I intend to rent out the investment property so that the rental income covers interest and part of the principal of the bank loan to finance the investment, the rental market has to be there for it to work.

Despite the current recessionary conditions, not all is gloom and doom, there are sectors that are doing all right and there is still rental demand for affordable private housing. The rental income from this will help offset the investment in property in that it is self-financing to a certain extent.

2) Volatility of Equities

Equities are volatile instruments. During the peak of the global subprime financial crisis. My equity portfolio plunged almost 50% after marking-to-market. It was pretty scary. I was fortunate that I have a stable job and had holding power to ride out the storm until the rally in the beginning of 2009.

Now, my equity portfolio is only showing slightly paper losses of $8k or so which I am prepared to accept as this is nothing compared to what I saw when things were at its worst in the stock market.

The dividend cash flows from equities are also quite volatile as companies can change their dividend policies to conserve cash during poor economic conditions. Thus, it’s more challenging to predict cash flows from investing in shares.

3) Low Interest Rates

The current environment has been helpful that it allowed me to get out of equities with my net worth mostly intact and allowing me to consider switching into another asset, i.e. investment property.

I’ve enquired around some banks and one is offering as low at 1.88% for the first 2 years (of course the caveat is that no matter what rate is being offered, banks can change it giving you 30 days’ notice). This is at around 80% financing for investment property.

Movable Net-Worth

Equities are relatively liquid as compared to property but I also learnt that you have to make sure your limits for selling is raised when you are trying to sell more equities than your normal trading limit imposed by your broker.

Fortunately, a phone-call to my broker solved that problem though I still had to “time” the market to extract maximum value out of my holdings as I move from equities to cash.

Going forward, I’ll be doing a very focussed search for suitable investment properties and I’ve actually got a very good idea of what I want and how much I’m prepared to go in.

I’m looking forward to a period of relatively illiquidity although from cash flow perspective it’s relatively netural as I project rental incomes to cover financing plus a chunk of the principal repayment of the bank loan used to finance this pending purchase.

Be well and prosper.

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