“Losing your loved ones is tough, but having a financial planner in your life does help”
I am Monica, a widow aged 52 years old. I came from a poor family and didn’t know anything about finance or money management when I was growing up. I have been working hard with my late husband Andy, in the trading business for the past 20 years and we managed to grow our assets along the way.
Initially we thought that buying a simple life insurance is all there is to financial planning. That was until I was introduced to Stanley back in 2013.
We were skeptical and delayed our meeting with him as we thought he is another salesman coming over to sell financial products. I am a person who does not believe in investment and financial planning. Instead I believed that holding cash is the right thing to do.
Stanley spent many hours meeting us and patiently listening to our financial concerns. He is then able to understand and identify our life and financial goals. Stanley shows the financial pitfalls that we are facing and help us to visualize our cash flow and net worth at that time, while being able to identify our financial gap and estate planning concerns on multiple different scenarios.
After his careful review, he restructured our existing insurance portfolio and managed to increase my late husband’s insurance coverage substantially from what we have based on our limited cash flow. His integrity and process-oriented independent review, and ability to access all types of financial products in the market really impressed us.
Stanley also advised us to set up a complete testamentary trust in our will for resource preservation. Using resource liquidation strategy, we are able to avoid estate shrinkage and potential resource squandering by anybody who is not good at financial management. I am fortunate to follow the advice from Stanley which makes the estate execution process very efficient.
My husband was diagnosed with terminal cancer in 2017 and passed away a year later. Stanley did a good job with timely and efficient claims process. I was able to sail through the difficult period smoothly. He even visited my late husband almost every week in the hospital and accompany us until his last breath. Some of the big insurance policies that we bought a few months before the diagnosis date, Stanley is able to help us claim the insurance payout within a short period of time.
Our family benefited a lot from the insurance payouts. We managed to pay off our mortgages and ensure that our children’s tertiary education is fully funded. Our life and dignity is improved by using the resource optimisation strategy recommended by Stanley on a conservative money management. I am holding a well-diversified investment portfolio and received timely fixed payment to cover our living expenses. We are also being updated regularly on the market’s movement.
I am glad that Stanley is also able to provide my children with solid financial knowledge. Now all my children have graduated and they are back at my company to help me run the business. Stanley also provided my children with tips on business resource optimisation strategy to weather the pandemic and it has helped us tremendously.
I am comfortable knowing that we have a financial peace of mind under Stanley’sgood hands. We are very much on track to achieve our family’s financial goals!
About the Author
Stanley Hon is Practice Group Director at FA Advisory Sdn Bhd. He is a Licensed Financial Adviser, MDRT & Speaker, Will & Trust Specialist.
Anwar reached out to me in 2018 as he needed help with his personal finances. As the only son in his family, he was the executor of his late father’s inheritance. His father passed away many years ago due to cancer, and he remembered clearly the financial drain from cancer treatment.
34-year-old Anwar is a lecturer at one of Malaysia’s largest universities. His wife is a housewife taking care of their two children, aged 7 and 4.
“Although my father’s death hit us badly, we were thankful that he did not leave us with massive medical bills. This is because our prudent father had a healthy emergency fund,” shared Anwar.
Being the main breadwinner of his own growing family, he needed to prepare for such emergencies. Just like his father, he wanted to ensure that his wife and children are well-provided for in case anything happened to him.
Anwar’s father was a banker and had taught his children about saving money. Anwar also has a keen interest in personal finance and investment, and had read books and attended a Do-It-Yourself (DIY) course from a financial guru.
However, he found that the information was too overwhelming and didn’t know where to start with regards to his own personal finances. Having been approached by unit trust and insurance agents, he was wary as he recalled, “They were more interested in pushing their products for commission rather than to put a roadmap and direction for me to achieve my financial goals”.
Here are the 3 values of a full financial planning.
1. An Expression Of Love
Anwar and his wife know how dire their financial situation will be if Anwar passes away prematurely. People tend to forget verbal reminders easily. But if it is written in the form of a will, wishes, hopes and dreams; it helps tremendously.
Furthermore, the engagement allows him to translate his expression of love, his long-term and short-term goals into actions, and not just a wish. During our discussion, one of Anwar’s goals is to support his wife’s pastry business once his financial situation has improved.
After the third year of our advisory engagement, Anwar manages to make his wife’s goal into a reality. (You can check it out on Instagram Pastreen; it’s really delicious)
2. Aligning Strategy With Financial Goals
We provided insights to help him map out the strategies to reduce the Debt-to-Service Ratio (DSR), ideal asset allocations for his financial resources and guidance on financial products he should consider getting with the time horizon he needed in order to achieve his financial goals.
Since he was willing to start early, he will have more options and opportunities to optimise his wealth. As his financial planner, my role is to guide him with the options available so that he can take ownership in his financial planning by making an informed decision.
Anwar now understands the importance of building a healthy cashflow, and how to lead his ideal life within his means.
3. Financial Needs And Wants
A common situation is the relationship between savings for building cash reserves and other goals in life such as buying an asset. Many are unsure if they are over-committing one financial goal at the expense of another.
With a holistic financial plan, we can see how extra commitments will affect other financial goals. It helps to adjust our actions, weighing the pros and cons before deciding. Most importantly, it is a tool to effectively communicate your financial situations and life goals.
Conclusion
Anwar is a real-life story of “It is not about how much income you make, but how well you manage your income”. Without a roadmap and direction, we might spend unnecessarily and make poor financial decisions. Financial mistakes are painful.
Similar to inflation, financial goals and financial freedom are a challenge to understand and to manage, because it is intangible. Only after acknowledging what an ideal life is, you can move on to support your goals in life.
