Investment and Finance

Hello everyone, 

I'm finally writing on my favourite topic - investment. 

I'm still in the intermediate stage of investing and I'm always learning new investment methods and truly the way you diversify your portfolio is very dependent on your risk appetite and I'm someone who has a low risk appetite, so maybe if you're new to investing, haven't really thought about it or have a similar risk appetite as I do, you might find this useful. 

Firstly, for starters, there are two types of broad categories of investments which is dependent on your goal - long-term and short-term investments. For long-term investments, typically, they're investments that are more than a year, they are higher risk investments because naturally if someone has more disposable income that they are willing to put a way for a longer amount of time, they would be willing to take higher risks for higher returns. Some examples of long-term investments includes bonds, property and stocks to name a few. The latter refers to investments that are typically meant to be converted to cash within 3 to 12 months. Some examples include Treasury bills, government bonds, Certificate of deposit (CD). To simplify matters, I won't get into the specifics of finance terms, like options, futures, securities, etc. so as not to confuse you but if you are looking for further information on any specific items, you can always refer to the website, Investopedia (one of my go to sites when looking up for further information on finance knowledge)

Before you start investing, there are a few things you need to be looking at:

1. Net income (after taxes, monthly expenditures, etc.)

2. Risk appetite 

3. Investment Goal 

4. Yield

The easiest step is probably assessing your net income. The trickier part could be to identify your risk appetite, but one way of putting it is if you would require the amount within a certain period, i.e. how liquid do you need this investment to be, some people don't mind contributing X amount of their income and then not having to think about it, others maybe get affected by the fluctuation in their income and would like to make quick cash from it. 

The number one tip I can give anyone looking to start investing is to: Never be emotionally affected by investments. 

After years of investing, I can tell you that you cannot be upset by the current market sentiment, and it's looking at the overall market growth - which usually is long-term rather than the fluctuations in the market. 

Next, is identifying your investment goal, usually it's easier to plan your investment portfolio if you have a goal in mind, for example, if you want to buy a house, and the house is worth $XX amount and when would you like to purchase that house. In property purchasing, which I might delve deeper in some other time, a good rule of thumb would be to:

1. Have 10% of the down payment saved up

2. 2-3% of the sales and purchase agreement (SPA) price ready

3. 1% for taxes

4. 6 months of your monthly financing amount available

5. 1% for legal fees

At first glance, when you're looking at purchasing a property, it may not seem like you'll be required to pay much since you're only looking at the face value of the property, but there are definitely other fees that you should be looking at when purchasing a property. Once you have established the amount you require to purchase your property, the idea is to work backwards to identify the amount that you require to purchase the property. If we go one step further, which is what I would usually do, I would take into account the interest rate of the loan and then identify the minimum interest rate that I would have to earn to pay on a saved up capital. 

What does this mean?

For example:

I buy a house worth $500,000. My loan is 3% and my loan term is 35 years. 

Your monthly loan repayment would be somewhere around $1,925, that is $23,100 per year. 

If you have a capital of $100,000 per year, you would have to make 23.1% in returns so that you are able to net off your loan repayment, which is to say you have earned the equivalent of your loan repayment amount without having to deplete your capital. The returns here refers to the yield. Of course, if you were to have $200,000 in capital, then you would require 11.55% interest rate investment and the amount is equivalently reduced as you have more capital. So, the idea here is to make your money work for you, not to work hard for your money, because at the end of they day, currency depreciation would mean your money 10 years down the line can't afford you the same things it is able to afford you now.

These are all exciting I'm sure, but now the question is "Where do I put my money?"

Truth is, I'm not an oracle, so I can't really tell you where to put your money, I'd also caution you against any types of investments that looks too good to be true, DO NOT LISTEN TO PEOPLE when investing, these are referred to as market sentiments, do not be influenced by them, you don't want to end up losing money in some kind of Ponzi scheme. 

