Photo taken in Oct 2014, New Zealand, South Island, Rotorua
Asset Allocation – many Insurance Agent, Bankers or Financial Planner will think that – if you give them $100,000 to invest – They will use 45% to invest in Equity and 45% in Bonds and balance 10% in cash. To them, this may consider the Asset Allocation they are doing for their clients.
Asset Allocation is the most important criteria in our Retirement Planning application and we do it in a more comprehensive and holistic approach. We will look at client’s Total Assets – like their Cash, Stocks, Bonds, Gold Bars, Properties, Insurance Policies etc……. and more importantly, their Total Liabilities too.
Case Study :
I met this couple 2 years ago, they told me – Jonathan we only need you to recommend us some retirement plans to consider. They think that they are doing very well in term of their finances and they do not need me to do Retirement Planning for them.
They told me, in 12 years-time, their mortgage loan will be fully paid and they estimated that they will still be able to grow their existing investment and CPF of about $3,000,000.
Since I do not do product selling and will not recommend any products to clients without knowing all the assets they are holding now, I rejected their proposal. I insist that it is beneficial for them to reveal their finances to me.
Below are the summery of their finances :-
Clients – Couple, Age 53 & 53 with 2 children Age 16 & 18
Earning : $350,000/year – US MNC
Home : Landed @ $4.0 million – Loan : $2,000,000, Loan Term : 12 yrs
Monthly Loan Repayment : $17,000/month
Yearly Positive Cash Flow : $20,000/year
CPFOA : $56,000 & Cash : $250,000
Stock : $1,000,000 & Perpetual & Coco Bonds : $1,000,000
After consolidating their assets and liability, I have pointed out to them my concern on their high mortgage loan and their job security.
If a financial crisis were to hit now, their $2 million in Stocks & Bonds may drop 50% or more, their $4 million property may also fall more than 40%, but their $2 million mortgage loan will not be reduced. Furthermore, since they are working in an US MNC, there is a high chance they may get retrenched.
In the worst-case scenario, they may end up being forced to sell their house if they are left jobless and unable to service their monthly mortgage repayment.
I have recommended them to sell off their Perpetual & Coco Bonds and use the $1 million to pay down their mortgage loan to $1 million which I am more comfortable.
I have also recommended them to re-allocate some of their stock to lower risk investment products and some retirement plans.
Everything is more manageable now and I have since further enhanced their retirement plan. They also told me that ever since their mortgage loan has been reduced to $1 million and monthly loan repayment lowered to $8,500, they felt more at ease.
They are also more comfortable in indulging themselves in outing, concert, musical play and traveling. Knowing that if there is any economy downturn going forward, they are more prepared.
Clients always look forward to the Best-Case Scenario for their Investments. I always look for the Worst-Case Scenario for all my client’s investment and liabilities exposure.