Posted by: kamaruzamanomar | July 1, 2008

Have an investment objective, invest and diversify

I caught up with my girl friend for brunch yesterday. She is frantically looking for a nanny for her son as her baby sitter has decided to start a business and leave baby-sitting career behind. I have always enjoyed spending time with this friend. With her, I could talk about anything.

Yesterday she asked me about investment. My friend believes in diversifying her investment. Something that I completely agree with. She invests in stock market, unit trust and put some money in the the fixed deposit.

I took her by surprise when I asked her what her investment objectives are. She paused and after a while said she has never thought about working with an objective when it comes to investments.

I usually tell my clients, just like everything else, they should only go into something if they are clear about what they want. And, having an objective works best with a time line.

Some of my clients invest because they want a better retirement plan. Younger clients have more time on their side while more mature clients have more money on their side.

Most of the people I met depend on the Employee Provident Fund for their retirement. This is a great start. But, why put your eggs?

Since its incepion in 1952, EPF have not been able to give its members double digit return. So why not diversify your retirement plan?  Please see below for the details of dividend declared by EPF:

Year

EPF Dividends Declared (%)

Year

EPF Dividends Declared (%)

1952-59

2.50

1988-94

8.00

1960-62

4.00

1995

7.50

1963

5.00

1996

7.70

1964

5.25

1997-98

6.70

1965-67

5.50

1999

6.84

1968-70

5.75

2000

6.00

1971

5.80

2001

5.00

1972-73

5.85

2002

4.25

1974-75

6.60

2003

4.50

1976-78

7.00

2004

4.75

1979

7.25

2005

5.00

1980-82

8.00

2006

5.15

1983-87

8.50

2007

5.80

 Source: Bank Negara Malaysia and www.kwsp.gov.my

Another aspect to take into consideration, when investing is the inflation rate. Inflation is like a virus to our money. So when you are planning for retirement, ask yourself how much profit you actually make after deducting the inflation rate?

Imagine keeping all your money in EPF. Let’s look at last year alone. EPF announced a 5.8% return. Yet the inflation rate last year (announced by Bank Negara) was at 2.00%. This means the real dividend rate given to EPF members last year was 3.80%.

When we plan for investment we are planning for the future which means the value of RM1 would probbaly be a lot lesser. When I was in secondary school I get 50 sen spending money a day. That was in 1986. Today, my friends’ who have school going children give their kids RM1 to RM2 a day for spending money.

Another factor to think about is how much money do you think you need to sustain your lifestyle when you retire? According to studies, on the average, Malaysian men live to be about 75 years old while the women live to be about 78 years old. So you may wanna think about how much money you need to maintain your lifestyles the next 20 years (for men) or 23 (for women) after you retire.

Coming back to investing in unit trust funds, the government allows EPF members to take out a certain portion of their  EPF money from Account one (only) to be invested into a unit trust fund for their retirement.

This is to enable EPF members double or even triple their investments depending on the age they start investing and amount they can put in. 

Investing your money into a unit trust fund does not mean taking out all your EPF savings from Account 1 (Account 2 is strictly for education, medical, housing etc). There is a formula as to how much an investor can take out for investment purposes. It depends on an investor’s age and amount available in his/her EPF account 1. 

From January this, an EPF member as young as 18 years old can start taking out money from their EPF and invest it into a unit trust fund if he/she has a minimum of RM1,000 in account 1. This means for example if Ali, 18 years old, has RM3,500 in his EPF account 1 he has to keep the RM1,000 in EPF Acc 1. He can only invest 20% of the balance into a unit trust fund.

This means, (3,500-1,000) x 20/100 =500.

So, for a start Ali can only invest RM500.

And in order for EPF members to double or triple their investments, they are allowed to take out their EPF money from Account 1, four times a year. This is to allow them to leverage on the dollar cost averaging.

So, do explore what’s available out there so you can make the most of your money. Diversifying your investment is definitely the way to go. 

 

 


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