Protect sources of wealth first, then invest

IN times like these, where a combination of the credit crunch and the economic slump has affected the private wealth of many individuals and families, the need to preserve the sources of wealth becomes more urgent.

Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui, whose clients are mainly business owners, says the most important thing to do in times like this is to make sure the business cashflow is preserved.

“In this situation they have to review their position, maybe do a stress test analysis depending on how much revenue is coming down and think about how to protect their assets,” he says.

Yap says these individuals need to protect themselves first before they make more money.

He says for business owners, insolvency becomes an issue in such times especially if they stand personal guarantee for loans their companies take.

Yap says one sure way of preventing wealth being wiped out in the event of a bankruptcy is to move part of an individual’s or family’s wealth into a trust managed by a professional.

“In the event of a slump in revenue, which is inevitable at this point, standing personal guarantee for business loans becomes an issue because the person may not be able to repay,” he says.

Yap: Diversifying investments is more important at any time but even more so now

Yap says a business owner may have to also worry about any credit or loan policy changes when times are bad.

“A change like this, usually by tightening the rules on lending or pulling back of credit lines, can have an adverse domino effect on one’s business and bankruptcy may follow,” he adds.

Yap says many business owners are unaware that when they take loans, there is a “material adverse market condition clause” in which a bank may reduce or place more stringent conditions for its lending facilities.

He says for those who transfer part of their wealth to family members, they must ensure that those family members are not directors or partners in the company as they will be liable.

“It’s always better to have a trust but if they don’t have a professional managing their wealth, then maybe its time to review their protection plan,” Yap tells StarBizWeek.

From safeguarding the sources of wealth, he says individuals can then think about investing.

However, Yap says investors will have to set aside at least six months to a year of funds for everyday expenses and the occasional splurge before they start looking to what or where to invest.

He says the remainder can then be used for investing as long as its not needed for anything else such as sending kids off to college.

“Cash is king but investors must know to seize the opportunity when they see it, especially where investment opportunities are abundant in this kind of environment,” Yap says.

He says of all the investment choices out there, the one that is most obvious will be the equity markets due to the deep discount although investors will have to invest in “deep-blue chip” stocks for three to five years to see any sort of decent returns.

“These are the stocks that will always be investment targets by funds, even though they may have exited for now, but when things pick up, they’ll always be the first to move,” Yap says.

He says the more sophisticated investors will look to invest in the equity markets abroad for the reason that the discount is even bigger.

“The investor will have to be able to hold for a time, its not for the faint of heart,” Yap says.

Which brings him to the question of the time horizon. “I always believe that wealthy individuals do not have to put themselves at risk by growing their wealth exponentially within a short period of time via speculation,” Yap says.

He says as long as wealth grows above the inflation rate by 2% or 3%, it is good enough. “You’ll have done justice to your wealth,” Yap says.

He says diversifying investments is important at any time but even more so now.

“Diversification may mean sacrificing some returns but it will reduce risk,” Yap says.

He says always put cash in several different banks and if taking up a life policy, try to spread it over several policies.

“When I advised people five years ago about this, everybody thought it was troublesome, that it was going by the book, but look at the number of bank failures now, look at AIG,” Yap says.

Ultimately, he says any time is a good time to plan ahead when managing personal wealth.

“Don’t wait for times like this, because if you ask me, it may be too late if you’re planning for the downturn to come,” Yap says.

He says the best way an individual or family can solve personal wealth management issues is to have an updated plan so that they will know where they stand when adverse news of the type that is so prevalent in the media now comes up.

“They must know whether the bad news is relevant to them, whether it will affect their wealth in any way, it may be bad news to others but good news to them, they cannot also assume that opportunities highlighted in the media or through other channels of information are opportunities suited to them,” Yap says.

The Star-Fintan Ng