Rightways: Personal finance

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Monday, June 12, 2023

Financial management in the current environment

Learn new ways to budget, save and invest

“Avoid free/paid courses given by ‘investment guru’ who are not professionally qualified. The public must be aware and know how to differentiate them.’’- Kimberly Law

LOSING money is the hardest misfortune if you have just enough income for survival.

Many people have fallen victims to scams and have lost money in a bad investment.

Some have lent money to others but the loan was not repaid.

There are many reasons why people lose money and in the current times, every ringgit counts.

The costs of buying groceries, clothes, medical supplies and even essential body care items have risen so much that at the end of the month your salary may not be enough.

It is no surprise that a survey by Capital Market Research Malaysia (ICMR) showed that 64% of Malaysians respondents, feel that they are either financially unstable or are living from salary to salary.

Even Deloitte’s recent survey has indicated that 65% and 70% of the local Gen Z and millennials are living from hand to mouth. The global numbers are 51% and 52 respectively.

The majority of those within these categories report suffering from mental stress with regard to their finances.

It said there are still gaps between awareness and application when it comes to good savings behaviour.

There are gaps in financial literacy in the country and the rising rate of people falling to scams is also a concern.

Financial literacy is about how you budget, save, build credit, borrow, repay debt and invest to grow money.

If you want shortcuts by hoping your money will double or triple in the shortest amount of time then you ought to ask yourself if that is really possible or if it is part of a scam.

Everyone knows how to manage money, but the question is how effectively is it managed and whether you are making your money work for you.

There are many management and personal finance courses available to improve your financial literacy skills.

Some are offered free and some charge a fee. It is not wrong to learn and improve one’s skills even though you may be an expert in money management.

Several websites offer personal finance, money management courses available. Some are free, others charge less than RM100.

Some of the sites that offer courses include Udemy, Coursera, LinkedIn.

Often in a few hours of online learning, you will be able to create a format and update your budget or even create a plan using the tools they provide to help you reach your financial goals, according to a report.

However, Uno Advisers Sdn Bhd licensed financial planner Kimberly Law said she would avoid the free courses offered by people who are not from the industry.

“Avoid free/paid courses given by ‘investment guru’ who are not professionally qualified. The public must be aware and know how to differentiate them.’’ she said.

She recommends those interested to attend reliable courses from institutions such as the Financial Planning Association of Malaysia (FPAM) and the Malaysian Financial Planning Council (MFPC)

She says they offer some paid programmes while others are offered free to the public for financial literacy enhancement.

For her, the best way to get free financial education is to attend/listen to events/programmes organised by FPAM/MFPC and that are offered together or with the blessings of the industry regulators such as the Securities Commission and Bank Negara.

These organisations will get professionals to volunteer to offer/teach the programmes.

Some people felt that basic money management courses should be offered in schools to help children prepare for their future. This will surely benefit the larger school going population.

Even if it is not part of the syllabus, it can be a supplementary programme offered for a limited period of time every year at schools.

Law believes the syllabus for the young should include basic money management skills such as basic training or exercise on budgeting, managing expenses and planning that will be useful in their management of money and investments.

This will certainly raise the financial literacy rates over time in the country.

Even if you are doing well in your money management skills, it doesn’t hurt to enhance and learn new ways to budget, save and invest.

But don’t fall for courses that will make you invest even before you can learn something from it.

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Saturday, January 9, 2021

Generating sustainable retirement income

Many Malaysian are EPF contributors and have FDs as well. "You will never understand how bad the feeling is when you have to break your fixed deposit to cover your living expenses."

ONE of the top financial concerns of retirees is running out of money.

Whether you were an executive earning a reasonable income, or if you are making top dollars as a businessman, the fear is still valid.

For example, Tommy, who left the working world soon after selling his factory to a European multinational corporation. Tommy shared during one of our meetings that he was golfing every week and globe trotting almost every other month.

However, there was a problem that greatly bothered him. He found that he was dipping into his fixed deposit every now and then just to maintain his interesting lifestyle.

“Yap, you will never understand how bad the feeling is when you have to break your fixed deposit to cover your living expenses, ” he said.Combing through all of his finances, we discovered that Tommy’s lackadaisical attitude was to be blamed. He has not been paying enough attention to invest and generate income from the RM12mil nest egg that he had painstakingly accumulated. His investment portfolio was a mess.

Over the years, he invested in a few properties but never really bothered to oversee them. When tenants left, he didn’t make an effort to secure new tenants. In fact, some properties were even sitting vacant and idle. His excuse? He was too busy running the business.

