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Wednesday, April 10, 2013

The Importance of Investment Safety Nets

The Importance of Investment Safety Nets 

Volatility in the stock market is pretty normal and nobody could really time it. So continuously plant into your investment portfolio. If you are looking for the perfect timing on when to get in or out, then you are indeed gambling. Time is our greatest ally not timing, because over long term, the number of shares you have accumulated is still much more powerful than the price per share. 
The Importance of Investment Safety Nets

All the ups and downs of the market will also be corrected if your investment horizon is long-term. Your goal should be to accumulate as many shares as you can, as fast as you can while you can. This is the reason why you need to set up your “Investment Safety Nets” first because during a downtrend all of the three asset categories (paper, real and business) will be priced cheaply. 

Part of our financial strategy for wealth preservation and transfer is to avoid selling any shares or any of the three asset categories during times like this. 

Set Up Your 2 Investment Safety Nets 

Before taking any further risk in building wealth, remember always to set up 2 Investment Safety Nets: 

1. Long-Term Medical Savings 

Building wealth has no shortcuts so it means that we really have to deal with the uncertainties of life and at the near-end of our life, all of us will need more medical attention whatever our lifestyle is today.
In order for us to build a solid financial foundation, we need to make the right preparations because the most expensive part of our life is not sending our children to college, but sustaining our life during retirement amidst the continuously rising cost of medical expenses. 

Before we allow our team members and investors to invest on mutual fund equities (90 percent stocks and 10 percent government bonds), we make sure he/she will not spend it all for his medical expenses when he/she gets old and sickly. 

Why? A major medical crisis can wipe out everything that you have labored for in your lifetime if you don’t have a separate savings allocated for your long-term medical expenses. This is what happens to a lot of people who retire from their job very rich but die very poor because they consume everything that they accumulated in their entire life for their medical treatment. 

Why Have Long-Term Medical Savings? 

This is a part of our Financial Strategy to Wealth Preservation and Transfer. Let us not forget that the cost of medical expenses doubles every 5-7 years and considering major surgery today which will cost half a million pesos, then 30 years from now, it will already cost P4 million if it doubles every 10 years. 

This long-term medical savings should be our first investment so as not to burden our children or relatives with the expenses in the future. 

Again WHY Do We Need This? 

During downturn of the market or correction, and worst, during recession, all asset classes (paper, real and business) will be priced negatively. In the last 20 years, the annual returns of stocks and equities has hit negative four times and two times, it hit 5 percent and lower. If your equity investment will only earn 2 percent to 5 percent per annum, then your money is not growing because our average inflation is 5 percent to 7 percent per annum. Just like what is happening with your money in the bank, it loses value year after year. 

So, during these times, you can’t sell your shares of stocks and equities or any investment at a negative or losing value. What if you need the cash for a major medical treatment or surgery? Will you sell at a loss? 

Financial planning means having a separate investment instrument that will cater to your medical needs so that you will not dip into you investment and only sell when the market is up or when it gives greater positive returns. 

Don’t be a beggar to your own children. Be a responsible parent. Make sure to preserve your wealth for your future generations. Have sufficient long-term medical savings. 

2. Income Replacement 

Its sole purpose is to sustain the life of your family for at least 5-10 years without you providing for them. If you don’t want to follow the formula: Income Replacement (IR) = Annual Income x 10, then use this instead: Annual Expenses x (5-10). The bigger the better and you will have more peace of mind. 

Remember that Income Replacement is not for you to enjoy. Income Replacement can be provided by a “Pure and Term Insurance” only which is much cheaper than any other bundled insurance available in the market. 

If you are a corporate person, then right now you are covered with group insurance policy which you cannot take with you when you retire. 

Your financial position will be much better if as early as today you can secure your family’s future and your assets. 

The features and functions of a Pure and Term Insurance are: 

1. Its cheaper because there is no savings portion. (Your savings will earn much more if you invest it correctly, say 12 percent to 60 percent per annum.) Quit one merienda for P30 to P50 a day and you can already protect yourself and your family with a P1 million coverage that will double if death is due to accident. 

2. The major function of “Pure and Term Insurance” is Income Replacement if you die too soon without completing the wealth-building process. Your family should be able to sustain their life for the next five years even without you providing for them. 

3. Why Term only? Because your insurance coverage must increase as you become wealthier, so as to protect all your assets. 

4. Another function of insurance is that it can help your son and daughter pay off the needed estate tax within 90 days upon your death which is 20 percent of your total estate, to facilitate transfer of your estate to their names. 

5. It’s Tax free so it’s good money for your family. Why die without value when you can die and GIVE millions of pesos for your family, loved ones or even to charitable institutions? 

and lastly... 

“Insurance is not about you getting or receiving. Insurance is all about you giving and loving.” Have sufficient “Pure and Term Insurance” to protect your life and all your accumulated assets. 

Source: Wrote by Lyndon Malanog, TrulyRichClub Wealthstrategy

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