THE year is shaping up to be a challenging one.
Not only has the US Federal Reserve started to raise interest rates – a move mirrored by China’s central bank and the Hong Kong Monetary Authority with more developed countries expected to follow suit – but a market correction may be in the works following a strong run in both the US and Malaysian stock markets.
On the home front, inflation in Malaysia is expected to rise along with the Consumer Price Index, even as business growth and personal income levels are struggling to catch up.
With such a multitude of uncertainties on the macro level, it’s a little wonder if investors may feel disoriented, especially when they find themselves presented with infinite investment opportunities that seem to have taken root in every corner.
One just needs to look at the proliferation of bitcoin, the revolutionary cryptocurrency that reached its all-time high in 2017.
Yet despite its prices taking a plunge recently, its demand is still going strong. Similarly, ethereum, ripple, litecoin and Zcash continue to enjoy the mania status garnered by anything related to cryptocurrency. Equally enticing opportunities are abound with the rapid growth of equity crowdfunding (ECF) and peer to peer (P2P) lending platforms.
Given the plethora of new investment opportunities against a backdrop of market uncertainties, the question every investor should ask themselves is, “Which is the right investment for me?”
First things first – do housekeeping before rushing into investment opportunities
To quote Warren Buffett: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework”
And he is right! People should never attempt to make an investment decision according to their own whims and fancies; no matter how attractive the investment may seem.
Therefore, I would like to take this opportunity to share a wealth management decision- making framework that has been an indispensable guide for us at Whitman for the past 17 years.
This framework has helped our clients reduce unnecessary exposure to risk and increase the return potential of their investment assets. Here are the steps:
> Review your holistic financial plan
First, review your financial goals such as your retirement plan and children’s tertiary education and check to see if your provision is still adequate under the current inflated environment.
For all you know, you may experience a similar situation like a client of ours who had originally planned to put aside RM500,000 for his child’s overseas education five years ago; now due to inflation and currency exchange movement, he would need at least RM1mil.
Next, run a simulation to see if your assets and future savings will be enough to fund your revised financial goals.
In Whitman for example, we assist our clients to carry out a net worth projection to assess whether their net worth growth is sufficient to support their financial goals up to 90 years of age.
As many variables keep shifting, this rather crucial exercise is done on a yearly basis to ensure that the projection is up to date.
Once you know your latest financial position, ask yourself if there is a need to adjust your targeted ROI on your existing investments to meet your financial goals.
> Review your cashflow statement
Examine the impact of inflation on expense items and the effect of the price increase. By drawing up a budget (weekly, monthly or yearly), it will be easier for you to make a comparison and find out the actual increment. From there on, you can decide what adjustments can be made and how you can cut down on some of your expenditure.
Always keep tabs on your changing cashflow needs. A common mistake many individuals tend to make is neglecting to take into account factors that will impact their monthly and yearly cashflow.
For example, a client who used to have a comfortable excess of RM30,000 annually was in for a rude shock when his cashflow became negative after he enrolled his two children into an international primary school. Another client who had purchased an investment property a few years back under DIBS failed to set aside any monthly provisions while the property was under construction.
Then when the time came for him to start servicing the loan, the sudden additional commitment proved to be a huge financial blow. His dilemma was compounded when he could not find tenants due to an oversupply in the market, for he had been counting on rental income to cover the mortgage.
The moment you realise you are running on negative cashflow, corrective action must be taken immediately. Start by prioritising your expenses and looking for lower cost alternatives where possible. In the example above, where annual education costs for two children can set you back at RM60,000 or more in an international school, parents may consider other education avenues. Learning centres for instance, can provide the same curriculum and learning environment, but minus all the frills, at a fraction of the cost.
> Review your strategic asset allocation statement
Check your latest asset allocation status to see which of your asset classes have grown or shrunk? It is essential to know your optimum target asset allocation in order to assess if your current asset allocation diversification is sufficient, for example the distribution of your assets locally vs overseas.
Prior to investing, you should set aside funds for financial goals overseas. If you have children’s tertiary education funding requirements, then the percentage allocated in foreign investment assets should be reflected accordingly. On the contrary, investors who do not have such commitments are advised to keep at least 70% of their assets in Malaysia to ensure their cash flow needs in ringgit can be met.
Take a good look at your strategic asset allocation statement and identify which of your investments have been making money and which have been losing money. Consequently, what action are you going to take to cut your losses if there are any? If the problem is not nipped in the bud, not only is your profit at stake but your investment capital too. It is therefore critical for every investor to actively monitor the performance of his or her investments. Simply sitting back and assuming the money, will grow on its own once invested, is foolish. However, you would be surprised how many people still do it – invest and subsequently forget!
Where possible, find ways to grow idle cash more efficiently than what the current bank rates can give.Be proactive in looking out for investment opportunities. Be open to investments not normally in your comfort zone but has good potential. Due to familiarity and habit, some investors tend to put all their assets in properties, therefore they should be looking beyond properties for investment opportunities.
Investment opportunities can make or break your wealth. Make sure you choose the right one.
While it may be the current investment fad to dabble in cryptocurrency, ECF or P2P, a smart investor knows that at the end of the day investment opportunities can come, go and then come back again. It is not the end of the world if you miss out on one or two opportunities, in spite of what people may say.
There will always be a similar opportunity in the near future which may even be better than the one that got away.
Rather than act in haste and find yourself stuck with a decision that you will regret, do a timely housekeeping on your investment portfolio. I have already done all the heavy lifting for you by laying out the framework, now you owe it to yourself to get it in motion.
Yap Ming Hui (firstname.lastname@example.org) is a bestselling author, TV personality, columnist, coach and host of Yap’s Money Life Show online. He feels that the financial world is getting too complicated for everyone, and initiated a weekly online show to address the issues. For more information, please visit his website at www.whitman.com.my