September 2020

Which one to choose for investment? Equity or bond?

When one starts to be aware of the bond products, the next popular question which an investor ask is normally “Which one to choose for investment? Equity or bond?” If you are new to bond products, read this blog for further information.

I would say this is a wrong question. Both equity and bond are important financial instruments for one’s investment portfolio, i.e. one should invest in both equity and bond. The more important question to ask will be “How much you should invest in equity vs bond?”.

The proportion for the equity vs bond depends on the following factors:-

Age: Bond in general has lower risk compared to equity. When one grows older, one requires more stability of his investment, hence the proportion of bond should be higher compared with equity.
Goals: Bond is an income generating investment tool while equity mainly focus on growth than income generation. So, if the investment goal is on income generation, the proportion of bond should be high. On the other hand, if the financial goal is on growth, the investment should have more equity portion.
Risk tolerance: Equity is volatile in nature. If one’s risk tolerance is high, one can put more equity into his investment portfolio for growth.
Amount of capital you have to work with: This is critical as well if the capital is small, one will naturally have higher risk tolerance. For example, if the investment amount is RM 1000, even if the stock drops 50%, the loss will only be RM 500. If you are starting with big capital like RM 1 million, definitely, the risk tolerance will be lower and hence requiring higher proportion of the bond to stabilize the investment portfolio.

The usual recommended proportion of equity / bond based on the risk tolerance is as follow:-

Very conservative: 90% bond and 10% equity
Conservative: 70% bond and 30% equity
Balance: 50% bond and 50% equity
Aggressive: 30% bond and 70% equity
Very aggressive: 10% bond and 90% equity

In conclusion, having both equity and bond in the investment portfolio can balance out the volatility in a portfolio. When combining the two instruments in a structured and calculated manner, the risk can be reduced.

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Saving insurance plan: is the return of saving insurance plan good?

Recently, I received a call from a bank mentioning a saving product which can offer me 20% guaranteed payout for the initial years if I save with them. No doubt, this is the feature of the insurance saving plan. Does the 20% payout (interest) sound too good to be true?

Well, a lot of people do not understand how saving insurance plan works. Let me illustrate using one of the sample from X company.

The above is a 5 years’ insurance saving plan. The client will need to pay RM 6,000 premium every year for continuous for 5 years (total premium paid is RM 30,000). The guaranteed cash payment from year 1 to year 10 will be RM 660 yearly (11% of the annual premium) while the guaranteed cash payment from year 11 to 20 will be RM 1,200 (20% of the annual premium).

Many insurance agents used the 11% and the 20% Guaranteed Cash Payment as the motivation for the clients to buy the saving plan as the “interest” is much more higher than the current fixed deposit. However, the truth is – the 11% or the 20% is based on the yearly premium of RM 6,000. At the end of year 5, the client would have already paid RM 30,000 (RM6,000 x 5 years). Hence the “interest” is not 11% (RM 660 / RM 6,000) but 2.2% (RM660 / RM 30,000). In addition, if the clients are receiving the guaranteed cash payment every year, at the end of maturity (after 20 years), the client will receive RM11,970 – RM 30,897 as the maturity benefit. Why it is a range and not the exact RM30,000 total payment paid? Because the final amount depends on the performance of the fund. Normally the insurance companies will invest the amount into largely bond funds for higher return than fixed deposit. Hence, at the end of maturity, the client is not guaranteed to get back the total payment paid, if he chooses to withdraw the guaranteed cash payment every year.

What if the client does not withdraw every year? Well, based on past record, the return would be roughly about 3% to 5% per year. It might be higher than fixed deposit considering the low interest rate currently. However, there is no liquidity of the premium paid. Client will definitely suffer loss if early surrender of the policy, i.e. before maturity date.

So, in term of return, saving plan is not something that generate high return. It might be worst than fixed deposit considering the paid premium cannot be withdrawn easily (without loss) before maturity.

In conclusion, one may ask – what is the benefit of this plan?

Saving plan provides liquidity of fund in case the death of the life assured. The saving plan is an insurance plan, hence, it will trigger immediate payout on life assured’s death to the nominee(s). Fixed deposit is not liquid upon the death of the owner. The amount saved in fixed deposit will be frozen until the grant of probate issued in this event. So, it is a plan to be considered in lieu of fixed deposit when one needs to pass down some money to the next generation without the need of will.
Saving plan is a forced saving effort which is good for retirement saving effort. Based on research, more than 50% of Malaysians have insufficient retirement saving. As early withdrawal will incur early surrender penalty, the money is not easily assessible to the payer. Hence, the payer is more likely to continue paying the premium and not easily withdraw the saving. The saving becomes part of retirement saving after 20 years.

