Month: June 2022

We can all concur that the past few years has definitely thrown everyone a curveball when it comes to our finances. In fact, challenging would be quite an understatement and most of us would have experienced more downs than ups in light of the disarrayed state of the world economies.

Yet, even with the darkest clouds some silver linings did emerge and we have seen some sectors thrive amidst the gloom. So rather than despite the turmoil but because of it, some phoenixes managed to rise from the dust to favour the bold with good fortune.

If you had invested after the market correction, there’s a good likelihood that your investments performed fairly well. This is especially so for those who made the “right” calls, for example, investing in glove or technology companies’ stocks or in the gold sector.

For those lucky investors, there is certainly cause to rejoice given the current economic outlook, but how sure are you that you can strike another impressive home run any time soon? 

Some investors may be content to treat their winnings as a one-hit wonder, and now turn their attention to enjoying the fruit of their investments in tangible forms such as upgrading their property or vehicles or just putting it aside for rainy days.  

Nevertheless, positive returns on investments should not be regarded as the end-all but rather as a springboard towards other financial goals. For this to be achieved, some insight into your investment position is required and this can be ascertained with a few questions:

• Now that you’ve made some returns on your investments, what should the next step be? Should you simply take the profit or should you make changes to your investments? How can you repeat your investment performance in the coming year(s)?
• If you have made money on your investments, did your net worth grow significantly? Are you happy with the quantum or do you feel it can be further improved?
• Have you tracked your overall investment performance from Day 1? Do you know the annualised returns of your investments? Are you satisfied with the returns?

Unlike striking a lottery strike where you place your bets and keep your fingers crossed for your next windfall, investing is a process whereby consistent results can and should be obtained over the long term.

You probably will not get an exact repeat of your latest investment performance but having some control over your future returns sure beats leaving it to fate and chance. To this end, I would like to offer a different approach to have more consistent and repeatable results over time:

1. Invest Based On Your Risk Tolerance And Investment Objective

We’ve often heard this time and again but what does risk profile actually mean? Risk profile refers to how comfortable you are as an investor when the value of investments goes up and down over time. Do these movements cause you to lose sleep at night? If yes – then you need to dial it down and choose an investment with a slightly lower volatility.  Having said this, your ability to take risk (i.e. risk capacity) is also a function of the investment objective.

If your investment objective is to save for retirement which is over 10 years away, then you are likely to have a higher capacity to take on more risk on this investment compared to other investments earmarked for shorter term goals. Similarly, if your aim is to grow your small investment capital significantly to meet your financial objective over a shorter period (e.g. between 5-10 years) – then you will need to consider a higher target return on investment. It is likely that a fixed deposit-only profile might not be realistic for you to meet your goals.

2. Invest With Your Ideal Strategic Asset Allocation In Mind

While stock investments might be suitable for you, it will not be a good idea to put all your investable assets in the stock market alone. Similarly, while you might be a die-hard property investor, placing a very high percentage (e.g. above 50%) of your investable assets in property assets might cause liquidity issues should you need to dispose these in a short period.

Ideally you should have a right combination of low, moderate and high-risk assets that match your risk profile to be able to generate the ideal target weighted average growth rate required to help you achieve your financial goals. As a simple guide, a moderate risk investor should target to have a 10-20% allocation into low risk assets, 70-80% in moderate risk assets and the remaining 10-20% in high risk assets. Based on this breakdown, the target expected return on the portfolio is somewhere between 6-10% p.a. in the long run.

3. Keep A Keen Eye On Your Investments

Now that you have your overarching strategic asset allocation in place, it’s time to determine the target portfolio allocation of the actual investment to help you to keep tabs on its performance more effectively. Let’s take the example of a moderate risk profile investor who invests in a balanced portfolio comprising of 50% stocks and bonds. Should the stock market experience a bullish trend thereafter, the allocation in stocks would rise to say 80%, causing him to be deemed as an aggressive risk profile investor instead.

