18-09-2011, 06:29 AM
The Straits Times
Sep 18, 2011
Sometimes it's better to be chicken
Middle-aged investors must take extra care to gauge the risks and rewards of an investment before laying out hard-earned cash
By Goh Eng Yeow
For many of my friends in their 40s and 50s, it has been a trying time trying to juggle their finances.
With retirement approaching, they are anxious to grow a tidy nest-egg to ensure that they can spend their golden years enjoying the lifestyle that they have become used to.
For those with families, there is the added burden of seeing their children through college and taking care of aged parents.
They are worried that they may lose their hard-earned savings on a bad investment call. As they are in the last leg of their working life, they fear that they may not be able to weather any blow that they may suffer from investment losses.
They are wary of getting help from financial advisers, after the bad publicity which arose three years ago from the mis-selling of toxic products such as Lehman Minibonds as ultra-safe investments to retail investors.
And the recent roller-coaster ride in the stock market, with the Straits Times Index plummeting more than 10per cent since Aug 1, only adds to their misgivings about investing in stocks.
So even though inflation may be running at 5 per cent or more, some of them prefer to leave their savings in cash, even though its purchasing power is likely to be eroded in years to come.
Indeed, I have no easy answer for the risk-averse investor who comes to me with this question: This is the money I have for the rest of my life, and I cannot afford to lose it. Is there an asset where I can earn a return without losing my money ?
To get a higher return, it is necessary to put money to work in a better-yielding asset, but that requires taking a higher risk.
But while the average investor is afraid to invest in anything, he is also nervous about not being invested - and missing out on the higher returns.
So the big issue for such investors is to understand clearly the risks they are taking to get a certain reward.
Take my friend's 55-year-old uncle who recently used up his entire CPF savings as downpayment for a condo which he intended to hold as an investment.
He has never invested in property before, apart from the HDB flat he lives in. But he was worried that his savings might be eroded by inflation and believed that a condo would make a good inflation hedge, after seeing his friends taking the same action.
But as my friend noted, the snag was that his uncle had also taken out a big loan to pay for the condo - and this might not be appropriate for someone at his age.
As long as the economy stays buoyant, this will not be a problem as the condo can be leased out to get rental income to service the monthly mortgage payment.
But if there is an economic downturn, my friend's uncle may be unable to find a tenant for the unit. And if he is forced to sell at a loss, he may lose part of his CPF savings.
Of course, this is the worst-case scenario but a home-buyer should consider such a risk, given that there have been four recessions in the past 15 years.
In an economic downturn, it is not only harder to find a tenant, but job security can also be an issue - and this can be tough for those saddled with a big mortgage.
Therefore, my friend felt that his uncle had taken a risk out of all proportion to the rewards he might reap from making his condo purchase.
Before a middle-aged investor makes any big investment decision, he should consider if he has set aside enough money for retirement purposes.
If he thinks that he has enough to live on for the rest of his days, there may be some merit in keeping the cash in the bank, since this will ensure that he does not mess things up by losing on a poor investment.
But a better approach may be to have sufficient assets to be 'set for life' and then decide what to do with whatever is left over. It makes for unsophisticated financial planning, but it sure makes sleeping soundly at night much easier.
The problem is determining how much money you have to set aside to live on for the rest of your life.
As working professionals, most of us will say that while we are not rich, we are financially comfortable - and that the biggest problem we face is inflation eating through our nest egg faster than expected.
One suggestion is to take a hard look at your spending habits. This will give you an idea of how much you may need to set aside in order to live comfortably after retirement.
Apart from leaving this sum in the bank, you can also use it to buy the preference shares issued by DBS Group Holdings, United Overseas Bank and OCBC Bank which are listed on the Singapore Exchange. These are bond-like instruments which offer a considerably higher return of 4 to 4.5 per cent, as compared with bank deposits.
With the rest of the money, an investor should think hard about the risks he wants to take on an investment, and the rewards that come with it - whether it involves buying a condo or a portfolio of stocks.
