Schroders identifies eight themes that could transform the world, but how are these being affected by the coronavirus?
At the core of thematic investing at Schroders is the belief that the most powerful and persistent investment themes are those where human ingenuity ignites innovation to address imbalances in the world. These imbalances may be between populations and resources, or between supply and demand in individual industries.
As we all know, necessity is the mother of invention. As coronavirus throws the whole world into turmoil, humanity’s ingenuity and powers of innovation are being mobilised to fight the disease, care for our populations and adapt our work and home lives to a new set of economic, political and social realities.
Covid-19 is exacerbating existing tensions between populations and finite resources and dislocating supply and demand relationships in countless industries. Bearing this is mind, we examine the impact of this crisis on the eight investment themes that we think have the potential to transform the world we live in:
1.HEALTHCARE INNOVATION
“Crisis highlights importance of healthcare innovation”
This pandemic underscores the critical societal importance of healthcare innovation as countries seek to prevent and cure disease while wrestling with ongoing demographic and budgetary challenges. Central to our investment thinking in this area is the belief that science and technology will be crucial as companies harness data, computing power and medical knowledge to meet these goals.
We believe this will drive further breakthroughs in advanced therapies, medical technology, and healthcare services as well as in digital healthcare where technology in the form of ‘telehealth’ has shown its worth during this crisis as a means of making healthcare provision more responsive and efficient. As governments realise their vulnerability to pandemics, the drive to spend more on healthcare in the future can only intensify.
2.SMART MANUFACTURING
“Smart manufacturing essential as demandfluctuates”
Amid the acute demand and supply shock experienced by the global economy, manufacturers are also having to innovate. We expect to see companies developing local supply lines alongside their existing global networks while investment in data analytics will be imperative as a means of understanding and managing volatile demand and disrupted procurement in the future.
Investment will also take place in other smart manufacturing themes, including advanced manufacturing such as 3D printing, automation in the shape of robotics, sensors and controls, and advanced materials like lightweight composites as companies harness exciting innovations in hardware, software and materials to deliver greater agility.
While manufacturers face undoubted short-term headwinds, the disruption caused by Covid-19 demonstrates the importance of manufacturing innovation to ensure responsiveness and productivity in both good times and bad
3.CHANGING LIFESTYLE
“E-commerce and well- being are growing lifestyle trends”
During these turbulent economic times, people may be tempted into taking drastic action with their investment portfolio. For example, if a RM100,000 investment is reduced to RM80,000, that may trigger various reactions towards that RM20,000 loss, such as selling all or some portion of the investment, buying more of that investment, or even doing nothing at all.
These possible reactions from different individuals can provide some important insights into risk profiling. With the current volatile market conditions, understanding investment risk and implementing a systematic investment plan would assist investors to meet their long-term financial goals. Investors might typically ask “What are the risks involved in portfolio investment? What is a safe investment portfolio? How much risk should I take?”
1. Volatility, market information and noise traders
Proper research prior to investing is crucial as it’s important to understand the types of risk associated with each investment. However, investors tend to be confused between the concepts of ‘risk’ and ‘volatility’. In financial terminology, risk refers to the probability of losing an investment capital based on the expected return on any particular investment. Meanwhile, volatility measures price fluctuations in a security, portfolio or market segment. Typically, market news, such as changes in the company’s management team or an announcement about share dividend payouts, can result in stock price volatility.
There’s a growing number of information channels now serving the market, to the point that investors aren’t able to monitor every piece of information released. In fact, many investment decisions are influenced by emotions rather than rationality, which makes them difficult to manage. This is because emotional investment reactions cause short-term volatility. For example, positive news usually gives happiness to the investor, while negative news can lead to excessive reactions.
Emotional investments are usually revealed through the distinction between informed and uninformed investors (noise traders) and how they interpret market information. Meanwhile, noise traders refers to investors who trade based on what they falsely believe to be special information or their misinterpretation of useful information regarding the future price or payouts of a risky asset.
One of the factors of noise trading is the need for liquidity. To be specific, investors may liquidate an investment in order to reduce the risk factors. They tend to buy and sell on market reaction. This is an impulsive action based on irrational exuberance or emotions, such as fear or greed, without any major consideration on the long-term returns.
2. Making informed investment decisions
In reality, investors become highly emotional upon experiencing losses to the point of even selling off their investment. Therefore, frequent updates of risk profiling are essential in order to match the investment portfolio with the investor’s risk appetite. By performing risk profiling, investment advisers would be able to identify the investor’s level of required returns and their risk appetite in terms of capacity and tolerance. As a result, their investment objectives could be better achieved.
Risk profiling involves three types of risk measurement: risk capacity, risk required and risk tolerance. Risk capacity is a mathematical measure of the maximum level of risk that the investor could manage before it affects his/her financial goals. Therefore, this should be determined in the early phase of the risk profiling process, and act as a reference for the investment portfolio risk. Furthermore, risk capacity could be used during risk analysis to help determine the choice of appropriate risk responses. Moreover, it would also help manage financial risk shifts in the long term. This is also influenced by the investor’s financial factors, such as promotion or job loss, new-born child, or health issue that could lead to unpredictable medical bills.
While the risk capacity indicates the maximum level of risk that an investor can manage, the risk required refers to the optimal level of risk managed by the investor to achieve the desired level of investment return. Reaching this level is essential to fulfil the investor’s investment objectives and it also shows the direct correlation of the required risk with the investor’s required level of return.
3. Systematic investing
There are two concepts to be considered by investors in systematic investing, namely diversification and dollar-cost averaging. Based on classical finance theory, an investor’s risk-averse traits will determine the proportion of allocation between a number of risky and less risky assets.
Asset allocation refers to a strategy used by individuals to divide their investment portfolio between diverse categories to minimise their investment risks. This strategy is in line with the saying ‘do not put all your eggs in one basket’. Moreover, investors can choose to invest in the money market, fixed income and equity market. The asset allocation in the investment portfolio will reflect the investor’s need for growth, income and liquidity. Therefore, the allocation should cover the investment horizons, risk-free rates and expected returns on risky assets.
The dollar-cost averaging (DCA) strategy implements a regular and periodic purchasing of an investment. DCA gained popularity among financial advisers and individual investors after the recession throughout the mid-1960s. Furthermore, it encourages the investment of the same amount of money rather than the same number of shares each period. As a result, investors can purchase more shares at a lower price compared to when the shares are priced higher.
4. Periodic review
It’s highly recommended that investors should regularly review their investment portfolio to make sure that their investment performance is in line with their expected returns and investment objectives. In the current volatile market, some investments may present good performance at times, while there are times when their performances won’t be as good, and vice versa. If this isn’t done, an investment with poor performance could significantly affect the whole portfolio’s returns, especially if it constitutes a big part of the portfolio.
By reviewing the investment portfolio, investors would be able to separate their emotions and tactical decisions from their pure investment processes. However, the key question is when investors should review their investment. In general, a review of investment portfolios should be done with their financial advisers on a yearly basis, but additional reviews should also be done when investors go through different stages of life.
