Buy China, emerging markets over 2 years, Marc Faber says

Buy China, emerging markets over 2 years, Marc Faber says
Monday, 16 March 2009 13:56

CHINA AND OTHER emerging markets offer value over the next two years as growth picks up, investor Marc Faber said.

Investors should buy stocks and other assets in China after the market falls to its 2008 low to profit from an expected recovery, Faber said in an interview with Bloomberg Television. China is the world’s best-performing stock market this year.

“Rapidly growing countries have setbacks from time to time,” Faber, the publisher of the Gloom, Boom & Doom report, said in Hong Kong. “I think we’re going to test the lows again, but over the next two years, it’s probably a good time to invest.”

The MSCI World Index has retreated 18% this year, extending last year’s record 42% slump, amid concern the widening financial crisis and global recession will sap corporate profits. The Shanghai Composite Index, which tracks the larger of China’s two mainland exchanges, has gained 16% in 2009.

China is betting that a 4 trillion yuan ($900 billion) stimulus package and interest-rate cuts will help it reach its 8% growth target this year. The global economy is expected to expand at a 0.5% expansion, according to the International Monetary Fund.

Industrial and precious metals are attractive investments after the Reuters/Jefferies CRB Index of 19 commodities “collapsed,” Faber added. The CRB Index has dropped 8% this year, adding to the 36% retreat in 2008.

“Asset markets have already discounted a lot of the bad economic news,” he said. “ Some assets like commodities are very, very inexpensive.”

Faber had advised buying gold at the start of its eight-year rally, when it traded for less than US$300 an ounce. The metal topped US$1,000 last year and traded at US$932.78 an ounce today. He also told investors to bail out of US stocks a week before the so-called Black Monday crash in 1987, according to his website.

He continues to favour gold, which has gained 19% in the past six months because currencies including the US dollar are “not desirable”.

Stock markets are “not particularly expensive” and investors should consider buying them in anticipation of a recovery, Faber advised. The MSCI global index is valued at 11 times reported earnings, half its 10-year average multiple of 22.

“We also have a lot of equities that are not particularly expensive because they’ve collapsed,” Faber said. “These are relatively sound companies and whenever the recovery will come, they will be in a strong position.”



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Last Updated on Thursday, 19 March 2009 13:01
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Will the G20 meeting help resolve the crisis?

Will the G20 meeting help resolve the crisis?
Saturday, 21 March 2009 23:23


THE G20, REPRESENTING 20 of the world’s most influential economies, is to hold a summit meeting early next month. There have been intensive preparations for this summit and hopes have been raised in financial markets that joint international action will be taken to halt the spread of the crisis and lay the foundations of recovery. Our view is that internationally co-ordinated policies are a vital part of the policies needed to bring this crisis to an end but investors should be realistic about what can be achieved at such international summits.


WHY INTERNATIONALLY CO-ORDINATED POLICIES ARE VITAL
The current global slowdown is the worst we have seen since the post-World War II global economic order was established in 1945. Moreover, the global crisis is unprecedented in the speed of the economic declines many countries are suffering, its geographic spread and the complexity of understanding and resolving its roots because of the new-fangled financial innovations which lie at the heart of the crisis. The scale and global nature of the crisis alone calls for joint action but there are other reasons why coordinated actions are needed to resolve the crisis:

First, substantial amounts of monetary stimulus are needed to kickstart a recovery. Yet, if some countries are far more aggressive in this area than others, then any recovery could be thrown off-track by currency turmoil. For example, if the US is prepared to literally print money to ease its way out of the crisis but the European Central Bank is not, then at some point, holders of US dollar assets are likely to lose confidence in the dollar and switch to the euro. Already, the Chinese — now the world’s largest holders of US dollar securities — have signalled their discomfort with the risks associated with the US dollar. Premier Wen Jiabao noted in an important speech to the National People’s Congress recently that he was quite “worried” about China’s investments in the US dollar.

Related to this is the fact that so far policy makers have not used one monetary tool that could prove to be highly potent — getting the International Monetary Fund (IMF) to issue new Special Drawing Rights(SDRs). The latter are a form of global money which the IMF, acting as a sort of global central bank, is allowed by its statutes to issue. Technically, if 85% of IMF voting shares opt to do so, the IMF can simply “print money” by allocating each IMF member country with new SDRs. For the past 30 years though, the US has opposed such SDR issues. It will require a highlevel agreement among the world’s top economies to allow an SDR issue to materialise, something which could be a strong positive for the world economy.

Second, the global crisis is widening. Several countries in eastern Europe stand on the brink of a crisis that could be as bad for them as the Asian financial crisis was bad for this part of the world. Hungary — one of the countries at risk — has estimated that US$230 billion ($350.5 billion) worth of aid is needed to contain this threat. Such massive rescue packages can only happen if there is joint agreement to share the burden of such aid.

Third, an important reason why trade flows have collapsed so precipitately is the disruption in trade finance. So far, individual or bilateral efforts to get trade finance flowing again have not worked. Here, too, international co-operation is crucial.

Fourth, we need global agreement on avoiding mutually damaging actions, of which two are critical:

There are increasing signs that, despite all the rhetoric about preserving world trade, many countries are resorting to disguised forms of trade distortion to protect their producers. If there is no firm resolve to prevent this spreading, we could still see the breakdown of free trade which most people agree is important to maintain global economic growth.

There is also a temptation for some countries to engage in competitive devaluations. Again, joint agreement is needed if to avoid this.


DON'T HOLD YOUR BREATH
So, can the G20 economic co-operation process deliver the results we want? Here is where we cannot be fully confident. There are several reasons why we need to be cautious.

First, the structure of the G20 is not amenable to quick decision-making. While it is supposed to be restricted to just 20 countries sitting around the table, in reality, the number of actual participants has soared in recent weeks. For example, while Indonesia is the Asean member in the G20, Thailand as the chairman of the Asean summit this year will reportedly be there to represent Asean. Similarly, other countries are being added, as are several international agencies. We understand there might now be 48 people sitting around the table, not just 20. That size does not make for easy or quick decision-making.

Second, there are fundamental disagreements which can at best be papered over, not fully resolved. We saw this with the recently concluded G20 finance ministers’ meeting. While the US was keen to secure agreement among all nations there for aggressive fiscal pump priming, there was not sufficient consensus on this, forcing the Americans to drop their demand that all countries commit themselves to fiscal stimulus equivalent to at least 2% of GDP.

Nevertheless, the G20 process is still useful. Bringing together key world leaders in this format will help ensure that some governments do not follow through with mutually damaging policies. So long as all these countries see themselves as having a stake in the G20 process they are bound to avoid the trade-destroying policies that led to the Great Depression of the 1930s. Not only will the G20 process help avoid bad policies, the sharing of experiences at such meetings can also help individual countries craft solutions to their national problems by learning from others.

Moreover, only such gatherings of a large number of countries can secure agreement on the way forward on some key areas — such as the expanded resources to be given to the IMF and other multilateral agencies such as the Asian Development Bank, an agreement that was the product of the G20 finance ministers’ meeting.

So, what is the bottom line? The good news is that multilateralism is alive — so we can almost certainly avoid the foolish mistakes of the past such as blatant protectionism. The bad news is that the decision-making process will not be speedy and that means that the bottom to the crisis is still some way off.

Manu Bhaskaran is a partner and member of the board of Centennial Group Inc, an economics consultancy

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British property not quite a bargain yet

British property not quite a bargain yet
Saturday, 21 March 2009 23:36

“YOU REALLY SHOULD buy a property in London if you’ve got some spare cash; they’re going for a song!” a Londoner friend said recently. Indeed, after years of a property boom that saw prices triple, the UK housing market has crashed following the global credit crunch, with average house prices having fallen about 20% from their peak and the bottom of the market yet to be seen.