About the Author
Saidah Asilah started her career as a graduate trainee with Securities Commission Malaysia. Then, with a deep interest in investments, she furthered her studies in MSc in International Business and Emerging Markets, graduating in 2013 from The University of Edinburgh, UK. She is a Licensed Financial Planner, CFP Professional & IFP Certificant and describes herself as a multi-talented adventurer with a positive impact to whomever she meets. She can be contacted at saidah@wealthvantage.com.my.
We at Smart Investor and Wealth Vantage is committed to help you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxWealthVantage
“Given the nature of these alternative investments at this juncture – where price discovery remains a challenge, volatility is high, and long-term values remain uncertain – it would be more appropriate to classify them as part of your high-risk investment bucket.”
It is almost impossible to miss the headlines these days about the next new investment idea. Chances are those new ideas are likely related to digital assets (e.g. cryptocurrencies) or online funding intermediation (e.g. peer-to-peer lending or equity crowd funding) and the like.
These options seem to be the most attention-grabbing ones, attracting both seasoned and novice investors alike. This begs the all-important question – are these investments suitable for you?
To help us get a grip on this question, let us briefly take a look at what each of these alternative investments are, how it works and how can you benefit from it.
1. Digital Currencies (a.k.a. Crypto Currencies)
Digital currencies as the name suggests are an alternative means of a financial exchange in a non-physical format. This is unlike fiat currencies that are government issued and regulated such as the US dollar, British pounds or our own local currency – the Malaysian ringgit. Among digital currencies, bitcoin remains the most well-known and sought after.
The rise (and fall) in value of digital currencies has been nothing short of phenomenal. However, apart from scarcity, it would seem that speculation (partly fueled by celebrity tweets) and regulatory risks seem to be main drivers of price movements for now. This could change as digital currencies start to gain a foothold as a medium of exchange, potentially replacing fiat money in the future.
For now, an investor will monetise any returns by selling the investment, hopefully at a profit.
2. Peer-to-Peer (P2P) Lending
As the term suggests, this involved the lending of funds between individuals, supported by a platform as an intermediary to facilitate the process. It is effectively a way of cutting off the middleman’s role which has long been played by financial institutions.
In P2P lending, also known as “social lending”, investors are offered a socially attractive value proposition by borrowers who might otherwise find it challenging to fund their enterprise via traditional channels. Investors receive returns in the form of interest payments at the end of the loan period.
Given that these often represent higher risk lending, the interest payment will likely be higher than bank fixed deposit rates.
3. Equity Crowdfunding (ECF)
ECF works similarly to P2P lending in that it provides an alternative source of funding for budding companies. However, the main difference is that ECF investors will receive a stake in the business instead of an interest payment. This might be an attractive proposition for those looking to discover the next unicorn investment.
However, investors should also be aware of their exit strategy before committing their hard-earned money.
What’s Your Risk Profile?
Now that we have some high-level idea about these alternative investments – are they right for you? Instead of limiting your analysis to the investment idea itself, I would suggest that the question is better answered by firstly determining your investment risk profile, followed by your ideal strategic asset allocation. Only then should one take the plunge to invest.
Investopedia defines risk profile as “an evaluation of an individual’s willingness and ability to take risks”. Are you a risk taker by nature, fully aware of how investment values fluctuate depending on market condition and are ready to ride out any storm that come your way?
Or are you the more conservative type – preferring to err on the side of caution by placing your hard-earned money in risk-free assets?
Secondly, how long can you remain invested? If you need to use the fund in the next one to two years, then investments should not be on your mind. However, if your investment duration is between three to five years, perhaps you can consider moderate risk rated investments.
If your funds can remain invested for over five years, then you are in a better position to weather the ups and downs associated with higher risk assets.
Answering these two questions will give you an idea of your risk profile – conservative, balanced or aggressive. Next, you should determine your ideal asset allocation. The strategic asset allocation is a breakdown of your investment allocation into three simple investment asset classes – low risk, moderate risk and high risk.
Low risk assets would comprise of risk-free assets that hold their values and likely have a pre-determined rate of return. Examples would include deposits place in financial institutions and government issued bonds like Malaysian government securities (MGS).
Other fixed value assets with variable expected returns or those with minimal price fluctuations that fit this category include our Employees Provident Fund (EPF) savings, certain fixed priced Amanah Saham funds and low risk fixed income securities like money market funds or capital protected products.
Moderate risk assets on the other hand have the potential of generating a higher variable return (e.g. between 4-6% p.a. above the risk free rate) and could comprise of assets such as blue chip dividend stocks or a balanced diversified portfolio consisting of shares and bonds. Property assets and REITs that offer both regular income and potential long-term capital appreciation can be categorised here as well.
Lastly, we have growth or high-risk assets that are made up of stocks in a diversified portfolio of expansion-focused companies, small to mid-sized businesses in developing countries, commodities and perhaps alternative assets such as private equity investments or collectibles like wine, luxury watches and paintings.
These may fluctuate a lot more in value but offer potentially better long-term returns.
Let us look at a simple approach to asset allocation for one’s investable assets:
A moderate risk investor would probably place the bulk of his investable assets in moderate risk assets and only around 10% in the high-risk space. From this allocation, he should expect a blended overall return of around 6-8% p.a. As such, the strategic asset allocation gives you an idea on how you can select a combination of different assets classes and the corresponding expected returns on your overall portfolio.
Given the nature of these alternative investments at this juncture – where price discovery remains a challenge, volatility is high, and long-term values remain uncertain – it would be more appropriate to classify them as part of your high-risk investment bucket.
Back to the question of whether investing in those alternative assets in the examples given are suitable for you, firstly consider where it fits in based on the suggested strategic asset allocation.
