Financial Planning with M Farhan

No best way to invest

The following is my answer to a Quora question: “Why is there not a best way to invest?”

There is no best way to invest in the same way there is no best car. Some people like road racing, some like off road racing; some like rally racing. Investment strategies depend on the investment horizon, risk tolerance, principal capital, investment objective, and the ambient conditions of the market you invest in, and where your investment vehicle is based.

Aside from all the technicalities of putting money somewhere for a greater potential gain, you have to consider your tax liability wherever you are, political risk and currency exposure which is always relative depending on where you are in the world. That is why people in certain places favour one type of investment or investment strategy over another. A group of people in a different geographic region would have a totally different preference because of this.

For example, Singapore is one of those places with no capital gains tax. It is an entirely different matter in Indonesia. So, Indonesia’s ultra-wealthy tend to invest through vehicles based in Singapore. But there is creative accounting when it comes to declaring gains. These actions are not necessarily illegal, but they skirt the border sometimes.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/04/quora-answer-why-is-there-no-best-way.html?m=1 ]

Shariah-compliant Investment and Debt

Recently, I came across a Facebook ad on what makes Shariah-compliant Investment different.

One of the points mentioned is “No debt or interest payments in the investment structure.”

This is a laughable claim as it reflects ignorance of the Facebook page.

Anyone who has been involved in Islamic finance would and should know of Debt to Equity ratio.

1- Debt to equity ratio: The problem with debt in the capital structure of a company, from an Islamic point of view is that it is interest based. A company indebted through Murabaha, for instance, need not have any such restriction. Borrowing on interest is not permitted, therefore it is necessary that such borrowing is limited to a tolerable level. In certain situations Shari’ah treats minute and insignificant amount of non permissibles as negligible having no effect on the permissibility. But what is the cut off-point? There are many indications in Shari’ah which points out to the “one third” as “plenty”, and that anything less than one third is “trifle”. Though such distinction came in a different context, many contemporary Shari’ah scholars thought it relevant and assumed that a debt to equity ratio of less than 1/3 is tolerable. It is extremely important to note that such. criteria will never be suitable for wine production for example. This because, as we mentioned above, hardly any company can do without some debt. Our objective here is, therefore, to measure the extent of the firms financing with debt. Debt to equity ratio represent the relationship between funds supplied by creditors (debt) and investors (equity).
https://islamicmarkets.com/education/equity-screening-in-islamic-finance

Time and time again, we would find people who claim “Shariah-compliant” in promoting their financial or investment planning services, yet they do not know their stuff.

While I personally do not restrict myself to “Shariah-compliant” financial planning and advisory, and preferring what I would call a “practical financial planning for Muslims” approach (I shall write on this in a post soon, Insha Allah), occasionally I would find myself having to call out such claims of “Shariah-compliance” and exposing the claimant’s ignorance of his own field as a financial practitioner or even as someone who claims to do “Shariah-compliant” financial planning and advisory.

As mentioned in my introduction to this blog, I will be writing on a series called “Dispelling myths of Riba” from my perspective as a financial planner and a Shariah student.

Wise advice from a rich person

The following is my answer to a Quora question: “What is the wisest financial advice you have heard from a rich person?”

One of my ultra-high net worth clients once told me, “The banks are not there to make you money; the banks are there to make the banks money.” What this means is that while banks are useful, it is never wise to keep money only in the banks. It is important to diversify assets and financial instruments. And that is why he bought a lot of insurance policies, in addition to his other investments.

In every financial crash, it is banks that collapse, and require bail outs, not the insurance companies – somebody needs to insure the banks. In the 2011 crash, AIG was the only insurer that was in trouble, and it was because of credit swaps, not a weakness in the insurance industry. It is because of the weak US regulatory regime that a major insurer could engage in such a risky practice.

This is the same person who also said, “Poor people have savings accounts. Rich people have investment accounts and current accounts.” This means we should separate our accounts for bills from our accounts for wealth accumulation and management.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/04/quora-answer-what-is-wisest-financial.html?m=1 ]

Zakat in Practice (part 2)

[Introduction: This series is a sharing on zakat from the perspective of a financial planner. It is hoped to be educational, informative as well as practical to help readers better understand Zakat, especially Zakat on Wealth, as a Muslim in Singapore.