Keeping an eye on the investments would prompt him to rebalance to the ideal 50:50 target allocation, thereby triggering the investor to apply the “buy low, sell high” philosophy by selling down on the stocks and reinvesting back into bonds. Similarly, you need to ensure your investments remain fit for purpose – retain the good performers and switch out from the non-performers. Is there a profit taking opportunity? If yes – consider locking in the profit while retaining the underlying investment if the prospects remain good.

4. Track The Performance Of Your Investments & Net Worth

If your investments are in profit – good for you. However, knowing this is not enough. You need to determine the annualised returns of your investments so that you know if this is in line with the expected returns of this asset class or otherwise. Similarly, if you have had a good run in investing this year and made a lot of profits – great. But has this translated to a meaningful growth in your net worth?

If you’re not sure, then it’s time to start tracking your net worth on an annualised basis and more importantly look for ways to grow your overall net worth instead of just focusing on the performance of individual investments. When you diligently track your investment performance and net worth, you will be in a much better position to take the necessary steps to enhance it over time.

5. Rinse And Repeat

While the steps above are not rocket science, it does require a consistent application over a long period of time if your aim is to grow your net worth optimally to achieve your financial goals. 

 As the saying goes, make hay while the sun still shines. Your recent investment returns may be the envy of your peers, but winning streaks are often flashes in the pan and not sustainable in the long run without adopting a systematic approach.

Nobody can predict how the economy is going to fare in the coming year given the volatility of the pandemic situation the world over. Rather than just sitting back and waiting to jump on the next hot investment idea with your fingers crossed, it’s time to reposition yourself to do well irrespective of the short-term market conditions.  

View your recent returns as one step further to increasing your net worth in its entirety and apply the above five step process to enjoy the prospect of growing your net worth consistently for many years to come.

About the Author:

Felix Neoh CFP ^{CERT TM} is the Director of Financial Planning at Finwealth Management Sdn Bhd and is a certified member of FPAM. He can be contacted at enquiry@finwealth.com.my

We at Smart Investor and Finwealth is committed to help you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxFinwealth

To many, investing is a complicated subject and one that is overwhelming when you are new to it. It is confusing because:

• There are different types of investment products in the market. They include stocks, bonds, real estates, commodities, businesses and so on.
• There are different segments for each type of investment product. If we take stocks as an example, we have growth stocks, dividend stocks, value stocks, blue chips, small caps and so on.
• There are different methods of investing for each type of investment product. For stocks, you may choose to buy and hold, do short-term trading, invest via unit trust or EPF, short-selling and so on.
• Above all, many people “believe” they are investing when they are actually not. These people include traders, gamblers and even speculators and they make “investing” an even more complicated subject, especially if they profess to be successful “investors”.

What ‘Investing’ is Really All About

The subject of investing is made more confusing when people are not aware of the differences between:

• An Investment Plan,
• An Investment Procedure, and
• An Investment Product
  

Many today are still trying to get into investment products (stocks, real estates, unit trusts), or investment procedures (buy and hold over the long-term, short-term trading, dollar cost averaging) without having an investment plan. They also unconsciously follow the following order when buying their “investments”:

• Select Investment Products
• Explore / Test Out Investment Procedures or Strategies
• Have an Investment Plan, if ever, when needed
  
  

This investment approach is likened to building a house without first having a blueprint. This is not investing. Clearly, it is not a sustainable method for creating wealth.

What then is Investing?

Investing is a Plan, not a Procedure or a Product. Hence, a savvy investor would instead follow this path:

1. Have an Investment Plan.
2. Explore and Learn Investment Procedures or Strategies.
3. Select Investment Products.

As you can see, this is the exact opposite route taken by those who know how to build sustainable wealth over the long-term. I will touch briefly on the three points above:

Step #1: What is an Investment Plan?

An investment plan is like having a travel plan as illustrated below:

Say, I have to travel from Subang Jaya to Petaling Jaya in 20 minutes using X vehicle.

