March 2021

The formula of wealth

I recently learnt about a formula of wealth via a book authored by Rob Moore. So, I’m sharing some insights I got from the formula he shared in the book:-

Wealth = (Value + Fair Exchange) x Leverage

It is interesting to note that leverage is part of the formula. I realized that the inflation is rising too fast in the modern world currently, hence we require at least a bit of leverage to speed up the wealth creation process. If there is no leverage, perhaps there is no wealth at all. As long as the wealth is created slower pace than the inflation, our wealth is in fact decreasing. Leverage can come in the form of leverage on other people’s money, skills and time.

Value is the value of service we provide to others. Wealth cannot be built without active income. We need to trade our time / service to get some forms of active income initially before we can leverage on other to help our money works faster. Once we have some savings from our active effort, we can then channel our money on investment (leverage on other successful businesses). Read here for an article on this topic.

Fair exchange in the book refers to give and receive fairly. Products / services that we offer shall be in fair price. Also, we must also learn to receive the fair compensation. If we purely know how to give but unable to receive, we will be poor. If we only know how to take from others without serving, the money transfer will soon end as no one will be willing to give continuously without receiving.

In conclusion, money moves from those who value it least to those who value it most. Start to create more value and the equivalent amount of money shall flow back to you.

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Withdrawing your EPF savings via I-sinar?

Last month, the EPF authority has removed all conditions to withdraw EPF monies in Account 1. For those with balance more than RM 100,000 in their EPF account 1, they are allowed to withdraw up to 10% of their account 1 balance. For those with balance less than RM 100,000 in their EPF account 1, they are allowed to withdraw max RM 10,000. These withdrawals will be disbursed in stages over 6 months.

However, the question is whether you should withdraw the EPF retirement money?

According to EPF data, 65% of contributors below 55 years old had less than RM50,000 in savings. Around 60% of retirees used up all their savings within three years of retiring. Many published articles have shown that most Malaysians cannot afford to retire.

The reason why the government limit the withdrawal of the monies within the EPF account all this while is to ensure Malaysians have more locked savings for their retirement stage. Now, due to pandemic, it seems to be good to allow Malaysians to withdraw their retirement saving before age 55, however, the drawbacks could be severe if the withdrawal if not handled correctly.

Rules of thumb:-

If you do not need this money to survive, do not withdraw the money so that you can have more savings for your retirement.
Do not withdraw the money for purchase of non-essential products especially those products which cannot generate income for you now and in the future.
Never withdraw money to pay off loans that have interest lesser than 5%. EPF generally distributes dividends of 4-5%. If the loan interest is below 5%, i.e. PTPTN loans, housing loans, it is not recommended to withdraw.
Never withdraw money and keep the money in the saving account. Some may have the idea to have more monies sitting in their saving account so that they feel more comfortable. Saving accounts generally have very less interest and it is not productive to keep the long-term retirement money in the saving accounts.
If you are withdrawing the money to invest in the stock market, you need to ensure you have the appropriate skills and knowledge to invest and trade. Do not simply listen to rumors and bet on certain stocks.

Hope the above will give a rough idea for you to decide whether you should or should not withdraw your EPF saving.

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5 Keys in Managing Personal Finance

Personal finance is not just building wealth. It comprises wealth protection, wealth creation, wealth accumulation, tax planning and wealth distribution.

These 5 elements are crucial to build successful personal finance. Try to imagine one who only focuses on wealth protection. He is so scared about losing his wealth, how can he have more money? He would have spent more money buying insurance at low return which will not be able to cope the high inflation rate during the retirement years. Similarly to one who only focuses on wealth creation, if he does not accumulate and save, there will be no wealth despite his high earning capability.

Hence, to manage personal finance well, here are the 5 keys:-

Have a series of financial goals: Examples of financial goals are education funding and retirement funding. Some may want to have luxurious home or cars. Having specific financial goals will help to motivate one to prioritize the spending and investment. One who desires for better lifestyle will have higher financial goal so he / she needs to be more discipline in spending and investment than the one who desires the normal lifestyle.

Have extra cash flow every month: cash flow is the key in personal finance. One needs to be able to have extra saving every month. With extra cash flow, things can be planned. The extra cash flow can go into wealth protection or investment for accumulation purpose.

Investment planning: the investment strategies will depend very much on financial goals. If the gap to achieve the financial goals is huge, one requires to invest more aggressively or longer period of investment. If the gap to achieve the financial goals is very small, one can just save in risk-free financial instrument like treasury note, fixed deposits, etc.

Watch the debt level: debt is key in building wealth. Knowing which debt is good debt and bad debt is important. Bad debt will take the cash flow out from one’s pocket every month while good debt will give cash flow to the borrower. If one wants to build wealth fast appropriate level of debt shall be required.

Getting help from experts: we cannot be the master of everything. Sometimes we do need experts to help us do tax planning, will planning, trust planning. If we are having unresolved loan issue, we shall also look for consultant to help us do loan consolidation.

Hope the above 5 keys can help you to excel in your personal finance.

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The Source of Wealth Building

Learning from the richest from world, the wealth can mainly be built from 2 sources. One is building a successful business with high valuation and second one is building profitable investment portfolio by leveraging on other successful businesses.

If one desires to be very rich, one cannot simply rely on working to get higher salary and save more. Even becoming a self employed does not necessarily mean an effective way in building wealth. One needs to build the business to be automated and having high valuation to be able to increase his / her wealth. In fact, the wealth built through business can only be confirmed when the business is sold or listed. Else, the wealth is not retriable when it seems to be only on paper that cannot be realized.

The world wealth is being built at a pace that is so fast compared to last century. If we notice, the inflation rate is getting higher and higher. It is a sad fact to know that the salary increment mostly cannot catch up with the inflation rate. This is why we feel that the things are getting more and more expensive, and it is harder to afford a house compared to a decade ago.

Because of the high speed of inflation and wealth growing, one needs to be aware of what needs to be done on building his / her own wealth at least at the same pace. If others are growing their wealth at a faster pace, staying on the same pace will mean he / she is poorer. Things will be getting more expensive.

Hence, it is important to stop and think about the source of wealth. One shall not only put the focus on the salary increment or expenses reduction. The focus shall now be more on channeling the extra saving to build wealth. The effective ways, from what is happening now, are building a listed company or invest in such companies on the secondary market. If we cannot build a listed company, at least we shall find a way to leverage on such companies through investment.

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Should you spend or save?

Financial literacy of Malaysians is low. Research shows that most Malaysians do not have enough for retirement and many millennials have high credit card debts. What is the root cause? The saving rate of Malaysian is too low. Malaysians are spending more than what it should be. Malaysians are also very optimistic about their future as they just believe that they will have enough in the future.

In order to decide whether you should spend or save, there should be a financial plan in place. Understanding your future earning capability is hence very important. Say for example, if one can only work until age 40 and will spend another 30 years not working, one needs to save more compared to the one who is working till age 60 and spend 10 years on retirement life.

Many Malaysians ignore the importance of financial planning until they are too old to work or stuck with heavy debts. At that time, it is too difficult to resolve the financial issue. When one is too old to work, can he still reverse the time to earn more or save more? When debts are piling, where can he gets money to pay off the debt?

While having financial plan in place will ensure one has the clarity how much he / she needs to save per month to have comfortable retirement life. He / she will then able to judge what item he / she can spend on. For example, if one realized that he needs to have RM 1 million to retire and he has 20 years’ time before he retires, he needs to save RM 4,167 per month or invest RM 1,700 per month at 8% annual return. If he cannot save and invest RM 1,700, he needs to find ways to increase his income or reduce his expenses. He then knows what he can spend per month. If one has no clarity of what amount he needs to save monthly, he is likely to spend more. It is not when the earning capacity is increased only one needs to do financial planning.

It is also not when there is saving only one needs to start planning. We don’t wait for problem to arrive only we are thinking about the solution, it is often too late and the problem might be too difficult to solve. We need to start planning to avoid the problem!

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What are the healthcare funds available in Malaysia market?

Health care stocks seem to be under spotlight during the COVID-19 pandemic period. Let’s have a look at various unit trust funds available in Malaysia for healthcare sector.

Affin Hwang World Series – Global Healthscience Fund

This is a feeder fund that seeks to feed into Blackrock Global Funds (BGF) – World Healthscience Fund. As of December 2020, this fund has major exposure for US stocks (approximately 67.7%) followed by Switzerland (8.1%) and China (5.1%). It has major exposure on Pharmaceuticals and Health Care Equip. & Supplies companies (more than 50%).

