Financial Jargons

Oftentimes Financial Advisors are guilty of speaking jargons.

We use complicated and specialized words like wealth planning, diversification and holistic financial plans, as if everyone understood the word and all that it means when it took us hours of lecture and years of study.

But as a conference speaker thankfully reminded today, people don’t care what you know, until they understand what you are saying.

And so as punishment for the many times I use canggih Financial Planning words unintentionally, I shall share some interesting ways from this speaker on explaining jargons.

The first one is about independent, impartial advisory without tied agency restrictions.

When a financial advisor say this sentence, he/she would be very excited, satisfied, and proud. But I guarantee that almost everyone else hearing this sentence will just nod and promptly forgot about it.

Now let’s try retelling it in a story format: 

Imagine you are traveling for a holiday, you search high and low for a good deal, you go to airline A, compare it with airline M and airline E, selecting for price/comfort/convenience. And you do this for a holiday which will last you a week.

Now you are buying an insurance, which will affect the majority of your adult life with the monthly premium payments and the benefits will have lasting consequences for you and your love ones. And you do this by listening to only one tied agent which is pushing only one company’s product. Wouldn’t it make more sense to compare ALL the available products in the market and then selecting from them just like the way you did with the airline?

And with this story, doesn’t the above sentence now make sense and have an impact?

So let’s try another jargon: diversification.

Does the word have effect on you? No?

How about: a portfolio of asset classes.

Still no effect?

How about: ‘do not put all your eggs in one basket’.

Suddenly it becomes something that everyone can visualize.

And finally, the tough one: financial planning.
“Financial planning is good for you.”

Again everyone will nod politely and quickly forget about it. Very few people have actually seen a proper financial plan and can then visualize it.

But put into three separate questions that everyone can visualize:

“What happens when you survive?” (Retirement Planning)

“What happens when you die?” (Dependent Protection and Estate Planning)

“What happens when you survive but are ill?” (Income Replacement and Medical Planning)

Answer these three questions and you have Financial Planning. Now isn’t this easier?

Too Good To Be True?

There is a common protection mechanism used by many when confronted with an investment which promises high returns: “If it is too good to be true, it probably is”.

In fact, it is so popular that there are even variations of it:

Time in the market vs timing the market

Lame joke: what’s the difference between Time in the market vs Timing the market, besides the spelling?

Time in the market is putting your money to work in the market regardless of current market condition. Letting growth and inflation to grow your money in the long term.

Timing the market is trying to buy low and sell high, looking at the market opportunities to buy cheap stuff and selling the expensive ones.

Is there such thing as a perpetual Closed Ended Bond Fund?

One of the ideas of starting this blog was to write things that I myself would want to read.

So yah, connecting with most people and writing in plain english is fine but sometimes you just want to go full on technical for Financial Advisory practitioners. So this will be a technical writing.

I was just in a presentation yesterday on the Eastspring Global Target Income Fund**.

The presentation was good, kudos to the presenters as they clearly knew how to emphasize the appeal of the product.

There was one bit which was interesting was the reasoning behind the launching of the fund. Apparently Target Income Funds, close-ended, 3 year tenure, investing in high yield bonds for a targeted 5% return per annum, is popular. In fact the funds are so popular that the fund manager have to launch new funds on a continual basis due to old funds closing after their 3 year tenure is up.

Therefore the fund manager concluded that it should launch a ‘perpetual’ Target Income Fund, which will be open-ended, not close-ended, but still invest in the same short duration high yield bonds. Instead of launching funds (they call it ‘series’) constantly, they will have just one fund, forever. Instead of buying and holding bond papers in a fixed tenure case, the fund just have to tweak their routine a little by buying, holding, AND replacing expired papers with new ones in this perpetual tenure case.

So yep, it just became a normal bond fund, albeit one focusing on high yield bonds.

After that, a colleague commented, why did they sell it that way? Why did they dress it up as a perpetual close ended fund while in actual fact it IS just a regular bond fund?

Obviously the answer is that they want to associate themselves with the close ended bond funds. Their previous close ended bond funds generated higher returns than normal bond funds. Of all I said about people not doing apple to apple comparisons, people apparently did so by comparing regular bond funds with close ended bond funds. So while traditional bond funds have been returning boring 4%per annum, the 5% offered by a close ended bond fund sounds like a steal, right? Right? I mean they are both bonds asset class, right?

Of course they are not the same. Target Income Funds invests in high yield short duration bonds. In investment terminology, high yield bonds are also called ‘junk’ bonds, which due to their rating as ‘not investment-grade’, carries a higher risk of credit default, hence the ‘higher’ yield to attract people.