Anecdotes of prices of some central London properties plunging 50% — estate agent Hamptons International cites a London property worth £1million in December 2007 going for £470,000 in January 2009 — have attracted interest from investors, particularly foreign buyers drawn by bargain prices and a weak sterling. Recent figures from Hamptons reveal that properties in prime central London saw a 20% increase in European buyers in 4Q2008 y-o-y, while 12% more European and American investors registered to purchase property in the rest of the country.

Foreign interest has resulted in some central London property prices bucking the trend. According to property website Primelocation.com, prices in Mayfair and Knightsbridge rose for the fourth consecutive month in February by 0.94%, compared with the 0.56% fall in southeast London and 1.83% drop in southwest London.

Investors should, however, be aware that there may be further downside. Analysts warn that prices are set to fall further as they have yet to reach their fair value. Comparing total house prices with economic output, RAB Capital’s Dhaval Joshi said in The Observer that house prices will need to fall by another 15% before they are fairly valued. MoneyWeek reports that the UK house price-to-earnings ratio is currently 4.8, compared with the long-run trend of between 3.5 and four times, and that prices should fall another 17% to 39% before hitting fair value. Numis Securities, however, thinks house prices could fall by as much as another 55% if the market over-corrects itself to the same extent as during the 1990s recession. It’s a scary figure but highly possible, given the worsening economic outlook.

UK housing sales have remained at their lowest level since 1978, with an average of 9.5 transactions per agency over the three months to February, according to the Royal Institution of Chartered Surveyors (RICS)’s latest UK housing market survey. The Guardian reports that London agents are experiencing the worst transaction levels, with only six properties sold per agency over the three months to February.

The slowdown in transactions, however, is not due to a lack of demand. The RICS survey found that new-buyer inquiries in London jumped to a two-year high in February, as chartered surveyors reported a 44% rise in new-buyer inquiries, up from 25% in January. There is, apparently, strong interest nationwide, particularly in London and the south of England. Some analysts, however, see this as just “window shopping”, and do not foresee these inquiries leading to a marked rise in actual sales any time soon.

The reason for poor sales is the lack of funding, as the availability of mortgages tightens due to the credit crunch and first time buyers struggle to cough up the higher deposit or downpayment required — this now averages 25% of the property price, a long way from the 0% to 5% during the good times.

The current rate of mortgage approvals is still less than half of what it was a year ago, even if it has levelled out to an average of 31,000 a month for the past six months, as reported by the BBC. Last week’s indications that the Financial Services Authority may consider limiting the size of home loans in future to protect people from borrowing too much will certainly not help matters.

Grim unemployment figures — Office for National Statistics data revealed last week that unemployment has risen to its highest level in 12 years with nearly 2.03 million jobless in the three months to January — also means that would-be buyers concerned about their jobs will be reluctant to commit to a house purchase. Expectations of a further fall in prices are also holding back buyers; as Guardian Money editor Patrick Collinson said in his housing price blog recently, no one in their right mind would sink their life savings into a property if they felt it was about to drop 20% in value.

Anecdotal evidence suggests the contrary in some situations, however. Location will always matter, as well as a lack of supply. A house-hunting friend in Cambridge recounts situations where several of her offers for family homes were quickly outbid. The offers were for homes in a village location near good schools: Very few such properties ever come up in the market.

In the meantime, investors eyeing lucrative rentals should watch out for falling rental rates in London, where the top-end rental property market has been hard hit by cutbacks on employees’ rental allowance and by an exodus of financial expats from the City. According to Primelocation.com, prime London letting prices have fallen for the 11th consecutive month in February, registering 13.7% lower than the same time last year. Stock levels are up 97% on last year, as house sellers unable to secure a good price resort to renting out their properties instead. More and more of these “unplandlords” are expected to enter the market as the property sales market is not expected to bounce back any time soon, adds property expert Sarah Beeny in the Evening Standard.

Investors with spare cash would do well to tread carefully and do their homework before responding to the siren call of bargain British property.

Lim Yin Foong was editor of Personal Money, a Malaysian personal finance magazine published by The Edge Communications, from 2001 to 2006. She is currently based in the UK.

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Safety and Risk: How do you define a perfect investment?

Millions buy stocks, bonds, or mutual funds, purchase real estate, or make similar investments. They all have reasons for investing their money. Some people want to supplement their retirement income when they reach age 65, while others want to become millionaires before age 40. Although each investor may have specific, individual goals for investing, all investors must consider a number of factors before choosing an investment alternative.

Safety and Risk

How do you define a perfect investment?

For most people, the perfect investment is one with no risk and above average returns. Unfortunately, the perfect investment does not exist, because of the relationship between safety and risk. The safety and risk factors are two sides of the same coin. Safety in an investment means minimal risk of loss. On the other hand, risk in an investment means a measure of uncertainty about the outcome.

Investments range from very safe to very risky.

At one end of the investment spectrum are very safe investments that attract conservative investors. Investments in this category include government bonds, certificates of deposit, and certain stocks, mutual funds, and corporate bonds. Real estate may also sometimes be very safe invesment.

At the other end of the investment spectrum are speculative investments. A speculative investment is a high-risk investment made in the hope of earning a relatively large profit in a short time. Such investments offer the possibility of larger dollar returns, but if they are unsuccessful, you may lose most or all of your initial investment. Speculative stocks, certain bonds, some mutual funds, some real estate, commodities, options, precious metals, precious stones, and collectibles are high-risk investments.

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Secrets of the ultra wealthy

2008/06/28

Business: Secrets of the ultra wealthy


MOST of personal finance books share the methods and approaches that you can use to manage wealth of average person.

If you happen to own more than average wealth or have more complex needs, you may not find all your answers in those books.

The book, Family Office: The Super Rich's Secret to Wealth Maximisation, shares with you the wealth management approach (Family Office) that was once the exclusive domain of ultra wealthy individuals and families in the world.

Family office is a physical office that is set up to manage the financial affairs of one family or more.

If the family office operates on a larger scale and caters for extremely wealthy families, it may be staffed by accountants, lawyers, investment advisers, bookkeepers, tax specialists, real estate specialists and even art curators.

John D. Rockefeller, Bill Gates, Michael Dell and many other super-rich have a dedicated family office to manage their personal wealth.

As a trusted adviser to some of Malaysia's richest entrepreneurs and chief executive officer for more than 10 years, Yap Ming Hui is a right person to write this book. He is the founder and managing director of Whitman Independent Advisors Sdn Bhd, a boutique firm that provides financial advisory services to high-net worth individuals and families in Malaysia.

Yap has had columns in the newspapers and has also written several books, including You Can't Manage Your Money ... Especially When You're Rich, Maximise What You've Got ... No Matter How Much You Have Now and MaxWealth: How To Maximise Your Wealth Beyond Investment Returns.

As the first book in Malaysia on the subject of family office, the book covers almost everything you need to know on the subject.

In addition to concepts and theories, this book also shares real-life examples of how different families in West have used family office to preserve and maximise their wealth for generations.

This book provides a good introduction to family office for those who are new to the concept. Readers will find it easy to relate as the author has used many Malaysian or Asian real life stories to illustrate his points.

This book is different from most personal finance book that teaches you how to make money and create wealth. It focuses on how to preserve and maximise the wealth that you have created.

Therefore, this book is a must-read for those who have worked hard to accumulate their wealth. Many wealthy families in Malaysia and Asia will be able to break the curse of "wealth doesn't last three generations" if they were to read and apply the ideas in the book.

