Vital to start planning for your retirement early

COMMENT BY V.K.CHIN RETIREMENT is meant to be a rewarding experience when those who have toiled for decades to raise families and contribute towards nation-building can relax and take it easy.

Retirees are supposed to spend whatever time they have left to do the things they have always wanted to but did not have the time as they had to earn a living.

But the opposite is true in many cases as the majority of retirees are in fact facing a nightmare in just trying to support themselves with the basic things in life.

Their main torment is finance or lack of it. It is estimated that at least 70% of retirees and pensioners were just not prepared to stop work because they could not afford to.

Most of those in the private sector depend on their Employees Provident Fund contributions for their retirement. This is almost the only money they have to look after themselves.

Unfortunately, it has been proven by none other than the EPF that most of the money would be gone in three years after its withdrawal.

This is indeed a very sad state of affairs and the workers have only themselves to blame for their plight.

Very few people have proper planning for retirement. They do not save enough for this purpose until too late. Though everyone starting work should be saving for this purpose as early as possible, they only realise the seriousness of their situation in their 40s or 50s.

Without their compulsory EPF contributions, many of them would have been even worse off with almost nothing to their name. Many have their own homes and if they are lucky, they would have settled their mortgage by then.

Life insurance is still frowned upon by some as not being urgent and in any case not many earn enough to put money into shares, bonds or other saving instruments.

Saving outside of the EPF is not a culture as people may have difficulty in coping with their monthly family and personal commitments financially.

EPF contributions are also being drawn to meet the demand for funds for housing and health. This will further limit the money meant for retirement.

Too many are expecting their children to look after them when they retire.

They are prepared to use whatever assets they have for their children’s education.

Many of them would have been left penniless by the time their children complete their studies.

They would then be completely at the mercy of their children.

If the kids are filial, then the parents would have a comfortable retirement.

If not, then the last few remaining years would be extremely difficult for the retiree.

Some children can be extremely selfish and may insist on going to study overseas though their parents may not be able to afford it.

Parents may have to mortgage their house or borrow a sizeable loan for this purpose. They may end up bankrupt if their children refuse to repay the loan.

There are countless such sad stories and these are serious social issues where not much can be done to help. It is impossible to tell those nearing retirement that they should keep some money for themselves instead of using it all to educate their children.

Parents should be practical and realistic. If their children are not academically good enough for university, they should opt for vocational education where they would be able to obtain a skill to earn a decent living.

It is worth repeating this message so that hopefully the message will sink in and those approaching retirement would take measures to protect themselves financially.

source

Mutual Interest

By JIN JING

FOR the first time in her life, 32-year-old Wang Ying, an office worker in Shanghai earning 5,000 yuan a month with little prospect of promotion, feels rich, thanks to the booming stock market. She knows nothing about the stock market and has never bought a single share. But like millions of other Chinese investors, Wang has put a big part of her savings into a mutual fund. The initial investment of 10,000 yuan she made in July has already appreciated by 45%.

“I never knew making money could be this simple,” Wang says.

Now she is seriously thinking about parking all her family savings in mutual funds.

Her newfound enthusiasm is shared by many others. Latest figures compiled by TX Investment Consulting Co Ltd, a financial research firm, show the number of mutual fund accounts jumped 400% in the six months to June 30 to 43.49 million, of which 90% were invested in equity funds, with the remainder in various fixed-income funds.

The performance of 323 funds of 56 management companies has largely tracked that of the stock market in the past year or so.

Statistics from the People’s Bank of China show the aggregate net assets of all the 323 funds at the end of June amounted to 1.8 trillion yuan, up about 252% from a year earlier

Statistics from the People’s Bank of China show the aggregate net assets of all the 323 funds at the end of June amounted to 1.8 trillion yuan, up about 252% from a year earlier.

The rapid appreciation of the funds’ assets is reflected in the SSE Fund Index, which soared 114.4% in the first eight months of 2007. In a recent survey by p5w.net, a financial website, 76% of respondents said they expected mutual funds to outperform the stock market in the following months and 34.7% of respondents said they believed the price of stocks picked by fund managers would rise faster than the others.

Ask Zou Hua, a 46-year-old punter converted to a fund follower. “I used to have a lot of confidence in my stock market knowledge accumulated in years of investing in shares,” he says. But the best he could do in the bull run was a meagre 20% profit. “I’m putting my money in mutual funds now,” Zou says.

Although he continues to pay regular visits to his stockbroker’s office to watch the latest price movements on the TV screens, “I feel a lot more relaxed” than before, he says.

Mutual fund sales have peaked three times since last year. According to statistics from financial data provider Wind, the first time was during the second quarter of last year, when the number of new mutual fund issues jumped to 29 from an average of 15 in the previous quarter. During that period, the stock market rebounded from a low point, rising 28.8%.

Mutual fund sales again rose in the fourth quarter of last year, with issues of 23 mutual funds raising a total of 165.45 billion yuan, while the stock market jumped 52.67%.

Mutual funds have again been on a roll since the beginning of the second quarter of this year, with 20 new fund issues raising a total of 162.7 billion yuan. However, analysts warn investors must increase the holding period of the existing mutual funds while reducing their fund holdings percentage in the following months to prevent potential risks owing to high price-earnings ratio of stocks and possible policy adjustments.

“Fund investors better lower their expectation of short-term returns and choose bond funds to reduce the potential risks because companies’ growth potential has been largely factored into the current stock prices,” says Zhang Yu, an analyst at China Jianyin Investment Securities.