Perhaps a 10% allocation in each of these strategies would be sufficient for most. In simple terms, this means roughly 1-3% allocation of one’s investable assets would be about right for the balanced to aggressive profile investor.
In conclusion, the next time you encounter an innovative investment option that comes across as the best invention since sliced bread, the first thing you need to do is to increase your knowledge and understanding of that product instead of signing the dotted line simply based on a herd mentality or the fear of missing out.
Should you decide to proceed thereafter, then invest based on your ideal strategic asset allocation in line with your risk profile. This golden rule should keep you in good stead for a long time to come.
About the Author:
Felix Neoh CFP CERT TM is the Director of Financial Planning at Finwealth Management Sdn Bhd and is a certified member of FPAM. He can be contacted at enquiry@finwealth.com.my
We at Smart Investor and Finwealth is committed to help you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxFinwealth
Based on the OECD/INFE 2020 International Survey of Adult Financial Literacy that included 26 countries, Malaysia was ranked third highest behaviour score after Slovenia and Indonesia. This ranking was achieved thanks to three common, prudent financial planning behaviours that emerged in the survey answers, including saving and long-term planning, making considered purchases and keeping track of cash flow.
However, Malaysia was also placed in the bottom tier in the section of financial knowledge. The report also highlighted that globally, youths (defined as those aged 18-29) have a lower financial literacy score compared to middle-aged individuals (30-59 years old), of which a similar trend was seen in Malaysia as well.
Thus, I would like to take some time to share about costly mistakes that you should avoid in your financial planning journey, especially for the younger generation to take note of!
1. Ignorance
Ignoring the basic knowledge about invest and power of compounding is like ignoring the blinking fuel light on your dashboard while driving! In the worst scenario, ignoring this indicator may result in your car inadvertently stopping in the middle of nowhere after running out of fuel. Not a pleasant situation to be in!
In financial planning, you may end up paying a huge price in the future because you will not be able to get back time which is essential to growing your personal financial assets through your active income period, either via employment, business or investments.
The first step you must take is to accept your current financial situation, no matter what level you are currently at. This is just like the example above, where you can drive your car to the nearest petrol station to refuel before continuing your journey. Just do not run out of fuel!
Once your financial situation is assessed either by doing it yourself or getting professional assistance, identify several steps you can take towards your goal such as starting to put aside savings regularly, monitoring your cashflows, and identifying investment assets that are suitable for your risk appetite in order to build and grow your wealth.
2. Procrastination
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Procrastination tends to occur when we would rather do other things instead of what we actually need to do. Thinking that reviewing and planning your finances is something that can be delayed or put off to a later date is actually a very common problem.
In investing, this will translate to you needing to save a higher amount each month due to the shorter investment horizon, compared to another individual who started earlier than you. The cost of procrastination may not bite you early on, but its effects can be far reaching in the future!
This can also apply to insurance planning – some individuals may have certain conditions excluded or charged more on their premiums should they want to apply for and purchase health insurance at a later stage. As their health is not in as good a condition as it was when they were much younger, naturally the price will increase.
Therefore, it is advisable to get insurance early on with appropriate coverage when you are young. Review your insurance needs annually or whenever there are changes to your lifestyle. After all, any medical emergency can wipe out your savings in an instant so always be prepared!
3. Fear
Some individuals may have adopted the wrong beliefs or have misconceptions about investing, creating their own meaning out of their own experiences or that of others. That may also be the reason why some of them tend to keep most of their wealth in their bank accounts, or at best, fixed deposits. Although they would rather opt for certainty in life, the only thing that is certain is change.
What is more important for you is to implement proper diversification in your portfolio, being disciplined and focused on consistent savings, and growing your wealth in order to reach your long-term financial goals.
Do you worry that you might not have enough financial resources to fund your retirement in 320 years’ time? Or would you rather worry about the short-term fluctuations in your investment portfolio during periods of market volatility?
You cannot turn back the clock if you do not have enough savings in your retirement age, so it is wise to maintain a long-term perspective when looking at investing.
Give yourself a head start. Learn how to gain the right knowledge through reading, attending seminars or seeking out financial professionals such as licensed financial planner to guide you. These avenues will greatly help you with overcoming fear of volatility and taking advantage of it to grow your retirement nest egg or reaching other financial goals you may have.
In conclusion, the three mistakes to avoid in your financial planning journey (especially among the younger generation) is to get rid of your ignorance, overcome procrastination and conquer your fears.
It is important to start taking smaller steps as early as possible to improve your financial literacy, and start to save and invest regularly to enjoy your financial planning journey with more confidence. Your future self will be very grateful!
About the Author
Goh Chee Yong is a licensed financial planner under Capital Markets Services Representative License (CMSRL) and Bank Negara approved Financial Advisor Representative (FAR). Prior to becoming a financial advisor, he spent eight years working in Big 4 audit firms and multinational corporations. He can be contacted at cygoh@imaxfinancial.com.my
Well, if this is the first time that you heard of these letters, you are likely new to investing or Warren Buffett. Let’s start by giving you the background of this super investor, his letters and its significance to the investment community around the world today.
Who is Warren Buffett?
Warren Buffett is the chairman and CEO of Berkshire Hathaway Inc, a US-listed holding company that owns substantial interests in some of the world’s most profitable and valuable companies. They include Apple, Coca-Cola, American Express, Wells Fargo, US Bancorp, and so on.
The 91-year-old Buffett has accumulated a total of US$125 billion in net worth, hence, placing him as the fifth richest man and a living investment legend on planet earth today.
A native of Omaha, Nebraska, Buffett is also known as the Oracle of Omaha because the investment community closely follows his investment picks and comments on the market.
