Financial planning is all about investing

LOTS of people shy away from financial planning because they think they may be pressured into investing. And when you think investing, what comes to mind are horror stories of people who lost their life savings during the Asian financial crisis and Dot Com Bubble.

We hear tales of greed and chasing the hottest sexiest investment themes that has led them down the path of poverty and for some great debt due to leverage.

Admittedly, in the wealth management business, investments do form a large part of conversations that happen between ourselves and our clients.

For the most part, people speak to financial planners or wealth managers about how to make their money grow faster so they can meet their goals.

How much return can I get? What can I get if I invest in equities? How about properties? How can I start investing in currencies?

When people engage in a conversation about investments, inevitably, we get seduced by the quest to find the highest yielding asset. We steer into instruments we are not familiar with, drawn by the allure of high headline returns.

Think dotcoms. Think gold investments. Think land investments. Think bitcoin. Not necessarily bad investments but the basic concept of risk and diversification fall by the wayside as we chase returns.

But, step back for a moment.

Are you asking the right question? Is financial planning only about finding the next best investment?

While investing will likely play a key role in your financial plan, there are a lot more questions that need to be answered before you can choose the right investment, or if you even need to invest aggressively.

First question, how much do you need? Second question, when will you need it? Third question, how much have you set aside or are prepared to set aside? Last question, what returns are you going to get?

So say, I would like to buy a property in five years, of which I plan to make a downpayment of RM50,000. I have currently set aside RM10,000. I can currently save RM500 monthly.

Let’s assume I have no experience investing and decide to place it in fixed deposit at 3% per annum. Doing my maths, after five years, with interest compounded, all this adds up to only RM43,000. You are RM7,000 short.

In such an example, most people approach an adviser to find out what could yield them higher returns. In the above example, any misadventures in your investments could possibly set you back in your acquisition of your next property.

What if this was your children’s education? You may not want to risk your child entering university two years late. These are things your adviser needs to know as there other alternatives.

Financial management is very much about balancing between these four requirements. While getting higher returns so you can meet your goal is one way, it’s not the only way! You have other options. So, let’s go back to the four questions.

Firstly, you could buy a cheaper property with RM43,000. Alternatively, you could wait another year to purchase that property, giving you more time to save up. Or, you could increase your monthly savings to RM600 at 3% per annum. Lastly, consider investing in something that yields you 7% per annum. So, really, out of four options, only one is about investing.

For the most part, investing plays quite an essential role in most people’s portfolio. However, before you even have that discussion, think about the goals you want to achieve and whether investing is required and what kind of investment performance is needed.

By Ong Shi Jie

For the most part, investing plays quite an essential role in most people’s portfolio. However, before you even have that discussion, think about the goals you want to achieve and whether investing is required and what kind of investment performance is needed, says Ong.

Ong Shi Jie (CJ) is head of wealth management, OCBC Bank (M) Bhd.

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Expert advice on investing

Property Vs Shares : Discover your knock out investment strategy 

Author : Peter Koulizos and Zac Zacharia Genre : Business, Finance and Law Publisher : Wrightbooks >>

ABOUT three to four years ago, a friend in his 20s bought his first property. Prior to this, he was trading in stocks. His interest in the property sector came about when he saw the double-digit price increase during the run-up in the property sector in 2009/2010.

While his interest in shares continues, it was the property sector which became the main focus of his attention. His intention was to sell the serviced apartment once it was completed at a profit, a strategy taken by many during those heady days, and today. He has the same principle when it came to stocks. If he has read this book Property Vs Shares, he may have taken a different strategy for his investments.

This book serves as a guide for those who are interested in either or both forms of investments. While it was written with beginners in mind, it provides useful reference to readers on higher rungs of the investment ladder.

In Malaysia, the two most common investments are properties and stocks. While there are unit trusts, these are, at the end of the day, also linked to stocks. The last several years, a number of books on property investments have appeared on the shelves of our local book stores. Most, if not all of them, are focused on property investments alone and therein lies the difference.

Property Vs Shares compares one asset class against another. It has two authors. Peter Koulizos is the author of The Property Professor’s Top Australian Suburbs and lectures on the subject. Zac Zacharia lectures on share investment at TAFE SA and is a founder of a wealth management group.

Both of them provide some ground rules for investment decisions in today’s volatile economic climate. They look at how property and shares have performed historically and give pointers on research.

In today’s search for yield, all sorts of schemes have entered the market. They highlight some of these scams and schemes. In short, they look at investments much more broadly, and takes into cosideration the many who keep their money in time deposits.

Using the analogy of two boxers in a boxing ring, one representing real estate and the other shares, they begin with that all pertinent question Why Invest? and explains the importance of being a shrewd steward of one’s finances if one wants to retire early and richer.

