Small Change

What's the best investment asset class? It is ourselves

For starters, pay attention to insurance and diversification

A couple of weeks ago, I had lunch with some friends and my favourite topic of investing came up.

The question that was raised was this: What's the best investment asset class today?

One of them said property, because land is immutable and has made many poor people rich.

Another friend said stocks, because over the long run, markets are more likely than not to go up manifold.


Many younger people do not feel the need to buy insurance because they feel healthy and probably invincible. But a car accident, or a stroke, could result in them losing out on their future earnings, and leave them in financial ruin.

A third friend, who was quietly eating his grilled chicken with salad, looked up quizzically at the rest of us. He put down his fork and knife and said simply: "Ourselves."

He's right.

For most of us, the best yields do not come from real-estate investment trusts or high-dividend blue chips but from the wages we get from our jobs.

In other words, we are our best asset class.

It is a view that legendary investment guru Warren Buffett also holds.

"Generally speaking, investing in yourself is the best thing you can do. Anything that improves your own talents; nobody can tax those or take those away from you," he once said.

"They can run up huge deficits and the dollar can be worth far less. You can have all kinds of things happen. But if you've got talent yourself, and you've maximised your talent, you've got a tremendous asset that can return tenfold.''

But more often than not, investors often overlook themselves and their jobs when making investment decisions.

Take the perennial problem of people being under-insured.

A study by the Nanyang Technological University, commissioned by the Life Insurance Association in 2000, found that Singaporeans were under-insured by 65 per cent.

This is a classic case of not protecting one's capital, which could lead to massive losses if the same principle is applied in stock investing.

The situation is not unique to Singapore.

Reinsurer Swiss Re said that there is a widening protection gap in Asia. The protection gap refers to the difference between the resources people have and those they will need to maintain living standards if a working family member can no longer be a provider.

Swiss Re's report estimates that the mortality protection gap for the region has widened further between 2010 and last year. It said the gap rose to US$58 trillion last year from US$42 trillion in 2010 for 13 Asia-Pacific markets.

Many younger people do not feel the need to buy insurance because they feel healthy and probably invincible.

But a car accident, or a stroke, could result in them losing out on their future earnings and leave them in financial ruin.

In other words, before making financial investments in the stock market or even in real estate, invest in yourself first.

After protection, the next area that is often overlooked is diversification.

The self is often not taken into account when making investment decisions.

Here's a thought experiment: If a person had 80 per cent of his stock portfolio in banks, would the logical thing be to buy even more banking stocks?

Most financial experts would probably say that the right thing to do is to buy stocks in the medical or education industries, which are not correlated with banking, because these help to diversify your portfolio.

But the same logic is not applied when it comes to thinking about one's job and income. These do form a big part of your portfolio of financial investments.

In other words, if you are in a banking job, think about buying non-banking-related stocks.

Taken one step further, if you are in a cyclical industry - industries that are correlated closely with the economy - then a good choice would be to buy stocks in the defensive industries.

The same principle applies for those who are in the medical industry. Buying banking or commodity stocks may help improve your overall portfolio.

At the end of the day, the best thing to do is to take care of yourself. This will not just achieve the best yields you can find across asset classes. But taking care of yourself, both mentally and physically, will also ensure happiness and health, two rewards no financial asset can give you.

A version of this article appeared in the print edition of The Sunday Times on October 25, 2015, with the headline 'What's the best investment asset class? It is ourselves'. Subscribe