In my line of work, it's pretty common to meet people who make financial purchases out of convenience. This was especially the case when I worked as a banker and doing roadshows. In the past, I was always puzzled how it was possible for people to make long term financial commitments after talking to a stranger when they didn't even go to the mall to buy such solutions.
7 years in the industry and I've since learnt that financial planning is something many people are not particularly interested in. It's simply a hygiene need that most sensible adults know they need to do, hence people try to get it done and over with as conveniently as possible.
Recently, I was asked, "can I invest as and when I have money?"
You can but it may not be the best strategy.
To be fair, making an effort to ensure your surplus funds is working for you is a good thing. It certainly beats doing nothing! However, making purchases as and when excess cash is available is a pretty reactive behavior. It's not the same as making a plan to take a certain set of action to reach your goals and contributing your resources towards it.
Unintended Consequences Of Random Financial Commitments
One common scenario of random financial instrument purchases that can lead to less effective outcomes is when clients purchase long term solutions without an objective in mind. In one policy review with a new client, she took up an endowment that matures when she was in her 40s. She took up the policy when she was in her 20s. When asked for the purpose of her purchase, she mentioned she simply wanted to get started on saving and the money is likely going to be for her retirement. In her case, it's pretty unlikely she is retiring in her 40s. Which leads to the question why does she have an endowment that matures in this period?
Another consideration would include the concern of reinvestment risk because financial solutions with shorter maturities have a smaller compounding effect. Since her funds mature when she is in her 40s, her timeline to retirement might not enable her to enjoy a more favourable compounding effect should she take on a new saving policy. At that age, she might also have a lower risk tolerance for investments compared to when she is in her 20s.
How did she end up with that purchase? She walked into a bank to open a bank account and had surplus funds at that point in time. Hence, she took up the solution proposed out of convenience.
What if the commitment is a true blue investment?
Logically we are encouraged not to time the market and hence, buying as and when you have money seems reasonable. This is true as long as you adhere to a few principles.
You intend to stay invested for the long term
You are invested in a diversified portfolio
You are prepared not to panic sell if the market goes against you the following week
You are aware of your exit strategy
Here's the common problem. A common behavior of consumers who invest as and when they have money usually do not have a long term strategy. They simply know they need to make their funds work harder. Hence, it's highly possible they end up in investments that might be too concentrated, too volatile, an unrealistic timeline and an unclear plan in terms of how this investment fit into their overall goals and portfolio. It's easy to make purchases, but for investments with the possibility of losses, the crucial question is how would you react when the market moves against you?
Everything will sound like it makes sense when you are looking to buy something
It is easiest to make impulse purchases when you are feeling rich. Personally, I make the best financial purchases when I plan what to buy BEFORE I have the money available as compared to making snap decisions when I already have the funds ready.
There is no right or wrong in financial planning as long as it makes logical sense. A common observation speaking to multiple individuals who regretted their financial purchases is how they felt that the solution sounded like it made sense at the point of purchase. Usually, they only regret the purchase later on when they realised they didn't put deep thought into it.
Guess what? The solution might make sense if judged as a standalone purchase. For instance, if your intention is to start saving money, taking up an endowment which matures when you are 40 does meet the requirement. However, if your intention is to start saving money for your old age, then maybe a plan that matures at 40 becomes an opportunity cost. It not only locks up the budget you could have committed to your retirement plan, it also exposes you to reinvestment risk. Because we invest or save money for specific goals, random solutions might not be suitable for YOUR goals, that's all...
It's also pretty unlikely you have no goals to begin with...
What is a better way to manage excess money available from time to time?
Speak to a credible financial advisor whom you intend to build a working relationship with. Building a financial plan for yourself is an on-going process. It's pretty unlikely one can get all the financial needs sorted out in 1 financial discussion. For starters, your earning power is lesser when you are younger. Also, you might have numerous financial goals to fulfill at different stages of your life.
Hence, you actually have a functional purpose for all your surplus money if you were advised properly from the get go.
A good financial planning discussion would enable you to foresee the amount you need to set aside to cater for various goals that you wish to accomplish. Without knowing how much you need, how would you prepare the money to fund your wants? This process is usually very easily established because it can be mathematically calculated. As goals change, your financial goalpost will shift along. This is why, financial planning is a process not a quick fix.
Going through a proper financial planning process with a reliable advisor would give you a good idea what to do with available monies once you have it. It makes it easier to not be tempted by frivolous spending that you may encounter randomly as well. Think about it, when you were focused on saving for your dream house or dream car, you didn't suddenly spend your bonus on a random pair of luxury shoes right?
Summary
Actively looking to invest your money only when you have available funds available is a very reactive way to manage money. Often it leads to impulse buys that may be counterproductive to your long term financial goals.
A better way to cater for excess funds that might be available as and when is to work out a long term financial plan.
This is will enable you to:-
Regain control and predictability in terms of what to do with the money when its available
Avoid confusion or impulse splurges
Reduce risk of mismanaging a large sum of money that suddenly becomes available
Having a financial strategy planned out before excess money becomes available is a good way to avoid convenience purchase. It also enables us to manage our money unemotionally. It gives us time to consider the solutions we take up, and help us make wiser decisions especially when we are caught up with our everyday roles as a employee, spouse, parent or child.
- Janice Yip -
If you would like to kick start a proper financial plan, please speak with a trusted advisor. You can also drop me a message if you would like me to help you with it.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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