IF you had RM1mil in cash, what would you do?
If it is a windfall, it is your lucky day and the mere thought of having so much money can be thrilling.
Since the Covid-19 pandemic, people have been spending mainly on food and essential items. Hence, the higher-income groups would have accumulated more savings at this time. Globally, savings are on the rise and the case is similar in Malaysia, with RM53bil of excess savings at the end of 2020.
But if you had RM1mil in cash, what would you really do?
Azril (not his real name), a Gen Z young lad, still in college, immediately said he would buy one, then said, two properties, preferably apartments and use one for rental income. A car was next on his list, as were computer gadgets and some luxury items. He is keen to dabble in cryptocurrency but said the amount would be very small for he knew the risks of such investments.
Anna (not her real name), on the other hand, is nearing retirement, and her constant worry is not having enough to retire and a windfall would be a blessing.
Raymond Kang believes in sweating the money to make more money. He will put half into a brick and mortar business, the remaining half, in equal portions, into real estate investment trusts and stocks.
With this kind of money, there are plenty of choices and preferences – either you invest to double it, or spend it to no end.
“If you have RM1mil, the first thing you should do is set aside some to clear your debts that accrue compounding interest and the high interest rate loans,’’ said Kimberly Law, a licenced financial planner with IPPFA Sdn Bhd. Then, build an emergency fund to take you through 24 months in case of any eventualities.
Secondly, “allocate’’ funds to have a balanced portfolio. That depends on the person’s level of management, risk tolerance and time frame. Young people who do not intend to retire soon should be more aggressive to take more risks as they have more time to accumulate wealth. But for older people, who are close to retirement, be passive and take less risk, she said.
“Allocate 20%-30% in secured investments, 50%-70% in growth and the remaining 10% for speculative investments,’’ Law said.
Secured investments include bonds and fixed income instruments, while growth is mainly investing in equity markets. But to invest in stocks, you need time and expertise, without which, she suggested opting for unit trusts.
“For equity markets, focus on the China stocks. It is great if you can have direct access. If not, you have the option to invest through unit trust funds. For the US markets, it is best to invest in S&P 500 ETFs (exchange traded funds),’’ she said.
Law believes there is also potential in Malaysia and recommends unit trust funds to rely on the fund manager’s expertise. For speculative investments, she said the risks were very high and cited examples including, P2P (peer-to-peer) lending or equity crowdfunding.
In terms of allocation, she suggested RM200,000 in secured investments, RM600,000 in unit trust funds, RM100,000 each in stocks/ETFs and speculative investments.
That is, if you have RM1mil to invest. But if you do not have such money but still want to make your first million, then the fundamental part to building wealth is by saving.
Saving is a habit you need to inculcate. But that does not mean you give up your comforts and live a frugal life. Live comfortably but cut down on excessive spending.
“Assuming your portfolio has an average rate of return of 8% per annum and if you save RM1,000 monthly, it will take 26 years to reach RM1mil. If you double that, it will take you 19 years. So, time and allocation determines how fast you reach your objective,’’ Law said.
There are two methods in “allocation” – capital growth and income generation, she said.
Capital growth is growing capital in value without dividend payout. This method performs well in the long run and people below 40 years of age need to focus on this.
Income generation on the other hand, pays dividends, and this is suitable after you have a good amount of capital and you are above 40, reaching retirement soon.
She said the mistake young working adults make is focusing on income generation too early.
“Another thing to note is expectation on annual return rates. The best annual return rate is normally a high single digit, around 7%-8%. It is a common mistake to aim for double digit return rates. That is possible for a year or two but impossible in the long run. It is overly risky and could potentially jeopardise your whole process,’’ she added.
Whatever your preference, accumulating wealth requires discipline, patience, knowledge and setting goals. In your quest to accumulate your first million, avoid falling for “get rich quick schemes’’ or entering into investments that are dubious in nature. If you need help, get it from professionals.