Yap Ming HuiYap Ming Hui

Tommy has also invested in some shares and unit trusts but he seldom monitors and reviews their performances. Imagine his surprise when he went looking for some extra cash but discovered that most of the investments were not making money. Prior to meeting me, he couldn’t decide whether to sell or to keep those underperforming investments.

Consequently, the bulk of Tommy’s wealth is in fixed deposit. The trouble is the interest income from fixed deposit barely covers the impact of inflation. As such, if Tommy continues to spend on his interest income, he will risk having the principal depleted.

Asset rich, income poor

Tommy’s problem is a typical case of “Asset Rich, Income Poor.” His situation is definitely not unique. In fact, I find most self-made millionaires or business owners, typically strong at creating wealth from their business or professional career, but poor at generating income and gain from the created wealth.

For one, all the time spent ensuring their businesses succeed also takes them away from making sure that the wealth created is optimised.Let’s examine Tommy’s assets and see how it measures up (see chart).

The RM6mil in fixed deposit generate approximately 2% interest income. However, notice that the 2% of interest is not sufficient to offset the 4% inflation provision. As a result, there is negative net income coming from Tommy’s fixed deposit asset.

Tommy’s properties are worth RM3mil and only generates RM50,000 in rental income per annum. Nevertheless, this can be considered a net income because inflation will be hedged by capital appreciation (at least 4% per annum) of the properties.

The RM1mil in shares gives a total return of 5%. Factoring 4% inflation, the actual income received from share investment is RM10,000.

Unfortunately, the RM2mil unit trust investments didn’t offer any returns. After inflation provision, his unit trust investment has a net income of RM80,000.

The reality is if nothing is done now, Tommy’s wealth will continue to shrink by RM140,000 a year once inflation is factored to the equation. How does this play out for Tommy? The fact that he needs RM360,000 a year to maintain his current lifestyle will not augur well for him.

So, how can you prevent from ending up in Tommy’s situation?

The optimisation measures

> Remember to review the performance of each of your investment asset classes. In order to generate more income and gains, be proactive in getting rid of poor quality and poor performing investments. Look at each investment and ask yourself, should you keep it or should you sell?

> Consider moving fixed deposit into higher return investment.

Any gains from your fixed deposit would probably be eroded by inflation, especially given the current low interest, which will probably persist for quite some time. After calculating and providing for your emergency fund cash reserves, the balance of your fixed deposit should be invested into other investments that can generate higher return and income to hedge against inflation.

> Diversify the source of retirement income

Even if one investment asset can give you a good income and hedge against inflation, it does not mean that you must bet all or the majority of your wealth in it. For example, property investing. Some investors have found success in it. They were able to generate good capital appreciation and rental income.

As a result, they put a majority, if not all, of their wealth into properties. It may sound logical at first but rental income is not sustainable in the long run. It is subjected to changes, some of which cannot be controlled. Therefore, the best practice is still to diversify your retirement income across different asset classes, like share dividends and capital gains, unit trust gains, bond investment gains, retirement income products and others, so that it is not badly affected by any one impact.

The ability to grow your wealth during retirement years is important. Just because you have stopped working, it does not mean your money should stop working too. The idea behind wealth optimisation is to ensure that you can upkeep your retirement lifestyle and protect your wealth from inflation.

Ideally, one should get a plan done a few years prior to retirement to see how your retirement income would play out. After all, you wouldn’t want to have any unpleasant surprise, like in Tommy’s case. When you have time on your side, you can improve your investing skills and adjust your retirement plan accordingly while still in your active income earning years.

Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information https://www.thestar.com.my/business/business-news/2021/01/09/generating-sustainable-retirement-incomeshared is therefore strictly at your own risk.

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Sunday, July 22, 2018

The rich are becoming richer

They are becoming richer at a faster rate too

DON’T the rich always grow richer, while the poor well, remain poor.

If you’re already disheartened, it gets worst. The rich are getting richer, and at a faster rate too.

A 36-page report released by the Boston Consulting Group (BCG) last month showed that global personal financial wealth grew by 12% in 2017 to US$201.9 trillion.

This total, roughly 2.5 times as large as the world’s gross domestic product (GDP) for the year (US$81 trillion), more than doubled the previous year’s rate, when global wealth rose by 4%.

It also represented the strongest annual growth rate in the past five years in dollar terms.

“The main drivers were the bull market environment in all major economies, with wealth in equities and investment funds showing by far the strongest growth and the significant strengthening of most major currencies against the dollar,” said BCG in the report.

