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

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.