89. Governments are Worried about Inflation, should we? 2023 Investment Approach?

Last week, the US Federal Reserve Board announces another rate hike to combat rising inflation currently doing at 7.1% (November 2022), this is not surprising as this is way beyond their inflation target

What Is Inflation Targeting?

Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. This is known as the target rate, which is normally set at around 2% to 3%.

The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation. (https://en.wikipedia.org/wiki/Federal_funds_rate)

As the biggest economy in the world, this policy decision by the US Fed influences the rest of the world including the Philippines, expect that the BSP would be announcing hawkish monetary policies along this line

How does this affect us?

Higher interest is a double edge sword - this is generally good for savers as we could expect an uptick in the interest we are getting for our savings, but a bane for borrowers as this would translate to higher costs, this is especially disadvantageous to corporate borrowers as the extra cost in borrowing may eat into their profit margins

This is why the stock market normally reacts negatively to interest rate hikes or even just the prospects of it

2023 Investment Approach:

1. Ensure that you have sufficient liquidity (at least 3 to 6 months of expenses)

2. Funds placed in any equity linked vehicles may not provide any capital gains in the near term

3. Just like any other economic indicator, interest rate policies move in cycles, so if you have extra funds that you can set aside for a year or two, picking up some bargains may make sense. As there would be quite a lot of volatility going forward, take a "cost averaging approach", the best would be taking position on a monthly basis (whether VUL, MF or UIT)

Disclaimer: This may not be suitable for you considering your specific financial circumstances, best to consult with a financial advisor

all the best my friends!

#acgadvice

88. Why the "Critical Illness Rider" is Critical to a Successful Financial Plan

 

Most VUL cases I see being bought by policyholders are either intended to provide money for  (1) education expenses of a child (2) retirement funding (3) saving up for a life goal

These are all good and are positioned to benefit from the long term upward bias of the investment component, usually invested in an equity fund or a variation thereof, a lot of academic studies shows that over the long term, an equity fund is the optimum vehicle for capital appreciation, so all a policyholder needs to do is the maintain the policy and wait for the maturity period? right?

One aspect that some advisors may have overlooked is the "long term nature" of the plan, we are looking at 10, 15 or even 20 years into the future, while we cannot guarantee investment returns, what is "guaranteed" is that the policyholder will get old, and as they get older, the chances of them getting sick becomes higher

Imagine 15 years into a 20-year retirement funding plan, the policyholder suddenly contracted a critical illness that requires substantial expenses, it is possible that surrendering the policy for fund value may happen to help defray medical expenses, will there be anything left to fund his retirement?

Attaching a critical illness rider to the plan may make sense in this case, if the same circumstances happen to the policyholder on the 15th year, he can claim on the protection benefits of the CI rider keeping his retirement fund value intact

All the best my friends!

#acgadvice

87. "Ahente lang ako.."

 "Ahente lang ako.." 

is one of the saddest declaration I can hear from a financial advisor in describing what we do as financial advisors, this is both demeaning and de-moralizing, it's as if we are only purveyors of insurance products to sell, earn commission and we are done

There is no question that to be successful in this line of work, the ability to sell is very crucial, but we may have to define the parameters as to where the sales function begins and the financial advisory function starts

Life Insurance in a lot of ways is a very flexible product, I say this because most life insurance products now (VULs) are very straightforward and can actually be custom designed with specific financial needs in mind 

A well thought of VUL plan can be tweaked to address both the "protection" and "wealth accumulation" goals in a single plan through the attachment or dis-attachment of "riders"  

For example, for a breadwinner just starting out can put more weight on maximum protection while building up the "fund value" by adding a term insurance rider, this can be decreased over time as the fund value increases thereby increasing the funds allotted for wealth accumulation, this plan after a time can be used to fund longer term goals such as retirement

The "sales function" in this case is helping the client realize the importance of starting early, as the resulting fund value is a function of market movement over time, we always hear experts telling us that over the long term, capital markets investments almost always deliver decent returns

But capital market returns are earned without a lot of volatility in between, this is where the financial advisory comes in, we have to continuously "update" the client and ensure that this volatility will not lead to a premature cancellation of the plan

So, if we are asked what we do as financial advisors, we can say that we help people achieve financial security by helping them design a plan appropriate to their current financial circumstances, then provide a "helping hand" to guide them along the way

All the best my friends.

#acgadvice

86. Create an instant "ESTATE" using Life Insurance

Life Insurance is often viewed as an unnecessary "expense" in one's family budget, I used the word "expense" to highlight the perspective by which some of us we decide on whether to get one or not

Classifying it as an "expense decision" placed it in the same category as decisions pertaining to whether to take a vacation or not, the type of car we purchase, or even the brand of shampoo we pick up at the grocery aisle. 

"We purchase something, what do we immediately get in return?", in our mind, it has become a commodity purchase decision

I think this particular mindset with regards to Life Insurance is brought about in part by how we advisors offer it in the first place,  it is not surprising to hear advisors telling prospects that his product is better because - its cheaper.. it has more benefits..etc etc.., we have framed our proposal as a commodity purchase, it is also not surprising that most of these offers get rejected

What is the price of "peace of mind" to a family breadwinner? 

My suggestion is look at the money you would decide to allot to a life insurance policy as your regular savings, something you set aside for a rainy day, money intended for some important future life goal, money intended to give you peace of mind in case of some catastrophic events

Consider a typical family breadwinner, whose main aim to provide the best to his family from the fruits of his labor, in an ideal world this objective will go on unhindered for as long as the family breadwinner can provide..

An "estate" is something of value that is pass on to the family in case the breadwinner meet an untimely demise, its main purpose is to provide a base by which the family can use to absorb the financial difficulties this event may have created, it gives them a buffer to adjust to the new reality of going forward with the least disruptions

Contrary to popular belief, purchasing a Life Insurance Policy for this purpose in not that expensive, I have seen proposals that would enable a breadwinner to set up a ONE MILLION PESO estate for the price of several gourmet coffees that we indulged in from time to time

What is the price of "peace of mind"?

all the best my friends!

#acgadvice