Family Office is priced at RM49.90 and is available at all major bookstores.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2278689/Article

Family planning hinges on financial stability

Your Money: Family planning hinges on financial stability
By Yap Ming Hui

2008/11/01

AS a financial planner, I have seen many clients’ financial planning position greatly influenced by their family planning, that is, having children: how many, how frequent, how early and so on. Some clients plan the family carefully to match their financial planning. There are some whose financial planning position suffered due to their poor or lack of family planning.

In this article, I will look into the various aspects of family planning and how they affect one’s financial position.

How many children to have? There are some who love children; the more the merrier. Some of them talk about having as many as six children. The financial planning implications of having more children are obvious. The more children you have, the more financial resources need to be allocated to address their needs.

Nowadays, raising a child is not cheap. The expenses, other than feeding, include healthcare, medical expenses, pre-school mental development, clothing, private school fees, tuition fees, hobbies and leisure and many others.

As a result, more financial resources must be allocated for children’s maintenance and education. Hence you have less resources for other financial objectives, especially for your retirement planning.

Alternatively, you may limit your financial allocation for the children. Then, the financial resources allocated for each child would be diluted.

The third alternative is to work harder to accumulate more money.

Those who have more children would enjoy a merrier family life. This is especially important when one gets older. The atmosphere during festive occasion is much merrier with six children compared with one. You can also expect more financial support when you are retired, if necessary.

For those who choose to have a small family, you can channel more financial resources to your children.

The rule of the game is quality rather than quantity. At the same time, you can expect less financial burden from your children. However, you must be prepared to live a retirement life with less children for company.

How frequent to have children? Some people prefer to have children close to each other so the age difference between the children is small. Some would prefer to space out their children. There are advantages and disadvantages for both types of family planning.

In the first case, the couple have the advantage of finishing their duty as parents early.

For example, if you are married at the age of 28 and have your first child at 29, second at 30 and the third at 31, by the time your first child is 18 and ready to go to tertiary education, you are 47.

If he or she takes four year to complete the tertiary education, you will be 51 by the time your first child graduates from college and may not financially be dependent on you anymore.

By the time your last child reaches 18, you will be 49.

When the child graduates, you are only 53.

As a result, such a family planning allows you to enjoy your retirement with peace of mind. You do not have to worry about the cash flow needed to support your children’s tertiary education when you stop earning active income.

But everything comes with a price. This type of family planning will relatively give you more financial stress.

From financial planning point of view, you would have three series of cash flow overlapping each other.

Using the example of tertiary education expenses that stretch over a period of four years, by the time your third child enters college, your first and second child is still in college.

If each of the child’s annual tertiary education expenses is RM50,000, then you would have a total of RM150,000 (3 child x RM50,000) cash flow needs to meet in that year.

If you intend to have such family planning, it is important that you are aware and prepared for such financial challenges.

In the case of a couple planning to have their children’s age relatively farther, they have the advantage of performing their duty as parents in a less stressful manner.

For example, you are married at the age of 28. If you have your first child at 29, second at 33 and the third at 37, then by the time your first child is 18 and ready for tertiary education, you are 47.

You would be 51 by the time your first child graduates from college.

Your second child will only enter the college after your first child has graduated from the college and is not financially dependent on you.

Your second child will graduate when you are 55.

Only then your third child would start his or her tertiary education. By having this type of financial planning, you can space out your cash flow need so that it does not overlap each oth e r.

If your budget for each child’s annual tertiary education expense is RM50,000, you only need to plan for a cash flow need of RM50,000 in a year instead of RM150,000 as in the first scenario.

However, this type of family planning would require you to continue financing the children’s tertiary education expenses after 55. Using the same example, your third child would only complete his or her education when you are 58.

If you stop earning active income after 55, you will still need to worry about financial sources to fund the child’s education. As a result, you may not have complete peace of mind even though your have retired.

There is no perfect family planning from financial planning point of view. There are advantages and disadvantages under various alternatives. It is important for you to be aware of the different financial planning implications for different family planning.

You must search your soul and ask yourself which scenario you are comfortable with.

The worst case is letting your family planning take its natural course and not knowing its implications on your financial planning.


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© Copyright 2009 The New Straits Times Press (M) Berhad. All rights reserved.


http://www.nst.com.my/Current_News/NST/Sunday/Focus/20081101214646/Article/pppull_index_html

Making the correct assumptions

NST Online » Focus
2008/06/14

Business: Making the correct assumptions
By : Yap Ming Hui

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IN wealth management, you could go to three different wealth management advisers and get three completely different financial plans depending on the assumptions used in the calculations.

It boils down to the assumptions used by the wealth management advisers.

Some of the key assumptions that will result in the wide variations are: - The expected rate of return (ROI) - Rate of inflation - Marginal tax rate of the person - How long will the person live - The income the person needs to support his lifestyle in retirement


I will now highlight how different assumptions used can affect the amount required for a retirement nest egg.


Wong is 45 years old and earns RM100,000 per annum. He would like to retire at 55 and estimates that he is going to need 60 per cent of his current income (RM60,000, taking into consideration inflation value).


He would like to use two per cent as the rate of inflation and eight per cent as the rate of return.


Based on the above factors, he would need RM991,076 for his retirement by the age of 55. With this amount in place, Wong can afford to spend RM60,000 per year and finish spending his capital at the age of 80.


However, by varying the assumptions used, we can get different results.



Rate of inflation


If Wong used four per cent as the rate of inflation, then the retirement nest egg required would be RM1,465,771 instead of RM991,076.


With a difference of two per cent in rate of inflation, we have a difference of RM474,695 in the amount required for the retirement fund.


The rate of inflation experienced by any individual or family is basically dependent on two main components.


First is the basic inflation factor experienced by the general population. This rate of inflation can be projected by using the rate of consumer price index.


However, each individual and family also experiences an inflation that we term as life style inflation. Life style inflation basically refers to the inflation on those items consumed other than the common household items, for example the car, house to stay in and holiday package.


Since the different inflation rate will influence the end result of any wealth management, it is important to use a rate of inflation which is as accurate as possible.


In an era of high inflation, we need to review the assumed rate of inflation. Without adjusting the rate of inflation, you may under prepare your various financial goals.


Income needed to support retirement living


If Wong decides that 80 per cent rather than 60 per cent of his current income would be sufficient for him to enjoy a comfortable life style then he would need a retirement fund of RM1,321,435 instead of RM991,076.


With a difference of 20 per cent in the income needed for your retirement, we have a RM330,359 difference in retirement fund.


Undeniably, the figure will become more accurate as you get closer to retirement. There is a rule of thumb that suggests a person will need about 60 to 80 per cent of his pre-retirement income. To have a more accurate projection, you must continue to update the calculation as you get closer to retirement age.


How long will you live


Wong chose 80 years as his life expectancy for his retirement plan calculation. If he chooses to use 95 years, the retirement nest egg will change to RM1,166,515 from RM991,076.


It is obvious that the assumptions made on your life expectancy have a relatively smaller impact compared to the other assumptions. If you live longer than you have assumed, then you risk outliving your money.


Rate of return


When we use an eight per cent rate of return, Wong would need RM991,076 by the age of 55. If he were to assume that he could achieve 12 per cent rate of return, he would need RM730,280. With a four per cent difference in the estimated rate of return, we have a difference of RM260,796 in the retirement fund needed.


While you may want a higher rate of return, no one can guarantee what the financial market will earn eventually.


So what rate of return should be used in your financial plan? It should be the rate linked to the economic outlook, your personal asset portfolio mix, the inflation rate and the long-term historical rate of return for your investment asset, less management charges.


In order to have a more accurate financial plan, we must be cautious in deciding various assumptions used in wealth management calculation. Since the impact of using the wrong assumptions could be a financial disaster, you may want to confirm your assumptions with an independent wealth management professional.