They outline from the start that saving and investing are two different things. In order to invest, one must first of all, begin a journey in savings. But while saving, as in keeping money in a time deposit may be “safe” and “risk-free”, the returns are minimal. On this premise, the authors suggest other forms of investments which, if prudently selected and managed, and depending on when one enters and exits, may provide a better yield.

My 20-something friend could have just kept his money in a fixed deposit account but with the cost of living escalating, he figured he would be earning negative interest rates in no time. And therein lies the value in property and stock investments – they provide a regular income and have the potential for capital appreciation.

However, there are caveats to this and the authors explain the perils of both clearly and succintly, without diminishing the importance of diversification.

Although this book is based on the Australian property sector and the Australian stock market, it holds within its covers very insightful information and suggestions about property and stocks that are universal.

The last several years, there has been a great interest in property investments on a global scale with Malaysians buying real estate at home and abroad, and with it comes currency risks. The Malaysian stock market has generated both interest and returns for investors. What and where one buys, or feels most comfortable with, depends on many personal and individual factors as well as global and national events.

Investment markets are inter-related, like a big jigsaw puzzle. When property prices dip, the shares of property companies may dip. When interest rate goes up, there may be less application for housing mortgages, which in turn affects bank revenue and bank stocks.

The importance of having some knowledge of economic and investment cycles are clearly spelt out with graphs and tables. But these details are used sparringly.

As mentioned earlier, my 20-something friend may have taken a different route had he read this book because in the middle of this reference guide, the authors draw the distinction between trading, investing and speculating.

The main difference is the investment timeframe. Trading on the stock market can occur within seconds whereas speculating on property can occur within weeks or months. They suggest taking a longer time frame with both.

Only you can decide why you are in the game – is it for capital growth, or for income, or both? Do you want to fund a certain lifestyle, or are you hoping to retire richer and earlier? If you are able to answer the above, you will be guided as to what suits you best. This book will set you on the road to investing with some insightful information in hand.
 
There are many nuggets of gold to be found in this book. Whether your preference is for stocks, properties, or both, there is a place in your book shelf for this slim volume.

 - Contributed by Thean Lee Cheng The Star/Asia News Network

Investing in 2014

Value Investing Summit 2014 - 'Live'

The end of the year is the time to reflect on the past and the beginning of the year is time to reflect on the future. 

SO how did your portfolio do last year?

The Dow Jones Industrial Average for US stocks hit 16,576 with a 26% gain for the year, the best year since 1996. By comparison, the Hang Seng Index performed 3%; Tokyo Nikkei did best at 57% and Bursa Malaysia ended 10.5% higher, just a tad off its record high.

On the other hand, the fastest growing economy in the world had the worst stock performance – the Shanghai A share index closed the year at -8%. Gold prices fell 27% to US$1,196 per oz, while property prices seemed to have done well in the United States and China. Bond prices are now extremely shaky, with the JPM Global Aggregate Bond Index falling by 2% during the year.

What is going on?

The answer has to be quantitative easing (QE) by the advanced country central banks. The world is still flush with liquidity and since investors are unclear on what direction to invest in, they have reversed investments in commodities (such as gold), avoided bonds because of prospective rises in interest rates and essentially piled into stocks.

Individual investors like you and I tend to forget that the market is really driven today by large institutional investors, including fast traders with computer-driven algorithms that have better information than the retail investor and can trade in and out faster and cheaper. It is not surprising that retail investors who have traditionally driven Asian markets have been moving more to the sidelines.

Even institutional investors are not equal. Long-term fund managers like pension funds and insurance companies are, by and large, highly regulated, with restrictions on what they can or cannot buy. So it is not surprising that the biggest money managers are today even larger than banks. BlackRock, the largest independent fund manager alone looks after nearly US$4 trillion, larger than most banks in emerging markets.

There are, of course, two types of asset management – active (where the managers actively invest according to their judgement on your behalf) and passive, where they simply follow the market indices or buy exchange traded funds (ETFs) that track market indices. According to the Towers-Perrin study of top 500 global asset managers, during the last decade, passive managers did better than the group as a whole.

So should we trust the market experts? I have been reading for years Byron Wien’s annual Predictions for Ten Surprises for the Year. Byron used to be a top investment pundit for Morgan Stanley but he is now working for Blackstone. His prediction of surprises is defined as events where average investor would assign one-third change of happening, but which he believed would have a better than 50% change of happening. He got roughly seven out of ten wrong in 2013, the more relevant mis-calls being the price of gold, a possible drop in S&P 500, the price of oil and the A share index.

