Believe it or not, portfolio diversification has worked

It looks great on paper. Diversification is the hailed financial theory that says investors can reduce the ups and downs of their portfolio by sprinkling money all over the place in different types of investments, rather than plunking down everything on just household-name U.S. stocks.

Investors who take a closer look, though, can see that diversification has done what it’s supposed to do. And for investors looking for a prudent way to gear up for the stretch goal of saving for retirement, diversification can still be a big key to success.

“Diversification is like a free lunch, or at least a free hors d’oeuvre,” says Ian Ayres, professor of law at Yale University who has studied diversification. “You want to take advantage of it.”

“Diversification is a great tool to protect against risks of problems at a particular company or industry, but not if the entire financial system comes under strain.” Read how diversification can get more powerful over time and what the key ingredients to make your diversified portfolio work at USA Today.

IM$avvy – Why I worry about retirement

Many close friends who read my blog often label me as a salty man. This has a negative connotation because in Hokkien context, it is “kiam” or scrooge in western terms. However, when I explained my rationale to them, suddenly they realise they either be prepared to work past 55 or be better off being more salty.

In today’s competitive workplace, there are not many people who are willing to work past 55 years old, even if they are ABLE to. Perhaps it is due to the increased pace of life and work pressure, many people just find it too stressful to cope mentally and physically beyond 55 years old.

The problem is exacerbated when the same group has ailing parents, growing kids and mortgages to repay monthly.

Life becomes much more stressful, simply because they need to work or they die (from debts and poverty).

In a nutshell, most people don’t retire at 55 simply because they cannot afford to do so, not because they choose not to.

The last word: He said he was leaving. She ignored him.

When Laura Munson’s husband asked for a divorce, she ducked instead of fighting. He needed to learn, she says, that his unhappiness wasn’t really about her.

Different phases in life have their own unique challenges. The transition is usually the toughest, akin to a “cold turkey” reaction. When we lose what used to define us to face a new and unfamiliar lifestyle, we get confused, fustrated and start looking for reasons, answers, anything logical to explain the change. Perhaps we should embrace the changes and let time work it’s wonders as we assimilate into our next phase, a better phase.

Read how Laura managed her husband’s “cold turkey” reaction as he transits to a different phase in his life. We all can learn a thing or two from both her and her husband in this story:

The last word: He said he was leaving. She ignored him.

Retirement is also a phase in life most need time to cope and accustom to. Read what one retiree shared about about his retirement lifestyle and how better to enjoy your golden years – So you want to retire.

Living With The End In Mind

As a nation, Singapore is at times seemingly relentless in striving to improve its quality of life. Now, it must do more to enhance its quality of death. As the country advances further to First World status, in some areas, serious deficiencies have opened up, fresh fissures stretched further by driving forces such as a rapidly silver-haired population, fewer babies, and smaller nuclear families downsizing to the limit: individuals living out the rest of their days alone. How to raise the quality of end-of-life care—so as to raise the quality of life itself—is more urgent a question than ever.

This study, commissioned by the Lien Foundation in Singapore, places the spotlight squarely on a subject whose importance can only expand. The project’s ultimate end in mind is to achieve greater widespread public and professional awareness, and to garner support for all relevant ways to enhance the environment for quality palliative and end-of life care, from the home to hospice and hospital systems, and everything else in between, that can help facilitate a good death, for a better life.

Read more in Lien Foundation’s Living With The End In Mind. On the same note, doctors face and ethical dilemma when caring for the dying.

The study said: “One of the most difficult ethical issues doctors face is the issue of withholding their diagnosis from patients at the family’s request. While the legal position makes it clear that doctors have an obligation to give full and frank disclosure to their patients, they often find that they need to work hard on family members to be allowed to talk to patients truthfully.”

Read more at TODAYOnline – Dying patients have less say in care and treatment than their families do.

25 Shocking but True Statistics About Retirement

MorningStar has compiled 25 shocking but true statistics about the state of retirement in the United States. Wonder how many of them reflects the state in Singapore. Here are the 25 statistics, with some comments:

• 19: Percentage of U.S. workers participating in a defined-contribution plan, such as a 401(k), in 1980. (401(k) is an opt-in type of retirement savings account, akin to SRS in Singapore)

• 52: Percentage of workers participating in a defined-contribution plan in 2004.

• $71,500: Average balance of Fidelity 401(k) account holders at the end of 2010, based on 11 million accounts.

• $740,000: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and no inflation.

• $1 million: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and a 3% inflation rate.
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• $1.25 million: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and a 5% inflation rate. (These numbers are the same for Singaporeans, just that they are in SGD)

• 45: Percentage of retirees who don’t factor inflation into their retirement planning. (Many tend to ignore the cost of inflation in their retirement plans when they reach their retirement)

• 13: Percentage of retirees who look at least 20 or more years into the future when planning for retirement. (Singaporeans do not look so far ahead when planning for their retirement too!)

• 21 and 17: Average number of years, respectively, that women and men in the U.S. will be retired. (Note that Singaporeans have a longer life expectancy then Americans)

• 25: Percentage of 401(k) participants ages 56-65 who had more than 90% of their accounts in equities at year-end 2007.

