“Grow Retirement Nest Eggs with the Right Investment”, Published in The Star, On 03 December 2022.
Everyone wants to be assured that his or her nest egg for retirement will be adequate, if not comfortable. Unfortunately, with the trends that we are seeing currently – a steeper-than-usual inflation rate, the rising risk of a potential recession, and a slower-than-expected economic recovery – Malaysians who have depleted their savings or income loss during the height of the pandemic would need to rethink how they can achieve it.
According to EPF’s predictions, 73% of its members will not be able to meet the minimum threshold of RM 240,000 for retirement by the time they reach age 55. Based on EPF’s estimation, that would mean surviving with less than RM850 per month for the next 25 years. In my personal opinion, that is nowhere near enough for a comfortable retirement in Malaysia.
Meanwhile, if you belong to a group that believes that living expenses would cost less post-retirement, you may need to rethink your retirement planning strategy. A global study conducted by HSBC highlighted that 52% of people in retirement have seen no reduction in their outgoings. Instead, 17% have seen their outgoings increase after retirement.
This is probably the reason why so many middle-class folks are eager to invest and grow their money in the hopes of keeping their retirement dreams alive.
Through investing, you can be assured that your savings not just retain their value against inflation, but also exceed it by growing your wealth and retirement nest eggs
That last caveat is extremely important to your retirement nest eggs. It can make all the difference between retiring in comfort or losing your retirement fund in its entirety.
In the last two years, Malaysia have recorded almost 72,000 scams and RM 5.2 billion in losses, of which investment scams accounted for close to 12,000 of the overall number of scams. Like sharks smelling the blood in the water, a plethora of creative scams disguising themselves as “investment opportunities” have descended upon and prey on unsuspecting Malaysians who end up losing their capital, and some, even their entire life savings.
The Securities Commissions Malaysia (SC) has warned the public to be wary of self-proclaimed investment gurus who offer questionable advice. As a result, I feel compelled to share a set of proven investment strategies that have been practised at my firm to support our clients to retire financially free. This set of investment strategy is also the main feature of my latest book, Financial Freedom Investing – The proven investment strategy to grow retirement assets and achieve financial freedom with high certainty. Financial Freedom Investing is the result of decades of experience helping my client to invest their serious money – money that they cannot afford to lose and don’t want to risk.
“The first rule of an investment is don’t lose money. And the second rule is, don’t forget the first rule” ~ Warren Buffett
For starters, the investment strategy that I am about to share is only meaningful to serious investors looking to save up for their retirement. Therefore, if you are someone who lacks discipline, and patience, and is easily swayed by the latest fad investments, then the S.R.B approach is not for you.
Now that we have established some ground rules, let’s take a look at what this set of gold standard for investment represents and the need for every investment to fulfil its criteria.
Investments must be Safe (S)
In order to beat inflation, you need to invest in a fund that is volatile enough to get you the appropriate returns. As such, it is acceptable that your money may fluctuate between the range of 20% – 30% especially during a market downturn.
Many high-risk investments in the market promise to double or triple your money. However, there’s a correlation between risk and return – the greater the risk, the higher the potential for profit or loss. If you are serious about accumulating your retirement assets, then you must never be exposed to nor invest in products that have any risk of depleting your investments completely, up to 100%.
So how do we determine that products are safe? Your investment product must:
- Be regulated – In Malaysia, this means that the investment must be regulated either by Securities Commission or Bank Negara Malaysia.
- Have a third-party trustee or custodian – This means that the money is not being held directly by the investment product itself, but is being held by a third party trustee that protects the interest of its investors. This prevents any abuse and practices that go against the investment product’s deed and prospectus.
- Avoid leverage/ margin financing – Leveraged investment strategies or margin financing must be avoided at all costs. Any loss is amplified, and it is even possible to lose more money than you have available to invest.
- Have clear and solid underlying assets – the investment that you select needs to invest in asset classes that are tangible and have a solid value to grow over time, such as cash, bonds, shares, properties, or commodities.
- Be of moderate risk / return – investing in a low risk / return investment may end up not beating the inflation rate. Conversely, high risk / return may have you lose your capital. Rather than taking any unnecessary risks, one should always go for moderate risk/ return investment that offers around 7% – 9% annualized ROI.
