“When to spread investments and not sit on savings”, featured in StarBiz, The Star, on 7th July 2012.
AT my favourite kopitiam recently, a customer was distressed to find that his morning cuppa now cost RM1.30. It struck him that the price of his breakfast coffee had been climbing up steadily. Three years ago, he remembered, it had cost him RM1 to get his routine caffeine fix.
“That means, inflation is pushing prices up by 10% annually,” he pointed out anxiously.
Indeed, inflation is very real for the man-in-the-street today. Everyone can feel the purchasing power of their income being eroded increasingly. They see it when they have to pay more for food, clothes, transport and other services and higher taxes.
This was not the case about 10 to 15 years ago, when inflation was seen mostly in the property sector while other prices were more stable. At that time, people needed to be educated about the effects of inflation on their lives.
How then should we deal with inflation? Let’s look at what to do when spending and investing.
Firstly, we now need to plan our spending better. Before deciding what we want to buy, we should ask ourselves: Is this a need or a want?
When times are good, we tend to develop the habit of accumulating our wants, and over time, many of these wants will become standard.
If we want to get some exercise, for example, today it has become quite normal to spend about RM1,000 to RM1,500 a year on gym fees alone. That’s not including the wardrobe and shoes. Ladies, in particular, may want several sets in matching colours.
To cut down the effects of inflation, we must ask ourselves some questions about these lifestyle choices.
Secondly, we have to time our purchases for items like clothes and electrical appliances. Previously, we could buy these items whenever it suited us. Now, we should wait until retailers hold sales carnivals or warehouse sales. Shopping carefully can help us to deal better with inflation.
Thirdly, we can cut down on eating out. When a bowl of seafood noodles that cost RM9 before the festive season gets inflated to RM12 in a week take it or leave it that smacks of profiteering. In such a situation, it’s time to exercise our consumer power. We can choose not to patronise food operators and restaurants that hike their prices without a valid justification. Instead, we can opt to cook at home more often.
Adjusting our investment behaviour during inflationary times is equally important. The idea is to limit our cash in hand when inflation bites, because cash depreciates in value in such a situation.
Here is how it works: Assuming that inflation was 4% a year ago, and the interest we were earning on our savings was 3%, that means our money was losing value at the rate of -1% annually.
Now, if the rate of inflation is taken to be 6%, the value of our money is shrinking at -3% per annum. Clearly, sitting on our savings is not an option.
Those who have an active income should maintain a cash reserve of six months’ living expenses and put the rest of their money to work.
People who have recently retired and collected a lump sum from their life savings should at most keep three years’ worth of living expenses in cash. For example, if they need RM30,000 a year, they should limit their cash pile to RM90,000 and invest the rest.
It is very important to realise that in times of rising inflation, it is not OK to sit at the sidelines.
There are three main categories of investments to consider as a hedge against inflation. The first is equities, because as material prices increase, businesses will eventually pass their costs on to customers. This will lead to higher revenues, and with that, an increase in their profits too, which will be reflected in the value of their shares.
So, it makes good sense to invest in shares because their value is not depleted by inflation. By choosing good quality equities, we can ride out the storm that comes with the rising cost of living.
The second category for investment is the property sector. This is an obvious choice because land prices tend to rise due to inflation. The cost of building materials goes up too, so the developers will increase their prices. Property prices will definitely increase over time.
But what about the bubble effect? Well, inflation tends to exert constant upward pressure on prices, but bubbles will burst eventually and prices will come down. The bubble factor includes the inflationary too.
Nevertheless, investing in property makes sense in the longer term even though the bubble effect may affect the property market in the medium term. Moreover, the bubble effect is more pronounced in certain urban areas, such as parts of the Klang Valley. Towns a little farther like Semenyih and Rawang see less of the bubble effect and more of inflation.
Secondly, since property investment should be seen in a longer time frame of five to 10 years, the investor should not be too worried. Another option is to buy land instead of property, as land is less susceptible to the bubble effect. However, the time horizon for realising gains is much longer, since the investment will bear fruit after at least 10 years.
The third category unit trust funds is suitable for beginners in the investment game, who are not so savvy about what to do. However, be aware that not all unit trusts are the same. For example, a unit trust that concentrates on the money market and bonds will not help much in the fight against inflation. Funds that focus on equities should be the preferred choice. To hedge against inflation, at least the fund should have a balanced portfolio.
For people who hold only cash, inflation will leave them much poorer just five years from now. So, do your homework and spread your investments over different types of assets. In times of low inflation, it won’t hurt if you don’t do anything, but today, you have to come forward and educate yourselves about investing.
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