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3 Mistakes To Avoid In Your Financial Planning Journey

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

27/04/2022
5 Investing Lessons from Warren Buffett’s Letters

The letters of Warren Buffett… What are they?

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

27/04/2022
Investing In Property With A Holistic Perspective Using This 3-Step Process
“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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27/04/2022
Covering All Bases for SMEs With SME Insurance

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

Young Asia girl wear face mask turning a sign from open to closed sign on glass door cafe after coronavirus lockdown quarantine. Owner small business, food and drink, business financial crisis concept

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

27/04/2022
4 Tips To Invest For Long Term

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.

26/04/2022
5 Drawbacks Of Unit Trusts Investment That You Should Know Before Investing

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.

Well, if you never heard of unit trusts investment, maybe you should read Unit Trusts, The ‘Safest’ Investments For Beginners In Malaysia?

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.

Read : Best Mutual Fund In Malaysia During The Pandemic

4. Lower Returns Than ASB & Tabung Haji

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!

Want to know what unit trust investment can offer you? Please read The Benefits Of Unit Trusts Investment In Malaysia.

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.

25/04/2022
Here’s Why You Need To Plan For Your Retirement

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

25/04/2022
Is Takaful Not Attractive For Most Malaysians?

“Wisdom is not measured by appearance.”

As a husband, father, son, and even brother, I am the breadwinner and main contributor to the family finances. I work hard to give my best to my loved ones. The pressure is on to make sure I can leave my loved ones in the same or even better state when I am gone

As a Chief Agency Officer, I am aware of the need for takaful protection in life. It can alleviate unexpected situations Takaful benefits provide for its participants in times when emergency funds are required because of a disaster resulting in death, accident, critical illness, or hospitalisation.

The adage preparing for a rainy day holds true with a comprehensive takaful plan that can maintain our, or our beneficiaries’ lifestyles in times of disaster.

I am often asked what is takaful and how is it different from conventional insurance.

Takaful vs Conventional Insurance?

Conventional insurance and takaful share the objective of protecting against financial loss. However, closer inspection reveals some clear differences.

Takaful is based on Islamic principles of mutual cooperation (taawun). Participants (customers) fulfil their obligations by contributing a certain amount of donation (tabarru’) into a fund to protect one another against losses or damages covering life, general (assets) and medical. A takaful operator manages this fund.

The takaful operator disburses the funds according to its participants in the event of loss or damage suffered. Surplus monies will be distributed between customers and operator at the end of the financial term based on an agreed ratio. This will only be done after all obligations of assisting customers has been fulfilled.

Despite being based on Islamic principles, anyone can obtain takaful protection.

Factors Affecting Takaful Contribution Amount

Like conventional insurance, lifestyle factors affect the contribution amount each participant is required to make. These include occupation, age, family history, and underlying health factors.

As takaful is based on the basis of donation, if the tabarru’ fund is insufficient, there may be a revision in the contribution amount. For example, the tabarru’ fund can be short due to volume of claims or medical inflation.

A responsible takaful operator must monitor and revise the fund if necessary, to ensure it s contributors are always adequately protected. It is important in sustaining the tabarru’ fund for the long term. If a revision to contribution amount is necessary, the operator will notify customers beforehand so contributors are never caught unaware.

What Can I Do If I Cannot Afford To Fulfil My Contribution?

If personal circumstances change, let your takaful agent know so that a customised plan can be worked out based on your affordability. There are two main options provided to customers.

Firstly, there is the option of reducing some of the benefits while maintaining the same amount of contribution. Another option is to remove certain riders (add-ons) and replace them with other benefits that may be more relevant to the customer’s needs in life.

This is where a knowledgeable agent is invaluable. A good agent can advise you on the available options, and what may be best for your situation. Everybody’s protection needs differs from person to person. This is why Bank Negara Malaysia requires agents to conduct thorough fact finding to assess customers’ needs and provide recommendations.

Do I Still Need Takaful When My Employer Already Provides Protection?

Many overlook the importance of having their own personal protection plan. They think t heir employers will provide coverage for them until they retire. But work situations can change. Some may receive better offers or choose to work for themselves. When this happens, the protection afforded to them by their employer ceases. The level of protection can also cease or change upon retirement.