His Letters
Buffett writes to his fellow shareholders of Berkshire Hathaway Inc to report on the latest happenings and future direction undertakings of the company, and more importantly to the rest of the world, imparting his gems of wisdom and as well as decades of experiences in the field of investing.
Tens of million investors around the world have read and studied his letters in search of insights to what or how they can do better when it comes to managing their investments.
My Advice to New Investors
Empty cinema white screen with audience. Ready for adding your picture. Screen has crisp borders. This shot was made using tripod with long exposure.
Read it. Study it. It is worth it. You will emerge as a better stock investor from it. Here, in this article, we’ll share five lessons from reading the letters written by Warren Buffett.
1. Investments Into Productive Assets
Warren Buffett invests for steady and rising cash flows for the long-term. In his letter in 2011, he views a stock or a business as a ‘commercial cow’ which could produce ‘milk’, referring to recurring profits and cash flows for years or decades to come in the future.
Also, in his letter in 2013, Buffett wrote that if your focus is on ‘prospective price change’ when buying stocks, you are speculating and he is sceptical of anyone who claimed to have sustainable success in doing so in the stock market.
So, put it into perspective:
An investor is one who will be looking at a stock’s long-term income-generating ability before investing for he wants to receive recurring profit or to have its shareholdings revalued higher as a result of sustainable growth in earnings in the future.
A speculator tries his luck buying into stocks in the hope that its prices might somehow jump in the future, which is not wise based on the writings of Buffett. After 78 long years of investing, he has not seen anyone able to speculate his way to sustainable profits in the stock market. Thus, the question is: ‘Why would you?’
2. Be Prepared For The Thousand-Year Flood
Jokingly, Warren Buffett remarked in his letter in 2014 that he would be the guy who sells life jackets if the thousand-year flood occurs in the future. What does it mean to get ready for the thousand-year flood?
The answer lies in the ‘financial staying power’ of an investor. This is evident for Buffett for he has maintained a sizeable cash balance of US$ 75+ bil within Berkshire Hathaway Inc in Q3 2019. While he stated that cash itself is a poor investment, he is holding onto them for emergency funds or to stand by for significantly discounted investments in the future. In other words, Buffett believes not in being cash-strapped and is one who builds a sizeable buffer at all times.
3. The Use Of Debt Or Borrowings
In his letter in 2010, Buffett likens debt as being a double-edged sword. It can either make people rich or poor. He is known to favour an investment into stocks where their businesses earn a good return on equity (ROE) without or with little use of debt.
But, having said that, Berkshire had made investments into companies which were funded by long-term debt such as Burlington Northern Santa Fe and MidAmerican. Nevertheless, Buffett is comfortable with them as the obligation from both corporations is serviced by cash flows from operations which are stable and recurring.
4. Reduce Investment Fees At All Cost
In his letter in 2017, Warren Buffett wrote a profound statement: ‘Performance comes, Performance Goes. Fees never falter.’ This comes after Buffett emerged as the winner of a 10-Year Bet against Protege, a US-based investment advisory firm where Buffett has publicly challenged any investment firm to create a fund or funds to beat a ‘virtually’ cost-free unmanaged S&P 500 index fund.
Protege, the firm who took up Buffett’s challenge, had failed to create funds to overcome the returns of S&P 500 index fund despite having assembled a team of investment experts to manage these funds professionally over the last 10 years.
The conclusion of this bet is pretty simple. It is to educate the public, and especially those who had invested in mutual funds or hedge funds, to rethink about their investments. First, he wishes to point out about the recurring ‘fees’ involved in these investments, for they are not cheap. Second, he wants us to consider the worth of fees paid to fund managers.
This is because fund managers are compensated regardless of the fund’s investment performance over the long-term. Hence, the message is clear, and it is to avoid investing in funds that charge high fees for they would erode your investment returns in the future.
5. Continuous Learning Is Important To Investors
Warren Buffett is an avid reader, an active learner and one who appreciates the power of mentorship. It is evident, as Warren Buffett revealed that he had read two books that had effectively shaped his investment life.
The first is titled ‘The Intelligent Investor’ by his mentor, Benjamin Graham, while the second is titled ‘Common Stocks and Uncommon Profits’ written by Philip A. Fisher. To date, he remains committed to applying what he’d learnt from these books into investing in the stock market and now, Buffett believes that he should pass along this same investment wisdom to the next generation, which is us.
What Should I Invest In 2022 And Beyond?
The answer is: ‘Investment Education’. Instead of finding out what stocks to buy or speculate in 2022, why not take time to learn to become a better investor? It would be the most profitable thing to do if you are new to investing, be it stocks or properties.
By the way, you can download Buffett’s letters from Berkshire’s website, for free. Begin your progression towards becoming a better investor.
About the Author
This article is co-written by KC Lau and Ian Tai.
Ian Tai is a Dividend Investor. Financial Content Machine. Producer of 200+ Articles, Weekly Host and Presenter at KCLau.com. Co-Founded DividendVault.com, an online educational membership site that empowers retail investors to build a stock portfolio that pays rising dividends in Malaysia and Singapore.
KCLau is a financial educator, having published seven books including the current bestseller Money Smart, and co-created a dozen online financial courses. He gives away his popular Money Tips e-book volumes free at his website: https://KCLau.com
“17 years ago, I missed the opportunity to invest in Desa Park City. 5 years ago, I missed Sunway Velocity. I regret it. I don’t want to miss the boat this time”.
“Too many new projects available now and developer offers good incentives and rewards, I don’t know which to choose.”
“I heard many unpleasant experiences from friends and family, I worry the property I invested would be abandoned or the quality is bad when I gain vacant possession.”
