There is the principle anyone must grasp and internalize in their hearts in order to achieve abundant wealth and life. The principle is stewardship. The opposite of stewardship is ownership. So what is the difference between these 2 principles? Let us find out more.
Ownership to most people may be the key to financial and life success. “Take ownership of your finances and you will take responsibility in managing it”, is often a goodwill advice given to someone who is managing their finances poorly. However, in my opinion, the poor guy even after taking ownership over his finances, he will still face difficulties growing and managing his finances, simply because he is the ‘owner’! This ‘owner’, even after he takes responsibility over his money, will not do well as he still does not have the habits and attitude to manage his finances well.
Imagine I have a sum of money in my hands, and it is MY money. What will I do with it? I will most probably spend on the things I like and give me immediate gratification. Yes, I may save some for a rainy day, but the money is usually subjected to the wimps and fancies of my human nature, the desire to live well and have a good life. And believe me, the human nature, if not controlled, will usually end up in self indulgence, simply because it is MY money, I own it, and I decide what to do with it.
Let us take a look at the principle of stewardship. Stewardship can be illustrated in a story:
There was once a Master, and he had 3 servants. The Master was going on a long trip and he said to his servants, “I will give each of you talents, and I want you to take care of it when I am gone and be fruitful.” He then gave the first servant 5 talents, the second 3 talents, and the third 1 talent. He then went on his journey.
The first servant immediately took the 5 talents and traded in the marketplace and gained another 5 talents after some time. The second servant did likewise and gained another 3 talents. The third servant, after the master was gone, took the talent and buried it into the ground and went on with his daily affairs.
The Master then came back and demanded back his money. The first servant reported, “I have went to invest and managed YOUR talents, and I have gained 5 more.” The Master was pleased and said, “Well done, good and faithful servant. You have been faithful in little things. Now I shall give you 5 cities to govern over in my kingdom.” Likewise he was pleased with the second servant and rewarded him with 3 cities to govern.
However, the last servant came and said, “Master, I was afraid that I will lose your money and therefore I buried it and went on MY daily affairs. Here, this is your one talent.” The Master was furious and banished the servant out of his kingdom, because he had not kept the Master’s command of being fruitful.
Stewardship thinking will radically transform our approach to our finances. For me, knowing that my financial resources are from God by grace, given by my ability to work, and it is for my family and loved ones, gives me tremendous drive to manage it well to be fruitful. I am accountable to my family, my loved ones, and God, who gives me the ability to acquire wealth, to bless the people I care about.
And this principle of stewardship does not only relate to our financial area, but all other areas of life as well. We have to be superb stewards, or managers of our life, our resources, our relationships, our health, everything! Also, having the awareness that our time on earth is limited and we have to pass on someday, gives us a healthy perspective of how we manage our life and resources, as we are not going to take it with us when we die, rather, they are passed on the our next generation, as a legacy.
In addition, coupled with being a good steward is a need for wisdom. The book of Proverbs in the Bible read, “Does not wisdom cry out, and understanding lift up her voice? She takes her stand on the top of the high hill, beside the way, where the paths meet. She cries out by the gates, at the entry of the city, at the entrance of the doors.” Wisdom is calling out to mankind, because it is an essential life skill for survival and growth in life. Wisdom is the key to effective stewardship, and effective stewardship is the key to having an abundant and fruitful life.
Are smart, intelligent people actually wise? Well, not necessary so. I may be very intelligent in my studies, in math, in making a lot of money in investments, but I may not be wise in handling my life, my emotions, my morals, etc. I may lose the whole lot of money overnight, just because I fail to handle other areas of my life well, for example, my indulgences, my lust, my pride, and many other things. Wisdom is gained from life experiences, from applying our knowledge into practical life situations, and always having the attitude of humility with learning.
For me, the source of wisdom is from the Bible. The Bible presents life stories, in which truth and knowledge is applied in the lives of the characters. I learn so much though the life experiences from the people in the Bible. Also, I acquire wisdom by speaking to mentors, elders, and people whom I respect. I can even gain wisdom by watching a little child learning to walk, and he picks himself up whenever he falls down, never giving up. Wisdom is everywhere! Wisdom is calling out from the streets! Seek for wisdom and wisdom will find you.
I am always seeking for wisdom to be a good steward of my money, my life. I am on a financial life journey, learning through books, through the media, through people and through life experiences. And I know that I am growing day by day, being the person I envision to become. I will be that wise man, the sage, the elder, with a loving wife who adores me, children and grandchildren who respects me, friends who favor me, people who share my wealth and wisdom, and God, who is smiling at me and saying, “Well done, good and faithful servant. You have been faithful in little things in your life. Now come and be rewarded in your Master’s presence.”
With wise stewardship of God’s resources to me, I will thus complete my financial life journey with excellence. How will you complete your financial life journey?
Aaron Graham Tay, CFP
Friday, April 17, 2009
Monday, April 13, 2009
Wealth Distribution – Leaving a Legacy
Wealth has a purpose. Money is not the end in itself; rather, it is the means to an end. What is the ‘end in mind’ for you? In Financial Planning, we always start with the end in mind, and then we draw out the roadmap to achieve the success that we desire. Imagine that you have already created the wealth that you always dream of and living the life that you desire. Will that be all that it is to life?
Many successful investors and entrepreneurs I know and whom I read about, always have the desire to give back to society. They are grateful that the people around them and the community at large have given them the opportunity to succeed in life. Of course, these are billionaire investors who have built up massive wealth for themselves and their family, and are able to set up foundations for the noble cause. We may not achieve the level of wealth which they have attained, but I believe that whatever capacity we are in, we are also able to bless others with what we have.
In total financial planning, estate planning and leaving a legacy is often communicated to the client. Many clients want their wives, children, grandchildren, to be well taken care of as the first priority. They will set up trusts for the family, for example, an education trust which will ensure that their grandchildren will have enough funds to complete university.
After they have sufficient funds to provide for their family, some of the clients will want to extend their compassion and financial help to support a particular cause, for example, medical advancement, education for the poor, etc.
Some of the philanthropists whom I admire are Bill Gates & Warren Buffet. Bill Gates build his computer empire over his lifetime and later on set up the Bill & Melinda Gates Foundation, giving grants to numerous organizations dealing with global issues such as health, agricultural development, financial services to the poor, etc. Mr. Warren Buffet, similarly build his wealth via his investing brilliance and became the richest investor in the world. After which he donated half of his billions of wealth to the Gates Foundation, blessing many beneficiaries of the foundation. He subsequently became the richest man on earth and still is today. Other notable successful philanthropists include Rockefeller, Andrew Carnegie and George Soros, each to his own personal calling and cause.
I personally desire to impact the world to the extent like these great men listed above. And I can do it today. Leaving a legacy need not happen only when we are passed on from this world to the next, but rather, it takes a life long commitment to build a legacy that is remembered by future generations.
Charity begins at home. Leaving a legacy begins at home. As we are accumulating wealth in order to provide and bless our families, we can right now show love to them by giving them quality time, caring for them, listening to them, encouraging them, etc. Many people take priority in making money, thinking that providing for their family financially and buying gifts for them is sufficient to show them that they love their family. Sad to say, they are sadly wrong. To love a person we need to communicate, and if we spend all our time at work and making money, where are we going to have the time to love them and communicate with them. In contrary, many people realize only after they have accumulated sufficient wealth for themselves, which their family is already breaking apart, for a myriad of reasons. It is sometimes too late to salvage the family which they have always wanted to build and provide for.
Also, many people have made such claims, “When I am wealthy enough, I will start a foundation or charity that will help many people.” I will have these questions in my mind, “What do you mean by wealthy enough? When do you think you will be wealthy? How many people do you want to help?” These claims are vague and abstract. Most of the time, wealth is never enough. People will usually be trapped in the whirlpool of greed, never being satisfied with what they have. After buying a condo, they will want a bungalow. After buying their BMW, they will want a Porsche. When will it end? When can we start to really help people?
For me, my stand is clear; I will accumulate wealth and at the same time, start building my legacy right here, right now. There is no time to waste. At the end of our lives, on our death bed, we will not be asking the question. “How much time have I spent in the office today? Or how much money have I accumulated.” I want my life to be with no regrets. I want to be able to say, “Yes, I have made a difference to the lives of many people, my family and my friends.” That is why today, I will tell my loved ones that I love them, whether in words or in deeds. Life is uncertain, and I can fully comprehend it given my experience with illness since 8 years old. And I have experience a new birth in life, by my brother giving me his kidney in his kindness. Also, with a woman who is willing to be united with me in Holy Matrimony, I have experienced God’s goodness and grace, and yes, true love.
Therefore, it spurs me even more to accomplish what I have started out to do, to set up a foundation to fund and heal the lost, sick, poor and needy kidney patients, giving them a new life, just like how I have received my new life in humility. And it will not start 10 year later or 20 years later. It will start now and as my wealth increases, so will the blessings to these needy people increase. I will minister to these needy patients in their spirit, soul and body by loving them and providing for them, right here, right now.
This is truly wealth with a purpose.
Aaron Graham Tay, CFP
Many successful investors and entrepreneurs I know and whom I read about, always have the desire to give back to society. They are grateful that the people around them and the community at large have given them the opportunity to succeed in life. Of course, these are billionaire investors who have built up massive wealth for themselves and their family, and are able to set up foundations for the noble cause. We may not achieve the level of wealth which they have attained, but I believe that whatever capacity we are in, we are also able to bless others with what we have.