Participation in takaful is for future needs. It is not only for one time use. Nobody can guarantee our health throughout life.
Separating your takaful plans to cover different scenarios and needs is advisable.

The rule of thumb is to differentiate existing plans for specific purposes, such as medical, savings, and retirement.

Nowadays, there are plenty of plans with competitive and flexible riders. This allows users to choose add-ons based on their lifestyle needs. It minimises the need for multiple plans as one plan can cover different things. It is recommended to seek professional advice from a knowledge agent to get a better understanding.

How Can I Tell If The Agent Is Right For Me?

Agents are dutybound to ensure they do not bring disrepute to the takaful company, which seeks to help individuals, businesses, and community from financial loss. All agents must be licensed. You can and should ask to see the agent’s credentials before signing o n the dotted line. To obtain the license, the agent is required to pass a high integrity and closely supervised Pre Contract Examination organized by Malaysian Insurance Institute (MII).

Takaful agents are subject to an additional Takaful Basic Exam (TBE) by the Islamic Banking and Finance Institute Malaysia (IBFIM). Many agents now opt to sit for TBE so they have wider breadth of knowledge to better serve customers.

Beyond this, good agents must have solid fundamentals on different plans available. Investing time in the Customer Fact Finding (CFF) form will enable agents to understand the lifestyle and needs of the customer. Only then can agents propose a suitable plan within the customers’ budget, with adequate protection and savings.

What Makes A Great Agent Stand Out From The Rest?

Simply put it is their effort to upskill and improve themselves. Agents must complete the Continuous Professional Development (CPD) training yearly. The minimum is 30 hours. Dedicated agents typically undertake up to 60-70 hours of learning per year to upgrade and upskill themselves with knowledge in providing professional service and advice to help their customers better.

Great agents prioritise customers. They consider customers’ future needs and explain how the recommended plan ca n help address customers’ concerns and provide peace of mind. The agent must also be honest in what the plan can or cannot do for the customer.

Customers may have other concerns as well such as the processing of claims, plan maturity or even lapsation of policies. A well trained agent must be able to answer and address these concerns.

Can Agents Help Me Get Claims Approved?

A common complaint about the industry is the difficulty in getting claims when required. It does not help matters if the agent is absent or not helpful at all. Claims may be denied due to plans not covering certain aspects, or in other cases it may be due to anti-selections. This is where a person does not declare their health conditions when subscribing to a plan. Upon filing a claim, their case is studied and if found to have not declared, their claim could be denied.

Good agents will advise customers to be honest and the onus is also on customers to do so. Customers must make timely contributions to ensure their takaful certificates do not lapse. To this end, agents will also advise customers to go through available online portals to avoid delays which could leave the customer unprotected.

In the case where genuine takaful claims are denied, the customer can write to the takaful provider to appeal or dispute the denial. All takaful providers will act in a fair manner and review the case thoroughly before rejection. The providers are careful to ensure all legitimate claims are honoured.

Investing into protection is a critical life decision. It is wise to engage a certified and knowledgeable person on different plans and coverage. Seeking advice from multiple agents to make more informed decisions is also good.

About the Author

Nazrul Namizan is Chief Agency Officer of Zurich Takaful Malaysia Berhad.

22/04/2022
Aggressive Investment vs Conservative Investment, Which One Is Suitable For Me?

“Should I invest in aggressive investment or conservative investment?”

This is one of the most common questions often asked by the public. We all know that aggressive investment implies potential higher return, but it always comes with higher risk. While conservative investment implies potential, or sometimes guaranteed lower return but it always comes with a lower risk.

There are usually two types of answer from the investors and non-investors. Investors will always argue that aggressive investment is the best choice because conservative investment can’t even beat the inflation rate. Non-investor will always defend that conservative investment is the best choice as it possesses lower risk of losing capital.

However, all the above said reasons should not be the primary factors when we decide on which investment tools to invest in. Instead, we should be more concerned on whether the investment tool can help us to achieve our goals.

Below are two scenarios to illustrate the above argument.