To illustrate this point, during the early stages of an investor’s career, he or she would usually need a combination of liquidity and growth in their portfolio. Throughout their employment period, their risk and return preferences will reflect that they have stable incomes and they may experience an increase in their commitments and goals. Following that, as they approach retirement, the investment portfolio should primarily reflect their need for income, including several stages of growth to manage the effects of inflation.
Conclusion
Investor anxiety over a decrease in investment value by more than 30% is inevitable. In fact, when the market faces extreme volatility, some investors choose to rely on their instinct to make investment decisions instead of data and trends. While there may be a few extraordinary individuals who may make the right calls, most individuals end up making huge mistakes.
Essentially, risk is a natural component of investment. However, greater knowledge regarding the risks associated with investment and the practice of risk profiling would assist investors in determining their comfort level and building their portfolios and expectations accordingly.
About the author
Joe Tiong, CFP, Investment and Financial Planning Unit at UOB Kay Hian Wealth Advisors Sdn. Bhd. Her expertise is focused on financial planning and wealth management across an investor’s life cycle. She is also responsible for equipping financial advisors with the right skillset and materials in conducting business. She can be contacted at joe.tiong@uobkayhian.com
“Soo Yee, I can’t make any investments. I don’t have money left every month, how do I even invest?”
This is a common reply when I bring out the topic of investment. And no, you don’t really need a large amount of cash savings to start investing!
Did you know that you have the option to invest your EPF monies into EPF approved investments via the Member Investment Scheme (MIS)? Let me explain more below.
1. EPF Member Investment Scheme (MIS)
MIS was introduced back in November 1996 for EPF members to diversify, boost and strengthen their retirement savings.
In short, if you have enough funds in your EPF account 1, you can invest part of the funds into EPF approved investments via appointed fund management institutions (FMIs) including Unit Trust Management Companies and Asset Management Companies.
2. Advantages of MIS
a. Allows you to enhance investment returns
At the end of February 2021, EPF announced the 2020 dividend rate for Conventional accounts and Syariah accounts, paying out 5.2% and 4.9% respectively.
But what has the historical rate of EPF dividends looked like?
SK = Conventional AccountSS = Syariah AccountThe graph above is taken from the EPF website (as of 26 May 2021)
So while EPF has been paying a solid return each year, MIS provides the opportunity and potential for you to increase your investment returns and boost your retirement savings overall.
b. Enables you to increase exposure to foreign markets
Have you thought about where EPF decides to invest your money?
As at December 2020, EPF invested 67% of its investment assets in Malaysia and the remaining 33% outside Malaysia.
The numbers show that the majority of your EPF money is invested in Malaysia.
So if you’d like to have greater exposure to foreign markets, you can diversify your investments overseas via MIS.
c. Empowers you to have some control over your EPF investment
You can now choose to invest according to your risk profile.
There are EPF approved investment options for you to match your objectives and risk appetite.
3. Disadvantages of MIS
a. No guarantee of investment returns
For all its benefits, please note that any investment done via MIS doesn’t come with any guaranteed return, while EPF has a minimum guarantee of 2.5% dividend. You might get a higher or lower return compared to the EPF dividend rate, depending on your actual investment return.
You are solely responsible for the investment via MIS that you made.
b. Not entitled to EPF dividends
One of the big downsides is that the EPF money that you channel into MIS is no longer eligible for EPF dividends. Basically, you’re on your own. However, if you’re confident about your investment, this shouldn’t concern you.
c. MIS investments come with fees
Investment fees (such as sales charges, management fee and trustee fee) might eat up your investment returns. You must ensure that your investment returns (after deducting fees) will still be on par with EPF dividends at the very least.
4. How much can you invest under MIS?
You may invest up to 30% of savings in excess of basic savings in account 1 with EPF. You may continue investing via MIS every three months as long as your balance in account 1 exceeds your required basic savings and fulfills all EPF requirements.
To confirm your eligible investment amount for MIS, you may check it under the i-akaun website.
Go to i-akaun website → withdrawal tab → withdrawal eligibility → member investment scheme.
The number that appears next to the member investment scheme is the amount eligible to invest via MIS.
Alternatively, you can also do a self-calculation of how much you can invest under MIS.
The formula is as below:
(EPF account 1 value – required basic saving in account 1 based on your age) x 30%Basic Saving Table from EPF website (as of 26 May 2021)
The minimum savings benchmark set by the EPF will be updated from time to time. You may check out the latest minimum savings required on the EPF website.
Sample calculation from EPF website (as of 26 May 2021)
5. Your investment options under MIS
You may invest via EPF in approved Unit Trust Management Companies and Asset Management Companies under MIS.
epf member investment scheme mis
Difference between investing into unit trust funds compared to managed account (portfolio of unit trust)
In summary, any investment that you may choose to do via MIS comes with pros and cons. Do research and understand all the risks that you’re taking before proceeding with investing. If you have further enquiries on EPF investment via MIS, I suggest that you seek out a financial professional to discuss and design an investment plan that matches both your risk profile and investment objectives.
About the author
Kuah Soo Yee is a Licensed Financial Planner (CFP) who is passionate about helping people make sound financial decisions and achieve their financial goals, and recently launched her own app. Her personalised strategies and advice have helped many to gain better clarity and take firm control of their financial future. She can be contacted at soo.yee@ipp.com.myWebsiteLinkedInFacebookInstagram
Back in December 2019, the Covid-19 outbreak was triggered in Wuhan, a city located in the Hubei province of China.
The virus continued to spread and eventually escalated into a global pandemic which devastated every single corner of the world, causing radical changes in the way we live as well as social, economic, technological, and political policies.
Amidst the economic doldrum in China, there have been interruptions in exports and imports, while global supply chains have been disrupted significantly.
With a strongly connected and integrated worldwide trading relationship, the contraction in the global supply chain led to a big drop in global economic activities.
Furthermore, governments around the world have been forced to implement harsh restrictions on human activity to curb the spread of the virus.
These travel restrictions further burdened the financial markets and led to dramatic falls in global economies.
It’s been a similar situation in Malaysia, with the implementation of various Movement Control Orders (MCO) costing millions of people their jobs across varied industries, leaving many Malaysians suffering from salary reduction, furlough, or unemployment and retrenchment.
This impact has become apparent since the outbreak and many of them have turned to alternative jobs like driving Grab cars, venturing into the food and beverage industry, online vocations, or direct selling to make ends meet.
In December 2020, the Employees Provident Fund (EPF) launched a new scheme which allowed members to prematurely withdraw their EPF savings in order to aid their cash flow during the difficult economic times posed by the Covid-19 pandemic.
What are i-Sinar withdrawals?
The EPF i-Sinar initiative enables EPF members to make a partial withdrawal from their savings in EPF Account 1.
This initiative was launched by the EPF for the purpose of easing the financial burden of members who’ve been affected by the Covid-19 pandemic, helping them sustain their livelihood. The withdrawal amount will vary, depending on each member’s needs and of course their available balance.
