Should You Make A Will?

write will

A will is a legally enforceable declaration of how a person wishes his/her assets to be distributed after death. In a will, a person can also recommend a guardian for his/her children. A well-constructed will ensures that your wishes are carried out, and it can make things simpler and easier for your heirs.

When a person (non-Muslim) dies without leaving a will, he is said to have died intestate. Sometimes, even if a person has a will (died testate), the will may not be properly drafted and certain assets are left out of the will. These remaining assets (net-estate) will fall into intestacy.

Intestate Succession Act (Chapter 146), the mother of all estate planning laws in Singapore, applies in these situations. According to the law, regardless what the deceased may have wished, the net-estate will be distributed as below:

Who survives the deceased:

Assets distributed to:

Spouse (No issue or parents)

Spouse – 100%

Spouse & issue

Spouse – 50%

Issue – 50% in equal portions

Issue  (No spouse)

Issue – 100% in equal portions

Spouse & parents (No issue)

Spouse – 50%

Parents – 50% in equal portions

Parents (No spouse or issue)

Parents – 100% in equal portions

Siblings (No spouse, issue or parents)

Siblings – 100% in equal portions

Grandparents (No spouse, issue, parents or siblings)

Grandparents – 100% in equal portions

Uncles & aunts (No spouse, issue, parents, siblings, children of siblings or grandparents)

Uncles & aunts – 100% in equal portions

None of the above

Government – 100%

 

Even if the consequences may seem unfair and undesirable, if you do not have a will, the law decides how your assets are distributed. There are many cases where family members and relatives have fallen out over the distribution of the deceased’s assets. Your hard-earned money may not be given to people whom you truly care for and are in need of money. Worst, it may end up with someone whom you dislike. Creating a valid and up-to-date will is of great importance in estate planning.

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Are You Ready to Invest?

In the midst of the recent anxiety and unpredictability of the global financial markets, many investors have been left wondering if this is still a good time to look for investment opportunities. As with everything in life, there are two sides to the same story. On the one hand, the economic turmoil could be taken as a clear sign to rush out and away from the market. On the other hand, an economic turmoil can be a signal for long-term investors to slowly work their way into the market, following the belief that crises are often opportunities in disguise. What most people forget, however, is to ask whether they are even in a position to invest. The basic questions: “Are you financially ready to invest?”, “How do you determine if you are financially ready to invest?” and “What have you done so far to gauge your financial readiness?” are furthest from their minds.

How To Assess If You Are Financially Ready

Determining your financial readiness is not simply estimating how much you have in your bank account. There are 3 barometers of financial health that you will have to check yourself against: Personal Income and Expenses Statement, Personal Net Worth Statement and Financial Ratios. Only when you systematically review your finances will you be aware of your readiness to invest in the future. Let us go through the 3 barometers so that you will be more aware of what they are and how they can give you an idea of where you are financially.

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Establish Your Current Financial Standing

Firstly, you should be able to keep a good track of the money entering and leaving your wallet. You can achieve this through a personal income and expenses statement, a tabulation of your monthly income and expenses. Someone who is financially sound will have greater money inflow than outflow.

The next step in determining your financial readiness is to identify your assets and liabilities and compile them in a Personal Net Worth Statement. This statement shows you whether you are a positive net worth individual with many assets or whether you are a negative net worth individual, one who is hung up with the many liabilities of life.

Finally, to really determine if you are financially ready, you must understand important financial ratios that will assist you in seeing the bigger picture of your financial health. Here are 3 financial ratios you need to be aware of:

1. Basic Liquidity Ratio = Cash or Cash Equivalents (Liquid Assets) / Monthly Expenses

This ratio provides an indication on the number of months a person could continue to meet his/her expenses from existing cash or cash equivalent assets after a total loss of income. We should have liquid assets equal to 3 to 6 months expenses in an emergency fund.