Topics to include: Zakat on Investment, Zakat on Savings, and Zakat on Estate.]

[Previously: Zakat in Practice (part 1)]

Zakat is often understood as a purification of wealth.

What’s the wisdom or lessons behind zakat?

1. Reminds us that Rizq (sustenance) is from Allah.

Since Rizq is from Allah, He has the right to command us how to spend our wealth.

2. In our Rizq, lies another person’s Rizq.

Notice how a portion of our income/wealth is spent on family and others? That’s their Rizq through us.

3. Hence, when it comes to Zakat, a portion of our wealth belongs to a list of recipients.

In my earlier post (part 1), I mentioned how zakat is with regards to our relation to fellow mankind (hablun min an-Nas). It reminds us that we have a responsibility to look after one another, such as the poor and the needy.

Thus, zakat becomes a system of financial support for a group of recipients stipulated by the religion.

4. Purifies the heart

I personally see zakat more of a purification of the heart. It moulds our heart not to be attached to the world or materialistic wealth, teaches us the meaning of giving.

And yes, the more we give, the more we receive, especially when we are grateful.

“And remember! your Lord caused to be declared (publicly): “If ye are grateful, I will add more (favours) unto you;”
Quran 14:7

(To be continued…)

Recognising the red flags

When an agent meets you for the first time, on the pretext of a “policy review”, and recommends that you surrender your policy, that is the first red flag. 🚩

If it is meant to help you reduce premium as you’re currently financially tight, the agent should justify why that particular policy should be surrendered, and how does it impact you.

If it is so that you can get a “better policy” from the agent, that is churning. Red flag #2 🚩

Worse, premium is higher than what you’re currently paying. Red flag #3 🚩

To add on to it, despite it being a review, agent already has a “template policy” to recommend, having stipulated the coverage amount. That’s product pushing. Red flag #4 🚩

Not highlighting that it is an investment-linked plan, while your current plan is whole life or term, which would impact you should you surrender the policy. Red flag #5 🚩

And to wrap it up, claiming that your current policy is not “Islamic” so that you’d consider her recommended policy. Ultimate red flag. 🚩🚩🚩

Why am I sharing this? It’s to help you identify the red flags of an agent who’s merely pushing a product, rather than providing appropriate financial advice and planning.

There are many trustworthy agents/planners/advisors who’d do the right thing when engaging you as a client.

Sadly, agents like the above tarnish the industry’s image, reputation and professionalism.

Dollar-cost averaging (DCA)

Dollar-cost averaging (DCA) is an investment strategy in which you:

put in regular contributions (for example, monthly or quarterly)
over a period of time (say 3 to 5 years, 10 years, or more; depending on your objective)

The strategy is to ride or sail thru investment and market fluctuations such that you buy more shares/units when price is low and buy less when price is high.

Image courtesy of: https://www.investopedia.com/terms/d/dollarcostaveraging.asp

DCA hence mitigates and lowers your risk of losing over the period of your investment.

In times of crisis, investors who are on DCA tend to sit back and let their investments ride the fluctuations. While investors who put in a single sum investment would panic as to whether to sell off or hold and rebalance their portfolios.

For more information, do read: Dollar-cost Averaging

“7 years of prosperity, 7 years of drought”

And the king said: Lo! I saw in a dream seven fat kine which seven lean were eating, and seven green ears of corn and other (seven) dry. O notables! Expound for me my vision, if ye can interpret dreams.
Quran (Yusuf: 43)

He said: Ye shall sow seven years as usual, but that which ye reap, leave it in the ear, all save a little which ye eat.
Then after that will come seven hard years which will devour all that ye have prepared for them, save a little of that which ye have stored.
Then, after that, will come a year when the people will have plenteous crops and when they will press (wine and oil).
Quran (Yusuf: 47-49)

The story above of Prophet Yusuf (peace be upon him) seems apt to be reflected upon, after the market crash yesterday.

It reminds us of the economic cycle: “7 years of prosperity, 7 years of drought”; that there will be a bull market, and there will be a bear market.

Should the story be taken literally to imply 7 years of bullish market followed by 7 years of bearish market?

Personally, I’ve been taught and understood it to be a concept to illustrate the economic cycle. Furthermore, the ascribing of “7 years” in the Arabic language is figurative to describe a length of time.

