Long Term Investing – How to make it simple
The quintessential of long term investing is to be attentive to factors that we can control, instead of being led by market’s short term direction or chasing after a rumoured hot tips. As an intelligent investor, we need to comprehend that making an intelligent fund or stock selection involves assessing its risks, cost and time required to generate a return instead of just engaging in crystal-balling its future returns.
Time is Money
Allow your investment to grow with time. Time is indeed our biggest ally or foe (if we squander it). Start our investing habits as early as possible. Begin in the early 20s if you can. But if you are not that young anymore, it is never too late to start either.
Imagine putting in an investment of RM10,000 at age 20, and earn an annualised return of 8%. By the age of 30, RM10,000 would have grown to approximately RM22,000. Leave it there for another 10 years, at age 40, RM22,000 would be approximately RM48,000.
Compounding effect is a miracle worker. Its best friend is time. Allow your money plenty of time to reap the benefits of the compounding magical wand. Start as early as possible.
Many investors lament that they got ‘burnt’ by the market. This is simply due to investors deviating from the long term investing principles. Many simply chase unrealistic returns through short term speculation. This short term greed is costly.
Hence, for our investment to grow healthily, there are a few principles to keep in mind.
- We must INVEST. The worst risk that can lose us our money is not making it work harder for us. Inflation will erode the value of our money.
- TIME is our ally (or foe). Start as early as possible. Let the effect of compounding works its magic for us.
- Take EMOTION out of the equation. Be objective in our investing decisions. Be realistic about our returns expectation. Don’t follow the herds. Warren Buffet once said be greedy when others are fearful, be fearful when others are greedy.
- Do your homework mathematically. Track your investment expenses such as sales commission, transaction cost, advisory charges etc.
- Just stay simple. We don’t need to be a rocket scientist and complicate matters. Know our investing objectives, time horizon and expected returns. With these, asset allocation becomes simpler, either Equities, Bonds or Money Market etc.
- Stick to the plan. Though periodically portfolio re-balancing is required, but stick to the overall plan.
Source: Common Sense on Mutual Fund – John C.Bogle
What is Investing?
When we acquire an asset or an item for the sole purpose of generating income or for capital appreciation for future, that is the basic meaning or definition of investment. It is a vehicle to generate or build wealth for everybody, regardless of your present wealth level. The not so wealthy can start small and increase their investment portfolio slowly or consistently.
Remember the cliché “work smarter not harder”? Investing is exactly about that, it is about how to make our money work (harder) for us to accumulate value in the future, instead of us just working harder for it. Hence, it is important for us to set our financial priority right. Example, do you spend that year-end bonus on a new mobile gadget or stash it away in an investment portfolio? Setting it aside would of course be a wiser choice, either as a retirement investment or children education in future.
Compounding and time value of money
Money earns interest. That is obvious, unless we keep them under our bed all the time. Interest reinvested with the original principal amount would earn more money. After a certain period of time it grows exponentially. As simple as that. It isn’t rocket science.
A person who starts investing RM1,000 per month at age 30, with an average annual return of 8% would have grown his retirement fund to RM1.49m at age 60. Meanwhile, for a person of age 40 investing the same amount, same average annual returns would retire only with approximately RM0.6m at age 60. A whopping difference of RM0.89m. That is what time can do to our money
It isn’t difficult to be a millionaire, right? We just need to start investing as young as possible. The compounding effect on money is the surest way to accumulate wealth, especially if we are doing retirement planning or achieving any other financial goals.
Which types of investment?
This depends on two factors; investment horizon and risk tolerance. Different investors have different needs. There are many types of investment to cater for different needs.
Shares/Stocks: Investors can buy shares of stocks listed in Bursa Malaysia. This gives the investor the opportunity to gain certain ownership of participating companies in Bursa Malaysia. An investor needs knowledge, skills and expertise in order to choose the right kind. The volatility of the stock market can be very stressful for some. However, in the long term, stocks are excellent investment to overcome inflation and to grow the purchasing power of our money through capital appreciation. Investor who do not want to subject themselves to the stress of managing their portfolio could engage professionals to manage their investment by investing in unit trust of mutual fund. Learn more about unit trust here.
