TheWall: Managing your wealth in a crisis

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 22, 2020 - June 28, 2020.
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Many Malaysians are currently worried about their finances. The Movement Control Order (MCO) has caused some to lose their jobs or receive pay cuts while the low interest rate and volatile markets have negatively impacted their retirement portfolios.

In such times, it is crucial for individuals to review their wealth plan — which includes their investment portfolio, budget and insurance policies — to ensure that these are updated and resilient enough to withstand a downturn, say industry experts.

“This is a great time to revisit your financial goals or define them more clearly. As discretionary spending — such as entertainment, eating out and travelling — have already been curtailed due to the MCO, one may want to use this opportunity to save more, reduce debts and prioritise daily necessities,” says Sammeer Sharma, managing director and head of wealth management at Standard Chartered Bank Malaysia Bhd. 

The unemployment rate in the country rose to 5% in April, the highest since 1990. Last month, Bank Negara Malaysia cut the overnight policy rate to its lowest since 2010 as the economy is expected to continue being impacted by the Covid-19 pandemic. 

Meanwhile, bourses across the globe saw a steep fall in March. Although many markets are recovering to pre-pandemic levels, the volatility is still present. This provides investors with both opportunities and risks. 

“Even if you already have a well-defined investment portfolio, it may be a good time to revisit your asset allocations, given the recent market fluctuations. Opportunities have emerged in equities and fixed income. For instance, international fixed-income portfolios that were yielding 4.5% in early February can now offer yields above 7%,” says Sammeer, adding that those who have appropriate time horizons could consider redeploying their money to growth assets.

But before doing that, individuals should first consider whether their risk profile has changed. Some adjustments may be needed for those who have short-term financial commitments.

Reuben Tan, head of wealth management at OCBC Bank (M) Bhd, suggests that individuals use this time to reflect on their current circumstances. They should look at their liabilities and ensure that they have enough cash flow for emergencies and investments. 

“Only after considering all these, do you look at your portfolio and think about rebalancing it in view of the current market volatility or opportunities in the context of the new normal we are facing today,” he says. 

In fact, when the market cycle changes, investors should revisit their risk appetite, says Samir Gupta, CEO of group consumer banking at CIMB Group Holdings Bhd. “They should prioritise factors such as the certainty of recurring income and emergency fund buffers as these could have an impact on how much risk they are able to take.

“Some questions to consider include whether the investors’ current income stream has been impacted, how long it will be affected and whether there will be a need to dip into their savings or wealth portfolio if the situation continues. If their income stream is not affected, the current market volatility could present an opportunity for them to add to their wealth portfolio while maintaining their overall long-term objectives.”

Health and wealth

The pandemic has shown that health is one’s most valuable asset. It is important for individuals to see this as a priority and have adequate insurance policies in place, say experts. They point out that this takes precedence over portfolio adjustments.

“Even if your employer provides health insurance, it is always better to have your own insurance. This is especially true in circumstances where you are concerned about layoffs and job security. Having sufficient medical coverage and income replacement insurance policies take precedence as this pandemic has shown us that it is important to prepare for uncertainties,” says Sammeer.

Tan agrees. “It is important to have sufficient protection against rising medical costs. Therefore, even before 

thinking of making adjustments to your portfolio, the more critical consideration is to ensure your medical safety net is independent of your current employer,” he says.

Having insurance provides immediate liquidity to the next of kin, who may need the money to settle outstanding debts or maintain their quality of life. 

Those who are going through financial stress may be tempted to forego insurance payments. That should not be the case as insurance should be seen as an asset and not a liability, says Fiona Eng, a licensed financial planner with iFast Global Markets (iGM). 

“For retirees and pre-retirees who have never reviewed their policies, now is the time to do it, so you can have a clear picture of what you bought. Some may find that they are underinsured, overinsured or have overlaps in their policies. By restructuring their policies, they may be able to have better cash flow without compromising on their life goals,” she says. 

Individuals should also take the time to examine their legacy planning strategies, which is important for wealth preservation in case anything unexpected occurs. 

“Legacy planning is important for those who plan to leave something behind for their loved ones as it ensures the distribution of your hard-earned money according to your wishes,” says Tan. 

“This can be done by writing a will that determines how your assets will be distributed in the event of death. Without a will, the assets will be frozen until a letter of administration is obtained, which could take months or even years, depending on the complexity,” says Tan.

A will could also assist their next of kin in times of need, says Eng. “To prepare for the unfortunate event of you being hospitalised in the intensive care unit for an extended period of time, which is not uncommon for Covid-19 patients, it is essential that you give someone you trust the power of attorney to manage your financial and medical affairs.”

Growing and maintaining your wealth

While the country is slowly reopening its economy, the impact of the recent shutdown on businesses is still unknown and Malaysians are understandably cautious. Therefore, individuals should try to reduce expenses and increase savings to boost their cash reserves. This liquidity is crucial to tide them over in tough times that may go on longer than expected, say the experts.

Tan suggests that individuals increase their cash reserves from three to six months’ worth of expenses to reduce the stress associated with job security. Parents who are worried about their children’s education fund should do the same.

If the loss of income is expected to be prolonged and requires either a liquidation of investment holdings or reliance on investment income, then their asset allocation and risk profile should be revisited, says Gupta. “They should have a less aggressive portfolio that is heavily skewed towards high-dividend stocks and bonds.”

A key strategy individuals can use is to save before they spend. They should also check their budgets and see if there are any big discretionary expenditures that they can forego until the situation improves, Sammeer suggests.

