The weakening of the Malaysian ringgit (RM) against the US dollar can potentially erode the value of your ringgit-denominated savings. This depreciation has been driven by various factors beyond your control. As a result, many Malaysian investors are exploring wealth management strategies to diversify their portfolios and potentially offset the impact of a weakening ringgit.
Why Diversification Beats Chasing a Single Currency
Simply converting all your investments to foreign currencies isn’t a guaranteed solution. Not all foreign currencies remain strong against the ringgit all the time. For example, while investing in US dollars may seem attractive now, the dollar could weaken in the future, leading to losses if the ringgit appreciates.
Instead of concentrating on singular currencies or stock market darlings, a well-diversified portfolio spread across multiple economies and currencies offers a more effective and sustainable approach to investment planning in Malaysia.
3 Benefits of a Diversified Portfolio
Diversification mitigates risk by reducing exposure to the fluctuations of any single market. Here are the 3 benefits of having a diversified portfolio:
- Weakness in one currency can be offset by the relative strength of others.
- Exposure to multiple stock markets reduces reliance on any single country.
- It positions your portfolio for long-term growth despite regional volatility.
How to Determine Your Foreign Allocation
Maintaining a strong ringgit base is crucial for daily needs since most expenses are still denominated in ringgit. A general guideline is to limit foreign currency investments to no more than 30% of your investable assets. This ensures your portfolio remains diversified while keeping your liquidity intact.
- Diversification can potentially increase overall returns.
- Exceeding 30% allocation increases exposure to currency fluctuations.
- Overexposure has historically led to losses for some investors who feared ringgit depreciation.
What Is The Difference Between Local VS Foreign Investment Markets?
Investing abroad can be an eye-opener for those unfamiliar with overseas markets. Unlike Malaysia, countries like the US, Singapore, and Hong Kong have more open markets with fewer regulatory restrictions and less government support. This openness attracts higher global portfolio fund flows but also results in greater volatility and price fluctuations.
Bonds – Stability vs. Volatility
Take bonds as an example. In Malaysia, bond investments are relatively stable, similar to fixed deposits.
However, in other countries, bond funds experience more price volatility. A Malaysian bond fund (Fund A) might show steady growth, while US (Fund B) and European (Fund C) bond funds fluctuate more and underperform Fund A. All three funds invest in somewhat similar investment-grade papers, only that they invest in different markets. This disparity can be surprising for Malaysian investors.
Case Example – Why Research Matters
I once had a client who lost a significant portion (around 20%) of his investment in an Asian bond fund based in Singapore. Unfortunately, he wasn’t properly informed by their financial advisor about the specific risks associated with this particular fund. A little more research or consulting an independent financial advisor, and he could have avoided such a significant loss.
Equities – Diversifying Across Regions
The same principle applies to overseas equity investments, where markets can be more volatile than Bursa Malaysia. Investing in equities globally can be achieved by purchasing investment funds that cover different regions.
For instance:
- You can buy a fund that invests in the US.
- Another that covers Europe.
- One for Asia.
Additionally, consider investing in a fund that covers China. China’s rapid economic growth makes it a separate, attractive market for some investors. This approach allows you to potentially capture opportunities with established players like TSMC (Taiwan), Nvidia (USA), and Apple (USA) alongside the diversification benefits offered by regional funds.
Summary Table of Local Vs Foreign Markets
| Aspect | Bonds (Malaysia) | Bonds (Foreign Markets) | Equities (Malaysia) | Equities (Foreign Markets) |
| Volatility | Relatively stable, similar to fixed deposits. | Higher price volatility (e.g., US, Europe, Singapore). | Less volatile compared to some foreign markets. | More volatile than Bursa Malaysia. |
| Performance | Steady growth over time, fewer large swings. | Could underperform Malaysian bonds due to market fluctuations. | Familiar companies make performance easier to follow. | Potential for higher growth, but with significant fluctuations. |
| Example of Pitfalls | Generally predictable, lower risk if held to maturity. | Potential losses if not properly researched; e.g., client losing ~20% in an Asian bond fund. | More familiarity for Malaysian investors. | Requires thorough research; less familiarity increases the risk of unforeseen challenges. |
| Diversification Approach | Mostly local instruments; simpler to track and manage. | Requires regional diversification for stability (US, Europe, Asia, China). | Investors typically focus on local companies they use daily. | Broader exposure across regions and sectors recommended for balanced risk. |
5 Challenges of Investing Abroad
While familiarity with local companies comes naturally through daily experiences using their products and services, venturing into foreign markets presents a knowledge hurdle.
