Why should you start investing early?

The most precious commodity in the world is time. Everyone has finite time. We cannot buy nor sell time. We only can make use of what we have to make the best out of it. So why should you “waste” your precious time away to invest.

My answer: If you don’t put in the hard work today when you are young, capable, how can you make sure that the future, older you will do it for the even future and older you?

We will always put out excuses to stop ourselves from starting. Have you told yourself something similar before?

“I’m not earning money yet”

“Investing is too hard to understanding”

“I still have a lot of time, I will start when I’m working”

You see, it’s never a good time to start. There will never be one. We should just START. Take that leap of faith and go into it. This is because, once you start it is easier for you to correct yourself on the way and learn from your mistakes. Mistakes can help you find the correct eventually as long as we persevere. There are also 5 main reasons why you should begin today:

Power of inflation

Remember the time when a bowl of fishball noodles cost $0.50 at your primary school canteen? Or the time when a cup of iced milo costs $0.80? Well we don’t see that anymore and that is largely due to inflation. Inflation simply means that over time our money erodes in value and we can buy less things with the same $10 in the future.

The scary thing about inflation is, it slowly eats our money away. If you have $1000 in a bank account today that gives you 0.5% interest, with inflation rate at 2%, you are losing -1.5% every year simply by putting your money in a bank account doing nothing. Your $1000 today will become $860 in 10 years time.

The aim of investing should minimally beat inflation so that our purchasing power or the value of our money do not get eroded. 

Power of time value of money

$1 today is worth more than $1 tomorrow. If today you have won TOTO of $1,000,000 dollars and you have two options (1) Receiving the money today or (2) Receiving the money in a year’s time, how would you choose?

If you said you wish to receive the money today, you have made the correct choice. Not because you can spend it immediately but because you can deposit this $1,000,000 dollars into a fixed deposit that give you 1% return in a year, and after a year you will receive $1.01 million, $10,000 more than what you would have. Time plays a huge role in the investing game.

The more time you have, the more you are able to convert time into money. 

Power of compounding

Compound interest is an interesting concept in growing our money. If you deposit $1,000,000 today at a bank that gives you 1% interest this is how it will play out. 1% interest = $10,000

Year 0: $1,000,000

Year 1:

$1,000,000 (Principal)

+ $10,000 (Interest)

= $1,010,000

Year 2:

$1,000,000 (Principal)

+ $10,000 (Interest)

+ $10,000(Interest) + $100 (Interest on Interest)

= $1,020,100

By compounding, you would have receive $1,020,100, $100 more interest because you have left the $10,000 from the first year untouched. Every time you do not touch the interest that was given to you and kept it in your bank account, you will receive more interest because (1) Interest was given to your original principal of $1,000,000 (2) Interest was given to the interest that was previously given to you.

Leave your money back into the investment vehicle, do nothing, and you will be rewarded even more money than what you would originally have. 

Power of education

Starting investing early does not mean that you will have to put in money immediately. You can always start by educating yourself. Nowadays, paper trading or paper investing has been made easy by several online platforms that offer you a way to start buying and selling stocks virtually. You do not have to fork out a single cent to use these platforms and practice – although I feel that you will only begin to learn more from the entire process if you have put in a small nominal amount, any amount that you are comfortable to lose. This is because when there is real money involved, you will feel more pain when you make a wrong decision. You will remember those mistakes more vividly and learn from them.

Investing is also not a one-size-fit-all process. How you invest depends on your personality, temperament, amount of time that you have and many other factors. This is a journey – the earlier you start, the better you can understand yourself and find a style that suits you.

Educating yourself adequately today can prepare yourself for more battles to come

Power of starting small

When you have a small capital you can make more mistakes and the impact is not as great as when you have a big capital. Imagine if you only start in your 30s with a $200,000 portfolio and zero knowledge in investing. One big mistake can hurt pretty bad as compared to having a $2,000 portfolio.

Making mistakes with a capital of that size is going to hurt. Why not just start small today and start making mistakes that you can avoid so that when you have a big capital in the future, you have use it to your advantage.

Losing an apple today is better than losing your entire farm tomorrow. 