What I can tell you is:

If you are based in the US:

1. Max out your 401K

2. Get your employer to match your ROTH IRA

3. Look at refinancing your loans (especially your student loan)

If you are anywhere in the world:

1. Choose a high-yielding fixed deposit (FD) (to be honest, this is the safest way to invest but honestly, will never be my favourite choice because it acts similar to a savings account but just with a higher yield but you do have to deposit the amount for a fixed amount of time, the length of time depends on the terms of the fixed deposit)

2. Stocks that pay out dividends (point to note here is, it really does not matter whether the company pays out their stocks quarterly or bi-yearly because at the end of the day, it's the same thing, it just is such that you are receiving a different number of paychecks, so, please don't get caught up on this - the yearly dividend that you earn at the end of the day is still the same)

3. Mutual funds (what I like about mutual funds is that you make an investment in a fund with a mix of securities, bonds, etc. and you pretty much don't have to do the work, you look at the estimated annual yield and voila, you're investing)

4. Max out on your tax returns (this may seem quite straightforward, but every year, if you're employed, you're entitled to different amounts of tax exemption, Malaysian Tax Exemption list can be found here, and you can just declare what you spend or plan your spending to maximise these returns and at the end of the tax year also get some money back)

5. Robo-Advisor (this has been something new I've been dabbling in, Robo-Advisors like StashAway, they are transparent with your portfolio and inform you on the changes that take place in your portfolio - once again, don't be affected by the fluctuation - the securities invested in are USA based securities so you will have to take that into consideration as there will be currency exchange differences so changes due to currency fluctuations and portfolio fluctuations. They do have a Simple portfolio which is a fixed return - currently at 2.4%, higher than a FD but is liquid as it only takes 4-6 business days to get your cash back)

6. If you are below the age of 35, I would urge you to purchase a property as it allows you a few benefits:

i. Longer loan term

ii. Currency depreciation would mean you would be able to gain income when the property appreciates (remember however, usually if you dispose a property before a certain period, you will have to pay a hefty capital gain tax, so, do check that if you intend to do that)

iii. Lower commitment amount (owing to a longer loan term, again don't worry about this, if you have spare cash, just pump it back into repaying the loan and you reduce your loan anyway, so you might just end up repaying your loan faster but the reason why you choose longer loan term is because it doesn't overload your credit facility, this means if you're looking to get another loan, etc. if your monthly commitment is too high, you might be denied the credit facility as there is a risk that you might default)

7. Credit Card (this may not seem obvious at first but I recently learnt this, that is to NEVER USE YOUR OWN MONEY - this was a really interesting thing, because when you utilise your credit card, although not directly related to a quantifiable return of investment, you a) build your credit score, b) get rewarded c) earn points that you can convert to some form of nominal value i.e. buy things using your points d)use your cash to grow in a different investment vehicle)

P/S: I actually thought this was really clever, because why use cash when you can use credit (other people's money) to pay for your stuff, and at the end of the day, your money can work for you when it's placed in an investment account and you are literally building a good credit score with the bank and yielding all the benefits that come with using a credit card. Safe to say, I've stopped using my debit card. 

If you're based in Malaysia, then another place to look at is:

8. ASNB which has an average return of 4% per annum - one of the safest ways of investing/saving and you can even take out a loan to invest which I would recommend if you are currently looking to leverage debt especially now since the OPR rates are low.

I actually can't think of any other low-medium risk investments at the moment, but I'm looking at high risk investments which I target to have by end of the year/early next year, I'll update once I have a portfolio ready and then we can get into more details.

Extra Tips:

1. If you are currently paying an annual fee by owning a credit card, you can call your bank and ask them to waive the charges and you can do this every year, I know people who do this. However, you may still have to pay service taxes where it applies.

2. If you own a credit card, spend within your means, treat it just like cash, i.e. setting your own monthly limit to it - remember if you pay it off in full within the timeframe when your statement is due, you get charged 0% interest. If you pay the minimum payment amount, then you get charged interest on the outstanding balance and usually, credit card fees are atrocious, with an average interest rate of 15%. So, every month ignore the minimum payment, or whatever payment they have - just focus on paying off the full amount.

3. Own a credit card if you don't already own one - it really is a great incentive to be rewarded for spending money

 

If you have any questions, you can always follow and drop me a message at opco.my on instagram, where I would be more than happy to answer any questions. 

As always, till next time. xx