What is important is to realise that while an investment strategy may be appropriate for others, it may not be right for you. You should take only risks that will not give you sleepless nights.
engyeow@sph.com.sg
Sep 18, 2011
Sometimes it's better to be chicken
Middle-aged investors must take extra care to gauge the risks and rewards of an investment before laying out hard-earned cash
By Goh Eng Yeow
For many of my friends in their 40s and 50s, it has been a trying time trying to juggle their finances.
With retirement approaching, they are anxious to grow a tidy nest-egg to ensure that they can spend their golden years enjoying the lifestyle that they have become used to.
For those with families, there is the added burden of seeing their children through college and taking care of aged parents.
They are worried that they may lose their hard-earned savings on a bad investment call. As they are in the last leg of their working life, they fear that they may not be able to weather any blow that they may suffer from investment losses.
They are wary of getting help from financial advisers, after the bad publicity which arose three years ago from the mis-selling of toxic products such as Lehman Minibonds as ultra-safe investments to retail investors.
And the recent roller-coaster ride in the stock market, with the Straits Times Index plummeting more than 10per cent since Aug 1, only adds to their misgivings about investing in stocks.
So even though inflation may be running at 5 per cent or more, some of them prefer to leave their savings in cash, even though its purchasing power is likely to be eroded in years to come.
Indeed, I have no easy answer for the risk-averse investor who comes to me with this question: This is the money I have for the rest of my life, and I cannot afford to lose it. Is there an asset where I can earn a return without losing my money ?
To get a higher return, it is necessary to put money to work in a better-yielding asset, but that requires taking a higher risk.
But while the average investor is afraid to invest in anything, he is also nervous about not being invested - and missing out on the higher returns.
So the big issue for such investors is to understand clearly the risks they are taking to get a certain reward.
Take my friend's 55-year-old uncle who recently used up his entire CPF savings as downpayment for a condo which he intended to hold as an investment.
He has never invested in property before, apart from the HDB flat he lives in. But he was worried that his savings might be eroded by inflation and believed that a condo would make a good inflation hedge, after seeing his friends taking the same action.
But as my friend noted, the snag was that his uncle had also taken out a big loan to pay for the condo - and this might not be appropriate for someone at his age.
As long as the economy stays buoyant, this will not be a problem as the condo can be leased out to get rental income to service the monthly mortgage payment.
But if there is an economic downturn, my friend's uncle may be unable to find a tenant for the unit. And if he is forced to sell at a loss, he may lose part of his CPF savings.
Of course, this is the worst-case scenario but a home-buyer should consider such a risk, given that there have been four recessions in the past 15 years.
In an economic downturn, it is not only harder to find a tenant, but job security can also be an issue - and this can be tough for those saddled with a big mortgage.
Therefore, my friend felt that his uncle had taken a risk out of all proportion to the rewards he might reap from making his condo purchase.
Before a middle-aged investor makes any big investment decision, he should consider if he has set aside enough money for retirement purposes.
If he thinks that he has enough to live on for the rest of his days, there may be some merit in keeping the cash in the bank, since this will ensure that he does not mess things up by losing on a poor investment.
But a better approach may be to have sufficient assets to be 'set for life' and then decide what to do with whatever is left over. It makes for unsophisticated financial planning, but it sure makes sleeping soundly at night much easier.
The problem is determining how much money you have to set aside to live on for the rest of your life.
As working professionals, most of us will say that while we are not rich, we are financially comfortable - and that the biggest problem we face is inflation eating through our nest egg faster than expected.
One suggestion is to take a hard look at your spending habits. This will give you an idea of how much you may need to set aside in order to live comfortably after retirement.
Apart from leaving this sum in the bank, you can also use it to buy the preference shares issued by DBS Group Holdings, United Overseas Bank and OCBC Bank which are listed on the Singapore Exchange. These are bond-like instruments which offer a considerably higher return of 4 to 4.5 per cent, as compared with bank deposits.
With the rest of the money, an investor should think hard about the risks he wants to take on an investment, and the rewards that come with it - whether it involves buying a condo or a portfolio of stocks.
What is important is to realise that while an investment strategy may be appropriate for others, it may not be right for you. You should take only risks that will not give you sleepless nights.
engyeow@sph.com.sg