“The market did not react to the slide in other markets and to cooling policies at home. Given this, investors should stay even more cautious,” says Lipper China head of research Zhou Liang, who tracks the performance of mutual funds.

But Fullgoal Fund vice-chairman Li Jianguo says he is still positive on the stock market because of China’s strong economic growth. “Mutual funds are a long-term investment tool that need investors’ patience to wait for a much higher return instead of quick redemption.”

source : The Star, Wednesday September 24, 2007

The 80:20 rule on asset allocation

To protect ourselves from the present market volatility, investors can consider using the simple “80:20 rule” on asset allocation — invest up to 80% when the market is bullish and reduce to 20% if the market is in for a big correction.

Q: GIVEN the uncertainties over the future direction of the stock market, what should I do now?

A: Despite all the goodies from Budget 2008, our market was unable to escape from the effects of sharp drop in the US market.

The weaker-than-expected US job data raised concerns over a possible economic recession soon. At present, given that our market is highly influenced by the performance of the overseas markets, some retailers have started to feel uneasy, mulling over whether to sell all their shares and hold only cash, or continue holding on to their stocks given our positive economic outlook for next year.

It is always difficult to time the stock market. It requires the ability to depart from a normal investment stance when the market offers an unusual opportunity. Hence, to stay on top, investors need to be able to act in contrary to a misguided consensus with a thorough analysis on the risks and rewards.

According to a groundbreaking study in 1986 by Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower titled Determinants of Portfolio Performance, asset allocation affects more than 90% of portfolio performance. Hence, in view of the uncertainties over the future direction of the stock market, we need to make the appropriate asset allocations to hedge against any risks as a result of big volatility in the stock market.

Assuming investors have only two types of asset classes in one portfolio, i.e. cash and stocks, we would suggest that the asset allocation ratio between cash and stocks should always be 20:80.

If there are any uncertainties over the future market direction, investors should reduce their equity exposure on a staggered basis to 20%. The remaining 80% of the assets will be in cash. However, if the market has dropped to a very low level and the overall market sentiment starts to turn bullish, we will increase our equity exposure to a limit of 80% and maintain 20% in cash.

The main reason for setting an upper limit for stock investments at 80% is the fact that stock price movements are always unpredictable and random. Unless there is a very attractive opportunity, we should always try to maintain a minimum 20% cash in the portfolio.

If more than 80% of our portfolio is invested in equity, any increase in stock prices would be a good opportunity to sell down to our target level of 80% in stocks and 20% cash.

If the stock market touches a new high and starts to show signs of a correction, investors need to consider adjusting down their equity exposure to about 20%.

However, the 20% invested level is with the assumption that the economy remains intact and the outlook positive. We should only start to increase the invested percentage when the market has found a bottom and shows a clearer outlook.

Besides, investors may need to set a target floor level, which is the maximum loss that they can tolerate.

According to Andre F. Perold and William F. Sharpe in their study titled Dynamic Strategies for Asset Allocation, one of the suggested methods is called Constant-Proportion Portfolio Insurance (CPPI).

This method entails setting a floor limit for the inventor’s portfolio based on his tolerance level. If the overall portfolio drops below this floor level, the portfolio will hold only cash and has no exposure in equity. This method is found to be quite useful in a super bear market when the economy slips into recession.

The above simple “80:20” rule is just a basic guide on asset allocation and is not foolproof. The ultimate asset allocation is still dependent on the stock market outlook and investors’ risk tolerance. (This rule is not the same as the Pareto Principle (also known as the 80:20 rule), as the latter states that 80% of the consequences stem from 20% of the causes).

Ooi Kok Hwa is a licensed investment adviser and managing partner of MRR Consulting.

Source : The Star, Wednesday September 12, 2007

Old age not a blessing – INSIGHT DOWN SOUTH

By SEAH CHIANG NEE
With the rising cost of living, senior citizens who have little education, money or family support are becoming the city state’s rising disenchanted.

WEALTHY Singapore has unfolded a strategy to deal with the plight of a growing number of financially strapped retirees who live for 20 years with insufficient savings.

As a result of better lifestyles, the people are living a lot longer today – 82 years compared with 66 in 1970 – but not every one finds it a blessing.

The retirement age is 62 and Singapore has one of the fastest growing ageing populations in Asia. With the rising cost of living, especially in healthcare, senior citizens who have little education, money or family support are becoming the country’s rising disenchanted.

(At last count, there were 400,000 Singaporeans aged 60 or older, but only 73,000 of them, or 18%, were working.)

Visitors to the city can see more of these hunched figures collecting tin cans at hawker outlets, selling tissues for S$1 (RM2.28) near train stations or picking up used cardboards. Others clean tables or toilets. They are generally not homeless, merely the rising poor in a rich city.

This is contributing to a widening wealth gap and a hot political potato for the government.

Three years into his leadership, Prime Minister Lee Hsien Loong last week announced a package aimed at a long-term financial solution. Without dipping very deeply into the Treasury or overturning the state’s no-welfare tenet, Lee has a tough job.

His main theme is to get Singaporeans, both employers and workers, to carry on working beyond 62 years and increase old age savings so that it can last longer.

Lee increased payout by 1% to 3.5% to the people’s CPF (Central Provident Funds) deposits of up to S$60,000 (RM137,325) with the rest remaining at 2.5%.

