DR LIM was 65 years old when he first came to see me. This was a man who had come from humble beginnings and had worked his way up determinedly to become an accomplished doctor.
By the time we met, he had retired. Like most elderly parents, his wife and him wanted to spend their days with their children and grandchildren.
That meant moving from a small town to Kuala Lumpur. Nevertheless, despite having saved up all his working life, he could not afford to buy a house near his children. He was forced to rent one instead.
I was very perturbed by the whole situation. My question was this: how could a successful consultant surgeon have difficulty buying a house?
To help him ease his current financial situation, I made a few suggestions to optimise his money. This involved several low risk and moderate-risk investments.
We arranged a follow-up meeting and this time, Dr Lim’s wife accompanied him. She told me that her husband hadn’t slept properly since his last meeting with me. The suggestions I had made worried him a great deal.
The upshot was that he did not want to invest in anything.
Her exact words were, “He thinks that since we’ve been fine so far with fixed deposits, we should carry on with it. Now that we’re old, we really don’t want to take risks with our money.”
As she continued to speak, the heart of the issue emerged and all the pieces of the puzzle fell into place.
About 35 years ago, Dr Lim invested a great deal of money and suffered heavy losses.
She explained the nature of the investment: “A salesman (who was introduced by a friend) would give us gold bars worth RM100,000 to keep for six months. In return, we had to give him RM100,000 in cash.”
“At the end of six months, we would return the gold bars and get our RM100,000 in cash plus 15% in interest.”
“When we asked him about the level of risk, he said that we would enter into a contract. He also said that even if we didn’t get our money back, we would still have the gold bars that were worth RM100,000 in total.
Dr Lim made an initial investment of RM100,000. As promised, six months later, he received RM115,000 – the investment plus a 15% interest.
Seeing this, he decided to invest much more, to the tune of RM1mil. To get that amount, he refinanced the house and even borrowed from relatives.
As she went on, her eyes started glistening with tears.
“We gave the salesman the money and took the gold bars. And we never saw him again.
“When we finally took the gold bars to be valued, we found out they were worth only about a quarter of what he said. The contract we entered into with him was not even worth the paper it was written on.”
The first return of 15% over 6 months was just the bait.
It was a devastating experience that kept the Lims from making any other form of investment for the subsequent three decades. Money saved was kept in savings accounts and fixed deposits. To educate their four children overseas, they dug into their hard-earned savings.
Dr Lim had gone from one extreme to another.
When he first started investing, he did so without knowing enough. He did not do his due diligence and I would even go as far as to say that he was rather careless with a huge amount of money. Remember, we are talking about RM1mil more than 35 years ago!
When that investment failed, he was so traumatised by the experience that he avoided investing totally. As a result, his hard-earned money was depleted greatly by inflation.
I do not use the word “traumatised” lightly. There are many people who invest without learning enough, and who eventually lose a great deal of money.
They then come to equate all investment with losing money and stop investing altogether.
The key phrase here is “invest without learning enough”. The problem is not with investing. The problem is investing without enough knowledge.
In fact, you cannot afford not to invest and optimise your money. That in itself is risky.
Take the initiative to learn to invest the right way. Perhaps mistakes will be made. Minimise them and improve as you go along. Never stop investing.
Most importantly, always remember: the price of not investing is always higher compared to small losses when investing.
To minimise losses when learning to invest, you should not put all your eggs in one basket. To minimise your risk exposure, do not invest more than 3% of your investable assets into any high return and high-risk scheme.
When the investment grows, make sure that you take the profit and put it elsewhere to control your risk exposure.
Most importantly, you should also not borrow to invest in such schemes.
By following these guidelines, the investments are unlikely to shatter your life should losses be incurred.
Never let a mistake stop you from investing because if you do not optimise your money, you will not be able to keep up with inflation.
Inflation is a very real issue nowadays, especially with the impending implementation of GST next year.
Even if you live a frugal life, whatever you have will not be enough for you to live on.
For example, at an inflation rate of 5% and with an average 2% return, RM100,000 would have grown to about RM200,000 after 35 years, but its purchasing power is only worth about RM36,000.
At an average 8% return, RM100,000 would have grown to about RM1,478,000 after 35 years, but its purchasing power is worth about RM268,000.
This clearly shows the importance of growing money at a return higher than the inflation rate.
Dr Lim’s case may be an extreme one. But if we look at the story carefully we will realise an undeniable truth: that there is a bit of Dr Lim in all of us.
- Yap Ming Hui, best-selling author of Set Yourself Free, hopes Malaysians will take the bull by the horns and start optimising their money before inflation eats up their hard-earned income. He will be sharing his wealth of knowledge at the 2015 YMH Money Optimisation charity fund-raising seminar on Nov 8. For more information, please visit www.yapminghui.com
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