Five Money Resolutions to Make in 2018
An edited version of this article was published in the 17 December 2017 issue of ZaoBao.
Below is our original article in full.
1. Resolve to know yourself
Many go about working and saving hard as well as trying to find the best instruments to invest without having a clear objective. When asked why they are investing, many reply "To make more money".
But that is not good enough a reason for you to stay the course which means that it will take very little for you to panic and sell out of the investment at the worst time.
Having a clear objective of why you are saving (e.g. for retirement) helps you determine important parameters like the time horizon needed to achieve your goal as well as the risk you need to take. If the required risk is too high for you, then you need to adjust your time horizon (i.e. retire later) or save more.
Once you have determined the acceptable risk level and time horizon, then you can select the appropriate investment with the highest probability that will help you achieve your financial goal.
In times of market downturns and recessions, it is very easy to succumb to one’s emotions in making financial decisions which often leads to a poor outcome. This is when a good financial adviser is of greatest value by helping you with a well-thought out plan and informing you beforehand how your investment is likely to behave (from modelling past market crises). This will help you stay calm through uncertain times and avoid panic-induced behaviours which could seriously damage your porftolio.
So, take some time to think this through or work with your financial adviser on a plan if you don’t already have one. Revisit it from time to time to see if whether any change is warranted.
2. Be disciplined. Stick to the plan
Once you have made your plan, stick to it.
But this is easier said than done. We thus offer you some tips as to what you can do to help you stick to your plan.
A. Make sure your plan is properly constructed
A wrong or poorly constructed plan is a recipe for financial disaster. So it pays to spend more time thinking and discussing your plan with your financial adviser before adopting and proceeding with it. A good financial adviser should not be overly emphasizing potential returns (which is uncertain) but making sure you understand and are comfortable with the risks of your portfolio. For example, ensuring you are aware of the potential 1-year loss on your portfolio as well as historical worst case drawdowns. Because when markets do unexpectedly tank, you will be mentally prepared for the paper losses reflected in your statements so that you can better ride through the storm. Although markets are up 70% of the time, you need to be prepared for the 30% down markets as that is often the time when investors panic and ruin their investment plan.
B. Have a review meeting with your financial adviser at least once or twice a year
Having periodic review sessions with your financial adviser allows you to track how you are doing as well as provide an opportunity to update your adviser of any significant changes to your life situation. Your financial adviser could then process this new information to see if there is a need to review and modify your current plan. Such meetings are also good opportunities to ask questions and to remind yourself of why you are investing.
C. Avoid reacting to news headlines and unsolicited advice from third parties
Do not unilaterally make decisions on your portfolio without first consulting your adviser and hearing him/her out on your proposed course of action. Remember that any news can be sensationalised and that it is almost always a bad idea to invest according to market news. Do not also be unduly disturbed by unsolicited advice from self-proclaimed investment experts, even if they have impressive credentials. Everyone's plan and financial situation is different and no one plan fits all sizes.
At the beginning of 2017, many experts from large financial institutions proclaimed that market valuations were high and that caution was needed, along with likely disappointment in stocks. Some investors took the opportunity to cash out early in 2017, expecting a large stock market correction. Yet markets defied the 'experts' and those who stuck with stocks enjoyed pretty decent returns.
3. Be financially responsible to yourself
Retirement can be voluntary or involuntary. So it is best to be prepared.
In recent years, the common finding in a number of surveys by different financial institutions conclude that the majority of Singaporeans are financially unprepared for retirement.
A simple way to get prepared is to:
- break down your expected spending at retirement into 2 main buckets: ‘essential expenses’ and ‘lifestyle expenses’.
Essential expenses will include necessities like food, transport, utilities, etc. while lifestyle expenses will include discretionary items like vacations, luxury goods, spa treatments, etc.
- Plan to fund ‘essential expenses’ with income sources that are less risky, eg. CPF LIFE payouts, annuity plans with guaranteed payouts, etc.
- Plan to fund ‘lifestyle expenses’ with moderate to higher risk investments (eg. higher component of equities) to get higher returns and to hedge against inflation.
With the US Federal Reserve signalling a rising interest rate environment, mortgage rates which are tied to SIBOR, have already been revised upwards in the last few weeks. It may be a good time to consider refinancing your mortgage with either fixed rates or rates that are not pegged to SIBOR, eg. bank fixed deposit rates.
Explore and take advantage of tax deferment schemes like the Supplementary Retirement Scheme (SRS). It is a useful tool for tax savings as well as a systematic way to accumulate and grow your savings for retirement.
4. Be responsible to your loved ones
Despite being less of a taboo subject nowadays, not many people have done a will.
Find out what would happen to your money and assets if you were to suddenly pass away without a will, i.e. to die intestate.
In accordance with Singapore's Intestate Succession Act, it is possible that your estate (comprising monies and assets belonging to you at the point of death), may not be distributed to your loved ones in the way that you would have liked to be distributed. In some cases, it could even be distributed to persons whom you would never have expected nor intended.
Family fallouts from inheritance disputes are not uncommon. Do your loved ones a favour, and draw up a will, so as to ensure that your monies are distributed to whom you want to receive them.
Do remember to make your CPF nomination as well, as CPF money cannot be distributed through a will in Singapore.
In addition, take time to review your insurance policies from time to time to ensure that your loved ones are also not suddenly saddled with a huge medical bill or a need to repay a huge mortgage loan.
5. Get moving
Lastly, borrowing the famous saying from Virgil: "The Greatest Wealth is Health."
Ill health means higher health care costs, potential loss of income and a lower quality of life.
Hence, making the decision to be healthy is also one of the important money resolutions one should make in 2018!