These are typical comments you might hear when Malaysians share their perspective on property investing. Like other developing countries, economic growth and continuous urbanisation in major cities have made real estate investing one of the more attractive investment vehicles for Malaysians to grow their wealth.
There are loads of property investing books and “property gurus” on hand to offer pointers to those looking to embark on the property investment journey, imparting their strategies and experiences in this field. Some share their seemingly unbelievable profit-making experiences through property flipping (buy-to-sell) or property management (buy-to-rent).
The outbreak of Covid-19 in 2020 put a dampener on an already sluggish real estate market, resulting in property players having to transform their business model to weather the storm. Industry players responded with various digital innovations to allow most of the transaction process to be conducted without physical interaction.
Supported by a low interest rate environment, these efforts seem to be paying off, as property demand at certain areas remained fairly stable despite the depressing health and economic backdrop.
Just like any other investment asset class, the real estate investment journey has its ups and downs. Some of us may make money from it, others should learn from the mistakes made so as not to repeat them to our own detriment.
An opportunity often arises from a threat, so it is important to be able to separate the wheat from the chaff. In order to have a higher probability of success, we will need to apply a structured approach to address these potential opportunities.
Plan-Check-Monitor
A structured opportunity management approach for investing involves a simple three-step process: Plan-Check-Monitor.
Plan refers to having a clear purpose and objective for the investment – do you know what you want to achieve and when you want to achieve that? The answer will determine your direction in investing and know what information is required to build a solid investment portfolio.
Check involves activities to survey and collect information about the respective investment to ensure it is compatible with your plan.
Monitor is about keeping track of any changes on investment and being sensitive to the important indicators that your investment returns can potentially sustain and improve, or otherwise. This also requires one to be nimble and responsive according to changing market conditions. Adopting the PCM approach will enable investors to differentiate whether it is a real opportunity, and to know how to ensure the compatibility of the opportunity to one’s current situation.
As property investing is possibly the single largest financial commitment in one’s lifetime, it can have a different impact on various aspects of our personal and family life. As such, merely asking what property to buy or where to buy is not enough.
So how we can apply the PCM model in a property purchase scenario?
You should start with questioning. What is your primary purpose for this property investment? What is your goal for this investment? The answer is crucial to determine the appropriate strategy to follow.
Say you are looking for an own stay property. You will need to identify a property that caters to your current and future family needs. Start by consolidating information about the targeted property (for example, understand the potential of the upcoming neighbourhood, the demographics, nearby amenities, etc.).
Then identify and assess the saleable area of the property, number of rooms, potential renovation costs due to expansion or layout restructuring and suitability for future expansion to determine its compatibility to your needs. For newlyweds, do not forget to consider the extra rooms for your future children.
If you are looking for investing or a rental property, you need a clear approach with cost-effective solutions and a well-planned property rental management strategy to optimise your rental yield. If you want to save the cost of engaging agents or a property management company, you need to determine if you have the capability to do it on your own.
Again, start with gathering information about the property types that are popular for rent, the targeted potential tenants, their preferred rental price range, etc. Then continue to identify and assess the property based on the needs of your targeted tenants.
In addition to this, you should continuously monitor the progress around the targeted property area. Are there any growth plans and projects to spur the development of that area, such as upcoming MRT lines, connection to highways and other developments that might affect your investment return direct and indirectly?
You should also be prepared for vacant tenancy periods without rental income as this will represent an opportunity cost to you. Hence, your sensitivity towards the growth around the property area will assist you to seize the opportunity in pricing the rental accordingly.
Potential capital appreciation and positive rental income is a property investor’s ultimate goal. Nevertheless, few can accurately predict their actual investment return as this will depend on the overall development and progress of property location – actual versus expected.
Given this uncertainty, it is important for you to have a practical plan to secure the rental yield and a well-planned exit strategy prior to investing in any property. As such, one can apply the PCM model prior to the investment instead of blindly following what is recommended by people around you.
Impact On Your Financial Health
Malaysia currency of Malaysian ringgit banknotes background. Paper money of one, five, ten, twenty, fifty and hundred ringgit notes. Financial concept.
The above examples should give you a fair idea on how you should approach a property purchase in the future. But is this sufficient for you to make the right property-related financial decisions? Will the purchase have a positive or negative impact on your overall financial well-being? To answer this, we will need to overlay the decision-making process with a holistic financial planning perspective.
Broadly speaking, holistic financial planning provides you a 360-degree view of your financial situation, taking your current and future financial expectations into consideration to empower you to make more informed investment decisions. A holistic financial planning empowers you to constantly be on guard against possible investment risks and potential financial costs as you expand your property portfolio holdings.
Working on strategic asset allocation helps you manage your investment risk while stabilising your overall investment returns. For example, strategic asset allocation will remind you to invest less than 40-50% of your funds in properties.
Understanding key financial ratios provide valuable information to help you monitor your debt ratio to avoid over-gearing and keep track of your emergency funds in the event of a scenario without rental income. Cash flow management will help you ensure that you have sufficient cash for down payment without using up your emergency funds, and give you clarity on how you can continue to save and invest for other goals once the property loan repayment starts.
In conclusion, there is no doubt that property investing has a big role to play in growing one’s net worth. However, there are pitfalls in investing in this asset class so the practice of opportunity management approach utilising the PCM model, coupled with holistic financial planning, will help to minimise.
