Article # 11:What You should Factor into your Financial Planning for the next decade

( This article had been published in The Borneo Post on 18th Jan 2011 )

In the last two weeks articles, I have discussed a few factors that I think will still be a constant when we look to plan for the next decade in financial planning.

First on the list are terrorism and sporadic bombings incidents, the security threats and disruptions it poses. The economic and financial market cycles, as sure as the cycle of night following the day, will be another constant you can expect. You can also expect the disasters and violence, both natural and man-made, to be around. And of course the ever changing information and communication technology.

Since there is no reliable way to predict the exact occurrence of such events happening, there is a strategy you can take in your financial planning, which in Chinese, it is called, yi jing zhi dong. （以静制动 ）I have tried hard to find a good translation in English, by typing the phrase in Google. One that come close to its meaning is coping with all motions by remaining motionless.

Be Systematic -Value Averaging

By consciously remaining passive, instead of being carried away by all the hypes; the jittery and the euphoria in the financial market, you will much better off at the end of the day.

In your financial planning to accumulate funds for your retirement, you can adopt a mechanical, systematic and passive investment strategy called value averaging. It haven been shown by Harvard professors that this approach can help increase your investment returns without increasing undue risks.

Another way you should manage the investment risks is to construct your investment portfolio based on a simple and established model call the personal investment pyramid. ( see figure 1 )

You can find this model in any of the personal investment planning textbooks. There is a reason why it is taught in investment and financial planning. It is because you need to manage your investment through a strategy of diversifying your risks.

What Does Investment Pyramid Mean?

Investopedia.com defines it as a portfolio strategy that allocates assets according to the relative safety and soundness of investments. The bottom of the pyramid is comprised of low-risk investments, the mid-portion is composed of growth investments and the top is speculative investments.

Safety of Capital and Liquidity

The bottom of the pyramid is the foundation for your investment plan. Sufficient safe, low risks vehicles should provide the base or foundation of your investing plan. Safety of your capital and liquidity are the main objectives.

From a financial perspective, liquidity refers to the accessibility of an investment. The best way to find the liquidity of something is to determine how long it would take to convert to cash if you happened to need your money today.

After you have built the foundation of your investment pyramid, then you can start looking at growth and speculative vehicles. The higher you go up the pyramid, the greater the risk and the potential return or potential loss from your investment.

What is Investment risk?

In the investing world, the dictionary definition of risk is the chance that an investment’s actual return will be different than expected. Risk means you have the possibility of losing some, or even all, of our original investment.

How will Changes in ICT affect your financial planning?

You will come to realize that information and communications technology ( ICT ) is a double-edged sword. It will either help an investor or in an extreme case, destruct him or her.

On one side, the easy and efficient access of financial information and knowledge can empower a person to become a better-educated and informed investor.

However the vast amount of information can cause information-overload. An investor may be worse-off if he or she cant sift through the useful information from the information rubbish which clouds an investors decision making.

Another real danger is that an investor can find himself or herself too close to the market because of the constant streams of real-time financial data available on the Internet. An investor may unknowingly become a speculator in the stock market and exposed to unnecessarily high financial risks.

On the darker side, the Internet is littered with con-artist schemes and Ponzi ( pyramid ) schemes disguised as MLM, investment or moneymaking opportunities.

Call LKC Chartered Financial Consultants ( 082 245 998 or 016 888 0138 ) before committing any insurance or investment products. We will 100% tailor-make a financial & estate plan with your best interest in mind. Lee is a Certified Financial Planner, Chartered Financial Consultant and Fellow, Life Management Institute.