Where are all the Millionaires?

Where are the customers’ yachts? is a familiar title to many, a hilarious description of the folly and hypocrisy of Wall Street, and the lunacy of the investment business in general. As conspicuous consumption has become less acceptable nowadays, it seems more appropriate to ask instead “Where are all the millionaires?”

Now, if you are a fan of Thomas Stanley’s The Millionaire Next Door, the answer to the question “Where are all the millionaires?” is that they are all around us, practising stealth wealth, or the the simple practice of keeping your wealth and fortunes hidden from others, including friends, family, and co-workers. Indeed, there are some other research which backs this up in Singapore. For example Credit Suisse’s Global Wealth Report 2021 pegs the number of millionaires in Singapore at 270,000. Or Knight Frank’s Wealth Report 2021, which estimates the number at 244,700. That works out to be about 5%+ of the adult population here, or 7%+ of the adult population here who are not on a work permit. Literally one in 14 people you meet at home or at work is one of those fabled millionaires!

Whichever figure you believe, the only thing we can be sure of is that nobody from either Credit Suisse or Knight Frank personally counted each and every one of those millionaires. So it is best to take those numbers with a pinch of salt. And those numbers are certainly a far cry from back in the early 2000s, when these reports were first started for private bankers. Then, the number of millionaires in Singapore was only around 66,000. In between those years, as our population went up by 40% (from 4 million to 5.6 million), the number of millionaires went up a staggering 300%!

But all that is well known, having been exhaustively reported by the press. What is more interesting, is: Why are there not more millionaires in Singapore? Where are all the millionaires?

How to count millionaires in the past

It’s not difficult to become a millionaire in theory

In theory, it should not be hard to become a millionaire in Singapore today. After all:

Singapore is one of the richest countries in the world, by per capita GDP
There is no tax on dividends or capital gains tax. which allows investments to grow faster
A million dollars today is worth $600,000 just twenty years ago, so the yardstick has dropped over time

Furthermore, given the investment opportunities we have access to – Singapore REITs, US growth stocks, Chinese tech stocks, a risk-free 4% in the CPF – it should be quite straightforward to grow our investments past the million dollar mark over time. Don’t believe it? Let’s illustrate with a simple example:

Suppose we have 2 colleagues who studied in the same schools and work at the same job straight out of school, initially earning $2,500 a month, and getting an raise of 4% every year, and a promotion of 10% every 10 years, until they hit a maximum monthly pay of $15,000 a month after 35 years on the job. Now, $15,000 a month may seem high at first, but if you only get it in 35 years time, it is worth less than $7,500 a month when you first started, or less than 3 times their starting pay. So this is a pretty realistic (if below average) scenario.

Let’s also suppose that these two colleagues have different savings habits. Mr Early Saver, starts off diligently saving 20% of his pay from the age of 25, and increasing this by 10% every 10 years. Mr Late Saver, prefers to enjoy himself in his youth and saves nothing for the first 10 years. He only starts saving at the age of 35, but starts off at a higher savings rate of 35% and increasing by 10% every 10 years. Their savings habits are summarised in the table below:

The colleagues’ progress over the years

	Mr Early Saver	Mr Late Saver
Savings rate @ age 25 years	20%	0%
Savings rate @ age 35 years	30%	35%
Savings rate @ age 45 years	40%	45%
Savings rate @ age 55 years	50%	55%
	Retire at age 65	Retire at age 65

So what do their spending and savings look like? We chart these out for both Mr Early Saver and Mr Late Saver below. Curiously, this shows that neither of them actually reach their peak annual savings amounts until almost at the end of their working careers, meaning that the higher rates of savings which happen later do not actually affect the trajectories of how much their savings and investments may have grown.

1. Mr Early Saver’s Spending and Savings by age

Where are all the millionaires? Mr Early Saver

Now, Mr Late Saver, on the other hand, chooses to spend a little more at the start of his career, and a bit less at the end. Doing so, he smooths out his spending and consumption over time, just like what homo economicus would.