About the Author
Jess Hon is a Licensed Financial Planner with Finwealth Management Sdn Bhd and would like to assist millennials to take control of their own finances and achieve financial happiness. She can be contacted at jesshon@finwealth.com.my
We at Smart Investor and Finwealth is committed to help you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxFinwealth
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The world we live in is highly dynamic and we face different challenges daily. This is even more pronounced if you are involved in the operating a small and medium-sized enterprise (SME). Due to a lack of resources, many SME owners may actually overlook the finer details of managing the operational and financial risks of their businesses.
Many also view paying for insurance as an additional, unnecessary expense or a luxury instead of a necessity. This often results in the average SME owner missing out on crucial protection to cover their business and mitigate risks.
Facilitating Risk Management
The Covid-19 pandemic has provided a timely opportunity for SME owners to reassess and review their business operations. This also includes potential financial risks that could be transferred to insurance companies to minimise potential losses if an unexpected scenario occurs.
Naturally, different types of businesses are exposed to different levels of risk, which calls for different protection plans. The insurance market offers various forms of protection packages in order to suit the unique requirements and needs of each individual SME.
Let’s explore a few major areas that SMEs should consider for protection.
The Basics
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The first order of business is to ensure that the operations and premises of your SME are fully covered. This is to ensure assets are protected against financial losses caused by fire, burglary, and/or damage from natural disasters.
A common protection package will include fire insurance cover for the building, fixtures and fittings, and all assets inside, as well as insurance against burglaries.
Depending on the nature of your business (for example food and beverage, beauty, education, office, healthcare, hospitality, retail, construction), SMEs can also opt for optional coverage deemed necessary, such as coverage for loss of income due to business interruptions (consequential loss), breakdown of machinery or electronic equipment, glass breakage, loss of money on the premises, or during the transit between the premises and bank, floods, fallen trees and so forth.
With the basic minimum coverage to protect against fire and burglary, should these unfortunate incidents occur, insurance claims can help to negate or reduce your losses on assets, thereby cushioning the financial blow to your business.
However, there are many other operational risks that occur in running a business. For example, if a small construction or renovation business neglects safety procedures during business activities, this could end up causing injury to employees or even the general public.
Extra money will need to be forked out in order to compensate for the damages, injuries and other related claims. This could pile up to a hefty amount which will affect business cash flow.
To minimise the financial impact of risks associated with doing business, it is advisable to protect your SME against potential claims with various liability insurance options available:
Directors and Officers (D&O) Liability
Coverage is intended to protect individuals from personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organisation. It also covers legal fees and other costs incurred as a result of such a suit.
Employers’ Liability
Protects employers from financial loss if a worker has a job-related injury or illness that is not covered by workers’ compensation. Employers’ liability insurance can be packaged with workers’ compensation insurance to further protect companies against the costs associated with workplace injuries, illnesses, and even death.
Professional indemnity
Often referred to as professional liability insurance or PI insurance, this covers legal costs and expenses incurred in your defense, as well as any damages or costs that may be awarded, if you are alleged to have provided inadequate advice, services or designs that causes clients to lose money.
Public Liability
Covers the cost of claims made by members of the public for incidents that occur in connection with your business activities. Public liability insurance covers the cost of compensation for personal injuries, loss of or damage to property, and death.
Product Liability
Covers manufacturing or production flaws that cause unsafe defects products.
Protecting Your Greatest Assets
Confident Vietnamese business executive with digital tablet working at his table
Did you know that SMEs can also protect against the loss of key staff such as the CEO, CTO or any team member you deem crucial to your business? The loss of such personnel could lead to financial losses due to disrupted sales, loss of creditor confidence, and customer relationships.
Keyman insurance is a protection for SME owners to ensure the company has sufficient funds to keep the business going in the short term before a successor is recruited and trained. The coverage calculation can be ten times of the person’s annual compensation.
It is also important that business owners take care of all their employees. SMEs may consider providing group insurance coverage for employees that includes group personal accident cover for accidental death, total permanent disability, and hospitalisation income.
While group medical insurance provides hospitalisation and medical surgery coverage, these benefits can also be extended to an employee’s spouse and family members.
With suitable protection as a safety net, your business can operate with minimum interruption in the knowledge that should the worst happen, public property can be repaired and employee welfare is taken care of.
Ensuring Business Continuity Interest
Many businesses come to a standstill or even close down when one of the partners passes away or chooses to exit the business. In fact, plenty of SMEs do not generate enough money to buy over the shares of the owner who passed away, making it tricky for the remaining parties to continue the business.
To offer a safety net for business continuation, the company can take up an option on life insurance to provide capital for the required liquidity. Together with a buy-sell agreement and a confirmed share valuation, business partners can buy a policy assigned to an insurance trust as a source of funding to pay for the share of the business partner who passes away or wishes to exit.
This buy-sell agreement effectively keeps business ownership in the hands of existing owners in the event of a sudden exit of one of the partners due to unforeseen circumstances. It can also grant existing partners the first option to buy the exiting owner’s share of the business according to a pre-set valuation formula.
Existing owners can buy out the share through a direct payment to the exiting partner or the partner’s heirs. This also prevents beneficiaries from being stuck in a business they are not interested in, while protecting the remaining partners from being forced to deal with new partners unexpectedly.
I would say that all SMEs should assess their operational and financial risks based on their nature of the business, and seek suitable insurance protection to transfer risk for financial peace of mind.
About the Author
Angel Pau, CFP, IFP is a financial planner with Wealth Vantage Advisory.
We at Smart Investor and Wealth Vantage is committed to help you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxWealthVantage
Countless investment articles have continually espoused the benefits of having a long-term view. Forget about the short-term setbacks and keep your eyes on the prize. It is just a bump in the road. Stay invested and you will reap the rewards in the end.
But in reality, adopting a long-term view might be more difficult to practice. It can be a long journey riddled with sudden surges of volatility capable of wiping out massive gains in a portfolio.