However, since nobody ever hear or experienced a junk bond default YET, everyone just assumes all bonds are the same. Which goes some ways in explaining why Close ended bond funds are so popular.

As always, know what you’re buying into and what you’re recommending to your clients. What risk you’re taking and what risk you’re asking your clients to assume.

(** Funds mentioned here are not a recommendation to buy them, you should consult a proper Financial Advisor to assess your cashflow, risk tolerance and investment diversification)

The Big Short

I just finished watching the movie The Big Short. 

And it was a sobering experience. It’s a movie about the US subprime mortgage crisis and how a bunch of financial guys managed to profit from it. 

But to me the movie wasn’t a celebration of guys profiting from the crisis. There’s no joy, no celebration of being right, no ‘I told you so’s. To me it’s a reminder of how a lack of financial education in the general populace caused the crisis in the first place. And how far we have yet to go to address the gap in knowledge.

Some people might laugh when the movie characters talk about ninja-loans, adjustable-rate-mortgages and thinking, that couldn’t be me! Nobody wanted to admit they ever believed in the myth that property prices will never go down. But I see this constantly, people making poor financial decisions because they believed in something without truly understanding the basis. Leveraging up property loans to the max, believing the past forms a trend which will carry on to the future. Unfortunately if one truly understand how the economy works, this is all not true. And in the financial crisis, the root cause was the people buying into this myth.

At one point Brad Pitt’s character was telling his financial protégés that there’s nothing to be happy about: “If we’re right, people lose homes. People lose jobs. People lose retirement savings, people lose pensions. ”

Sometimes as a financial advisor it pains me. We can see the disempowering financial beliefs, but people don’t. There’s nothing happy about people needing financial advisory, it just means that many people will still suffer from financial mistakes without aid.

And the movie ends with Steve Carell saying a quote that many financial writers still like to use today to illustrate why people will not try to educate themselves and instead support Trump or Brexit: “I have a feeling, in a few years people are going to be doing what they always do when the economy tanks. They will be blaming immigrants and poor people.”

For Malaysians and most developing countries, the additional scapegoat is of course corruption and the government too. Yes, that is precisely the enticing short term solution that people like to hear that absolves them of any responsibility to do anything themselves.

The fact is that poor financial knowledge drove people to do what they did. And to really solve the problem in the long term, financial education must be improved.

Financial Goals

The objective of a financial plan is always to achieve one or many financial goals. One of the more cheeky questions I get asked is: “What if I don’t have a financial goal?”

This question is really nonsensical when you think about it as everyone definitely has a financial goal. Whether it is to retire early and to travel the world, everyone has a dream.

However since we do not think critically about our dreams and our plan to achieve them, or feel that we are unable to achieve them in the first place, we think that we do not have a financial goal. 

And on days that we do try to work it out, the following image appears:

And… We instantly get a headache. Is it really that complicated?

First thing first is to set an image in your mind that financial goals are achievable. Breakdown the components one by one and have an action plan for each of them.

I’ve already discussed about investment and how a systematic approach can improve returns and reduce risk at the same time. Imagine having investments that are fundamentally well researched and monitored actively.

Imagine utilizing insurance to the task that it is designed for, imagine having enough coverage to protect ourselves against most calamities yet not too much that we are overpaying for it and minimizing returns.

Imagine setting up Wills and Trust effectively, covering our dependents without leakages.

Imagine navigating the minefield of ever changing world of inflation, deflation, negative interest rates, financial crisis and having action plan all along the way to protect existing assets and seek out new areas of growth. 

And all along the way a constant reminder of where we are and small tweaks to make to make sure we arrive at where we want to be.

We do not need to worry that we do not have enough to spend. We do not need to worry that our money will run out. We do not need to worry that we may need to sell the house. We do not need to worry that our money is all tied up in illiquid property. We do not need to worry that we are taking excessive risks. We do not need to worry that we do not understand our investments. We do not need to worry about cheaters after our hard earn money. We do not need to worry that our dependent do not have guides for them to manage their finances without us around. We do not need to worry about the future. We do not need to worry that we do not have a plan.

So what are your financial goals? Is it that difficult to dream?

Where does investment returns come from?

As a business owner, I am in the privileged to ask some pretty interesting questions.

Chief of which is: “where the @#$%&! is this year’s increment going to come from?”
Year after year, employees without fail expect increment regardless of economic conditions.

But why should we expect it so? I am struck by how this expectation parallels the expectation of investment returns.

Year after year, investors without fail expect returns regardless of economic conditions.
Chief comments about investments sounds a bit like: ” Where the @#$$%&! is my investment returns? I put some money, I should get something back!”

So where does investments returns come from? What kind of returns is rational?