Bill Gross, one of the top bond fund managers, pointed out that retail investors tend to be conservative, focusing largely on safe portfolios, such as investment grade and high yield bonds and stocks. But institutional investors have gravitated instead into alternative assets, hedge funds and more unconventional assets. Unfortunately, all these assets are “based on artificially low interest rates”. So if low interest rate policies are reversed, investors have to be prepared.

He rightly pointed out that the advanced country central banks are “basically telling investors that they have no alternative than to invest in riskier assets or to lever high-quality assets.” But if they withdraw QE or “taper”, then higher interest rates will cause a reversal of investment prices and also cause de-leveraging.

In other words, in order to bail out the world and keep the advanced economies afloat, their central banks are asking global investors to bear quite a lot of the risks of the downside. The smart money might be able to get out fast enough, but most retail investors do not have the skills to time their investments right.

So what should the retail investor do?

Peter Churchouse, who writes one of the best reports in Asia called Asia Hard Assets Report, quoted his son’s advice as “Buy good companies with strong earnings, strong growth and rock solid management. The world will go on.”

Quite right.

But how do we know which companies have rock solid management? My answer is: watch not what the annual report say (by all means read them), but look at what the management does. I have always tended to shy away from companies with high-profile CEOs who tend to win “Manager of the Year” awards.

There is, of course, no substitute for solid own research and look for yourself how the company or the economy that it operates in is doing.

The consumer or tourist is still the best investor because seeing for yourself gives you a feel of what is quite right or wrong with the country and just visiting the retail outlet, getting a sense of the service quality and the employee attitude would give you first hand what is right or wrong with the company you are investing in.

My favourite economy in Asia right now has to be Indonesia. I spent nearly 10 days over Christmas going through the markets of the most densely populated cities in Java and my conclusion was that Indonesia is on the move – literally. The population is young, mobile and connected. Every other shop seems to be selling mobile phones, cars or motorbikes. The quality of the retail shops, design and service has been improving over the years. And despite the coming elections, there is hope for change.

My bet, therefore, for 2014 is that if we stick to the better-run companies in the stronger economies, we should be better prepared for any tapering of QE to come.

Contributed by Tan Sri Andrew Sheng

Tan Sri Andrew Sheng is president of the Fung Global Institute.

Investing in things that count

Sometimes it is not what we want that bears the richest blessings, but where we are sent that makes the difference.

THERE must be moments in our life when we pass by, say, a high-end store, and wish that we could pick up the latest electronic gadget without even thinking about the price.

The young father who wants the best education for his son may be convinced that the correct route is through a private or international school, if only he has a million ringgit to spare.

Day by day, we may wish for a lot of things. But aren’t we thankful that we do not always get our prayers answered?

The August month on the calendar in my office has a poem supposedly written by an unknown Confederate soldier. Titled “Prayers and Answers”, it includes the following verses:

“I asked for strength, that I might achieve. I was made weak, that I might learn humbly to obey.
“I asked for riches, that I might be happy. I was given poverty, that I might be wise.

“I asked for power, that I might have the praise of men. I was given weakness that I might feel the need of God.”

A friend gave up a nice job in the city to “Teach for Malaysia” in a rural school. The stories she shares regularly on Facebook are truly touching.

The first time I met her was at Fraser’s Hill some years back, when I was one of the facilitators at a writers’ camp.

While the purpose was to teach them to write well, I also told them that I would not expect them to eventually become journalists.

What is more important, I said, is to have a passion for life and a desire to make a difference wherever one is placed.

This friend did go through a stint in journalism but I now see her blooming in her real calling, which is to teach – not to the children of the rich and famous at some private school – but children who still struggle with the basic necessities of life.

The skills she honed as a communicator have allowed her to be practical and creative in teaching these children even the simplest of words. Here is a recent example:

•   She draws a picture of a globe.
•   Students: World!
•   Teacher: Very good! Another word that starts with “E”? We learned it recently.
•   Student: Earth!
•   Teacher: Ada nampak telinga dalam perkataan ini? (Do you see another word in ‘Earth’?)
•   Student: EAR! Ear! Ear!
•   Teacher: *smiling ear to ear* Thank you, Class!

 I should add that this is a Form One class whose standard of English has recently been diagnosed at Level 1.
It is a long haul, certainly, but my friend perseveres.

Meanwhile, another friend is doing something similar among the refugee community somewhere in Chad. Back on home leave, she showed me a clip of the children learning the alphabet by writing on the sand of an outdoor classroom.

These two young women gave up the comfort of home to venture into places where there are no high-end stores and where richness is definitely not measured by material possessions.

In places like this, strength, power and riches do not matter. Faith, hope and love are what really count.

