Low Risk Investment In Malaysia
One common question that I am always asked by the readers and seminar participants is where to invest my money (of course, in a proper way). In the marketplace, there are so many low risk investment in Malaysia.You can put the money into different types of saving account, properties, shares, unit trust funds, commodities, structured products and other investments. Each of them has its advantages and disadvantages. To invest successfully in the long run, I would suggest that one should not to rush into any of these investments before having a game plan for your low risk investment in Malaysia. In Warren Buffet’s words, it is a sound intellectual framework. He once said, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” This game plan of investment that I would like to share today is the 3 money buckets concept. This concept is easy to understand and apply in you own context.
The 3 Buckets for your money
What is 3 money buckets all about? Basically, this idea advocates that one should allocate all his money into 3 money buckets as shown below:
The First Money Bucket is money bucket where you put your low risk assets. The purpose of this money bucket is to give you liquidity, especially in the time of emergency. The suitable investment asset to put into this bucket is saving account, fixed term deposit and bond investment. The suitable investment asset here must be low risk. As such, you don’t expect high return for investment asset in this bucket. If you are under employment, you should put about 3 month’s living expenses amount of money in this bucket. If you are self-employed or business owner, you should put about 6 month’s living expenses amount of money into this bucket. If you are a retiree or to retire within 3 years, you should put about 3 year’s retirement living expenses amount of money in this bucket. If you have any cash-flow commitment within 3 years like children’s tertiary education funding and others, you should also provide it in this bucket.
The second money bucket is money bucket where you put your moderate risk assets. The purpose of this money bucket is to fund your long term financial goals like, retirement expenses, children’s tertiary education and long term wealth enhancement. The suitable investment asset to put into this bucket is diversified and balanced portfolio of unit trust, shares and selected properties. The suitable investment asset here should achieve reasonable return above inflation with minimum risk to lose substantial amount of the capital. The right target return for this money bucket should be around 8-10% annually.
The third money bucket is money bucket where you put your high risk assets. The purpose of this money bucket is to seek high return opportunity. For some people, the function is of this money bucket is give them some thrill in their investment portfolio. The suitable investment asset to put into this bucket will be direct stocks, initial public offering (IPO) stocks, single country unit trust funds, single theme unit trust funds like gold, energy, lottery, 4-D and other speculative investment. Basically, you have certain view on the market and you would like to take a position to benefit from it. For example, if you are bullish on China economic potential for the next 3 years, you will invest your money into a China fund hoping to capitalise on and benefit from the opportunity. The investment asset here should target high return in line with the high risk taken. The investment asset here will face the risk of either losing substantial amount of capital or even all of it. The right target return for this money bucket should be any return beyond 12% annualised return.
Guides to Fill Up the 3 Money Buckets
When starting out, one should always fill up his first bucket of money first before moving into second bucket of money. When you do that, you will ensure that you have the holding power for the investment you make in the second bucket. If there is an emergency where you need some money, you can always fall back on your first bucket to provide you the liquidity. Therefore, you can avoid selling your investment in second money bucket, especially when the market is not doing well and your investment is losing money.
One should minimise his money in third money bucket if his second money bucket money is still not filled up. We should put all our money for serious financial goals in second bucket. All money we have is hard-earned and limited. We should do our best to prevent from losing it. Therefore, we should be very careful in investing in the third money bucket.
By having the 3 Money Buckets, you will allocate your money to work for you for specific purposes. You will have money for your short term emergency needs. You will have money for your long term growth. You will have money to speculate as and when the opportunity arises. As a result, you will put the right money in the right place for the right purpose.
The Problem of Managing Money without 3 Money Buckets
Without using the 3 money buckets to guide your asset allocation, one tends to make 2 common mistakes. The number one mistake is to leave to much money in first bucket. Some people tend to leave more than enough money in the first bucket. It could be they don’t know how much should they put in first bucket. It could also be that they don’t know where else to put the money. As a result, their money will not be able to grow fast enough to fund their financial goals. Worse still, the money will also shrink over the years due to the erosion of inflation. The number two mistake is to put most if not all of the money into the third bucket. Some people never thought of putting money into first bucket and second bucket. They put all their money into the third bucket targeting for highest possible return. What is in their mind is just to get rich and get rich fast. As a result, they may lose a lot of their hard-earned money. They will also always face cash-flow problem every now and then. Personally, I have a classic story of how people make this mistake. Once, a gentleman approached me after a talk I conducted in one hotel in the 1998. He was then a CEO of a multi-national corporation. He told me that he has invested all his children tertiary education fund into the KLSE when the market was all time high. He felt that then was a good time to capitalise on the market growth and make some money. However, the market crashed and he suffered a paper loss of up to 70%. The worst thing was that his son is supposed to go to UK for study in next 3 months. This is really a classic mistake of how one failed to put his short term cash-flow into his first money bucket. He asked me what should he do. I can only wish that I have met up with him earlier to share with him the concept of 3 money buckets.
Even though the concept of 3 money buckets looks very simple and easy, it is a powerful and effective idea. If you can apply it effectively in your low risk investment in Malaysia, you can be sure to move yourself to the right track to financial freedom.