Starting early gives you an advantage now for the problems later in life. You do not want to start figuring things out when you have other more pressing matters on your plate such as your career, your family or other commitments that need a lot of your time and attention. Do it when you are young and free, even if you are struggling to start. Start picking up a book, reading finance blogs, read about thoughts of people with similar struggles. You do not have to fight this battle alone, always know that you have somewhere to fall back on in the personal finance community and that there is someone who faced the same issues and have found a way to solve. Actively seek advice from people on tips of how to manage your own money, and apply in a way that suits you the best. We can achieve more by sharing around the best practices that are available!

If I have seen further than others, it is by standing upon the shoulders of giants

 

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The Story of a Chick & a Chicken

There was a farmer who has a farm. In this farm there were many chickens. One day, a fox came and ate up all the chickens. The distraught farmer was very unhappy and but came to his senses eventually. He wants to rebuild his farm. So he took his remaining savings of $10 to the neighbouring farm and wish to rebuild his farm. The farmer from the neighbouring farm offered him two choices: (1) He will sell him a chicken at $10 or (2) He will sell him 5 chicks at $10.

The farmer thought to himself: If I buy the chicken, I will be able to get it lay eggs and sell those eggs for cash. I can accumulate the profits I got to rebuild my farm! But another idea struck in his head: If I buy the 5 chicks, I will be able to feed them, nurture them and care for them until they grow into fully grown chickens and sell those chickens at much higher prices than the eggs.

If you are the farmer, what would you do?

Generally to profit from a stock there are two ways, dividends or capital appreciation.

Dividends: The Eggs in the basket

Dividends are paid out by companies to reward their investors for holding their stocks.

Dividends are usually paid out with either cash or in other forms such as extra stocks. Not all companies pay out dividends. Mature companies pay more regular dividends than small cap companies because it is harder for them to reinvest their earnings into projects that are more profitable. Hence, it will be better if they pay out some of their earnings as dividends. On the contrary, smaller companies which are still growing rapidly need to reinvest their earnings into growing their company, thus usually they do not pay dividends.

Cash dividend is a dividend that a company pays out of its earnings, in cold hard cash.

Stock dividend is a dividend that a company pays out using additional stocks to shareholders.

Interim dividend is a dividend that is declared and approved by the board of directors of the company anytime during the year, before the full-year financial results are released.

Final dividend is a dividend that is declared and approved by the board of directors of the company after the full-year financial results is released. It is typically a cash dividend and the amount is higher than the interim dividend. This is because management is unsure of how much cash will be available at the end of the year to be distributed as dividends hence they will be more conservative when distributing interim dividends.

Liquidating dividend is a dividend that is paid not fully out of a company’s retained earnings but rather its current share capital. This is also known as the terminating dividend as the source of the dividends paid is not from the company’s profits. It is a negative sign as the company usually pay out liquidating dividends only when it is winding up.

Lesson: Mature chickens can periodically give you eggs that you can sell to receive income

Capital Appreciation: The Growing chicks

When companies earn profits, they reinvest them into the growth of the company. As the company expands into bigger companies, the value of the company increases. Investors will also be willing to offer higher prices for the higher value of the company, hence stock prices should increase. 

If you bought Apple shares at $22 at 1980 when it first IPO-ed, over the years Apple has reinvested its earnings back into its company. Today Apple is worth around $$113.95, a 417% increase from its IPO price! 

You buy at $22 and sell at $113.95, you would have realise a capital gain. 

Lesson: You grow the “chicks” into chickens and sell them off at a high price.

Choosing the method that suits you the best

Any strategy will encapsulate both aspects; buying dividend stocks will also allow the opportunity for capital gains, buying stocks for capital gain will sometimes reward investors with unexpected dividends.

Dividends provide a steady stream of income annually , while capital gains require time to materialise and grow even though it can potentially beat the returns that you get from dividends in the long run. 

How you determine your preferred strategy can also depend on your life stage. If you are a young, driven and energetic adult in your 20s, you can consider putting your money into stocks for capital appreciation as you have a longer investment horizon. This gives more time for your investments to bear fruit. Investing in dividend stocks with a low capital may be discouraging as the amount might be too little for you to feel that your investments are bearing fruit.  