Unfortunately, Malaysians are taking advantage of this opportunity to maximise their withdrawals and spending it on non-necessities.
In fact, without realising it, they’re withdrawing and spending their retirement savings nested in the provident fund!
According to a survey conducted by UCSI, among 809 people in Malaysia who have withdrawn from or planned to participate in the i-Sinar scheme, 47.2% of the respondents realised that the withdrawal will affect their retirement funds, 22.6% of the respondents were uncertain, while the remaining 30.2% of respondents didn’t realise the huge impact it would have on their retirement funds!
Returning to fundamentals, EPF serves as a social security organisation that primarily provides retirement benefits for the private sector and pensionable employees in Malaysia. Since 1951, it has proven to be a responsible and efficient custodian of its members’ retirement savings.
With the introduction of i-Sinar, this can potentially lead to a significant reduction in our retirement savings. The reason for this is that it leads to fewer dividends earned, missing out on the compounding interest in future.
If our savings are insufficient to sustain our retirement years, we may be compelled to delay our retirement further and continue to work, or may even be forced to downgrade our retirement lifestyle to one that is humbler or minimalist.
For individuals who’ve withdrawn their i-Sinar, what else they can do to manage the money beside spending it?
Well, upon fulfilling current needs, you’re highly encouraged to utilise the balance for better purposes such as investing. This is one of the instruments that’s able to grow our wealth through capital gain and appreciation in the value of an asset over time.
As with any savings fund, the benefit of putting money in EPF is the dividends and the compounding interest that you could accumulate over the years.
However, many EPF members have also opted to withdraw their i-Sinar and invest it into different investment vehicles which could offer potentially higher returns compared to EPF dividends.
Let’s use an example to illustrate this: Ms. Maria, aged 35 has withdrawn RM10,000 via the i-Sinar withdrawal facility and invested this into an investment vehicle that has the potential to generate 15% returns annually.
EPF DIVIDEND
ALTERNATIVE INVESTMENTS
PRINCIPAL
RM10,000
RM10,000
ESTIMATED ANNUAL RETURN
5%
15%
AGE 40
12,763
20,114
AGE 45
16,289
40,456
AGE 50
20,789
81,371
AGE 55
26,533
163,666
AGE 60
33,864
329,190
The table above explains how her i-Sinar withdrawal may grow from RM10,000 in the subsequent 25 years to RM329,190 thanks to higher returns and compound interest. If she doesn’t withdraw her i-Sinar and let it nest in EPF, she will only receive RM33,864 in the 25th year!
According to the aforementioned survey conducted by the UCSI Poll Research Centre, it shows that almost half (47.7%) of T20 income group earners who were polled said they used or would use their i-Sinar withdrawal for investment purposes.
Although the hardship faced during Covid-19 pandemic didn’t affect the T20 respondents as much as the others, they still saw this as an opportunity to invest and plan better for their retirement funds!
In a nutshell, the i-Sinar withdrawal is a good initiative to ease the financial burden of Malaysians who have been affected by the Covid-19 pandemic, helping them sustain their livelihood.
Despite part of the population not being affected much by the pandemic, they still continue to think about withdrawing their i-Sinar for investment purposes so that it can potentially generate better returns for their retirement funds. So instead of spending it on unnecessary items, invest it if possible!
Edmond Tang Zhen Han is a certified financial planner that is passionate about helping people achieve financial literacy in order for them to reach financial freedom. He can be contacted at edmondtangzh@genexus.com.my
Do these statements sound familiar? This mindset is typical for many Malaysians, and their very conservative nature and trust in fiat currency often leads to them keeping most of their savings in fixed deposits (FD). Although many understand that collective investment vehicles are essential to any comprehensive financial plan, there are also many hurdles that prevent people from doing so. Here are some common problems that contribute to this mental block:
Poor investment literacy
On average, investment literacy among Malaysians is relatively low compared to other countries with a more advanced and robust economy. Many people lack basic knowledge about capital markets, as well as banking products and services. Thus, this leads to a heavy reliance on FDs, while others unfortunately get caught up in investment scams. This knowledge gap can often be the main reason for many Malaysians being reluctant to invest.
Information overload
Many often look to get involved with the stock market just by doing basic research on Google or attending stock trading courses to discover the fundamentals. However, they can quickly find themselves being overwhelmed by the large amount of complex information and contradictory advice available on the internet. Worse still, some even hire unlicensed “gurus” or end up using suspicious investment platforms.
Lack of time
Investment isn’t a random game of chance – it requires deep homework and monitoring. As most people are busy with their daily life activities, it’ll be difficult for everyone to be able to do research and monitor their investment portfolio regularly, especially if it contains exposure to equities and derivatives which can be highly volatile.
Without enough time, they may not be responsive enough to respond immediately to drastic change in financial markets, which may cause them to lose opportunities or suffer losses during market corrections. This can be compounded if investors are trading in overseas exchanges that operate in different time zones.
Limited capital
One of the biggest challenges most investors face is having limited capital available to invest, making certain financial instruments too expensive and beyond their reach. For example, the share prices of gigantic companies like Facebook, Apple, or Tesla are often much too expensive for a new investor to buy and own.
Leveraging investment through collective investment vehicles
The lack of capital can often be resolved by leveraging collective investment vehicles coupled with proper advice from financial professionals. Collective investment vehicles provide facilities for investors to participate and invest in a wide variety of investment asset classes with the help of fund management institutions.
Examples include unit trusts, private retirement schemes, and even funds available via government agencies and statutory bodies such as EPF and Tabung Haji. It also includes exchange traded real estate investment trusts (REITs) and passive management vehicles such as exchange traded funds (ETF). Collective investment vehicles can be either actively or passively managed.
Benefits of investing through collective investments
There are many advantages when investing in collective investments, namely:
Diversification
For example, an equity based unit trust fund can easily invest into 30 to hundreds of quality companies depending on the mandate. It’d be better still if investors hold a basket of different kinds of funds with a combination of various asset classes and regions. The diversified nature of collective investment vehicles actually reduces the risk and volatility of the portfolio significantly, yet benefits from the return potential of the underlying assets.
Professional management
Investing through collective investments allow you to tap into the expertise of experienced licensed fund managers where they have a wide range of resources to access crucial market information. Professional teamwork between fund managers, investment analysts and their research team ensures that the best efforts are made to safeguard investors’ interest in benefiting from market movements. Fund managers are also able to utilise sophisticated financial tools effectively, which aren’t able to be executed correctly by the average retail investor.
Low entry costs
Investors can begin buying shares or units with a relatively small amount of money. This is because investment funds can be highly cost-efficient as they make “bulk-purchases” through a huge pool of investor funds. Some funds even allow investors to invest on a regular basis with contributions as low as RM100, which means the investor is actually buying into fragments of quality companies using that small amount of money.
Flexibility
Many fund management companies administer several different funds, such as money market, fixed-income, dividend, balanced and growth funds. They allow investors to switch between funds within their fund with little or no charge. This enables investors to allocate and rebalance their portfolios as per personal needs or changes in market conditions.