Telling someone to be patient and ride through the volatility is the common refrain used in the industry to tell investors to stay invested and not part with their funds. But how convincing is it sometimes?
Here are a few tips on how you can practice long-term effectively in your investments:
1. Accept That It Is Going To Be Bumpy
Having a long investment horizon does not mean you will be spared from the volatility that is bound to happen in any market. An investor with a 20-year investment horizon who started investing in the year 2000 would have to endure the dotcom bubble, September 11 terrorist attacks, the 2008-GFC, taper tantrum in 2013, and now the Covid-19 pandemic.
In fact, the longer your investment horizon, the more economic recessions, bear markets, geopolitical flares and market memes you have to endure. Saying that you have a long-term view does not automatically give you a free pass and allow you to bypass these short-term swings. Your portfolio will react in tandem and you might have to put up with losses for periods of time. This sounds painfully obvious, but few investors appreciate this fact.
Many still react immediately and make drastic shifts in their allocation because the sight of red just makes them nauseous. That is when you start making those impulsive decisions and kicking yourself later.
Learning to live with volatility requires a mental adjustment and some getting used to. But accepting it is the first step.
2. Diversification Is No Fun, But It Works
The future is inherently unpredictable and no one has perfect foresight of everything including how an industry or a company will evolve in the future. So how do fund managers do it then and invest with conviction?
The answer probably lies somewhere in between. There are no absolute yes’ or no’s in the investment realm where the tide can turn at any time. Decisions are made by fund managers by determining what is probable and what is not based on information available.
That is also the reason why the holdings of a fund are diversified across different companies or sectors to avoid any overreliance on a single stock to drive returns.
In an age of instant gratification, where expectations for returns have only gotten higher and quicker, diversification almost seems passé today. Making concentrated bets in eye-watering meme stocks or cryptocurrencies with promises of double-digit returns is now considered à la mode.
But to succeed in investing is not about making no mistakes at all. Not even Warren Buffet can lay claim to that. Rather, it is about making sure you get more rights than wrongs in your investment journey.
The fact that we do make mistakes in investing is why it is critical for our portfolio to be diversified. That way, losses can be offset by gains in your portfolio to ensure that you still have skin in the game.
Setting aside some ‘play money’ to chase the next stock or crypto darling is unlikely to do much harm. But the real danger is when investors gamble their entire savings away and lose all their capital with no chance of ever returning.
3. Holding Power Is Crucial
The ability to think long-term can only happen when we feel secure about our present state. An investor with low savings and piling debts cannot be expected to stay ‘optimistic’ about the future and ignore the losses in his portfolio when his survival is on the line. Who bothers about the future, when they are worried about the now?
There were many lessons that Covid-19 taught us about managing money, but the most valuable one is undoubtedly the importance of keeping an emergency fund.
The future is becoming inherently more unpredictable. The only way to tide things over is to keep an ample margin of safety through cash reserves and liquid instruments such as money market funds.
To be fair, it is hard to know how each of us will react when a market meltdown happens. It is usually preceded by really scary events like a terrorist attack or this current pandemic. But if you are experiencing real anxiety, perhaps it is an indication that you might be taking too much risk or you actually do not have the financial endurance that you thought you had before.
This brings us to the final tip…
4. Revisit, Review And Rebalance
Change is constant throughout history and market cycles. But many of us underestimate the capacity for change in ourselves too. Major life events such as a new addition to the family, marriage or a career switch can affect our capacity for risk and investment objectives.
For example, an investor who is now nearing retirement might have to tweak the portfolio’s allocation towards more conservative asset classes like fixed income or balanced funds. On the other hand, an investor who has just become a parent may want to be positioned more heavily in equities for long-term capital growth opportunities.
While investors should commit and stick to their long-term plan, it is important that they also periodically review their portfolio to see whether it is still geared effectively to accommodate any new changes in their life. An investment plan should not necessarily be seen as being carved in stone; it is meant to be organic and fluid just as life is.
Lastly, throughout the year, an investor should also consider whether the asset allocation (for example, in equities and fixed income) has drifted away from the initial parameters because of market movements. In hot markets, the equity portion in a portfolio might climb higher than other asset classes.
Rebalancing is then necessary to ensure that the portfolio is reset back to its target allocation to ensure that it is compatible with the investor’s risk appetite. Otherwise, the investor might be taking more risk than originally intended which might be detrimental to his long-term goals.
Hold On And Sit Tight
Long-term investing is not so difficult when you focus on yourself and ignore the goings-on of markets. Some patience is needed, but what is also essential is the ability to endure and be willing to put in the time to compound returns.
As legendary American stock trader Jesse Livermore said, “It never was my thinking that made the big money for me, it always was sitting.”
About the Author
Lee Sheung Un is a Communications Officer at Affin Hwang Asset Management. A millennial, he is still finding that balance between wealth, freedom and purpose. Views expressed are his own.
We’ve gone through unit trusts investment in few articles before. You may get the ideas of having unit trusts investment will help clear your mind on investing but there are some drawbacks that need to be considered.
If you want peace of mind, you may consider unit trust as one of your investments. You just sit back, relax and let professionals do their job. You just have to wait for the results of your investment. How’s that?
Like there’s no light without the darkness, there is also its downside. It’s up to us how to manage our investment settings. Unit trusts investment may not suit us, but it may suit somebody else well.
5 Drawbacks of Unit Trust Investment
1. The Fees
Investing hassle free will cost you some fee. As we all know, your funds will be managed by professionals who are the fund manager. As the fund manager trying their best to get the most profit from your investment fund, you will need to pay for their expertise.