If you are a middle-aged, experienced adult looking for other income streams to replace your working income, you can consider putting your money into stocks that pay regular dividends. With a substantial capital, the dividends paid out may be enough to cover part, if not the entire recurring expenses that you make every month. A $500,000 portfolio with a 3% dividend yield will give you $15,000 per year – which is $1250 a month that can pay for your phone bills, utilities and other fixed expenses that you incur every month. 

My personal opinion

Being in my 20s, I have the greatest advantage in investing – Time. I have the time to nurture the chicks into beautiful, fat chickens that I can sell at higher prices. I am more inclined in investing in stocks that will give me high capital gains as each stock is actually a business. Businesses grow and expand over time – like how Apple has grown from a company with market capitalisation of $1.778 billion in 1993 to $607.27 billion today. These stocks will also reward me with dividends, which is like a bonus as I will not expect the dividends to matter as much. 

A high dividend yield will not be substantial without a large enough capital. 3% on a $20,000 capital will only yield you $600 per year. I would rather focus my time and energy in growing my capital through capital appreciation. Once I have accumulated a large capital, perhaps the dividends will play a more important role in replacing my recurring expenses.

Let me know how you feel below!

Nov 2016 Portfolio Update

Current Portfolio Size: $26,025.37 (with a starting capital of $24,000)

Current YTD: 8.44% (with dividends)

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Purchases made during Nov
  1. Nil
Divestment during Nov
  1. Nil
Dividends collected during Nov
  1. Chemical Industries (Far East) Ltd (SGX:C05): $0.12 for 3600 units
  2. LTC Corporation (SGX:L17): $0.01 for 3700 units
  3. Wing Tai Holdings (SGX:W05): $0.03 for 1100 units
  4. Wing Tai Holdings (SGX: W05): $0.03 for 1100 units

Total Dividends Collected: $535.00


Benefits of diversification taking this place strongly this month. Even though I have a few individual stocks that are in the red currently, my overall portfolio is still in a healthy range in the green zone.

I currently hold 10 stocks, each representing approximately 10% of my stock portfolio.

This month, 3 stocks paid me dividends namely Chemical Industries (Far East) Ltd, LTC Corporation & Wing Tai Holdings. Chemical Industries Ltd surprised me a little with the exceptionally large dividend which represent a 21% gain at cost.

Hence, I decided to dive deeper to look at its recent report to see if I can find out where is this money coming from.

According to the latest half-yearly results of Chemical Industries (Far East) Ltd:

The Group is declaring a one-off interim special one-tier tax exempt dividend of 12 cents to return surplus cash to shareholders after taking into consideration the Group’s cash flow requirements for the next twelve months. This includes the repayment of the remaining S$7.240 million long-term bank loans in November 2016. After these payments, the Group continues to maintain a healthy cash position of about S$20.0 million for future deployment and opportunities.

This seems to be the reason why we are getting so much dividends back. In the same report, it is also mentioned that profitability has decreased due to loss of certain customers but liabilities also decreased due to repayment of short term loans. We can also expect revenue & profitability to decrease in FY17 due to poor economic conditions.

One more month till the first year anniversary of the start of my investing journey!

Cheers!

Personal Finance Planning Process (Part 3/3)

In Part 1 of Personal Finance Planning Process, we’ve discussed about Mr Rich, a hypothetical character that I have made up to help us understand our personal finances better – because some of us are just better with examples.

We have also discussed about some basic healthcare insurance needs that each of us to PROTECT our human capital, our sole “asset” that is able to help us generate income.

In Part 2, we’ve discussed about some of the wants and needs that Mr Rich has. And let’s be honest, most of his wants and needs are also our wants and needs! So we are not too different from him.

And we’ve also talked briefly about risk profile – the willingness and ability to take risks.

Finally, we are going to dive deeper *oh I love this phrase* into the last part of this Personal finance Planning Process: INVESTMENT STRATEGY.

Investment Strategy

Quick recap for those who have not read Part 2: Previously Mr Rich has listed down all his financial wants and needs such as a HDB flat, a second-hand car, his wedding, retirement expenses as well as his funeral expenses.

We have calculated that in order to achieve these goals given his current earning power and expenses, he would have to achieve a 3.76% return of his investments annually from today till when he turns 60 years old.