So, with the above, understand your reason of buying. If you need liquidity during your lifetime, saving plan is not something that provides that. If return is important for you, you might consider investment instruments rather than insurance plans.

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Are you saving enough?

Saving is very important for financial planning. Expert recommends one should save at least 10% to 15% of his / her salary. This is why in Malaysia, there is a compulsory EPF saving (Employee Provident Fund) which forces the employees to save at least 11% for their retirement. Thank you for EPF authority who forces the employers to contribute another 12% of one salary to the retirement pots.

However, is it really enough? According to EPF, 70% of Malaysians who withdrew their savings at age 55 used it up in less than 10 years. Our life expectancy is also steadily increasing to about 75 years . Hence it shows that it is important to build enough savings to last our retirement years. If contributing over 20% is also not enough, then how much is enough? Many do not realize the sufficiency of the saving actually depends on the following:-

How long you work (how long you contribute to EPF)?
How long is your retirement life?
Your retirement lifestyle

The rule of thumb is you need to save 30% of your saving for 40 years to pay for your 20 years’ retirement life, considering your expenses during your retirement life is only 60% of what it costs during your working life.

So if you want to save less every month:-

You need to save longer / work longer (delaying your retirement is a need if you want to save less)
Reduce your spending during retirement life
You need to invest so that your saving grows

The next question is “Are you ready to work more and reduce your current lifestyle during retirement?”. If the answer is “no”, investment becomes a necessity if you wish to save less.

Don’t know how to start investment? Feel free to contact me via telegram or Facebook.

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One simple tool on Maybank website that can help you save money

Many people are having the problem of saving. They want to save and they know the importance of saving but in reality, they could not save. I once learn this from a motivation guru that if we want to change, we must target to change our action, then our behaviour and our attitude will change eventually. In order to start saving, don’t think about how hard it is. Start with the simple step. Once you start action, you will no longer think that it is hard. This is how our action changes our attitude and behaviour.

One tool that is available on Maybank website is “Goal Saving”. I found out this from one of my friends 2 years back and I have since been using this tool to automatic save the money that I won’t normally save. It looks something like this.

I hardly save money for leisure, hence I created a goal called “Play Jar” so that I will use the money for my holiday plans. I have another goal called “FFA” which stands for Financial Freedom Account. Once the small goal is reached, the money will be removed and transferred to my investment account. New goal will then be created again. The process will repeat.

To create goal, you just need to click the top right hand corner of “create goal” button, then the following box will pop up.

Select the type of goal and how you want to achieve it, either using a fixed amount every month or a fixed duration (which means your goal amount divide by the duration you set). Remember, the goal is to start the saving habit, once you have it, you will continue it. Happy saving!

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What does low OPR mean to you?

OPR is Overnight Policy Rate, which is the interest rate at which a bank lends to another Bank. It is one of the monetary policies to stimulate / contract the economy and is set by Bank Negara Malaysia (BNM). When the economy is over-heated, BNM will tighten the monetary policy by increasing the OPR rate. However, when the economy is contracting, BNM will loosen the monetary policy by reducing the OPR.

When the OPR is reduced, it has the several effects below which can spur spending.

Reduce the saving interest rate

When the OPR rate is cut 25bps, the fixed deposit and saving rate will be reduced accordingly. Bank savers will hence be disappointed as the interest received will be cut. The OPR cut, nevertheless, will not affect previous fixed deposits in place but on the new fixed deposits.

2. Reduce the loan interest rate

While the savers will be unhappy about the OPR rate cut, the loan taker will be happy as the loan interest will be reduced too. See the example below for better illustration:-

You can see that for 0.25% OPR cut, the loan taker of the loan of RM 500,000 is paying RM 71.50 less per month for his loan installment. Hence, following the OPR cut, people will spend more because less people will save in the bank due to low saving rate. Also, people will spend because it is cheaper to get a loan to purchase a house, a vehicle, etc. Spending will then stimulate the growth of different sectors which will in turn stimulate the general economy growth.

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What do you need to consider when buying property during low OPR environment?

