Finding the all-important missing piece in your financial plan

To secure your financial future, invest in things that give you an immediate result, and can last as long as possible. ( pic)

Most financial advisors are in fact retirement planners. A retirement planner shows you the roadmap to achieve your retirement goal by saving an adequate nest egg that can last a lifetime.

However, that might not be the best financial advice. General planning could be a false dream because some assumptions are dangerous if followed blindly.

Fallacy 1: Diversification

The first generic advice you often get is to diversify your portfolio. Typically, Malaysians are encouraged to save in EPF (Employees Provident Fund), PRS (Private Retirement Schemes), life insurance, and unit trusts.

When you don’t know what you’re doing, diversification is the most common strategy that makes sense. You don’t want to rely heavily on a specific asset class and put your money at risk. So you diversify.

However, it’s rather rare to become rich with EPF, life insurance or unit trusts. You’ll get better results acquiring productive assets like good ROE stocks and high-rental-yielding properties.

Fallacy 2: Pay down debt

Another bit of advice is to pay down your debt, especially your housing loan. However, this might not work in your favour.

Most home buyers use their EPF Account 2 to pay down the loan principal. You could be tempted to use every year-end bonus to reduce your outstanding mortgage.

However, this could be a case of being penny wise, pound foolish.

This method worked for your parents because interest rates then were over 7%. It was as high as 13% at one time. But the past decade of low-interest rates has resulted in putting those who save on the losing end.

Fallacy 3: Compound interest

You wish to see compound interest work wonders. Here is where you might think of doubling or tripling your investment over a long period.

Usually, the projections of some insurance savings plans look highly profitable because you are looking at the end figure. It looks good on paper.

For those who don’t understand the time value of money, any mediocre asset compounded at a low return rate will look impressive on paper.

Take a RM10,000 fixed deposit compounded at 3% for 30 years, and you’ll get about RM24,000. It seems impressive for someone who doesn’t see the opportunity cost of a higher return rate.

If you take the same figure compounded at 12%, the result is close to RM300,000 – 12 times more wealth.

To secure your financial future, invest in things that give you an immediate result.

Fallacy 4: 30-year plans

You’re hoping your plan will work after 30 years. But what if it doesn’t? What if this retirement plan doesn’t achieve what it was supposed to? By now, you would have already run out of time to “redo” the whole thing.

For example, during the 2008 subprime crisis, the net worth of many retirees was wiped out due to the market crash.

The problem was not the risk of stock volatility. It was that you couldn’t redo a 30-year plan because you did not have another 30 years left to do it again. Think about it, how many decades more can you live?

New paradigm: The missing piece

By knowing the fallacies above, you want to ensure a plan that will work no matter what. So the missing financial advice you should get is how to invest in things that give you an immediate result, and can last as long as possible.

When you have this new paradigm, you will know that spending on developing your skills, capabilities and self-improvement bear the best fruits.

You spend the first two decades of your life acquiring skills. The person who does it right, sees the tremendous result during adulthood and enjoys it during retirement.

For example, if you have good people skills, you can be a great manager and climb the corporate ladder faster. If you have superb communication skills, you can be a great marketer and sell tonnes of products, or pitch your ideas much more effectively.

You reap the rewards in almost everything you do. Everything you touch has a chance to thrive when you have the capability.

As for entrepreneurs and business people, they make the best returns investing the profit back into their companies.

When you are running a business, you have control over people, products, cash flow, systems, expansion plans, etc. Every dollar you plough back will give you a return that could be much better.

So every time you see an investment scheme, ask yourself if you can get a better return investing in what you know and control instead.

What you can do now

Grab a pen and some paper. Write down the investment options you have, including all that you have done, and all that you can do ie invest in unit trusts, your business, self-development courses, stocks, properties, etc.

Assess how much returns you can get from each. Sort the list according to the level of your knowledge, control, performance and risks.

Focus on the top few options, and you will see your wealth grow at a much better rate. Then you can rest assured that your strategy to build wealth is focused, leveraged, and compounded at the best return rates.

This article first appeared in

KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.