Well there are a couple of ways that he is able to achieve that but I am going to share with you something called the Strategic Asset Allocation.

Strategic Asset Allocation

Strategic Asset Allocation is a portfolio strategy that involves setting target allocations for various asset classes, then yearly rebalancing the portfolio to maintain these original allocations. Allocations can deviate due to differing returns from various assets. (Source: Investopedia)

Simply put it means, you buy different types of assets and allocate them a specific % for each asset in your overall portfolio accordingly based on your risk profile. The main point of Strategic Asset Allocation is to minimise volatility and maximise returns.

Generally, when bonds perform well, equities will not. By allocating both asset classes into your portfolio, the gains of one asset class will be offset by the other asset class, hence reducing the risk and provide a smoother return of investment.

There are 3 main types of asset classes that people should consider when forming a portfolio: Bonds, Equities and Cash Equivalents.

However, for more seasoned investors, they tend to include other financial products such as derivatives, forex, real estate, commodities, into their portfolio.

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Bonds 

Bonds are debt instruments in which an investor loans money to an entity (e.g. a company or the government) which borrows the funds for a defined period of time at a variable or fixed interest rate. (Source: Investopedia)

For example, the 10-year Singapore government bond is a type of bond that the government use to raise money to finance public projects.

In Singapore, you can consider buying a “ready-made” diversified portfolio of bonds: ABF Singapore Bond Index Fund, to include bonds in your portfolio.

Equities

Equities are stocks or any other securities representing an ownership interest. This may be in a private company (not publicly traded). (Source: Investopedia). It is derived by taking Total Assets minus Total Liabilities.   

Whenever you buy a stock like DBS or Singtel, you are actually owning their equity – you OWN DBS or Singtel just like how you own your camera when you buy it from the Great Singapore Sale last week. Equities are generally riskier than bonds.

In Singapore, you can consider buying a “ready-made” diversified portfolio of 30 blue-chip companies: STI Exchange Traded Fund, to add equities into your portfolio

Cash Equivalents

Cash Equivalents are investments securities that are for short-term investing and they have high credit quality and are highly liquid. These securities have a low-risk, low-return profile. There are five types of cash equivalents: Treasury bills, commercial paper, marketable securities, money market funds and short-term government bonds. (Source: Investopedia)

Sounds familiar? They are like your POSB Savings Account that give you 0.05% per annum or 1-year Singapore government treasury bills. Even the new Singapore Savings Bonds can be considered as cash equivalents as it is highly liquid.

In Singapore, you can consider depositing your money in high interest bank accounts such as OCBC 360 Account, UOB One Account, CIMB FastSaver Account, to generate higher returns for your cash holdings in your portfolio.

~ BACK TO OUR STORY of Mr Rich ~

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Mr Rich needs 3.76%

Mr Rich is a balanced investor

A balanced investor’s recommended strategic asset allocation will be..

45% in bonds, 45% in equities and 10% in cash equivalents

He should calculate the overall performance of his portfolio based on the annualised historical returns of the assets that he wishes to buy.

E.g. If Mr Rich buys the following:

ABF Singapore Bond Fund Index for bonds, 2.84% per annum since inception

STI ETF for equities, 10.29% per annum since inception

OCBC 360 Account that gives him 2.0% per annum

His portfolio returns will be (45% x 2.84%) + (45% x 10.29%) + (10% x 2.0%) = 6.1085% which exceeds his requirement of 3.76%.

However, past performance does not equate to future performance, so this is only a gauge that it is possible for him to get this portfolio return. 

Balancing his portfolio ever year based on Strategic Asset Allocation

Also, Mr Rich should relook at his portfolio and adjust accordingly every year.

For example, during next year, equities perform so well such that it represents 50%, he should sell the excess 5% in order to adjust it back to 45%. Similarly, when bonds underperform and represent 35% of his portfolio, he should buy more bonds to make up the difference to 45%. This, in essence, is what we call “Buy low, sell high”  – take advantage of the low prices to buy more and take profits when we are performing well.

A diversified portfolio is important for us to weather all kinds of storms because history as proven again and again that no single asset class will perform well every year. The performance of each asset class follows the business cycle – it’s just the natural way of how life is, we shouldn’t fight it but outsmart it.