Mr. A
Current age: 40 years old
Desire retirement age: 60 years old
Life expectancy: 99 years old
Annual retirement income needed at current value: RM60,000
Inflation rate: 5%
Target annual return after retiring: 5%
Current investable asset: RM1 million

After some calculation, Mr. A find out that he needs to have a total of RM6.28 million of retirement fund at the age of 60 to sustain his life until 99 years old. With the investable asset of RM1 million that Mr. A has, he needs to expect 10% annual return for 20 years to grow his RM1 million to RM6.28 million.

For Mr. A to gain 10% annual return, he would have to choose moderate to aggressive investment tools. He can have a combination of few investment tools in his portfolios such as stocks, derivatives, equities unit trust fund and P2P financing to generate potential 10% annual return.

However, it is definitely a wrong decision for Mr. A to invest his money into conservative investment tools such as fixed deposit, money market fund or savings account. This is because these financial tools are not able to deliver a potential of 10% annual return for Mr. A.

Choosing any investment tool that is unable to help Mr. A to achieve his retirement goal, which is to have a total of RM6.28million at the age of 60, is considered a wrong investment decision.

Despite some of the aggressive investment might be risky and volatile, investor can still mitigate the risk by doing proper research regarding the investment tools before making decision, diversifying the investment portfolio, knowing the investment horizon, and only investing through the legal platform.

As what Warren Buffet said: “Risk comes from not knowing what you’re doing.”

But, does this means that if an investor choose to invest in conservative investments is wrong?

The answer is NO.

Mr B
Current age: 60 years old
Desire retirement age: 60 years old
Life expectancy: 99 years old
Annual retirement income needed at current value: RM60,000
Inflation rate: 5%
Target annual return during retirement: 0%
Current investable asset: RM6.85 million

Mr. B goes through the same calculation, he finds out that he needs RM6.85 million to sustain his life until 99 years old and he already has RM6.85 million in hand.

In this case, Mr. B does not need to invest his money at all as his retirement goal is already met. So, it is alright for Mr. B to keep all his retirement fund in conservative investment tools such as fixed deposit, money market fund or even savings account.

Whereas it might be a wrong investment decision to Mr. B if he choose to invest the retirement fund in an aggressive investment tool because he might risk losing the capital which will then affects his retirement plan.

Hope that these two scenarios can clear the doubt when making an investment decision.

About the Author

Angel Chan is a Licensed Financial Planner attached to UOB Kay Hian Wealth Advisors Sdn Bhd. Besides providing comprehensive financial advisory to her clients, she is also committed to educate the public about the correct financial management mindset and methodology through article, YouTube video and Financial Management Workshop conducted by her and the team.

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21/04/2022
IRB Tax Audits And Investigations

The Inland Revenue Board of Malaysia (IRB) conducts tax audits to ensure that taxpayers have declared the right amount of income in their income tax returns in accordance with current tax laws and regulations.

There are two types of tax audits that can be carried out by the IRB, namely, desk audits and field audits.

Desk audits are conducted on the supporting documents requested by the IRB from selected taxpayers in relation to the taxpayers’ business transactions and income tax paid. As the name suggests, field audits are usually carried out at the taxpayers’ premises. However, during the Covid-19 pandemic, the IRB officers have been mainly conducting desk audits to comply with the standard procedures enforced by the Malaysian government.

The period of review for the tax audit ranges from three to five years of assessment. Cases selected for tax audits are mainly based on risk assessment, third party information, specific industries targeted by the IRB, specific issues related to taxpayers, etc.

A tax investigation is another approach adopted by the IRB to examine documents relating to taxpayers’ business and financial matters, including their personal documents. While there is a limited period of review for tax audits, there is no limitation as to the investigation period, but it normally covers five years of assessment based on the IRB’s current practice.

The modus operandi of the IRB investigation officers is to carry out an inspection visit to taxpayers’ business premises, residences, tax agents’ premises and other related premises. Taxpayers may be chosen through a random selection and computer screening process.

The basis of selection of investigation cases includes risk analysis, insider information, intelligence information and information from other law enforcement agencies. During the Covid-19 situation, the IRB investigation officers have cancelled inspection visits. As an alternative, desk investigations which are similar to desk audits are carried out.

A comparison between tax audits and tax investigations conducted by the IRB officers is as follows:

Source: Crowe KL Tax Sdn Bhd.

