Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Dec 21 - 27, 2015.

 

Your golden years may be far away, but the time to begin strategising is now. Needs are evolving at a quicker pace and ideally, the methods to protect your nest egg should also change with time. How you plan and invest for wealth protection hinges on how emotionally, physically and mentally fit you are, especially with rising life expectancy. Maintaining a good social circle and learning new skills will not only help you stay intellectually stimulated but also age happily and healthily.

 

THE traditional ways of accumulating wealth for retirement, such as through fixed deposits and bonds, are no longer enough in today’s economic environment of low interest rates, slow growth and rising cost of living.

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Danny Chang, head of managed investments and product management at Standard Chartered Bank Malaysia, says interest rates today are half those of 15 years ago. This has compelled people to take on more risks by investing in asset classes such as equities. Fixed deposits and other fixed-income instruments would not provide a sufficient return in saving for one’s retirement.

“Fifteen years ago, interest rates in Malaysia, on the low side, could be around 7% to 8% on government bonds. Now, it is half of that. Compared with those who started saving 15 years ago when interest rates were higher, people today need a longer time frame to accumulate a sufficient amount of money to retire,” says Chang.

Rising inflation is another factor. Manulife Asset Management Services Bhd says in its report, One step forward, half a step back: Meeting financial goals in Asia, the cost of rainy days (for example, hospitalisation), higher education, home purchases, and lifestyle needs and retirement is rising at a rate of 11.9%, 11.5%, 9% and 2.4% respectively. It estimates that the annual increase in the cost of these financial goals is 8%.

In a survey of 500 Malaysians aged 25 and above, it was found that they expected an annual return of 5% based on their asset allocation. This means they would still be 3% short when it comes to funding their financial goals.

The survey also found that, on average, these Malaysians hold 44% of their portfolio in cash, 20% in equities, 20% in insurance, 4% in mutual funds, 2% in fixed income, 1% in real estate and 9% in other investments.

Given today’s economic volatility, how should an investor apportion his portfolio at the different stages of his life? And what investment strategy should he adopt to grow his wealth? 

Fund managers often cite the 80/20 and 20/80 approach when it comes to investing for retirement. This means keeping 80% in equities and 20% in bonds when you are working and doing the reverse when you are retired.

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The underlying philosophy is simple. Take risks and invest in equities when you are still earning. Then adjust your portfolio and be more cautious after you retire. You would want to have a steady income stream with as little volatility as possible when you no longer have a job.

Jason Chong, managing director and chief investment officer at Manulife Asset Management Services, says people in the pre-retirement stage should take on more risk by investing in equities. “When you are young, the salary you receive every year is likely to increase. This could compensate for any losses and help rebuild your savings. But when you are 55 and have only five years to retirement, how will you build up your savings again?”

He suggests investing half of your cash in equities. By doing this, people could get an additional return of 2.4%. 

“Why hold on to so much cash? Based on our research, if you cut your cash holdings by half, your shortfall [in funding your main financial goals] will drop to 0.6% from 3%,” says Chong.

Alvin Vong, director of EquitiesTracker.com, a provider of educational courses focused on the fundamentals of a company, says “time” is a huge advantage for people in the pre-retirement stage, especially for the younger generation. This allows them to ride out any market volatility and have good returns when the market recovers.

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“Historically, if you look at our stock market, our longest bear market lasted 18 to 24 months. At the same time, every bear run was shorter than the bull run. Investing while you are young is a huge advantage. The earlier you start, the more time you have to ride out market volatility,” he adds.

Vong says equities allow investors to start small, which is why the younger generation with little savings should look at this. Stocks also have higher liquidity compared with properties. (However, properties have enjoyed a higher price appreciation in recent years.) Investing in blue chips could, over time, provide a much higher return than the 3% by fixed deposits, he adds. 

EquitiesTracker.com uses an algorithm to track stocks in the local market. Citing Nestlé as an example, Vong says the price return on the stock for the past three years has been 8%, excluding a dividend payout of about 3%. 

“If you think the three-year return for Nestlé is low because the market is not so good, you can look at the compound returns of the last five and 10 years, which are about 11% and 12% respectively. So, there is not a lot of risk,” he says.

Pramod Veturi, country head and managing director of wealth management at Standard Chartered Bank Malaysia, has a different view on what people between the ages of 25 and 35 should do. Taking into account their living expenses and debt payments, such as car and housing loans, he says they should keep 25% to 30% of their income in a savings plan. 

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This could be a form of forced savings, which is the most effective way to help the younger generation save for their future. “In a world of unsecured credit cards, the personal loan rate is very high. Forced saving is an option in preventing you from spending beyond your means,” says Pramod.

“For instance, between a 30-inch and a 52-inch TV, the 30-inch should be enough as they are both TVs, right? If a person is in a forced savings programme, he will have less flexibility to emotionally spend beyond his limit and buy the 52-inch,” he points out.

“And as you get to the age of 40 to 45, you will have accumulated more savings as an individual. Therefore, you will have greater flexibility in taking on more risks in your investments. We would then introduce you to lump sum investment programmes based on your risk profile.”

It is critical that individuals live within their means, which is in line with the spirit of financial planning. “What is financial planning? You have to understand what your current income and savings are, the return on your savings, a reasonable level of expenses and so on. When you do this, you will start saving more,” says Pramod.

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