However, if you are a person that would like to be in control there is also something else that we can tweak here to achieve better performance.

There are actually two ways that we can invest in these asset classes: Passively or Actively.

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Passive Investing 

Passive investing is a way to maximise returns by limiting the buying and selling action. The main idea is to reduce the transaction fees that are paid from frequent trading. This is because the more transactions you make, the more it will eat up your returns.

Passive investing tracks or mimics the performance of a particular index or portfolio. The most common way is to buy a ETF or a mutual fund.

In Singapore, the most common way that you can invest passively is by purchasing both STI Exchange Traded Fund & ABF Singapore Bond Index Fund to form a portfolio. They mimic the Straits Time Index & iBoxx ABF Singapore Bond Index respectively.

Straits Time Index is regarded as the benchmark of Singapore Stock Market, i.e. if you buy the STI ETF, you are buying the entire Singapore Stock Market

iBoxx ABF Singapore Bond Index is regarded as the benchmark of bonds issued by the Singapore government or its agencies, i.e. if you buy the ABF Singapore Bond Index Fund, you are buying the entire portfolio of bonds issued by the Singapore government and its agencies.

There are a few ways you can passively invest. You can open a POSB InvestSaver Account or POEMS Blue Chip Share Builder Plan (OCBC Blue Chip Investment Plan is excluded as it does not have ABF Singapore Bond Index Fund). Both allows you to invest in both STI ETF and ABF Singapore Bond Index fund. All you have to do is to set up the plan and every month, a fixed amount will transferred via GIRO to purchase the units.

Certain months, when the prices are high, you will be able to buy less units. When the prices are low, you will be able to buy more units. This is called Dollar Cost Averaging. For example you have invested $100 each month. This month, the price of each unit is $1, you can buy 100 units. Next month, the price of each unit increased to $1.20, you can only buy 83.33 units (~83 units).

Over time, you will accumulate units and the value of your investment will be the number of units you have at that time multiply by the future price of each unit. This strategy believes in the long term growth of the assets.

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Active Investing aka Stock Picking

Active investing is way to get short term gains through buying and selling of the assets. Active investors tend to monitor prices more frequently than passive investors. Typically, active investors seek short-term profits.

Famous investor Warren Buffett is an active investor. He does very in-depth research on the companies that he invests in and reads their annual report thoroughly before he invests. He invests in undervalued companies that eventually pays him off in the form of above-average returns when the value of these companies gets realised.

Passive Investing or Active Investing?

To determine which kind of investor you are, ask yourself these two questions.

Can I afford the time to do in-depth research of each stock that I wish to invest in? 

Do I have the confidence and skill to time the market and gain above-average returns than a typically investor?

If your answer is no for both questions, you fall under the category of passive investor. Just passively invest and you will be profitable in the long run. Focus your time and energy on other activities to increase your income such as self-development or starting a side gig to earn more income – this way you will have more money to invest in and your money will work harder for you.


AND THAT’S ALL FOLKS. The very basic-but-not-so-basic guide of Personal Finance Planning for people like me who was once very confused by all these terms but now am getting some clarity.

Do leave me a note or two about your thoughts on this series or basically anything about personal finance so that we can all learn together! Learning something new every day is something that I enjoy a lot as well :). And also if you like to read more about what I write, please subscribe.

Lastly, thank you for taking your precious time off in reading what I write. It really means a lot to me and it’s something that drives me! Thank you so much 🙂

Personal Finance Planning Process (Part 2/3)

Welcome to Part 2 of Personal Finance Planning Process, where if you have totally NO CLUE on how to plan out your finances, this may offer some answers for you! And again, I am no professional in this matter, so if you wish to seek professional advice, you may want to look for a professional financial planner to help you with that.

If you haven’t check out Part 1 of Personal Finance Planning Process, click here.

Without further ado, let’s get started!

Previously I talked about how personal finance planning is a 5-step process.

  1. Know your Client (KYC) – i.e. yourself
  2. Insurance – hedging human capital
  3. Goals & Needs
  4. Risk Profile
  5. Investment Strategy

In Part 1, I have covered 1. Know your Client (KYC) – i.e. yourself and 2. Insurance – hedging human capital. Today I will be covering 3. Goals & Needs and 4. Risk Profile.