Taxpayers should be aware that a tax audit is merely an examination of records and does not imply that taxpayers have intentionally made errors in their income tax returns. Having said that, one should be prepared for a potential tax audit or investigation by keeping in mind the following information.

Keep Sufficient Records For Seven Years

Taxpayers are required to keep sufficient records for a period of seven years from the end of the year to which any income from the business or operations relates. This means keeping records in manual or electronic form to explain each transaction, that have enabled a true and fair profit and loss account and balance sheet to be prepared.

Although tax audits or investigations may only involve examination of accounting records for a period of three to five years of assessment, it is mandatory for taxpayers to keep sufficient records to avoid a penalty of RM300 to RM10,000, or imprisonment of up to a term not exceeding 12 months, or both.

Supporting Documents For Any Payments Made

During a tax audit or investigation, the IRB officers will request for supporting documents for expenses incurred or payments made. Invoices, purchase orders, receipts or any proof of payment are essential to substantiate the expenses claimed in the tax computation.

Otherwise, the expenses claimed will be disallowed for deduction.

Payments Made To Non-Residents

The payments made to non-residents such as royalty or contract payments may be subject to withholding tax. If the payment is subject to withholding tax but no withholding tax had been deducted and remitted to the IRB previously, taxpayers are not allowed to claim tax deduction for these payments.

As such, taxpayers are advised to determine the withholding tax implications for any payments made to non-residents.

Accruals Or Provisions For Expenses

The deductibility of expenses depends on the nature of expenses. If an expense is an accrual amount (an amount set aside for a known expense) and taxpayers are able to provide the relevant invoices or other supporting documents, i.e. the final amounts are ascertainable, the expense will be allowed as a deduction. However, if the amount is merely an estimate and no supporting documents from a third party are available to prove the expense, the expense may be disallowed.

Segregation Of Expenses Between Separate Business Sources

If a business entity carries out several business activities which are distinctly different from one another and therefore treated as separate business sources for tax purposes during a year of assessment, taxpayers should be able to segregate the expenses incurred in respect of the different business sources with proper justifications.

Taxpayers should take note that different expenses may be allocated by using different bases of apportionment to ensure that allocation of expenses between different business sources is fair and reasonable.

Capital vs Revenue

Tax authorities and taxpayers frequently have major contentions about whether a receipt is capital or revenue in nature. If a taxpayer has received a large lump sum of income during a year of assessment, it is important for the taxpayer to determine the taxability of the income received or obtain a tax opinion from a reputable tax consultant as to its tax position.

An assessment of the income received based on the badges of trade or other tax principles may provide the relevant indications as to the taxability of the receipts.

Allowance For Doubtful Debts Or Bad Debts

It is common for business entities to make provisions for doubtful debts or write off bad debts if the trade debtors fail to settle their amounts owing due to various commercial reasons. Based on Public Ruling No. 4/2019, Tax Treatment of Wholly or Partly Irrecoverable Debts and Debt Recoveries, taxpayers are required to take reasonable steps to recover the doubtful debts or bad debts, e.g. issue letters of demand, reminder letters or other correspondences.

Otherwise, the IRB may disallow the doubtful debts or bad debts recorded in the financial statements.

Direct Expenses Incurred In Respect Of Other Income

Taxpayers may receive other income in addition to the business income from their business operations. To gain maximum deduction, taxpayers may need to identify the direct expenses incurred to generate the other income as these expenses are not allowed for set-off against business income. Any adjusted loss (income less allowable expenses) derived from the other income is a permanent loss for taxpayers.

Taxpayers will need to keep the supporting documents for direct expenses incurred because the IRB may verify these documents during a tax audit or investigation.

If the above cannot be properly substantiated during an IRB’s tax audit, any adjustments made by the IRB would result in additional tax payable and penalties being imposed under Section 113(2) of ITA. Therefore, taxpayers should consult their licenced tax agents on the taxability or deductibility of income or expenses prior to the transaction taking place or prior to submission of income tax returns.

About the Author

Dr. Voon Yuen Hoong is an Executive Director of Crowe KL Tax Sdn Bhd.

20/04/2022