Business

Start planning soon to achieve financial independence

Successful businessman John Lim (not his real name) ​​had jointly owned a software company specialising in logistics with two partners.

The 70-year-old decided pretty early on that he wanted to retire by 50 to focus on projects he had put aside, and essentially enjoy life. After all, he had been working hard since he was 20.

The business flourished and one year ahead of his target, John was able to get a good valuation and sold his stake to his partners. He then retired with his wife to a neighbouring country where the cost of living is lower, built their dream house and settled into a more relaxed and healthy lifestyle.

What Mr Lim has continued to do though is keep tabs on his investments, spending one to two hours daily tracking their returns, and looking for other potential investment opportunities.

With longevity in mind, the couple would need to provide for their expenses for, possibly, another 30 to 40 years.

​What to consider when making investment decisions

Having a long-term view is critical when deciding on investments. Not many people own profitable companies which they can monetise come retirement, and even Mr Lim’s case shows that after pocketing millions of dollars from a sale, the proceeds may not last a lifetime. Hence the need to continue tracking one’s investments, and make adjustments if warranted.

More than a year on, the Covid-19 outbreak continues to present challenges for people and the global economy. At an individual level, it has not only forced us to rethink how we live, work and play, but at times, raised anxiety over job security, said Ms Evy Wee, head of financial planning and personal investing at DBS Bank. 

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The pandemic brought about an end to the bull run since the 2008 Global Financial Crisis; but it also presented an opportunity for many retail investors who took the market correction as a buying opportunity for equities, said Ms Wee.

Comparing data from the first two months of 2020 with figures from a year later, DBS observed a four-fold increase in the number of retail investors who are now invested in global equity markets.

Similarly, Central Depository account openings with the Singapore Exchange grew by more than 2.5 times between February and July 2020, compared with the same period in 2019.

How do you mitigate risks?

“While it is encouraging to see that more young people are aware of the benefits of investing, this also brings to light the importance of understanding the types of market risks they are getting exposure to,” said Ms Wee.
 
Not understanding or being mentally prepared for such risks can, in some cases, result in unintended consequences.

“This can be compounded by the socialisation of trading or by solely following self-styled investment gurus. The issue here has little to do with these alternative sources of investment advice itself. In all fairness, they might provide new perspectives or discuss stocks rarely covered by mainstream sources.”

“Instead, it boils down more to whether they are the sole sources of information for many first-time investors. As with most issues or situations we are faced with in life, blindly following advice from a single source isn’t recommended.”

Among the dangers of heeding investment advice on social media is that many of these sources are not regulated or licensed by authorities.

This means investment ideas are given with little consideration for how much each individual fully understands his risk profile, risk appetite and knowledge of investment products.

“All investors, regardless of age, must fully comprehend the risks that each investment solution carries, especially as uncertainty (and consequently, market volatility) from the pandemic remains,” said Ms Wee.

How a digital tool can be helpful

DBS customers without guidance typically invest $3,000 a year. However, customers who are guided by personalised recommendations in DBS NAV Planner — a digital financial and retirement advisory tool — invest more than double that, at around $7,500 a year. 

“As DBS NAV Planner users have a better understanding of their risk profile and appetite, they are also able to invest their excess cash savings more adequately than others. While we were reasonably sure of this logic before, we now have data substantiating the fact that our customers need and are enabled by a guided advisory framework.”

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All investors want to make more precise and better-informed decisions with their money.

This, according to Ms Wee, guided the bank to launch the “Make Your Money Work Harder” feature within the DBS NAV Planner in April this year.

“A digital advisory tool like this can be used to help customers remove guesswork along with investment biases, which in turn, widens the pool of investment solutions suited to them. It can help customers uncover blind spots too.”

DBS customers in Singapore have about half of their assets under management in Central Provident Fund and Supplementary Retirement Scheme funds, and such tools draw attention to using funds from these schemes for investing, said Ms Wee.

Why protection like health insurance is important

As you invest over the years, don’t lose sight of protection coverage, especially health insurance, said Ms Lorna Tan, DBS Bank head of financial planning.

“Having adequate insurance cover when you are younger ensures insurability, affordability of premiums and helps to cushion the cost of treatment without having to dig into your savings,” said Ms Tan.

As you start working — when you are likely to be in the pink of health — pick up plans that cover hospitalisation, like an Integrated Shield plan, and critical illnesses, she said. Other considerations include personal accident insurance if budget permits.

If you have dependants, having term insurance can provide them with a payout to carry on if you suffer from terminal illness or die prematurely. 

The Life Insurance Association Singapore (LIA) recommends approximately nine to 10 times your annual earnings as basic term life coverage.

As this amount varies from person to person, it might help to have a meeting with a wealth planning manager to evaluate your protection needs.

For critical illness coverage, the LIA recommends approximately five times your annual earnings, based on the likely recovery period of five years.

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If you have children, start saving for their tertiary education when they are still young through endowment plans and investment-linked policies, said Ms Tan.

For those supporting parents, the priority is to ensure that they are adequately insured against unexpected medical bills and treatment costs.

“You do not need to have insurance for everything, just the things that could set back your financial situation or derail your financial goals,” she said. 

To help you decide what insurance you need, make a list of the risks or events that concern you. Assess the likelihood of the events happening and the financial loss you may suffer if they occur.

Consider how you would cover the financial loss. For example, large hospital bills could set back your retirement goals if you don’t have savings or insurance to cover this.

Not everyone can be like Mr Lim and retire early. But what is available to everyone are financial tools and advice to make more precise and informed decisions about their money.

The writer, an ex-Business Times journalist, grits her teeth when it is time to renew her annual health insurance, then duly pays up.

Red flags in online content promising quick returns

  • Investment videos and posts on social media platforms tend to have catchy titles to attract views such as “once-in-a-lifetime opportunity” or “buying this stock can make you a millionaire”.

  • The use of language promising high returns, especially for people who are facing financial difficulties. They might be attracted to the possibility of making money without consideration for potential downside risks.

  • Over-simplification of complex investing strategies or processes, making it seem possible to earn huge profits with little financial knowledge. This paints an inaccurate picture of investing, where investors often have to deal with the ebb and flow of the market.

This is the fourth of a seven-part series in partnership with DBS 

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