In fact, a prudent practice would be to do more than one financial projections in each scenario so that you can see the impact of the different outcomes on your ability to achieve your financial goals.


One financial projection is certainly not enough, not when preparing a business plan, and not when doing a personal financial plan.


Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2265087/Article

Roadmap to financial freedom

Business/Your Money: Roadmap to financial freedom
By Yap Ming Hui

2009/03/08

IN my previous articles, I had discussed the five essential elements of financial freedom namely, spending, inflation, return on investment (ROI), time and saving. If you have knowledge of these elements it is good. However, knowing and understanding the five elements will not help you achieve financial freedom. Knowledge is only powerful when you apply it. Therefore, the challenge is to apply the knowledge of the five elements to your own real-life situation. Do you know how?

Let me share a real-life case study of Muthu. The following details of him:

- He is 36 years old and the wife is 34 years old

- He has two children age 8 and 5 now

- He works as senior manager in a multi-national corporation with RM120,000 annual income. His wife works as adminis-trative manager with RM100,000 annual income

- He has the following financial assets:

-- House: RM500,000 with RM250,000 mortgage loan

-- Unit Trust: RM30,000

-- Bank savings: RM200,000

-- EPF: RM200,000 (himself), RM150,000 (wife)

- He and his family is currently enjoying a life style of RM120,000 per year.

- He and his wife intend to retire at 55 with RM96,000 living expenses per year.

- They would like to provide RM200,000 each for their children's tertiary education.

Do you think Muthu will be able to achieve his financial freedom (assuming that he expects to live until the age of 80)?

Will he or will he not?

The best way to answer this question is to plot a roadmap to financial freedom for Muthu and it would look like chart A.

The Y axis of chart A represents the net worth amount of Muthu. The X axis represents the age of Muthu.

From the roadmap, we can see that Muthu's net worth will grow to about RM400,000 when he is 45. But it drops to almost zero at 46 when his first child goes into university. After that, it rises slightly but drops to zero again at 49 when the second child enters the university. His net worth stays there until 55 when he withdraws his EPF money. Then, his net worth grows to about RM1,100,000.

At age 57, his wife withdraws her EPF money and their family net worth grows to about RM2,450,000. From there, their net worth continues to drop. Their net worth becomes zero when Muthu is 65. In another words, Muthu's wealth will run out at age 65.

Based on Muthu's desire to have his wealth last until age 80, the roadmap shows that his current money management will not achieve all his financial needs and wants.

It is important to have a roadmap to measure our progress towards our goal of financial freedom.

By having the roadmap, we are able to know where we stand now in our journey to financial freedom, and the necessary actions to take to move towards that destination.

Without a roadmap to financial freedom, you won't know if you have enough financial resources to meet all your financial needs and wants. Without this knowledge, you may continue to over-spend and under-save. When you realise the problem at age 50 or 55, it is already too late to make any changes or take any actions.

In short, managing your personal finance without the roadmap to financial freedom is like shooting a target in the dark. You don't know where the target is and you don't know whether you have shot the target.

By knowing his current roadmap, Muthu will be able to take some actions and re-prioritise his financial needs and wants to achieve his financial freedom.

First, he can restructure his investment portfolio to achieve higher ROI. His current investment's ROI is 3.8 per cent. If he is able to achieve nine per cent ROI for his investment portfolio, his roadmap will look like chart B.

After increasing his ROI, Muthu's net worth will last longer now from age 65 to age 68. This is still not good enough. The target is to have the money last beyond age 80.

In that case, he will need reduce his life style spending during his retirement from RM96,000 to RM84,000. It means RM1,000 less per month. Muthu is willing to make the adjustment to make his wealth last longer. After the adjustment, his roadmap will look like chart C.

After reducing his retirement life style spending, Muthu's net worth will last until age 71. This is better but still not good enough.

Based on the adjusted roadmap, Muthu will need to adjust his current life style spending to increase his savings. If he reduces his current life style spending per year from RM120,000 to RM105,000, he will have additional RM15,000 savings per year. Then his roadmap will look like chart D.

After reducing his current life style spending Muthu's net worth will now last until age 83. By making those few adjustments Muthu is now able to achieve his financial freedom.


* Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, which has recently launched Roadmap to Financial Freedom service to help guide Malaysian families to achieve financial freedom.



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Our financial needs and wants in life

YourMoney: Our financial needs and wants in life
By Yap Ming Hui

2009/02/22

IN order to achieve your financial freedom, you must know clearly what your financial needs and wants in life are. Your personal financial management should make a healthy contribution to the realisation of the life that will make you happy. Contrary to most financial planning practices, I will not define your financial needs and wants before defining what a good life is to you. If you expect your money to contribute to your good life and you're not clear about what that good life is, how can you possibly get there?

In order for your money to be more than just a financial figure, it is important that you identify and articulate your definition of good life.

It must not be the social norm version of good life. Your self-defined good is your innermost driving force. It gives you a sense of direction and purpose. It motivates you to your highest levels of energy.

Your financial needs and wants are about supporting a good life that is consistent with your core values and beliefs and it's the starting place for any money management. Your own definition of good life is there, within you. But most of us simply haven't identified it.

To share with you a guide on defining good life, I would like to quote a formula outlined by Richard J. Leider and David A. Shapiro in their bestselling book Repacking Your Bags.

"Living in the place you belong, with the people you love, doing the right work, on purpose."

According to them, good life is an integration -- a sense of harmony among the various components in one's life.

It means that, for example, the place you live provides adequate opportunities for you to do the kind of work you need to do. And that work gives you time to be with the people you really love. And that your deepest friendships contribute to the sense of community you feel in the place you live and work.

The glue that holds the good life together is your purpose. Defining your sense of purpose -- the reason you get up in the morning -- enables you to continually travel in the direction of your vision of the good life. It helps you focusing on where you want to go and discovering new roads to get there.

If you are interested in finding out more on how to define your own good life, I suggest you can read Repacking Your Bag or any other life-planning books.

Only after defining what good life is, can you move on to identify the financial needs and wants required to support your good life.

The following are some of the questions that you can ask yourself to identify your financial needs and wants in life:

- When would I want to retire and how much income will I need to maintain my desired retirement life style?

- How much tertiary education do I want to provide for each of my children? By when do I need the money?

- How much do I need to finance my annual vacations? How about my vacations during my retirement?

- How much would I need to maintain my current life style?

- How much would I need to buy my dream house?

- What are the other financial goals that I would like to achieve and how much will they cost me, and when would I need it?

A sample list of financial needs and wants

Below is one of my client's list of financial needs and wants for a good life.

- I would like to retire at 50 with RM96,000 annual income.

- I want my wife to retire earlier at 35.

- I would like to provide RM200,000 each for my children's tertiary education.

- I would like to set aside RM20,000 for my annual vacation and I hope to double it to RM40,000 when I retire.

- I would like to maintain my current family lifestyle of RM120,000 per year.

- I am happy with my current house. I will not need to buy another house.

When you develop your list of financial needs and wants, don't be restricted by your current financial resources. You should focus purely on defining the financial needs and wants that will give you the good life you want.

That's what we mean by defining the financial freedom goal that you really want in life. When you do that, you will develop a strong sense of belonging to the financial freedom goal that you set because it means a lot to you. When you do that, you will not blindly follow the common financial freedom goal of just wanting to become a millionaire or a multi-millionaire.

Each one of us will have our own financial freedom goal. Therefore, each will also have our own code for our financial freedom.

We need to find out what combination of spending, ROI, inflation, time and saving is the right code for us to achieve our own financial freedom.

Have you found out what is your code to your financial freedom? If you have, you are on the right track to achieving your financial freedom.

If you haven't, you better start finding it out now before it is too late, because without the essential element of time, it is going to be difficult, if not impossible, to achieve your financial freedom.