In total financial planning, estate planning and leaving a legacy is often communicated to the client. Many clients want their wives, children, grandchildren, to be well taken care of as the first priority. They will set up trusts for the family, for example, an education trust which will ensure that their grandchildren will have enough funds to complete university.
After they have sufficient funds to provide for their family, some of the clients will want to extend their compassion and financial help to support a particular cause, for example, medical advancement, education for the poor, etc.
Some of the philanthropists whom I admire are Bill Gates & Warren Buffet. Bill Gates build his computer empire over his lifetime and later on set up the Bill & Melinda Gates Foundation, giving grants to numerous organizations dealing with global issues such as health, agricultural development, financial services to the poor, etc. Mr. Warren Buffet, similarly build his wealth via his investing brilliance and became the richest investor in the world. After which he donated half of his billions of wealth to the Gates Foundation, blessing many beneficiaries of the foundation. He subsequently became the richest man on earth and still is today. Other notable successful philanthropists include Rockefeller, Andrew Carnegie and George Soros, each to his own personal calling and cause.
I personally desire to impact the world to the extent like these great men listed above. And I can do it today. Leaving a legacy need not happen only when we are passed on from this world to the next, but rather, it takes a life long commitment to build a legacy that is remembered by future generations.
Charity begins at home. Leaving a legacy begins at home. As we are accumulating wealth in order to provide and bless our families, we can right now show love to them by giving them quality time, caring for them, listening to them, encouraging them, etc. Many people take priority in making money, thinking that providing for their family financially and buying gifts for them is sufficient to show them that they love their family. Sad to say, they are sadly wrong. To love a person we need to communicate, and if we spend all our time at work and making money, where are we going to have the time to love them and communicate with them. In contrary, many people realize only after they have accumulated sufficient wealth for themselves, which their family is already breaking apart, for a myriad of reasons. It is sometimes too late to salvage the family which they have always wanted to build and provide for.
Also, many people have made such claims, “When I am wealthy enough, I will start a foundation or charity that will help many people.” I will have these questions in my mind, “What do you mean by wealthy enough? When do you think you will be wealthy? How many people do you want to help?” These claims are vague and abstract. Most of the time, wealth is never enough. People will usually be trapped in the whirlpool of greed, never being satisfied with what they have. After buying a condo, they will want a bungalow. After buying their BMW, they will want a Porsche. When will it end? When can we start to really help people?
For me, my stand is clear; I will accumulate wealth and at the same time, start building my legacy right here, right now. There is no time to waste. At the end of our lives, on our death bed, we will not be asking the question. “How much time have I spent in the office today? Or how much money have I accumulated.” I want my life to be with no regrets. I want to be able to say, “Yes, I have made a difference to the lives of many people, my family and my friends.” That is why today, I will tell my loved ones that I love them, whether in words or in deeds. Life is uncertain, and I can fully comprehend it given my experience with illness since 8 years old. And I have experience a new birth in life, by my brother giving me his kidney in his kindness. Also, with a woman who is willing to be united with me in Holy Matrimony, I have experienced God’s goodness and grace, and yes, true love.
Therefore, it spurs me even more to accomplish what I have started out to do, to set up a foundation to fund and heal the lost, sick, poor and needy kidney patients, giving them a new life, just like how I have received my new life in humility. And it will not start 10 year later or 20 years later. It will start now and as my wealth increases, so will the blessings to these needy people increase. I will minister to these needy patients in their spirit, soul and body by loving them and providing for them, right here, right now.
This is truly wealth with a purpose.
Aaron Graham Tay, CFP
Tuesday, March 24, 2009
Wealth Management – Preserving Capital and Enhancing Returns
Risk and Return. This is a universal law which cannot be disputed. Like the law of gravity, it always works. Just like when we throw a ball into the air, it will always return to the ground. Likewise, if we want more returns on our investment, we will have to undertake more risk. Like the old adage, “There is no free lunch in this world”, the risk is directly proportional to the return we will achieve.
In amassing wealth, we will also need to manage the wealth with wisdom. There are people who can amass wealth overnight with their brilliance in investing or by a stroke of good fortune, but unfortunately, they do not have the wisdom and character to keep the wealth and very soon, they are back to where they started off. We need to understand this fundamental principle of risk and return in order for us to preserve our capital which we have accumulated and enhance its return, growing our portfolio to the next level of wealth.
We have discussed risk management for life previously and I shall now focus on investment risk management. The most effective key in reducing investment risks is diversification. Diversification is when we created a portfolio of various asset classes, for example, stocks (equity), bonds (fixed income), property (real estate), futures and options (derivatives), and other classes. Within the asset class, we can further diversify into different sectors and countries. This is called the level of diversification.
When we invest in the stock of a particular company, for example, Microsoft, we are taking the risk of the company, its sector, the country which it operates, and the global economy. The risk of the company will include the quality of its managers, the health of its financial statements and its business model. The sector risk will be the industry performance as a whole, in this case, is the information technology industry. The country risk will be USA, as the business primarily operates there. And finally, the global risk will also affect Microsoft since USA is part of the global economy.
However, when we include Apple Computers into our portfolio also, we will eliminate company risk to a large extent. Reason is that if Microsoft share price declines, Apple shares may be increasing due to a superior product. However, if a bad news hits the IT industry, both of them may face share price decline. Thus we can also include other industries into our portfolio, for example, Kraft Foods in the food industry which is not correlated to the IT industry.
We can protect the downside of our investment portfolio also, if we invest into other countries besides USA. If USA is facing a national recession, we may have investments in other countries for example China to sustain the portfolio.
The risks that we are eliminating in the previous methods are non-systematic risks. If we ensure that our investment portfolio has a healthy allocation of funds into the different asset classes and sectors, which are fairly correlated negatively to each other, our portfolio should not sustain much market shocks. There are, however, systematic risks which affects the whole global economy that cannot be diversified away. We can do our best to diversify into other asset classes which have different behaviors to economic indicators, but we will still be exposed to systematic risks to a certain extent.
Now that we understand how to preserve capital by diversification, we need also to understand asset allocation to enhance returns while preserving capital. The first step to this process is to understand our risk profile. A high risk taker will allocate his portfolio into very sector specific or even single companies, while low risk taker will have very diversified portfolios, with much into bonds and other low risk instruments. A moderate risk taker will usually have a hybrid of both.
Asset allocation is a very dynamic process and there are numerous books written on this subject. In essence, asset allocation uses the different characteristics of investment instruments to create a portfolio that is diversified. The different instruments will be negatively correlated to reduce the risk. However, the returns will also be moderated due to the lower risk. The art is to have an optimal allocation such that with the risk the investor is able to undertake, he is also able achieve the highest return. Asset allocation is also dynamic with reference to the markets. In different investment climates, allocations will be different. For example, in the climate where interest rates are high, an investor will most probably move more allocations into equities instead of bonds, as bond prices generally decline when interest rates are high, and vice versa.
Therefore, in order to preserve the wealth that we have accumulated and enhance the returns for capital appreciation, we need to understand these important principles. Risk and return, diversification and asset allocation, will serve as very useful principles when we manage our wealth with wisdom. The learning of these principles is not exhaustive, and I will encourage you to keep on upgrading your knowledge of these concepts, and the rewards will be invaluable.
Aaron Graham Tay, CFP
In amassing wealth, we will also need to manage the wealth with wisdom. There are people who can amass wealth overnight with their brilliance in investing or by a stroke of good fortune, but unfortunately, they do not have the wisdom and character to keep the wealth and very soon, they are back to where they started off. We need to understand this fundamental principle of risk and return in order for us to preserve our capital which we have accumulated and enhance its return, growing our portfolio to the next level of wealth.
We have discussed risk management for life previously and I shall now focus on investment risk management. The most effective key in reducing investment risks is diversification. Diversification is when we created a portfolio of various asset classes, for example, stocks (equity), bonds (fixed income), property (real estate), futures and options (derivatives), and other classes. Within the asset class, we can further diversify into different sectors and countries. This is called the level of diversification.
When we invest in the stock of a particular company, for example, Microsoft, we are taking the risk of the company, its sector, the country which it operates, and the global economy. The risk of the company will include the quality of its managers, the health of its financial statements and its business model. The sector risk will be the industry performance as a whole, in this case, is the information technology industry. The country risk will be USA, as the business primarily operates there. And finally, the global risk will also affect Microsoft since USA is part of the global economy.
However, when we include Apple Computers into our portfolio also, we will eliminate company risk to a large extent. Reason is that if Microsoft share price declines, Apple shares may be increasing due to a superior product. However, if a bad news hits the IT industry, both of them may face share price decline. Thus we can also include other industries into our portfolio, for example, Kraft Foods in the food industry which is not correlated to the IT industry.
We can protect the downside of our investment portfolio also, if we invest into other countries besides USA. If USA is facing a national recession, we may have investments in other countries for example China to sustain the portfolio.
The risks that we are eliminating in the previous methods are non-systematic risks. If we ensure that our investment portfolio has a healthy allocation of funds into the different asset classes and sectors, which are fairly correlated negatively to each other, our portfolio should not sustain much market shocks. There are, however, systematic risks which affects the whole global economy that cannot be diversified away. We can do our best to diversify into other asset classes which have different behaviors to economic indicators, but we will still be exposed to systematic risks to a certain extent.
