Wednesday, October 22, 2008


(If you have reservations about the wisdom of investing your money in these financially-troubled times, you may find the article below quite helpful.)

The world is going into financial meltdown. As pictures of panic-stricken stock traders are splashed on the front pages of our newspapers, what are we, the little people, supposed to do with what little we own? How should we respond to this crisis? ANIZA DAMIS of NST turns to independent financial planner Yap Ming Hui for some advice.

Q: Is this a good time to invest?

A: Yes, provided that the money you are going to invest is money that you are not going to use or need for the next three to five years.

Q: Why do you need such a period of time?

A: Because you need to make sure that you don't need to sell your investment if it goes down by 20 to 30 per cent. Otherwise, you will be forced to realise a loss. If you keep the investment for three to five years, chances are it will have recovered any loss in value or seen a gain by then.

The second criteria for investing is, whatever you invest in must be something that you really know. And it has to be something of good quality. You should invest in something that is recession proof, like a stock or a company that is involved in businesses such as food, daily consumer items, healthcare or transport.

Q: Bank Negara has guaranteed all deposits in the banks. But should you let your money just stay there?

A: Before you decide, look into your current income level, expenses and see whether you are in the black or in the red. Also, take stock of all the assets and liabilities, only then will you know where you can go. But, before you invest, you need to provide for an emergency fund.

Q: How much should that be?

A: If you are working, you should provide for at least three to six months' expenses. Your expenses should include all your instalment payments. If the economy slows down, we can expect some retrenchment. If this were to happen to you and you've invested all your money, you will have very little cash available. While you are looking for a job, you still have to eat, pay the rent, and so on. If you don't provide for an emergency fund, you will be forced to sell your investment at a loss.

Q: How financially secure should you be before you consider making investments?

A: Let's say you have RM20,000. Assuming your monthly expenses are RM2,000, a three-month emergency fund would amount to RM6,000. So, if you've got RM14,000 to spare, you can invest that RM14,000.

Q: If you don't have any business sense, wouldn't it be safer for you to keep your money in the bank and let it ride out the recession, or should you take your money out and invest it?

A: If you don't need the money for the next three years, you should invest it. There will always be inflation. That is why you must invest. You must put your money in an investment that gives you high enough returns to offset inflation. But the problem here is you cannot invest without providing for short-term liquidity.

Q: How secure is the Employees Provident Fund (EPF)?

A: EPF should be very secure because the government is behind it.

Q: If you think you've got a foolproof investment, is it better to take your money out of EPF and invest it?

A: There's no foolproof investment. Some people may have the impression that if they invest in unit trust, they'll be able to get a better return. There are two types of people who invest in unit trust funds: The first type invests blindly and simply listens to tips from his agent. The second type has a proper investment strategy. He knows how to diversify his unit trust investment, how to monitor it and rebalance it when necessary. He knows how to deal with the threat of a crisis and opportunities along the way. We can expect the second type of investor to do better than EPF.

Q: Some people have a lot of money. But what about people who can only afford RM10,000 or RM20,000? Is this too small an amount to invest?

A: There's no such thing as too little or too small. If this is money that you can put aside, you should invest it.. When it comes to investment or financial management, inflation works against us. But time works for us if we know how to make use of it. We can accumulate and compound the gains we make in our investments over an extended period of time.

Q: If you're renting, should you buy a house now?

A: Usually, when the economy is not growing as fast or there is a recession, there will be less demand for raw materials. So, the price of raw materials will drop and it will probably cost less to build houses. So, if you want to buy a house maybe you should wait until the recession actually hits. When this happens, housing developers will launch their projects at a lower price.

Q: If there's a recession in six months and that's going to affect your other expenditures, is it still a good idea to buy a house?

A: If you are going to buy a house, you must have enough liquidity to take care of short-term problems.

Q: So, if your economic situation is not very stable, it's better to continue renting?

A: Yes, because if you're retrenched, you'll end up with liabilities. You may even become a bankrupt.

Q: Should people be selling their shares now?

A: It depends on the kind of shares you are holding. If you are holding some blue chip shares and the company is very solid, then you should wait for the market to rebound. The market will definitely rebound. But if your shares have weak fundamentals, and the company is not performing well, then you need to sell because it may get worse. Even if the economy recovers, and the bourse rebounds, the shares may not go up. You might as well sell the shares now.

(Yap Ming Fui has a fortnightly column in The Sunday Times where he shares his expertise on financial matters affecting Malaysians.)

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