The story teaches us to plan ahead:

“Is it a good time to buy or to sell?”
Image source: https://www.straitstimes.com/sites/default/files/st_20160731_ltemo31c_2484029.jpg

That in good times, don’t forget to plan for bad times.
- have you set up your Emergency Fund in times of need?
Market volatility: “what goes up, must come down”
- when your investment is doing well, be prepared that a bearish market is up ahead
- what do you do when market becomes bearish? Do you sell off your investments or do you hold? Do you still maintain heavy in equities or do you start to switch to bonds?
Short-term vs Long-term planning
- If you’re investing for the short-term (say 3 to 5 years), timing of entry/exit is crucial.
- If you’re investing for the medium to long term, keeping in mind your time horizon is more important. Dollar-cost averaging strategy could be employed, as well as portfolio auto-balancing. A multi-asset fund could be a core portfolio.

So do you act on emotions and market sentiments? Or do you adopt a rational approach in your investments?

Ultimately, it boils doing to how you plan ahead: your financial goals, objectives and time horizon. As illustrated in the following verse:

O ye who believe! Observe your duty to Allah. And let every soul look to that which it sendeth on before for the morrow. And observe your duty to Allah! Lo! Allah is informed of what ye do.
Quran (Al-Hashr: 18)

Dr Haniff Hassan explained that this verse teaches us to plan ahead, for tomorrow, not just for the Hereafter.

But well, that will be another post, insha-Allah.

Zakat in Practice (part 1)

Topics to include: Zakat on Investment, Zakat on Savings, and Zakat on Estate.]

Zakat, as we know, is one of the 5 pillars of Islam, following Salaah (prayer).

“Who believe in the Unseen, are steadfast in prayer, and spend out of what We have provided for them;”
Qur’an 2: 3

“And be steadfast in prayer; practice regular charity; and bow down your heads with those who bow down (in worship).”
Qur’an 2: 43

It is interesting to note how, in many verses in the Qur’an, the commandment to prayer is accompanied with the commandment to pay zakat.

One point of reflection:

Prayer is one’s relationship with Allah (hablun minAllah)
Zakat is with regards to one’s relationship with fellow mankind (hablun min an-Nas)

(To be continued…)

Growing your wealth: savings or investment? (part 1)

Why choose savings?

When we say savings, we should not limit to savings account in the bank but also fixed deposits as well as savings/endowment plans.

1. Short-term vs Long-term

The main reason one saves in the bank is to preserve capital, in return for very low return (which is not the purpose of the savings account to begin with).

Liquidity and ease of access are main considerations as well. Hence, a short-term view in managing money.

2. Long-term, decent return but locked-in

However, one can opt for a savings/endowment plan, offered by insurance companies, which purpose is to help you to save for medium to long term. It can be for a 10 year term, though generally customers opt for between 15 to 25 years term.

The idea is to help the customer with a disciplined savings towards a goal, hence locked in. (There is also an option to receive yearly cash payout.)

In return, customers can expect to get a decent return projected between 3.25% to 4.75% per annum.

3. Risk averse

This is often one of the main reasons a customer would choose a savings option.

Capital preservation is attainable through savings account or fixed deposits offered by banks.

But for a decent yet higher returns, customers would consider savings/endowment plans offered by insurance companies.

While it is not capital guaranteed, customers are not subjected to investment fluctuations. That is an assurance some customers prefer in savings towards a particular goal.

(Next: why would a customer opt to do investment instead?)

The Journey Begins

Thanks for joining me!

It is about time that I set up this blog as a platform to collate my posts and thoughts on finances and financial planning, which would facilitate reading and browsing. This is as compared to my Facebook profile and page.

This blog would also allow me to expand further some posts, as compared to bite-size nuggets on Facebook, especially on topics like:

Zakat in Practice (series)
Dispelling Myths of Riba (a series that I will start here)
Practical financial planning for Muslims
finances, investment, insurance and estate planning

I would like to thank the few friends and clients for suggesting and pushing me to launch this blog.

To you who are reading this, may you find my posts and thoughts beneficial.

Regards,

M Farhan M Samsudin

Good company in a journey makes the way seem shorter. — Izaak Walton

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