Goals & Needs

Previously, we used a totally fictitious character, Mr Rich, as our case study. Today, we are going to continue his story.

Everyone has their own wants and needs, so does Mr Rich. Mr Rich wishes to buy his own house; Mr Rich wishes to buy his own car; Mr Rich wishes to get married; Mr Rich wishes to retire by the age of 60; Mr Rich wishes to travel the world once a year when he retires. These are not just Mr Rich’s wants – these are most of our wants as well.

However, how can an accountant earning just $4,000 get to do all that? Well he can, with proper financial planning of course!

Let’s list down all of Mr Rich’s wants in a chronological order in this timeline below

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Downpayment of a typical 4-Room BTO flat

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Based on HDB’s website, the average selling price of a 4-room flat in a non-mature estate with grants will cost around $200,000.

Mr Rich can opt for a HDB loan that means he would have to make a 10% downpayment of $20,000 for his new flat. Luckily, Mr Rich has been working for 2 years and has some money in his CPF-Ordinary Account to make the downpayment. Subsequent loan payments can be made using CPF as well. Hence he will opt for the following at the age of 30:

CPF-OA: $15,000

Cash: $5,000

Average cost of marriage

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Mr Rich plans to get married by the age of 30. He will be setting aside $30,000 for the the entire wedding from the photoshoot to the wedding banquet that his traditional parents would love if he has it. This is the extra amount that he has to fork out after collecting all the ang baos that his generous guests will give on his big day.

2nd-handed car downpayment

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For his first car at the age of 32, Mr Rich would like to get a second-hand car with a remaining COE period of 2 years. This will cost roughly $25,000. The upfront payment he would have to make will be 30% downpayment + insurance + first instalment + transfer fee = $9,500

Retirement expenses per month

Mr Rich is a frugal man and thinks that he will require $3,000 per month after he retires to sustain his lifestyle. $3,000 is enough for him to live comfortably and to go down to his favourite restaurant every now and then and for him to enjoy his daily coffee at the kopitiam near his place – provided that it will still be around by then.

Travel Expenses per year

Travelling the world is on his bucket list. Mr Rich aims to visit a different country every year after his retirement with his beloved wife. This is his definition of “living the retirement life”. He thinks that he will miss home terribly if he leaves Singapore for too long. Hence, he will only take these trips only once a year, with each adventure lasting for not more than two weeks. He is prepared to spend $4,000 to fulfil this wish every year.

Funeral Expenses at end of life

Death is inevitable. However, Mr Rich wishes to be self-sufficient and not rely on his family for his funeral expenses because he believes that the best financial gift that he can give them is to be financial independent himself. Hence, he has set aside $20,000 for his entire funeral expenses

If we do some calculations and projections, we can actually find out roughly how much returns should Mr Rich’s investment portfolio get every year:

Some assumptions that are made:

  1. Inflation = 2% per year
  2. Annual savings will be reduced to $12,000 due to car mortgages and increased insurance expenses.
  3. Annual income and expenses are constant

PV of Retirement & Travel Expenses & Retirement Expenses at age 60 = $667,516.76

That means Mr Rich would need a total of $667,516.76 by the time he turns 60 years old.

That means he will need 3.76% per year annualised in order to achieve his goals!

Now wait a minute, you mean he only needs 3.76% per year to achieve all his goals that he has set out AND pay for a flat AND get married AND plan for his retirement? Well, even though there are a lot of assumptions made, the answer is still yes! This is the power of starting to invest early and the magical concept called the time value of money!

Risk Profile

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Next, we need to understand what kind of investor Mr Rich is. There are 3 types of risk profiles:

Aggressive: An aggressive investor is prepared to accept higher risks in order to obtain greater investment returns with a potential to lose all or more of his capital

Balanced: A balance investor seeks a mixture of capital growth and regular income from his investments; prepared to accept moderate amounts of risks to earn more potential returns

Conservative: A conservative investor seek capital preservation and a safe regular income is a priority over capital growth.

There are also a few factors affecting each individual’s risk profile: Investment time frame, risk capital, investment experience.

Investment Time Frame

For a longer investment time frame, the risk tolerance should be higher as there is more room for aggressive investing. When the investment time frame is relatively short, the investor should be more conservative. That is why we are able to take on more risks when we are younger.

