LET'S TALK FINANCIAL STRATEGIES
In the previous chapters, we had discussed about the 4 common financial goals most people have. The next million dollar question is, how do I achieve them?
You see, we always hear people say “If you want to hit your goals, you have to invest and take advantage of the compounding interest effect.”
However, on the other hand, we also hear stories of people who suffered great financial losses because they were trying to follow the financial “gurus” method to invest in stocks, bonds and commodities.
Remember there will be multiple investment and financial strategies introduced to you in your lifetime. The responsibility is always up to you to decide which one works best for you. Don’t follow blindly, consult your advisor and read up more to cross verify it.
Now, let us share with you an investment (financial) strategy and you decide if it makes sense to you.
THE ABCD INVESTMENT STRATEGY
Now when it comes to investment strategy, there are 4 things you have to know:
1. What assets can you invest in?
2. Risk & Return on each of these assets
3. Your Risk appetite
4. ABCD Investment Strategy
#1: What Assets Can You Invest In?
These are only five asset classes you can invest in:
1. Property - Property has been a favoured asset investment across many generations because it has shown its potential to combat inflation rate across years.
2. Equities (a.k.a. shares) - Equities refer to ownership in a company. You usually acquire it by buying stock/shares or some form of securities. It could also be inherited from previous generations.
3. Bonds (also known as fixed-interest stocks) - Issued by government or companies, they pay a fixed level of interest. Bonds are generally regarded as safer investments than stocks.
4. Commodities - Commodities are natural resources like food, energy, and metals. This includes oil, gas, gold, silver and even rice. Commodities prices change with supply and demand and could be purchased in the open market.
5. Cash - Cash is considered a liquid asset that you have on hand that allows you to use it to exchange for goods and services. It issometimes regarded as a safe haven from the volatile market.
#2: Risk & Return Of Each Asset
When we look at investment assets, we need to consider the risk and return of each of these assets.
Remember, higher risk asset classes usually lead to higher returns.
You should look at:
1. Liquidity - How fast you can convert this asset into cash. As your age increases, it is important that you convert more of the investments into assets that are more liquid.
2. Volatility - How risky is this asset as an investment. Would the price change suddenly and unexpectedly?
3. Yield - How much return can you expect from the investment.
Let me do a quick comparison for you:
Understanding how these assets differ from each other will allow you to determine the right investment strategy for yourself.
#3: Your risk appetite
The next thing you should do is to determine your risk appetite.
Some financial advisors you meet will use risk-attitude questionnaires to determine your risk, but let me assure you, 90% of the clients we have met will not know their risk appetite.
In fact, through our decades of experience, many clients would say that they are high risk takers but when they really lose the money, they probably become low risk takers.
However, here’s a fun fact, do you know that a person’s risk appetite falls across time? Think about it, in your early 20s, you are probably more willing to invest in higher risk assets like stocks and commodities but in your 60s, you probably would want to convert them to cash so that you can have income for retirement, right?
#4: ABCD Investment Strategy
Remember, an illiquid Asset in retirement becomes a liability.
Let us give you an example: Imagine you are 80 and all of a sudden you get a call from your property tenant, asking you to fix the toilet that is leaking. Now, how would you feel?
You see, when you get to a certain age, you don’t want to be managing illiquid assets. They actually become a liability. The true asset in old age is pure income.
You want to be getting income every single period of your life, rather than having to work on your assets, restore your asset or even manage your asset.
Retirement and proper financial planning is having income every month without having to think about what happens to my asset!
So your investment strategy must be based on income generation & income accumulation.
The following ‘ABCD’ Investment Strategy could work for you.
Here’s an explanation on how this formula works:
1) Term to Retirement minus 2 (last strategy period) = Number of years of ABC investing 2) No. of Years from Equation 1 divided by 3 = No. of years for each segment of A, B and C.
So, according to the example, if you are 25 years away from retirement:
1) 25 years minus 2 = 23 years (term for ABC investing) 23 years divided by 3 = 7.33 years (term for each phase of A, B, C).
Explanation:
The idea is that as you reach closer to retirement, you will have to transit your asset from illiquid to more liquid assets. Also your risk appetite tends to fall across age. This explains why you are shifting your assets from higher risk to lower risk across time.
You have now learned the ‘ABCD’ Investment Strategy but you will be probably be asking “Okay, I now know more about the different types of assets, but honestly I don’t have time to monitor or learn more about it. Is there any quick fix?“
The answer is yes! Insurance!
Why Insurance Is A Smart Financial Strategy?
Many of us do not have a proper understanding of insurance and its purpose.
You see the true purpose of Insurance means transferring risk to a third party that would compensate you for losses.
Across the years, the insurance industry has created many amazing financial products that cater to different financial needs. Just like the 4 financial goals we discussed earlier, they could be achieved either via you personally managing the risk or you getting financial products to transfer your worries.
This is why stage 4 is all about insurance & identifying how much you need.
Next week, we will discuss about the different types of insurance products and how much you should get to allow you to hit your financial goals. Don’t worry we will guide you all the way.
