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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on November 2 - 8, 2015.

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Ong Shi Jie (CJ) is head of integrated marketing and analytics at OCBC Bank (M) Bhd

 

AS MUCH as we hate to admit it, most of us accept that life isn’t fair. This happens especially when we talk about income inequality — there is a niche group that is highly affluent, a middle-income group that seems to be stagnating and fighting against the tide of escalating expenses, and a lower-income group.

In a world where most of us believe that the rich get richer, I read with glee about how inequities between the haves and have-nots are addressed in Finland in the form of speeding tickets. Yes, that’s right. Speeding in Finland can cost you a fortune as a Finnish businessman found out — and took his anger to Facebook — early this year. Reima Kuisla was fined €54,024 (RM255,319) for travelling 64mph in a 50mph zone. You could have bought a new car with the money used to pay for the traffic infraction. 

In Finland, fines are calculated using a complex formula based on income. The idea here is that fines should vary in proportion to the offender’s income so that the economic “pain” or loss serves as an effective deterrent. A €300 fine may hurt a low-income person and deter him from speeding. But if you impose that amount on a millionaire, it is unlikely to cause a dent in his wallet. Based on this line of justification, the fine should progressively increase in line with one’s income for it to be effective as a punishment. In this case, Kuisla’s fine was calculated based on his 2013 income of €6.5 million. Just to illustrate this point, a person earning an annual income of €50,000 would get a fine of about €345. 

Unfortunately, that’s probably as far as equality goes when it comes to the haves and have-nots. For the rest of us who live outside the Nordic region, we have to contend with the fact that the rich do get richer. In an economic paper by New York University released late last year, economist Edward Wolff decided to examine the reasons behind this. He studied household wealth over the past decade and his conclusions were startlingly obvious. The wealthiest 1% put 75% of their savings into investment assets. The middle class, on the other hand, had 63% of their assets tied up in their homes, with most of them having two-thirds of their properties still outstanding in loans. Of course, we know that the US property market went through tough times during the subprime crisis, creating an even larger gap between the rich and the middle class. Also, for the middle class, their financial resources are fairly limited. It is only expected that most of that will go towards putting a roof over their heads. This situation is no different in Malaysia.

That said, there is data to show that individuals in Asian emerging markets hold way too much cash compared with their developed peers in the region. There have been correlations between the state of advancement of a country’s capital markets and its citizens’ affluence. Countries such as Singapore, Hong Kong and Japan come to mind. Are the rich getting richer because they are better investors? Or because they simply have more money to multiply?

Sure, give me a million bucks today and I’m guaranteed to be richer than the me without the million bucks in 30 years’ time. Or will I? There are too many stories to disprove this theory. Lottery winners are a good example. I’m sure we all have heard stories of lottery winners who squander their new-found wealth and end up no better than they were before winning the lottery. Or how about the trust fund kid who was born with a silver spoon in his mouth, but blew it all away on a lavish lifestyle? Much closer to reality, we may have a sibling or close friend who earns more than us (by our estimation) but also outspends us by some margin. 

So, does money make more money? I would agree that there is probably a higher chance. However, having money is not the only ingredient. You also need wisdom to make more. And in this regard, I agree that the wealthy do have a lot more access to resources to manage their wealth. The very nature of markets is such that extraordinary profits are made by spotting an “opportunistic” price and trading on it. The first person to act on this gets the biggest piece of the action. 

The wealthy have access to expensive financial data and also well-connected advisers. This generally helps them earn higher returns. The average man, on the other hand, is disadvantaged if he naively thinks he can beat the market where there are thousands of industry participants way ahead of him. These differences in returns compound over time, and that’s where we witness the effect of the rich getting richer. 

But is the average investor condemned to picking up scraps from investing? I don’t think so. Investors have to understand that they should be making decisions based on the overall fundamentals of the economy and whether this translates into an overall pick-up in asset prices. Forming the portfolio and timing the entry of the markets are best left to professionals such as fund managers. 

While many investors scoff at the thought of investing in a unit trust fund, thinking they can do better, I would rather think of it as diversification of fund manager. While you may be a fantastic money manager, don’t rule out the possibility that there are other equally good managers out there. No one ever beats the market 100% of the time. And unless that happens, diversify, diversify, diversify. 

So, after all is said and done, the world remains unfair. But we can increase the odds in our favour. After all, we do have a choice in deciding which side of the gap we want to be on. Regardless of how much money you have, if you live far beneath your means, you are more likely to succeed financially. If you are good at saving and investing, you are more likely to succeed financially. If you can control your desire for materialistic acquisitions, yes, exactly, you are more likely to succeed financially. We are unlikely to get our wish for more money, but we can definitely change our mindset for success. 

 

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