Wealth protection does not seem to be the first thing on most people’s minds. Perhaps we’re more on survival mode and looking for ways to generate wealth to bring us to the desired lifestyle.
So while it is not an intentional act of neglect, it is often not a priority as well.
I recall my first purchase of insurance policies. Back then, I was more certainly inclined towards endowment ones. I wanted my wealth to grow better than the bank’s interest rate. It was only after entering the workforce that I added on medical insurance. Afterall, I was young – what could happen to me? It seemed a little morbid to be thinking and preparing for (touch wood) untoward happenings.
Yet, protection is one of the key strategies on the Road To Financial Freedom.
The same philosophy applies in business as well – keeping is harder than winning (创业难，守业更难). Knowing how to generate wealth by passive income and active income is important. Not forgetting the topic of reducing your expenses as well.
However, you do need to have a holistic wealth protection plan in place.
There are factors such as risk management in your trades and insurance for your life. Without which, you would not be able to keep your returns. Or, you could have to channel a significant portion of it towards medical bills.
To understand the severity of wealth protection, we look into three wealth protection strategies. When it comes to conquering financial freedom, these make a world of a difference. In all of them, we revolve around two principles:
- Prevention is better than cure.
- Prepare for the unexpected.
1. Portfolio protection: Hedging, not overtrading
When it comes to trading, a simple and powerful fundamental truth is to not overtrade.
This is adopting the preventive principle. It’s exercising risk management and wealth protection.
While it is a straightforward concept and easy to understand, the difficulty lies with implementation. More often than not, traders are tempted into overtrading when the market is on a bullish run. If it looks like every trade does well, the urge to increase the number of trades might get stronger.
Perhaps it is the desire for instant gratification too. Or the fear of missing out on potential opportunities that leads traders to take on more positions than they should. Or for the trading addict, they could be lured into adding positions despite their existing trades requiring no further action.
Remember that even if the most recent bear market has passed, the market will always correct to key support levels. Overtrading exposes your portfolio to unnecessary risk. You can be sure that it will take a significant hit especially if proper risk management measures are not in place.
For portfolio protection and preparing for the unexpected, there are several ways to do it. The most methodological one is to set stop-losses. Hedging is also another common portfolio protection method, which you can achieve by buying put options and inverse ETFs. Other common practices include diversifying the portfolio by sector and/or market.
Essentially, you need to be prepared for the eventual situation where the market or your trade moves against you. Hedging and knowing how to protect your downside is key.
Proper risk management reflects growth and maturity in your trading journey. It is certainly not the easiest thing to do. Nonetheless, it is precisely being able to overcome it which allows you achieve success ahead of other retail traders.
That is how you will be able to protect the wealth that you have grown.
2. Term insurance: Buy term, invest the rest
While most of us would be familiar with life insurance, there is a lesser-known form of it. Known as term insurance, the difference, as the name suggests, is that term insurance will apply for a specific term. Life insurance would apply for your entire life.
Insurance is important. Financially, it provides for you (or your loved ones) in event of unexpected accidents resulting in death, terminal illness, or total permanent disability.
Insurance is probably the most well-known tool when it comes to wealth protection. One would rather insure himself against unexpected occurrences, than to be completely vulnerable and financially drained.
In that context, we are comparing life and term insurance for the reason that the premiums differ to a large extent.
Life insurance has a cash value upon surrendering of the policy whereas term insurance has no maturity benefit. In simple terms, life insurance is a bundled product which includes insurance coverage and wealth generation. This also means that the premium for life insurance is higher than term insurance. This is because the latter only gives you insurance coverage.
Are you already managing your own trades and investments? If so, having a term insurance would be a better use of your funds. This is a strategy known as “buy term, invest the rest”.
By the way, if you haven’t realized… All Singaporeans and Permanent Residents with valid CPF contributions are automatically enrolled in term insurance. Known as the Dependants’ Protection Scheme, it is automatically renewed annually until age 65. If you would like to compare other term insurance to suit your needs, that could be a good way to start.
Knowing where to channel your funds and making them work for you. That definitely fits in the broader picture of conquering financial freedom.
3. Medical insurance: Be shielded
The simple way to apply the preventive strategy is to live well. Eat right, exercise regularly, reduce unnecessary stress. Reducing trips to the doctor and the onset of illnesses will also decrease your expenses. This ultimately contributes to financial freedom.
No wonder there is also a saying that health is wealth. Likewise, health protection = wealth protection.
Alas, unexpected things events do happen. We hear of how perfectly healthy people suddenly come down with illnesses despite their fervour for healthy living.
Then comes another saying: It is cheaper to die than to fall sick (in Singapore).
In terms of the costs to be warded in a hospital, the range is approximately between $200/day in Ward C of a public hospital, and $5,000/day in a private hospital. Do note that this information is not the most accurate, as costs are currently tracked based on conditions, not wards. Nonetheless, it provides a good idea of the extent of medical bills in Singapore.
In a different comparison of costs, an estimate of the costs for cancer treatment is at $17,000/month. Compare this against the $11,000 needed to arrange for a somewhat luxurious funeral service. You can tell that there is some truth that it is cheaper to die than to fall sick…
It is little wonder why we have different kinds of “shields” in Singapore. Think MediShieldLife, ElderShield and CareShieldLife. (It is beyond the scope of this article to explore the differences in these shields.) Nonetheless, surely policymakers have their justifications when proposing them. Suffice to say, there were adequate considerations when it came to implementation too.
If there is a specific condition and corresponding treatment that you have in mind, do check out the Ministry of Health’s website. There are fee benchmarks and bill amount information which will enhance your financial understanding of the condition.
Or, you could ensure that your medical insurance is in place, so you don’t have to worry about treatment costs when the time comes.
All these might sound like a lot to take in the beginning (hence the saying that adulting is not easy). Nonetheless, it gets better as we go along. Take the opportunity to review your existing preventive strategies and protections. Check if these are still relevant and sufficient for your needs.
On that note, congratulations on conquering the land of Hidden Protection! We are nearing the end of this series. Almost completing the conquest of financial freedom.
Just a little more to explore, for little progress is better than not at all.
Stay tuned to the next parts of this series as we forge ahead into terrains to be discovered and conquered. Plus, focus on practical, actionable steps which you can take.
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