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Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, which has recently launched Roadmap to Financial Freedom service to help guide Malaysian families to achieve financial freedom

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© Copyright 2009 The New Straits Times Press (M) Berhad. All rights reserved.
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Personal finace: When you do it matters

YourMoney:When you do it matters
By : Yap Ming Hui

2008/12/27
Malaysians have now become very knowledgeable in personal financial planning. However, having the knowledge and acting on it are two different things.

Unfortunately, most Malaysians procrastinate in their financial planning, despite their knowledge.

There are many challenges and obstacles to proper financial planning. biggest obstacle, as I can attest from having worked with my clients, is yourself.

Procrastination is the most common cause of financial management failure.

Two categories of procrastination
The first is the obvious: not even taking action to plan.

The second is the procrastination in taking action to implement what has been planned.

Reasons why people procrastinate

No Time: This is one of the most understandable reasons for not doing it now. After all, who has enough time?

With the current priorities and deadlines, you don't have time to work on something the effects of which will not be felt for another 20 years.

You may think it is okay because you are still young and have a lot of time to do it later.

But you would be wrong. Like tomorrow, someday never comes.

There is no date in the calendar called "Someday."

It is just a hazy, undefined concept in time -- always out there somewhere in the nebulous future, as far away as we can mentally push it so that we won't have to think about it.

No Money: This is yet another reason people use to justify procrastination.

They have identified the cause of their procrastination as insufficient income. The only solution now is to make more money.

To them, it is impossible to consider restructuring their financial priorities and disciplining themselves in spending and saving.

In a book entitled The Law and The Profits, author C. Northcote Parkinson introduced the famous time management Parkinson's Law: Work expands to fill the time available.

In the same book, Parkinson made a second statement: Expenditures rise to meet income.

He said that individual expenditure not only rises to meet income but tends to surpass it, and probably always will.

Therefore, "not enough income" is not the problem. The true problem is the reluctance to reexamine the current life style and reset financial priorities.

The truth is that it is not how much you make, but what you do with what you make.

No Need: For the majority of people, there is this little fantasy in the back of their minds: That when we grow older, the Employees' Provident Fund will take care of us.

According to EPF, the average saving of a member when he retires at 55 is RM77,000.

If the high income contributors are excluded, the average amounts of most retiring EPF members falls to RM33,000.

How long can this nest egg last if you depend totally on it?

A survey conducted by the EPF in 1995 found that 70 per cent of those who withdrew their EPF contributions upon reaching 55 finished their savings within three years.

As such, we cannot really expect that our EPF saving will be enough to take care of us in the older days. It is advisable not to rely solely on your EPF saving.

The EPF can be considered as an extra retirement fund but definitely not the only pillar.

The cost of procrastination

There is, in fact, a specific cost to procrastination in financial planning.

If you are 30 and want to raise RM1,000,000 by age 55, you need to invest only RM747 every month (assuming a 10 per cent annual return).

But if you are 50 years old, you would need to invest RM12,807 per month to obtain that same RM1,000,000. This is the cost of procrastination.

It is not money but time that makes people successful in financial planning So, starting young has its advantages.

Some of you will concede the fact that starting young has its advantages. But then comes the thought: Why not start next year. After all, what difference can one year make?

A big difference

If you are 30, and save RM1,000 a month, earning 10 per cent per year, you would have a total of RM1,337,890 by the age 55.

But if you begin saving at 31, you would have a total of RM1,199,605 by the age 55.

Thus, the cost of procrastination for just one year is RM138,284. Can you really afford to blow away RM138,000?

If there is one thing that you need to take on faith, it is this: there is never an ideal time for planning.

You have to do it now.

Procrastination will cause you financial ruin more completely than the worst advice an incompetent financial planner could ever give you.



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Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2436769/Article/indexpull_html

Finding out what financial freedom is to you

Finding out what financial freedom is to you
By Yap Ming Hui

2009/02/07

IN this article, I will elaborate on the definition of financial freedom and share a few points to help you define your own financial freedom. When you ask people what financial freedom is to them, chances are that you are going to get different answers from different people. Some may say that financial freedom means having RM1 million in the bank. For some financial freedom means no more debts and loans, and for others it means having enough money to do whatever they want.

I define financial freedom as "a controlled financial position whereby there are sufficient financial resources to meet your financial needs and wants at any time and in any circumstances".

From this definition, we can see that there are two main components to manage in attaining financial freedom.

The first involves the management of your financial resources. The second involves the management of your financial needs and wants.

The management of financial needs and wants should not be viewed only in the financial context. You need to view it at a higher context of your life. You need to identify your financial needs and wants that will give you a good life based on your definition.

This type of financial freedom planning helps you to stop chasing financial freedom defined by the society at large.

For example, having a bungalow with swimming pool, driving a luxurious car, wearing branded clothes, and so on. This definition challenges you to define your own financial needs and wants.

Normally, the first component is the component where most people understand and would focus their attention and effort on.

Most people start their life with little or no financial resources. They are very sure that they don't have sufficient financial resources to meet all their financial needs and wants. As a result, they won't bother to define their financial needs and wants in detail. They will focus their attention on making more money. That is not entirely wrong. However, you cannot achieve true financial freedom by just generating more financial resources without considering what your financial needs and wants actually are.

Remember that money is only a means to achieve an end. It is used to support an ideal or good life that we want.

The component of your financial needs and wants is whereby you translate you self-defined good life into financial terms and measurements.

Without defining your own financial needs and wants, it is likely that you will take other people's definition of financial freedom as your own. That's why there are so many people out there who just want to keep up with the Jones.

Based on this definition, the amount required to achieve financial freedom will vary from one person to another because different persons have different needs and wants.

For someone who has fewer needs and wants, he will require less money to achieve his financial freedom. For someone who has more needs and wants, he will require more financial resources to achieve his financial freedom.

Therefore, a multi-millionaire may not have achieved his financial freedom if his needs and wants are more than what his millions can meet.

On the other hand, someone who is not a millionaire may still be able to achieve financial freedom if his financial resources are more than enough to meet his needs and wants.

Key steps to attain financial freedom

The following are the key steps to follow to achieve financial freedom:

- Define what is a good life to you.

- Find out the financial needs and wants to support your good life.

- Test if you have sufficient financial resources to meet all your financial needs and wants. If you have enough, congratulation, but if you don't then have a plan to increase your financial resources and re-look and re-prioritise your financial needs and wants

- Test again if you have sufficient financial resources to meet your adjusted financial needs and wants. If you have enough then you are on your way to achieve your financial freedom. But if you don't, then you have to continue to increase your financial resources and re-look and re-prioritise your financial needs and wants.

As we can see, true financial freedom attainment is not only about money or financial management. It is also about managing your financial needs and wants.

Essentially, financial freedom attainment is about balancing your financial resources with your financial needs and wants. You can increase your financial resources to meet your high financial needs and wants but you will have a certain price to pay.

You may have to take more risks. You may have work longer hours and harder.

On the other hand, to re-prioritise your financial needs and wants, you will also have to pay a price. You may have to change your lifestyles or give up some of your expensive hobbies. The upside of it is that you get to have more time for yourself and family, less stress and more health.

Francis, one of my clients, is a business owner. He and his wife like to enjoy a luxurious life. He knows that he has to work very hard and take a lot of risks to have enough money to support his expensive lifestyle. However, he is happy to do so.

Another client of mine, Joshua, is also a business owner. He knows that he will need to spend a lot of time and undergo a lot of stress to make more money. As a result, he does not mind lowering his financial needs and wants to match his financial resources.

To Joshua, a good life is having peace of mind and more time for himself and family.

From the example of Francis and Joshua, we know that a person can either increase his financial resources or reduce his financial needs and wants depending on his values and definition of a good life. There is no right or wrong in either case.

