What financially savvy folks know about money that others don’t (2003)
By Leong Chan Teik, Leong Sze Hian and Dr David Tay
It has been a few months since I last read. This book may be published more than 10 years ago, with some information outdated. However, it does provide some real insights on some financial areas about money.
- Avoid the kiss of debt
Overspending can be undoing of everything you have worked long and hard to achieve, and in some cases lead to total devastation.
- Broken Nest Eggs
Economic slumps hurt everyone, but perhaps none more so than retirees or those approaching retirement especially those who have made wrong financial moves with their savings.
– Do not concentrate investments in one asset class.
- How able are you able to fork out cash in an emergency?
Calculate your liquid assets to net worth ratio. Liquid assets include shares and unit trusts while net worth is all your asset minus liabilities.
Rule of thumb : The ratio should be 15% or more.
- How able are you able to repay debt?
Calculate debt to asset ratio, which is your total debt divided by total assets. (Assets include properties)
Rule of thumb : The ratio should be below 50%.
- How much can you afford to have your assets decline before you become insolvent?
Work out your solvency ratio, which is total net worth divided by total assets. The lower the ratio, the higher the chance of bankruptcy.
Rule of thumb : The ratio should be 40% or more.
- Don’t be slave to numbers.
A ratio by itself actually means very little. For example, if a person spends 50% of take home pay on personal development and educational course fees, does it mean that the person is not prudent?
It is the integration and analysis of one’s current financial situation and future plans relative to one’s financial goals and concerns that really matter, rather than benchmarking with financial ratios, which may do more harm than good.
- Bet on leaders who are desperate to be No.1.
When investing in a company, find out the character of the leaders, their psyche, their determination to succeed beyond just being decent corporate stewards. Avoid successful Asian enterprises which start losing their lustre after the deaths of their founders. The decline happens because the new bosses lack the drive and hunger to be No.1.
- When should stock investors cut their losses?
Sell if the stock falls to a level representing a loss of up to 20%. Sell if there are signs that business fundamentals are worsening. Sell a stock when it has become the market’s darling. Sell when a stock or sector has too large a representation in your portfolio. Sell when you see more potential for gains elsewhere.
- Usefulness of lifelong protection from whole life policies.
Someone’s mother had a heart problem and was hospitalised for nine months before she died. Her bill was about $750,000. Everyone in the family had to cough up $100,000 each. If you don’t have insurance, it is your family who have to pay.
- Cash is not always king.
Cash grows at a lacklustre pace compared to long term investments in blue chip stocks.
- Respect your elders
If being nasty can cost you friendships, consider what is at stake if you are a potential beneficiary of a large inheritance. In one case, a widower had willed most of his assets initially to his only child, a daughter, but in his final years, made a complete U-turn. He left all his money to charities and hospitals here and in India. The daughter got nothing. She challenged the will but was unsuccessful.