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A Very Succinct Explanation of Life Planning by AIA’s CIO

My big boss Christopher Tan from Providend often encourages us to put out our thoughts in the public realm.

The main reason is that in order to explain things clearly and in a simple manner, you have to know your stuff, be able to distill information, data and knowledge into wisdom.

This weekend, Sunday Times’ Me and My Money interviews Liu Chunyen, who is the chief investment officer at insurance firm AIA.

This is one of the better Me and My Money interview. Ms. Liu discusses getting wrong about the commodities trend, and the usually Me and My Money topics.

It is quite interesting that for someone who grew up when the Taiwan stock market was booming, and a CIO, her allocation usually stayed around 60% in fixed income and 40% in stocks. She is happy with a 5% to 10% returns a year with a 5% target rate of return.

She may be one of those rare ones who let her life goals and her risk tolerance drive her asset allocation. (My guess)

We do not get that a lot since most who are deep in this industry have a tendency to be equity animals.

What I would like to share with everyone is her explanation of “How are you planning for retirement?”

I am very lucky to have married a banker who enjoys financial planning as a weekend activity! Believe it or not, a lot of conversations during our free time center on retirement planning and how far away we are from our goals.

We started planning by envisioning the kind of lifestyle we wanted to lead after retirement. Then we began analyzing our spending habits to develop an estimation of expenses by major categories.

On top of that, because of our passion for travel, we have a separate category for travel expenses. We even budgeted for the number of short-and long-haul trips we wanted to be able to take every year.

Once we arrived at a yearly budget, we then decide how many years of retirement we want to save for. This helps us decide when we can retire and what are the potential investment returns we need to achieve.

It’s a fun exercise if we do it frequently enough. It provides clarity to our investment goals and how we can achieve these goals.

Firstly, if you want to put correct life planning / financial planning in a very succint manner, it will be as above.

  1. Start with the life that you wish to live. Now, within the next 10 years and further into the future
  2. Then work out your expenses for those different lifestyle
  3. Create a yearly budget and figure out your surplus amount
  4. Mathematically work out how many years you need minimally to accumulate enough for this lifestyle. Come up with what-if scenario if you could save more or less

The couple totally get the sequence of things correctly. Life then money. Money is ancillary to life.

There are some naunces that we could learn from this:

  1. There are discretionary expenses out of all discretionary expenses that you will not compromise on. That is OK. Make sure you have a concentrated number of these. If you refuse to compromise on all your expenses, you will have a problem.
  2. Quantify some of your discretionary wants. Many people think vacation is a recurring expense but often it is not. The couple de-constructed roughly the cost of long-haul and shorter-haul travels and perhaps how many they want in one year. For many of you, during the period where your child is small, you might still want to save for vacation still, so that when they are older, your vacation sinking fund is healthy to go for more trips.
  3. Have frequent, constructive discussions about life & money between couples. The couple discuss about money even though both of them work in a field where they probably discuss these things all day. Money is not a conversation subject for many but I think most are interested in what kind of life they would like to live in. Money is ancillary to life and thus if both are clearer where they want to go, you get clearer about money as well.
  4. Your target rate of return could be lower if you know what you have and what you want. Ms. Liu shared that her target rate of return is 5% a year.
    • It is likely that by working out the numbers, they realize that they could comfortably reach their life goals within the amount of time they are looking at without needing to take additional risks.
    • By not violating her risk tolerance, she is able to stay the course to achieve the return better and not let volatility scare her into making irrational portfolio decisions.
    • You do not need to chase returns. Know the income that you bring in and how much you need. Your rate of return needed might be lower.

It is amazing what can be achieve if you have high salary, good spousal communication and when you go deep into a subject both of you are passionate about.

I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.

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Monday 15th of June 2020

If you've spent a few years in the finance industry, you'd realise that the majority of the high-salaried executives are rather risk averse. And in terms of equities, it will be around +/- 50%. The only thing they'll splurge on are physical properties. And often, they'll talk about the smaller portions of their net worth, while keeping mum about where they are actually stashing the bulk of their monies.

It can be rather hypocritical environment where top mgmt constantly harp on risk assets in the news & TV, dressing up investment products every 3 months, and no qualms about weekly or monthly termination sessions for those advisory salesmen who cannot hit quota, lol.

Buffett revealed many years ago (accidentally?) that he had the bulk of his personal money in Treasuries. Maybe that has changed in the last 10-20 years with two -50% stock market drops.

It's also a function of salary & savings size. High salary allows high savings rate. High savings rate (and principal) allows a lower, less volatile returns target.


Monday 15th of June 2020

Hi Sinkie, think the property angle is prevalent. High salary is possible. The rest probably inline with the rest of my thoughts.

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