This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on October 12 - 18, 2015.

Kam Teik Guan is a certified financial planner with IPP Financial Advisors Sdn Bhd.

Q: I am a 23-year-old with a decent job and personal savings of RM30,000 to RM40,000. What should I invest in if I want to access the money in a decade? And how much risk should I take for my investments?  > Khairin, via email

A: I would like to start with a few planning assumptions so as to give more specific recommendations. 
• The reader has just started his career;
• Marital status: Single;
• Financial dependency: None (still living with family);
• Financial commitments: None;
• Gross annual income of RM42,000;
• Personal life savings: RM35,000;
• Investment profiling has been done and the reader’s general profile towards investment risk is likely to be “growth”;
• The reader is considered new in the area of investing;
• From the monthly cash flow, the reader is able to save regularly and invest 40% of take-home pay; and
• Investment time horizon: 10 years.

As a financial planning practitioner, I would like to approach this topic from a holistic point of view. Looking at the questions posed, we note that the reader is very interested in investing. This is very common in among fresh graduates. Before I address the topic of investing, I would like to encourage the reader to reconsider his planning strategy — ensuring that his offence is as strong as his defence. 

First, never underestimate the power of wealth protection or insurance planning. This is particularly advantageous for younger people, and neglecting it is often a common mistake. Realising this later in life will not only cost more in premiums but may give rise to possible complications in the application process, which can result in outright decline and exclusions to your policy contract. 

Remember: The best investment is the investment that pays you the most when you need it the most. In other words, will you be able to liquidate your investments without suffering much capital loss when crisis strikes? To illustrate, the Malaysian stock market fell to less than 270 points during the 1997/98 Asian financial crisis. What if an investor had placed all his funds in the stock market during this period and needed money for a health emergency?

The reader can then look into the area of investments (wealth accumulation) with some peace of mind. The goal here is to counter the effects of inflation that erode the future value of money. 

Moving on, I would like to introduce the reader to a balanced view investment concept. We call this the “trinity of investments”. In most cases, there will be a need to compromise if the investor wants some form of liquidity and to make a better return. 

For the current life savings of RM35,000, we recommend the following asset allocation:
i.     To allocate RM15,000 for an emergency fund. This roughly translates into four months’ salary buffer. Ideally, this should be placed in fixed deposits and the certificate locked away to prevent unnecessary spending.
ii.    To allocate for moderate risk, RM10,000 should be invested in high quality balanced unit trust fund. 
iii.     RM10,000 should be invested in blue-chip stocks with strong dividend yield. This is to allocate for higher risk and to potentially gain higher returns from the stock market. 
I also recommend that the reader consistently save and invest 40% (RM1,200) of his monthly take-home pay by investing RM700 a month in a unit trust and saving RM500 a month in a high quality endowment product. This will act as an overall portfolio stabiliser. 

A portfolio review should be conducted at least once a year to ensure that the goals of your investments are aligned with your expectations. A 10-year investment horizon is considered long term. This means you can invest confidently without trying to time the market. 

As Warren Buffett says: “Be fearful when others are greedy. Be greedy when others are fearful”. With the right strategy in place, you will be glad that you planned and saved at this early stage.

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