Now that we understand how to preserve capital by diversification, we need also to understand asset allocation to enhance returns while preserving capital. The first step to this process is to understand our risk profile. A high risk taker will allocate his portfolio into very sector specific or even single companies, while low risk taker will have very diversified portfolios, with much into bonds and other low risk instruments. A moderate risk taker will usually have a hybrid of both.
Asset allocation is a very dynamic process and there are numerous books written on this subject. In essence, asset allocation uses the different characteristics of investment instruments to create a portfolio that is diversified. The different instruments will be negatively correlated to reduce the risk. However, the returns will also be moderated due to the lower risk. The art is to have an optimal allocation such that with the risk the investor is able to undertake, he is also able achieve the highest return. Asset allocation is also dynamic with reference to the markets. In different investment climates, allocations will be different. For example, in the climate where interest rates are high, an investor will most probably move more allocations into equities instead of bonds, as bond prices generally decline when interest rates are high, and vice versa.
Therefore, in order to preserve the wealth that we have accumulated and enhance the returns for capital appreciation, we need to understand these important principles. Risk and return, diversification and asset allocation, will serve as very useful principles when we manage our wealth with wisdom. The learning of these principles is not exhaustive, and I will encourage you to keep on upgrading your knowledge of these concepts, and the rewards will be invaluable.
Aaron Graham Tay, CFP
Friday, January 23, 2009
Accumulate Wealth with Investment Wisdom
Let us do some simple mathematics here. Assuming we start work at 25 years old and retire at 55 years old. We have an average income of $5000 a month and we can save $2500 a month. Without investing and parking our money in a bank, we will achieve approximately $968,400 at 0.5% rate of investment (ROI). If we invest our savings over long term at a modest 7% ROI, we will achieve $2,833,823 as our retirement funds. Is there a big difference between $968,400 and $2,833,823? I bet there is! Now that is the magic of the law of compounding in investments.
Rule of 72
The Rule of 72 simply states the number of year it takes to double our invested money at a given rate of interest. For example, if we invest our $10,000 at 2% ROI, it will take 72/2, that is 36 years, to become $20,000. If we invest it at 4% ROI, it will take 72/4, only 18 years to become $20,000. So on as so forth. This is another illustration of the magic of compounding.
Establishing your Investment Philosophy
Investment Philosophy (IP) is a set of beliefs that you adhere to as you make your investment decisions. It is a style of investing that is very personal to the investor and is different from investor to investor. If we do not have an IP, whenever a investment situations arises, we will not know what to do and may make unwise investment decisions. An IP will suit the investor’s risk profile, personality, goals, personal beliefs, etc. For example, if people around you say that oil prices will increase because of an impending war, will you take advantage of the situation and buy oil futures? One investor may feel that it is a tremendous opportunity because he is an aggressive investor to be able to tolerate the risk inherent in derivatives instrument (with leverage) and he is a short term opportunist. On other hand, you may feel that futures is too risky for you and you prefer stocks that are more stable and has a longer time horizon. Also, you may feel that profiting from a war, which usually results in the loss of innocent lives, is not ethical. With a clear IP, you will not chase after profits and be lead by them, which will leave you frustrated and even cost you money. But you will be a stable investor, knowing exactly what to do in the ever changing capital markets.
A good financial advisor is supposed to help you discover your personality type and establish your personal IP. He can share with you his IP, and you may want to adopt his IP if it suits you, but it is important to understand the IP that you undertake which underlines your investment decisions.
My Personal Investment Philosophy
1. Have at least 6 months of income saved in my bank account. This acts as an emergency fund in the event of retrenchment, emergency medical bills, etc.
2. Differentiate my ‘needs’ from my ‘wants’. I do need a flat for me to get married and start a family. I do need money to fund my children through a formal education and I do need money for a comfortable retirement of about $3,000 expenses per month in today’s dollars. However, I want to own a Ferrari sport car. I want to live in a bungalow. I want to own a private jet. I want to set up a charitable foundation. We need to prioritize our needs from our wants and provide for our needs first.
3. Open different ‘accounts’ for different goals. Each goal has a different time frame and different amounts. With that in mind, we can then undertake the most effective investment strategy for each goal. For example, if your goal is to hold a wedding one year later, the wedding funds should be held in a conservative portfolio, consisting of bank deposits or money market instruments. However, if the goal is to be financially independent in 20 years time, we can undertake an aggressive portfolio to achieve our target amount for retirement.
4. With our budget set up, we are able to allocate our savings per month towards our goals. For a start, I will recommend savers to construct a portfolio that can withstand market shocks. This can be achieved by diversifying our money amongst different companies, industries, and countries. Unit trusts (mutual funds), exchange traded funds (ETFs), real estate investment trusts (REITs) are effective instruments to accumulate wealth over the medium to long term. These instruments also allow us to contribute periodically. A regular savings program (RSP) is a powerful way to accumulate wealth by a strategy called dollar cost averaging, which means lowering our investment cost over time when we invest regularly with discipline. This strategy should enable us to comfortably achieve our ‘needs’ goals in life.
5. When we have accumulated a certain sum of money, eg $50,000; we can then proceed to explore shares of companies which are of long term value. In this exercise, we will be putting on our thinking caps and perspective of a business owner. A good business sense and acumen will be of great help to identify companies with profitable long term prospects. We may even start a new venture and invest in the growth of the company. Being a shareholder of a profitable company that is sustainable over long term will exponentially increase our wealth. We can then start to dream of achieving all our ‘wants’ in life, given time.
6. Properties will be the next investment vehicle I will be keen to invest. A property will either require a huge capital investment, or a loan from the bank to finance the mortgage. In both cases, having a large pool of funds to invest or sustain the loan financing will be a prudent way to start investing in properties. Of course, there are other creative measures to use leverage in property investments, and it depends on our risk profile and personality type when it comes to investing. And believe me, a tremendous amount of wealth can be amassed if we understand and invest in properties wisely. By this time, I presume we are all living in our dream lifestyle, with profitable investments, passive income, dream house, dream car, country club memberships, etc. The list goes on and on. However, I would like to quote a passage from the Bible. “What good does it profit a man, if he gains the whole world, and yet loses his own soul?” To me, having good health in the spirit, soul and body, with a warm family, is still the greatest treasure of all.
7. Finally, if we have the courage and the appetite for risk, we can venture into the ever complex capital markets for trading and speculation. The financial markets are usually responsible for the rise and fall of many millionaires, even billionaires. Like one of my trader friend said, “The financial market is the greatest mystery of all time.” No one can ever predict with 100% accuracy the next move of Mr. Market. Trading and speculation in the financial markets require a great amount of study and emotional tenacity. Thus it is the final area of investing sphere that I will recommend to investors due to its complexity and sophistication. I believe when we have done the above 6 steps correctly, we will have amassed great wealth and have all the time in the world to explore the mysterious world of capital markets. The capital market instruments include stocks, bonds, currency, futures, options, warrants, etc. There are also numerous strategies that we can adopt and every trader/speculator has their own strategy of profiting in the markets. But beware, even though trading in the markets may sound exciting, or even sexy… it has still caused many to laugh, cry or even die, as a result of great rise and decline of their wealth. Are you prepared for the challenge?
In conclusion, a journey of a thousand miles begins with a single step. After knowing how powerful investing can be in amassing our wealth and achieving our life goals, and knowing our own investment philosophy, it is time to start putting our first dollar to work. Don’t procrastinate. Start saving. Start investing NOW.
Aaron Graham Tay, CFP
Rule of 72
The Rule of 72 simply states the number of year it takes to double our invested money at a given rate of interest. For example, if we invest our $10,000 at 2% ROI, it will take 72/2, that is 36 years, to become $20,000. If we invest it at 4% ROI, it will take 72/4, only 18 years to become $20,000. So on as so forth. This is another illustration of the magic of compounding.
Establishing your Investment Philosophy
Investment Philosophy (IP) is a set of beliefs that you adhere to as you make your investment decisions. It is a style of investing that is very personal to the investor and is different from investor to investor. If we do not have an IP, whenever a investment situations arises, we will not know what to do and may make unwise investment decisions. An IP will suit the investor’s risk profile, personality, goals, personal beliefs, etc. For example, if people around you say that oil prices will increase because of an impending war, will you take advantage of the situation and buy oil futures? One investor may feel that it is a tremendous opportunity because he is an aggressive investor to be able to tolerate the risk inherent in derivatives instrument (with leverage) and he is a short term opportunist. On other hand, you may feel that futures is too risky for you and you prefer stocks that are more stable and has a longer time horizon. Also, you may feel that profiting from a war, which usually results in the loss of innocent lives, is not ethical. With a clear IP, you will not chase after profits and be lead by them, which will leave you frustrated and even cost you money. But you will be a stable investor, knowing exactly what to do in the ever changing capital markets.
A good financial advisor is supposed to help you discover your personality type and establish your personal IP. He can share with you his IP, and you may want to adopt his IP if it suits you, but it is important to understand the IP that you undertake which underlines your investment decisions.
My Personal Investment Philosophy
1. Have at least 6 months of income saved in my bank account. This acts as an emergency fund in the event of retrenchment, emergency medical bills, etc.
2. Differentiate my ‘needs’ from my ‘wants’. I do need a flat for me to get married and start a family. I do need money to fund my children through a formal education and I do need money for a comfortable retirement of about $3,000 expenses per month in today’s dollars. However, I want to own a Ferrari sport car. I want to live in a bungalow. I want to own a private jet. I want to set up a charitable foundation. We need to prioritize our needs from our wants and provide for our needs first.