Bonds: This is a debt instruments issued by corporate or governments to borrow money from investors. It promises to pay an fixed return over a fixed period of time. Bonds issued by Malaysian government is called Malaysian Government Securities (MGS). Islamic bond is known as SUKUK fund. Bond provides a stable income for more conservative investors. Bonds are excellent investment for retirees who want a stable income during their retirement periods.
Unit Trust or Mutual Fund: Unit Trust or Mutual Fund is a collective investment vehicle for people with similar investment objectives. These people pool their financial resources together and invest in a fund which is managed by a group of professional fund managers.
It is a long term investment scheme. It capitalizes on the power of compounding interest to generate investment returns for its unitholders. Hence, it is not suitable for people seeking short term gains in the financial markets. It is a financial planning vehicle which is often used for retirement planning, savings, children education planning and also for a stable income, such as bonds and deposits.
Unit trust invests in different assets classes such as securities or equities, bonds, properties, deposits and commodities. It provides investors with investment returns in the forms of dividends and capital appreciation. It provides investors, in the mid to long term (3-20 years), a better returns compared to normal bank savings accounts and fixed deposits.
Alternatives: Investor can also choose alternatives investment vehicles such as properties, Real Estates Investment Trusts (REITS), Money Market, Fixed Deposits and Exchange Traded Fund (ETFs).
Creating investment portfolios and diversification
There is no perfect system or methodology to build an investment portfolio. It depends on our investment objectives, our financial goals and investment (time) horizons. When we understanding these factors, it would allow us to plan our assets allocation wisely. Example, If we are planning for retirement, with an investment (time) horizon of 10 years and above, we have the time luxury to be a little aggressive in our approach. In this instance, we can invest in equities funds that would generate capital growth over the long term. Equities can help us to beat inflation and preserve the purchasing power of our Dollars or Ringgit. However, equities are more volatile and not good for those with short term financial goals. If we are planning for education, we may want to choose to balance it with equities and bond, and do not forget insurance. Education fund planning for our children is a different ball game. In this context, protection is as important as investment.
For mid-term financial objectives or goals, it is better to mix Equities, Bonds and Money Market. Those already retired and more concerned with steady income, Bonds and Money Market funds would be a wiser choice. When we are building our investment portfolio, we need to consider the following factors:
- What are our financial objectives?
- How much time do we have? What is the investment (time) horizon?
- What is the risk appetite?
We stress this again, let our money work harder for us. To achieve that, we need to have a plan and strategy.
- Analyse our risk appetite
- Analyse our investment horizon
- Invest objectively, do not let emotions overcome us when making decision. Otherwise, we should engage professionals to assist us
Warren Buffett, the famous and successful investor once said “ you don’t need to be a rocket scientist to invest….”. What we need is a financial goal, plan and discipline. Investment and retirement planning are extremely serious matter. Don’t leave our financial future to chance and emotions. Most importantly, do not procrastinate. Start young. Let time and the compounding effect work to our advantage.
Contact Us for Consultation
Investment Planning with Unit Trust In Malaysia
Unit trust or mutual fund is becoming more popular as a component of Malaysians’ investment planning. We provide here some information on the basics of unit trust or mutual fund.
What is Unit Trust or Mutual Fund
Unit Trust or Mutual Fund is a collective investment vehicle for people with similar investment objectives. These people pool their financial resources together and invest in a fund which would then invest the fund in securities, bonds or money market. The fund is managed by a group of professional fund managers.
Unit Trust or Mutual Fund is a long term investment scheme. It capitalizes on the power of compounding interest to generate investment returns for its unitholders. Hence, it is not suitable for people seeking short term gains in the financial markets. It is a financial planning vehicle which is often used for retirement planning, savings, children education planning and also for a stable income, such as bonds and deposits.
The funds invest in different assets classes such as securities or equities, bonds, properties, deposits and commodities. It provides investors with investment returns in the forms of dividends and capital appreciation. It provides investors, in the mid to long term (3-20 years), a better returns compared to normal bank savings accounts and fixed deposits.
