Desmond Ng

“A financial adviser is a professional who renders investment advice and financial planning services to individuals and businesses. Ideally, the financial adviser helps the client maximize their net worth while minimizing risk by using proper asset allocation.”

Many times, people who already have an adviser shuns other planners because he or she feels that there is no need for another adviser in their lives. This is true to the extent that IF & only IF your adviser is currently serving you well and thinking with your best interests. A professional adviser is one who helps you with proper planning and “Be Good but not Nice”. He should be highlighting key areas in your life that needs to be looked at and help you get a better long term return compared to other normal investment vehicles.

It is NOT, in any means, someone that comes to sell you something useful and disappears like a magician. Which means, you may have your friend or relative serving you but they are only helping you minimally because they are salesmen, not advisers.

So what should you look for in a Financial Adviser?

1. Nothing comes for nothing:

There is such thing as free advice. However, remember that if you use the services of an adviser, at some stage they must have some hope of getting paid or of selling you something that pays them a commission. A professional adviser will keep you updated and service you as long as you welcome him to. A salesmen adviser will try for a few months and give up on you.

2. Look for an upfront declaration:

A competent honest adviser will make it clear how they are paid and happily tell you in detail how this happens. Somewhere, somehow, people need to be paid. If it is not clear to you how your adviser is paid, keep on asking. You must understand how they are paid, so you can understand their bias. If the adviser tries to hide costs involve, get rid of him. How can you trust your money with someone that isn’t proud of what he should be paid for? Hiding the costs means that he feels that he doesn’t deserve your money.

3. Plan for your first meeting:

At your first meeting, or over the phone, get straight to the point about your position and what you want. Professional advisers who are successful have good technical skills, but they also have strong people skills. Advice is a personal business and few advisers will be willing to offend people by saying early in a meeting that you are just not the sort of client they want to look after, so it really is up to you to be able to succinctly say, ‘Hey, this is my situation, am I the sort of client you service?’

4. Build a relationship:

The best advisers want to give you ongoing advice and will charge you an annual fee for this. It is important to have an ongoing relationship with your adviser. You want someone who will understand your needs and help you solve your investment problems now and in the future. You don’t want someone who sells you a product, takes the commission and then forgets you. Be very cautious about an adviser who only earns a commission when you buy something. They will only wish to see you on an ongoing basis if you want to buy something or they can sell you something. Frankly, if the ‘advice’ is always free and the adviser only makes money when you buy product, it is very hard to see how you are ever going to get unbiased advice.

5. Be sure they are working for you:

A good adviser should be giving you quality advice that suits your needs - not using you to help fund his or her personal deals. One of the great traps in financial advice is buying deals from the adviser when the adviser is personally involved in the deals. A professional adviser needs to keep a critical eye on your investments. This means that they should not be personally involved. If they have lots of their money tied up in the deal, this may sound like a good thing to you, but it may also cause the adviser to become too emotionally tied to the investment, leading to poor decisions on your behalf.

6. Know what you have got and know what you want:

Don’t expect a professional adviser to waste valuable time trying to work out things that really you only know. Approaching an adviser in a logical, prepared fashion will pay big dividends. The biggest obstacle to finding a professional adviser is not being clear about what you want. So, before you find an adviser, sit down with a pencil and piece of paper somewhere quiet and pour a glass of wine if it helps. Write down all of your assets and liabilities, your income and spending habits. Think about your aspirations for your career, relationships, any dependents and estate planning. List your insurance and your long-term goals. Consider when you want to stop work, how much income you would like to have.

After reading through this, take 5 minutes and think “Is my current adviser like this?”. Weighing the fact that I invested $???? with him, I should be ranked ? in his list, am I getting the right amount of attention? Understand that the higher the amount of assets you have invested with him, the quality of service definitely rises.

Hence, keep looking around for better advisers if your current one doesn’t satisfy you. There are a lot of salesmen advisers out there, but there are also advisers that are honest and acts in your best interest. So STOP SHUNNING them! You never know when you have just chased off a great adviser.

Ok continuing from where we left off…

At this moment, if you are still not convinced about investing globally. You must read this on to see my argument.

Firstly, according to Behavorial Finance Study:

Investor Experience:

[Monthly]-Frequent Sharp Movements [Annual]-Smoother Ride

Investor Emotion:

[Monthly]-Fear Dominates [Annual]-Rationality Prevails

Investor Equity Allocation:

[Monthly]-41% [Annual]-70%

So the solution to this is Diversification.

