When Canadian high school teacher Andrew Hallam was in college, he worked at a bus depot during the summer, and met a 47-year-old mechanic who was a millionaire.
The latter suggested to the young man that he should choose a job that he loved doing, rather than choose a job simply because it paid well. And that he could earn a middle-class income and still become a millionaire by his 40s or earlier if he learnt about investing his money.
That meeting piqued Mr Hallam's interest in investing, which has become his lifelong passion.
He even considered getting into money management in his early 20s. 'But it occurred to me that I would benefit at the expense of my clients. Did I want to do the best for my client or myself?' he asked himself. In the end, Mr Hallam, now 41, chose teaching.
He came to Singapore eight years ago to take up an English teaching position at the Singapore American School but has switched to teaching personal finance this year.
He recently published a book Millionaire Teacher: The Nine Rules Of Wealth That You Should Have Learnt In School.
Having read about 400 finance books since he was 19, Mr Hallam says: 'There are all these academically irrefutable premises but the financial service industry doesn't want you to know them. I want to help people out there.'
He is married to Pele, also a teacher at the Singapore American school. They have no children.
Q: Are you a spender or saver?
I'm a saver. People on middle-class salaries can amass wealth, but I don't believe they can do it if they are big spenders, especially while they're young.
My wife and I save roughly 70 per cent of our annual income. We invest all that we save, and we spend the rest. I'm not as thrifty as I used to be. I spend most on food (mostly organic fruit and vegetables), travelling and massages. We both enjoy a massage at least once a week.
In order to grow wealthy, I think there's a rule of thumb that applies nicely: Never borrow money to buy a depreciating asset. A car is a depreciating asset. But over time, a house is an appreciating asset. Many people try to look wealthy before they truly have money.
Plenty of people borrow money to buy fancy cars and live an extravagant lifestyle, but most of those people are living well on borrowed time.
Q: How much do you charge to your credit cards every month?
I don't know what percentage of our spending we charge to our credit cards. But I do know that I've never paid a penny in interest to a credit card company. Credit card companies hate guys like me!
Q: What financial planning have you done for yourself?
I determined my financial planning by asking myself how much money I would need if I wanted to retire in a given year.
I figured out what kind of portfolio I would need to allow for that kind of income, and I made an estimated adjustment to cover the rising costs of living. It's all about cash flow.
Studies have shown that if you have a diversified investment portfolio of, say, $100,000, its real worth is $4,000 a year. In other words, you can sell 4 per cent of your portfolio each year and have a strong likelihood that you'll never run out of money.
This 4 per cent rule is a fairly standard one.
I knew that if I could live off 4 per cent of my portfolio, I would be financially free. That doesn't mean that I would quit work and lie around all day. But it did mean that I could choose to work or not work, in any given year. This can certainly reduce the blood pressure.
I diversify my money across international stocks and Canadian bonds and I rebalance my assets. I have 60 per cent in stocks and 40 per cent in bonds as I want my bond allocation to equal my age.
Most college endowment funds and pension funds do the same with the rebalancing of asset classes but it's not easy for most people to do - psychologically.
I own just three low-cost index funds - a total US stock market index, a global stock market index and a Canadian bond market index.
I have medical insurance, but no other insurance. I think the best insurance of all is to have no debts, and enough money saved to live off it.
Q: What advice would you give to investors?
Two things significantly reduce many people's portfolio returns:
- They often chase 'what has done well lately'. This is one of the worst pursuits an investor can take part in.
Studies show that if a particular unit trust has, for example, returned an average of 10 per cent a year for the past 20 years, the average investor in that fund, for that duration, would have made only 7 per cent a year.
Investors would have added more money when the fund was 'doing well' and they would have added less money or even sold some of their investment when it underperformed. In essence, they would pay a much higher than average price for the units of the fund.
Such behaviour, over the long term, can be the difference between amassing a $500,000 account and a $1 million account. But this behaviour is very common.