Types of Unit Trust or Mutual Fund
This is the most common type. Investment in this fund allows investors to own units in securities or stocks listed in Bursa Malaysia. In the long term, investors earns dividend and profit from its capital appreciation. Equity is a excellent investment for those doing retirement planning or saving for children’s education in the mid to long term.
There are many different types of equity funds to cater to investors’ risk appetite. There are Equity Local Fund, Regional Fund, Balanced Fund, Mixed Assets Fund, Index Fund that tracks the performance of Bursa Malaysia and Shariah compliant funds to cater to the needs of Muslims. Of course there are also funds that invest in international markets such as US, China and Australia. Some of the equities funds are also approved for EPF–MIS (Member Investment scheme).
Equities provides better investment returns compared to savings and fixed deposits. Over the long term, this investment preserve or better the purchasing power of investors’ funds against inflation.
Bonds or Fixed Income
This is also known as Fixed Income Funds. It is a debt instruments issued by corporates to borrow money from investors. It promises to pay an fixed return over a fixed period of time.
Bonds issued by Malaysian government is called Malaysian Government Securities (MGS). Islamic bond is known as SUKUK fund. Bond provides a stable income for more conservative investors. Bonds are excellent investment for retirees who want a stable income during their retirement periods.
This is short term deposits funds. It is very low risk and highly liquid. This fund invest in short term debt instruments that can range from several days to less than a year. This is an excellent investment for short term and risk averse investors.
REITS (Real Estate Investment Trusts)
This fund allows properties lovers to own some of the best properties in the Malaysia! By investing in units in REITs, small investors would gain exposure in the property market. A choice to diversify their investment portfolios.
As the name suggests, it is a fund with a mixed of equities, bonds, money market etc. It provides diversification and reduces risks for investors.
This is a shariah compliant fund, catering to the investment needs of Muslims. This fund does not invest in businesses involved in non halal products such as gambling, alcohol, non halal food and non-Islamic financial institutions.
BENEFITS OF INVESTING IN UNIT TRUSTS OR MUTUAL FUNDS
Investing involves a certain amount of risk. Individual investors would require knowledge, expertise, time and objectivity to manage their investment portfolios successfully. Unit trusts or mutual funds offer investors many benefits as listed below.
- Affordability – Investors can start their retirement planning, children’s education planning or any other financial goals planning with as little as RM100.
- Diversification – As the saying goes, don’t put your eggs in one basket. Unit trusts or mutual fund spread and lower the risks for investors.
- Liquidity – Investors can buy and sell easily, as compared to investment such as property. Investments that are not liquid pose additional risks to investors.
- Professional Fund Management – Unit trusts or mutual fund is managed by trained professional. They relieve investors of the stress and subjectivity or emotions involved in managing your own investment portfolios.
- Wholesale investment cost – When investing directly or individually, investors face cost, brokerage or fees that would likely be higher. Unit trusts offers economics of scale.
- Regulatory – Unit trust industry is a highly regulated industry. It is regulated by various regulatory bodies such as the Securities Commission. Hence, investors can be rest assured that their retirement fund or children education is invested in a safe investment instrument.
Many Malaysians believe that they do not have enough saved for retirement. According to reports, 68% (2/3) of EPF members have less that RM50,000 in their EPF savings when reaching 54. Most of them, after withdrawing their EPF savings at age 55, spend their savings in less than 10 years.
As life expectancy is improving due to better living conditions and healthcare, it is advisable that we start our retirement planning as young as possible. Average male Malaysian is expected to live 72.5 years and female 77.4 years. Hence, it is of paramount importance that Malaysians prepare themselves well for retirement. Capitalize on retirement initiatives such as Private Retirement Scheme (PRS), Private Retirement Scheme – Youth (PRS-Youth) and EPF-Member Investment Scheme. EPF-Member Investment Scheme is a scheme approved by EPF, allowing members to invest certain portion of their savings in approved funds to boost the value of their retirement funds.Contact or WhatsApp +60123898648 for more professional consultation.
