Saturday 18 January 2014

Managing My Father's Money Has Become A Full Circle

After reading La Papillion's and Derek's blog posts on how they invested their parents' money, I also wish to share how I invested the money from my father. Because our circumstances are different, our portfolio allocations are also different.

The money did not come from my father, rather, the money came about because we sold a flat and bought a new one. Instead of using the sales proceeds from the old flat to pay for the new flat, we retained the sales proceeds as cash and took out a loan. Strictly speaking, it is my father's money, because he paid for the old flat. However, it could also be viewed as taking out a home equity loan which I am responsible for paying off (there is no change in the flat ownership). The money became a joint investment, and we set up a new joint bank, CDP and stockbroking account for the investment (on hindsight, this is an important step as it allows us to check how the account is doing).

The terms of the account are similar, it is "capital guaranteed" in the sense that I have to pay back the loan at the end of the loan tenure. It's hurdle rate is the loan interest rate of 2.6% (HDB concessionary loan interest rate). However, the investment horizon is much longer, at almost 30 years.

Because both my father and myself are share investors and because of the long time horizon, we invested the money in a portfolio of shares and cash. After reading the 2 gentlemen's blog posts and reviewing my own experience, I think our parents' investing experience and how the money is viewed have a very huge impact on how the money is eventually invested. On the first factor, my father is a share investor, so he is very comfortable with investing the money in the stock market. In contrast, my mother has bad experience with shares and unit trusts, so she is only comfortable with bank preference shares.

On the second factor, if the money is viewed as a stand-alone account with capital guarantee, then very likely I would have invested it mostly in bonds and preference shares. On the other hand, if the money is viewed as a loan for my own portfolio, the money would be invested in shares. There would be almost no change in the risk appetite. In my case, the money was viewed as a joint investment of both my father's and my money. So while the money was still invested in shares, it has a reduced risk appetite since my father's money is involved. Only good shares would be selected, and at the first sign of trouble, the respective shares would be sold out. This has resulted in smaller profits but also less losses compared to my own account.

Thinking back, managing my father's money has become a full circle. I guess a number of us would have the same experience as me. When I was in university, I would recommend to him which stocks to buy (I was not trained in stock analysis then), so in a sense, I was helping to manage his money. When the stocks made money, I would feel very proud of my recommendations. But when the stocks lost money, I would quietly go away hoping it would be forgotten in time. During the days of the Asian Financial Crisis, losses were not in the region of 30-40%, it was almost a complete wipe-out! But my father never blamed me for the losses.

Fast forward to today, we are now officially entrusted with our parents' money. I guess we have all grown to be more sensible and responsible in managing the money, understanding that the money is hard-earned and earmarked for our parents' retirement. Taking smaller risks and making smaller profits is more important than taking larger risks and making larger profits. 

The greatest satisfaction in managing my father's money is not in seeing how much money have made for the account, but in seeing the satisfaction on my father when he views how well the account is doing. This, to me, is priceless.

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  1. Well said well said. Couldn't have wrote it better.

  2. Some of us are in a similar situation as yourself. Interesting read. You are privileged to have a father who has exposure to the stock market. When handling my parents money, i tend to go for lower risk portfolio because their age and mentality usually cannot handle the large swings.

    1. Yes, I am fortunate to have such a father. It's important that our parents are comfortable with the way the money is invested.

  3. Hi Chin Wai,

    I believe to your Dad, it's not about the money but the lessons he wanted you to learn when managing the money. To him, that is priceless.


    1. Hi Derek,

      I try not to disappoint him. That is also a challenge in managing this account.