- Most people also pay investment fees that are too high. I pay roughly 0.09 per cent each year for my exchange traded funds. But most people in Singapore pay roughly 15 times that amount if they invest in actively managed unit trusts.
Most people still get drawn to a fund because of its strong historical returns, ignoring the academic evidence suggesting that portfolios of low-cost funds, over a lifetime, have much higher statistical odds of outperforming funds with higher expenses.
Q: Moneywise, what were your growing-up years like?
I grew up in Kamloops, British Columbia, Canada. My dad was a mechanic and I was one of four kids. If we wanted something material, after the age of 12, we had to earn the money to pay for it ourselves. My parents bought me underwear and socks until I turned 15. I was really on my own, although I was still under their roof. My parents didn't have a lot of money, but it has worked out well for me.
The Chinese suggest that wealth doesn't last three generations. The generation that works hard and succeeds wants to make life easier for their kids. So they buy things for them and essentially weaken them.
Children of the affluent grow up with expensive expectations. They're typically the same people who borrow money to buy depreciating assets. And this results in the beginning of the end.
I know that if my parents did the metaphorical heavy lifting for me when I was young (by giving me money or buying me things), I would not have developed the financial muscles I have today.
Q: How did you get interested in investing?
I started to invest when I was 19 years old, after meeting the millionaire mechanic, so I've given myself plenty of time to apply Einstein's Eighth Wonder of the World: compound interest.
Twenty years ago, I started investing a minimum of $100 a month and I increased that every year.
I also read finance books, of which two of the best are The Four Pillars Of Investing by William Bernstein and Common Sense On Mutual Funds by John C. Bogle.
Q: What property do you own?
I don't own any property. I like the thought of buying property when it 'isn't performing well'. For this reason, I wouldn't buy property in Singapore today.
I bought an acre of oceanfront land on Vancouver Island in Canada, during a mini recession in 2002. Property prices hadn't moved much in a decade, so I bought it.
Then when people started piling into property, prices soared and I sold it for three times what I paid, in 2007. It cost just $147,000. I sold it for $484,000.
Q: What's the most extravagant thing you have bought?
I bought a 1974 Mercedes-Benz for $3,000 in Canada and then spent another $7,000 restoring it. The car was cheap by Singaporean car standards, but it was my most extravagant purchase to date.
Q: What's your retirement plan?
I believe that I'm financially independent now. My portfolio is worth roughly $85,000 a year (based on the 4 per cent rule).
But I have no plans to retire. I love teaching at the American School. You know that you've found the perfect vocation when your job doesn't feel like work. My job is so much fun.
Q: Home is now...
A rented four-bedroom apartment at Dairy Farm Estate.
Q: I drive...
My wife's 2003 Mazda 3.
joyceteo@sph.com.sg
WORST AND BEST BETS
Q: What is your worst investment to date?
I bought into a Ponzi scheme in 2003. Of course, I didn't know that it was a Ponzi.
My friend told me about Insta-Cash Loans, which paid 54 per cent interest a year. The high interest rate scared me - think of how crazy the investment must be, but what's crazier was I eventually changed my mind.
My friend was collecting his interest every year and travelling all over the world, so after five years, I went to meet the company's head.
I still thought it was a scam but after hearing my friend had collected interest payments of more than $100,000, I invested $7,000. I received interest payments for a while but the party ended in 2006, when the firm went bankrupt.
In the end, I lost money as I had to pay 25 per cent tax on my gains.
Q: And your best?
My best investment to date is my investment in the ideology behind dispassionate rebalancing.
In 2001, 2003, 2009 and twice last year, I rebalanced my portfolio and netted hundreds of thousands of dollars in profit over the past decade as a result.
When the stock markets crashed after 9/11 and when George Bush went to war with Iraq in 2003 (and the markets crashed), the stock portion of my 30 per cent bonds and 70 per cent stocks portfolio all of a sudden dropped to 50 per cent because the market dropped.
So I sold some of my bonds and bought more stock index.