Each individual will have his own unique financial freedom goal, depending on his financial needs and wants.

Financial freedom is never about becoming a millionaire or billionaire like most people would assume.

The biggest challenge to achieving financial freedom is finding out what financial freedom really means to you. Once you find that answer, the issue of how to achieve it would not be so difficult.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia


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© Copyright 2009 The New Straits Times Press (M) Berhad. All rights reserved.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2471848/Article/pppull_index_html

Without health, there is no wealth

Business/Yap Ming Hui: Without health, there is no wealth

Yap Ming Hui

This article, explores the role of health factor in wealth management and how our health affects our financial position.

Since the rising cost of medical care is a concern for everyone, we will look into the financial impact of ill health.

Many wealth management books talk about maintaining good health in retirement years in order to live life to the fullest. I cannot agree more with that. However, in my opinion, the relationship of good health and effective wealth management goes back much earlier than that.

The importance of good health starts when someone is still studying in school. Good health keeps the mind alert and fresh which helps you to concentrate more on learning.

Comparatively, someone who does not have good health will always have various pains as well as complaints of lethargy. This will affect his learning. Even though both persons may graduate with the same degree, a healthier person is definitely more employable.

The relationship between wellness and your personal finance is even more obvious when you start working after college.

When you are in good health, your mind is alert and your body is fresh and strong. You feel more energetic and upbeat physically, mentally, emotionally and spiritually. You address the problems and challenges more positively and effectively. You would require less medical leave.

A sound mind and strong body will help you to perform your job well. When you perform your job well, you not only keep the job, but you also enhance your chances of getting promoted - all of which supply the income for your wealth management.

However, when you do not have good health, your mind lacks the alertness you need to be at your best all day, every day. Same thing happens to your body. When you are out of shape, your body lacks the stamina you need to be in your top form. This will directly affect your job performance.

When you are not able to perform the job well, you not only decrease your chances of promotion and increment, but you may also have difficulty in keeping your job. When that happens, the impact on your personal finance is direct and obvious.

Down the road, your bad health lifestyle may lead to critical illness such as heart disease, stroke or cancer if it goes out of control. The treatment of critical illness could easily eat away your financial reserves or even wipe them out.

In addition, you would also suffer the loss of income for not being able to work during the treatment and recovery period. When that happens, your financial position would definitely be affected. The consequence is that you are forced to adjust or postpone the attainment of your financial goals and dreams.

Even if you can afford all those expenses and income loss, wealth without health carries no value and meaning.

When you are bedridden or housebound, it is difficult, if not impossible, to pursue your dreams. Without good health, you would lack the energy and vitality for an active and fully engaged life.

You only get to fully optimise the value of your wealth when you are physically fit and mentally fresh. "Health is wealth. Without health, there is no wealth."

Even though you are blessed with good health now, you must not take it for granted. You may need to take some action to keep yourself fit. Your good health today does not guarantee you will still be in good shape tomorrow.

I have a client who was a sportsman when he was in school and college. He is always proud to show me his sport achievements. However, he did not continue to keep himself in good health. He skipped his exercises and was under tremendous stress as the business grew.

The last time I visited him, he told me that he had failed the stress test for his heart. The cardiologist told him that he had a minor heart attack that went unnoticed. The doctor put him on medication and warned him not to do excessive work.

Therefore, it is important to realise that our health could change in an instant. We must never take wellness for granted. It is an ongoing commitment, a never-ending series of moment-by-moment healthy lifestyle choices.

The message is clear. Poor health cost you good money, earned and unearned, now and in the future.

Practising healthy lifestyle to keep your body fit is definitely one of the best wealth management practices.

By taking charge of our health today, we can proactively steer clear of the unhealthy lifestyle that guarantees a reduction in quality of life and erosion of wealth.

In our journey to pursue wealth for financial freedom, we must never exchange it with our health. Always remember to watch your stress level and do exercises more regularly.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2223449/1

Teaching kids to manage wealth

2008/03/29

BUSINESS/YAP MING HUI:Teaching kids to manage wealth
By : Yap Ming Hui


Parents should encourage their children to start saving in the piggy bank at a young age.


MANY high net worth individuals worry that their children may not be competent to manage their inheritance.

So when should the parents inform their children regarding their potential inheritance? If they learn of their inheritance too early, will that knowledge adversely affect their motivation to be self-sufficient adults? In anticipation of their future wealth, the children may not reach their full potential in life.


If they are told at later date, will the surprise adversely affect their ability to maximise the advantage of the inherited wealth? The answers to these questions have very much to do with how well we prepare the children for the responsibilities of wealth? We are supposed to be the best judge about when is the best time to talk with their children as each child is different.


However, it is important to teach the children about how to management wealth responsibly before you tell them about your wealth.


In the best case, you are leav - ing your wealth to children who have developed prudent earning, saving and investing habits. They understand the value of wealth and will respect the time and effort you expended to accumulate it.


Ideally, you should begin to educate your children about finances when they are young. When they are 4 to 5 years old, you can start introducing wealth management concepts. You do not need to tell them how much money you earn. Your objective should be to introduce three basic ideas:

That you earn money by working

That you use money to pay for things your family needs, such as food, clothing, the house, the car and others.

That you save and invest to meet more luxurious goals like overseas holiday or higher education for the children.


Remember that children learn from their parents.


Our children need to see us exercising a consistent approach towards wealth management.


The value of thrift is lost in children who see their parents indulging in luxuries.


The children copy the highlife style of their parents. It is not so much what we tell our children in words but how we express our perception of “having arrived”.


The expensive car, branded clothing, overseas family vacation and the luxurious home are statements that our children are reinforced with each and every day. So rule number one is to be a good example of wealth management to our children.


The concept of saving

One of the earliest wealth concepts you can start with young children is saving.


You should encourage your children to start saving in the piggy bank. To further motivate the saving habit, you may choose to match the fund inside with an equal amount.


When the child is old enough, you can give him allowance and teach him to put half of each allowance in the piggy bank. Half of his saving could be used to purchase what he wants and whatever balance would be deposited in a savings account for long-term saving.


Bring the children to a bank and tell them that this is where you save money for the family. Explain how you save money to do things for the family. You may even open a savings account for them so that they can see the money grows each month because the bank pays interest.


Explain to them the source of money for your ATM card. Otherwise, the children may have the impression that you have endless flow of money to spend.


Regular allowance programme

Giving children an allowance for doing common household chores is another good way to teach wealth management knowledge.


It is important for you to decide early whether your children’s allowance must be earned.


I would suggest that the children should take care of certain chores because they live in a household with other people. It is their contribution to the smooth running of the household. The idea is to instil a sense of responsibility and the concept that you have to work to make money.


Decide also how much should each child get. Will it be based on age, number of chores completed, or will it be the same amount for all? Decide how frequent they will get their allowance.


Very young kid may have trouble waiting to buy things and should get the allowance weekly. Otherwise, they may finish spending their allowance before the next is due.


Older children may get the allowance on monthly basis.


They need to learn about spending carefully, making it last for at least 30 days.


Living within their means

This is definitely a great wealth management concept for all ages. It simply means that no bail-out when the children cannot make his or her allowance stretch for the whole month.


You simply must not give in.

Lots of parents would give in and bail the children out. Life would not provide your children a bailout when he or she is an adult.


We have to let the children learn to manage money the hard way. Eventually, the child will get the message and live within the allowance, now and for the rest of his life.


The concept of investing

As your children start their secondary education, you can begin to share with them the concepts of investing in stocks and unit trust.


Select companies that they can identify with and track their performance in the newspaper. When the child gets older, you can buy individual stocks to give them a feeling of ownership in the business.


