8 Steps to Achieve the Highest Probability of Success in Money and Life

Two weeks ago, I was in Guangzhou again. Besides spending time with government officials, I had the opportunity to spend time with several Chinese financial institutions to share how advice should be given.

Incidentally, on the day (8th Oct) that I arrived in Guangzhou, Chinese stocks rose 5.93% to welcome my arrival. The rise was fuelled by the government’s pledge of fiscal stimulus. And because the Chinese markets have been experiencing a three-year drought, financial institutions were busily putting in trades for investors who did not want to miss this rally, believing that the rebound was finally here.

During lunch the next day, one of the guests shared that he was having breakfast at a local eatery and overheard a group of “aunties” discussing the stock markets. After a lot of chatter, one of them concluded the discussion with a serious message, that they were to take their savings to buy into the markets that same day by a certain time. With that, they quickly departed. In a second story during dinnertime, I was told that one investment adviser set up a makeshift stall at a night market and convinced a large crowd of people to open trading accounts with him. I was dumbfounded by both stories.

Shortly after the initial government announcement, the Chinese National Development and Reform Commission (NDRC) provided more details on the above-said stimulus and the market retreated by 7.05% the next day (9th Oct), indicating that the measures were perceived as less substantial than expected. Following this decline, the stock market fluctuated, with an increase of 1.06% on 10th October and a drop of 2.77% on 11th October, as the Ministry of Finance (MOF) prepared to unveil additional fiscal stimulus during a briefing scheduled for Saturday, 12th October. And because there were significant concerns that the recent rally could reverse if the measures announced at the MOF briefing did not meet market expectations, the CSI 300 Index experienced its worst week since July this year, falling by 3.3% for the week.

I felt sad for those aunties and the hundreds who bought into the stock markets after they opened accounts at the night market. Just six months ago, I was in Guangzhou to speak to more than 500 leaders in the Chinese investment advisory industry on how they can help their clients navigate the volatile Chinese markets. I definitely did not suggest this approach of market timing.

In my firm, we manage monies for our clients to enable them to achieve their non-negotiable life goals and events. And because they are non-negotiable, we have to use an evidence-based approach that gives them the highest probability of success. There are eight steps to this systematic approach.

8 Steps to Achieve the Highest Probability of Success in Money and Life

  1. Only using asset classes that from empirical evidence will give long-term expected returns
    For an investment to generate long-term returns, it must participate in and contribute to global economic production. Otherwise, we should not expect there to be long-term investment returns. From evidence, equities and bonds are examples of such asset classes. Both are ways for investors to provide capital to companies to conduct their business activities. The companies are expected to create value for their customers through the services or goods they deliver. Investors receive returns if the businesses are successful; and lose money if they are not successful.
  2. Using a scientific method to estimate future expected returns
    Having a scientific basis to estimate future expected returns of asset classes is important not just so that the return numbers used for wealth planning are more robust. But if the returns do not come in as expected, we know what went wrong and what adjustments are necessary. We use the Ibbotson-Chen model to estimate equity returns and term premium between bonds of different terms to maturity to estimate bond returns.
  3. Creating portfolios of different asset allocations with different risk levels and returns
    With the estimated expected returns of each asset class, we would be able to know the expected returns and risk level of each portfolio with different proportions of asset classes combined.
  4. Finding suitable instruments that will deliver these expected returns with higher certainty
    Next, we look for evidence to see which instruments are able to reliably deliver the returns over the long term. We use them to express the asset allocations of different portfolios. For now, we only use low-cost, non-forecasting funds in our portfolios.
  5. Understanding life goals and events
    In our advisory process, we help clients achieve clarity about their non-negotiable life goals (we also call them ikigai goals) and events (such as retirement) and ascertain the amount of money needed to achieve them. Based on their current financial situation and relationship with money, we would be able to establish their need for returns, their ability to take the risk for the returns they need and their willingness to take risks.
  6. Finding suitable portfolios to be able to deliver money when needed
    We then invest using suitable portfolios (from step three and four) that are expected to deliver the returns clients need and at a level of risk that clients should be able to stay invested to reap the required returns.
  7. Helping clients stay invested
    Once clients are invested, the hardest part of the process is helping them stay invested through the ups and downs of the markets. Although they are in the right portfolios (in step six) that would theoretically help them stay invested, when markets become volatile, theory gets thrown out of the window. The ongoing process, which involves a lot of financial education and coaching customised based on an individual’s wealth plan, helps clients stay on course.
  8. Making adjustments
    Because we are investing for the long term, we must expect changes in our life circumstances, geopolitical situations, markets, etc. Investments that may have done well in the past may no longer do so. Investment instruments that in the past were not available in Singapore may now become available. Past estimated returns (in step two) may now become irrelevant, and this affects clients’ wealth plans. As such, ongoing monitoring and adjustments need to be made to the planning assumptions and investment portfolios.

Many investors are only interested to know how to get the highest returns. We think it is more important to have enough money when you need it and be able to use the money to achieve your life events and live out your ikigai. This cannot be done by forecasting markets (which is really gambling!) or by simply buying a bunch of products.

Only through a systematic step-by-step process that is regularly fine-tuned can one achieve the highest probability of success both in money and life. Yes, it is labour-intensive but my experience tells me there is no better way.

The writer, Christopher Tan, is Chief Executive Officer of Providend Ltd, Southeast Asia’s first fee-only comprehensive wealth advisory firm and author of the book “Money Wisdom: Simple Truths for Financial Wellness“. He is also a Certified Ikigai Tribe Coach.

The edited version of this article was published in The Business Times on 28 October 2024.

For more related resources, check out:
1. A More Reliable Way to Get Enough Investment Returns
2. Active Investing That Adds Value to the Client
3. Why a Robust Estimate of Future Returns Is Important for Investment Planning

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