Choice of sectors and regions
Investing into collective investments allows you to take advantage of a wide variety of investment sectors and geographical regions. You could invest in a fund that invests in several global regions, which can reduce your exposure against big market swings in any one area. Or you could target specific countries and regions, to take advantage of the growth of their markets and gain more lucrative profits.
Investing through institutions
Would a retail investor or an investment institution have the upper hand in investing? The answer is obvious. When you leverage your investment through collective investments, you’re participating in the market through institutional investors. The level of detail and analysis that an institution does is far superior to anything a retail investor can access.
Though there are a relatively low number of investment institutions compared to hundreds of thousands (if not millions!) of retail investors in the market, the decisions made by the institutions often create a greater impact and opportunities compared to the retail as institutional funds are huge and professionally managed.
Summary
Investing through collective investments is meant to seek leverage on the expertise, time and convenience, minimise risk and optimise investment returns through professional and sizeable fund management. And while there are plenty of collective investment vehicles and fund managers, if you remain unsure which ones you should opt for, consider consulting a licensed financial adviser or planner to work out a tailor made solution for you!
About the author
Lee Yee Xiong, (FAR AfRFP BAAcc) is a licensed financial advisor with an accounting background and is well-versed in a holistic, independent and unbiased advisory approach. He is among the very first batch of MDRT International Benchmark Awardee in the FA Channel. He can be contacted at YeeXiong.Lee@yesfinancial.co
When I graduated and first started my career, I always loved buying coffee at premium coffee outlets each day. It’s widely accepted and seen as a cool thing culturally, and such outlets are also a frequent hang out for friends or colleagues. I wasn’t thinking about my financial goals.
In recent times, the very trendy and fancy boba tea and or yoghurt drink culture has led to multiple chains and outlets mushrooming everywhere in our country. It’s not uncommon to find entire streets or areas such as Subang Jaya dedicated solely to selling different brands of boba and yoghurt drinks.
What could you do if you save the money used to buy a cup of coffee or boba tea each day? Imagine if you could spend or accumulate these savings over a period of a month, a year, five years, or more than 20 years?
Here are some alternatives that you can consider:
Short-term
Charitable organisation
You could make a difference in other people’s lives by helping those less fortunate than yourself. For example, for as little as RM65 per month, you can sponsor a child through World Vision Malaysia – a charitable organisation dedicated to working with children, families, and communities to overcome poverty and injustice. If there are other causes that you are passionate about, why not consider using part of these savings to donate to those organisations?
Fine dining
If you are a food lover, why not consider celebrating a special event with your loved ones, family, or friend at a fine dining restaurant or a hotel buffet? Based on the above assumption, you may just need to save up for at least two months of drink expenses for you to enjoy such a meal. However, it’s likely to be a memorable experience instead of a routine afternoon drink!
Holiday trip with your family
Where are your favourite places to visit? I spent around RM3,000 in total for my family trip (with my wife and parents) to Kota Kinabalu two years ago. When interstate travel is allowed or after the Covid pandemic, you may consider using the savings that you put aside for over a year to bring your family for a holiday and spend quality time together.
Books or personal development course
With RM250, you could purchase up to 10 books with one of the leading online book retailers in town. You can also consider using part of the savings to pay for a subscription to join organisations like Toastmasters for you to become a better communicator and better leader. Also, you may want to allocate the amount saved to invest in one or two personal development courses that will eventually help you to become a better person.
“The best investment you can make, is an investment in yourself. The more you learn, the more you’ll earn” – Warren Buffett
Medium-term
Save for a wedding or downpayment for a house
If you can save RM250 per month from your daily coffee/drink, you would have accumulated up to RM18,000 in a five-year period. This amount would be good for you to plan for wedding and or other medium-term goals.
And if you saved the same amount over a 10-year period, you would end up with RM46,000 in addition to your other savings. This is likely to be sufficient to pay the downpayment for a house that you have been dreaming to own!
Long-term
Private Retirement Scheme
Private retirement scheme is a voluntary long-term savings that allows individuals to save more for their retirement. By regularly saving RM250 a month or RM3,000 a year, contributors not only save up for their retirement, but also can take advantage of the tax relief available until 2025 of up to RM3,000 each year.
Assume an individual who is only 25 years of age saves RM250 diligently every month for over 30 years in a PRS fund that grows at approximately 8%. Taking compounding interest into account, he or she would have accumulated RM375,000 by the age of 55. This doesn’t even include any other investment vehicles, such as EPF and other savings that might have been invested or grown along the way.
Saving money on a cup of coffee / tea may seem like a small amount after a single day or even over a month. However, over a long period of time, this amount can grow to become quite substantial, where there are different choices available to spend, to save or even to grow, whichever resonates with your financial goals in life.
The aim of this article is not to say that you can’t enjoy your coffee or drink once in a while, but to give you an idea of how decisions you make will have some financial implications in the future. It’s never too early to start thinking about financial planning!
Assumptions used for illustrations mentioned above:
A drink costs RM12.50
Saving for 5 days a week (1 month = 20 days)
1 month = RM12.50 x 20 = RM250
Invest in a vehicle that grows with annual compounding of 8% per annum
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). He can be contacted at cygoh@imaxfinancial.com.my
Lots of us would like to reach our RM1 million goal, but how do we do it?
What is your MAGIC number to reach your first million?
While it may seem like a number that’s hard to achieve, let’s break it down to see how it’s possible to do so with discipline, time and the power of compounding!
When do you want to achieve your RM1 million?
Keep a time-based goal in mind.
For example, if you set a timeline of 30 years to achieve your first million, that will take you RM2,777.78 of savings a month. But, if you want to achieve it in a shorter time span of 10 years for example, it requires you to save a whopping RM8,333.33 a month without compounding. Therefore, keep in mind that time is your best friend.
Longer time = lesser RM saved each month Lesser time = more RM saved each month
So, the time is NOW! It’s just a matter of how much you want to commit to saving on a monthly basis.
Some of you may be asking what this rule is so allow me to explain.
It’s a fast track to calculate how long it takes to double your money with a fixed interest rate without using a financial calculator.
How does it work?
For example, if you have RM100,000 in a fixed deposit that yields 3% interest, how long does it take to double your money?
Simply take 72 / 3 = 24. This means your RM100,000 will take 24 years to become RM200,000. If you were to get an interest rate of 5%, 72 / 5 = 14.4 years to double your money.
Below is a table with some examples of the rate of return that will affect the amount of years needed to double up. The higher rate of return, the faster you’ll achieve your goal of RM1 million.
Rate of Return
Years it would take to Double Up
3%
24
5%
14.4
8%
9
10%
7.2
15%
4.8
For example, RM100,000 at a rate of return of 15% per annum will accumulate as per the table below. This means it will take 20 years to reach RM1.6 million!
Year
Amount (RM)
1
100,000
5
200,000
10
400,000
15
800,000
20
1,600,000
How much would I need to save each month?
Let’s use an example of 8% return per annum.