3. Open different ‘accounts’ for different goals. Each goal has a different time frame and different amounts. With that in mind, we can then undertake the most effective investment strategy for each goal. For example, if your goal is to hold a wedding one year later, the wedding funds should be held in a conservative portfolio, consisting of bank deposits or money market instruments. However, if the goal is to be financially independent in 20 years time, we can undertake an aggressive portfolio to achieve our target amount for retirement.
4. With our budget set up, we are able to allocate our savings per month towards our goals. For a start, I will recommend savers to construct a portfolio that can withstand market shocks. This can be achieved by diversifying our money amongst different companies, industries, and countries. Unit trusts (mutual funds), exchange traded funds (ETFs), real estate investment trusts (REITs) are effective instruments to accumulate wealth over the medium to long term. These instruments also allow us to contribute periodically. A regular savings program (RSP) is a powerful way to accumulate wealth by a strategy called dollar cost averaging, which means lowering our investment cost over time when we invest regularly with discipline. This strategy should enable us to comfortably achieve our ‘needs’ goals in life.
5. When we have accumulated a certain sum of money, eg $50,000; we can then proceed to explore shares of companies which are of long term value. In this exercise, we will be putting on our thinking caps and perspective of a business owner. A good business sense and acumen will be of great help to identify companies with profitable long term prospects. We may even start a new venture and invest in the growth of the company. Being a shareholder of a profitable company that is sustainable over long term will exponentially increase our wealth. We can then start to dream of achieving all our ‘wants’ in life, given time.
6. Properties will be the next investment vehicle I will be keen to invest. A property will either require a huge capital investment, or a loan from the bank to finance the mortgage. In both cases, having a large pool of funds to invest or sustain the loan financing will be a prudent way to start investing in properties. Of course, there are other creative measures to use leverage in property investments, and it depends on our risk profile and personality type when it comes to investing. And believe me, a tremendous amount of wealth can be amassed if we understand and invest in properties wisely. By this time, I presume we are all living in our dream lifestyle, with profitable investments, passive income, dream house, dream car, country club memberships, etc. The list goes on and on. However, I would like to quote a passage from the Bible. “What good does it profit a man, if he gains the whole world, and yet loses his own soul?” To me, having good health in the spirit, soul and body, with a warm family, is still the greatest treasure of all.
7. Finally, if we have the courage and the appetite for risk, we can venture into the ever complex capital markets for trading and speculation. The financial markets are usually responsible for the rise and fall of many millionaires, even billionaires. Like one of my trader friend said, “The financial market is the greatest mystery of all time.” No one can ever predict with 100% accuracy the next move of Mr. Market. Trading and speculation in the financial markets require a great amount of study and emotional tenacity. Thus it is the final area of investing sphere that I will recommend to investors due to its complexity and sophistication. I believe when we have done the above 6 steps correctly, we will have amassed great wealth and have all the time in the world to explore the mysterious world of capital markets. The capital market instruments include stocks, bonds, currency, futures, options, warrants, etc. There are also numerous strategies that we can adopt and every trader/speculator has their own strategy of profiting in the markets. But beware, even though trading in the markets may sound exciting, or even sexy… it has still caused many to laugh, cry or even die, as a result of great rise and decline of their wealth. Are you prepared for the challenge?
In conclusion, a journey of a thousand miles begins with a single step. After knowing how powerful investing can be in amassing our wealth and achieving our life goals, and knowing our own investment philosophy, it is time to start putting our first dollar to work. Don’t procrastinate. Start saving. Start investing NOW.
Aaron Graham Tay, CFP
Tuesday, January 6, 2009
Risk Management for Life Uncertainties
Life Insurance: A word that is usually shunned by most people. Why is that so? One reason might be that life insurance agents are pushy in their recommendations for life insurance product, making clients feel uncomfortable, even though they know that it is important in their financial lives. Another reason is that people do not believe that mishaps will happen to them. They do not see that protecting themselves, their family, and their wealth from unfortunate life events such as death, disability, illnesses, heavy medical bills, is of any priority. They would rather use their savings on material needs and wants, or investing for the future to accumulate more wealth. This thinking is very common amongst the young people. They feel good, keep a healthy lifestyle and everything is well for them. What could go wrong?
Let me share with you a true story. My own story…
I was born in 1980 into a humble middle working class family. My father was a teacher and my mother was a nurse. As the eldest child, my parents had high hopes on me and doted on me. When I was 6 my younger brother was born. I knew I was a big brother and had to take care of my younger brother. In the end, it was my younger brother who took care of me and saved my life.
Things turned a different route in 1988. I had mumps for a period of time. My parents took good care of me and expected me to turn well soon however, things got more complicated. My legs started to swell and my mum suspected something was wrong so she took me to see a doctor. I was diagnosed with kidney problem. Being young, I did not know the seriousness of the illness until I saw the pale and worried faces on my parents. I was not only diagnosed with kidney problem, the real cause of the problem was lupus. Lupus is an auto immune disease that starts a civil war in my own body, with the antibodies attacking its own cells. My parents were at a state of loss, not knowing what they should do.
A lot of questions went through my parents’ mind, “What will my future be?” “How much will be the medical expenses” To make matters worse, my father did not believe in buying life insurance for me when I was young, so we had to pay for the medical bills ourselves. This added on addition burden to my parent’s expenses. I felt that I was a burden to my parents too and there is nothing I could do to make things better. The only thing I could do is to study hard and support myself in the future.
With God’s grace, I managed to complete my secondary school education and went on to junior college. However, I had to go for regular routine check up for my condition. Every month my parents have to spend about three thousand dollars for the medical bills. Due to the care I received from my doctor, I was inspired to become a doctor and save the lives of people. However, it was a far fetched goal for me and I only managed to enter into the Pharmacy course in university.
In university was the turning point of my life. As the saying goes, when a problem comes, it does not come alone. Soon I suffered a serious relapse of my illness and I was bedridden for one whole month. And I was in depression. Without a choice I had to quit school and stay in hospital with other patients.
In hospital, I saw the suffering of many patients whose family has deserted them because the medical bills were too huge for the family to bear. Some of them have no family and have to depend of social services. Others have no money to treat their illness and their health deteriorates day by day. A patient with diabetes even had to have both his legs amputated due to improper care. After witnessing the different heart wrenching scenarios, I realized one hard and real fact, “Life is unpredictable. You will never know what you are going to get.” I understood the value of being ready for the crisis in life. If life crisis such as major illnesses hits us without warning, what we have planned and expected life to be will be destroyed and gone forever. In some cases, our spouses may even run away due to the financial burden to take care of us. We may then have to depend on charity foundations and that also is not guaranteed. If all things fail, we may even die. The only solution is to insure our life and health when we can still be insured, to ensure that financial resources will be there when we desperately need them.
That was the reason I joined the insurance and financial advisory business in 2003 when I quit the Pharmacy course. It was after much thought and reflection. It was not because I gave up on my dream on helping patients medically. It was because I realized that not matter how much we prevent people from being struck by serious illness, there will always be victims of life unfortunate events. Illness, accidents, disabilities, deaths, will always exist on this earth. What we really need to do is not only to prevent sicknesses, but to be ready if we ever get struck by one. And the most important thing is financial resources. My dream was to become a doctor to help people get well. Now, I am ensuring that people have sufficient resources to seek the best medical treatment. If there were adequate doctors but inadequate resources, the patients will still die. It is a very realistic world.
Therefore, in my opinion, life is fragile and mishaps can happen to anyone of us. Of course, when we dream and plan for our lives, we should plan for the best that no bad thing will happen to us. But as reality shows, we do need to prepare ourselves for unexpected events. Insurance is but merely a tool for us to cushion ourselves against financial disasters if anything untoward happens to us or our family. A good financial advisor will surely recommend insurance instruments to protect your wealth from uncertainties. These instruments include term insurance, whole life plans, investment linked plans, medical schemes, etc. Much information can be gleaned in this area on the internet or from your nearest friendly neighborhood financial advisor. However, I personally feel that you should not spend more than 15% of your income on your insurance portfolio, as it is for wealth protection and does not help to accumulate wealth at an optimal rate of return.
So to continue my story…
I also saw in my encounter with patients was that patients like myself who are seriously ill and yet have no insurance have no money to seek medical treatment. Where do we turn too? Fortunately, there were foundations such as NKF and KDF to help desperate kidney patients. Previously, I was undergoing dialysis at the NKF. Now, after a kidney transplant of which the donor was my younger brother, I have a new lease of life once again and a deep sense of conviction for my purpose in life, that is to help patients like myself to overcome their illnesses and limitations. However, without these foundations like NKF, I will probably die of my illness due to lack of money to seek quality medical treatment. Before 1970, people with kidney failure will die as dialysis was very expensive. It costs about $3000 per month. And in other countries with no charity foundations and no proper medical treatment, lives are lost as if it was of little value. Therefore, I am now determined to set up a foundation. This foundation will help thousands of poor and needy people, not only in kidney problems, but also in other illnesses such as cancer and others. If I was a doctor, I can only save a few lives that come along my path. However, if I owned a foundation, I will be able to save thousands or even millions of lives. The only way I could do that is to become wealthy. And I believe I am well on the way to fulfill my vision and my destiny.
Let me share with you a true story. My own story…
I was born in 1980 into a humble middle working class family. My father was a teacher and my mother was a nurse. As the eldest child, my parents had high hopes on me and doted on me. When I was 6 my younger brother was born. I knew I was a big brother and had to take care of my younger brother. In the end, it was my younger brother who took care of me and saved my life.
