Better late than never?


By COMMENT
  • Business
  • Saturday, 23 May 2009

RECENTLY in a family gathering, I noted a change in my brother-in-law. A self-professed fine food and wine lover, he had declined an offer to drink at lunch. And he spoke fondly of his gym session that day, which apparently is now a regular routine! Strange indeed coming from him. Naturally our curiosity took over as we probed deeper into this change of lifestyle.

As it turns out, he’s always been “suffering” from high cholesterol levels since early adulthood. Previously, he conveniently dismissed it as hereditory and that he could do nothing about it, until recently. His cholesterol level has risen significantly in recent years that he is advised to go on medication. Whilst the medication could help regulate his cholesterol level, it is a life-long commitment with potential side effects that could damage his liver! So although one problem is solved, another complication is possible.

But going on medication is not Hobson’s choice for him, there is still an alternative – more exercise and regulated dietary intake (like cutting back on rich food). He bravely refused medication and instead converted to a healthier lifestyle. His motivation? The wife’s support aside, it was also that he can then continue to live and eat and enjoy his food and drinks, albeit more sparingly. So better some than nothing.

Despite good advice and sound guidance for years, his action recently was only triggered when he was faced with the inevitable.

As he said, “better late than never”, which is so true! But I would suggest something that requires a little more foresight – “better early than late”. And this same principle should be applied to our financial planning.

When you start young, the financial world is truly your oyster.

When you are older and plagued with medical conditions, then you might find it tougher to get insurance. Generally, insurance has exclusion clauses for pre-existing conditions. If you are already diagnosed with certain conditions or conditions that are pre-disposed to certain illnesses, then you may no longer be insurable. Insurance favours healthy individuals at the point of underwriting.

In some cases, you may be insured despite certain pre-existing medical conditions. The policy may then exclude specific illnesses, or if it does include, it is likely to cost you a significantly higher premium. This is termed as “loading” to account for a significantly higher risk under taken by the insurer.

Insurance at an older age will definitely cost you more than when you are younger, everything else being equal. Generally, age is a reflection of risks and therefore when you are older and of a higher risk, you pay more. My wife bought her first policy as an undergraduate, paying only RM100 a month. A few years and one bronchitis episode later, she bought a similar policy with less favourable terms for more than double the premium!

What this means is very clear. Insurance is cheaper and easier to underwrite and approve when you are younger and healthier. Many policies are auto-renewable or guaranteed renewal as long as the policy never lapses. So a person who is healthy at the point of insurance can continue to be insured even when he or she subsequently develops health conditions. So it pays to be insured earlier in life rather than later.

The advantage of youth and health is also relevant to investments as well. More importantly, it actually allows us to learn valuable lessons early in life.

Time is valuable when it comes to investing your money. When you are 20 to 30 years away from retirement, you can afford to make mistakes with your investments. There is time to recover from it. Conversely, when you are already at the doorstep of retirement, you should only be invested in conservative investments so that your nest-egg is not subject to the volatility of risky investing.

It can be proven that if you invest consistently (no ad hoc market punting) over a 10- or 20-year period, the chances of experiencing a negative return is almost zero, even for a pure equity portfolio. In fact, it is conceivable that such long term investing could give a return that is higher than risk-free cash deposit interest.

Such long-term investing rides over business cycles and is able to recover from market shocks such as the Asian financial crisis, oil shocks and technology bubble burst. I am sure, in time, we will also recover from this round of the financial crisis and global recession.

Learn from your mistakes early, forgive yourself but don’t forget the lessons. I have a friend who, during the Asian financial crisis lost his house and savings through losses in share margin trading. He was 30 years old then. It took him almost eight years to recover and pay back his debts but he has learned his lessons especially when taking risks. Now he only sets aside an amount that he can afford to lose completely for margin trading (he has resisted topping up endlessly during margin calls).

Funds for children’s education and retirement are kept separate. He now knows that he cannot afford to play with this part of his money. His example is a good one because sometimes our emotions take over when punting in the market becomes so addictive. Much like the reason why you should never put your life savings in casinos. He has learned his lesson. I hope readers don’t need to experience it for themselves to empathise with him.

I suppose we all have that natural bit of inertia in us. Why should we plan for retirement when we just graduated from university at the tender age of 22 years? After all, we still have another 30 to 40 years to go before retirement. Why should we worry about our children’s education at their birth? That would be 18 years before they go to university. Such is the inertia in our way of thinking that we will constantly push things to tomorrow and beyond. Just like my brother-in-law who has been pushing his health to its limits for years until he is faced with the inevitable – go on medication for life or change his lifestyle.

Must we put ourselves in such a bleak situation before we make a life changing choice? Here in lies the difficulty. If you are reading this and feel that there is still no rush, then you may need a a bit of reflection and a reality check. If you feel a sense of regret for not doing something earlier, then at least plan and do something now. No one can turn back the clock, but it is up to ourselves to make the future better, after all “it’s better late than never”.

> Tay is senior vice-president and senior head of UOB’s financial services division

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