This table below shows that the more money you set aside, the faster you can achieve your RM1 million.
If you were to increase your savings from RM500 to RM1,000 a month, you can achieve your first million eight years faster!
Monthly Savings
Years to RM1 Million
500
33
1,000
25
2,000
18
3,000
15
4,000
12
5,000
10
10,000
6
Summary
Ultimately, it doesn’t matter if you’re 10 years or 30 years away from your RM1 million target. Take some time to think of the three steps below and apply the rule of 72 to it.
1. When do you want to achieve your RM1 million?
2. What is your targeted rate of return?
3. How much am I saving monthly?
With the above information now set in stone, you’re now able to clearly plan your destination and search for a vehicle or investment products that are able to drive you towards your goals.
Saving as much as you can now will help you to reach your first million as soon as possible.
The more time you let your money grow, the less you’ll need to set aside each month, and this in turn will mean you can accept lesser returns to reach your designated amount and goal.
While lesser returns may not sound attractive at first, it also means you don’t have to expose yourself to much market risk and simply let time do the work for you.
As the saying goes, better late than never.
So keep in mind that it’s never too late to start saving now and I hope this will help you to achieve your goal with more clarity and direction!
About the author
Nick Lim is a licensed financial planner under Capital Markets Services Representative License (CMSRL) and a Bank Negara-approved financial advisor representative (FAR). He can be contacted at nicklim@imaxfinancial.com.my
Very recently, I’ve been shopping around for property for my own stay. This reminds me of the time I looked for my first property investment over five years ago. I’m still holding on to that property at a loss – both in cash flow and unrealised capital losses.
As a friend once said, things that happen to us could either be a blessing or a lesson.
This loss-making investment has given me three very important lessons that I hold close to my heart when it comes to property purchases.
1. Avoid new developments
As a professional real estate lawyer friend once told me, “Buy certainty when you are looking at investment property”.
The allure of a new development is apparent – minimal to no upfront costs (i.e. affordable), a lot of incentives, looks new and nice, etc.
However, every new development that we buy into is a bet. A bet that the developer will not fail, a bet that the future market is bright so that the value goes up, a bet that it has a market for good rentals.
When I bought mine, it was going to take three years to finish building. It was a mixed development that was supposed to come with a mall right in the middle (the second mall in that area). But, it didn’t happen.
The (prominent) developer decided to take out the mall from the development, SECRETLY! I only found out about it after it was completed in three years.
The mall just disappeared from the plan altogether as if it never existed.
Furthermore, more high-density properties started to pop up around that development. Causing supply to skyrocket around that place. Naturally, the value of my property dropped significantly.
As a result, I’ll be avoiding all new developments, even for my own stay. Nothing’s stopping them from delivering the property to you hastily or taking forever to fix the defects in the property.
Or building up the commercial space, which they promise will be vibrant, but end up becoming a dead place with only a few tenants.
Rather than buying something so uncertain, it would be better to buy into an existing property, where I can clearly evaluate how good or bad the place actually is.
2. It’s all about the maths
From the get-go, it’s all about the calculations when it comes to property investment. I got suckered in by the sales pitch for my first property and being a newbie then I didn’t do my own calculations.
The obvious part is that the rental income has to be higher than the mortgage payments and management fees.
The not-so-obvious part is the indirect costs – agent fees, maintenance fees, assessment tax, income tax, etc. These will eat into the income and hence reduce the net income that we would get.
Which means, we’d require a bigger margin in order to cover all these costs so that it’s profitable in the end.
For example:
– Mortgage + management fees = RM1,500 – Rental Income = RM1,700 – Indirect costs = RM140 (RM1,700 / 12 being the agent’s first month fee) + RM200 (miscellaneous fees) – Loss = RM140 per month (= RM1,700 – RM1,500 – RM140 – RM200)
Don’t hope for capital gains because it’s uncertain. Ask anyone who bought a new property five years ago at the peak of property prices. Most, if not all, are suffering from capital losses now.
Get the profit maths right before any investment. If it’s cash flow negative, forget it. It’ll be a pain somewhere down the road.
The saying of, “at least partially it’s being paid by someone” or “It’s breaking even!” is nonsense at best. Nobody enters an investment to break even!
3. Property investment is semi-passive
When we talk about property investment income, mostly we talk about renting out to tenants to collect rental income. The passive income part is when tenants pay rentals on time throughout the tenancy.
That’s about it.
There is a whole other side of property investment, which demands active participation. Some examples:
– Getting a tenant in involves liaising with the property agents on and off (every month it’s not tenanted is a loss to the P&L) – In between tenancy, there is a period where the property needs to be “cleaned up” and ready for the next tenant. The degree of work (and costs) required depends on how well the previous tenant took care of the place – Tenants with issues can create headaches during their tenancy. This could be delayed payments, pests, broken things, etc. We won’t know any of these for sure until the start of the tenancy
Some investors, especially those with a big portfolio of properties tend to engage property managers to manage the portfolio to get the headache off their minds.
This will bring down the returns but at least it’s converted into a mostly passive income portfolio. However, for most of us, this can take up significant brain juice, time, and effort to handle.
However, it’s all good as long as the profits from the investment better justify the effort required. Refer to lesson no. 2.
Closing thoughts
My first property was a headache. Students are potentially one of the worst tenants ever, in my experience.
In contrast to my trading and other investments, I’d rather put in more of my efforts there. The rewards in property can be huge, no doubt, but it isn’t one that I prefer.
It might be obvious for many but hope this reaches those of you who are looking into your first property for investment. It may help you in your journey!
About the Author
This article was originally published at betweenthemoney.com, a personal finance website by Jason Loh that focuses on money matters and investment topics for Malaysians
This article is written to share some steps for you to consider when evaluating properties as an investment vehicle in Malaysia.
Think of it as a methodology for you to apply during your first round of scouting properties before going into more detailed research.
This selection process can be applied to property investment opportunities in both the primary market (properties under construction) and the secondary market, including auction properties.
The goal is to identify a suitable area and then select property that will represent a logical, financially-suited and tax-effective investment vehicle.
1. Look for established and planned infrastructure
One of the specific elements that influences demand within an area is the degree to which established and planned infrastructure is readily accessible to tenants.
Thus, it’s crucial that the existing and planned infrastructure surrounding property is critically identified and assessed.
Ask yourself why property in areas like Taman Tun Dr Ismail (TTDI), Mont Kiara, Bangsar and Desa Park City are very sought after?
One factor is that these neighbourhoods are matured, secure and self-sufficient townships that offer many modern conveniences — from good schools, access to banks, retail and F&B outlets, and many popular public parks.
Using TTDI as an example, it’s close to popular commercial developments such as 1Utama Shopping Centre, the Bandar Utama City Centre, and the Curve, as well as a number of multinational companies that base their offices nearby like Tesco and IKEA in Bandar Utama.
It also has a green lung of Lembah Kiara as a public park.