Things turned a different route in 1988. I had mumps for a period of time. My parents took good care of me and expected me to turn well soon however, things got more complicated. My legs started to swell and my mum suspected something was wrong so she took me to see a doctor. I was diagnosed with kidney problem. Being young, I did not know the seriousness of the illness until I saw the pale and worried faces on my parents. I was not only diagnosed with kidney problem, the real cause of the problem was lupus. Lupus is an auto immune disease that starts a civil war in my own body, with the antibodies attacking its own cells. My parents were at a state of loss, not knowing what they should do.
A lot of questions went through my parents’ mind, “What will my future be?” “How much will be the medical expenses” To make matters worse, my father did not believe in buying life insurance for me when I was young, so we had to pay for the medical bills ourselves. This added on addition burden to my parent’s expenses. I felt that I was a burden to my parents too and there is nothing I could do to make things better. The only thing I could do is to study hard and support myself in the future.
With God’s grace, I managed to complete my secondary school education and went on to junior college. However, I had to go for regular routine check up for my condition. Every month my parents have to spend about three thousand dollars for the medical bills. Due to the care I received from my doctor, I was inspired to become a doctor and save the lives of people. However, it was a far fetched goal for me and I only managed to enter into the Pharmacy course in university.
In university was the turning point of my life. As the saying goes, when a problem comes, it does not come alone. Soon I suffered a serious relapse of my illness and I was bedridden for one whole month. And I was in depression. Without a choice I had to quit school and stay in hospital with other patients.
In hospital, I saw the suffering of many patients whose family has deserted them because the medical bills were too huge for the family to bear. Some of them have no family and have to depend of social services. Others have no money to treat their illness and their health deteriorates day by day. A patient with diabetes even had to have both his legs amputated due to improper care. After witnessing the different heart wrenching scenarios, I realized one hard and real fact, “Life is unpredictable. You will never know what you are going to get.” I understood the value of being ready for the crisis in life. If life crisis such as major illnesses hits us without warning, what we have planned and expected life to be will be destroyed and gone forever. In some cases, our spouses may even run away due to the financial burden to take care of us. We may then have to depend on charity foundations and that also is not guaranteed. If all things fail, we may even die. The only solution is to insure our life and health when we can still be insured, to ensure that financial resources will be there when we desperately need them.
That was the reason I joined the insurance and financial advisory business in 2003 when I quit the Pharmacy course. It was after much thought and reflection. It was not because I gave up on my dream on helping patients medically. It was because I realized that not matter how much we prevent people from being struck by serious illness, there will always be victims of life unfortunate events. Illness, accidents, disabilities, deaths, will always exist on this earth. What we really need to do is not only to prevent sicknesses, but to be ready if we ever get struck by one. And the most important thing is financial resources. My dream was to become a doctor to help people get well. Now, I am ensuring that people have sufficient resources to seek the best medical treatment. If there were adequate doctors but inadequate resources, the patients will still die. It is a very realistic world.
Therefore, in my opinion, life is fragile and mishaps can happen to anyone of us. Of course, when we dream and plan for our lives, we should plan for the best that no bad thing will happen to us. But as reality shows, we do need to prepare ourselves for unexpected events. Insurance is but merely a tool for us to cushion ourselves against financial disasters if anything untoward happens to us or our family. A good financial advisor will surely recommend insurance instruments to protect your wealth from uncertainties. These instruments include term insurance, whole life plans, investment linked plans, medical schemes, etc. Much information can be gleaned in this area on the internet or from your nearest friendly neighborhood financial advisor. However, I personally feel that you should not spend more than 15% of your income on your insurance portfolio, as it is for wealth protection and does not help to accumulate wealth at an optimal rate of return.
So to continue my story…
I also saw in my encounter with patients was that patients like myself who are seriously ill and yet have no insurance have no money to seek medical treatment. Where do we turn too? Fortunately, there were foundations such as NKF and KDF to help desperate kidney patients. Previously, I was undergoing dialysis at the NKF. Now, after a kidney transplant of which the donor was my younger brother, I have a new lease of life once again and a deep sense of conviction for my purpose in life, that is to help patients like myself to overcome their illnesses and limitations. However, without these foundations like NKF, I will probably die of my illness due to lack of money to seek quality medical treatment. Before 1970, people with kidney failure will die as dialysis was very expensive. It costs about $3000 per month. And in other countries with no charity foundations and no proper medical treatment, lives are lost as if it was of little value. Therefore, I am now determined to set up a foundation. This foundation will help thousands of poor and needy people, not only in kidney problems, but also in other illnesses such as cancer and others. If I was a doctor, I can only save a few lives that come along my path. However, if I owned a foundation, I will be able to save thousands or even millions of lives. The only way I could do that is to become wealthy. And I believe I am well on the way to fulfill my vision and my destiny.
Monday, January 5, 2009
Life Planning – Setting Value Goals
As a financial consultant, I have clients coming to me saying, “I want to invest my money and make it work for me.” First question I will ask is, “How much do you want to achieve and by when?” The client will answer, “As much as possible and with the least possible time.” At this moment I will have 2 options: One is to politely tell the client that we are not suited to be financial accountability partners. Second is to educate him about the right mindset about setting investment and life goals. And more often than not, clients will take the latter option, as they are interested as to what is the accurate blueprint of setting investment and life goals, and this will assure the clients of a higher success in reaching their fullest financial and life potential.
Investment Goals
Many people have vague goals. Usually as the New Year commences, we have new resolutions. Some will say, “I want to lose weight”, “I want to be richer”, “I want to be healthier”, etc. These are good intentions, but they are very vague, and vague goals do not get accomplished. We need to set concrete goals, goals that we can see, feel and touch it in our minds. We need to set SMART goals. The definition of SMART is:
S – Specific
M – Measurable
A – Attainable
R – Realistic
T – Time Frame
Specific - A specific goal has a much greater chance of being accomplished than a general goal. To set a specific goal you must answer the five "W" questions:
*Who: Who is involved?
*What: What do I want to accomplish?
*Where: Identify a location.
*When: Establish a time frame.
*Why: Specific reasons, purpose or benefits of accomplishing the goal.
For example, “I (who) want to get accumulate $100,000(what), in my business (where) in 10 months (when), for our wedding (why).
Measurable - Establish concrete criteria for measuring progress toward the attainment of each goal you set. When you measure your progress, you stay on track, reach your target dates, and experience the exhilaration of achievement that spurs you on to continued effort required to reach your goal.
To determine if your goal is measurable, ask questions such as......How much? How many? How will I know when it is accomplished?
Attainable - When you identify goals that are most important to you, you begin to figure out ways you can make them come true. You develop the attitudes, abilities, skills, and financial capacity to reach them. You begin seeing previously overlooked opportunities to bring yourself closer to the achievement of your goals.
You can attain most any goal you set when you plan your steps wisely and establish a time frame that allows you to carry out those steps. Goals that may have seemed far away and out of reach eventually move closer and become attainable, not because your goals shrink, but because you grow and expand to match them. When you list your goals you build your self-image. You see yourself as worthy of these goals, and develop the traits and personality that allow you to possess them.
Realistic - To be realistic, a goal must represent an objective toward which you are both willing and able to work. A goal can be both high and realistic; you are the only one who can decide just how high your goal should be. But be sure that every goal represents substantial progress. A high goal is frequently easier to reach than a low one because a low goal exerts low motivational force. Some of the hardest jobs you ever accomplished actually seem easy simply because they were a labor of love.
Time Frame - A goal should be grounded within a time frame. With no time frame tied to it there's no sense of urgency. If I want to accumulate hundred thousand dollars, when do I want to achieve it? "Someday" won't work. But if I anchor it within a timeframe, "by Oct 1", then I've set my unconscious mind into motion to begin working on the goal.
Once we have determined the amount and time frame, then we are able to accurately access the kind of risk the client needs to undertake for his investments. If the client has a large amount to accumulate and has a short time frame, the client will need to take very high risk to achieve his goal. Vice versa, if the client has a modest goal over a long period of time, he will only need to take minimal risk. Thus it is important to find out how much and when the client needs to accumulate, as it is important not to take unnecessary risk in investments.
Life Goals
Money is not an end by itself. It is a means to an end. When I think of myself of a millionaire, I do not just imagine the figure $1,000,000 in my bank account statement. Rather, I envision the things that the million dollars can bring me, either material or non-material. I dream of my happy family, living in a spacious and luxurious home, driving around in my dream sports car, having good food, enjoying good health, favor with friends and loved ones, etc. Nothing about money, but money is the tool to enable my dreams to come true. I believe it is the same for you too.
Thus when we plan for our investment goals, we also need to link it with our life goals. What do we want the money for? For our marriage? For our children’s education? To buy a Ferrari? To start a charitable organization? We need to prioritize our life goals, as we have limited resources. Which is more important? Having a Ferrari or sending our kids to a reputable school for his future? This boils down to what our innermost values and desires are. Values are deeply held beliefs that are deep in our heart. For example, my number one value is family, so I will make sure I spend quality time with my family and that my family has comfortable lifestyle. If I regard fame as important, I will achieve wealth and publicize my success, so as to get the recognition of others. What are your values in life?