2. Mr Late Saver’s Spending and Savings by age

Where are all the millionaires? Mr Late Saver

Let’s now assume that their savings and investments have a compounded return of 5% per year over the entire period (after accounting for how volatility, downturns etc. drag the value down at times). And of course they never touched their investments to chase after meme stocks and cryptocurrency. This is somewhat lower than the 6% which is used quite often in illustrations, but let’s be a bit conservative and see where we get to.

So how do our two savers fare over their careers as far as saving for retirement and becoming millionaires is concerned? As expected, it always pays off to start saving earlier, rather than save more later. But it turns out that the difference is not that significant, with a gap of less than 10% between them. On the other hand, while Mr Late Saver ended up with less money in retirement, he did spend more early in his career, when both of them had less money. So he arguably had a better time, since there are many things which you can only do when young. But what about becoming millionaires?

Mr Early Saver’s and Mr Late Saver’s Investments by age

The really interesting thing here is that they both attained millionaire status around the age of 55. This is some 5 years before reaching their peak income and savings. And they subsequently end up with between $2.5 million and $2.7 million in their retirement funds at the age of 65. And even though Mr Late Saver had 10 full years of not saving a cent, he too becomes a millionaire just 2 years after his colleague does.

While this is just a harmless fictitious example, it shows that even an average wage slave, with very average investment returns can become a millionaire. And do so within just 20 to 30 years from the day they start saving and investing, and years before they retire. Which brings us back to our original question: If it is so straightforward, why are there not more millionaires? Where are all the millionaires?

Why are there not more millionaires? Where are all the millionaires?

If it is so easy to become a millionaire, then virtually half of all the people who turned 25 between say 1985 and 2005 should be millionaires by now. That is, there should be at least 400,000 millionaires in Singapore. But there does not seem to be so many. Or maybe Credit Suisse and Knight Frank should really go count every single one of them.

There could be a number of reasons for this, the usual ones being (a) saving too little and (b) spending too much. Or perhaps not knowing how to invest, which is a bit odd since there are tons of guides and videos on the internet showing how to set up accounts with discount brokers and crypto platforms, to trade meme stocks, Bitcoins and literally everything else under the sun. So while ignorance is possible, there should be a number of other people for whom investing is not a mystery.

But perhaps the true reason is our investing habits and beliefs and behaviours. For example, the fictitious example of Mr Early Saver and Mr Late Saver rely mainly not on investment returns, but on not touching the investments for 40 years. And this is very, very hard to do. What are these investment beliefs and behaviours which result in far fewer people becoming millionaires than there should be?

1. Touching the investments

This is self-explanatory. It is very, very hard not to dip into our investments. Perhaps just a little to renovate our homes? Or to have enough funds for the deposit on a new property? What about to pay for higher education? How about to help a friend or a family member? Or even to gamble in a casino or on the latest investment fad in the hope of making it big? But no matter how well meaning the raid on the investment reserves may be, ultimately, it breaks the investment compounding effect and will leave you worse off.

2. Dividend investing

Dividend investing has become very popular with many investors fed up with the volatility of stocks. To a large extent, dividends help to psychologically insulate investors from market volatility by providing a seeming safe stream of investment returns, regardless of how the market or stock prices are doing. And this helps, because all too often, investors panic when stock prices drop, selling off their investments and putting everything into cash at precisely the lowest point in the market during a downturn. It does not matter if the dividend stocks themselves are as volatile as the rest of the other stocks. It is the illusion of steady returns which helps to calm investors in such a crisis.

But dividend investing only works in the long run if we re-invest the dividends. Imagine if we have a dividend portfolio, which pays out 4% in dividends and 1% in capital gains. Only by re-investing the dividends back into the portfolio do we end up getting a 5% compounded return over the long term. Otherwise, it would be a case of touching the investments again.

The moment the dividends are not re-invested, we end up compounding the portfolio at 1% instead! This is the worst case scenario where the dividends are used for spending (which essentially have a return of 0%). It is not so bad if the dividends are used to pay down a loan. For example, one which charges interest at 3% a year. In such a case, the dividends can be considered to be re-invested at a return of 3%, but this is still lower than if they were re-invested directly in the portfolio.