Risk Capital

This is the money that is available for investment, which should be the money that “you will not touch” and in excess of your normal spending and liabilities also known as net worth. The higher net worth you have, the more you are able to take risks. Also if the capital that you are risking is a small percentage of your overall net worth, you can also take more risks.

Investment Experience

Typically, seasoned investors are able to take more risks as they have been investing for quite some time. New investors should aim to preserve their capital and learn more before committing more.

Fortunately, there is a quantitative way to determine your risk profile. Below are two risk profile questionnaires from DBS Vickers (from page 11) & UOB Kay Lian (from page 5) to help their clients understand their risk profiles better. It is a set of 11 questions. Complete it and tabulate the score accordingly.

DBS Vickers Securities Customer Investment Profile

UOB Kay Lian Customer Investment Profile

Mr Rich completed both questionnaires and found out that he is a BALANCED INVESTOR. This means he seeks to have a mixture of capital growth and regular income from his investors. He is prepared to accept moderate amounts of risk to earn potential returns. He accepts that there is a real potential to lose at least part of his capital in seeking moderate returns. He understands that there will be, even in times of stability, occasional periods of volatility and risk of loss of capital.


Finally, in the next part of the series, I will be talking more about the Investment Strategy that Mr Rich should take to achieve his required returns in Part 3 of Personal Finance Planning Process.

Personal Finance Planning Process (Part 1/3)

We are a manifestation of a series of choices made by our past self. It is funny because I never expect myself to pick up finance in University. Everyone around me thought that I will be an engineer because of good grades in Math and Science during my secondary school days. The decision to study Banking & Finance was not an easy one because I came in with the expectation to study Marketing – a field where it seems more vibrant and energetic – something to my liking. However, I knew that I needed to capitalise on my edge of being student debt-free and having a decent sum of money to invest. Hence I made a big decision to study finance, with the objective to know more about personal finance and investing.

When I was in University, I took a wealth management module that taught us how to plan our personal finances. It opened my eyes and through this course I was enlightened on why we do certain things; such as why do we buy insurance, why do we invest, etc.

Hence, to consolidate my learning and to help my friends out there who have no idea why this is important, I will be writing a 3-part series of elaborating the entire process. Below is a summary of what I will talk about:

  1. Know your Client (KYC) – i.e. yourself
  2. Insurance – hedging human capital
  3. Goals & Needs
  4. Risk Profile
  5. Investment Strategy

I will be adapting some of the parts that I’ve learnt and use it in a way that suits my style better.

Know your Client (KYC) – Yourself!

First, conduct a personal profile for yourself of your finances. Create a balance sheet & your income statement. State your dependents and the relevant expenses that you incur on them.

Let’s go with this hypothetical person for example. Mr Rich’s personal profile is as such:

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His dependents are as such:

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Below are his personal balance sheet which states his assets and liabilities and his personal income statement that records his income and expenses.

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By consolidating these information, we can better understand Mr Rich’s cash flows, spending habits, and his net worth. The assumed data is simplified to focus on the process of planning your finances.

Insurance – hedging human capital

The purpose of health insurance is to hedge against unforeseen circumstances such as death, total/partial permanent disability, critical illnesses, or accidents. Simply put, it is to minimise the risk of you losing your earning potential. Insurance helps defray the cost of the treatment so that you do not have to put a huge dent in your savings or cash out your investments – which slows you down from achieving your financial goals. This concept also applies to general insurance such as car or home insurance – to cover for current and future expenses by paying a small premium compared to the the huge payment required due to unforeseen circumstances.

The question is not “Is insurance important?” but, “How much insurance is sufficient?”. In order to not buy more than what is needed, we have to calculate approximately how much coverage is suitable for Mr Rich.

First, we have to state his liabilities:

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As well as the expenses that he has to incur if he is unable to work

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Case 1:

Should anything happen to Mr Rich today i.e an accident resulting in Mr Rich’s inability to work, he would require $16,000 to pay off all his liabilities and a minimum of $1,730 ($2,230 – $500 from student loan) per month to pay for his living expenses.

