personal financial planning for investors pdf slide

Puah Soon Lim, CFA

May 2015

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Personal Financial Planning for Retail Investors

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The information presented in the following slides

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Profile

Mr. Puah Soon Lim, CFA, has a Bachelor degree in Business Administration majoring in Finance from the National University of Singapore. Mr. Puah has more than 23 years of experience in the investment and financial industry. For the past 7 years, he has participated actively in investment education and delivered on a series of popular workshops, particularly on value investing and ETFs. He is a regular speakers at the SGX Academy and Bursa Malaysia.

Currently, he is an Associate Director of an independent financial advisory firm. He works with both individual and institutional investors to provide customised advice on optimal asset allocation. His extensive experience and thorough knowledge in wealth management enables him to break apart complex concepts into easy-to-understand components for the individual investors.

In his spare time, Mr. Puah is a keen endurance athlete and has completed several marathons and international triathlons. He is married with two school going children.

Runner

Public Speaker

Portfolio Adviser

Investor

What do you think is the biggest threat to your financial well beings?

Its Not What You Think it is

Know What Matters in Your Life

You May Already Have it

How much is enough?

FINANCIAL PLANNING

is the allocation of limited resources against unlimited wants.

Step1 Summarise Present Position

Step 2 Establish Financial Goals

Step 3 Identify & Evaluate Option

Step 4 Implement, Review & Revise

How can a financial plan help

you?

Minimize your taxes.

Cover insurance needs.

Buy a home and pay off the mortgage quickly.

Fund your childrens education.

Optimize employee benefits and pensions.

Save and plan for retirement.

Fund long-term health issues.

Care for elderly parents.

Manage estate planning and how to transfer

wealth in families.

Protect you from Yourself

FINANCIAL PLANNING

Step 1: Summarise Present Position

Preparing your Personal balance sheet & Income statement

How much is enough?

How much is enough?

Your Personal Income Statement

How much is enough?

What are your option if your Cash Flow Margin is Zero or a Negative number?

Understanding the Magic of Compounding

Time, Interest rate and Amount of Money the three variables needed for compounding to work

Let introduce you to 3 friends

21

The Magic Power of Compounding

P RN

x (1+ ) =

The time value of money

% 1 2 5 10 15 20 30 40

2% 1,020 1,040 1,104 1,219 1,346 1,486 1,811 2,208

4% 1,040 1,082 1,217 1,480 1,801 2,191 3,243 4,801

6% 1,060 1,124 1,338 1,791 2,397 3,207 5,743 10,286

8% 1,080 1,166 1,469 2,159 3,172 4,661 10,063 21,725

10% 1,100 1,210 1,611 2,594 4,177 6,727 17,149 45,259

12% 1,120 1,254 1,742 3,106 5,474 9,646 29,960 93,051

14% 1,140 1,300 1,925 3,707 7,138 13,743 50,950 188,884

16% 1,160 1,346 2,100 4,411 9,266 19,461 85,850 378,721

18% 1,180 1,392 2,288 5,234 11,974 27,393 143,371 750,378

20% 1,200 1,440 2,488 6,192 15,407 38,338 237,376 1,469,722

22% 1,220 1,488 2,703 7,305 19,742 53,358 389,758 2,847,038

24% 1,240 1,538 2,932 8,594 25,196 73,864 634,820 5,455,913

25% 1,250 1,563 3,052 9,313 28,422 86,736 807,794 7,523,164

Compounded Return on $1,000 Invested

$1,000 Deposited Each Year End of Year Values

% 5 10 15 20 25 30 35 40

2% 5,204 10,950 17,293 24,297 32,030 40,568 49,994 60,402

4% 5,416 12,006 20,024 29,778 41,646 56,085 73,652 95,026

6% 5,637 13,181 23,276 36,786 54,865 79,058 111,435 154,762

8% 5,864 14,487 27,152 45,762 73,106 113,283 172,317 259,057

10% 6,105 15,937 31,772 57,275 98,347 164,494 271,024 442,593

12% 6,353 17,549 37,280 72,052 133,344 241,333 431,663 767,091

14% 6,610 19,337 43,842 91,025 181,871 356,787 693,573 1,342,025

16% 6,877 21,321 51,660 115,380 249,214 530,312 1,120,713 2,360,757

18% 7,154 23,521 60,965 146,628 342,603 790,948 1,816,652 4,163,213

20% 7,442 25,959 72,035 186,688 471,981 1,181,882 2,948,341 7,343,858

22% 7,740 28,657 85,192 237,989 650,955 1,767,081 4,783,645 12,936,535

24% 8,048 31,643 100,815 303,601 898,092 2,640,916 7,750,225 22,728,803

25% 8,204 33,253 109,687 342,945 1,054,791 3,227,174 9,856,761 30,088,655

3 Friends You Need

Money To Invest

Patience

Knowledge on Investments

Equities is The Best Wealth Creation Tool

Suppose you invested in 3nd Quarter 2007 and lost 40% of your principal, how much does the stock market need to appreciate in order for you to breakeven?