Thus the formula for accurate and powerful goals will be:
Step 1: Discover our innermost values
Step 2: Establish and prioritize our life goals according to our values
Step 3: Determine how much financially we need to achieve those goals
Therefore, having a general and vague goal for this coming year is not enough. We need to discover our most heartfelt values and prioritize our goals. Then we need to establish SMART goals that is specific, measurable, attainable, realistic and with a time frame. When our goal is clear, it becomes real and ‘tangible’ in our mind’s eye. We can then feel the excitement and passion in achieving the goal which will then produce daily discipline to do the things that will lead us to the goal. Nothing will seem impossible for us then.
Investment Goals
Many people have vague goals. Usually as the New Year commences, we have new resolutions. Some will say, “I want to lose weight”, “I want to be richer”, “I want to be healthier”, etc. These are good intentions, but they are very vague, and vague goals do not get accomplished. We need to set concrete goals, goals that we can see, feel and touch it in our minds. We need to set SMART goals. The definition of SMART is:
S – Specific
M – Measurable
A – Attainable
R – Realistic
T – Time Frame
Specific - A specific goal has a much greater chance of being accomplished than a general goal. To set a specific goal you must answer the five "W" questions:
*Who: Who is involved?
*What: What do I want to accomplish?
*Where: Identify a location.
*When: Establish a time frame.
*Why: Specific reasons, purpose or benefits of accomplishing the goal.
For example, “I (who) want to get accumulate $100,000(what), in my business (where) in 10 months (when), for our wedding (why).
Measurable - Establish concrete criteria for measuring progress toward the attainment of each goal you set. When you measure your progress, you stay on track, reach your target dates, and experience the exhilaration of achievement that spurs you on to continued effort required to reach your goal.
To determine if your goal is measurable, ask questions such as......How much? How many? How will I know when it is accomplished?
Attainable - When you identify goals that are most important to you, you begin to figure out ways you can make them come true. You develop the attitudes, abilities, skills, and financial capacity to reach them. You begin seeing previously overlooked opportunities to bring yourself closer to the achievement of your goals.
You can attain most any goal you set when you plan your steps wisely and establish a time frame that allows you to carry out those steps. Goals that may have seemed far away and out of reach eventually move closer and become attainable, not because your goals shrink, but because you grow and expand to match them. When you list your goals you build your self-image. You see yourself as worthy of these goals, and develop the traits and personality that allow you to possess them.
Realistic - To be realistic, a goal must represent an objective toward which you are both willing and able to work. A goal can be both high and realistic; you are the only one who can decide just how high your goal should be. But be sure that every goal represents substantial progress. A high goal is frequently easier to reach than a low one because a low goal exerts low motivational force. Some of the hardest jobs you ever accomplished actually seem easy simply because they were a labor of love.
Time Frame - A goal should be grounded within a time frame. With no time frame tied to it there's no sense of urgency. If I want to accumulate hundred thousand dollars, when do I want to achieve it? "Someday" won't work. But if I anchor it within a timeframe, "by Oct 1", then I've set my unconscious mind into motion to begin working on the goal.
Once we have determined the amount and time frame, then we are able to accurately access the kind of risk the client needs to undertake for his investments. If the client has a large amount to accumulate and has a short time frame, the client will need to take very high risk to achieve his goal. Vice versa, if the client has a modest goal over a long period of time, he will only need to take minimal risk. Thus it is important to find out how much and when the client needs to accumulate, as it is important not to take unnecessary risk in investments.
Life Goals
Money is not an end by itself. It is a means to an end. When I think of myself of a millionaire, I do not just imagine the figure $1,000,000 in my bank account statement. Rather, I envision the things that the million dollars can bring me, either material or non-material. I dream of my happy family, living in a spacious and luxurious home, driving around in my dream sports car, having good food, enjoying good health, favor with friends and loved ones, etc. Nothing about money, but money is the tool to enable my dreams to come true. I believe it is the same for you too.
Thus when we plan for our investment goals, we also need to link it with our life goals. What do we want the money for? For our marriage? For our children’s education? To buy a Ferrari? To start a charitable organization? We need to prioritize our life goals, as we have limited resources. Which is more important? Having a Ferrari or sending our kids to a reputable school for his future? This boils down to what our innermost values and desires are. Values are deeply held beliefs that are deep in our heart. For example, my number one value is family, so I will make sure I spend quality time with my family and that my family has comfortable lifestyle. If I regard fame as important, I will achieve wealth and publicize my success, so as to get the recognition of others. What are your values in life?
Thus the formula for accurate and powerful goals will be:
Step 1: Discover our innermost values
Step 2: Establish and prioritize our life goals according to our values
Step 3: Determine how much financially we need to achieve those goals
Therefore, having a general and vague goal for this coming year is not enough. We need to discover our most heartfelt values and prioritize our goals. Then we need to establish SMART goals that is specific, measurable, attainable, realistic and with a time frame. When our goal is clear, it becomes real and ‘tangible’ in our mind’s eye. We can then feel the excitement and passion in achieving the goal which will then produce daily discipline to do the things that will lead us to the goal. Nothing will seem impossible for us then.
Friday, January 2, 2009
Financial Planning Process – Finding a Financial Advisor for Accountability
I have a great dream and vision for my life, that is build a profitable business and a charitable foundation to help the lost, sick, poor and needy patients in their healing process. But I can never accomplish this vision by myself. I need to partner with like-minded people to achieve the goal. I need not only partners, but also good mentors to lead and guide me to fulfill my purpose so that I am effective and strategic in the endeavors I undertake.
Similarly, all of us need life mentors and partners around us to achieve our goal in life. This also applies to our financial life and goals. Many times, we set out to achieve a targeted financial goal, for example, to accumulate enough for our dream wedding, dream house, dream car, dream lifestyle and dream retirement. But as the days go by, we find ourselves falling short in our financial resources and have to lower our expectations. Eventually, we look at our current resources and let it decide the kind of lifestyle we can have, rather than looking at our desired lifestyle and finding strategies to achieve it. I believe many of us do plan for our desired lifestyle, just that we have distractions along the way, and lack of self discipline to stick to the plan. I also believe that the key to the solution is this, Accountability.
In our country, Singapore, I think many people have the perception that ‘financial advisors’ are essentially insurance agents, doing up a financial plan for clients and eventually recommending an insurance policy. Financial advisors can be from insurance companies, banks and also independent financial advisory firms. In my opinion, most financial advisors are remunerated by commission, which is tied to how many products they sell for their company, resulting in the focus on selling their company’s products, as their livelihood depends on it. However, there are also some advisors who are fee-based, and may be based on per hour of consultation or by the amount of planning work that needs to be done. This kind of fee structure is currently more established in the Western countries, and I believe Singapore is also heading towards that direction and also other Asian countries in time to come.
So what exactly is the role and value of a financial advisor, other than recommending financial instruments? Besides understanding your financial goals, knowing your risk profile, establishing a written plan, recommending suitable instruments and periodically review your roadmap, I believe the key value of a financial advisor is to be an accountability partner. Let us better understand how a competent financial advisor can add value to your financial success.
Understanding your financial goals
First of all, your financial advisor must be someone you trust. There must be a good relationship to begin with and trust is the foundation of all relationships. You must be comfortable with your advisor so that you can share without restrictions about your heartfelt dreams for your future. An advisor is also akin to a counselor, and should be a good listener, to understand heartfelt concerns which may require the advisor to ‘read beyond the lines’. A good advisor should inspire and encourage you to achieve your maximum potential, but also realistic in your situation. For example, if the client wants to achieve $5 million in 5 years so that he can be financially independent, the advisor must be able to manage the client’s expectations, so that the client has a reasonable expectation of what can be achieved and how.
Knowing your risk profile
You may find it surprising, but I feel that many of us, including myself, do not actually know ourselves very well, especially in the area of taking risks. We may feel that we are risk takers, mainly because we like fast cars, like action movies, and live for the thrill of the moment. However, when it comes to money matters and investments, once the markets drops 30%, we may start to have stomach cramps and unable to sleep at night. Therefore, it is important that the advisor ask good questions to discover your true risk appetite when it comes to money. Risk profiling is not just filling up a questionnaire and signing off. Rather, it is really asking personal questions with regards to real life situations and listening to the client’s response. For example, the client may like sky diving, and wants to double his money in 2 years, so that he can start a business. However, he has limited funds and needs to take care of his sick mother, as he is the only child. Can he invest all his money into a high risk instrument that can either double his money in 2 years, or lose 50% of his funds? A good advisor must keep things in perspective and advise the client for his welfare, rather than grabbing at every opportunity to invest the client’s money for commissions.
Establishing a written plan and recommending suitable instruments
The advisor, after understanding your goals and knowing your true risk profile with regards to money matters, will then proceed to formulate a plan and strategy to achieve your goals. Strategy formulation will be an important part of the financial planning process and you may wish to enquire about the experience and credentials of the financial planner you are working with. A good credential in the financial planning industry will be the Certified Financial Planner (CFP) designation. A good strategy will mean that needs will be prioritized, the risk that the client needs to undertake will be suitable for him, he has realistic expectations on the goal that he will be set to achieve, and financial resources will be effectively utilized.
After the plan is in place, the advisor will usually recommend some financial instruments that will help the client achieve his goals. These instruments will be either equities for wealth accumulation, bonds for wealth preservation, insurance plans for wealth protection or estate trusts for wealth distribution. The list is not exhaustive, and the advisor can use creative ways to help the client grow their wealth efficiently. In my opinion, a great asset and value that the advisor can provide is their network of contacts. Usually advisors are relational people and they have friends who are professionals and business people in other fields of work. The advisor is able to link up their clients with people who are seeking opportunities to people who have the opportunity. Like the famous Robert Kyosaki said, “The poor look for work, while the rich look for network.” Indeed, a person’s network may well determine his net worth.