Let’s also assume that he would require a further $800 for after-care services and related medical expenses. That will be a total of $2,530 per month or $30,360 per year

Assuming Mr Rich is still alive and has to incur these expenses for as long as he is alive, he has to have a coverage of at least $623,200

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This is assuming that he is unable to work at all and the returns from the investment portfolio is after inflation.

Case 2:

However, if he is able to earn at least $1,000 per month, he is able to reduce his insurance coverage to $382,200

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Case 3:

Assuming Mr Rich unfortunately passed away, his family will need $26,000 to pay off his existing liabilities (including $10,000 funeral expenses) and an additional $3,000 per month for 20 years to provide for his parents’ post-retirement expenses,

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For this case, it is assumed that his parents stop working after Mr Rich passes away. However, Mr Dad can still carry on driving his taxi and supplement the household with his income.


According to the 3 different cases presented, Mr Rich would require insurance plans with a coverage of approximately $750,000 for death, total permanent disability and critical illness. This lump sum could help defray expenses that he incurs in the future should he be unable to work.

I understand that the calculations may be a little simplistic, but it is the concept that is important! This only provides a rough estimate on how much coverage is needed so that we do not pay more premiums than what is needed. After all, we might not even need to use the insurance policies if we are healthy and well. The extra premiums from overpaying a policy that we do not need can be better utilised such as channelling it to our investments.

Do let me know if you have any thoughts about these calculations and if it makes sense thus far! Leave a comment or your thoughts below!

In the next post, I will be talking about step 3 & 4 – Goals & Needs as well as Risk Profile.

Gentle note: I am not a professional in this field, I am simply sharing what I’ve learnt. If you wish to seek professional advice regarding financial planning, please seek a certified financial planner for their advice.

Price is what you pay. Value is what you get.

Price is what you pay, value is what you get. Familiar? This is a famous quote by Warren Buffett.

The essence of this phrase is that you should never pay more than the value of a certain stock. If the value of a stock is worth $1.00, you’ll get a bargain if you pay anything below $1.00; and similarly you would have overpaid if you pay anything more than $1.00. Simple to understand? Yes it is. The challenge though, is giving an accurate valuation of the company that you will be owning. Some investors will measure the assets & liabilities that the company CURRENTLY has while some investors will forecast FUTURE earnings and get a valuation based on that. Either way, investors would have a magic number in their minds, known as the value of the company.

In fact, this theory applies to everything that happens to us in life.

Price is what you pay, value is what you get. How much are you willing pay for a 10-day trip to Taiwan? How much are you willing to pay for that 4-room BTO flat that you and your girlfriend intend to get? How much are you willing to pay for a good meal at a reputable Japanese restaurant over the weekend? How much are you willing to pay for a new GoPro Hero 5 or the new iPhone 7?

Well it depends.

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It is a good deal if the perceived value exceeds the price. This is called the consumer surplus – the difference between what consumers are willing to pay and what they actually pay.

The higher the perceived value of something we buy, the more willing we are to buy it. Value comes not only in tangible terms but also intangible terms. For people who travel often, these phrases may sound familiar to you:


“Travel while you are young and able. Don’t worry about money, just make it work. Experience is far more valuable than money will ever be”

“The greatest reward and luxury of travel is to be able to experience everyday things as if for the first time”

“Working makes you money. But travel makes you rich”

“Travel is the only thing that you can buy that makes you richer”


The value in travelling comes in the experiences that you have, the memories that you make during travelling. These are not physical assets; we can’t value them easily. If you value these intangibles highly, the more you are willing to pay for. Again, it is only a good deal if and only if you pay a price that is LOWER than the value of whatever you are buying.

Faced with limited resources that we have at our age, it is hard to prioritise how to spend our money wisely to maximise the TOTAL value we can derive from our money. How to maximise the “Value per dollar spent” to get best bang for your buck.

Will the $10,000 that you are going to spend on a student exchange maximise your value per dollar spent? Or perhaps spending the $10,000 on a car will do the trick? 

Ultimately, the decision is ours to pull the trigger to spend money in areas we feel that we should spend to make us happy. Some of us like to live in the moment, some of us like to plan for our future. My take is that we should ALWAYS live in the moment AND plan sufficiently for our future. How? I’ll leave it till next time 🙂