The arrival of an unexpected lump sum would see Sydney residents favour structured investment products versus the insurance products preferred by residents of Asian cities. How prepared are your clients for a sudden windfall?
We often hear advice about saving and investing for rainy days. The message is essentially about avoiding poverty. Yet we seldom hear advice on preparing for sudden good fortune, such as receiving a surprise inheritance or winning the lottery.
Part of the reason is because these tend to happen more in movies and dramas than in real life. History, however, has no shortage of stories concerning lottery winners who squandered their fortune within a few years, ended up back at square one or even going bankrupt.
It seems, therefore, that staying rich is perhaps just as challenging as becoming rich, especially when we become rich overnight. So it is interesting to know just how ready people are for staying wealthy if luck knocks on the door.
Setting up the question
Fidelity questioned 500 respondents in each of the following 10 cities: Beijing, Hong Kong, Mumbai, New Delhi, Seoul, Shanghai, Singapore, Sydney, Taipei and Tokyo. The respondents were selected randomly and aged between 21 and 55.
They came from all income groups and the numbers were balanced across gender.
For every city we posed a theoretical question: if you suddenly receive a lump sum of money, what would you do?
To produce a similar impact for every city with this lump sum, we set the amount at roughly 20 to 25 times the city’s annual median salary. How did we choose this multiplier? We were interested in seeing what decisions people would make on receiving an amount of money that, although substantial, was not enough for them to retire.
So in Beijing and Shanghai, for example, the amount in question was 5 million renminbi. In Singapore, it was 1 million Singaporean dollars. In Sydney, the amount was 1 million Australian dollars, while in Hong Kong it was 5 million Hong Kong dollars. In Taipei, the sum was 15 million New Taiwan dollars. In Seoul, the amount was 1 trillion Korean won and in Tokyo it was 150 million yen. The amount for New Delhi and Mumbai was 3 million rupees.
It’s all about options
We then listed a number of investment options for people to choose from to manage the windfalls. For the average person, the obvious use of that money would perhaps be to buy a new home or pay down their existing mortgage. But because this option was so obvious, we excluded it from the list. It is simply not very informative in terms of telling us the level of thinking and knowledge among the general population.
We wished to know how people would manage that money as a portfolio and gauge their ability to stay financially sound, if not rich. Our choices instead consisted of the following: cash, foreign currency, insurance products, stocks/ bonds/derivatives, funds, structured investment products and hedge funds. We also allowed respondents to choose “other” and specify what that would be.
Some very interesting patterns emerged. Firstly, very few people – less than 1 per cent – chose paying down their mortgages or buying a house as the “other” option. Perhaps this reflected inertia towards filling out a blank box or perhaps respondents understood that we were testing for money management skills or perhaps people simply needed more time to think matters through and decide.
Secondly, regardless of the country and city, cash was the most popular choice. Across Asia, people opted to put anywhere from 30 per cent to 58 per cent of the theoretical windfall into cash. These are high percentages, suggesting that most Asians are either very conservative or, again, were unclear about how to manage sudden wealth. It may also suggest that respondents simply wished to spend a chunk of that money.
The third interesting pattern that surfaced concerned what people would do with the other 42 per cent to 70 per cent of the windfall. In this case, Asians fell into two camps. Respondents in Greater China favoured investing in single stocks, opting to allocate 10 per cent to 13 per cent of the lump sum into this category. The rest of Asia favoured insurance products, opting to allocate 13 per cent to 18 per cent to that. The only exception was Sydney, where people chose to put 48 per cent in cash, followed by 13 per cent in structured investment products – several of which offered capital protection.
What do you know?
Since individual stocks are generally higher risk than insurance products, respondents in Greater China appear more aggressive, while those in the rest of Asia seem more conservative. In general, the large allocation to cash across all cities suggests that when people are suddenly endowed with money that is not sufficient for them to retire, they tend to be cautious with it.
Perhaps the tragic lottery-winner stories are more common among those whose wins are enormous. In other words, larger sudden windfalls may increase the chance of misfortune.
Some respondents (1.25 per cent in Hong Kong and 9.2 per cent in New Delhi) selected hedge funds as an option to park some of their gains. This group was obviously unaware of the high threshold – typically at least US$1 million dollars – to become a hedge fund investor.
One last notable finding was that only 0.2 per cent of respondents across Asia indicated that they would seek professional financial advice. Yet judging from the patterns of most people’s allocations, which tend to heavily favour cash, Asians appear rather unprepared to be rich.
Most of us strive to climb the wealth ladder, yet we may also need to raise our financial literacy in order to stay wealthy, or seek help when necessary. Luck may land us in the circle of the rich, but staying wealthy requires more than luck.
Betty Ng is a director and investment commentator at Fidelity Worldwide Investment.
