Which Financial Plan Predicted Covid-19? NONE!
There’s a saying that says ‘all plans are bound to fail, why bother to plan”.
But in the financial services industry, those who need you to buy product from them will always tell you this, “Fail to plan is plan to fail”. Is that true?
Which product predicted Covid-19 and the full lockdown that we have seen around different corner in the globe? Anyone who is selling an investment, insurance, or even the fund managers, foreseen that this was about to happen a year ago, or months ago?
When an event that is unprecedented like this happen, every plans you were sold, or made, are bound to crumble down like a house of cards.
Am I implying that a Financial Plan could have predicted Covid-19 and helped the client to avoid the impacts and consequences that come with it? I’d be lying if i tell you yes.
NO. Who would have predicted that?
Does this mean that there is no point in having a Financial Plan then?
Yes and No.
Yes, because a financial plan is just a static document. It is only true today, and it’s authenticity will decrease every day into the future when those assumptions used in the plan turn out to be different in reality. In fact, I always believe that the plan has no tangible value at all. That is also why I always have a smirky smile when someone was saying they product financial plan that is 100 pages. That document is most likely stuck somewhere in the closet now.
No, because I believe that the document call financial plan is not the main focus, but the planning process is where the real value lies in. It is the planning process, where the client get to reflect on their life, look at their financial position, identify their challenges and issues, brainstorming the action plans and guided by the KPIs, that help propel the client to make progress in their life.
However, having said that, still, no financial plan or planning process would have forecasted that we would spent nearly half of 2020 staying at home!
So where is the value of financial planning then, you may ask?
Evidently, what is happening now could not have been predicted by anyone. While no financial plan could have predicted this, however, if you have gone through a proper planning process, you may be able to deal with this better than you had not. Below are some pointers of WHY i said so.
Liquidity in Net Worth
For many people, their net worth may be a good positive integer and could be in the range of millions. However, if this value is courtesy to illiquid asset, then this will mean they are asset rich, but cash poor.
In our planning process, a Financial Planner who is worth his value would have discuss this situation with the client and work together to increase the liquidity situation. In the case of an individual, the planning process might have pointed out to the client that most of their net worth is tied to asset that either take a long time to sell, or is not liquid. This awareness may help the client to see things in a different light and channel their future cash surplus to build a portfolio of assets that are can be more readily converted to cash.
Emergency Buffer Fund
Personally, as a Financial Planner, I really emphasize on this a lot. One of the fundamental work I’d do with client is to ensure they have adequate emergency buffer fund. These are money that are supposed to cover their lifestyle and commitment for at least 6 months or more depending on their situation, and if they have chronic illnesses, dependents, or their job outlook etc.
Apparently, this event has put the spotlight on emergency buffer fund a lot as those who were without a strong emergency buffer fund will soon realize the have a huge hill to climb. In the last 2 months, I have had many conversations with people whom will see their emergency buffer fund become an emergency issue for them, as most will not survive beyond June, especially those who are self-employed, or are affected by retrenchment, or pay-cut.
What does it tell us, it is important to save up a pile of money, and stash it somewhere safe. In this case, the return on this money is not your primary objective. But it is important that this money will always be around and you do not have to guess how much of it is left when you need it.
Cashflow Management
Again, we are ‘trained’ to spend, and most people have a strong tendency to practice instant gratification than delayed gratification. Going through the financial planning process allows us to honestly confront our spending habit and our lifestyle choices.
Conducting a conversation on how money flow in and out from our pocket also helps us to understand if we are being tied down by too much of debt. If your debt-servicing-ratio is high, eg. over 50% or in some extreme cases 60% or more, you will find it suffocating to get by when your salary is cut, or when you lose your job. Even without Covid-19, you are most likely be tied down to your job even you dislike it, because you could not afford to lose this income that keep you afloat.
Most of the time, the debt and installment commitment comes from a few common thing, car, house, and insurance premiums. Understandably, we need to have a car, but sometimes, we tend to buy the car that eat up a huge chunk of our income. This reduces our flexibility to adapt into new situation or job landscape.
When it comes to houses, I observed that many people are bugged by their second property that they have purchased thinking they could lend out, only to find that either there is no tenant to rent because the location is not favored, or they have to ‘subsidize’ the property because they are renting way below their mortgage commitment. This is usually caused by blind optimisms or blatant ignorance as they chose to only see the bright side of “sure can rent out” when they made the investment decision.
When you do that (take on new loan), it is important to look at your cashflow situation. You need to ensure that after servicing the new installment, you will still have excess cashflow to build on your other life goals. This brings the next point to the picture.
Dream Management - Save for your future
Going through the financial planning process helps us to confront our lifestyle choices, and at the same time it also allow us to prepare for future. Covid-19 may have disrupted your plan for 2020, or maybe 2021, but it surely will not destroy what we want to do in a more distant future. If it does, it would not be in a huge magnitude like how it disrupted 2020.
If you had gone through your financial planning process few years ago and you are planning to do something this year, example to get married, had you only start to prepare for that in the beginning of this year, the MCO may have prevented you from starting to build the fund needed for marriage. However, if you have been saving steadily, you would have your wedding money sitting somewhere by now. While it is true that you may have to postpone your plan to get married now, however, it does not hurt that the money is already there.
It would be worst if you had to postpone your wedding plan, and also postpone your preparation to make it happen. That may require you to postpone it to a longer future.
Risk Management and Dependent Care
Financial planning process and working with a real financial planner would have also enabled you to think about the “What-If”. What if you had to leave your family earlier than you wished, like those victim who had passed away as a result of Covid-19.
Personally, I always count my blessing as it could have been me. In fact, it could have been anyone.
What if the person who died had dependent? What if there is a child, or aged parents counting on this deceased person to bring home income, for food, for shelter etc?
If you have not planned anything, then your dependent would be exposed and at the mercy of life. A child who could have grown up with a bright future might have ended up being an addict. There is an infinite of possibility with regards to what would happen to our loved ones if we did not plan a good ‘exit’ plan.
I’d always tell parents with young children, write a Will, write a Will, write a Will. It is very important, very crucial. Apart from that, it also includes making nomination for your EPF, PRS, and insurance policies, together with planning that can help you provide for your dependents.
Unless you do not see that as your responsibility, these are really crucial.
Diversification and Asset Allocation
Which investment or asset class is the best?
My answer is “I don’t Know”.
If you make your decision on a piecemeal basis and only invest and chase after investment return, chances are your investment portfolio is not optimized.
However, if you have gone through the financial planning process and engage in a proper discussion with your financial planner (the real one but not the one who sell product to you), you would have learned that it makes perfect sense for you to have asset allocation and portfolio strategy that fits with your risk tolerance level, your risk profile, and your investment objective.
A couple of months ago, when stock fell, not every asset classes fell with it. That, is why you will benefit from asset allocation strategy. That is also one of the reason that could potentially help you to reduce your exposure to one single asset class, for example, property. Or, your fixed deposit.
The above are just some reasons I see that despite the fact that no financial plan could predicted Covid-19, but how going through the financial planning process with a real financial planner could help put us in a better position to deal with events like this.