We can definitely teach our children many wealth management lessons. However, the children learn most by observing and practising.


They learn good wealth management habits, like many other habits in life, by imitating their parents.


So, it is important to make sure you keep your wealth management affairs in order.


Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/20080329150955/Article/index_html

Savings mean the road to financial freedom

2009/01/10

YourMoney: Savings mean the road to financial freedom
By : Yap Ming Hui


THE discipline of being able to save consistently and on target would make or break our financial freedom journey. There are three main reasons why is saving important.

- The more we save, the more we accumulate

The first reason is simple and obvious. The more we save, the more we can accumulate. Obviously, we would have more resources to invest to grow our assets.

- The more we save, the less we spend

When we force ourselves to save more, we would definitely have less to spend. As such, we are able to control the standard of living and live below the mean.

Throughout my practice, I have come across clients who are able to accumulate substantial amount of assets through prudent spending and disciplined saving.

When we do not have too high a standard of living, it makes our job of maintaining a living standard during our retirement easier to attain.

On one hand, I have seen people who do not make much but save a lot. On the other hand, I have also met people who earn high income but save very little.

Many years ago, when I had just started my profession, I met Eugene, a chief executive officer of an American multi-national corporation, who earned more than RM50,000 a month.

At that time, he was the highest income-earner person I had ever met.

In my heart, I was overjoyed as I believed that I would have a big case on which to do financial and investment planning.

However, after the fact-finding process, I discovered that Eugene had assets worth only about RM2 million.

And about RM1 million of this asset was his forced savings in the Employees' Provident Fund.

The balance was the worth of the house he was staying in.

I was very surprised to find out that he had so little assets despite his high income.

So, I asked him: "Eugene, how much do you save every month?"

Eugene said: "Well, I did want to save every month. However, at the end of the month, there is always not much left."

So, if you just want to wait till you have more income to save more, you might as well forget it.

It is never about how much you make. It is always about how much you save.

- How best can we solve this problem?

Yes, you are right. Before you start spending and paying bills every month, pay yourself first.

Determine how much is the right amount of saving for you and save that amount first. It is even better if you can have a regular and automatic saving scheme.

- The more we save, the less rate of investment return we need

In fact, the more we save, the less risk we need to take in financial freedom planning.

Let's take an example of RM5,000,000 accumulation goal.

Let's assume that you are 45 years old, and planning to retire at 60.

If you can save RM50,000 per annum, you need to achieve 23.9 per cent of rate of interest (ROI) for RM5,000,000 goal.

If you can save RM120,000 per annum,you need to achieve 13.4 per cent of ROI.

If you can save RM180,000 per annum, you need to achieve only 8.3 per cent of ROI.

Of course, RM5,000,000 is only the example.

The lesson to be learnt is that the more we save, the less ROI is required to achieve the same accumulation goal.

When we do not need to achieve a high ROI, we do not need to stomach too much risk and volatility.

The less risks we take, the more peaceful life will be.

- How much to save?

I believe most of us understand the importance of saving. In fact, almost every time I was interviewed by the media, I would always be asked, "How much of their income should Malaysians save?"

To some financial planner, it is not a very difficult question for them to answer. Some would say 20 per cent. Some would say 30 per cent. Some would even say 40 per cent.

However, this is quite a tough and tricky question for me to answer.

Based on my experience of developing many tailor-made financial plans for clients, I know that the right saving rate varies from one person to another.

For example, if you have a monthly income of RM3,000, the right savings rate for you may be 20 per cent.

This is because you need to spend majority of your income to sustain your standard of living.

However, if you have a monthly income of RM50,000, the right savings rate for you may be 50 per cent.

This is because you don't need to spend the majority of your income to sustain your standard of living.

Of course, this is just one of many examples, but it shows that there is no standard "right saving" rate for every one.

Therefore, each of us should have a tailor-made financial plan to determine the right savings rate for us.

Only then, would we know that we are saving enough to meet our future commitments.

- What if your saving is under target?

If the savings and contributions are less than target planned, you may fail to achieve your financial freedom.

If the gap continues, chances are that you may not be able to achieve your original financial goals set.

In the situation whereby the actual saving is less than planned, we must review our cash flow statement to identify the discrepancy and take necessary recovery measures.

If we have confirmed that the planned saving target is unrealistic, it is important that we readjust some of our financial goals and asset allocation strategies.

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Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2446987/Article/index_html

What is your optimum ROI?

2008/12/13

Your Money: What is your optimum ROI?
By : Yap Ming Hui


RETURN on Investment (ROI) is an important ally in attaining financial freedom. ROI can help us overcome the threat of excessive spending and inflation. If we are serious about achieving our own financial freedom, it is important for us to understand and know ROI better.

Power of compound ROI

Table 1 shows the compounding effect of RM100,000 invested at different compound ROI compounded over 36 years. From the table, we see that differences in ROI that may appear moderate in the short-term can, with compounding, multiply into very large differences in the long term.

For example, if you don't do anything with your saving which earns about two per cent ROI then. your RM100,000 will multiply by two times to RM204,000 after 36 years. If you transfer the money into fixed deposit, you may earn about four per cent ROI and multiply your RM100,000 by four times to about RM410,000. If you grow your money at eight per cent ROI your RM100,000 will multiply by 16 times to about RM1,597,000. With a slight increase of your ROI from two to eight per cent, you end up having a huge difference of RM1,393,000. (1,597,000 - 204,000). If you grow your money at 15 per cent ROI, your RM100,000 will multiply by 153 times to about RM15,315,000.

Of course, increasing the ROI means you may face higher risk of losing your money.

The price of making a mistake

Most people fail to realise the high rate of ROI required to make up for money lost in investment. For example, if you start with RM100 and lose 50 per cent of it, you would have to earn 100 per cent on the remaining RM50 just to get back to where you were at the beginning.

Table 2 shows the ROI required to overcome various losses. The time period is five years, and there are two scenarios: an ROI target of 10 per cent and of 15 per cent.

For example, you plan to increase your money for the next five years with 10 per cent ROI. Unfortunately, instead of getting 10 per cent target return, you ended up with a 25 per cent loss. In order for you to still achieve your original target, you would need to achieve 21 per cent ROI for your money for the next four consecutive years. Now, that's the price you will have to pay for making 25 per cent loss in first year. Do you think it is easy to achieve 21 per cent for four years continuously? Of course, it is not easy.

In addition, you will also notice the spread between the amount of the loss and the required ROI over the next 4 years widens as the magnitude of the loss is increased. The larger the losses, the more difficult it is to overcome.

I believe you now understand why the first rule to investing, according to Warren Buffett, is "Never lose your money".

Inflation-adjusted ROI

Our money is subjected to the depletion of inflation. Therefore, to effectively grow our money, we need to attain an ROI higher than the inflation rate. For example, if the inflation rate is four per cent, the 3.7 per cent interest rate for your fixed deposit will not help your money grow. In fact, in the long run, you lose your money safely. In this case, the inflation-adjusted ROI is actually -0.3 per cent (3.7-4).

Therefore,to grow our money, we need to seek inflation-adjusted ROI.

To achieve financial freedom, you have know what rate of ROI you actually need.

There is an optimum ROI rate to target and achieve. This optimum ROI rate should be higher than the inflation rate but not too high that will risk losing money.

Therefore, the challenge for all of us who want to achieve financial freedom is to find out what that ROI is? Do you know what is your optimum ROI? If not, it is always better to find out earlier than later.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2426202/Article/index_html

My comment: Aim for 15% compound annual return per year. This translates into 100% return on your investment every 5 years.

Five elements to achieve financial freedom

2008/10/05

Business: Five elements to achieve financial freedom
By : Yap Ming Hui


WHEN you ask people what is financial freedom to them, chances are that you are going to get different answers. Some may say that financial freedom means having RM1 million in the bank. Some may say it means no more debts and loans. Some say it means having enough money to do whatever you like.