Answer: 66.67%

The mathematics of a loss

Loss % 10% 20% 30% 40% 50% 60%

Breakeven 11.11% 25% 42.86% 66.67% 100% 150%

3 THINGS TO WATCH OUT FOR

Do Not lose Money

Refer to point #1 above

Refer to point #1 Again

The Rule of 72

36

Rule of 72

If your friend told you that she brought a house for $150,000 and that it is now worth $600,000 and she has held it for 10 years. What is the rate of return?

Illustration

Exercise

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Step 2: Establish Financial Goals

Provide direction and purpose, help to crystallise your thinking and provide personal motivation

Four Reasons We Dont Set Goals

Fear of Failure

Not Enough Time

Dont know what goals

to set

Dont know how

Categorise the Goals

Expenditure

Pay cash for car in 3 years time RM 35,000

Visit Europe with wife RM15,000

Protection

Top up life Insurance RM250 a month

Top up disability insurance RM 100 a month

Savings/Investment

Pay for my childrens university education in 15 years time : US$200,000

Retire at age 65 with an income of US$40,000 a year

Timeline of Goals

Short Term

Visit Europe end of this year

Pay Cash for Car in 3 years time

Top up life and disability insurance

Medium Term

Pay for childrens education in 15

years time

Long Term

Retire at age 65 with an annual

income of US$40,000 a year

Ah Lim

25 years old

Wants to pay cash for a Car in 3 years time

$35,000

Ah Lims Personal Balance Sheet

Ah Lims Income Statement

Ah Lims Income Statement

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Ah Lims Goal

How much is enough?

If your Cash Flow Margin is Zero or a Negative number, you have three options:

a Work on the time factor

b Work on the $ Factor

c Work on the R Factor

STEP 3: IDENTIFY & EVALUATE YOUR OPTION

Your options can be found in the three elements of the compounding formula:Time, Money and Return


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OPTION 1: INCREASE YOUR CASH FLOW MARGIN

Finding money you never knew you had

Long Range Objectives

Financial Independence

Start a Business

Pay off debtLifestyle Desire

Retirement Education

Cash Flow Margin +

Appreciation in Assets Growth in Net Worth

INCOME

Living Expenses Debt Repayment Taxes Giving

3 THINGS YOU NEEDFOR STABLE PRESENT FINANCES

A consistent budget plan

Absence of bad debts

An emergency fund

Five kinds of Debt to Avoid

1. Credit Cards

2. Consumer Debt

3. Mortgage Debt

4. Business Debt

5. Investment Debt

The case of magic of compounding working against you

*$+,-

Financial Implications of Debt

1. Compounding is working against you.

2. Getting in debt is a lot easier than getting out.

3. Debt always mortgages the future.

4. Debt always robs you of the freedom of choice.

Increasing Your Cash Margin

Ah Lims Cash Flow Margin

OPTION 2: WORK ON THE TIME ELEMENT

Postpone your goals later

Work on the Time Element

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OPTION 3: WORK ON THE RELEMENTIncreasing the R element require skills. The more skills you have in investment, the higher the R

Work on the R Element

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Expenses

An average household with yearly expenses of

$60,000 will see their expenses grow to $108,366 per

annum in 20 years at an inflation rate of 3%

$5,000 $9,030 (per month)

The Reality for Some

Expenses vs. Provident Fund

With an initial amount of $100,000 in your provident

Fund and a monthly contribution of $1,250 with a

Return of 5% over 20 years will leave you with $761,319

The Reality for Some

Hard Facts You Need To Know

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Building Financial Wealth

WEALTHDestroyers

Natural Disasters Wars & Social Unrests Illnesses/Accidents Bad Spending Habits Divorce Careless Investments

Be Aware Avoid Minimise Protect

AB"'C"B/-'

/9'C/

-'"B/D

Benjamin Franklin

STEP 4: IMPLEMENT, REVIEW & REVISE

The 6 Steps Strategy to Successful Investing

Eliminate all high interest debt

Keep one months living expenses in savings account

Keep 3 6 months living expenses in a money market account

Put saving for major purchases in money market account

Protect yourself with adequate Insurance

Invest to meet long term goals in: Stocks, ETF, Unit Trust

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The 6 Steps Strategy to Successful Investing







Asset Allocation

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The Asset Allocation Pyramid

Cash in Local currency 30%

Real Estate 60%

-$

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4

Cash in Local currency 75%

-$

Individual

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5%

10%

20%

30%

35%

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