2. Savings Ratio = Savings / Gross Income

This ratio provides an indication of what percentage of gross income an individual is setting aside for future consumption. A ratio of 10% or more is healthy.

3. Investment Assets to Net Worth Ratio = Total Invested Assets / Net Worth

This ratio provides an indication of the value of investment assets as against net worth. This would show how well an individual is advancing towards wealth accumulation goals. A person should have a ratio of at least 50% and it should get higher as retirement approaches.

4 Simple Ways to Invest for The Long Term

Most people do not want investing to take up too much of their time and effort. This is due to us having many other things in life to focus on, such as our careers, families, housing etc. And so, trading, timing the market and stock picking is not suitable for 90% of retail investors.

So how can you grow your money without taking up too much time and effort? Here are 4 simple ways to do so and if you stick to this, there will be a high chance for you to retire comfortably after 20 to 30 years.

1) Start Early & Stay Invested

Inexperienced investors looking to grow their money without active monitoring can first look to compound interest to pursue gains over time. The key ingredients here are starting early, and staying invested. By doing so, you will have more time to grow your money. The table below shows how even saving and investing a small amount every month when you are young benefits you, simply because of the power of compound interest.

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2) Diversify Your Portfolio Among Various Assets and Geographical Regions

Market timing and stock picking are not suitable strategies when you want to invest passively. What you can do is to construct a well-diversified portfolio.

Diversification involves another important concept – Asset Allocation. This means mixing you portfolio among various asset classes to spread your risk. The most common asset classes for retail investors are: equities, bonds and cash. A lack of diversity means less liquidity in times of need.

A simple two-asset portfolio, comprising bonds and equities, helps to enhance returns and reduce risk. The proportion of a person’s investment portfolio to be allocated in bonds should be equal to the person’s age (or age minus 10 if he/she is more risk tolerant).

The reason behind this formula is because as we age, we are closer to retirement and should safeguard out nest egg by having less exposure to risky assets such as equities. For young people who mostly have higher risk tolerance, they can allocate more of their investments in equities which can potentially yield higher returns. I have written a separate article on why we should invest in equities if we have a long investment horizon to prepare for retirement.

Besides the classes of assets, having a basket of stocks spread across different geographical regions can reduce your long-term portfolio risk.

Interestingly, we should note that much research have shown that more than 90% of investment returns are determined by asset allocation. Only 10% is influenced by stock picking and market timing. The pie chart below illustrates the recommended asset allocation for a person with a moderately aggressive risk profile.

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3) Invest Regularly – Effect of Dollar Cost Averaging

Every stock investor may fall into the trap of emotional or irrational investing. This stems from our 2 strongest emotional forces – fear and greed, which leads to failure to grow our money.

1. Fear – When the price of our stock holdings fall, a common response stemming from fear is to sell our shares and cut our losses. Subsequently, when the stock price rises, we may be afraid to invest in the stock again. If the stock price continues to rise, we may enter the market too late to see any substantial return.

2. Greed – When we see the price of a stock going up, greed drives us to invest our money in it, with irrational optimism that the price will continue to rise. Quite often, the stock price drops instead.

Emotional/irrational investing often yields little returns for retail investors. Instead of speculating on a stock price, we should do quite the exact opposite – We should set aside a fixed amount of money to invest regularly, regardless of how the stock market is performing. The graph below illustrates what happens if we invest a fixed sum of money on a monthly basis for a certain stock, X:

DCA graph

This enables us to take advantage of Dollar Cost Averaging, a passive mechanism which helps you to buy less of an investment when the price rises, and more when the price falls. This lowers your overall purchase price for investments in the long term.

4) Review and Rebalance Your Portfolio

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Given the dynamic global economy, investors should review their investment portfolio regularly and change the mix of assets, a process called rebalancing. Rebalancing safeguards your portfolio from being exposed to undesirable risks and maintains your original desired asset allocation. This would ensure you are on track to meeting your financial goals.