April 2021

Leveraging on the successful sector

What is the best sector to invest in currently?

As you can see on many company earning news, many companies are making huge money despite the current pandemic. Those companies are mostly technology-based companies. The following shows the top 13 largest companies in the world by market capitalization in 2020.

Top companies in the world (market capitalization in 2020)

Source: https://www.statista.com/

You might notice that most of the biggest companies in the world are also technology-based companies, i.e. Apple, Amazon, Alphabet, Facebook, Alibaba, and Tencent Holdings. These are also the companies that contributed a lot of capital gain on investment, i.e. 62% over the past 1 year in the US market (see the table below).

1 year return for different sectors in US
Source: https://stockcharts.com/

Based on the historical return and the data of the growth of the companies, technology sector is a sector that should not be missed by investors. During the pandemic season, the technology companies are the enabler for effective communication in the absence of physical interaction. It is hence hard to be eliminated even if the pandemic is finally over. The virtual habits have been formed, people are used to using computers and phones.

Many may argue that the valuation of such technology companies is high. No doubt, for some of these companies, the valuation is over-valued. However, there are plenty of technology-based emerging companies of all sizes and start-ups as well to be considered for investments.

To tap on the emerging technology companies, there is a recent available unit trust fund in Malaysia which focuses on innovative technology fund called “Global Disruptive Innovation Fund”. The fund is focusing on 5 elements of technology, i.e. artificial intelligence, energy storage, DNA sequencing, blockchain and robotics. This fund does not focus on typical technology companies [FAANG – Facebook, Amazon, Apple, Netflix and Google] which the valuation is high but it focuses on alternative smaller, medium and emerging companies for better growth and opportunities. Apart from technology, the fund manager focuses on research to look for technologically-enabled innovation including fintech innovation, internet innovation, genomics innovation and industrial innovation. It also focuses on capturing early stage disruptors rather than matured and established companies to enable better growth in long term investment.

Something to note is that technology sector offers investors a lot of opportunities, but it is not without risks. Technology changes quickly and one-time leaders can fall behind quickly as well. Hence, when investing in this sector, proper diversification shall be done to mitigate risk. Take calculated risks while growing your wealth!

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What is your relationship with money?

Do you know that your relationship with money has a lot to do with your speed of wealth growth? What is the relationship with money then?

If you are having good relationship with money, it means that you are working well with money. You are neither obsessed with more money nor you dislike money. You love money but you are not emotionally tied with money.

For this group of people, they understand the value of money. They know how to earn more money as they spend time understanding the concept of active and passive income. Also, they are willing to spend on things they need to spend on because they are not too emotionally attached to having lesser money son buying things they need. They do not hoard money by simply saving the money in the bank because they understand they need to take certain risk to get higher return. Security is the opposite of freedom. A prison is secure, hence the prisoner has no freedom. Security and freedom cannot be achieved at the same time. When higher return is required, certain level of risks must be taken.

People who are not having good relationship with money are people who always avoid the financial topic because they either cannot cope with money issue or do not care about the money. This group of people hence cannot manage or do not manage money at all. At the same time, it can also be the people who are worried too much about money.

The people who cannot cope with money are generally compulsive spender. They like lifestyle and easily fall into the debt trap. Once they are in the debt trap, they will try to avoid the financial topic thinking that it will be resolved automatically in the future but in fact it gets worse.

The people who do not care about money are thinking money is unimportant. The thinking is mostly from their family history which they think that money is evil and hence it should not affect the important decision in life. This group of people will ignore the money management hence results in poor financial situation.

The people who are worried too much about money are generally compulsive saver. They are worried too much that they do not have enough money and require high security on their finances. Hence, they are always worried that they will lose their money in investment and are lack of confidence in achieving financial success despite they are saving a lot of money. Understand your current relationship with money and change the relationship for better wealth growth. If you are treating the money like your friend, your finances will be well. Do not treat your money like your master or your slave. Treat it well and you will see more coming to you effortlessly.

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What is financial freedom?

Recently, I have quite a bit of discussions with people on this topic. When I asked, “what does financial freedom mean to you?” Surprisingly, the answers are not the same from different people. Generally, there are a few definitions to “financial freedom”.

Some people define financial freedom as not having to worry about finances anymore. So when I asked more, they will answer that financial freedom means they are having enough income to cover their basic expenses. Say one needs RM 3,000 per month to pay for food, utility bills, rental, kids school education, he will achieve financial freedom when he gets the RM 3,000 income every month despite not working.
Some people define financial freedom as having the leisure to buy what they want. For example, one might want to have a luxury car, a big bungalow to be considered as financial freedom.
Some people define financial freedom as being able to finish paying off all the mortgages and loans such as car loans, house loan, credit card loans, etc. When there is no more loan, one is financially free as he / she does not need to worry about financial commitments anymore.

The usual definition of financial freedom is as follow: –

Monthly expenses = Monthly passive income

When one can achieve the above, he can be considered as achieving financial freedom. Some books will mention that this is considered as financial independence. Financial freedom will then be the next level above financial independence, means having enough money to buy what one needs and wants. Regardless the definition of financial freedom, it is important for one to recognise the importance of having sufficient passive incomes. This is the key to financial freedom.