Diversifying reduces fluctuation in your returns and allows you to sleep much more peacefully, however it definitely depends on your financial goal and time horizon. Although it may not be easy to find a decent financial adviser to plan your investment portfolio as there are many “Salesman” disguised as a financial adviser, you still need a professional financial adviser to help you in this area.

For example, the asset allocation for a 3 year goal and 30 year goal would be very different, similarly a retirement goal and lifestyle goal would be different too. I wouldn’t put 100% equity into a 3 year goal.

I understand that many of you have the worry that the US Sub prime mortgage issue may last longer then expected or that the US may enter into a recession.

Frankly Speaking, I would love to share the research I have on hand with you here, however, it would just be a wall of text without the beautiful charts that I can help use to explain to you. So if you are interested in knowing more, e-mail me or call me.

“I do not like to invest in Global funds.”

Why?

Among most of the people I met, they like funds that are more concentrated as they find Global funds too slow. Besides the golden rule of “Buy Low, Sell High”, there is also one rule that people tends to forget when investing their money even though they know: “Diversification”.

“Diversification reduces profits.”

That may be true, but it reduces Risk too. Despite the declaration of many investors that they are risk-aggressive, most investors panic when there is a market drop etc. Evidence? When bad news or rumours spread, the stock market drops. I have advisers that have shared with me how his clients panic and want to sell out his funds after 3 months despite the fact that the time horizon stated at the point of purchase was at least 3 years.

So do not overestimate your risk tolerance, take a proper investment portfolio according to your risk profile.

Taken off the research of AllianceBernstein, here is the chart of performance of funds for the past few years:

What does it mean? Basically, it is to tell you that NO asset class or region perform well all the time.

More about this will be shared on my next post. Stay tuned…

With the market volatility, most investment portfolios may be experiencing a negative returns at the moment.

Many people are wondering what are the things they can do to their portfolio to take advantage of it.

Should I…

a) Just leave it there

b) Switch to bonds

c) Switch to higher potential funds

d) Do a top up

e) Sell away and put it in the bank

There is no best answer to it. But however e) will probably be the most unwise decision as of today.

Remember the fundamentals of investing? You are investing in businesses, developments of countries and not market news. Look at a long term and understand that the market will climb back one day. So leaving it there isn’t a bad choice as NO ONE can predict the future. So leaving it there is the best for people that have a diversified portfolio.

Secondly, switching to bonds. If your fund allows a fund switch free of charge, consider switching to bonds as volatility is anticipated for the next few months. If you want to cut losses or lock profits, this is the best option since it is free. This will be for a more risk averse approach.

Thirdly, switch to higher potential funds. Take a look at the funds available for switching and check which one is being very resilient and still having a net upwards trend despite the volatility. Consider switching to this fund as this means that if there is a dip, it will dip lesser and if there’s a growth it will grow faster then your current portfolio. Not a bad choice in my opinion if you are willing to take some risk to recover your investment or grow it faster.

Fourthly, If you have the spare cash to set aside for a long term of 5-10 years or more. Now is really a golden window opportunity to invest and do a top up. I would recommend doing top ups consistently during this 6 months if you have extra amount to invest.  However, if you are really really super conservative… wait for the volatility to settle.

So look for your adviser and have a review with him and make the appropriate amendments to your investment portfolio and sleep more peacefully.

Do you look at your investments everyday and fill happy, sad about it?

Research has shown that the psychological impact on ourselves is very huge when we look at fund volatility.

When prices goes up, our happiness level increases.

However, when prices goes down, our happiness level actually decreases by 2.5 times!

Even if prices were to go up 1 day and go down another day, your net emotional psychology is still a negative!

Hence remember the most important fundamental of investing…

INVEST LONG TERM!

Even if it is to depreciate by 10% or increase by 40% tomorrow, a long term approach balances the risk and the charges involved in buying and selling of stocks/funds.

Remember that the Passive investor > Active investors.

Economist A says the market is going into a global slowdown with US is moving into recession.

Economist B says this volatility will last at most 6 months.

Expert A says that now is the time to invest.

Expert B says that you should stay away from investments for now.

Professional A says China & India is the next big thing and will appreciate regardless of short term volatility.

Professional B says China & India are too risky with too much uncertainties.

GREAT! So many different ideas and different perspective even though they are from the same industry. Who should I listen to? Or maybe I should listen to the uncles in the kopitiam and put my savings in the bank for life.

Truth is, NOBODY is right. NOBODY can predict the market or forecast the short term future. The only thing that we can do is forecast PROBABILITIES. What’s the probability that the market will recover in 5 years or 10 years time? What’s the probability that India will do better then Europe?