The public has welcomed these moves. Most people are happy with the option to carry on working past 62. What is unpalatable is Lee’s decision to postpone CPF payouts progressively from aged 62 to 65 years. (Under present laws, Singaporeans withdraw these retirement savings at 55 but have to keep a minimum account, which now totals S$99,600 (RM227,870), to be drawn down after 62.)

Many Singaporeans are unhappy with the government retaining any part of their life-long savings, preferring to be repaid in full at 55 as originally planned.

“It is our money and we should be allowed to use it any way we want,” posted one writer. “Trust people to do what is best for themselves.”

However, others think the government is right to take over at least partially the management of people’s retirement finances to ensure they have enough money to spend on their daily needs.

While the majority of Singaporeans are conservative with their money, some retirees recklessly blow it in a short period on wine, women or gambling and become a burden on society.

“People are always quick to want individual choice but when it goes wrong and leads to bankruptcy, they blame the government for doing nothing,” said an official, when explaining the state’s action.

But by far the loudest protest is reserved for Lee’s proposal to start a compulsory annuity scheme to finance people who reach 85 years old. This is how it works. A small portion of the CPF minimum sum will be used to buy the annuity that will pay out nothing for 20 years. At 85, if he lives that long, he gets a monthly payout of S$250 – S$300 (RM571– RM686) until death.

Should the person die before 85 the money goes into a pool to help other 85-year-olds, not to his next-of-kin.

The concept of the government compelling hundreds of thousands to buy an annuity and get nothing in return if they do not live longer than 85 has angered a wide section of the population.

“This is an atrocious idea. Life span is currently 82, how much more can it go up to?” demanded a reader. The total number of Singaporeans aged 85 or older stands at about 25,000.

An online petition has started against it. Some are calling for people to wear black in Orchard Road this weekend.

Reflecting the feelings of many others, Ong, 69, said: “Come on, give us Singaporeans a break. When will you, the government, stop intervening into how we spend or invest our own hard-earned monies? It ain’t yours!”

Since independence in 1965, schemes like the CPF and the HDB (Housing and Development Board) that provides public housing have been two pillars of the republic’s prosperity.

Under a new environment, both are transformed and are now earmarked for the new social role of reducing poverty.

In perspective, few of Singapore’s elderly are homeless and street-sleepers are not as numerous as in Osaka or Los Angeles.

“In real life, the picture here is less gloomy because the majority of retirees live with their children,” said a social worker.

While not employed by any company, many are actually working in the “underground” economy – as private tutors, part-time plumbers and electricians.

This is PM Lee’s second big initiative that will change Singapore, the first being his decision to build two large casino resorts.

The measures have earned general praise, particularly the 1% CPF interest rise and the lifting of the retirement age to 65 (eventually 67).

“This will give me the choice to carry on working and earn my keep,” said a civil servant.

For the government, it has two benefits. Apart from having more old citizens working and being self-reliant, it will have a larger manpower pool needed to sustain growth.

But the compulsory annuity system, in its present form, could blow into a major crisis for the ruling party.

Source : The Star, Saturday August 25, 2007

Survey: Most Malaysians ill prepared for retirement

By HARIATI AZIZAN

KUALA LUMPUR: The majority of Malaysians are not only ill prepared for retirement, but are also unconcerned about financial security in their twilight years, according to an independent survey commissioned by Prudential Assurance Malaysia Bhd.

The Prudential Retire-Meter 2007 survey revealed that as much as over 80% of its 1,038 respondents were indifferent about having an ample coffer to lead a reasonably comfortable life after retirement.

Only 34% were saving regularly for retirement,” said Prudential chief executive officer Tan Kar Hor.

“The survey shows that Malaysians clearly know what they want to do when they retire, but the majority are not actively planning for their retirement.

“When Malaysians stop working, they want to travel, spend time with the family and be more involved with the community. Financial security is crucial to fulfil these dreams.

“However, it is startling to learn from our survey that only 34% of Malaysians are putting money aside regularly for their retirement funds,” Tan told reporters after launching the survey’s findings on Wednesday.

He added that an alarming 60% of the people interviewed were found to be ignorant of how much they would need to save for their retirement.

“They believe that they just save as much as they can now and hope that they would have enough to cover their retirement needs,” he said.

Tan noted that only 42% of the retirees surveyed said they were confident that they had enough to cover all their retirement needs, while 37% planned to return to the workforce.

source: The Star,Wednesday August 8, 2007

You’ve qualified for your first paycheck. What’s next?

In this competitive business world, getting a job seems to be getting tougher day by day and more and more graduates are jobless. But, you’ve got your first victory of securing yourself a job. Congratulations!

Okay, with your first victory in mind, you have to continue your daily life with whatever amount promised for your qualifications. You have to do a very good financial planning or budgeting of your income and expense. Apart from that, you must also take care of your career path. An early start is a good start!

I’ve heard numerous complaints that the paycheck is too small, not enough to meet expenses, etc. But, hey, trust me… I used to save more in my first job than I could save right now, even though the current salary is much higher. Why, you ask? Simple. That’s it. Simple. Keep your lifestyle simple. During my first job experience, I used to take public transport, eat simple food and do loads of overtimes. Now, I drive my own car, no overtimes and at times, let myself indulge in hearty meals in posh restaurants just to keep up to our standards (or other people’s view of our standards).

So, here I list some of the things that I suggest you should do right from the start:

1. Use public transport for as long as possible

• It may seem glamorous to get on your own car, but the hassle of finding a parking space in the city centre, getting stuck in the traffic jams and getting an occasional summons for over speeding is not so glamorous after all. And not forgetting the fact that once you are used to getting your own vehicle, getting on the public transport would be the last thing you would want to do.
• And try to save as much as possible for the down payment of your car. The more down payment you put for the car, the lesser interest you would be paying for the loan later.