I define financial freedom as a controlled financial position, whereby there are sufficient financial resources to meet your needs and wants at any time and in any circumstances.

The amount required to achieve financial freedom will vary from one person to another. For someone who has less needs and wants, he will require less money to achieve his financial freedom. For someone who has more needs and wants, he will require more financial resources.


For example, a multi-millionaire may not have financial freedom yet if his needs and wants are more than what his financial resources can meet.


Five essential elements of financial freedom


To achieve financial freedom, I believe one has to understand and manage the five essential elements of financial freedom effectively. Let's do a quiz to see how much do you understand the following essential elements that I share.


- Spending


Spending is one of the five essential elements of financial freedom. Unless and until you understand the impact of your spending to your achievement of financial freedom, it is unlikely you will achieve it. The more we spend, the less we save. The more we spend, the more money we need to maintain our life style in retirement years. Based on the definition of financial freedom, your spending level measures your needs and wants.


- Inflation

Inflation is another essential element that will make or break your financial freedom planning as it will not only deplete your accumulated capital, it also reduces your purchasing power. This is one of the most challenging elements to understand and manage because it is intangible and difficult to see. You can only feel it over an extended period of time.


- Return on investment


Despite the negative effect of spending and inflation, one can count compound interest to help achieve financial freedom. The higher the return on investment (ROI) rate, one can achieve, the better he can make his wealth works for him. As far as achieving financial freedom is concerned, we are not talking about ROI in isolation. It is not that you have a choice as to what ROI you want. If you don't achieve certain ROI for your money, your effort to achieve financial freedom will be very much discounted by the impact of inflation and spending.


- Time


Time is another essential element for you to consider and integrate in your financial freedom planning. We need to know the time when our financial needs and wants appear. For example, at which year will you need to finance your first child's tertiary education. We also need to know the time horizon that you have to accumulate your financial resources. Only then, you are able to structure your investment properly to achieve your funding target.


- Saving


The more we save, the less ROI we need in order to achieve the same accumulation target. For example, if you can save RM16,000 per year, you will need an annual ROI of 18.3 per cent to accumulate RM1 million in 15 years time. However, if you can save RM36,000 per year, you only need to achieve an annual ROI of 8.3 per cent.


Applying the five essential elements to your life


After examining the five essential elements of financial freedom, you will find that the five elements are closely related and inter-connected. One element will affect another. For example, how much you spend will affect how much you save. How much time horizon you have will affect the ROI you need to achieve an accumulation target. Therefore, you need to understand the combined result of these five elements.


Each one of us will have our own financial freedom target. Therefore, each one of us will also have our own code for our financial freedom. We need to find out what combination of spending, ROI, inflation, time and saving is the right code to achieve our own financial freedom.


Have you found out what is your code to your financial freedom? If you haven't, you better start now before it is too late. By then, without the essential element of time, it is going to be very difficult, if not impossible, to achieve your financial freedom.


* Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2364354/Article/index_html

Danger of excessive spending

BUSINESS/YAP MING HUI: Danger of excessive spending
By Yap Ming Hui

2008/03/16

THE founder of one of the largest investment fund in the world, Sir John M. Templeton, once said: “Those who are thrifty will grow wealthy, and those who are spendthrifts will become poor. During my first 15 years after college, I made a game of adhering to a budget that included saving 50 cents out of every earnings.” In fact, the discipline of being able to control our spending and save consistently would make or break our wealth maximisation success.


Case study


Many years ago, I met Joshua in a business seminar. He was then the managing director of a multinational corporation. He was in his late 40s. Over a conversation, he shared with me that he was earning RM600,000 per year. I must admit that I was impressed. I was still new to the industry then.


RM600,000 annual income was really big.


I expected him to have accumulated a substantial amount of wealth over the years. However, when I added up all his assets, I found that his total asset was less than RM2 million. His net worth was less than RM1 million. More than 70 per cent of his net worth was from his EPF saving.


Iwas really shocked.I asked him where all his income has gone to.


He told me that he didn’t know.


Every month, his family and he spent the income to maintain their life style. At the end of the month, there was nothing much left to accumulate and invest. Every time there was an income increment, he just increased his spending accordingly. This is a classic example of excessive spending.


The problem Joshua is definitely the classic victim of Parkinson’s Law. The law states that your expenditures rise to meet your income.


Remember the time when we started working, we earned about RM1,500 per month. Then, we barely had enough money to sustain our monthly expenses.


However, we were not worried.


We knew that when our income increased later, we would have some saving. After a few years, our income rose to RM3,000 per month. Did you really end up having a lot of saving? The answer, of course, is no. You discovered that your expenditures actually went up to meet your income. As a result, you didn’t have much to save. To most people, the same thing happens when their income increases to RM5,000, RM10,000 or RM15,000. In the case of my friend, Joshua, his expenditures rose to meet his income of RM50,000 per month.


When you suffer from excessive spending disease, it will cause the following problems to your wealth maximisation:


•The more we spend, the less we save
The first problem is simple and obvious. The more we spend, the less we can save. As a result, we would have less resource to invest.


•The more we spend, the more we need to sustain during retirement
When you spend the majority of your income to maintain your current life style, you create a huge challenge to maintain your life style in the event that your active income stops.


We can see the picture better by using Joshua as an example. He spent almost all of his income almost every month to maintain his RM30,000 life style. Should he retire, he would have to maintain a retirement life style of RM30,000 per month without his active income.


This would present a very huge challenge. However, if he were to control his living expenses to RM20,000 per month, not only would he have extra RM10,000 to save, also he would need only maintain a life style of RM20,000 per month during his retirement.


•The more we spend, the higher rate of investment return we need The more we spend and the less we save, the more risk we will need to take in wealth accumulation planning.


Lets take an example of RM5 million accumulation goal in Table 1. Assume that your are 45 and plan to retire at 60. If you can save RM180,000 per annum, you need to achieve only 8.3 per cent of return on investment (ROI). If you can save less at RM120,000 per annum, you need to achieve a higher ROI at 13.4 per cent. If you can only save RM50,000 per annum, you need to achieve 23.9 per cent of ROI for RM5 million goal.


Therefore, the lesser you save, the higher ROI is required to achieve your accumulation target.


As a result, you will need to take higher investment risk to achieve the same goal. When we do not need to achieve a high ROI, we do not need to take too much risk and volatility. The less risk we take, the more peaceful our life will be.


Alternative solutions


•Acknowledge the danger of Parkinson ’s Law
To avoid the problem of excessive spending, you must be aware of the impact of Parkinson’s Law. You need to know that saving would not come naturally unless you make it an effort to control your spending. Unless you acknowledge the danger of Parkinson ’s Law, it is very difficult for you to tackle excessive spending

•Spend after you save
The most effective practice to avoid excessive spending is to spend after you have provided for saving (Income –Savings = Expenses. NOT Income –Expenses = Savings). By forcing yourself to save more, you would definitely have less to spend. As a result, you are able to control your living expenses and live within your means.


• Conduct a life-long cash-flow plan
In order for you to know your optimum life style (living expenses) and savings required to support that life style without active income, it is important that you conduct a life-long cash-flow plan.


This cash-flow plan will project your annual income and expenses until the last day of your life.


By doing this exercise, you can find out what living standards yo u can afford and determine the savings needed during your active income years.


As a result, you can appreciate how challenging it is to sustain high living expenses without active income.


Hopefully, you can also recognise the urgency and importance to start saving now.


Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-family office in Malaysia


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http://www.nst.com.my/Current_News/NST/Sunday/Columns/20080316084555/Article/pppull_index_html