Interlude: Learning to build a more resilient portfolio

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 27, 2020 - August 02, 2020.
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During the Movement Control Order (MCO) period, my friends invited me to play a free online game that teaches people to manage their cash flow so they can achieve financial freedom. That experience proved to be insightful enough that I played the game a second time with some of my colleagues.

The goal of the game is to achieve enough passive income to cover your expenses and thus, achieve financial freedom and the ability to pursue your dreams. Players are randomly assigned an occupation, a corresponding salary and a set of expenses or liabilities at the start of the game. Along the way, they are offered opportunities to invest in stocks or properties that can generate passive income.

While it was a fun way to connect with friends during a time of isolation, the game taught us several important and relevant lessons. The takeaways are especially useful in this time of uncertainty.

One major insight that I walked away with was discovering my risk appetite, which is conservative. I got so hung up about paying off my liabilities that I did not dare to invest too much in anything. And when the price of a stock fell, I bought only a few shares. 

It took a lot of convincing for me to take a loan in the game to purchase properties. Interestingly, this corresponded with my behaviour in real life when the global markets plunged in March. I only had the courage to buy one or two lots of dividend-paying stocks, even though the prices were low.

It is good to know my risk appetite as it will guide my investment decisions. But it is also worthwhile to note that it was tough for me to move forward in the game because I did not dare to invest too much. Consequently, I could not generate enough passive income to cover my expenses as I held mostly cash. 

I can already see a similar scenario happening in my life, given my inclination to rely on relatively safe assets or vehicles such as bonds and fixed deposits, rather than taking more risks to invest in equities or equity funds. If I want higher returns and have a longer time horizon, I will need to have the courage to diversify my investments.

The game also allows players to take on debt to invest or pay off their existing liabilities. Through this function, they learn to manage their liabilities and cash flow. They also need to make sure that they have enough cash flow to handle the debt. We saw this as a good takeaway as some of us were tempted to take on too much debt to generate passive income, thus diminishing our cash flow to pay for unexpected expenses.

Another takeaway that my colleagues shared with me was the understanding of how our situations in life can drastically impact our financial standing. In the game, some of us were assigned to be doctors and lawyers with high pay. Others started out in careers with lower pay but still had high liabilities. Along the way, some players were slapped with unexpected expenses such as the birth of a child or were declared bankrupt.

Those with higher salaries managed to accumulate assets quicker while others, who started with a low salary, suddenly had to contend with the expenses of their two children. This really reflects how life can throw curveballs at you and how a better-paying job can give you an upper hand in achieving financial freedom.

But does this mean we should get better-paying jobs when we are young and only pursue our dreams after we have generated enough passive income to cover our liabilities and expenses? I am inclined to disagree with that notion as I believe we should pursue our dreams if we can — even before achieving financial freedom — and live within our means while we do so. However, that very much depends on one’s financial situation and goals. 

This game has helped me to better understand my financial habits and risk appetite as well as how to balance my liabilities and cash flow. I now have a greater appreciation for the various asset classes available and I am able to build a more resilient portfolio for myself.