The increasing millionaires and billionaires now hold almost half of global personal wealth, up from slightly less than 45% in 2012, says BCG. In North America, which had US$86.1 trillion of total wealth, 42% of investable capital is held by people with more than US$5mil in assets. Investable assets include equities, investment funds, cash and bonds

In terms of asset classes, US$121.6 trillion (60%) of global wealth took the form of investable assets – mainly equities, investment funds, currency and deposits, and bonds, with the remaining US$80.3 trillion (40%) held in non-investable or low-liquidity assets such as life insurance, pensions funds, and equity in unquoted companies.

Residents of North America held over 40% of global personal wealth, followed by residents of Western Europe, with 22%. The strongest region of growth was Asia, which posted a 19% increase. All wealth segments grew robustly, but high growth rates were especially prevalent in the uppermost wealth segments.

The market sizing review encompasses 97 countries that collectively account for 98% of the world’s gross domestic product.

The personal wealth bands are generally measured as such:

1. Retail: below US$250,000

2. Affluent: between US$250,000 to US$1mil

3. Lower High Net Worth (HNW): between US$1mil and US$20mil

4. Upper HNW: between US$20mil and US$100mil

5. Ultra HNW: above US$100mil

Everybody is getting richer

The US is home to the largest number of people with more than US$20mil. Globally, the classes of the ultra-rich are expected to reach 671,000 by 2022.

Meanwhile, the Middle East is the region with the greatest share of wealth held in investable assets US$3.1 trillion of a total US$3.8 trillion. Western European residents held 56% in currency and deposits, while in North America the attention was on equities and investment funds, with 62% of US$47 trillion of investable wealth parked in those assets.

Should personal wealth creation continues at the rate of the past few years, BCG forecasts a compounded annual growth rate of about 7% from 2017 to 2022, in US dollar.

Events like stock market corrections and geopolitical uncertainties could knock that down to 4%.

In a worse-case scenario, such as a major economic crisis, global wealth might produce a compound growth rate of only 1% over five years, the study found.

BCG says opportunities abound for wealth managers seeking to increase their focus on different client segments.

For example, despite being far apart on the wealth spectrum, both the above US$20mil segment (upper HNW and ultra HNW) and the affluent segment are attractive because they represent very large wealth pools with high growth rates.

In 2017, the upper HNW and ultra HNW segments held more than US$26 trillion in investable wealth.

US residents held over 30% of this wealth, making the US easily the largest country of origin.

Other economic areas with large pools of ultra HNW investable assets include developing markets such as China (in second place), Hong Kong, India, Russia and Brazil, and developed markets such as Germany (in third place), France and Italy.

The share of wealth held by upper HNW and ultra HNW individuals varies widely aong the top 15 countries, ranging from 47% in Hong Kong to 8% in Japan.

Over the next five years, the upper HNW and ultra HNW segments wealth is likely to post the highest growth across all regions.

“Financial institutions looking to acquire and serve these segments will need to bring a broad international skill set to the table,” said BCG.

Affluent individuals

Afluent individuals is a segment whose population is burgeoning, hold a large and increasing amount of the world’s personal wealth at US$17.3 trillion or 14% of investable assets in 2017. (see chart)

This group of about 72 million people represents the growing middle class and many of its members will become the millionaires of tomorrow.

“We expect the wealth of this segment to post a compound annual growth rate (CAGR) of around 7% over the next five years, increasing its pool of wealth to nearly US$25 trillion. To successfully tap into this segment, wealth managers must have at their disposal an efficient service model and significant skill in and innovative digital technologies,” said BCG.

Entrepreneurs

The entrepreneur segment represents another attractive opportunity for wealth managers to tap into money in motion and provide needed services.

“We expect these individuals, who have equity in their own companies – recorded as unquoted equities (non-investable wealth) – to significantly increase their pool of investable assets, by liquidating some or all of their equity through sales and by earning new wealth through their entrepreneurial activities. The largest pools of entrepreneurial wealth are in the US, France, Italy and Japan.

Asia

Personal wealth in Asia grew by 19% to US$36.5 trillion, with residents of China holding nearly 57% of that amount, and the region registered per capita wealth of US$13,000. Although the asset allocation share of equities ad investment funds has grown over the past five years (from 22% in 2012 to 31% in 2017), Asia remains a cash-and-deposit-heavy region, with 44% of personal wealth held in this asset class. We project regional wealth to grow over the next five years at a CAGR of 12%.