The plan will have four elements to take into consideration:

1. Where You Are Now – Subang Jaya
2. Where You Want to Be – Petaling Jaya
3. Duration (Travel Time) – 20 Minutes
4. How to Get There Safely – by X Vehicle

Likewise, investing starts with an assessment of your life. This includes your age, marital status, earning capabilities, financial condition, set of skills, tolerances of risk, expected returns, and a vision of your future self. Often, it takes quite a fair bit of soul searching to find your unique answers to the questions stated above. So, please take your time to do so. Don’t rush into it.

The first line of your investment plan should look something like this:

(A) I want to increase my monthly income from RM5,000 to RM10,000 in three years by using X strategies.
(B) I want to earn a passive income of RM1,000 a month in two years by using Y strategies.
(C) I want to grow my net worth from RM500,000 to RM1,000,000 in five or 10 years by using Z strategies.

What then are your X, Y, or Z strategies? Let us move onto Step #2:

Step #2: What is an Investment Procedure?

Let’s use the same travel plan from above:

I will be travelling from Subang Jaya to Petaling Jaya in 20 minutes by using X vehicle. Your X vehicle could be any of the following:

– A Car
– A Bus, or
– by LRT

If you know how to drive, then, you would choose a car. If not, you may hop onto a bus/LRT/Grabcar/Taxi to get to your destination.

So, the mode of transport is the procedure that will take you to where you intend to go. Likewise, the skills of investing are procedures that will act as the modes of transport to bring you to your financial destiny. The more skills you have today, the more vehicles you get to choose from to get to where you intend to be.

In travelling, some procedures include:
– Walking or Running,
– Riding a Bicycle,
– Driving a Car, or
– Flying a Plane

In investing, the procedures include:
– Working (get a job or starting a business)
– Saving (building cash reserves)
– Trading (Simple Moving Average (SMA), Exponential Moving Average (EMA), Bollinger Bands, etc)
– Investing (Growth, Value, Dividend, etc)

Step #3: What is an Investment Product?

An investment product is likened to an X vehicle: a Car, a Bus, LRT and so on. One vehicle is not necessarily better than the other. It all depends on suitability.

A car is not necessarily better than a plane. Likewise, investing in real estate is not necessarily better than investing in stocks, bonds, unit trusts, gold, EPF and so on.

Two guys may invest in stocks but their choice is for their own reasons. For example:

• Mr C aims to build a stock portfolio that earns RM1,000 a month in dividend income. He intends to buy and keep dividend stocks as long as their dividend yields are 5% and above. Thus, Mr C may consider an investment into a REIT that pays 6% dividend yields as the REIT fulfils his investment criteria.
• Mr D aims to build a stock portfolio that appreciates in value for the long-term. He intends to buy and keep stocks that have grown profits consistently and are expandable over the long term. Thus, Mr D may consider an investment in growth stocks as they fulfil the needs of his objectives much better.

In short, here are the key takeaways:

• Investing is a Plan, not a Procedure or a Product.
• A Plan helps to determine Your Procedures and Products.
• One Product is not necessarily better than another Product.
• Take time to do Soul-Searching.
• Your Plan will Advance according to your Skills (Procedures).

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

Most working-age Malaysians have certain ideas of how they want to live their retirement years, but more often than not, the stark reality of retirement paints a picture that is far from rosy.

Challenges such as the lack of adequate savings and rising medical costs are knocking well-made retirement plans off kilter, and thus reducing the value of one’s nest egg. Throw the Covid-19 pandemic into the fray and Malaysians are suddenly discovering that their retirement funds are insufficient.

For context, according to Employees’ Provident Fund (EPF), current EPF savings for most Malaysians are barely enough for a decent life after retirement. In fact, statistics indicate that 70% of Malaysians outlive their retirement savings – those who withdrew their funds at age 55 use up their savings less than a decade after retiring.

Equally troubling is the fact that more than two-thirds (68%) of EPF members aged 54 had less than RM50,000 in EPF savings, and with the household poverty line income at RM930 monthly, the RM50,000 in savings will only last approximately 4½ years. The bottom fifth of EPF members, meanwhile, have average savings of only RM6,909.

