When the brakes are working
COMMENT
By TAY HAN CHONG
TWO of my previous articles had generated more feedback and interest than I had anticipated. More people have asked me about my thoughts on the market and whether they should be jump in now or later. And in some cases, I was asked if they should take profit and await a possible W shape recession, or perhaps even a stretched out L shaped recession.
Honestly, even the most experienced investment expert wouldn’t be able to predict how exactly the market is going to be in the next six to nine months. But it doesn’t mean that nothing can be done amidst such uncertainty. I had a bit of an insight recently.
Last week, we had a company event at Cameron Highlands. Many car-pooled for a very scenic and pleasant drive there, especially going by the newer route which was less challenging compared to the narrower old route. Nonetheless, the new route is still winding and at some points, the turns are literally hairpin sharp. Logically and prudently, we will brake and slow down at such bends or when following a slower vehicle. But when possible, such as along straight paths, we will speed up and overtake.
A safe drive doesn’t just rely on your judgment alone, there are road markings to help you too. Where there are dotted or broken centre lines, it means that the stretch of road allows you to see a safe distance ahead for you to overtake by cutting into the opposite lane.
I had another equipment to help me too – a GPS (Global Positioning System). Whenever I go faster than the allowed road speed limits, a warning “peep” is heard. Naturally, keeping to the speed limits when on a winding mountain road is an important safety feature.
Here’s an interesting question, when the brakes of your car has problems, do you end up going faster or slower?
It doesn’t matter because when the brakes are experiencing problems, you should not even be driving at all! I guess if you are really compelled to move the car, you will probably be inching forward slowly, with the hazard warning lights blinking. However, I would never advise as such.
But when the brakes are working fine, perhaps you would be more confident about driving faster. Is there an irony here? Of course not. Many Malaysians are experienced drivers and know that brakes and tyres are probably the two features of the vehicle that one cannot compromise on.
Yet when it comes to financial well-being, people tend to give me that puzzled look of disbelief when I talk about financial-brakes. So during the Cameron Highlands trip, I gained an insight which hopefully translates into an interesting perspective that allows investors out there to appreciate why managing investment risks is like having good brakes.
The hallmark of one’s “financial brakes” would be the ability to manage risk, and ratchet down the risks of investing. Here, risk is defined as the chances of losing your money. The three financial brake options are:
(1) Savings deposits. These are “natural brakes” and are very safe. Until end of 2010, there is a 100% guarantee by PIDM too. It can’t get safer than this. But as brakes work, the better they are, the lesser opportunity for you to get ahead. Hence the returns are typically low and may not even get you much further or faster than inflation. So typically, after taking into account inflation, the real returns might be zero or even negative.
(2) Savings-oriented insurance policies such as endowment policies. Some insurance products come with significant savings elements which provide better yields compared to normal deposits, although they may require a long-term commitment such as 10 or 15 years. Generally, these also provide some form of participation in the sharing of the profits as well (they are known as participating policy). The principal amount or the single premium paid is typically also guaranteed. Such instruments trade-off time to give a higher yield when compared to traditional deposits which tend to be one year or shorter in tenor.
(3) Low risks investments instruments such as capital protected unit trusts. These do not pose risks to the underlying principal although they participate in the investments story to a certain extent. Generally, principal is not at risk and are protected at maturity. However, the potential additional returns are at risk as the product is structured to have exposure to the market thus allowing some participation to the market performance.
Here’s my advice. Markets are uncertain. Despite the equity market rally, opinions remain split between a long U-sharp recovery, a W-shaped double dip recovery or a L-shaped protracted recession. Even if there is a strong recovery, brakes are always needed (remember, there are speed cameras or police patrol cars on highways too!).
I profess to be a risk-taker and believing myself to have a generally well diversified portfolio; I thought that I didn’t really need to have one or another of these financials “brakes”. But my portfolio begged to differ! A recent financial health check actually revealed that I do have all the above three financial assets, an assortment of braking systems in fact.
I am an eager beaver when it comes to saving. I actually save first before I spend. Just like when I was 7, I still enjoy the excitement in seeing my deposits grow whenever I look at my savings passbook balance.
I also have two endowment policies which pay me a guaranteed yield yearly, plus a potential bonus at maturity. Though low yield compared to equity returns during the good times, these give me certainty of returns. Having a minimum is like having a bird in hand.
I only recently just invested in a capital protected product (actually last week). My banker had been reminding me about diversification, and I finally came round to having capital protected products in my portfolio despite my higher risk profile. In this case, the product allows me access to instrument that as a retail investor I have no access to. And I have my capital protected as well.
Be it driving or investing, it is always more interesting to discuss acceleration, how to gear the engine and move ahead. But the wise will remember that brakes are just as important, because you never know if you need to slow down to negotiate a bend or to avoid a crash.
