Investors need to look within themselves to determine their life goals, before embarking on the road to financial contentment, financial planner Arun Abey tells GENEVIEVE CUA
WHAT does happiness have to do with financial planning? Some may say happiness is the fruit of a well-laid financial plan. After all all, such a plan should foster greater confidence in the future, leading to financial security - and, hopefully, happiness.
But what of the reverse?
Ipac group co-founder and executive chairman Arun Abey believes that getting your life together - in term of your goals and choices - should come first, and financial planning follows. Ipac manages US$9 billion in client assets globally, advising some 20,000 individuals and institutions. It began in Australia and has operations in Hong Kong and Singapore.
‘People use the phrase ‘lifestyle financial planning’ as a slogan. But it’s a real thing. It’s about putting the ‘life’ into financial planning. It’s how the two integrate.
‘I’ve increasingly become convinced that the financial planning part is an outcome. You get the ‘life’ part right and the financial planning is actually easy.’
He adds that the biggest hurdle in financial advisory is that clients typically do not have a clear idea of what they want. ‘I’ve become convinced that an important part of financial planning is getting clients to want what they need.
Clients come in with a list of ‘wants’. Those ‘wants’ are completely unrealistic.
‘They say I want to make a lot of money, but I don’t want to lose any money. That doesn’t work. As Warren Buffett says, give me a bumpy 15 per cent any time. I’d rather take a bumpy ride than no returns.’
Drawing on the experiences of clients, Mr Abey has just published a second book How much is enough?, in which he tackles the amorphous question of happiness and the more mundane but no less challenging issues of financial planning and investing. The book is co-authored with Andrew Ford.
The book is meant to be a companion to his first book Fortune Strategy, published in 2000 , which delves into portfolio construction against a backdrop of the historical pattern of risk and return. Fortune Strategy, he says, explained the behaviour of markets. This time, taking centrestage is the behaviour of investors themselves.
‘If you understand markets, you can do something. I’ve come to understand that that’s not enough. You need to look within to understand your behaviour… People who can be confident, who can manage their behaviour and not worry about what others are doing, are also people who can control their behaviour in investment markets. It’s the same neural pattern, I hadn’t realised that before.’
The book draws on the growing body of research on happiness and behavioural finance, written in a readable, down-to-earth fashion. A few chapters are devoted to the behaviours that can undo the best laid investment plans.
These include loss aversion as a wealth hazard - that is, in seeking to avoid loss, investors actually incur greater losses. In a chapter ‘The Madness of Myopia’, he writes that the more frequently investors evaluate their returns, the more likely they are to make inappropriate decisions.
Several of the foibles come up repeatedly among clients, he says. One is unrealistic expectations. Two is a poor understanding of risk. Risk covers not just a probability of loss, but also the failure to beat inflation. ‘With cash you’ll never see a negative return, but with inflation you’re losing buying power every year. That’s pretty serious. A capital guarantee doesn’t protect you from that.’
Manage your time
A third mistake is the belief that the right timing could be the ticket to success. ‘It’s a very naive belief that you can get the timing right. Over 4,000 days there may be 40 key days. If you miss those days you miss the returns of the whole market. You have a 1 per cent chance to get it right and you don’t do something for a 1 per cent chance.
‘Fortune Strategy and this book use the same core investment strategy. If you apply that, the odds are in your favour. The only thing you have to manage is time.’
Ipac advocates four key principles in investments. These are to invest in quality companies; to diversify; to avoid overpaying for assets; and to give your portfolio time.
But there is yet one more mistake - as Mr Abey sees it - that may be hard for Singaporeans to swallow. That is the tendency to over-invest in property. ‘Investing in residential property other than your family home is likely to result in higher risk and lower returns than investing in quality shares,’ he writes.
He argues that the risks of a property investment tend to be understated, and the returns overstated because of flaws in measurement. Assessment of values, for one, is infrequent and informal.
‘Property investors never see red ink on a statement unless it is on the day of sale. And most property investors never formally evaluate the performance of their investments at all.’
Mr Abey lives in Australia, where cities like Melbourne and Sydney, and more recently Perth saw the strongest home prices until recently. He himself does not ‘invest one cent in residential property outside of my family home’.
Perhaps the key chapter in the book is the one that presents a framework for understanding the role of money, which he calls the ‘bridge of well being’. The process of developing and implementing this framework is the essence of lifestyle financial planning itself.
There are three steps to this. One is to understand your goals. Two is to apply your resources towards those goals.
That includes saving and investing. The third is to have a simple investment strategy.
‘You need to develop a financial plan for yourself - not for your money … The aim … is to help you experience the good life you want to live, knowing sufficient money is there to support you.’