Read : Retirement Planning, Why It Is Important From An Islamic Point Of View

This begs the question: is having insufficient retirement funds beyond one’s control given the worsening global crisis, or could this be due to poor financial management?

Managing Priorities And Habits

Retirement planning can be daunting, but the beauty of the process is that it allows you to think about your retirement goals, how long you have to meet them, and most importantly, it allows you to work out how much you would need to comfortably enjoy your golden years.

“Retirement planning can be planned, but at the end of the day, it all comes down to one’s priorities and habits,” opines Harveston Wealth Management financial advisor Annie Hor.

“If you are in your 50s and have nothing prepared for retirement, you are in a lot of trouble. You may not be able to stop working immediately and would need to start relooking at your expenses and trim as much as possible while saving most of your nett income,” she says.

Hor goes on to share that she once advised a client in his late 50s to immediately cut back on his lifestyle and spend no more than half of his income.

“The client is single, has a house that has been paid up, and other loans. However, he has no one to depend on and has less than RM150,000 in his savings and EPF account. While he has a medical insurance, he also has a medical condition that requires regular treatment which is not covered by his medical insurance.

“At the moment, he can still claim employee benefits, but because of his age and low resources, he is unable to maximise his investments and would need to be mindful about his money management,” Hor recalls.

Hor cautions that despite not being in a similar situation, one should not make the mistake of thinking that time is on his side and that he still has many more years ahead of him to plan for his retirement.

“We don’t have much time to plan for retirement as there will always be distractions and setbacks in life, chief among them being getting married and starting a family, worrying about your children’s school fees, having to take care of your ageing parents, and even the Covid-19 pandemic,” she reveals, adding the earlier one sets his retirement plan in motion, the better.

Ensuring you have medical insurance is the basic foundation of financial planning. If you do not have one, falling ill can potentially affect your wealth, she adds.

“Medical insurance can secure your coverage for today and for the future. This is because when you are much older and possibly less healthy, it would be difficult to get adequate insurance coverage even if you are willing to pay for it.”

Bridging The Growing Gap In One’s Retirement fund

While EPF does its best to support one’s post-retirement life, simply relying on it alone is not enough, as indicated in the revision of the minimum savings target in 2017, which saw the EPF raising the minimum savings target by age 55 from RM196,800 to RM228,000.

Suffice to say, active contribution to one’s EPF account alone may be insufficient for achieving one’s retirement goals, and Malaysians would need to explore other avenues to give their nest eggs a boost. And a useful tool that one can consider is private retirement schemes (PRS).

“PRS was introduced especially for Malaysians to save for their retirement in a structured and regulated scheme. It complements the mandatory contribution scheme to bridge the retirement savings gap.

“If you are self-employed and do not contribute into a mandatory scheme, PRS is a great avenue to start building your savings as it provides diversification into various asset classes in multiple regions to grow your retirement nest,” Private Pension Administrator (PPA) Malaysia CEO Husaini Hussin tells Smart Investor.

According to PPA’s survey last year, 67% of the respondents want to save more for their retirement.

“However, as we go about our lives balancing various commitments, perhaps at one point it became inconvenient to find the time to set up an account. Or maybe we procrastinated a little in another instance and forgot to follow up later on. One way or another, this intention of wanting to save did not translate into action.”

As such, with the PRS Online service developed by PPA, the user experience of opening a PRS account is now made easy, convenient and secure. A seamless process, Husaini stresses, will be one less barrier for Malaysians to enrol and continually top up their PRS accounts.

“It is never too late to start. In fact, the government encourages you to save with a PRS Tax Relief of up to RM3,000 each year. This means that when you start saving in PRS, not only are you saving for your future, you also get to enjoy immediate benefits through the tax incentive. 

“For example, if your tax bracket is 24%, then just by setting aside RM250 per month into your PRS account each month for one year will earn you a tax savings of RM720. Reinvesting the tax savings on a yearly basis will further compound the growth of your retirement fund,” he explains.