Experts & Economists can only give their opinions and what they say may not necessarily be the truth!

However, one thing I can assure you is that the market appreciates over time. Looking into a long term horizon, your investments will experience bull and bear runs but overall the appreciation will be there. So invest long term and don’t be too swayed by short term volatilities!

A lot of people feel that they are not ready to do investments yet. Some find that they are too young, some say they need more liquidity or some say its too risky at their age.

However, its not really true! The earlier you invest the better it is; Every Drop makes an ocean even if its regular small investments; As long as you do not dump 100% of your savings in investments, you should still maintain an investment portfolio even at a higher age!

Take this example;

As the example shows, John started investing at age 25 and contributed for 10 years. Mary invested for 30 years, but waited until age 35 to get started. At retirement, John has a larger account not because he invested more, but because he started earlier.  *example taken from http://www.wellsfargoadvantagefunds.com/*

Remember that every small amount you are contributing monthly can mean quite a good amount in the future! So do not procrastinate!

#1: I Shall Not Time The Market

No one, I repeat, no one has made money consistently by timing the markets. One may be lucky a few times to get the timing right, but then that’s gambling not investing.

Everyone loves Sales & Discounts, and it should be the same for equity! When there is a discount in the market, what are you waiting for?!

The market can be very volatile and it is not possible for a country or sector to experience solid growth rate forever. There are always going to be correction in the market sooner or later. Does that mean you don’t invest? NO. Because correction is a possibility not a certainty. What if the market continues to bloom and grow? Then you would have missed the train.

Hence, I recommend investing regularly so you will reduce the risk of volatility.

#2: I shall NOT look at the DIVIDENDS

Just as share price and NAV are different, so are the dividends from equity share and those from a MF.

In a mutual fund, all growth is reflected in the NAV. And when it declares a dividend, it is merely distributing a part of this growth i.e.

pre-dividend NAV minus dividend = post-dividend NAV.

So, in totality nothing changes. Dividend is not something extra.

Shares are different. Dividend is paid by the company out of the profits, whereas share price has technically nothing to do with the company or its’ performance. It is mainly an interplay between the buyers and the sellers. So the share price may or may not change with dividend distribution.

#3: I shall invest according to MY NEEDS

As a financial adviser, investing for a purpose is important. There is no BEST funds around. China and India may be doing extremely well today, but does that mean that they are still the best in a year? in 3 years?

Looking at the time horizon, investment goal and your own risk appetite is important as by bending the rules it may result you losing money instead of earning. What is a good fund for your father may not be the same for you.

So choose the asset allocation for that specific NEED and then choose the funds. Approach an honest and professional adviser for advise on how to allocate wisely.

#4: I shall have a balanced PORTFOLIO

Finding the right asset allocation is usually a big headache to many people. Investing fully into the Equity market may result in too much volatility.  A pure Debt (bonds, fixed income instruments) investment is too slow to provide adequate returns.

Finding the right balance is usually quite complicated but to simplify things let me help you with a few tips I learnt from books.

If it is a long term Retirement Fund: Diversify according to your age, if you are 60 years old = 60% bonds, 40 years old = 40% bonds, 25 years old = 25% bonds. The rest into equity investments.

If it is a short term Goal: Invest according to the number of years left.

0-3 years: 30% Equity

5 years: 50% Equity

10 years: 100% Equity

Of course, a lot of factors still come into play, example your tolerance level etc but this are just a simpler guide to help you have an easier time.

#5: I will practice what I PROMISED

If after reading this, you just walk away with more knowledge and do nothing about it, then time would have been wasted. SO DO IT!

It has been a good year for Singapore. Despite the US Credit crisis, most companies are doing very well and it can be well seen from your bonus received!

The problem is, with such volatility in the market, should I invest my money or put it in the bank or spend it since inflation is going to be high next year.

I would say that if the market is dropping and you are able to get it at a good discount for eg. around 3300-3500 STI, then it is alright to invest a portion of your bonus inside. Chances are the market volatility will last for the next 6 months or so and taking advantage of the market volatility to get fund prices at a discount is a bonus.

What about the rest? It is alright to spend a bit of your bonus to reward yourself and your loved ones if your financial situation is doing well. Buy something you like or go for a trip and enjoy your holidays! It is important to learn to dote and reward yourself once in awhile, but of course make sure you don’t overspend!

Other then that, if you still got leftovers, park it in safe investment vehicles like money market funds or government bonds. They give you a very safe 2-3% annualised return and on top of that it is very liquid. You can withdraw them without any penalties.

Have a Merry Christmas!