LOTS of people shy away from financial planning because they think they may be pressured into investing. And when you think investing, what comes to mind are horror stories of people who lost their life savings during the Asian financial crisis and Dot Com Bubble.
We hear tales of greed and chasing the hottest sexiest investment themes that has led them down the path of poverty and for some great debt due to leverage.
Admittedly, in the wealth management business, investments do form a large part of conversations that happen between ourselves and our clients.
For the most part, people speak to financial planners or wealth managers about how to make their money grow faster so they can meet their goals.
How much return can I get?
What can I get if I invest in equities?
How about properties?
How can I start investing in currencies?
When people engage in a conversation about investments, inevitably, we get seduced by the quest to find the highest yielding asset. We steer into instruments we are not familiar with, drawn by the allure of high headline returns.
Think dotcoms. Think gold investments. Think land investments. Think bitcoin. Not necessarily bad investments but the basic concept of risk and diversification fall by the wayside as we chase returns.
But, step back for a moment.
Are you asking the right question?
Is financial planning only about finding the next best investment?
While investing will likely play a key role in your financial plan, there are a lot more questions that need to be answered before you can choose the right investment, or if you even need to invest aggressively.
First question, how much do you need?
Second question, when will you need it?
Third question, how much have you set aside or are prepared to set aside?
Last question, what returns are you going to get?
So say, I would like to buy a property in five years, of which I plan to make a downpayment of RM50,000. I have currently set aside RM10,000. I can currently save RM500 monthly.
Let’s assume I have no experience investing and decide to place it in fixed deposit at 3% per annum. Doing my maths, after five years, with interest compounded, all this adds up to only RM43,000. You are RM7,000 short.
In such an example, most people approach an adviser to find out what could yield them higher returns. In the above example, any misadventures in your investments could possibly set you back in your acquisition of your next property.
What if this was your children’s education? You may not want to risk your child entering university two years late. These are things your adviser needs to know as there other alternatives.
Financial management is very much about balancing between these four requirements. While getting higher returns so you can meet your goal is one way, it’s not the only way! You have other options. So, let’s go back to the four questions.
Firstly, you could buy a cheaper property with RM43,000.
Alternatively, you could wait another year to purchase that property, giving you more time to save up.
Or, you could increase your monthly savings to RM600 at 3% per annum.
Lastly, consider investing in something that yields you 7% per annum.
So, really, out of four options, only one is about investing.
For the most part, investing plays quite an essential role in most people’s portfolio. However, before you even have that discussion, think about the goals you want to achieve and whether investing is required and what kind of investment performance is needed.
By Ong Shi Jie
Ong Shi Jie (CJ) is head of wealth management, OCBC Bank (M) Bhd.
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