2. Get yourself covered

• Shop around for a suitable insurance plan.Since there are various insurance companies with various plans, get a good/reliable agent that could suggest an appropriate plan for you. Remember, as your needs are unique to you it is not necessary that the plan suggested to you would be the same as the one suggested to your friend. And do not delay getting yourself covered, as you would be paying higher premiums as your age catches up with you.

3. Start building yourself a safety net

• No one else, but you yourself are fully responsible to take care of your financial health. This means that you should also be fully prepared for the rainy days. As the workplace gets highly volatile nowadays, you should be prepared for self-sustaining without any income between 3-6 months. This would depend on the number of people who are dependent on you for financial support. The more people signifies that you should get ready for a bigger, stronger net.
• Even though with lowest interest rates, it is advisable for you to keep them in a savings account (separate from your salary account, if possible).

4. Start investing

• With whatever amount leftover from your salary, start your investing, even though with a smallest amount. The earlier you start, the better for you as the power of compounding has a miraculous effect on your savings.
• Remember, investing is not saving and there can be short-term investing and long- term investing.

5. Pick up saleable skills

• At times, you may be wondering why you are getting lower offers while your friend who studied together with you and graduated with similar results can command a higher pay check. He/she probably has a skill that is wanted in the industry. A saleable skill. That is what the employers are looking for. That is what that makes a high earner apart from his other mates.
• For example, if you are in the IT industry, ask from your seniors/ read from related magazines:
  • What is the current trend in the industry?
  • What programming language/skill in demand currently?
  • Which is the booming sector right now? (eg. medical,banking, etc.)

Use all these knowledge gained to boost your skills so that you can command a relatively higher jump for your next pay rise or even your next job.

6. Build your network

• This is very very important in the long run. Whether you plan to work for others until you die or go on your own, networking is very important. People should look upon you as an expert and reliable person in your field. If there’s any offer for part time jobs or even favours requested from you, by all means take them up if you think you can deliver them (higher quality than expected, and faster than due date). If not, you are just risking yourself to be shunned by them even before you are going to bid for a job.
• For the beginners, try to build your name first rather than worried about the money. Once you have built sufficient credit to yourself, others will start looking for you.

7. Don’t jump jobs just for the money

• Money is not everything, but it is the only thing! You may have heard it and yet why not hop jobs for the sake of money? It is in your best interest that you do a proper analysis before you jump.
  • Does the new company provide you with a good career growth?
  • What about the work environment there?
  • Do you enjoy that type of job?
• Apart from that, make sure that you stick to the same industry and build up yourself. Then people would start to recognise you in that field. You will find that it would be more rewarding in the future in terms of monetary gains and self-satisfaction.

For a start, practise these little tips first. Let’s start small to ensure that you have a great financial well-being in the future.Good luck!

What can you do to supplement your income?

There are many things out there you can do to supplement your income. However, since most of the time people don’t get to do what they love to do in their primary jobs ( they are most like to be working for the paychecks) first of all you have to ask yourself a few simple questions. This is an important step as you want to enjoy yourself as well as earning some income at the same time.

• What is your hobby?
• What is it that you can continue to enjoy to do even though there’s no money involved in it?
• Can you get support from your family members in what you intend to do? (not necessary but you will soon find that it will be much easier if you had their support or understanding)
• Do you need any special facilities or equipments and how much cost would be incurred?

Having thought about all these questions mentioned, you have various choice of jobs that you can start-off as a part-timer or as a hobby. Besides generating some income for you, it can continue to be your favourite past-time. You can relax yourselves and free yourselves from the daily stress.

Among the choices that you have:

• Teach part time
  • This can include at colleges/institutes or giving private tuition.
• Baby sit
  • If you find that you love kids, you can always offer baby sitting service, starting from your relatives.
• Designing websites
  • You can help to design and maintain websites for the smallbusiness owners and gradually as your skills improve, you may even offer your services to the corporate group as well.
• Service computers
  • Usually customers find it difficult to troubleshoot or maintain a pc (from viruses, defragmenting, installation of software,etc) after their warranty period is over. Why not offer your service in this area?
• Tailoring service
  • If your service is good and you are good with your hands, you are sure to have your hands full especially during festive seasons.
• Bridal & make-up service
  • This seasonal service is also good for a part-timer who is artistic and creative. Together with this, you can have decoration service also included.

The examples given above are merely to jumpstart in case you are having difficulties looking for ideas. But hey, the sky is the limit. You don’t have to limit yourself to these jobs alone as you can come up with your own method to supplement your income as you should know best what you are good at!

Wealth creation versus inflation

In this second article, CIMB Private Banking provides insights on the wealth creation practice in Malaysia and the often overlooked but highly important aspect of wealth building – the effects of inflation and the power of compounding. WHEN defining wealth, reports usually refer to it as the accumulation of resources. Individuals are said to be wealthy when they are able to accumulate substantial and valuable resources of goods and/or assets. Net worth is the most common expression of one’s wealth.

In Malaysia, wealth is acquired either via inheritance or generated from earned income, with the latter often associated with entrepreneurs, businessmen and professionals.

Wealth creation is the key to financial freedom and building one’s wealth requires having the right information, planning and making skilful investment choices.

Having executed this, the result would be having enough financial resources at one’s disposal to enjoy a blissful retirement and ensuring a prosperous future for one’s children and heirs.