An often-asked question is how do I build my mutual fund or unit trust portfolio for my retirement planning and children’s education?
In this brief discussion, we will discuss the 4 most basic funds for investment planning. They are Equities, Bonds, Money Market and Balanced Fund.
- Equities funds are funds that invest in stocks. In general, these funds’ objective is to generate long term capital growth. Of course, there are many different types of equities funds. That would be a topic for another discussion.
- Bond funds are debt instruments issued by governments or corporates. It promises to pay a certain return upon maturity. Bond funds provide a steady stream of income for investors.
- Money Market Fund is a short-term debt instrument. It is placed with financial institutions as deposits and in government bills. It is a safe investment vehicle for those who are extremely concerned with capital preservation. Money market funds do not earn investors high or substantial returns, but it still provides a return that would be higher than putting money in savings account or fixed deposits.
- Balanced Fund, as its name suggest sought to provide a balanced investment spread for investors. It is primarily invested in equities, bonds and money market according to a certain asset allocation ratio. Its objective is to provide a steady stream income and generate capital growth over the medium and long term.
There is no perfect system or methodology to build an investment portfolio. It depends on our investment objectives, financial goals and investment time horizons. Understanding these factors would allow us to plan our assets allocation wisely. If we are planning for retirement, with an investment (time) horizon of 10 years and above, we have the time luxury to be a little aggressive in our approach. In this instance, we can invest in equities funds that would generate capital growth over the long term. Equities can help us to beat inflation and preserve the purchasing power of our Dollars or Ringgit. However, equities are more volatile and not good for those with short term financial goals. If we are planning for education, we may want to choose to balance it with equities and bond, and do not forget insurance. Education funds planning for our children is a different ball game. In this context, protection is as important as investment.
For mid-term financial objectives or goals, it is better to mix Equities, Bonds and Money Market. Those already retired and more concerned with steady income, Bonds and Money Market funds would be a wiser choice.
In conclusion, building an investment portfolio depends on the following factors:
- What are the objectives?
- How much time do we have? What is the investment time horizon?
So, embarking on this journey requires us to know what we want in our retirement or the needs of our children’s education.
Source: Investopedia.com and moneycontrol.com
According to a report Malaysians are aging fast. By 2035, 15% of our population would be 65 years old and above. Life expectancy is rising due to better living standards and healthcare. A male life expectancy is estimated at 72.5 years and 77.4 for females.
Aging is a process none of us can escape. The million-dollar question is are we prepared financially to live longer? According to EPF, 68% (2/3) of EPF members have less than RM50,000 in their account! That would mean a monthly budget of RM320.5 per month to spend if you retire at 60 and live to 73 (RM50,000/13years/12months)!
Retirement is serious business. Not just fun, sun and vacation, unless you’re financially prepared. If you are in your 40s or even 50, approaching retirement, perhaps you should start checking out these items.
- Define what retirement means to you. Does it mean working less, working part time or just not working at all? Whichever definition is your retirement, have you done enough savings or investments to live it out?
- What would be my monthly expenses during retirement? Do I have enough fund? Do I need to do more savings now? Do I need to do more investments to grow my retirement nest eggs?
- Where or What would be the source of my income during retirement? EPF? Investments, e.g. unit trusts/mutual fund, stocks etc? Passive income, e.g. rental from properties or businesses?
- Do you need to relook or review your savings and investments strategy? How to grow your nest eggs? Have you explored avenues such as Private Retirement Scheme (PRS), EPF-Member Investment Scheme (MIS), Unit Trust or Mutual Fund, Insurance etc.
- Get professional help. Professionals are trained people who would assist in monitoring our investments. They take away the ‘emotions’ element in our investment decisions, which is always the biggest killer in our financial planning.
In conclusion, retirement planning is an extremely serious matter. Don’t leave it to chance or emotions. Most importantly, do not procrastinate.
Contact or Call +60123898648 for more professional advice now.
*Information sourced and summarized from Investopedia.com and thestar.com.my