Why holistic wealth planning is a must

Sound financial planning has become more essential than ever amid health risks and market volatility

Invest, finance, investment, women, money, Covid-19, wealth planning
Market volatility and uncertainties caused by Covid-19 have forced many to question whether they have adequately managed the risk in their investments, says Ms Chung Shaw Bee, UOB’s head of deposits and wealth management for Singapore and the region.

Growing your wealth has become an ever-pressing challenge. Ultra-low interest rates suggest investors should take some risk to seek higher yields and capital growth. But uncertainties lurk in every corner, ranging from emerging and more virulent strains of Covid-19 to the prospect of a deeper recession.

The pandemic has fundamentally changed many people's consumption and investment behaviours, says Ms Chung Shaw Bee, UOB's head of deposits and wealth management for Singapore and the region.

"The rapid spread of Covid-19 last year plunged the global economy into a deep recession and households across the world had to take a closer look at their finances and adjust to these unforeseen circumstances. Today, the idea of risk is very much at the forefront of investors' minds.''

What's more, the scale of the market plunge last year in March and the subsequent sharp rebound have forced many to "confront the question of whether they have adequately managed the risk in their investments'', she says.

The big question is: How do you plan your wealth so that almost all your bases are covered? That is, your portfolio remains resilient despite volatility; that illness or an accident wouldn't burn a hole in your finances; and, through this all, that you are able to regularly set aside funds for your children's education and eventual retirement.

Growing your money

Wealth planning may sound intimidating, but this need not be the case. It is important, however, to note that there are no shortcuts, just as it is often said in finance that there is no free lunch. Investing regularly harnesses the power of compounding, so that even a modest amount set aside regularly grows to a substantial sum over time.

The good news is that Singaporeans intend to invest more, as a UOB Asean Consumer Sentiment Study has found.

Overall, 38 per cent of Singaporeans aim to invest more and this is more pronounced among younger ages. Among Gen X, those between 40 and 55 years old; Gen Y, aged 24 to 39; and Gen Z, aged 18 to 23; 39, 42 and 36 per cent, respectively, indicate their intention to invest more. The survey was published last October.

Here are some steps to help you take stock of your financial position.

Set financial goals

Framing your goals in terms of short term (three to five years) and longer term (10 years or more) helps to set investment horizons which will have a material impact on how you invest. As an article on MoneySense says, goals must be smart - specific, measurable, achievable, realistic and time-bound.

Take stock of your assets and liabilities

Assets include amounts in bank accounts, investments, your Central Provident Fund (CPF) account and your home. Liabilities comprise any loans including credit card debt and home or car loans.

Your CPF account is an all-important foundation of your financial plan. It earns substantial risk-free rates of between 2.5 per cent for the Ordinary Account and up to 6 per cent for the Retirement Account.

More Singaporeans are making voluntary top-ups to maximise the interest rates. Based on CPF data, the amount of Retirement Sum top-ups has risen from $1.9 billion in 2018 to $2.9 billion in 2020.

Work out your net cash flow

This involves totting up your monthly inflows and outflows of cash. Inflows should include employment and investment income including dividends. Outflows typically comprise household expenses and insurance premiums.

You may find that you have substantial sums of cash in excess of what you need for a "rainy day'' cash cushion. Since cash earns very little and inflation is widely expected to creep up, amounts in excess of this cushion may be placed into higher-yielding alternatives.

Prioritise protection

Protection is the basic building block of a financial plan as it addresses the risks to life, health and your assets. Life protection gives a lump sum on death to tide over your dependants until they are able to enter the workforce.

The same goes for critical illness plans, which tide over family expenses upon diagnosis of a serious illness. Mortgage protection is also a must as this ensures your home loan is taken care of should death or a permanent disability occur.

A hospital plan is essential. The MediShield Life and Integrated Shield plans (IPs) are hospital and surgical plans under the CPF umbrella. Here it helps to consider your expectations of healthcare and the affordability of premiums especially for older ages.

Premiums for both MediShield Life and IPs are deducted from your CPF account, subject to a cap. Riders must be paid for in cash. Include children in your cover, of course.

Invest regularly

There are certain broad and prudent principles to ensure that you are able to stay invested through market cycles.

Invest, finance, investment, women, money, Covid-19, wealth planning

One, be diversified so that any downturn in a single sector or geography would not cause an entire portfolio to tank. Two, invest regularly which enables you to "dollar cost average'' your exposure. Regular investments enable you to buy more of an asset when prices are low, and less when prices are elevated.

Three, be patient and stay invested. Given the unpredictability of markets, it is impossible to consistently time entries and exits. Data shows it is far more important to stay invested over the long term.

Revisit your plan and asset allocation

Your asset allocation is a big-picture map of your investment plan. An article on the Investment Management Association of Singapore website explains: "Asset allocation is probably the single most important decision you have to make.

Research has shown that 90 per cent of returns generally come from asset allocation." Review your plan regularly, at least once a year, but particularly when you have a change of life circumstance.

Risk-first as a foundation

Wealth planning and advisory at UOB start from a holistic risk-first approach. This proprietary approach envisions a client's financial needs as a pyramid.

The base comprises elements to safeguard one's assets; the middle is for asset building. These two layers form the core strategy. The top of the pyramid is for wealth enhancement, and corresponds to the tactical portion of one's allocation.

With this starting point, the advisory process seeks to understand a client's willingness and ability to take risk to ensure they take only the appropriate amount of risk and work towards their financial goals sustainably.

Ms Chung Shaw Bee, UOB's head of deposits and wealth management for Singapore and the region, says the bank takes a two-pronged approach to help clients: safeguard and build.

It is important to ascertain the appropriate amount of risk one should take, commensurate with one's purpose and horizon, she says. UOB's investment portfolios comprise two types of solutions - Core and Megatrend. Core solutions are typically lower risk and form the foundation of a portfolio. Megatrend solutions enable clients to invest in companies able to generate profits from future structural trends.

To enhance its client advisers' services, the bank has rolled out the UOB Portfolio Advisory Tools (PAT), a purpose-built digital advisory platform that draws on more than 12 years of market data to simulate the expected performance of a portfolio against various market scenarios.

"This helps clients better understand the potential downside risks and compare the volatility and risk-return trade-offs of the different investment options. These tools are designed to support our bankers so they can deliver wealth advice that is comprehensive, relevant and actionable,'' she says.

UOB offers an omnichannel approach giving clients flexibility in how they wish to engage with the bank. This ranges from digital tools and insights to in-person advisory.

An example of how the risk-first approach works:

Mrs Lim, 35, is a working mother with two children, ages two and four. Her risk profile following a fact-find is '3': She has moderate risk appetite and is open to moderate levels of volatility.

Based on the PAT, the adviser finds she has a $150,000 shortfall in critical illness coverage. She is recommended solutions to bridge this gap.

Mrs Lim has $200,000 to invest. The recommended allocation is 80 per cent in core strategies and 20 per cent in tactical strategies. The 80 per cent allocation goes towards lower volatility solutions like global multi-asset funds and bonds to build her wealth sustainably.

The balance of 20 per cent is allocated to tactical strategies such as equities and structured notes to enable her to participate in market opportunities and megatrends identified by the bank.

Genevieve Cua is the wealth editor of The Business Times.

Read the first article in our "Rethink Your Wealth" series here.

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