We restarted our Bid And Ask interview series after a hiatus. Our first guest in this new season is none other than one of the co-founders of Dr Wealth, Louis Koay. He made a big decision to switch his career from oil and gas to the finance industry, giving up his advantage as a first class honours awardee in engineering. It wasn’t an easy decision because of the social stigma being a financial advisor. Even his friends and relatives made negative comments instead of giving their words of encouragement.
These comments mattered. He delayed his decision to become a financial advisor for about two years before figuring out that no one should decide his life. He doesn’t need permission from others what he chooses to do. So he went ahead.
Fast forward 5 years, he is successful in many measures. He now manages a team of 6 advisors with $20 million worth of assets under management. He shared how he built this business up in a previous article.
In this interview, I wanted to pick his brain on the common money problems among the clients that he have met. The utility of this is that you can learn to avoid some of these problems. I learned about one mistake from this interview and I am going to correct it. So I believe everyone should be able to take away something useful.
#1 – Use short-term savings for long-term investing
There are many big ticket items in life which we aspire to own. They usually require a large amount of savings to even afford the deposits. Saving for these purchases are not a problem since Asians are good savers in general. But we often commit mistakes on these goal-oriented short-term savings. For example, we may plan to buy a house in two years and have a sum of savings set aside for it. But we may sulked at the bank’s interest rate and may end up investing it in hope to get a higher return, thereby risking this sum of money meant for a property purchase. Two years is a short time-frame for the stock market and yet the downside could be a stock market crash. Investing short-term savings in volatile instruments is really a bet on our luck.
To make matters worse, it is hard to have holding power and avoid selling at the lows because our big ticket purchases are in jeopardy. It is hard for us to think straight. Louis saw quite a handful of clients liquidating their stock holdings as the market dived during Covid-19 because they needed to salvage whatever capital they could.
What they should have done is to park their money in low- to medium-risk investments with a certainty of returns and payouts at the time they need the money. The priority should be capital preservation rather than capital appreciation. Some of these instruments can be Singapore Savings Bonds (SSBs), fixed deposits, money market funds and short term endowment plans.
#2 – Paying too much for inadequate insurance and dependents not knowing what they can claim
Louis have found some clients to have overcommitted to endowment plans as the premiums can be high but the protection are often insufficient. There are more important insurance coverage to be purchased prior to an endowment plan. The foremost being a hospitalisation plan.
Louis emphasised about having an insurance summary, which is a quick overview of the insurance policies we have. The common mistake is that we are the only ones who know about the policies we have bought, while our close ones are unaware of them. The problem arises when we either pass away or are in an incapacitated state. The close ones would have to make the claims on behalf of us and it is impossible to know without calling every insurance company to find out. In fact, there are unclaimed insurance and this is so wasteful. Hence, be sure to have an insurance summary and share it with your close ones.
#3 – Invest without any strategy
Louis observed some clients have a long list of investments in stocks and funds and he knew that they don’t monitor these investments. They invest with the view of ‘buy and hold forever’ – keep adding investments without reviewing the ones they have. Some of these investments should have been sold because the situation may have changed and deteriorated. No one is so good to get every investment right so correcting mistakes along the way is part of a good investment process.
Moreover, investment objective may change overtime. You may go for capital gains in your younger days but you are likelier to go for investments that provide cash flows during your retirement. This would require a complete review of your investment holdings and you need to restructure the portfolio to reflect the change in objective.
Some investors do not know their risk tolerance well. They often increase their exposure to stocks during a long bull run and only to find themselves unable to accept the volatility when the market turned bearish. They resort to panic selling at the lows as a result.
On the question about why Singaporeans generally have more cash than investments, Louis replied that one possible reason could be due to a group of investors who always hold the opinion that the market is going to crash. And when the market tanked during Covid-19, they still didn’t to pull the trigger to invest because they were waiting for a better deal. He added that there were investors who have been holding too much cash over the past 10 years and have been missing out on the rising stock market. His advice is that it is impossible to buy at the exact bottoms. It would be more prudent to stay invested and while it is okay to hold some cash for future opportunities, it is too disadvantageous to hold too much.
#4 – Invest in products that they do not understand
Investment linked policies (ILPs) were very popular in the past as many financial advisors were pushing for them. The policy holders mainly believe that ILPs are meant for investments but they failed to know that there’s a protection component and the cost goes up overtime. Hence they have been paying dearly without knowing what their policies were meant for.
Many endowment policy holders do not know their investment returns too. They often assume that the non-guaranteed returns are their policy returns. But they failed to account for the guaranteed component which would pull down the overall returns for the policy.
Louis shared a case where a client bought a 25-year endowment policy meant for his daughter’s tertiary education. It doesn’t make sense for his case because his daughter was 2 years old at the time of purchase and she would have graduated from university by 27 years old. The endowment plan’s payout would be too late to fund her education. Surrendering the policy would incur a huge loss on the other hand. So he was pretty stuck with it.
We also discussed that it is easy to blame advisors for ill advice. Levelling up your financial knowledge is not difficult nowadays with abundance of information online. But at the same time we must also be careful with the information we obtain from the internet. We should go for trusted sources or at least get a few perspectives to help us think about our own situation. Ultimately, there must be a healthy dose of skepticism. Don’t be a cynic believing all financial advisors are bad. And don’t be gullible believing everything anyone says. Trust but verify.
#5 – Lack of understanding and urgency for retirement planning
Many clients assumed they have planned for retirement as long as they have saved and invested. But they may not understand much about CPF despite it being a foundation of retirement planning. It is a complex topic but it pays to know the key policies like CPF Life and some options like CPF top ups and enhanced retirement sum.
The misconception is that retirement planning is what you do when you are nearing the retirement age. Those in their 20s and 30s are uninterested to plan for retirement. But if you start too late, there’s too little time for compounding effect to kick in. A holistic financial plan means that you should tackle all aspects in parallel, not just budgeting, savings, protection but also retirement, even if you are in your 20s.
Louis also find that clients tend to focus on wealth accumulation but not distribution at the later stage of their lives. Distribution means receiving streams of retirement income to pay for your living expenses. You should structure multiple layers of income. There should be some guaranteed cash flow from instruments like annuities and bonds. Dividend stocks can be useful but should not be the only avenue because dividends are not guaranteed and volatility might be too high.
Louis has definitely given a lot of useful tips for all of us. Even for myself, I realised the importance about letting my close ones know about the policies that I have. I am going to update this summary and share it with my wife right after this. My wife would know where to claim the money from should anything happens to me.
I hope you will take action on some of the things we have discuss. No action equates no results.
Louis has also created a personal finance mastery course if you would like to learn more about financial planning for yourself. It is an e-course and you can take it anytime you want and as many times as you like. Remember to use “50off” during checkout for a 50% discount. Sign up here.
In my next episode of Bid And Ask, I am going to interview Rayner Teo of tradingwithrayner.com. He is an independent trader who has over 500,000 followers on his Youtube channel and 30,000 traders in his community. I will get Rayner to share about the common mistakes he observed among traders and suggests how to avoid them. We will do it over Facebook live on the Dr Wealth Facebook Page so follow us to get the reminder to the session. We go live on 6 Jul 2020, 7:30pm. See you there.