Creating wealth is no doubt the aim of every Malaysian. However, research shows that many admit they do not take a proactive approach nor do they have in place a strategy to build wealth.

Survey shows that Malaysians tend to only start planning or be actively involved in building wealth for retirement at the age of 45, when it becomes apparent that the funds saved will not be sufficient to provide for their retirement.

The perception among many Malaysians is that their discretionary savings, together with their retirement funds from the Employees Provident Fund (EPF), would be sufficient for their retirement and their children’s needs.

One of the most common factors contributing to this mindset is that they often find the financial world complex and as such, tend to opt for the simple route – leaving their money in the bank in the mistaken belief that it will generate sufficient returns.

Interestingly, an individual often forgets the effect of inflation and how it impacts on their savings. For example, if a daily meal today costs RM20, in 20 years it will cost RM64 – this is on the assumption of inflation of 6% per annum.

If one forgets the effect of inflation and do not utilise their assets to generate a return higher than the rate of inflation, there is a possibility that the value of their wealth in terms of spending capacity at retirement could be smaller than what it is today.

One of the ways to avoid this is to engage in the process of compounding.

Compounding is the process of reinvesting one’s investment returns in the hope of generating higher earnings. In effect, the longer an individual leave the compounding process in action, the more money they will have – it’s literally that simple.

It has been described as the eighth wonder of the world because it is the most effective tool in helping build wealth, and yet it’s often overlooked by most.

To illustrate the impact of time and compounding, two types of investors are being featured:

Smart Saver invests RM250 per week starting at age 25 until retirement at 65.

Late Saver saves RM250 per week starting at age 35 until retirement at 65. In this example, there is an assumption of a 10% rate of return and that all earnings are re-invested.The chart shows that in the end, Smart Saver has accumulated the most, with over RM588,370, or 159%, more than Late Saver, and this is purely due to the effects of time and compounding returns.

To replicate the success of the “Smart Saver”, one of the first lessons to learn is to understand that wealth creation is not easily achieved. One needs to be disciplined as well as persistent to be financially sound now and in the future, not just for oneself but for their future generations as well.

In executing this, always remember the famous saying: “You don’t have to be wealthy to be an investor but you need to be an investor to be wealthy”.

source: The Star,Thursday August 2, 2007

Stay cool; grow rich

By RAJEN DEVADASON

Here are a few pointers on how you can take control of your finances.

MONEY is a deficiency need. So is fresh air. When we have plenty of it, we tend not to worry – or even think – about needing it. But during periods of scarcity, we tend to fixate on our state of want.

Collectively, we experience a loss of fresh air each time our air quality index plummets because of the haze from forest fires in Indonesia. Individually, we sometimes face times of economic scarcity because of a loss of a job through ill health or retrenchment or because of money mistakes of our own making.

Regardless of whether you’re currently a good or bad money manager, you’re just one day away from taking control of your finances.

The real question is: Do you want to?

If your answer is no, you might as well stop reading now.

If your answer is yes, you’re still with me. Good for you. Therefore, I’d like you to begin to think about how you might be able to regain control of your finances through three simple steps:

1. Knit yourself a safety net;

2. Save aggressively; and

3. Invest according to a written plan.

Knit yourself a safety net

Emergencies arise, by definition, at the most inconvenient times. Your car breaks down and requires pricey work, or a family member is diagnosed with a serious illness that isn’t sufficiently covered by medical insurance.

It’s wise for each of us to accept that the unexpected can always be expected to occur – but hopefully not too many times per decade! The way we prepare for such eventualities is by gradually building an emergency buffer fund, which I’ve trained my clients to refer to as their EBF. Other names for it are “cash cushion” and “financial safety net”.

Each of us should aim to fully fund our EBF through personal savings parked in bank fixed deposits and money market unit trust funds. If you’re employed by a company that pays your salary like clockwork, your buffer need only be between three and six months’ worth of regular monthly expenses. Whether it’s three, four, five or six months’ expenditure depends upon the stability of your company and of your position within it.

(For more details about creating an emergency buffer fund read my article, Soar as High as You Like – But ? at www.freecoolarticles.com/FP1.htm)

Save aggressively

A recent study by Prudential Assurance Malaysia indicates only 34% of Malaysians are saving regularly for retirement. Thankfully, though, the vast majority of working Malaysians are in better shape than their counterparts in most other countries because of the phenomenal job our EPF is doing in providing us with savings for old age.

However, for those who wish to ultimately live magnificent lives marked by gradually rising lifestyles, and not mere hand-to-mouth existences involving a radical destruction of our quality of life because of insufficient retirement funds, the path is clear:

Exercise delayed gratification. Choose to give up some good now (like that big flat screen TV, or the new BMW you’ll need to pay for over seven years) for that which is great later (like a seven-figure retirement fund and a wholly owned S-class Mercedes, perhaps).

Two wise steps toward success in this area are:

1. Look upon your EPF savings as the icing upon a cake you will bake yourself. This means you opt to start saving money today out of your net income, after EPF, SOCSO and tax deductions.

2. Aim to ratchet up that savings rate by between one and four percentage points each year. Make it your goal to reach, perhaps 10 or 15 years from now, a 40% to 50% net savings rate.

(For specific suggestions on how best to take both steps, read this piece entitled Articles on Saving and Investing to Help You Help Yourself and Your Kids at www.freecoolarticles.com/FP11.htm)

Invest according to a written plan

First, you should set money aside in zero-risk and low-risk savings vehicles. Then, once you’ve begun funding your safety net and your savings layers, aim to learn how to invest rationally.