Meanwhile Switzerland remains the largest offshore centre, domiciling US$2.3 trillion in personal wealth in the country. The next largest booking centres are Hong Kong (US$1.1 trillion) and Singapore (US$0.9 trillion) which have grown at yearly rates of 11% and 10% respectively – more than three times the rate (3%) of Switzerland over the past five years.

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Thursday, November 30, 2017

EPF investment income rises 5.13% in Q3 to RM12.95 bil, has benefited from overseas equities

The Employees Provident Fund (EPF) reports an increase in quarterly investment income to RM12.95 billion for the third quarter ended Sept 30, 2017 (Q3 2017), despite recorded net impairment of RM791.55mil in the third quarter, more than double the impairment made a year earlier. The EPF posted a 74% surge in investment income to RM11.8bil in the first quarter and a 36.6% growth to RM11.51bil in the second quarter.

KUALA LUMPUR: The Employees Provident Fund (EPF) today reported an increase in quarterly investment income to RM12.95 billion for the third quarter ended Sept 30, 2017 (Q3 2017), up 5.13 per cent, from RM12.32 billion recorded during the same period last year.

“The EPF’s overall portfolio performance has benefited from the rally in overseas equities markets in the third quarter of 2017,” Investment Performance, Deputy Chief Executive Officer (Investment) Datuk Mohamad Nasir Ab Latif said today.

He said the pension fund did not see similar returns from the domestic equities market as the FBM KLCI performance was flat compared with other markets, which recorded between two and five per cent growth.

The EPF recorded a net impairment of RM791.55 million, in the quarter under review, in accordance with the Malaysian Financial Reporting Standards (MFRS 139), and this was higher compared with RM349.59 million recorded in the same quarter last year, he said in a statement today.

This is due to the higher provision recorded for domestic equities in the telecommunications and oil and gas sectors.

In the third quarter of 2017, equities, which made up 41.86 per cent of EPF’s total investment assets, contributed RM7.91 billion of income or 61.09 per cent of the total investment income.

The income recorded was 12.75 per cent higher than RM7.02 billion recorded in the corresponding quarter in 2016, he said.

As at September 2017, a total of 50.45 per cent of EPF’s investment assets were in fixed income instruments which recorded an income of RM4.49 billion, equivalent to 34.63 per cent of the total quarterly investment income, said Mohamad Nasir.

Out of the RM4.49 billion, Malaysian Government Securities & Equivalent recorded RM2.17 billion in the third quarter of 2017, an increase of 10.96 per cent or RM213.98 million, from RM1.95 billion recorded in the same quarter in 2016, in line with the growth of the portfolio.

Loans and bonds, however, generated lower investment income of RM2.32 billion compared with RM2.56 billion in the same quarter last year, he said.

Investments in Money Market Instruments and Real Estate and Infrastructure each represented 3.53 per cent and 4.16 per cent of total investment assets, and contributed an investment income of RM274.27 million and RM263.83 million, respectively, in the third quarter of 2017.

“Our current investment in money market instruments is above the targeted three per cent under the Strategic Asset Allocation due to the ongoing regulatory restrictions in new overseas investments.

Over the long-run, the EPF must continue to expand our foreign assets portfolio as it is key to our diversification and allows us to meet our return targets,” said Mohamad Nasir.

As at Sept 30, 2017, the EPF’s overseas investments, which accounted for 30 per cent of its total investment asset, contributed 48 per cent to the total investment income during the quarter.

Diversification into different asset classes in various countries and currencies had helped the EPF to record higher income for the quarter, despite a significant difference in market performance, globally.

Out of the total RM12.95 billion investment income for the third quarter of 2017, a total of RM860.83 million was allocated for Simpanan Shariah, which derived its income solely from its portion in Shariah assets, while RM12.09 billion income was allocated for Simpanan Konvensional, which is generated by its share of both Shariah and non-Shariah assets, he said.

The value of EPF investment assets reached RM771.20 billion, a 5.48 per cent or RM40.09 billion increase from RM731.11 billion, as at Dec 31, 2016.

Out of the total investment assets, RM370.10 billion or 48 per cent, were in Shariah-compliant investments and the balance in non-Shariah assets.

“We still have one more quarter before the year-end and we are confident that our diversification into various asset classes will enable us to meet our real dividend target of at least two per cent above inflation over a three-year rolling period, for both Simpanan Shariah and Simpanan Konvensional,” he added.

The EPF posted a 74% surge in investment income to RM11.8bil in the first quarter and a 36.6% growth to RM11.51bil in the second quarter.

Source: BERNAMA

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