Your returns may be lower than the market due to this fee. Besides, other fees may also be applicable, such as administration fees etc.
2. Less Control of Your Investment
Yeah, that’s your money, but you don’t have control. The fund managers will manage it for you. You won’t be able to select the exact assets or specific stocks to buy. But no worries, as an investor, you can still choose trusts that align with your risk appetite or your investment goals.
Other than that, your fund manager will help you manage the fund based on your goals and preferences. You must trust their expertise in managing your fund!
3. Brain Dead Portfolio
There are also unit trusts known as brain dead portfolios. Fund managers will buy various types of investment instruments as an investment method, but there is no portfolio reconstruction process implemented by them (not all).
Your investment will be passive and wait for time to pass until the value of the stock increases in the future. This will be detrimental to investors as it will cause the profit taking period to be longer. A good fund manager will review their portfolio, sell unprofitable stocks, and replace them with more potential holdings.
Not everyone has the privileged to subscribe to ASB and Tabung Haji. They opt for other investments like unit trusts. Believe it or not, there are times when ASB and Tabung Haji returns were better than unit trusts.
Typically, these low return of unit trusts was due to too many funds being put into low-risk products such as government bonds that only will give you around 3% – 5% per year. If it’s too low, the investors have to wait for at least 2-3 years to get the original working capital (don’t forget about the other charges incurred).
5. Not Suitable For Short-Term Investment
Most of the unit trusts are not suitable for short term investment. That is what often touted by agents or principals. The acquisition of profits takes time. It’s not a one-night rodeo and you can just enjoy your profits. It takes time!
Unit trusts are a very good investment but it will not suit every investors. Make sure that you understand your investment preferences and needs before investing.
In the traditional context, the word “retirement” means withdrawing from one’s active working life. However, in today’s modern world, the concept of retirement goes beyond its literal interpretation, with more individuals now viewing retirement as the dawn of a new chapter in their lives.
A meaningful retirement should be one that affords you peace of mind without the worries of financial concerns. Only then would you be able to relax and enjoy the fruits of your labour.
However, an ideal retirement does not happen overnight. Just as building strong body muscles requires us to work out in a dedicated and consistent manner over time, the same principle applies to retirement too. When we want to build strong wealth muscles, there needs to be a continuous effort over a long period of time.
What is the right long-term strategy for our retirement planning to achieve our desired retirement lifestyle? The answer will form a clear blueprint to lead us towards a successful retirement path.
If it sounds straightforward, why aren’t more people committing towards this?
Financial Planning: The Starting Point For Retirement Planning
The biggest mistake one can make in retirement planning is thinking that we do not need to have a plan. Contrary to common belief, financial planning is not exclusively for the wealthy alone. Our financial planning journey is a lifelong marathon to uncover different needs, new opportunities and specific challenges that may arise at different stages of life.
A comprehensive financial roadmap will give us more clarity on our current financial situation so that we are able to identify the gaps and address them as we work towards achieving our financial goals.
Time Waits For No Man
People have all sorts of reasons for not planning retirement properly, with the most common excuse being – “I am too busy and have no time!”
I’m sure all of us are guilty of spending time on unproductive pursuits such as our social media activities or watching too much TV. Doesn’t it seem like a sorry excuse that we cannot plan for the rest of our lives because we have no time?
When we let retirement happen on its own, there is a real risk of running out of money before our time is up! Do we really want to live our golden years tightening our belts and scrimping on every sen daily?
The Sooner, The Better
It’s time to face reality and not let excuses hold us back any longer. If you are in your mid-20s, this is the best time to start as your young age affords the benefit of the compounding effect. If you are in your 30s, it is all the more critical to commence your retirement planning without further delay.
Once you are in your 40s, you will need to work harder to reach your retirement goals which will get increasingly challenging to execute if you wait until your 50s. Financial mistakes may still have a chance to be fixed even at this critical stage.
As a baby step, we can start by tracking our own expenses as we need to know where our money goes before we can have better control of our finances. As the saying goes “if we do not manage money, money will end up managing us instead”.
The Sandwich Generation
The dilemma faced by many Malaysians nowadays is that parents jeopardise their retirement for the sake of their children’s education, while the younger generation also risk their financial security to fund their parents’ retirement in return. This is an unhealthy financial cycle, leaving parents at an increased risk of a stressful retired life.
The younger generation themselves are struggling with the burdens of financial commitments brought about by the escalating cost of living and high levels of debt.
Mindsets need to change so that aging parents do not place excessive financial expectations on their children. At the same time, young adults need to have better financial literacy to plan their money matters better.
Many Hands Make Light Work
If the task at hand gets too overwhelming for us to tackle on our own, it is always a good idea to seek assistance. Many people already have their hands full managing their day-to-day or monthly financial affairs, what more to sit down and seriously plan for their retirement!
Help is always readily available in the form of professional advice and proper guidance to achieve your financial goals. Everyone has their own special skills and abilities; focus on your expertise to continue earning your active income while leveraging on a licensed financial planner’s know-how to help you grow your wealth.
In the past, retirement planning was hardly the norm and people went about their lives rarely thinking about it, only to deal with the situation when it happens. We cannot afford to adopt this outlook in this day and age where things around us are changing at a rapid pace, and taking a passive stance on our retirement is a huge gamble.
It is never too early to have a solid plan and a clear vision on how to work towards it with the right strategies.
One small step for our retirement, a giant leap for financial independence.
About the Author
Chan Li Yun is a Licensed Financial Planner with Finwealth Management Sdn Bhd and would like to assist others to improve their standard of living with proper wealth management planning. She can be contacted at liyun@finwealth.com.my
We at Smart Investor and Finwealth is committed to help you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxFinwealth