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7 tips to save more money every month

As per the Ringgitplus Malaysia survey on Malaysian financial literacy, 21% of Malaysians didn’t save money at all. Here is the article to share with you some quick tips on how you can save more money every month:-

Do not order drink on your meal: A lot of us are eating outside during working hours. Drinks cost much more than you think. Saving the cost of the drink can help to accumulate more saving. You can also choose to downgrade your drink to plain water instead of ordering coffee, tea or carbonated drinks. Plain water definitely is healthier too.
Save money automatically: save your money every month through a system. Get your monthly auto-debit activated. When you don’t see the extra money, there is no chance for you to spend it. Read here for one effective tool that you can used to systemize your saving.
Unsubscribe for emails or shopping updates: If you are the one who always shop online, unsubscribe the promotion updates from the online shops, this can prevent you from buying unnecessary stuffs.
Pay off your credit card debts: credit card debt interest is sky high. If you are having unpaid amount on your credit card, your saving will be seriously affected. Pay off your credit card debts to save interest and you shall see more savings then.
Review your utility bills: many of the times, due to the market competitiveness, the telephone bills can be easily reduced. Check out the promotion of the few selected providers and find the most cost-effective phone subscription plans. For electricity, use energy saving electrical appliances to save electricity bills.
Have fixed budget for each categories of expenses: having a budget in place is like setting the ceiling on how much you can spend. Ideally, you can have x amount in x account for particular purpose so that your expenses do not exceed the budget set for a particular purpose. For example, all your cash are for food only, your touch and go balance is for your tolls. You can have debit card for shopping to limit spending.
Have shopping lists: sometimes, we tend to buy more than what we need. Having a shopping list can ensure we only buy what we have planned to buy.

Execute the above tips and see how much you can save per month!

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Should I consider buying an annuity insurance for my retirement?

Annuity is an insurance product that insures your income for life or a certain period of time. Annuity insurance used to be quite popular in the past used for retirement planning. Life insurance companies will collect lump sum or a series of installments from the insured and help them to invest. In return, the life insurance companies guarantee the fixed regular income for a period of time to the insured. In this article, we will discuss the pros and cons of an annuity insurance.

Pros:

Annuity insurance is good because the income is guaranteed for a period of time during retirement. Some annuity products will provide life time guaranteed income. Hence, it provides certainty of income during retirement life. The income is kicked start after certain years upon purchasing the insurance policy.

Comparing annuity insurance with normal investment, the return of annuity insurance is certain. There is no need to worry about market volatility and hence the retiree has the peace of mind on the market movement.

Cons:

Annuity insurance is a type of insurance and hence there are various costs involved, i.e. insurance agent commission, administration charges, insurance cost, fund management cost, etc. The return will not be high compared to pure investment scheme.

Annuity is suitable for people that cannot save regularly, no idea on how to invest or very afraid on market volatility. It provides a good solution to help people to save and withdraw retirement income systematically. The regular draw down feature of the annuity will prevent people withdraw excessively and finish off their retirement fund just few years after retirement.

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How to calculate your retirement fund by “multiply-by-25 rule”?

As per the Ringgitplus Malaysia survey on Malaysian financial literacy, 21% of Malaysians didn’t save money at all. This is one of the biggest reason why most Malaysians cannot afford to retire.

There are many ways to calculate the retirement fund required. The one requires the financial calculator will be the most accurate one. However, is there anyway you can calculate your retirement fund based on some simple rule of thumb? Yes, you can calculate using “multiply-by-25 rule”.

Based on this rule, the formula is: –

Retirement fund required = 25 x annual income required during retirement

For example, if Ali needs RM 50,000 annual income to survive, the retirement fund required is RM 1,250,000 (RM 50,000 x 25).

This is assuming for 30 years’ retirement with 4% yearly withdrawal. How does the formula works? Basically, you are saving 25 years’ of annual income to fund 30 years retirement. It is based on the assumption that the lump sum is investing at a reasonable return slightly higher than inflation. Also, it is assumed that the yearly withdrawal is only 4% of the lump sum. For example, for the first year of Ali’s retirement, he will withdraw 4% of RM 1,250,000 = RM 50,000.

If one requires to retire early and have more than 30 years’ retirement, the fund needs to be bigger. Also, as mentioned above, the retirement fund requires to be saving or investing in vehicles which generate reasonable return slightly higher than the inflation. If the retirement fund is saved in normal bank account with no interest or low interest, higher retirement fund will be required too.

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How should you react if you have a low salary offer?

During the pandemic, many Malaysians are losing jobs. Some struggle to find new job. Some found jobs but the salary offered is much lesser than what is expected.

During this current pandemic, not only the employees are suffering financially, the businesses are struggling to increase their business revenue. Even some businesses have revenues, the net profit might not be high. In order to maintain the profit margin, many businesses will find ways to reduce cost. The easiest way to reduce cost is by reducing the staff costs. The employees will be the first to suffer because offered salary will be lower than expected.

How should you react if you have a low salary offer?