Infrastructure can be divided into two broad categories:
i) Accessibility – Local transportation links like access to local bus routes, MRT/LRT feeder buses, train stations, access to highways and also major arterial roads
ii) Local amenities – schools (including international/private schools), shopping centres, parks, hospitals, recreational areas, jogging/cycling paths, public parks etc
An attractive area for property investment is an area with amenities and rich infrastructure, of which there are several in Malaysia.
Alternatively, you could also look at areas that have some upcoming planned infrastructures like new highways (DASH, SUKE), highway access (MEX extension or interchange add ons), new MRT lines, LRT lines, and convenient access to commercial areas with eateries, banks and offices.
Other key indicators include sustainable malls (not just any mall, but those with established management with experience running malls that are well occupied/tenanted and well patronised), government or private/international schools, universities, public transportation, green lungs like parks and recreational areas, and working populations with a heavy focus on professionals in the middle to high-income group.
However, the time it would take for these infrastructures to be resident-accessible is a factor that shouldn’t be ignored.
Remember that you have to take into account the duration for your own target property to be built as well as the maturity of new infrastructures (highway, MRT, LRT, new central business district, malls etc) to be ready.
The faster one expects infrastructure to materialise, the quicker and better the chance of a property investment yielding capital appreciation while simultaneously lowering the risk of the infrastructure project being postponed or worse still, called off entirely.
Many will testify that this is not an uncommon occurrence in Malaysia!
2. Observe the residential vacancy rate and supply of similar properties
The same fundamental economic forces that affect the share market or even the price of coffee in your neighbourhood cafe are the exact same forces that affect the price and rental of the property market: supply and demand.
Naturally, an area with high demand but limited supply will inevitably experience above-average capital growth. An area that is “oversupplied” in contrast to demand will result in lower average capital growth.
A property investor in an oversupplied market may be forced to:
i) experience an extended vacancy period;
ii) be forced to revise the rental rate downwards to attract a potential tenant in a competitive market environment; or
iii) incur a greater than anticipated cash outflow/expense as a result of lower rental yield and/or extended vacancy rate
An area with strong property demand is also more likely to attract tenants and own-stay occupiers to the same area.
One perspective to consider is to think about an area with a lot of units, it’ll be sensible to analyse and identify the vacancy rates in the development and also the surrounding area of the neighbourhood.
If the vacancy rate is high (for example, over 10%), be wary about the competition you may have, not just within the development you have invested in but also neighbouring developments.
In the instance of high vacancy, it is a tenant’s market to pick and choose.
In a competitive tenant-oriented market, you will need to consider ways to manage the vacancy or to attract tenants to pick your unit over others.
Before buying any property for investment, plan ahead for sufficient reserves to act as a buffer to sustain a higher vacancy period and/or putting in more capital to furnish the place or make your unit stand out among the competition.
3. Focus on mass market property and homes with a unique selling proposition
For property investment, consider buying mass-market product homes in the target area, but ensure that your entry price isn’t above similar transacted prices.
In the worst case scenario, purchasing a poorly selected property that has little valuation upside below the average transacted cost of similar properties in the area, at the very least, an investor would not be the first to lose money.
You should also look at the median property price of any one area.
You’ll often hear the saying “location location location”, however, the relevance to that mantra is not quite the same in this day and age.
More importantly, consider whether the price you are paying is around the average of the property market, whether or not the average Malaysian can afford to buy/or rent in the area that you’re targeting.
A typical rule of thumb we recommend is that a property investor invests at a price point within a 15% range of the median property for that particular area or development.
Our observation is that by limiting one’s scope to properties within this 15% price range, an investor is able to obtain an “above average” property that is more likely to represent good value for a future purchaser and prospective tenants.
To put it simply, a property within this price range maximizes represents a home the majority in that area is likely to afford to either rent or buy.
4. Be open to multiple rental strategies
Have an open mind and consider having multiple rental strategies for your property investment to target different rental prospect segments such as students, middle to high income locals, or expats so that you don’t just depend solely on one type of tenant.
For example, a “mass market property” in Bangsar, Mont Kiara, or TTDI isn’t within the same price bracket of a “mass market property” in Puchong, Selayang, Rawang or Sungai Buloh. This also applies to other hot areas within Malaysia.
A mass market development refers to properties that are priced and rented at affordable levels to the locals in that area. There are two parts to this equation:
Firstly, you must find out what the prices are for the various types of properties within an area. For example, segments condominiums landed bungalows and terrace houses to use as examples.
The second component is to roughly estimate who the locals in the area are and how much they’re likely to earn.
Typically, as a rule of thumb, a tenant or own stay would spend a maximum of one-third of their disposable income for housing expenses each month.
So if the usual rental price of a property is RM2,000 per month, the disposable income for that household should be around RM6,000 to RM8,000.
Do plan out multiple rental strategies like having a master tenant, rental on a per room basis, or even platforms like Airbnb, so that if one doesn’t work, you can try another approach.
If you buy a property relying on one stream of marketing, eg. only Airbnb, you run the risk of property management deciding to ban it.
And if your Airbnb unit isn’t profitable or requires too much time to manage or a black swan event like the Covid-19 pandemic leading to a lack of travellers, you’ll struggle with tenancy options.
5. Pay attention to the cash flow rule
Ideally, you’ll want a property investment where the minimum expected rent can cover 80% of your monthly mortgage instalment so that it wouldn’t deplete your cash flow to the point where you need to sacrifice your vacations, luxuries, cars and other basic necessities.
This also implies that with better cash flow, you could be eligible to obtain more loans in the future and therefore can invest in more properties or other assets of your choice.
Let’s use a subsale property that costs RM560,000 as a case study.
Purchase Price = RM 560,000
Loan Amount = RM 504,000
35 years tenure, 4.6% rate, Installment = RM2,416
Assumptions:
There are no new major catalysts (e.g. transport infrastructure, central business district) that affect rental appreciation)
There are similar developments that we can take as a comparison. Rental benchmarks are taken based on the transacted rental of units with a similar layout that’s less than 10 years old
Case A: If your rental = RM1,900
Rental-Installment Ratio = Rental / Installment = 1900 / 2416 = 78.6% → not qualify
We can say that Case A is not good enough to be considered because the Rental Installment Ratio is below 80%.
Does this mean we disqualify Case A straight away? It depends.
We did the comparison based on assumptions that the area does not have any other major infrastructure to induce a more significant increase in the rental. Secondly, there are similar units in the area that aren’t much older than the subject.
Let’s look at another point of view, in which the scenario is that there are major infrastructure developments and amenities where the rental could possibly increase to RM2,000 for example:
Rental installment ratio = 2,000/ 2,416 = 82.7%
Therefore the property now should be taken into serious consideration.
OR
If there is no newer supply of similar units. Most existing developments are already more than 10 years old, and the rental benchmark against these developments aren’t apple-to-apple comparisons, and rent of RM1,900 would be an underestimation of rent potential.
New development with a modern facade and newer facilities has strong property investment potential and is in a strong position to command a higher rent.
Prospective tenants would likely be willing to pay a 10-20% premium to live in a more posh and modern residence, especially if they are expats in Malaysia.
