Myth - High Return Equals High Risk

I met a gentleman this morning at an international university gathering. He told me how interested he was in growing his money through 'investing' - but not for the long term.

After further investigation, it was revealed that anything over a year was long term for him! His idea was trading leveraged instruments like Forex and options with a holding period of days, sometimes hours!

I had to share with him a few key points.

The Emerging Voice of Sound Financial Advice

An article co-authored by Sam Wadia and Karen Tang published in iFAST Insight magazine's inaugural issue -

Case Study: "Before and After" comparison after restructuring the financial portfolio of a real client

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Good financial advice can make a world of difference to your financial well-being. Read on for a real-life case study of how one client actually benefited from this.

Mr. Bryan Lee (the name has been changed to ensure the confidentiality of the client), 35, is an IT manager married to a home-maker. They have two children aged 7 and 5. He earns $8000 per month (before CPF contribution and taxes). They own a 5-room executive HDB flat, a mid-size car, and are repaying loans on both. They enjoy an upper middle class lifestyle - eating out during the weekends, buying new gadgets for their home and children, and taking annual vacations. Their life's dream is to provide a good eduction for their children and to see them happily settled, while never being a financial burden to them.

Just a year ago, Mr. Lee felt like most ordinary residents of Singapore, who believed that lifelong financial security is something reserved for millionaires, and who could not foresee a clear end to their working lives. He was luckier than those who are in an even more precarious situation - those who simple believe that their financial security has been taken care of, with just their few existing insurance policies, or some randomly purchased investments, or even their expectations of subsidies from the government when they retire. Mere belief is a dangerous thing to rely on. Instead, actively knowing all the relevant facts - with professional advice - is what is required.

Over the years they had bought quite a few insurance policies sold to them by insurance agents. Some of these agents were friends and family whom they found hard to refuse. Other agents were so persistent in following up with him, he bought policies from them almost just as a form of compensation for their time and effort. Interestingly though, once they had sold such policies, these agents went almost completely out of touch. The only communication he did receive were reminders from their companies to pay his premiums and the occasional letter informing him of a reduction in bonuses.

Mr. Lee is considered to be a conservative person who had always chosen to buy the products from agents of well-known financial institutions. Besides insurance policies, Mr. Lee had also bought a few investment products from his local banks. These were almost always spontaneous decisions which were initiated by the banks' sales staff. His investments included low capital guaranteed funds and some unit trusts that were considered 'popular' back then.

In Mr. Lee's case his 'status quo' regarding his financial holdings was finally disturbed when he received yet another notice of downward revision of bonus for one of his insurance policies. This revision was blamed on 'volatile market conditions'. At about the same time, he checked on his investments only to find that many were still under performing, even after holding them for a few years.

Mr. Lee realized that he need to seek a second opinion from a financial adviser who would be able to provide him with a holistic, unbiased overview of his entire financial situation.

In the process of interviewing him, the financial adviser uncovered the following areas that were currently lacking in his financial plan:

1. More coverage required, especially critical illness & disability.

2. Premiums paid are costly for the existing coverage amount.

3. Regular portfolio review and rebalancing are required.

4. A suitable investment plan that would suit his risk appetite.

5. A savings plan for his children's education needs.

The financial adviser also conducted a thorough analysis of his present and projected financial requirements, with the aim of deriving the required rate of return which his funds would need to grow, to meet his future financial needs.

Currently, at age 35, the amount of investible funds he has is $70,000 (in liquid assets). He is able to invest $1,500 per month for the next 25 years. He would require $3,500 per month (in terms of current dollar value) during his retirement years. He intends to retire at age 60 and wishes to plan for a life expectancy of up till age 90. During his retirement years, his money will be invested in conservative financial instruments which will give a return of about 4% per annum ( a constant inflation rate of 2% is assumed).

After a thorough analysis of Mr. Lee's financial situation, the amount of liquid funds he would need at age 60, is $1,557,300.

As for the funds required for his children's education needs, in addition to a starting capital of $25,000, he is also setting aside a separate amount of $500 a month, and he wishes to grow that amount to $25,000 in 16 years' time.

To meet his requirements, Mr. Lee needs to grow his current and regularly invested capital at an approximate rate of over 7% per annum.

To achieve his investment objectives, it was recommended that Mr Lee hold a diversified portfolio of unit trusts investing mainly in global equities. Other investment vehicles such as bonds, deposits and structured products were inadequate to attain the above rate of growth over sustained periods of time.

Once his needs and financial goals had been established, the financial adviser commenced work on scouring the market for suitable plans that not only had customer-friendly clauses but which were cost effective as well. Although the companies were not as well-known as the big boys of the industry, they were very strong financially and able to pass savings to clients by quoting lower premiums, and were also able to include legal clauses which were beneficial to their clients in their contracts.

Table 1 gives Mr. Lee's existing insurance holdings - detailing the coverage he receives and the premium he has to pay. The total cash premium that Mr. Lee forks out annually for his insurance is $12,952, for a sum assured of $390,000 for death and Total and Permanent Disability (TPD) and $190,000 for critical illness. In this situation, Mr. Lee is actually "under-insured and overpaying".