Even in today’s globalised world with vast information flow, conducting in-depth research on foreign companies requires a significant time commitment. This can be particularly daunting for busy investors. As a result, your knowledge of these markets may be limited, potentially leading to unforeseen challenges.
5 Common Challenges:
- Staying up to date on international news and regulations.
- Understanding tax rules in other jurisdictions.
- Tracking company announcements in different time zones.
- Assessing political and currency risks.
- Ensuring information sources are reliable.
Why Professional Guidance Makes Sense
Given these limitations, attempting to pick individual stocks or properties overseas on your own can be risky.
My advice? Leverage the expertise of professionals.
- Unit Trust (UT) or Exchange-Traded Fund (ETF) fund managers actively research and invest your funds in promising opportunities across various markets.
- This allows you to benefit from their knowledge and experience without the time commitment required for in-depth individual research.
ETFs – A Simple Diversification Strategy
Alternatively, consider Exchange-Traded Funds (ETFs) for a more streamlined approach.
ETFs track a specific market index, like the S&P 500, which comprises leading US companies with strong financials. Investing in an ETF provides:
- Instant diversification within a particular market.
- Lower costs than actively managed funds.
- Less need to research individual companies within that index.
Key takeaway: ETFs can save you time while still providing broad exposure to international equities.
Safeguarding Your Capital – Avoiding Scams
When investing in foreign products, consider the safety of your capital. Be wary of investment opportunities that seem too good to be true.
For instance, an offshore commodity product once promised attractive double-digit annualised returns but turned out to be a scam, leading investors to lose all their money. This underscores the importance of differentiating genuine investments from scams—a challenge many Malaysian investors face due to limited knowledge and experience.
Cash Flow Needs and Investment Holding Power
Proper cash flow management is crucial when investing in foreign markets. Just like any investment, it’s important to ensure you have a clear understanding of your current and future cash flow needs.
Case Example
A client of mine once underestimated the amount of cash he would need to complete construction on his dream bungalow after having invested a significant portion of his liquid assets in foreign investments. This forced him to withdraw his foreign investments at a loss to cover the shortfall.
Key Takeaway: 3 Steps to Safeguard Your Cash Flow
- Plan an emergency fund covering six months of expenses.
- Reserve funds for loan repayments and near-term commitments.
- Avoid investing money you may need in the next three years.
Diversification and Due Diligence
Diversifying investments across markets, asset classes, and currencies is a sound risk management strategy. However, never assume foreign investing is akin to local investing.
How To Evaluate Foreign Investments:
- Conduct thorough research on the investment environment and regulations of the country.
- Study the investment product carefully and consult a professional if needed.
- Once invested, monitor the performance closely.
- In volatile markets, act swiftly to secure profits or mitigate losses.
Final Thoughts – Navigating a Weakening Ringgit
A weakening ringgit shouldn’t be a cause for panic. Instead, view it as an opportunity to broaden your investment horizons.
By strategically adding a slice of foreign investments to your portfolio, you can potentially hedge against currency fluctuations and tap into markets with exciting growth prospects. Remember, the world of foreign investments can be a powerful tool, but it’s not a game. Start exploring cautiously and with a well-crafted strategy. With the support of a professional, you can position yourself for a more secure financial future despite the challenges of a weakening ringgit.
This article is based on a published editorial. Read the full article: Financial Strategies to Counter the Weakening Ringgit