As of 11 March 2021, the past 1 year return of the fund is 18.15%. This fund has 5.5% initial sale charge and 1.8% annual management fee. It has a high entry investment level, i.e. RM 5,000 with subsequent investment of RM 1,000.

United Global Healthcare Fund

This is not a feeder fund and as of February 2021, the fund has major exposure for US stock (70.8%) followed by UK (5.81%) and Japan (4.55%). This fund has more exposure on biomedical companies than the Affin Hwang’s fund, i.e. 28.06% vs 13.5% in Affin Hwang’s fund. In terms of Pharmaceuticals companies, UOB’s fund has only 21.05% vs 30.1% (Affin Hwang’s fund).

As of 11 March 2021, the past 1 year return of the fund is 28.62%. This fund has 5% initial sale charge and 1.75% annual management fee. It has normal investment entry level of RM 1,000 with minimum RM 100 subsequent investment.

Manulife Global Healthcare Fund

This is a new fund recently launched by Manulife Investment Company. Hence the funds received are not fully invested yet hence no detail of holding and return are revealed.

This fund has 5.5% initial sale charge and 1.8% annual management fee. It has normal investment entry level of RM 1,000 with minimum RM 100 subsequent investment.

In conclusion, based on fund fact sheets available, United Healthcare Fund is cheaper to invest compared to other 2 healthcare funds available with better past 1 year historical return. Also, United Healthcare Fund has lower minimum investment entry of RM 1,000 compared to Affin Hwang’s fund.

If you are interested in the funds, please contact me.

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What to do with your investment when market corrects, when the bond yield hikes?

Last week, the general stock market is under the correction phase. Reporters, financial analysts and investment fund managers were saying that it was due to the increased bond yield. The investors fear that the government might increase the interest rate due to this faster than expected.

If you are selling your investment under such circumstances, you could be over-reacting. The US and the Asia market have been rallying up quite a lot since their lowest point in Mar 2020 last year. Periodic correction and market adjustment are expected. We cannot expect the market to keep going up without correction as it is an unrealistic expectation.

When the equity market is correcting due to the hike in bond yield, it denotes a good opportunity for us to accumulate value stocks or investments. We shall think about topping up or dollar cost averaging our investment than selling the investments (provided the investments are fundamentally good investments). Many researches have shown that equity market does better in higher interest rate environment than lower interest rate environment. When the economy is recovering, it is expected that the inflation will return. The government will increase the interest rate at some point of time in the future due to inflation. So, shall we need to worry about the market correction due to the bond yield adjustment? I leave the question for you to consider.

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What is the relationship among bond yield, inflation rate and bond price?

In layman term, bond yield is the “interest rate” which the bondholder will receive by investing in the bond. If the bond yield is 3%, it means the bondholder will be getting 3% return from the bond.

Bond yield and bond price has inverse relationship. When the bond price drops, the bond yield increases. Bond is issued at a fixed par value initially. Before the maturity date of the bond, the bond price is fluctuating according to the supply and demand of the market. If the demand is strong, the bond price will increase, i.e. can be higher than the initial issued par value, hence the “bond interest rate” (bond yield) will drop. Vice versa, if the demand of the bond is low, the bond price will drop to attract demand and hence the bond yield will increase.

For example, during the initial bond issue, Bond A was sold at USD100 at 5% coupon rate annually (USD 5 per year is given as “interest” to bondholders for every USD 100 bond). After a year of issuance, many bondholders of Bond A wanted to sell the bond and there were not many buyers around. Hence, the bond price of Bond A dropped to attract buyers. New bond buyers could buy the same bond at, say USD 90, lower than the initial price of USD 100. Considering the “interest” (coupon) is USD 5 per bond, the yield is no longer 5% but 5.55% (USD 5 / USD 90), an increase in the bond yield when the bond price dropped.

Bond yield is also greatly affected by the monetary policy – interest rate. The government normally increases the interest rate to slow down inflation. When the government announces higher interest rate, it means there will be higher saving rate and high borrowing rate. Corporates then tend to borrow less because the borrowing cost is higher. Savers will save more because the saving rate is higher. This will in turn curb spending and slow down the inflation.

When the interest rate is high, the bond yield will be high too. This is why, when the bond yield is climbing high recently, there is a fear that it was driven by high inflation rate. High inflation rate will lead to government increasing interest rate which will cause corporate borrowing cost to be higher and hence slow down the growth of the companies. It might in turn hurt the equity market. Read more about bond here and here.

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