Monday, April 23, 2007

Balance Sheet and Asset Allocation of a Singaporean Family

Before we go into the asset allocation , let’s take a look at the balance sheet of the Singaporean family. BTW I made all the no.s up and it is not based on any official statistics and no scientific/accounting methodology has been used to come up with the no.s. So please take them with a bucket of salt ok?

Anyways here it is:

Balance sheet of a typical Singaporean family
Cash & CPF $25,000
Stocks $25,000
Car $45,000
Other assets $5,000
HDB $400,000

Mortgage $350,000
Car Loan $50,000

Shareholders Equity $100,000

Thanks to the real estate recovery in the last 1 year, the typical household now sees some positive equity (as compared to past 10yrs of negative equity for a lot of Singaporean households)

So if we take a look at just the asset part we come to realize that a typical asset allocation/portfolio mix of a Singaporean family is about as interesting as watching a big snake poo-poo. i.e. not interesting at all lah! Anyway, in percentage terms, this would be

5% cash
5% stocks
10% in totally worthless depreciable assets like 1 x Automobile, 2 x Plasma TV and 32,000 credit card points exchangeable for 1 x 60GB white silly looking music player which is also worthless. (btw all these are under Other assets).
80% real estate (HDB flat)

If we apply what we have learnt about Modern Portfolio Theory, diversification and Markowitz, the Singaporean household is really quite undiversified and the fortunes of the household is basically determine by how much this little red dot is worth in the eyes of the world.

Fortunately our Government (with a capital G one, don’t pray pray) realizes this (maybe 10 yrs ago) and has planned to make the little red dot the favourite spot for foreigners to come and work and/or invest in our real estate. In concrete terms, 2 important policies made it all successful.
1) The 2 x Integrated Resort (IR) projects
2) The decision to grow our population from 4mn to 6mn pple
And as they say, the rest is history.

So what does it mean for the Singaporean family that is trying to push its asset allocation closer to the efficient frontier? Well if you believe in the almighty of our beloved Government, you can buy more real estate, hopefully somewhere overlooking Marina Bay and Sentosa. If your bet is right, forget about efficient frontier and the rest of the crap, you can start writing your own blog about how you made it and how this blog sucks.

If you believe in Markowitz and diversification, then it’s better to think of how to diversify the portfolio from real estate. Alas, this is not easy bcos RE will probably make up a huge chunk of your asset portfolio and you can only either save a lot more money to invest in stocks or other asset classes, or sell your property and downgrade. I admit both are not very realistic lah. But it’s important to keep this in mind though. And when you have the means to diversify, you should do it.

See also Efficient Market Hypothesis


  1. Hi 8percent,

    Very funny and interesting post. I like it a lot. Here's a few thoughts.

    1) I think the appreciation in real estate prices may eventually gives the stakeholders a false sense of security whereby they are worth more, and therefore, they will feel more comfortable to spend more on things which are irrecoverable in value, like your favorite Rolex, a meal at your fav restaurant weekly, a Gucci wallet and so on. What I meant by false sense is that for most people (regardless you are in SG or not), a high majority of us own only one single home which is our home - that is to say, we don't flip and flop our houses like investment. So even if the prices go way up, I think for most of us, it don't put real money into our pocket. So to spend that much more on a car, watch and so on, is basically straining more on the paycheck. Eventually, as I hold the view and see it, property by itself is not a real value-adding/generating asset, thus, whatever price it says are mostly on paper. And if you don't sell it before the party ends, or when you try to reach for it, maybe the gain that you see and try to reach for, just simply melts away.

    2)I do not know how to value a property business, property is unlike businesses like say Coke, a retail biz, colgate or so on. I find it hard to valuate the earnings that a property can generates or command with certainty say 3 years down the road. In fact, I think property is dependent on how all other sectors perform, because that is where buyers of property earn their keeps, and thus, determines how much they will have to pay for big ticket items.

    3)I think many perhaps do not realize the value of a dollar. When I say value of a dollar, it means the moment you spend a dollar today, it is gone forever. On the other hand, every dollar you keep, it is worth more than a dollar in the future. So it is wise to think that each dollar that you spend today is actually spending $50 of value, say 30 years down the road. Warren in one of his earlier annual report noted, the gist is something like this as I recall, somewhere in the 17th century, the Dutch purchased Manhattan Island for $24, it is worth about $180+ million. Most of us will probably curse why didn't our Ah Gongs were more smart to just buy a land and sit on it. Think of it, if we can say that, most of us are as unwise as our Ah Gongs. By the way, even if our Ah Gongs brought it, they ain't the wiser either because to grow from $24 to $180 million, it represents only 6.3% return annually. Compared to what the Dow did for the past century, that is a lemon.

    4) It is all about mentality in achieving successful financial freedom. Not that hard, neither that easy. As you always say I remember, it lies in-between I believe in this case.

  2. Hi Berkshire, nice to have you again. Very interesting comments. I like them too!

    Real Estate can be valued in the same way as stocks. How much rental they can give per yr, and then divide the rental by the discount rate.

    It is definitely good to have some real estate. But not 80% of your entire net worth. For most Singaporeans it's hard to reduce that, bcos you need a lot of cash to bring the % down. Nevertheless, we should try!

  3. Hi guys, it's being quite a while!

    Interesting thought 8%. WOW very insightful as usual there Berkshire!

    I have something to share with regards to property. =)

    In my opionion, real estate is can be good or bad, depending on how you manage it, as is with all investments.

    As a primary residence, yielding zero returns while zapping away and reducing your disposable income, real estate is really a waste of resources! Like what berkshire mentioned, you really won't see the gain in value of your home unless you sell it at the right time. But then again, that means you'll have to buy a replacement to put up, and you could end up paying your profits to the next person you bought you house from!

    But having said that, RE is also good if it becasue an income generating asset, say in the form of rents. I know of people with 2-3 condo renting out and more than paying off the mortage every month. But that also means buying a good piece of property at the right price. Considering the value of property in Singapore though, this risk can be very huge!

    So how? Suck thumb lor! neither left nor right seems to work...hai