(The strategies outlined here may not be suitable for every individual and are not guaranteed, whether expressed or implied, to produce any particular results but as a general guide. Specific professional advice for your individual circumstances is necessary in every investment.)
Investing in today’s word is far more diverse than, say, a generation ago when investors saw stocks and properties as the two major asset classes for investing. These days, the choices are aplenty. And so are the risks.
Volatility has become a common place in investing and risks, from the politically turmoil in the Middle East and North Africa to potential hyper-inflation threaten to throw a wrench in many sound investment plans.
So what can we do?
Number one is to first set your priorities right! Below is a general financial planning guide.
There are three broad categories of people:
1) The first group are those with a large amount of credit card debt
The priority here is to cut down that debt as much as possible before investing their cash on assets for capital return. There is no point investing as it will be very hard to get a return of 18% a year, which is the high annual interest rates being charged by credit card companies on debt rolled by card users.
2) The second group are those who don’t have credit card debt but have no spare or emergency cash at their disposal.
Individuals should at all times have savings equivalent to 6 months of expenses as a general guide. These savings are used to tide a person through bad times and emergencies and can be kept in Fixed Deposits account.
3) The third group are those who don’t have credit card debt and also have more than 6 months spare or emergency cash at their disposal.
Cash in excess of the 6 months emergency funds should be used to be invested on assets for optimal returns as money in FDs are below the rate of inflation.
It is important to keep debt at manageable level. As a rule of thumb, total monthly loan repayments should not exceed 30% of a person’s gross monthly income. Then we can talk about investments. What to invest in depends on one’s risk appetite. The rule is not to plough all your eggs into a single basket.
Blue Chip Stocks and Unit Trust
For the risk adverse, blue chip stocks that offer a good dividend yield would be a sound path. So is investing in unit trusts, especially on cost averaging method.
One class of investment that really dominated headlines at all times is property. Prices of homes in Malaysia rocketed from 2010 onwards, as much as 30% to 40% in hot areas. However, such a rise is not sustainable, and the appreciation in recent years is now tailing off. The bubble-like nature of the property sector is worrisome and not for the faint-hearted now. Although prices of property skyrocketed, it is not likely rents will follow suit, thereby we may see net yields falling instead. We ought to be very concerned when prices rise not in broad tandem with increases in household income.
Direct investment in the bond market in Malaysia is currently not accessible to retail investors. Those who invest directly in bonds are institutional investors and high net worth individuals.
Most retail investors entry into the bond market is via unit trust, where initial investment required is usually RM1,000 compared with the minimum of RM250,000 required for direct bond investment. Bonds are not without risks. When inflation and interest rates heat up, bond will lose value. Interest rates and bonds have an inverse relationship. In an environment of rising interest rate, it is good to par down on bond investments and vice-versa.
As the global economy grows, so will demand for commodities. In 2010, we have witnessed a strong rebound in the prices of commodities, especially of crude oil and crude palm oil. Many analysts believe the prices of these commodities would continue to rise as the global demand is expected to remain strong while their production would remain tight. But alas, the prices of crude oil has plummetted tremendously and is still very low at the time of writing.
Retail investors can buy directly into shares of companies involved in commodities business or buy into commodity themed mutual funds.
Another option is go into future or options. But futures trading is a high leverage investment, and not for the ordinary men on the streets.
One’s objectives of investing in foreign currencies have to be clearly defined. Some people invest in them as savings for children who will be pursuing studies overseas while some do it purely for investment gains.
Investment in foreign currencies has its inherent risks; the appreciation and fall of a currency depends on the country’s economic, social and political environment. So seek professional advice before going into this area except as a means of savings for children who will be pursuing studies overseas.
Many people regard gold as a safe investment, be it in the form of gold bullion coins or gold bars. Gold (and also silver) are seen as an investment tool offering long term protection against inflation and a hedge against the USD. However, in a market where equity markets rally and investors’ risk appetite grow, the appeal of precious metals softened.
Apart from buying physical gold, you can open up investment accounts at local banks where you can buy and sell gold at daily quoted prices using a passbook. However, this is not the same as investment in gold, but rather I consider this an investment in paper asset. Personally, I invest in physical gold rather than a paper asset.
This is one area that needs more study by the people on the street and I hope to write more in this area sometime in future when time permits. Personally, at this point of time, I feel silver has more upside than gold as it is more under-priced compared to gold.
And with both gold and silver at a 5 year low, as it is now at the time of writing (end 2015) it is a good time to buy into both gold and silver.
“Bitcoin” – this is the new investment buzzword that is creating a lot of attention and interest.
To have a better understanding of Bitcoin, it is better to understand the technology behind it called the “Blockchain”.
Like the internet (or your car), you don’t need to know how the blockchain works to use it. However, having a basic knowledge of this new technology shows why it’s considered revolutionary. Please go to my page “Blockchain Technology” for more information.
Before I end this posting, let me touch a bit on financial planning.
In the area of financial planning, most financial planners concentrate on just the three I’s , namely, Insurance, Investment and Inheritance.
A table cannot stand on one leg, nor two legs. On three legs, it can stand but not stable. To be stable, it needs all four legs.
Insurance agents concentrate on the first leg, i.e. protection. This is the most fundamental of the 4 legs. But be aware, most people buy the wrong type of insurance or not enough coverage.
Unit Trust agents concentrate on the second leg, Investment, and that only in a specific class of investment. Other classes of investments have been dealt with above.
Will Writers concentrate on the third leg, Inheritance, specifically on will itself, although Inheritance covers more than just having a will written up.
A full fledge financial planner covers all the above three legs but neglect the fourth leg, i.e. Income Diversification. We are not just to depend on a single source of income, and for most people this is a salary from a job or professional fees in the case of professionals like lawyers, dentists, doctors, etc. A dentist who injures his hand and needs three weeks to recuperate will not be able to attend to his patients and lose three weeks of income.
The first three I’s of Insurance, Investment and Inheritance are dependent on having continued streams of income month in and month out. For that, having income diversification is necessary, especially in creating an asset for passive income. This asset can be ‘money make money’ or ‘investment of time and effort to create passive income based on capital investments of others’.
Do touch base with me if you want to discuss more in this areas of the 4 “I”s.