Do not act immediately when receiving the salary offer. Take a few days to consider before rejecting the salary offer. This will be a more polite approach. Thank the company for the opportunity and inform what is the expected salary. You might be surprised they might call you in the future with the right salary offer.
Do not judge based on the salary offered. Look at the potential. If the company has career advancement potential, consider starting out with lesser salary and take the chance for better career advancement in the future.
Do not take it personally. Sometimes, low salary offer does not reflect your capability, especially during current pandemic period.
Take the chance to review the market offer. You can adjust your CV for the next job application.

Reject the offer after a few days telling the company about the minimum expected salary. Listen to their justification of the low salary offer to understand how you can improve at the next interview.

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Financial myth: student loan is easily affordable

Knowledge is power! We often hear this statement. Since young, we listen to our parents to get good grades in school so that we can get a good degree and a good job. Education is viewed to have a positive correlation with the ability to find employment.

When we are thinking for better education and we realize the cost is not cheap. Student loan then become the choice. It is a sad fact that before one even steps into the society to start earning money, he / she has already gone into a bad debt. After graduation, will one get a good job with good pay? Most people get basic starting salary, hence, it is often daunting to pay the study loan for the initial few years when starting out. It is important to choose carefully the degree programme and evaluate the student loan amount and the probable income from the chosen career path. Else, the student loans will very quickly become a burden.

Hence, student loan is not that affordable as we always thought. For some courses, the loan amount can be as high as a vehicle loan. It will take 10 years before one can fully pay off the loan. 10 years of commitment! Hence, if you are a parent, consider education fund planning when the kids are young. Never burden your children with student loan. If you are a youngster soon going to the university, assess your skill and passion, go into the course that you really like and choose the course properly based on your aspired career path. Getting a student loan to study something that you do not like will only hurt you more.

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Is bond worth investing in?

Investing in bond generally has lower risk than investing in equities (i.e. becoming the shareholder of the company. Because of the investment risk nature, investing in bond generally will yield lower return than investing in equities.

When investing in bond, if the bond is kept until maturity, the return is known / fixed. The bondholders are promised to get:

Initial capital: Assuming the bond is purchased from the primary market when the bond is first issued, the full capital used to buy the bond (excluding the service fee) will be returned to the bondholders. For those bondholders who purchase the bond from the secondary market after the bond is issued, they might get back more money (if they purchase the bond cheaper than the initial bond price) or less money (if they purchase the bond more expensive than the initial bond price)

Coupon: in layman term, this is called “interest payment” which the bond issuers (companies who issue the bond) promise to pay the bondholders for the sum borrowed. It can be in an annual mode, semi-annual mode or quarterly mode. The interest is fixed based on the initial bond price when the bond is first issued.

Some of the investors prefer to have certainty in their investment. Hence, bond products will be preferred. Bonds are available in Malaysia market with different currencies, e.g. China Yuan, Malaysian Ringgit, US Dollar, Singapore Dollar, etc.

The risk of investing in bond is very much related to the company’s financial position. If the company is strong in cash flow and has very less debt, the risk will be low. If the company is insolvent, the repayment of the bond might be affected. Hence, it is always good practice to diversify the bond investment into several companies to avoid concentration risk.

Whether or not it is worth investing in depends very much on the investors’ risk tolerance. If the investors want to have lower risk, bonds will be preferred. Investing in bond will give the investors more certainty in term of the return as it is fixed / known. If the investors want to get more return, equities shall be preferred as the return will be similar to what the businesses can generate in long term (business profits).

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How do companies raise capital for business activities?

Generally, businesses need capital to run. There are several ways which businesses can raise their capital for their business expansion plans: –

Raise capital by issuing more new shares: in this case, company will have more new capital injected into the business through distributing new shares. The investors who inject the capital via buying the shares will become shareholders of the company. Mostly, they will have the voting right during the annual meeting and they might be distributed dividends when the company has excess profits.

Raise capital by issuing preference shares: in this case, the investors who inject the capital will most likely be promised a certain percentage of return. The preference shares issued can be eventually converted to common shares, depending on the agreement between the company and the preference shareholders.

Raise capital by issuing bond: in this case, the companies are borrowing money for the businesses through bond instrument. The investors will normally be promised a fixed return every year (say, 4% to 8% depending on the rating of the bond) until maturity. On maturity, the initial borrowed amount will be returned to the investors.

Raise capital by taking loan: this is the most common method using by many SMEs. However, not all the loan will have attractive interest rate attached.

Generally speaking, the company has the lowest risk by raising fund via issuing new shares. This is because the company’s risk will be shared with the investors. The company does not need to return the money to the investors if the company does not make profit. The investors are also shareholders of the company. Hence, in view of the risks involved, the return of becoming the shareholders is higher if the company selection is done right.

The company will have the most risk with taking loan from the banks. Banks are secured creditors. Hence, when the company is insolvent, the company will first liquidate all its assets to pay off the loans before other preference shareholders and bondholders. The common shareholders will be the last who receive money. Bondholders shall have higher preference than preference shareholders on getting back the capital in the event of the company’s liquidation.

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