These are just two examples of how one development becomes a “good” or “bad” development based on different factors.
6. Prioritise and achieve balance of rental yield and capital growth
Capital growth isn’t the only factor that makes property investment exciting; it’s also the fact that regular and constant income can be derived from real estate that makes it a sound investment choice for many investors.
Rental income is also a source of cash flow that can be used to pay down debt on the property. Rental yield, therefore, is simply the annualised rental income expressed as a percentage of the value of the property.
For example:
Property value = RM400,000
Monthly rental = RM2,000
The annualised rental income = RM2,000 x 12 = RM24,000
Rental yield calculated as a percentage = 24,000 / 400,000 = 6%
This is not only an important percentage as it helps to determine the return on investment so that the cash flow requirement of servicing and maintaining the property can be calculated, it also provides important information about the rate of capital growth.
A natural response would be to obtain as high a rental yield as possible. However, this may not always be the best route for the investor.
More often than not, an area experiencing high rental yield is more likely to have a lower capital growth, and vice versa.
Usually, when rental returns are high, investors are willing to accept a less than average capital growth rate. When rental yields are lower, investors must be compensated by achieving a higher than average capital growth rate.
Most people will strive to achieve a balance between making a bit more money now (higher rental yield, cash flow and lower capital growth rate) or more money later (lower rental yield, higher capital growth rate).
7. Calculate potential cash on cash return(COCR)
COCR can be used as a metric to quickly evaluate if you should pump in more capital for the investment property.
However, we urge caution when looking solely at this number as this figure may not necessarily be the most useful and accurate way to evaluate the rate of return beyond one year.
Cash on Cash Return = Income / Capital Outlay
Income = Rental income – (installments + maintenance + sinking + quit rent + fire insurance)
To compare buying an undercon and subsale at nett price of RM550,000
a) Buying an undercon
Price: RM611,000
Loan amount : RM550,000
Monthly installment = RM2,637
Progressive interest costs: RM20,000
Downpayment: ZERO
Legal fee, stamp duty = Waived
Renovation = RM25,000
Capital outlay : RM 1,000 + RM 25,000 = RM 26,000
Assuming a first year rental of RM1,900 per month:
Income = (1,900×12) – (2,637+300) x 12 – 1,000 (assessment) = – RM13,444. In the first year, cash flow is negative for over RM13,000 and I spent RM26,000 to acquire the property
A quick calculation of COCR = -13,444 / 26,000 = -51.6%. This shows a negative COCR.
Consider the next investment option:
b) Buying a subsale
Price: RM550,000
Loan amount: RM495,000
Monthly installment = RM2,373
Progressive interest costs: ZERO
Downpayment: RM55,000
Legal fee, stamp duty, valuation = RM22,500
Remodeling / Refurbishments = RM30,000
Capital outlay: RM55,000 + RM22,500 + RM30,000 = RM107,500
Assuming a first year rental of RM2,200
Income = (2,200×12) – (2,373+300) x 12 – 1000 (assessment) = – RM6,676
In the first year, cash flow is at negative RM6,000 but I spent over RM100,000 to acquire the property
A quick calculation of COCR = -6,676 / 107,500 = -6.21%. This shows a negative COCR.
As COCR is only good in the short term, you need a better way to analyse your target property otherwise this number, which happens to be negative, will not tell you much. What can be deduced from this figure? Does a negative COCR tell you that you’re going to lose money?
Both options have negative COCR, but scenario (b) is less negative.
Scenario (a) capital outlay is RM26,000 with COCR -51.6% while scenario (b) capital outlay RM107,500, COCR -6.21%. How can you tell which one gives a better return? Can there be another way to evaluate these two options?
8. Meaningfully analyse your potential return on investment via internal rate of return (IRR)
As investors, it’s important to know the returns you make on your investment because you want to be able to know which are winning plays or losing plays.
For financial instruments like shares, bonds or unit trusts, keeping tabs on how well these investments are doing is quite easy because these investments have to produce some sort of “report card” each year; some may even produce it monthly.
If you don’t know how to check on the status of these investments, it’s probably best you engage a financial advisor to help you out.
However, it’s not that simple for property investments.
Using the internal rate of return (IRR) takes into consideration the cash outflows (your cost) of owning the property over any given investment horizon.
Cash on cash return (COCR) doesn’t give you an accurate picture of how good or bad your investments are, as you wouldn’t be able to make comparisons using COCR with the returns you get from other investments like entering into a business venture, Amanah Saham Bumiputera (ASB) funds, unit trusts, shares, or any other options available to you.
COCR = Annual cash flow / Total investment
Annual cash flow = all income – all expenses. It captures the snapshot year by year. If the COCR is positive, this suggests you’re getting some returns from the money put into this investment.
But what if the COCR is a negative number?
How would you benchmark against other asset classes? Property investment is a long term investment vehicle. Taking a snapshot return of any one particular year does not convey the full picture about whether you stand to make good or bad returns or lose money.
Rental yield = Annual rental / purchase price
This metric gives a quick indicator as to how the property is performing but it does not tell you anything about the expenses incurred to get the property rented out at a certain rental rate.
For example, let’s say owner A has two properties worth RM560,000 each of the same layout and size in the same development.
For one unit, the owner spends RM40,000 and he gets a rental of RM2,800 and for the other, he spends RM25,000 to get a rental of RM2,500.
Rental yield for unit #1 = 2800 x 12 / 560k = 6%
Rental yield for unit #2 = 2500 x 12 / 560k = 5.36%
The rental yield for unit #1 is 6% while unit #2 is 5.36%, but can we conclude that unit #1 is better than unit #2? It isn’t very accurate to make such an assumption just by looking at this equation.
If we restrict ourselves by analysing based just on rental yield, we will ignore the other extra cost of RM15,000 that it takes to be able to charge a RM300 premium on the rental yield of unit #1 compared to unit #2.
One way to address this cash flow is to use the internal rate of return as mentioned earlier. This is the third complimentary benchmarking tool to look at to help you make more informed decisions when evaluating a property, and is also useful for considering other asset investment classes.
IRR is simply the internal rate of return of the investment in which the net present value of all cash flow equals to zero.
When investing in property, it’s important for you to have a plan.
A plan is not the same as being told “let someone else pay your loan”; or “this property is yielding 20%” when you don’t know what those two sentences mean! Like all investments, there is a tried and tested method called IRR or internal rate of return.
One of the worst methods of getting information to validate an investment is through forums or a non-expert.
While we recognise the advantage of getting tips or rumours if you’re going to be spending a lot of money on your investment, why take the risk at all?
To evaluate transacted data, begin by benchmarking the selling price of the target property against the transacted price of similar products in the area for the last 12 to 24 months.
Building a portfolio is just like building up a football team – your team will require good cash flow properties (defensive) and good capital gains (offensive).
You can maintain your portfolio through defensive plays alone, but this strategy wouldn’t give you much cash to grow your portfolio.
The ability to consistently buy successful undercon properties involve many uncertainties that include the workmanship, delays or abandonment of the project, cancellation of nearby infrastructure and so on.
