KEY POINTS:
The global financial crisis has started to bite. We have all suffered some loss of wealth, be it temporary or permanent, and have been affected by the tidal wave of insecurity.
Regaining a sense of control and equanimity at times like this requires us to take time to be introspective - to focus on what is important; to go back to the basics and to recognise that in every crisis there are also opportunities, both in terms of personal betterment and investment. We need to focus on what I call building our Bridge of Wellbeing.
Truly content people are in control of several key domains of their lives - work, health, recreation, social life, money and relationships - and they aim to balance their time and effort across them.
Lifestyle financial planning involves looking inward to uncover your values and goals, then making choices that are consistent with these, rather than treating money as a measure of success.
Sustained investment success requires a personal financial framework that enables you to understand the role of money in your life and the choices you make to support the life you desire.
This framework is the essence of the Bridge of Wellbeing and the three pillars that underpin it are:
* Understanding and defining your values and goals.
* Deploying financial strategies that use your resources in a way that is consistent with your values and goals.
* Developing your financial and investment strategy.
There is considerable empirical and anecdotal evidence showing that increasing the strength of each pillar will help you cross the bridge to wealth and wellbeing.
UNDERSTANDING VALUES AND GOALS
The reality is, many of us spend too little time thinking about what would make us happy, and disproportionate time and effort chasing goals that don't bring the satisfaction we seek. When setting goals, it's important to look forward, not back.
Too often, people look back at what they've learned, at what qualifications they've achieved, and at what loved ones have identified as their strengths and weaknesses. The problem with this approach is that your future is dictated by the limitations of your past. So suspend reality and the limitations of the past and think about the things to which you genuinely aspire.
One aspect of determining how much money is enough is planning for security in retirement. The general rule of thumb is that once work stops, the kids leave home and expenses fall, most people find that they need something like 75 per cent of their final working income to sustain a good lifestyle in retirement.
APPLYING ASSETS TO ACHIEVE GOALS
Begin by mapping out your financial resources today and in the future. This is easier - and more fun - than it sounds. If you have spent time thinking about what you want to achieve at various stages of your life, it can be very enlightening. The basic steps are:
* Identify your current income and expenditure by doing a budget. Don't be too precise; estimates will get you started. Also, list your assets and liabilities to work out your net wealth.
* Estimate your income and expenditure in the medium term (three years) and longer term (five to 10 years).
Taking into account your savings potential, estimate the growth of your assets, net of liabilities, in the medium term, at the point of retirement and a couple of years into retirement. A valuable exercise is to calculate how long your estimated retirement savings will last, given your desired lifestyle.
* Balance your current and future needs and goals. As you go through this process, you will start to see how many of the goals that are important to you are affordable, given your current plans. One of the biggest challenges is reconciling our desire for security and a good lifestyle in retirement with day to day demands - particularly if we have teenagers or ageing parents.
* Savings and investment are complementary. Often too much emphasis is placed on investment returns and not enough on saving. Savings can be thought of as the cake. Investing them, to enhance their value over time, is the icing.
If you save a dollar, it doesn't make much difference to your wealth if the return after one year is 5 per cent or -5 per cent. But you have nothing if you don't save the dollar in the first place. Over time, investment returns can compound to a big amount and with a regular savings plan, this means the cake will grow very large, and the icing very thick.
DEVELOPING INVESTMENT STRATEGY
I have lived, advised and invested through six financial crises over 25 years. All crises come to an end and you need a sensible investment strategy to survive and make the most of the opportunities that crises throw up. In this regard, all you need is to understand four key investment principles and get good advice.
Quality: The only way to identify quality companies and investments is through rigorous analysis. Look for attributes that include sound longer-term earnings, good return on equity, capable management with a solid track record and a sound balance sheet.
Value: This means the quality and price. Some of the worst disasters have arisen from people paying too much for what are, essentially, quality assets. The key to assessing value and quality is to know whether an asset can produce an attractive return relative to its risk.
Diversification: Important because it provides access to a wide range of investment opportunities, across different asset classes, countries and funds It is also critical in times of great uncertainty.
But the ultimate test of a successful portfolio comes with time. Over long periods in the market, say five to 10 years or more, virtually all strategies based on the above four principles have greater upside potential, with less downside.
Ultimately, crossing the Bridge of Wellbeing means integrating all aspects of your money and your life to help you answer that most important question: how much is enough?
Arun Abey is executive chairman of financial planning firm ipac, head of strategy for AXA in the Asia Pacific and a director of the Spicers Portfolio Management advisory board. He is also the author of How Much is Enough?
www.howmuchisenough.net