• 42: Percentage of the target equity weighting for those retiring in 2010 according to Morningstar’s Lifetime Allocation Indexes.

• $1,000: Monthly Social Security benefit a retiree would receive if he begins collecting benefits this year, at age 62, assuming an annual income of $50,000. (Singapore has no Social Security benefit, the closest is our CPF and CPF Life)

• $1,951: Monthly Social Security benefit if same retiree delays receipt of Social Security benefits until age 70.

• 72: Percentage of Social Security recipients who begin collecting benefits at age 62.

• 34: Percentage of retirees who rely on Social Security for 90% or more of their income needs during retirement.

• 40: Percentage of average wage earners’ income that Social Security replaces.

• 80: Percentage rule of thumb for how much of one’s pre-retirement income will be needed during retirement. (The typical range is 70% to 80% of your last drawn pre-retirement income)

• $230,000: Amount that a 65-year-old couple retiring in 2011 will need to pay for medical care throughout retirement. (Alot of people do not consider the potential cost of medical care in their retirement plans!)

• 40: Estimate of the average percentage increase in 2011 premiums on long-term care insurance policies issued by John Hancock.

• 45: Percentage of Americans ages 40-64 who believe the government will pick up the tab for their long-term-care needs. (Singapore has Basic ElderShield in place, but is it enough?)

• $2,000: Amount of countable assets to be eligible for Medicaid to cover long-term-care costs in most states.

• 70: Percentage of Americans over age 65 who will need some form of long-term-care services during their lifetimes.

• $162,000: Average annual costs for private-room nursing home care in Manhattan in 2011.

• $60,000: Average annual costs for private-room nursing home care in St. Louis in 2011. (The monthly cost of private nursing home in Singapore ranges from $1,400 to $4,000)

• 2.4 years: Average length of stay in a long-term care facility.

Shield against costs of long-term care

IM$avvy featured a recent article Straits Times article on Long-Term Care (LTC) in Singapore.

ElderShield works on an opt-out basis, with premiums funded out of Medisave.

The scheme has undergone changes and, since 2007, supplementary covers – which are on an opt-in basis – have been launched to provide additional layers of protection.

These supplements can be funded from Medisave at up to $600 per year per person.

Aviva Singapore, Great Eastern (GE) and NTUC Income are the ElderShield insurers.

The basic ElderShield insurance pays a monthly cash benefit of $300 for up to five years or $400 for up to six years.

To qualify, policyholders must be unable to perform three or more of the six activities of daily living (ADLs): mobility, feeding, transferring, dressing, bathing and toileting.

There’s also a simple comparison of the LTC plans available in the market today

The Right Kind of Diversification

More and more, investors have been hearing that in order to be properly diversified, they need exposure to more asset classes than they previously had assumed. Instead of just stocks, bonds, and cash, many responsible financial writers and advisors–not to mention fund companies trying to pitch their latest wares–now suggest that a portfolio should also include some real estate and perhaps exposure to commodities as well. And of course, as in the past, you’re still told to include among the stocks some smaller companies as well as large, international (and make sure to own emerging markets), and domestic–and both growth and value.

Some investors have responded by owning more and more funds. But the result can be a sprawling, unmanageable portfolio of 20 or 30 funds or more. Others, especially in retirement plans, take the opposite course: They toss up their hands and own just one fund, a target-date vehicle or similar option that provides diversification all on its own.

With more choices, naturally comes greater confusion.  However, the proliferation of funds need not lead to confusion or overstuffed portfolios. This article from Morningstar points out the importance of investing through diversification – To Meet your Goals. Read more on The Right Kind of Diversification.

Update: New link of the article.

Here’s why those New Year resolutions are so hard to keep

Old Habits die hard. Bad Habits die harder:

http://www.todayonline.com/World/EDC110105-0000193/Heres-why-those-New-Year-resolutions-are-so-hard-to-keep-,,,

“Why are bad habits stronger? You’re fighting against the power of an immediate reward,” says Dr Nora Volkow, director of the National Institute on Drug Abuse and an authority on the brain’s pleasure pathway. “We are hard-wired that way, to give greater value to an immediate reward as opposed to something that’s delayed.”

This is the same for bad financial habits. Short-term, “immediate” gains are often favored for long-term, “delayed” gains. Temptation is often hard to fight and bad habits difficult to change.

Says Prof Nordgren: “People have this self-control hubris, this belief they can handle more than they can.”

How then can one stop from repeating bad financial habits? Will professional financial advise be useful?

I think so. and that is just one of the many things everyone should have – A financial ally by their side.

Maybe add “Find my financial ally” in 2011 list.

So You Want To Retire

Have you wondered how your retirement years will be spent? What are the things that will occupy you when you take your well-deserved break to enjoy your golden years?

Attached is a letter published recently in TODAY – So You Want to Retire – TODAYonline. The writer, who is retired, writes about the pre-conditions for retirement,

a. Your children do not have to depend on you financially,

b. You have zero liabilities,

c. You have enough savings to support your lifestyle,

d. You know what you will be doing during retirement.

He shares an interesting perspective on how one can one can stay active and have a fulfilling retirement.

“If you can afford to retire and want to do so, start preparing now to live your sunset years to their fullest.”

I hope you enjoy the read and have a great F1 weekend!