Husaini urges those who just entered the workforce should start saving too. “It’s a myth when people tell you that it’s too early to plan for retirement. Young Malaysians aged 30 and below get to enjoy 0% sales charge when they enrol for a PRS account with PPA’s PRS Online service.

“Get into the habit of setting aside a fixed sum into a retirement fund each month as saving regularly is more important than how much you actually put away, because even small amounts add up over time,” he advises.

Weathering Unexpected Setbacks

Unexpected setbacks like the Covid-19 pandemic are oftentimes inevitable and can put a glitch in one’s retirement plans, and temporary as they are, they can negatively affect your existing retirement plans.

“You may need to tap into your savings meant for retirement in such situations, but if you have done proper planning, your retirement planning is in fact not even your savings. You should have emergency funds at hand to weather these unexpected setbacks, and this will ensure that your retirement planning will still be untouched and intact,” Harveston Wealth Management’s Hor explains.

While the pandemic is unavoidable, she believes the situation can be rectified with proper planning. “Make sure that you have sufficient emergency funds to last you about three to six months should something like this happen again.

“On top of that, review your household expenses and try to use less than what you are currently earning. If you keep your lifestyle just within your average means and do not maximise your borrowings, you would have less to be worried about,” Hor suggests.

Worth a read : Saving Up For Our Retirement, Is It Possible To Do It Post-Pandemic?

On what Malaysians can do if their retirement funds are insufficient, here’s her advice: “First, find out what kind of retirement you would like to have. Then, look at your current resources and identify which basket of assets is meant for your retirement. Your next step is to identify the shortfalls and gaps, and ways that you can fulfil these realistically.”

“Start trimming down unnecessary wants and expenses and start investing for the future. You don’t only work to spend today. You work to spend today and save – or invest – for tomorrow.”

Doing The Math For Your Golden Years

If you are a young adult today (say, in your late 20s or early 30s) and taking into account the fluctuating global markets, how much would you need to retire comfortably?

How much one needs for retirement will depend on their current lifestyle. Studies have indicated that we will need 2/3 of our last drawn salary as replacement income to maintain our current lifestyle in retirement.

This is because work-related expenses such as commuting would no longer be incurred and long-term loans such as mortgages would most likely have been settled. In order to achieve this, we should aim to save 1/3 of our salary today.

The good news is, if you are currently employed, you are probably already contributing 11% of your salary into a mandatory scheme each month. Your employer also contributes at least a further 12%, which brings the total contribution to 23%.

Therefore, you just need to top up an additional 10% to achieve the 1/3 minimum. I say ‘minimum’ because one should first aim for 10%, and then plan to save more as our earnings increase.

As the amount each person needs for retirement differs, we have created a retirement calculator on PPA’s website for those interested to simulate different projections and scenarios. You can use it as a guide to design an accumulation plan to reach your retirement savings goal.      

Handy Tips For Retirement Planning

When it comes to ensuring sufficient retirement funds, good financial planning is paramount. Here are some important tips on saving and investing for one’s retirement.

1. Never underestimate the importance of having your own personal medical insurance. That way, in the event of a medical emergency, you can rest assured knowing that you can file a claim with the insurance company rather than tapping into your retirement funds;
2. It is not too early to plan for your retirement. You can always start early, and even if you do not have children, you can always start investing early for your children’s education. The sooner that you start, the better;
3. Take a bit of risk when it comes to retirement planning. You need to look at investing to grow your monies to beat inflation and not depend only on your savings to retire. Have a licensed financial adviser review your investments and help make sure that your investments grow according to your desired returns;
4. If your resources are limited, do not try to look at settling your mortgage and car loans and forgo investing. You might be asset rich but cash poor when you retire.
5. Always make sure that your children’s education plan and your retirement planning are done separately. If you do not plan for your children’s education, you might end up using your EPF to fund your children’s education. If you cannot afford to do both education and retirement planning, remember that you can borrow money for education but not for retirement so make a wise decision.