Friday, August 20, 2010

3 financial shocks you should guard against

By Thomas Mathew

All of us are given an opportunity to manage our own time and resources. Every day, we are given 86,400 seconds - to invest or to spend. The choice is yours.

If you have invested your time well, you will find that you have created enough wealth. Creating wealth is easy if you have invested your time, energy and money in the right places for the right purposes.

These three shocks are inevitable in most individuals' life, it is just a matter of when and the sequence.

However, if every individual handles them well, I would say your financial health status should be in pink, as your strategy should ensure retirement goes as planned even if the three shocks all occur at the same time.

Financial planning creates a well-planned and well-organised time line that can withstand three major shocks.

Time-line Shock

Disruptions to your life: Mainly physical or medical conditions and situations where you are not able to perform to your usual physical ability

You are very likely to have purchased insurance policies without much consideration and coordination to the scope of coverage, level of coverage and cost of coverage. As a result, you may be implicated in one of the followings:
  • Coverage that is not comprehensive - Risks that you should have been covered for, but are not
  • Too low coverage amount - Risks that you are currently covered for, but at too low a level
  • Too high in overall premiums paid - Paying a larger premium than necessary
To avoid the risks above, you should establish a proper Risk Management Portfolio (RMP) to manage your risk exposure efficiently and effectively.

What is an RMP? An RMP is a combination of a portfolio of risk management programmes to manage the different aspects, levels and degree of impact of the risks that you are exposed to everyday.

All these inefficiencies can be avoided by :
  • Insisting that you be given a thorough financial health check before any insurance plan be recommended or purchased.
  • Insisting that you be given a comprehensive selection of the insurance plans from different companies to compare and choose from so that you can have the best option in terms of coverage and premium costing.
  • Insisting that you be given a complete report on how your overall risk management portfolio is able to withstand the time-line Shock, Self-funding Shock as well as the Market Shock.
Self-Funding Shock

This situation arises when income comes to a stop and money is required to handle daily expenses until income start to stream in again.

This is one of the most overlooked aspects in risk management.

A classic example can be found in the way most people manage their medical risks. The cost of medical insurance plan increases every three to five years, depending on the medical plan.

If you are struck with a critical illness like cancer or heart attack, most probably you will be out of work for some time, and maybe even a long time. When that happens, it will create a great challenge - who is going to pay the premium for the medical insurance plan which is increasing every three to five years?

The premium can reach an unaffordable level after a few rounds of adjustment so unless a funding mechanism is structured within the overall Risk Management Portfolio, your savings or cash reserve will be wiped out rather quickly.

Therefore, it is important to ensure that your overall Risk Management Portfolio is able to withstand the self-funding shock and at the same time, provide you and your family with lifetime financial security.

Market Shock

When the market does not go in your favour or major events cause disruption to the usual performance of the market.

A risk management portfolio without any element of protecting you against market shock can only be as good as temporary protection.

We have seen so many cases in which the risk management portfolio was wiped out completely due to the inability to keep the program going in the midst of an economic or market crisis.

Market shock can only be managed through proper strategic planning. Understanding how inflation, economic data, interest rate and liquidity can impact the market is vital to the successful management of your money.

Depending on your risk profile, your funds can be invested into tactical growth, balanced and income funds. The percentage of allocation into each of these investment categories will depend on your risk appetite, investment objectives, time horizon, how much capital you wish to accumulated and the portfolio returns needed to achieve your investment objectives.

Your objective here is to construct an investment portfolio that can withstand market shocks and also give you a decent rate of return of between 8 per cent to 12 per cent annually.

Planning ahead...

One of the keys towards achieving lifetime success is to engage ourselves in financial education.

Financial education is more than just acquiring information and knowledge. Financial education is more than just knowing the facts.

The real process of financial education should entail:
  • Acquiring financial knowledge
  • Connecting to the financial community
  • Engaging in financial development
  • Being mentored by financial experts
  • Exploring new financial options
  • Being clear about your own financial destiny

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