Periodic review and Accountability
The financial plan and recommendations will usually take about 2 weeks to complete, but a good advisor usually partners the client for their whole financial life. This is because our financial life is so dynamic and events happen which can affect our financial situation and future, which we need a professional advisor who understands our situation will enough to advice on the right decisions. An advisor is like a doctor. If you have a chronic illness, would you like to go to a hospital that keeps changing doctors such that when you visit, you have to repeat your whole medical history to him? Or would you rather go to your family physician who knows your condition so well that you are confident with the decisions he makes are for your absolute welfare? I believe the answer is obvious.
Not only an advisor is like a doctor who is mandated to conduct periodic reviews, either half yearly or annual reviews, he is also an accountability partner to the client. In this aspect, commitment is required from both parties. I believe nobody wants to fail in achieving their intended goals in life, however, temptations are at every corner, distracting us from the course to success. And one of the reason people usually get into trouble, including financial ones, is that they don’t have to answer to anyone in their lives. They have blind spots which they think they can handle on their own. Accountability is the answer to these problems.
Financial accountability is to be regularly answerable in the financial area of our lives to qualified people. We need to give an accurate report, on how we are progressing towards our financial goals. If it is not progressing well, what is the issue at hand? These are tough questions, and the road to success is never easy and most times there is a price to pay, and that is discipline and some good pressure from our accountability partner regularly. It should not be sporadic or an ad-hoc basis. Therefore regular reviews are necessary to keep the accountability in check. I will recommend quarterly for a portfolio review and semi-annually for a full financial plan review. Qualified people will be people you trust and respect in the area of finance and wealth management. And who is more trusted in respected in the realm of your personal finance than your own financial advisor?
In conclusion, I believe the missing link as to why some people succeed beautifully in achieving their financial life dreams is because of accountability and discipline. We need to be disciplined daily to make the right decisions towards our financial success and have someone we respect, ideally our trusted financial advisor, to hold us accountable to the financial goals we have set for ourselves and our family.
Set out to find a trusted financial advisor and accountability partner today. Kick start your way to a roaring financial success. I believe we can all live the dream lifestyle we desire for ourselves and our family in the future, when we make the right decisions everyday.
Similarly, all of us need life mentors and partners around us to achieve our goal in life. This also applies to our financial life and goals. Many times, we set out to achieve a targeted financial goal, for example, to accumulate enough for our dream wedding, dream house, dream car, dream lifestyle and dream retirement. But as the days go by, we find ourselves falling short in our financial resources and have to lower our expectations. Eventually, we look at our current resources and let it decide the kind of lifestyle we can have, rather than looking at our desired lifestyle and finding strategies to achieve it. I believe many of us do plan for our desired lifestyle, just that we have distractions along the way, and lack of self discipline to stick to the plan. I also believe that the key to the solution is this, Accountability.
In our country, Singapore, I think many people have the perception that ‘financial advisors’ are essentially insurance agents, doing up a financial plan for clients and eventually recommending an insurance policy. Financial advisors can be from insurance companies, banks and also independent financial advisory firms. In my opinion, most financial advisors are remunerated by commission, which is tied to how many products they sell for their company, resulting in the focus on selling their company’s products, as their livelihood depends on it. However, there are also some advisors who are fee-based, and may be based on per hour of consultation or by the amount of planning work that needs to be done. This kind of fee structure is currently more established in the Western countries, and I believe Singapore is also heading towards that direction and also other Asian countries in time to come.
So what exactly is the role and value of a financial advisor, other than recommending financial instruments? Besides understanding your financial goals, knowing your risk profile, establishing a written plan, recommending suitable instruments and periodically review your roadmap, I believe the key value of a financial advisor is to be an accountability partner. Let us better understand how a competent financial advisor can add value to your financial success.
Understanding your financial goals
First of all, your financial advisor must be someone you trust. There must be a good relationship to begin with and trust is the foundation of all relationships. You must be comfortable with your advisor so that you can share without restrictions about your heartfelt dreams for your future. An advisor is also akin to a counselor, and should be a good listener, to understand heartfelt concerns which may require the advisor to ‘read beyond the lines’. A good advisor should inspire and encourage you to achieve your maximum potential, but also realistic in your situation. For example, if the client wants to achieve $5 million in 5 years so that he can be financially independent, the advisor must be able to manage the client’s expectations, so that the client has a reasonable expectation of what can be achieved and how.
Knowing your risk profile
You may find it surprising, but I feel that many of us, including myself, do not actually know ourselves very well, especially in the area of taking risks. We may feel that we are risk takers, mainly because we like fast cars, like action movies, and live for the thrill of the moment. However, when it comes to money matters and investments, once the markets drops 30%, we may start to have stomach cramps and unable to sleep at night. Therefore, it is important that the advisor ask good questions to discover your true risk appetite when it comes to money. Risk profiling is not just filling up a questionnaire and signing off. Rather, it is really asking personal questions with regards to real life situations and listening to the client’s response. For example, the client may like sky diving, and wants to double his money in 2 years, so that he can start a business. However, he has limited funds and needs to take care of his sick mother, as he is the only child. Can he invest all his money into a high risk instrument that can either double his money in 2 years, or lose 50% of his funds? A good advisor must keep things in perspective and advise the client for his welfare, rather than grabbing at every opportunity to invest the client’s money for commissions.
Establishing a written plan and recommending suitable instruments
The advisor, after understanding your goals and knowing your true risk profile with regards to money matters, will then proceed to formulate a plan and strategy to achieve your goals. Strategy formulation will be an important part of the financial planning process and you may wish to enquire about the experience and credentials of the financial planner you are working with. A good credential in the financial planning industry will be the Certified Financial Planner (CFP) designation. A good strategy will mean that needs will be prioritized, the risk that the client needs to undertake will be suitable for him, he has realistic expectations on the goal that he will be set to achieve, and financial resources will be effectively utilized.
After the plan is in place, the advisor will usually recommend some financial instruments that will help the client achieve his goals. These instruments will be either equities for wealth accumulation, bonds for wealth preservation, insurance plans for wealth protection or estate trusts for wealth distribution. The list is not exhaustive, and the advisor can use creative ways to help the client grow their wealth efficiently. In my opinion, a great asset and value that the advisor can provide is their network of contacts. Usually advisors are relational people and they have friends who are professionals and business people in other fields of work. The advisor is able to link up their clients with people who are seeking opportunities to people who have the opportunity. Like the famous Robert Kyosaki said, “The poor look for work, while the rich look for network.” Indeed, a person’s network may well determine his net worth.
Periodic review and Accountability
The financial plan and recommendations will usually take about 2 weeks to complete, but a good advisor usually partners the client for their whole financial life. This is because our financial life is so dynamic and events happen which can affect our financial situation and future, which we need a professional advisor who understands our situation will enough to advice on the right decisions. An advisor is like a doctor. If you have a chronic illness, would you like to go to a hospital that keeps changing doctors such that when you visit, you have to repeat your whole medical history to him? Or would you rather go to your family physician who knows your condition so well that you are confident with the decisions he makes are for your absolute welfare? I believe the answer is obvious.
Not only an advisor is like a doctor who is mandated to conduct periodic reviews, either half yearly or annual reviews, he is also an accountability partner to the client. In this aspect, commitment is required from both parties. I believe nobody wants to fail in achieving their intended goals in life, however, temptations are at every corner, distracting us from the course to success. And one of the reason people usually get into trouble, including financial ones, is that they don’t have to answer to anyone in their lives. They have blind spots which they think they can handle on their own. Accountability is the answer to these problems.
Financial accountability is to be regularly answerable in the financial area of our lives to qualified people. We need to give an accurate report, on how we are progressing towards our financial goals. If it is not progressing well, what is the issue at hand? These are tough questions, and the road to success is never easy and most times there is a price to pay, and that is discipline and some good pressure from our accountability partner regularly. It should not be sporadic or an ad-hoc basis. Therefore regular reviews are necessary to keep the accountability in check. I will recommend quarterly for a portfolio review and semi-annually for a full financial plan review. Qualified people will be people you trust and respect in the area of finance and wealth management. And who is more trusted in respected in the realm of your personal finance than your own financial advisor?
In conclusion, I believe the missing link as to why some people succeed beautifully in achieving their financial life dreams is because of accountability and discipline. We need to be disciplined daily to make the right decisions towards our financial success and have someone we respect, ideally our trusted financial advisor, to hold us accountable to the financial goals we have set for ourselves and our family.
Set out to find a trusted financial advisor and accountability partner today. Kick start your way to a roaring financial success. I believe we can all live the dream lifestyle we desire for ourselves and our family in the future, when we make the right decisions everyday.
Making Money – Being Entrepreneurial!