While you do so, through reading, thinking and discoursing with experienced investors, and possibly working with a reputable financial planner, begin to recognise the two key emotions at work in any fast-moving investment arena, such as the stock market. Those emotions are fear and greed.

In general, you want to train your brain to react in precisely the opposite way the grey matter of most others do! The key is to be accommodating.

When others rush to sell out for fear of a market collapse, you want to accommodate them by purchasing – only high quality investments – at steep bargain basement prices.

And when these same people decide later to race after expensive investments fuelled by excessive greed, again accommodate them by selling the portfolio components you don’t plan on owning forever.

Should you decide to work with a financial planner, begin your online search at the CFP Directory of the Financial Planning Association of Malaysia (FPAM) at www.fpam.org.my/index.php?useaction=cfp.main and if you aren’t quite sure what questions to ask a potential financial consultant, use the key questions in my article How to Choose a Financial Planner at www.freecoolarticles.com/FP17.htm

Finally, whether you work with someone else or on a D-I-Y basis, ensure that you write down, on paper, your core wealth building principles and strategies.

Having such a written document is the only way most of us can maintain a clear head during market extremes when emotions are running high, and temperatures even higher.

Remember your ultimate goal: stay cool; grow rich!

source: The Star, Sunday August 19, 2007

How to maximise returns

Having learnt the benefits of investing early, the next step is to further enhance one’s wealth. In this last of a three-part series, CIMB Private Banking defines wealth enhancement and how asset allocation can have a positive impact on investment returns. To be wealthy, one needs to create wealth, but to stay wealthy, one has to enhance, optimise and preserve his assets and investments. The question is how to enhance one’s wealth when the investment choices and offerings are becoming more complex?

Wealth enhancement is a methodology of planning a strategy and executing a plan to achieve certain financial objectives through the following process: Determining the investor’s goals and objectives, understanding the investor’s risk profile, analysing the investor’s current financial state, planning a financial strategy, detailing a recommendation and action plan, and executing the plan.

The key areas to focus on are the last three. For an investor, wealth enhancement is about maximising returns based on a certain level of tolerance for risk to returns.

The concept of risk to returns is also known as volatility in returns and is best described as the odds of expected returns not materialising, deviating from what an investor is expecting to earn from an investment.

Investors will always choose an investment that is able to generate the highest returns with the lowest level of risks possible. This is known as the Efficient Frontier (see Chart 1). According to this frontier, Investment X is more desirable than Investment Y because the former has the potential to earn higher returns based on the same level of risks than the latter.

Therefore, by choosing Investment X, an investor is able to maximise his returns given his appetite for risk, which in turn would enhance his wealth. To achieve this, prior to executing an investment plan, it is imperative for an investor to determine and know his level of tolerance for risk.

One of the most effective ways to have an investment portfolio that maximises risk-adjusted returns is to invest in a range of different investments or undertake diversification, particularly those that have low or no correlation to one another.

In short, investments with returns that do not move in tandem with one another.

To illustrate the importance of diversification, the table outlines four different investment proposals for an investor looking to invest RM10mil.

Portfolio A is fully invested in fixed deposits and it is the safest portfolio from a returns perspective since it is free from volatility in returns. However, it is also the one with the lowest returns.

When the investor decides to take on 20% equities in search of higher returns, referred to as Portfolio B, the volatility of his portfolio increases to 2.4% per annum although returns now stand at 5%.

He can increase his exposure into equities, but the volatility of his portfolio will also increase to a point where he could get uncomfortable with the volatility.

To enhance risk-adjusted returns to the portfolio, the investor now, via Portfolio C, starts shifting some of his fixed deposits and invests 30% in bond papers, which he holds till maturity.

Bond is a fixed-income instrument that generally has low correlation to equity returns. While maintaining his 20% exposure in equities, the investor now has higher returns than Portfolio B for the same volatility.

To further illustrate our point on risk-adjusted returns, in Portfolio D, investor now allocates 20% of his portfolio into other low-equity correlated investments, such as in private equity and absolute return funds.

In this case, returns increase faster than volatility and the portfolio has the highest risk-adjusted returns as measured by returns/volatility compared with the other portfolios.

By taking this approach, the investor has been able to maximise his returns, provided he can accept the degree of volatility that comes with it.

Devising an appropriate portfolio with suitable investments and a proper asset allocation strategy is a demanding and dynamic process that requires an awareness of the investor’s volatility tolerance level and a deep understanding of the various investments’ risk-and-returns profile.

In achieving this, investors need to be aware that there are various investment choices available today that deliver varying magnitude of returns with distinct volatility of returns as shown in Chart 2.

Given the complexity of products and the process of enhancing wealth, engaging the service of a professional financial advisor will help ensure a higher degree of success in wealth management.

In summary, it is worth noting that by diversifying the investments, it can act as the primary defence against unexpected market volatility, as was the case recently with the US subprime housing loans fiasco.

A common mistake investors make is to load up on what’s hot and find that when markets turn, they face difficulty in dealing with the volatility in their portfolio.

source: The Star, Thursday September 6, 2007

Tools to defy the myth

Creating and enhancing wealth is only half the battle. Will it outlast the proverbial 3-generation barrier?, writes CIMB Private Banking and CIMB Trustee Services in this conclusion of a two-part series AS families become more prosperous and their businesses flourish, the task of managing and retaining the wealth and businesses gets increasingly complex. This is why many people believe that the chances of these family-owned money and other assets remaining intact beyond the third generation are slim.