3. Keeping a warchest

It is almost a sacred ritual for investors to proclaim at some point in time that they are “keeping a warchest of 30% of their assets in cash” in readiness for a market downturn. While there may be many stories of how timing the market can yield very high returns, more often than not, the downturn does not happen, and the 30% cash position underperforms the boring 5% market return. And of course 30% of your assets have to start the investment compounding process all over again when you give up and reinvest them.

The stock pickers who proclaim that their investments have beaten the market index in any particular year usually only refer to the invested portion, and forget about the cash portion. If 70% of your assets returned 10%, beating the market return of 7%, but you have 30% in cash earning 0%, then all you are getting is only the market return, nothing more.

4. Stock Picking

Again, there is no shortage of investors willing to share their views on stocks or investments that will go up the most. And while this may be true from time to time, to justify this, you have to be a really good or lucky stock picker to continue doing this year after year for 30 to 40 years to beat the boring market returns of 5% over the entire period. Now, if the “warchest” folks trying to time the market are wrong most of the time regarding the timing of the market downturn, how likely are the “stock pickers” going to be right about their picks? More than 50% to 55% of the time (which is the norm for active portfolio managers)?

But stock picking has further effects on reducing the investment return over time. Stock picking usually means concentrating instead of diversifying the portfolio (as we discuss here), and this increases the risk and volatility of the investments. Which in turn drag on the returns over time (as we note here). So while there may be a few years in which these stock picks pay off, over the long haul the increased volatility will mean that they pay off somewhat less than expected at first sight.

Switching in-between different stock picks also results in having to leave part of the investment portfolio in cash over time. The cash position is probably one of the biggest reasons why people are not getting more from their invested savings. And stock picking only accentuates this further.

5. Property investment

There are many pathways to amassing a nest egg, and property investments are one of them. Indeed, as housing rental is one of the biggest expenditures for everyone, residential property should be a mainstay of everyone’s portfolio. Especially when you stay in your own property. But while investing in property over and above your own residence can pay off well, there are numerous frictions and costs involved. For example stamp duty, lawyers’ fees, renovation costs, loan interest, and so on. All of which will add up over time and create a drag on returns over the long term. After all, low cost investing is a mantra of those who prefer to let compounding over time do its magic!

Actually, none of this is new. And there is evidence to back it up (see here and here). After all:

Time in the market beats timing the market

Conclusion: Investing is harder than it looks!

Or more accurately, the behavioural aspect of investing is hard. For example, staying invested when the market has a downturn. Or, not chasing returns but allowing investment compounding to work its magic etc. On the other hand investing has never been more accessible and easier than before.

But it remains true that to be an outstanding investor is very, very difficult. It is very hard to beat the market returns and become really, really wealthy through investments, because it is next to impossible to foretell the future. After all, if we look at the Forbes list of the richest Singaporeans, we notice that very few of them have gotten where they are through investments alone. In the list of the top 50 in 2020, we have:

#10 the Khoo Family, whose wealth came from Mr Khoo Teck Puat’s investment in the Standard Chartered Bank
#15 Peter Lim, whose wealth came from a $10 million investment in Wilmar which grew to $1 billion.
#17 Richard Chandler, one half of the Chandler Brothers, once The Greatest Investors You’ve Never Heard of, but now with the combined net worth of the brothers being less than what it was when they split their assets back in 2006, showing how difficult it is in investing
#21 Oei Hong Leong, scion of the Indonesian Widjaja family. Well known for suing the banks he entrusted his foreign exchange bets with
#27 Chew Gek Kim, the current custodian of the investments of the Tan family

Hence a grand total of 5 out the the top 50 richest Singaporeans have earned their wealth from investing!

But as we have also shown, getting to be a millionaire is not as difficult as it sounds. All that is needed is patience and a sense of calm, while letting investment compounding do its work. Hopefully, we shall see a lot more millionaires in Singapore in the near future!