Tay is senior vice-president and senior head of UOB’s personal financial services division
COMMENT
By TAY HAN CHONG
TWO of my previous articles had generated more feedback and interest than I had anticipated. More people have asked me about my thoughts on the market and whether they should be jump in now or later. And in some cases, I was asked if they should take profit and await a possible W shape recession, or perhaps even a stretched out L shaped recession.
Honestly, even the most experienced investment expert wouldn’t be able to predict how exactly the market is going to be in the next six to nine months. But it doesn’t mean that nothing can be done amidst such uncertainty. I had a bit of an insight recently.
Last week, we had a company event at Cameron Highlands. Many car-pooled for a very scenic and pleasant drive there, especially going by the newer route which was less challenging compared to the narrower old route. Nonetheless, the new route is still winding and at some points, the turns are literally hairpin sharp. Logically and prudently, we will brake and slow down at such bends or when following a slower vehicle. But when possible, such as along straight paths, we will speed up and overtake.
A safe drive doesn’t just rely on your judgment alone, there are road markings to help you too. Where there are dotted or broken centre lines, it means that the stretch of road allows you to see a safe distance ahead for you to overtake by cutting into the opposite lane.
I had another equipment to help me too – a GPS (Global Positioning System). Whenever I go faster than the allowed road speed limits, a warning “peep” is heard. Naturally, keeping to the speed limits when on a winding mountain road is an important safety feature.
Here’s an interesting question, when the brakes of your car has problems, do you end up going faster or slower?
It doesn’t matter because when the brakes are experiencing problems, you should not even be driving at all! I guess if you are really compelled to move the car, you will probably be inching forward slowly, with the hazard warning lights blinking. However, I would never advise as such.
But when the brakes are working fine, perhaps you would be more confident about driving faster. Is there an irony here? Of course not. Many Malaysians are experienced drivers and know that brakes and tyres are probably the two features of the vehicle that one cannot compromise on.
Yet when it comes to financial well-being, people tend to give me that puzzled look of disbelief when I talk about financial-brakes. So during the Cameron Highlands trip, I gained an insight which hopefully translates into an interesting perspective that allows investors out there to appreciate why managing investment risks is like having good brakes.
The hallmark of one’s “financial brakes” would be the ability to manage risk, and ratchet down the risks of investing. Here, risk is defined as the chances of losing your money. The three financial brake options are:
(1) Savings deposits. These are “natural brakes” and are very safe. Until end of 2010, there is a 100% guarantee by PIDM too. It can’t get safer than this. But as brakes work, the better they are, the lesser opportunity for you to get ahead. Hence the returns are typically low and may not even get you much further or faster than inflation. So typically, after taking into account inflation, the real returns might be zero or even negative.
(2) Savings-oriented insurance policies such as endowment policies. Some insurance products come with significant savings elements which provide better yields compared to normal deposits, although they may require a long-term commitment such as 10 or 15 years. Generally, these also provide some form of participation in the sharing of the profits as well (they are known as participating policy). The principal amount or the single premium paid is typically also guaranteed. Such instruments trade-off time to give a higher yield when compared to traditional deposits which tend to be one year or shorter in tenor.
(3) Low risks investments instruments such as capital protected unit trusts. These do not pose risks to the underlying principal although they participate in the investments story to a certain extent. Generally, principal is not at risk and are protected at maturity. However, the potential additional returns are at risk as the product is structured to have exposure to the market thus allowing some participation to the market performance.
Here’s my advice. Markets are uncertain. Despite the equity market rally, opinions remain split between a long U-sharp recovery, a W-shaped double dip recovery or a L-shaped protracted recession. Even if there is a strong recovery, brakes are always needed (remember, there are speed cameras or police patrol cars on highways too!).
I profess to be a risk-taker and believing myself to have a generally well diversified portfolio; I thought that I didn’t really need to have one or another of these financials “brakes”. But my portfolio begged to differ! A recent financial health check actually revealed that I do have all the above three financial assets, an assortment of braking systems in fact.
I am an eager beaver when it comes to saving. I actually save first before I spend. Just like when I was 7, I still enjoy the excitement in seeing my deposits grow whenever I look at my savings passbook balance.
I also have two endowment policies which pay me a guaranteed yield yearly, plus a potential bonus at maturity. Though low yield compared to equity returns during the good times, these give me certainty of returns. Having a minimum is like having a bird in hand.
I only recently just invested in a capital protected product (actually last week). My banker had been reminding me about diversification, and I finally came round to having capital protected products in my portfolio despite my higher risk profile. In this case, the product allows me access to instrument that as a retail investor I have no access to. And I have my capital protected as well.
Be it driving or investing, it is always more interesting to discuss acceleration, how to gear the engine and move ahead. But the wise will remember that brakes are just as important, because you never know if you need to slow down to negotiate a bend or to avoid a crash.
Tay is senior vice-president and senior head of UOB’s personal financial services division