Hence we have the Chinese saying: “Wealth never survives three generations.” And there is a Western equivalent: “From shirtsleeves to shirtsleeves in three generations.”

However, CIMB Investment Bank director and head of securities and trustee services Yap Huey Hoong, who oversees matters relating to trustee services such as succession and distribution, points out that a handful of families have avoided this pitfall by coming up with a family holding structure or an estate succession plan.

“Creating a family holding structure for succession requires a lot of thought. Deciding who gets the baton can be difficult and even heart-wrenching, as the choice involves emotions and can at times create friction in the family,” she says.

“We have seen many cases in which the founders, in trying to be fair, have given their children equal shares of the businesses, irrespective of whether they are good at running the businesses, or whether they are even interested.”

It is also common to see many a wealthy founder facing a dilemma when his daughter is far more capable or astute than the eldest son. Yet, the latter is the person most often designated to be the founder’s successor. This is especially true among Asian families.

Says Yap: “It is clear that such succession and family structuring decisions are not easy. However, without a proper family holding structure and a succession plan, one is simply deferring a difficult decision to the next generation, thus forgoing a chance to preserve the family wealth and success of the business.”

The affluent, she adds, should seek the advice of professionals when establishing a family holding structure. “Having professional trustee advisors is important as they will devote their full attention to structuring a trust in accordance to one’s personal needs, goals and wishes,” she explains.

For generations, many wealthy American and European families have been relying on trust structures to preserve their family wealth. A trust is a good gatekeeper that can help hold together family businesses and wealth. The founder can use a trust to help him create a family holding structure to protect the business he has built. By doing this, he prevents the family business from being split into fragmented parts, with many different shareholders who may have varying expectations and requirements.

“Using a trust as a family holding structure also ensures that the business and wealth is kept intact and is passed down to the next generations in an orderly manner,” says Yap.

Another advantage of the family holding structure is that it protects the family’s businesses and wealth in cases when the family members lack the business acumen to succeed the founder or when they are just too young to manage the wealth.

Yap advises that when identifying a suitable trust holding structure, it is important to overlay this by identifying a decision maker to succeed the founder and to lead the family business or to make decisions relating to the family wealth.

It can take years to work out successful succession planning. Founders or decision makers need to set in place the chosen plan and parameters, groom the successors and monitor their performance.

When picking a decision maker, openness and communication between the founder, the successor and the other family members are important. This includes understanding their own needs and the family’s needs versus the needs of the business.

One has to set clear goals for the successor and there has to be an ongoing inter-generational dialogue between the senior generations and the successors. In choosing a suitable candidate to lead the family business, it is also important to hire career professionals as the company’s managers.

Yap reveals that unlike Asians, Europeans are more willing to accept a professional running the family companies. The Europeans clearly see the hiring of professionals as a solution to keep the family intact and to keep family members away from day-to-day operations, as their participation can lead to disputes.

The Rockefeller family is a well-documented example of the survival of family wealth going beyond three generations.

The Rockefellers are a famous American industrial and banking family. Their wealth was built on a business empire founded by John Davison Rockefeller and his brother, William. This is a classic example of a complicated family business that could have dissipated as the family grew into multiple branches.

Instead, thanks to the founders’ vision and plans, the Rockefeller family wealth has survived for over 140 years or six generations. The masterstroke was the setting up of the family trusts in 1934, which have locked up most of the wealth.

A powerful trust committee of decision makers govern the Rockefeller family trust structures. As at November 2006, there are over 160 members of the Rockefeller family, with aggregated wealth of over US$10bil.

This is a valuable lesson for families and founders who do not believe that their wealth can last for more than three generations.

Says Yap, “The failure of a family to preserve its wealth and business is not a curse. With proper preparation and most importantly, early planning and openness and communication amongst family members, this third-generation myth should remain just a myth, at least for those with the foresight to not leave anything to chance.”

source : The Star, Saturday September 1, 2007

Keeping wealth within the family

The Chinese have a saying: “Wealth never survives three generations.” The West has something similar: “From shirtsleeves to shirtsleeves in three generations.” As with most proverbs, there may be more than a grain of truth to these. To kick off this two-part series, CIMB Private Banking and CIMB Trustee Services look at the dynamics behind this popular notion.

Yap: Wealth protection and distribution vital.

THE wealth cycle comprises wealth creation, enhancement, protection and distribution. However, we at CIMB Private Banking believe that many of the family-owned businesses and the rich in the country often neglect the last two aspects.

CIMB Investment Bank director and head of securities and trustee services Yap Huey Hoong, who oversees matters relating to trustee services such as succession and distribution, concurs with this view.

“Even if family business owners and the affluent pay attention to wealth preservation, it is usually only through traditional methods such as fixed deposits, savings accounts, properties, unit trust funds and life insurance. Unfortunately, this does not optimise the growth potential of their wealth,” she says.

Ignoring the protection and distribution of wealth may lead to a realisation of the popular notion that stems from the Chinese proverb, “Wealth never survives three generations.”

The saying reflects our forefathers’ observation that many wealthy families have seen their fortune dissipate as it is handed down over the course of three generations. It starts with the founder of the company who has worked hard and has lived frugally to build his business.

He sends his children – the second generation – to tertiary institutions to ensure that they are better equipped in life than he was. Accustomed to a life surrounded by wealth, the founder’s grandchildren – the third generation – tend to fritter away the family fortune.