- Be obtained on a regulated provider or platform – Scams and dubious online trading platforms are getting so sophisticated that it is harder to distinguished from the real deal. Ensure that you purchase your product on a platform that is regulated by local authorities. Failing to do so will not protect you from the possibility from losing your capital, even if you fulfill all the safety qualities mentioned above.
Investments must Rise in the long-term (R)
When it comes to investing, most are generally aware of the tendency of investment to rise and fall in value over the short-term. Over time, some of these investments will return to their original values, or some will go even lower than the original capital. These are NOT the type of investments you want to target.
When investing for retirement, you are looking for something that may fluctuate in the short-term, but in the long-term shows a generally rising or upward trend. These are the types of investment that can lead you attain financial freedom.
So, how does one look for investment that rises in the long term? The key word here is – diversification.
To illustrate, let’s take a look at the MSCI All Countries World Index or ACWI. This is a stock index that tracks the stocks of nearly 3000 companies from 23 developed countries and 25 emerging markets and used as a performance benchmark for investments globally.
If you have studied the MSCI All Countries World Index, you would have observed the value of the key stock indices steadily rising since 1998 despite several downturns and market corrections. Had you invested from the inception in 1998 till the end of June 2022, you would have made a total return of 1,480%, or an annualised return of 8.32%.
This is because the MSCI ACWI is a “globally diversified portfolio” that has the ability to average out the performance of thousands of companies in multiple countries. This is the primary aspect of an investment that rises in the long-term.
If you only invested in one company’s share in one country, it is uncertain that the company would continue to do well and rise in long-term. In fact, it may not even survive.
But by “investing” in a globally diversified portfolio of over 3000 shares, each share in your diversified portfolio performs differently as an economy grows and shrinks, and each offers varying potential for gains and losses. These essentially average out itself, and you’ll see enough winning shares to offset the losses. Nett, nett, your investment grows as a result.
While every investor wants to place their money in that one investment that only goes upward, this is more of a short-term targeted strategy, and never the long-term reality.
Thus, when investing, do ensure that the portfolio that you have chosen is well diversified globally to stabilise any short-term losses and grow your assets in the long term.
Investments must be Best of Breed (B)
Lastly, while ensuring that your investments are safe and diversified to rise in the long-term, it is also essential that you ensure your investments are best-of-breed.
What this means is that when selecting your portfolio of investments in each asset class, you should always aim to select the most optimal and quality investment choice in the category that you select.
For example, if you are planning to invest in Malaysian equity growth funds, you would want to have a comparison on how various Malaysian equity growth funds are performing. Next, pick the best-performing one compared to its peers.
The illustration below captures the performance of various Malaysian equity growth funds:
Without looking at this comparison, you might have taken a look at Fund B’s performance on its own and thought that this was a good fund to invest in.
However, because you now have a comparison chart, it’s clear Fund A is better-performing than the rest of the funds in the same category. If we are looking at purely past performance track record, then Fund A is considered a best-of-breed investment in this category.
However, in actual practice, the performance of the fund alone should not be the sole indicator to narrow down the best-of-breed selection. There are other factors to consider, such as the people who make up the fund management team, and the robustness of the investment process.
All these considerations should go into determining which is the best-of-breed investment to select in order to grow your money optimally.
Conclusion
When you’re looking to invest your money, you’ll find plenty of ways and options available to you – each promising to grow your wealth to lofty heights but few actually keeping to its promise.
In fact, more than 90% of investments in the market do not fulfill the criteria of the gold standard of retirement asset investing. If you’re not careful, you may accidentally buy into these investments that will derail you from accumulating sufficient retirement assets.
Therefore, my wish is that with this S.R.B standard, you’ll be able to tap into my decades of experience in retirement financial planning and have a sound framework to guide you to ask the right questions and ultimately select the best investment option.
If you think that the selection criteria are too strict and conservative – you are absolutely right. But when it comes down to investing your precious money for such a serious financial goal, there’s no such thing as being too cautious.
Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information shared is therefore strictly at your own risk.
The article is featured in The Star Online, at the following link: Grow retirement nest eggs with the right investment | The Star