I believe everyone is born entrepreneurial. Do you believe it? Notice that I did not use the word entrepreneur, which means someone who organizes a business venture and assumes the risk for it, but rather ‘entrepreneurial’. You do not need to be an entrepreneur to exhibit entrepreneurship. Many people are employees working for an organization and yet exhibit tremendous entrepreneurship qualities in their daily work. These people are usually high flyers and you can identify them quite easily. They exhibit passion and enthusiasm in their work, usually expressing conviction and high levels of commitment in their areas of competence. In simple terms, they carry the Wealth Blueprint, and these are the qualities that entrepreneurs and entrepreneurial people possess. Many people say that entrepreneurs are born rather than made, but is this statement really true? Some very successful entrepreneurs are indeed born with the charisma and leadership qualities, e.g., Richard Branson of Virgin Group. In his biography, one can see that he has an influence on people ever since he was a child. But there are also some entrepreneurs who are ‘forced’ into starting businesses because of poverty stricken childhoods and became very successful in the end. So what are the common qualities which made these people different from the rest and can these qualities be learnt and applied for anyone who desires that level of success? We have all learnt this in the Wealth Blueprint.
After installing the Wealth Blueprint in our minds and hearts, it is time to apply it in the area of financial wealth. First of all, to make money, we need to create value. In other words, we need to serve the needs of other people and society. And we need to do it well. Doing something well also means that we have to do something that we are good at, naturally gifted in, and develop it into a skill. For example, you make be very good with people and love communicating. You may wish to pursue a career in sales and marketing. Or you may be a genius at numbers, but may fall short in your languages and communication ability. You may want to excel as an analyst or careers which require numeric ability.
Recently, I came across this book called ‘Billionaire in Training’ by Bradley J. Sugars, and I find it to be a simple, yet powerful book. The following ideas are what I have gathered from his book and some of my personal thoughts…
Usually, our first pot of gold comes from working in a company as an employee and building our capital. Acquiring knowledge and developing our skills is also an important part in this phase. This period is Phase 1. Most people will be financially contented to pursue a corporate career and climb the corporate ladder. The limitation of this phase as an employed is the income ceiling. Although some remuneration packages of high flyer employees are very rewarding, still there is a ceiling to the amount of money that we can make. Also, there are other risk factors, such as retrenchment, less freedom in time management, and others. However, one can still be very successful and wealthy working for a corporate company, and if the individual possesses entrepreneurial qualities, it will be certain that the company will pay a premium for the valued individual.
Some employees, having earned their capital and acquired sufficient knowledge and expertise, may decide to start a venture on their own. This period is Phase 2. They have the desire to be in control of their own time and their own destiny. However, there are also a different set of risks at a self employed level. They face business risk and the risk of bankruptcy if the business fails. Also, they will need to learn new skills, such as sales and marketing, negotiation and team building. This the time when they will learn to set up a working system for their sole proprietorship. Once the volume of business reaches a certain level which they cannot handle on their own, they will proceed to Phase 3.
Phase 3 is the time when the self employed has a system established and starts hiring people to handle the volume of business. He is now a manager, and his main job is to motivate his staff and recruit good team players for his business. Human resource management will then be his main skill set. He will still be overseeing the operations of the business and its day to day affairs. He is now at a phase where he is training competent people to run the business so that he can take a back seat and have a more strategic vision for his business.
Phase 4 is when the manager becomes the director of the business, leading his team towards the vision mapped out for the company. He is now the owner of the business and is no longer involved in the day to day management of the business. Rather, his team of competent staff will take over and be managed by a ‘General Manager’, whilst he is the ‘Director’ of the company. Now, having amassed his wealth through his hard work, he can start to really invest in business opportunities to expand his business and may even diversify into other industries.
Phase 5 is a very exciting time when the business owner start to pioneer new initiatives in his company, and venture into new areas in the current industry or even other industries. For example, a Chinese restaurant owner may start a chain of restaurants selling Thai food, Japanese food, etc. Or the business owner may enter a totally different industry, such as the entertainment industry. Which strategy and direction the business owner undertakes depends on many factors, such as network, opportunities, capital funding, experience, confidence in new industries, etc. They may also buy existing companies and develop them, and later on sell them for a profit. Usually, the business owner already have strong business acumen acquired over the years from building his company from scratch and can easily develop an ailing business into a profitable business, which he can sell at a premium. He is now an investor in businesses and venture capitalist.
Phase 6 is usually the most advanced stage of wealth accumulation and entrepreneurship. The investor of companies will then take his companies public and list it on the stock exchange. He will then have an investment holding company to hold the shares of these companies. By publicly listing or floating his companies, the investor is selling the shares of his companies on a national scale or even a global scale. This allows the rich entrepreneur to multiply his wealth many times over. Although the entrepreneur has relinquished most of his control over the companies to the shareholders, he could still retain a certain level of control via his investment holding company, which owns the majority of the shares of the companies. The companies that the entrepreneur has build over the years has become his investment vehicles, and he is no longer running the businesses, and he is now profiting by monitoring the companies’ share prices in the stock market.
Therefore, in my opinion, every individual has the opportunity and potential within to acquire great wealth. It all starts with having the correct values, the Wealth Blueprint, and knowing your passion, talents, and developing them into a skill to add value to others. Whether the individual is at Phase 1 or proceeds to other phases really depends on the lifestyle that the individual desires for himself, and also his risk tolerance level. Moving into other phases requires the individual to take certain calculated risks, and the financial reward is also proportionate to the level of risk he is taking. That is the reason there are always different people in the different phases, as every individual has the power to choose his desired lifestyle and career path for himself.
After installing the Wealth Blueprint in our minds and hearts, it is time to apply it in the area of financial wealth. First of all, to make money, we need to create value. In other words, we need to serve the needs of other people and society. And we need to do it well. Doing something well also means that we have to do something that we are good at, naturally gifted in, and develop it into a skill. For example, you make be very good with people and love communicating. You may wish to pursue a career in sales and marketing. Or you may be a genius at numbers, but may fall short in your languages and communication ability. You may want to excel as an analyst or careers which require numeric ability.
Recently, I came across this book called ‘Billionaire in Training’ by Bradley J. Sugars, and I find it to be a simple, yet powerful book. The following ideas are what I have gathered from his book and some of my personal thoughts…
Usually, our first pot of gold comes from working in a company as an employee and building our capital. Acquiring knowledge and developing our skills is also an important part in this phase. This period is Phase 1. Most people will be financially contented to pursue a corporate career and climb the corporate ladder. The limitation of this phase as an employed is the income ceiling. Although some remuneration packages of high flyer employees are very rewarding, still there is a ceiling to the amount of money that we can make. Also, there are other risk factors, such as retrenchment, less freedom in time management, and others. However, one can still be very successful and wealthy working for a corporate company, and if the individual possesses entrepreneurial qualities, it will be certain that the company will pay a premium for the valued individual.
Some employees, having earned their capital and acquired sufficient knowledge and expertise, may decide to start a venture on their own. This period is Phase 2. They have the desire to be in control of their own time and their own destiny. However, there are also a different set of risks at a self employed level. They face business risk and the risk of bankruptcy if the business fails. Also, they will need to learn new skills, such as sales and marketing, negotiation and team building. This the time when they will learn to set up a working system for their sole proprietorship. Once the volume of business reaches a certain level which they cannot handle on their own, they will proceed to Phase 3.
Phase 3 is the time when the self employed has a system established and starts hiring people to handle the volume of business. He is now a manager, and his main job is to motivate his staff and recruit good team players for his business. Human resource management will then be his main skill set. He will still be overseeing the operations of the business and its day to day affairs. He is now at a phase where he is training competent people to run the business so that he can take a back seat and have a more strategic vision for his business.
Phase 4 is when the manager becomes the director of the business, leading his team towards the vision mapped out for the company. He is now the owner of the business and is no longer involved in the day to day management of the business. Rather, his team of competent staff will take over and be managed by a ‘General Manager’, whilst he is the ‘Director’ of the company. Now, having amassed his wealth through his hard work, he can start to really invest in business opportunities to expand his business and may even diversify into other industries.
Phase 5 is a very exciting time when the business owner start to pioneer new initiatives in his company, and venture into new areas in the current industry or even other industries. For example, a Chinese restaurant owner may start a chain of restaurants selling Thai food, Japanese food, etc. Or the business owner may enter a totally different industry, such as the entertainment industry. Which strategy and direction the business owner undertakes depends on many factors, such as network, opportunities, capital funding, experience, confidence in new industries, etc. They may also buy existing companies and develop them, and later on sell them for a profit. Usually, the business owner already have strong business acumen acquired over the years from building his company from scratch and can easily develop an ailing business into a profitable business, which he can sell at a premium. He is now an investor in businesses and venture capitalist.
Phase 6 is usually the most advanced stage of wealth accumulation and entrepreneurship. The investor of companies will then take his companies public and list it on the stock exchange. He will then have an investment holding company to hold the shares of these companies. By publicly listing or floating his companies, the investor is selling the shares of his companies on a national scale or even a global scale. This allows the rich entrepreneur to multiply his wealth many times over. Although the entrepreneur has relinquished most of his control over the companies to the shareholders, he could still retain a certain level of control via his investment holding company, which owns the majority of the shares of the companies. The companies that the entrepreneur has build over the years has become his investment vehicles, and he is no longer running the businesses, and he is now profiting by monitoring the companies’ share prices in the stock market.
Therefore, in my opinion, every individual has the opportunity and potential within to acquire great wealth. It all starts with having the correct values, the Wealth Blueprint, and knowing your passion, talents, and developing them into a skill to add value to others. Whether the individual is at Phase 1 or proceeds to other phases really depends on the lifestyle that the individual desires for himself, and also his risk tolerance level. Moving into other phases requires the individual to take certain calculated risks, and the financial reward is also proportionate to the level of risk he is taking. That is the reason there are always different people in the different phases, as every individual has the power to choose his desired lifestyle and career path for himself.
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