So, is this saying really just a myth? Is this rags-to-riches-and-back cycle in three generations inevitable or can it be overcome? Can families hold on to their wealth and businesses beyond three generations?

Yap points out that the proverb has been proven true very often as there are many real-life examples from around the world.

She says, “In Asia, the bulk of high net worth individuals are generally what is considered as ‘new wealth’. Many affluent Asian families are only beginning to progress from second to third generation. We have seen high-profile cases, ranging from family disputes to lawsuits, whereby family wealth has dissipated due to family differences.”

She, however, adds that there are also a handful of families who have broken through the third generation ‘barrier’ through proper estate and succession plans.

“The estate and succession plans are put in place well in advance to ensure that the family wealth and the reins of the family business are handed over to the following generations in an orderly manner,” she explains.

“Many family businesses and wealth do not survive due to two primary reasons – the lack of proper succession planning and the lack of a united family holding structure. As a family grows, this can lead to discord between the needs and interests of the business, and the expectations and requirements of family members.”

Survival of family wealth

Yap advocates the creation of a family holding structure, paired with a succession plan, as the key to the longevity of family wealth and business.

Imagine a founder with five children, who each has a spouse (or in some cases, several divorced spouses) and at least three children. We are thus looking at a family with more than 25 members, each with his own needs and family requirements, and who are all shareholders of the family business.

The different needs of these individuals and families are frequently at odds with the demands of the family business and wealth.

Says Yap, “Unless a proper succession plan is put in place, there will be too many fingers in the pie, with the family wealth being run by five siblings, or worse, a consortium of cousins and uncles.”

This disarray, she adds, may lead to family disputes that cause disharmony and eventually lead to the dissolution of the family business or even the dissipation of the wealth.

When family-run business continues to grow, one is likely to see more founder-children type of partnerships and even cousin consortiums. As the family expands, more people become involved, even if they have not worked directly in the business.

Hence, says Yap, their expectations are different and clashes erupt. The relatives who are silent partners or shareholders may only be concerned with their narrow interests when judging capital expenditure, growth or other major matters.

Those who are engaged in the daily operations will judge matters differently because they have a broader picture to consider. Furthermore, when the owner of the family business grows older, he may become more risk-averse and thus often hinders the growth of the business; this too may cause a rift among family members.

In addition, the second or third generation family members who run the business may not be as united or as driven as the founder. For example, cousins who are shareholders may want to cash out or may not have faith in the new management.

Sometimes, the founder will find himself in a dilemma when his daughter or maybe his niece has better business acumen than his oldest son. Who then should take over the business?

Hence, without any proper succession planning, says Yap, family businesses are unlikely to last past the third generation, as family members’ ownership and individual needs are so fragmented that it will be impossible to find consensus among family members.

Next week: Advice on how one can create a family holding and succession structure as a tool to defy the third generation curse.

source: The Star, Saturday August 25, 2007

Let’s See How We Can Make Some Extra Bucks – By Doing Nothing

I love the concept – do nothing and make some money at the same time. Almost nothing, that is…

1.Put aside the change
Put aside all the coins that you receive everyday into a piggy bank – yeah, mummy is always right. Just continue to do what you were trained to do from young. After some time, you will be surprised that you have some substantial amount of money in your savings.

2.Terminate your gym membership
No, don’t get me wrong. If you are actively utilising your gym membership, by all means go ahead and exercise. After all health comes before wealth. But, if you are not using them and paying hundreds of dollars every month hoping that you will be using them soon (and this has been going on for a year or so), it is about time you looked into terminating the membership immediately and try to exercise at home instead using simple equipments such as the skipping rope and dumb bells.

3.Change to regular petrol
Unless you own a very new car and too sensitive to the performance of your car, you can always change to the regular petrol from your premium petrol. This will save you a few cents for every litre and for the few hundred litres your car is going to gulp down over a few weeks or months, you should be having a thicker wallet.

4. Use credit card instead of cash
Let me warn you first – you have to be extremely disciplined to follow this step, or else you will end up cursing me for giving you this idea. Credit card companies usually give out points to their customers for every swipe of the card that you make. Just make sure you record every transaction that you make with your card and before the end of every month, make a full settlement on your card. This way, you are not charged for your card, but you get something free instead for this service. At times, after a certain period of accumulation, you can even go for a free vacation! That’s a brilliant idea, wouldn’t you agree?

5. Disconnect your cable TV
For a person who is concerned about his finance, cable TV would sound too luxurious. Instead of being a couch potato, the time can be utilised to earn additional income or exercising or doing some better things. Or at the least, try to minimise the channels or switch to a lower plan, if available.

After following the steps mentioned above, you would have made some amount of money. Well, a dollar saved is a dollar made!

What is a Mutual Fund?

As the name indicates, Mutual Fund is a form of collective investment that allows investors with similar investment objectives to pool their savings. Then, this pool of fund is invested in a portfolio of securities managed by investment professionals also known as fund managers who are hired by the company.

Usually, returns that can be expected out of the investment in mutual fund is a combination of regular income payment (or a distribution/dividend) and capital appreciation.

Sometimes known as Unit Trust, there are various categories currently, including:

• Equity
• Fixed Income
• Money Market
• Real Estate Investment
• Exchage Traded
• Balanced
• Government Sponsored
• Syariah

An investor has various options to invest in a mutual fund which includes:

• Lump sum investment
• Regular savings
• Reinvestment

Before an investor jumps into a unit trust investment, it would be wise for him/her to understand not only the advantages but also the disadvantages related to it.