On the other hand, one can get more reliable data about transacted price and rental from subsales properties.
You can also visit the development and check out crucial factors like the profile of the residents and the upkeep of the development to entirely avoid the risk of construction delays or abandonment.
Cash from capital gain plays can be used for several purposes: loan reduction for defensive play properties, portfolio expansion, or used as self-rewards such as travelling, a dream car, or starting up a business.
Others may also use capital gains to fund children’s education or to keep for health emergencies.
You should also consider the time and effort of managing four units of low cost flats vs managing two residential properties for middle-upper income groups.
A low-cost only portfolio strategy does have its drawbacks.
Firstly, it’s more likely that you’ll encounter more issues managing lower income bracket tenants like late payments or even defaults.
Secondly, management spends on amenities improvements is limited. Most of these developments are run down and will not look appealing to future buyers or renters.
On the other hand, low-cost apartments provide better rental yields with limited capital appreciation.
Some people believe that buying landed properties gives better capital gain, sacrificing cash flow. Investing in too many landed developments will significantly affect short term cash flows compared to highrises.
In addition, to aim for better capital gains, people believe in investing in new areas or untested products (small units, new/low occupancy offices towers, landed play, negative cash flow) to hopefully enter at a lower price and exit the market after the boom, (for example, Setia Alam).
New areas and new mega developments involve huge resources and take time to build and there are a lot of dependencies and uncertainties involved.
Developers usually take a minimum of 10 years to build a self-sustaining township. Holding power and cash reserves are the most important considerations in deploying this strategy.
Your ability to maximise your property value depends on your holding power, your own patience, and cash reserves.
There are people who prefer the hybrid investment model (capital gain + cash flow), who would choose investments in high rises below market value while still offering decent cash flow.
And then there are others who use properties as a vehicle for wealth preservation or to provide a steady stream of income and tend to prioritise strong cash flow properties.
It all depends on your own resources in deploying proper investment planning, risk appetite, holding power, cashflow priorities and many factors.
The winning formula is about creating a balanced mix that suits your game plan to meet your financial goals. There are no free lunches out there so keep learning, and apply the knowledge learnt.
The more enlightened you get, you’ll make better, rational choices when building your nest egg for the future. All the best in your investment journey!
About the authors
Rozanna Rashid is a Licensed Financial Planner (CFP, IFP) and has an MSc in Real Estate Economics & Finance from the London School of Economics & Political Science. She can be contacted at rozanna@alpine-advisory.com
William Wong is an avid property investor and has an MBA (Finance) from Universiti Putra Malaysia. He is also the co-founder of Property Buddy PLT, a company that helps property investors strategise to achieve optimised rental returns via refurbishment for their investment properties
“I heard my friend talking about XYZ investment, do you think it’s good?”
These are just two examples of commonly asked questions on investment.
Yes, I get it. You don’t want to lose out on the “best” investment deals in town.
However, before you start investing, do ensure that you have built a solid financial foundation for yourself.
So how do you know which one is the best investment for you?
All financial solutions are designed for a target audience. The best investment is simply the one that suits you in the following three areas combined:
1. Investment goal 2. Investment time horizon and risk profile 3. Investment vehicle
As everyone is unique, there’s no doubt that an investment plan should be 100% tailored to your situation.
Blindly taking recommendations from friends (who don’t understand your financial situation) could be detrimental to your finances.
It’s just like self-medicating without a proper diagnosis from a health professional, but in this case, you’re putting your financial health at risk!
Investment goals
“Begin with the end in mind.” – Stephen Covey (Author of 7 Habits of Highly Effective People)
It’s important to know what you’re trying to achieve, because without a clear goal, how do you plan for it?
Take a moment to think.
What is your goal in investing?
– To build up emergency funds – To buy a dream house – To provide for children’s education – To further studies – To migrate overseas – To support family – To prepare retirement funds – To start a business – Others
Why is this goal important for you? (Your why)
– To prepare for unexpected expenses – To set up a family – To have peace of mind – To have freedom / choices – To have a comfortable retirement life – Others
Finding out your why in investment is crucial, because it drives and guides you towards the future/ bigger picture that you are seeking to create.
Investment time horizon and risk profile
Once you have defined your investment goal, the next thing to work on is your investment time horizon and risk profile with regards to investing.
To define your risk profile, you may ask yourself some questions:
1. How do you feel about a 20% loss in your investment? 2. What is a decent investment return for you? 3. What will you do during a market crash (sell off investment, buy more or do nothing)?
Investment vehicle
Lastly, what kind of investment vehicle suits you? Undoubtedly, suitable investment tools should fulfil your defined investment goals, risk profile and time horizon.
Investment tools come with three fundamentals: capital preservation, liquidity, and returns.
There’s always a trade off in any investment tool in terms of capital preservation, liquidity and return. Just like life, we can’t have everything we want. We have to give up something in order to get something else.
If you want capital preservation and high liquidity in your investment, you will have to accept that returns will be low.
If you want good returns and liquidity in your investment, you will have to accept that there will be absence of capital preservation.
If you want capital preservation and a good return on your investment, you will need to give up liquidity.
As you can see from above, there is no single investment that can give you capital preservation, high liquidity and high return at the same time. If you encounter one, there’s a good chance that it’s a scam – please do check with Bank Negara Malaysia on said investment!
Let’s use an example on finding the right investment for you. Assume that you have defined the following:
If your goal is to save up for an emergency fund, your investment vehicle should come with capital preservation (keeping your saved money free from volatile or fluctuating markets) and high liquidity (you need access to your money as soon as possible for unexpected events).
So, suitable investments for building your emergency fund can include:
Bank – high-interest saving account
Bank – fixed deposit
Fixed unit price unit trust fund
Please note that bank high interest saving account/ saving account and fixed deposit are protected by PIDM but unit trust funds are not protected by PIDM.
You may repeat the steps discussed above to design your best investment plan that’s tailored specifically to your needs.
All in all, there is no single best investment plan, because the best one is the one suits you the most! You have to define what you want, what you like and have a plan that you are comfortable with.
It’s incredibly dangerous to just follow the crowd and invest blindly, because that means you’re jeopardising your financial future.
If you feel lost when planning your financial future, you may consider investing in a financial professional.
A financial professional would not only develop a roadmap for you, but will also provide advice as unexpected financial issues arise in your life and bring you nearer to your financial goals.
About the author
Kuah Soo Yee is a Licensed Financial Planner (CFP) who is passionate about helping people make sound financial decisions and achieve their financial goals, and recently launched her own app. She can be contacted at soo.yee@ipp.com.my
So while EPF has been paying a solid return each year, MIS provides the opportunity and potential for you to increase your investment returns and boost your retirement savings overall.
In summary, any investment that you may choose to do via MIS comes with pros and cons. Do research and understand all the risks that you’re taking before proceeding with investing. If you have further enquiries on EPF investment via MIS, I suggest that you seek out a financial professional to discuss and design an investment plan that matches both your risk profile and investment objectives.
