Friday, February 5, 2010

Ron from KC Lau : case study

This is a case stolen from kclau's blog, I am just busy body giving my view point without anyone asking ... so I apologize first for whatever offence I could have brought. But my intention is just to share my thoughts, nothing more than that.

Ron is 40 years old married with a 10 years old kid, earning $6,500 a month? He has 2 houses 800k with 470k loan and 300k renting for $850 monthly. 840k in KLSE and 460K in EPF. He is asking if (1) he can retire, (2) his kid education plan ok and if he should (3) sell his house to buy stocks ?

kclau basically says (1) yes he can retire, (2) his kid's education is at good hand and (3) don't sell house unless Ron is really good with stocks.

I only agree with (3) respond because a 840k KLSE has already out weight 300k property by almost 3x, so there is really no point to further make it imbalance.

My immediate respond reading Ron's story is that it sounds too familiar. Familiarity with an alarm that is.

I am guessing ....

Ron moved in to his new house only recently ( less than 8 years ). He wanted to get higher loan amount but couldn't due to his income level. He may feel financially quite capable but he also find himself selling his stock investments at times for cashing out purposes.

These are the signs of overspent without consciously knowing it.

A 460k loan, be it been served for a while or new, would take 2,500 to 4,000 repayment monthly. That is 40-60% of the income level. A dangerous level. If the 800k is a typical resident judge, then its an over price of 20-25%. One should use only force sale value when assessing ones' personal finance health level. As a result, this new beautiful home is the main killing point in his personal finance but in return he has a home that he wanted, emotion return is priceless. But due to the same fact, he can NOT retire now. Paying off this repayment amount alone will kill off all his stock investment return in no time. ( check out the fact that even a 12% return is NOT enough to cover a 3% )

The 2nd pit fall is education plan. In 8 years time, at best his 300k education fund may become a 500k fund. But in 2018, a general 4-years-oversea-tuition-fee starts with a minimum of 1 million and above. At age 48, he can't really withdraw from EPF in full yet. Honestly, with this 300k plan, Ron's kid can only have the option to go to a local university ... which even a 100k is adequate. Should Ron not realizing this fact and stop working now, he will lose out all his retirement fund and get back to work at his 50s if his kid does want to go oversea.

The good part is 840k KLSE fund. There may be a few things we can tell from this figure. Ron is most probably an accumulator, he buys and keeps and doesn't sell as much as he buys. Although this is good but on the other hand, if the 840k value is today's valuation then 840k is most probably not a RIGHT value to use to assess his finance health. If he is an accumulator, then he doesn't have a consistent profit take strategy. So by mid year, his value may drop to 600k etc. Basically just like property over valuation, Ron's 840k KLSE value is questionable.

So at the end, my take is that (1) Ron should NOT retire yet, just keep working but keep his option open because now he can freely change jobs as long as the salary stays the same or higher. (2) His kid cannot go to oversea university yet, if that is the option he wants to keep open, he will need to beef something up, ie. allocate his stock investment fund as educational purpose.

Along with other 'typical' assumptions, Its important for Ron to accumulate another 800k in his liquid asset to further strengthen his portfolio.

To further obtain a more precise analysis, Ron needs to identify his family expense ratio and his very own personal inflation rate. Then he should also quantify the true potential capital gain of his both properties. The 300k one will do fine but the 800k one will remain flat. Finally his KLSE strategies and portfolio will play a critical role in his future too.

Hey Ron! You did great ... but not good enough for 21st century. Buckle up and keep doing what you were doing, it seems great so far ...

Don't ignore kclau's last part in insurance advises, your choices are Terms, whole life or investment links. Just in case you hit a "lottery" ... you would want the things still go the way they are suppose to be ...


TheCurious said...

I just like your analysis by taking practical considerations into account, not just the numbers !

Michael Tsen said...

Thanks, have a great CNY !! :)

Anonymous said...

can I know how we can get the personal financial chart tool?