“There are two reasons for this. First, under the MCO, you may find that your discretionary expenses such as entertainment and travel have gone down. Save that money. Second, with interest rates dropping and expected to remain low, you will need to set aside more money to achieve your financial goals,” he says. 

“For instance, at [a fixed deposit rate of] 3.5%, you will need 21 years to double your savings. But at 2%, which is what we have today, you will need 36 years to do so.”

In this low interest rate environment, investors need to be cautious about where they put their savings. Fully relying on fixed deposits for their retirement fund may not be wise.

Some investments that give consistent returns — such as bond funds, dividend-yielding funds or endowment plans — are worth considering, says Tan. These two types of funds can provide consistent income at a lower risk than equity funds while endowments are conservative plans that aim to give consistent mid to long-term returns.

“Endowment plans have fixed maturities that can give you that certainty of timing so that you will have sufficient cash flow at the different stages of your life. This feature is useful for a child’s education plan, where the date of the drawdown is known ahead of time. If you imagine the current Covid-19 situation happening when you need to draw down on your child’s education fund, you will recognise the benefits of a plan that gives certainty of timing,” says Tan.

Other attractive asset classes include investment-grade bonds issued by reputable companies that yield more than 4% per annum or funds that invest in the technology 

sector and potentially offer more than double-digit returns, says Sammeer. Of course, the choice depends on one’s risk appetite and time horizon, which one can review with investment consultants.

He suggests that individuals arrange their savings and investments into different portfolios with varying time horizons, depending on their goals and risk appetite (see table). “For instance, if you are saving for retirement and it is at least five years away, it may not be wise to sell down your entire growth or equity portfolio just because the markets are down right now,” says Sammeer.

“Conversely, if your retirement is less than three years away, depending on the composition of your investment portfolio, you may or may not have enough room to manoeuvre. In such cases, it is best to discuss with your investment adviser on how you can taper your investments into assets that can generate regular, sustainable income over your retirement.”

In times of uncertainty, investors should review their portfolios to determine whether any adjustments are needed. Investment portfolios that cater for mid-term goals are likely to require more attention during a crisis, observes Ong Dan Lin, a licensed financial planner with iGM, as these portfolios are typically parked in low-risk assets. 

“A well-constructed portfolio for long-term goals will be able to weather most crises with some restructuring in between to capitalise on opportunities in the market. Investors should look at the sectors, regions or countries that will benefit from the crisis. They need to do their homework to identify market winners. Once that is done, you can rebalance your portfolios accordingly,” she says. 

Ong adds that investors should still be mindful of the market volatility and uncertainties.  She suggests that they adopt a more balanced approach at this time.

For instance, investors with an aggressive portfolio could lower their allocation from 80% equities to 70% and hold the rest in fixed income and cash. Conversely, those with a conservative portfolio could increase their exposure to equities, from 10% to 20%, to take advantage of any opportunities while keeping the rest in fixed income and cash. Investors with a balanced portfolio, with an allocation of 60% equities, could maintain or reduce this exposure. 

 

Additional advice for Malaysians

Retirees and pre-retirees

This group may be concerned that their nest egg is under threat at this time. Despite the volatility, they should stick to their long-term goals and utilise the dollar-cost-averaging strategy, say experts.

“For this group of people, their current portfolio should already be heavily weighted towards regular income streams such as high-yielding dividend stocks and bonds. If these investors have planned their portfolios as such, they should continue to receive their intended income stream. The only change they would need to consider is adjusting their current lifestyle and ensuring that they do not liquidate their portfolio,” says Samir Gupta, CEO of group consumer banking at CIMB Group Holdings Bhd.

Should they take advantage of market dips to buy equities?

“Pre-retirees who still have a source of income and want to boost their retirement funds by investing in equities should consider this strategy only if they have planned for their near-term needs (if they are going to retire soon),” says Reuben Tan, head of wealth management at OCBC Bank (M) Bhd.

“They should not be tempted by the current market volatility and overinvest their nest egg, thinking that they will be able to enjoy the profits soon after. While the world is slowly coming out of a lockdown, it is by no means certain that the path to normalcy will be smooth.”

Those who will retire in 10 to 15 years should consult an investment expert and begin crafting their retirement portfolios now, suggests Sammeer Sharma, managing director and head of wealth management at Standard Chartered Malaysia. “Individuals who are planning to retire in the next three to five years may want to consult their investment advisers to review and potentially rebalance their portfolios. This may involve gradually tapering off their allocation to growth assets and rebalancing into income assets that can pay consistent income over the retirement period,” he says.

As for retirees, Sammeer suggests they ensure that their portfolios are adequately diversified to weather any downturn in specific sectors.

Freelancers

Freelancers tend to have income streams that are unreliable. Ong Dan Lin, a licensed financial planner with iFast Global Markets (iGM), suggests that they put aside 8 to 12 months’ worth of expenses as emergency funds.

“Those who derive income solely from the rental of mortgaged property may encounter challenging times ahead as their tenants may ask for a reduction in rent due to the soft economy. Emergency funds are meant to provide you with cash flow during trying times, and those who are prepared will have no trouble sailing through this period,” says Ong. 

Some may be tempted to take advantage of the Employees Provident Fund’s relief measures, which allow contributors to withdraw a portion of their money from their accounts or reduce their contribution rate. But Fiona Eng, a licensed financial planner with iGM, believes that individuals should only exercise these options if the situation is dire. “That is because you are essentially borrowing from your future self at an average interest rate of 5% per annum,” she says.