Many may wonder whether this is the right time to buy a property because property prices go down during this pandemic period. In addition to that, the loan rate has been reduced which make loans more affordable to take. However, OPR is reduced because of the slowing economy outlook, hence it is not as simple to just make the buying decision based on the reduced interest rate and reduced price. This article explains several points that you need to consider when buying property during this low OPR environment.

Purpose of the property buying

There are 2 main reasons why people buy properties, i.e. for own stay or for investment. If you are looking to buy for own stay, now might be a good period to look for cheap property. In previous year, your ideal property was selling at a higher price, but now it no longer! Get what you want when it is cheap and now is the buyer market, you will have a better chance to negotiate even better price than the already low price.

If it is for investment, you need to do more market research before going in because the supply of the properties in the Malaysia market is more than the demand in general.

2. Type of property

At the moment, purchasing residential properties at selected area seem to be less risky compared to commercial properties. With the new trend of people working at home and profit loss during the lockdown period, many companies are closing down or downsizing while slowly changing their mode to work-from-home. Hence, the demand of commercial properties is lower. Purchasing a commercial property at the moment may mean lower rental or even no demand for your property.

Because there are many residential developments launched in the previous years, the oversupply of the residential properties is seen. However, according to Ifast research team (read more here), the property overhang for the lower end / affordable housings in Selangor area is lesser compared to other states and higher end units.

When you are choosing for the property investment, consider the type and location of the property. Make sure there is demand in your properties, else, you might suffer loss at the end with no demand or low rental.

3. Future income stream

When people think that it is now very affordable to take up a loan when the OPR is low. However, when the economy is recovering, BNM might increase the OPR rate several folds. Do consider the increase in OPR and check whether you can afford to pay the increased loan installment in the years to come. Make sure you have stable income stream(s) for the coming years before you make a huge commitment to buy a property.

You can always start from lower end residential property purchase with lower risk rather than purchasing a big unit during this period.

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What are the millionaire’s habits?

As explained in the previous article before (read here), becoming a millionaire is not difficult at all as long as one started investment earlier. But, you will still realize that many Malaysians still are not able to achieve RM 1 million saving. Researches show that it is mainly due to the habits and the attitude towards the personal finance. Hence, this article is to show what habits millionaires have to make them millions:-

Saving and investment: Millionaires understand the power of compounding interest. They will save and invest their monies to make their monies work harder for them instead of just sitting in the fixed deposit to get the negligible interest rate.
Pay themselves first: Millionaires understand they need to set aside the money to prepare for wealth growth before spending.
Spend on assets and not liabilities: Millionaires understand assets will grow their wealth while liabilities will reduce their networth. They will buy spend more on assets so that their wealth will start to increase over time.
Focus on the goal: Millionaires understand what they want in life. They focus in growing their wealth rather than focusing on spending money for enjoyment.
Know to defer enjoyment: Millionaires understand the importance of delayed gratification. They are willing to delay their enjoyment to a later stage.

All these habits and mindsets are important to be formed to progress towards a millionaire. Let’s work towards it by cultivating the above habits.

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How to become a millionaire?

Many wish to become a millionaire but very few know how to become a millionaire. This article shows simple tips on how anyone can become millionaire. It is not hard to become a millionaire. In fact, everyone should at least target to become a millionaire due to the current rate of inflation. Trust me, with the current inflation rate, if you are not a millionaire, you will be struggling. Let’s look at the calculation below:-

Target: RM 1,000,000

Years to achieve: 15 years

So how much you need to save per month to reach RM 1 million? It is depending on the rate of return. If fixed deposit with annual return of 2.5% is used, then the monthly saving required to reach the goal will be RM 4,585 for 15 years. If one chooses to invest in higher yield investment (say 9%/annum return), the monthly saving required will be much more lesser. It is merely RM2,643 per month for 15 years. Almost half of the amount!

While one might think that RM2,600 is hard to save initially, it is doable if one can control expenses and increase their income along the journey. Becoming millionaire will not be a dream but a goal to be achieved!

What if one has longer duration to accumulate the RM 1 million?

Target: RM 1,000,000

Years to achieve: 20 years

The monthly saving amount will be reduced. If one chooses to invest in higher yield investment (say 9%/annum return), one merely needs RM1,497 per month saving to become a millionaire in 20 years. Something which is not hard.

What are the lessons here as illustrated by the above few example? One needs to the following in order to grow the wealth:-

Invest rather than purely keeping the money in the fixed deposit
Start to invest as early as possible for the compounding interest to work like magic

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