A recent article on Straits Times about Torque and Singaporeans investors losing their life savings serves as a stark and timely reminder. The most important rule of investing is to never invest money that you can’t afford to lose. Here is a short blog post on why it is important to only invest money that we can afford to lose and how we can guard against such dire outcomes.
Singaporeans lost life savings on Torque
In this article, it was reported that more than 100 people in Singapore have filed police reports against Torque, a crypto-trading platform. Their trading accounts have been suspended as a rogue Torque employee had made unauthorised trading activities that led to significant losses. It was also stated that more than 2,000 of the investors on Torque are Singaporeans. Straits Times ran a report and I found some of the interviews truly heart-wrenching:
“It’s their life savings and they think their money is still there, I can’t afford to let them know and get a heart attack from it.
“it was meant to pay for his daughter’s and wide medical fees. He said his daughter was recently hospitalised and his wife had been diagnosed with cancer.
“put all his savings of $13,000 into Torque… and the money was meant for the down-payment of a HDB flat.”
We all know that it is important to invest to grow our wealth and protect our savings against inflation. However, it is also important to note that not all investments are sure-wins and hence we must never invest more than what we can afford to lose. Here are 2 tips to ensure that even if our investments fail, our lives can still carry on largely uninterrupted.
1. Build up an Emergency Fund First
Before we start on the journey of investing, it is very important that we build up an emergency fund first. Depending on one’s household circumstances, I feel that an emergency fund should be equivalent to 6 to 24 months of expenses. This would guard against the financial risks from retrenchment, medical emergencies and unforeseen accidents. It would definitely come in handy against situations that those investors on Torque unfortunately found themselves in overnight.
I recall that I first socked away $10,000 of savings even before I started my investing journey back in 2014. $10,000 was sufficient to last me for 12 months based on bare bone expenses as I was a fresh graduate with no liabilities and dependents then. Fast forward to today, my emergency fund has since grown to a 6-digit figure given that my annual household expenses have increased with a child. It is equally important to ensure that your emergency fund is in keeping with your latest annual household expense.
As its name suggests, an emergency fund should not be used for investments since this represents money that one cannot afford to lose. Instead, they can be placed in very safe interest-yielding savings instruments that are liquid and easy to access when required.
2. Only Use Leverage In A Responsible Manner
As cliched as it sounds, leverage is indeed a double-edged sword. It can amplify your returns and it can also increase your risk of bankruptcy at the same time. Here is an example of how leverage can work against you in investing and set you on a path of financial ruin.
- You have set aside $10,000 for investment and this represents the amount that you can afford to lose.
- Greed and impatience consume you and you manage to obtain a 5X leverage on your equity from a bank and invest all of it
- Your investment goes bust and your entire investment of $60,000 evaporates overnight
- You realise that your emergency fund is not large enough to cover for the $50,000 that you have borrowed
This is obviously an oversimplistic presentation of how leverage can potentially work against you but I think you get the drift. Therefore, it is important to learn to use leverage in a responsible manner. When it comes to investing, leverage should generally be considered only for the more skilful and experienced investors.
Finally, amidst the euphoria of frothy valuations in both the global equities and cryptocurrencies markets, I feel that it is apt to remind ourselves to never invest with money that we can’t afford to lose. When the bulls are out in force, it’s easy to lose sight of our investing fundamentals.