TABLE 1: BEFORE RESTRUCTURING

* Excludes the single premiums

** Excludes coverage from single premium policies.

After talking into consideration the various factors listed below, the required sum assured for Mr. Lee was derived:

1. Annual premium budget

2. Critical illness treatment expenses

3. Current and future expected income

4. Number of years of income to be replaced in case of death, disability, illness or accident

5. Liabilities

The products (as listed in table 2) were recommended. It can be seen that there has been significant savings of $5,464, or 42% of the original premium, and yet the coverage has been increased by 55% for death/TPD and 216% for critical illness.

TABLE 2: AFTER RESTRUCTURING

The single premium policies were discontinued and the amount reinvested into unit trusts, due to the following reasons:

a. Single premium Investment Linked Policy (ILP) is cost ineffective for both insurance and investment purposes.

b. He did not need the protection provided by the ILP and single premium investment products because all his needs are taken care of by the new program.

c. The cash value of the single premium investment products was redeemed and reinvested with suitable unit trusts.

Endowment policies offer a rather sluggish rate of growth and this would not be adequate for Mr. Lee's retirement funding. The cost for his insurance coverage was also considered high which was why they too were discontinued and the cash value reinvested.

Mr. Lee's revised portfolio provided him with immediate benefits:

1. Insurance plan with limited premium payment term (payment will end before he retires), and yet provides sufficient coverage for life.

2. 42% lower annual premium costs.

3. Effects of the sequence of the various catastrophic events (disability, critical illness, accidents) were considered in the construction of the portfolio.

4. Greatly increased coverage amount in his working years.

5. More 'client-friendly" legal clauses in the contract

6. A comprehensive mix of products, each positioned in light of the other, versus an almost random addition of policies.

Satisfied, Mr. Lee noted that the whole process was by far a more rational approach - a simple comparison of available options in the market that matched his needs and the selection of the most ideal option vis-a-vis his resources.

The New Emerging Financial Advisory Landscape

Ever since the enactment of the Financial Adviser Act, new independently owned financial advisory firms are offering consumers with greater choice for financial advise that is not exclusively tied to any product provider (insurance or investment company). This new entrepreneurial setup ensured that client's , rather than product provider's, interests are considered first n providing holistic financial advice. As a client and consumer, it is beneficial to know that the wider choice available can make your hard earned money work harder, if you choose discerningly.

TOP 5 Mistakes in Investing

Protect your money by avoiding these mistakes

1. Trying to strike it rich

Too often investors try to look for get-rich-quick investments. Speculation in the market is especially true when the market is rallying and success stories abound. The truth is those that make it overnight are far and few. Investment needs time to grow and definitely not without a well thought out strategy and framework for making investment decisions.

2. Following tips and impulses

Do you invest based on a stock tip, news or only after careful consideration?

Many people believe in making fortunes overnight. When they hear of a hot stock that will jump from $0.75 to $40 overnight, they immediately invest their lifesavings in order to have a chance at these overnight riches. When you ask them about the company they just bought and what it does, they have absolutely no clue. This is more like gambling than investing. Imagine how you would feel if the company dropped to $0.15 a share the following day. If you want to take a chance with stock tips, at least do your homework and find out the following:

• Is the company in a growth industry?
• Has the company had any problems in the past?
• Is the company profitable?
• Does the company have a low market capitalization, allowing room for growth?
• Does the company already have a high P/E ratio?
• What are the company's main operations/businesses?

The knowledgeable and prudent investor will do his own research and does not depend on heresay or ‘hot’ news.

Investors who plan on working with an adviser should check out the adviser's references beforehand in addition to this person's fee structure. Be aware that an adviser who works on commission has an incentive to buy and sell.

Even when you have a trusted advisor to manage your investments, it is recommended that you take an active involvement in learning about your investments and be in-the-know what your advisor is doing for you.

An advisor who is only familiar with managing investments linked to insurance plans possesses different qualities and skill set from one who is well trained and exposed to managing pure investment portfolios (stocks, mutual funds).

3. Timing the market

It is every investor’s desire to buy low and sell high. However, many investors who have tried to predict the market cycle have failed. No one can foretell the future of the market.

The best approach for the investor who invests for the long haul is to ignore timing entirely. This is difficult for most people but the following are reasons enough to support a long term approach:

Research has shown that a buy-and-hold strategy beats a trading or ‘speculative’ strategy.

No one has a crystal ball to tell exactly when the market will rally and when it will hit a trough. It is, therefore, fruitless to time the market to lock in profits.

4. Straying from your investment goal

The path to investment success is to stick to your investment goal. Suppose you are investing to secure your retirement funding trough a portfolio of balanced and fixed income mutual funds (unit trusts).

But when the markets show signs of a rally, you are tempted to reap some quick profits and you decide to adjust your asset allocation from a balanced to an aggressive portfolio.

What happens if the markets tank? Depending on the time line you have before retirement, this move could potentially wipe out your retirement nestegg and leave you with a battered portfolio.

Warren Buffett could not have put it more aptly: “Be fearful when others are greedy and greedy when others are fearful”.

5. Forgetting about Portfolio Diversification

Portfolio diversification is the mantra of investing. In choosing a property, we know it’s the location that matters. Similarly, with your investments, you have to diversify, diversify and diversify. It cannot be emphasized how important this is to one’s investments.

An investor who puts his money in a well diversified portfolio of say 8 to 10 stocks or mutual funds is in a far better position than another investor who prefers to bet all his money on 2 stocks.

Diversification is the spreading out of investments to reduce risks. Because the fluctuations of a single security have less impact on a diverse portfolio, diversification minimizes the risk from any one investment. Diversification involves allocating your money in different asset classes to achieve your target investment return.