SUNDAY STARTERS BY SOO EWE JIN

> Soo Ewe Jin (ewejin@thestar.com.my), in this season of Merdeka, salutes the many people, unknown and unseen, making a difference in many parts of our country.

Making monkeys out of markets

IT'S now official. Even monkeys can beat the stock market index. Cass Business School researchers in London simulated 10 million portfolios of US stocks selected at random. They found that a US$100 invested at the beginning of 1968 would have yielded US$5,000 by the end of 2011, but half the monkey (computer-simulated) portfolios managed US$8,700, one quarter made more than US$9,100 and 10% made more than US$9,500.

So, does the market beat all the professionals if monkeys beat the market?

There is a real lesson here for investors. I had a great debate with a good friend last month regarding the benefits of investing in a world where fast trading algorithms (using super fast computers to detect market opportunities to buy, sell or short stocks make it hard even for traditional asset managers to compete. So what chance is there for retail investors? My friend decided to get out of trading stocks.

Investing has been such complicated business because there are just too many variables to handle. Gone are the days when you think you can understand how markets perform. The rules of the game changed when policymakers began intervening through unconventional monetary policy and politics become part of the equation.

You would have thought logically that growth economies should produce growth stocks. The BRICS economies (Brazil, Russia, India, China and South Africa) met in Durban at the end of March. These five countries accounted for over half of total global growth since 2001, but their stock markets have not done that well. Since its peak in 2007, the BRICS index is down 37%.

Chinese retail investors have declined in number, based on the number of accounts closed. The A share index is down 31% since its peak in 2009, and the Brazil, Russia, India and South Africa stock market indices are all in negative territory since the beginning of this year. On the other hand, both the US and Japan are sluggish in growth and their stock markets performed 11.1% and 20% respectively since the beginning of this year.

Despite being overall in crisis and negative growth, even the European stock market performed in positive territory, mainly due to better performance in Germany and France. There are globally diversified companies in these economies that can outperform despite the slowdown in the European economy.

The real problem is that negative real interest rates around the world are truly destroying the ability of investors to judge what is the right asset to invest in. Markets are clearly bubbly when emerging market investors start investing in taxi licenses.

Accordingly to a Bloomberg report, Turkish taxi licenses today trade for US$580,000 each. My Hong Kong taxi driver was complaining to me that a Hong Kong taxi license was trading over HK$7mil (just under US$900,000) and yielding next to nothing.

It made no sense to him as a taxi driver himself to be an owner. This reminded me that in 1996, golf club membership was being touted as the best investment ever, with the 1997 Asian financial crisis wiping out all gains thereafter.

So what should an honest, no-inside information retail investor do? I guess the old-fashioned advice to invest in diversified and value stocks and maintaining ample liquidity is still sound. Global bonds have done well since the financial crisis due to the massive quantitative easing.

Even those who have speculated on Greek bonds when they were yielding more than 20% have done well. But it is difficult to argue that ten year US Treasuries and German Bunds at under 2% per annum represent no risk. Certainly, Japanese 10 year bonds at 0.55% per annum, when the official inflation target is 2% per annum, must carry considerable interest rate risks.

Over the long-term, there is no question that investing in one's own home has been good investment. This is officially supported leveraged investment, since most mortgages still require not more than 30% down payment for the first home. The fact that there is a growing middle-class in most emerging Asia means that demand for housing is still on the increase, but given such low interest rates, it is hard to imagine how much further can house prices rise relative to the affordability index.

My own inclination is to go for high yield, solid growth companies that are globally diversified. You basically invested in the region that you are most familiar with, and in companies that demonstrate good governance and know what they are doing. The average price/earnings ratio of Hong Kong, Singapore, Malaysia and Thailand markets are still below those of the US (17.7). China A share has a PE ratio of only 8.1 and a yield of 3.7%.

Of course, the art of investing depends completely on the investor's risk appetite, age and liquidity requirements. If you are fully invested in illiquid assets or in illiquid markets, you cannot get out even though the returns look good. Property markets are notoriously easy to get into and difficult to cash out, especially in the smaller markets. Bond investments may look good on paper, but when you want to exit, the selling price may be lower than what you think you can get, especially for retail investors.

Knowing that even monkeys can beat the market gives one food for thought. You can do better, but you must invest the time and energy to think through what you are investing in, what risk you are taking and what you want to achieve. My friend in Australia had no formal training in investments, decided that she could outperform the market, relied on her instinct and own research into companies and is now doing pretty well on her own.

Even monkeys know how to survive, so don't look down on monkeys.

THINK ASIAN By TAN SRI ANDREW SHENG

■ Tan Sri Andrew Sheng is president of the Fung Global Institute. He was recently named by Time magazine as one of 100 most influential people in the world.

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