By CECILIA KOK
AT a recent gathering with friends, 30-year-old David T, an executive with a chemical plant in Port Klang, shared with them that he had just forked out money to invest in a structured fund that came with a maturity period of 15 years.
David said he liked the product because of its capital-guaranteed feature, on top of a guaranteed return rate of at least 30%. But his friends were rather surprised by his investment choice because they had always known him to be a playful guy with quite an appetite for risk. They thought the maturity period of his new investment was a tad too long for him.
But unknown to many of them, David actually owns a diversified portfolio of assets, comprising gold (10%), mutual fund (30%) and equities (60%). He regularly rebalances his asset allocation according to the prevailing market conditions to achieve his financial objectives. Based on his investment strategy, suffice to say that David is an example of a smart investor who knows his needs and risk tolerance.
According to financial advisers, what makes a meaningful and successful investment strategy is proper planning.
Mike Lee
As CTLA Financial Planners Sdn Bhd managing director Mike Lee explains, an individual with a proper investment plan will be able to cope better in different economic cycles – whether in a recession or a boom – compared with an individual who does not have one. He reckons that most people who fail in their personal investments are those who have failed to plan.
Financial advisers say individuals should plan their investment based on their risk tolerance capacity and financial needs or objectives, which encompass their preferred time horizon and rate of return as well as affordability to invest.
Being clear with one’s investment objectives will make the selection of asset classes in which to invest easier, Lee says.
For example, if an individual’s objective is to earn an annual return rate of 8% (be it for a child’s education or retirement), the individual just needs to select a combination of investment instruments that could provide such returns.
This will help investors avoid taking unnecessarily high risks through speculation or timing the market and rushing to earn high returns, Lee explains.
As for investors who want to minimise and recoup any potential losses from their investments, financial planners have always advocated a diversified holding of assets and the dollar-cost-averaging strategy.
Whitman Independent Advisors Sdn Bhd managing director and renowned author Yap Ming Hui says it is important for individuals to diversify their investment portfolio in terms of asset classes, countries and companies, and find an optimum allocation for each category to match their financial objectives and risk profiles.
Yap always advises his clients to assess their investment portfolio and rebalance their asset allocation regularly in response to the constantly changing market conditions.
For instance, when many investors would have lost a huge portion of their wealth following the bloodbath in the financial markets about six months ago, Yap had started advising his clients to restructure their investment portfolio to prepare for a strong recovery ahead.
Nevertheless, it is still not too late for investors to restructure their asset allocation now, but financial advisers say investors should stick to the timeless principle of “buy low and sell high”.
According to Yap, as long as the investors’ time horizon is at least five years, a strong recovery is expected. He says that with a foreseeable recovery, investors will have the opportunity to recoup their losses and make financial gain.
If investors do not restructure their asset allocation given the present opportunity, they could miss the ride on the recovery bandwagon and might have to wait for another 10 years for the next downcycle.
On the other hand, what about those who are near retirement age or are already there?
It is generally perceived that at that stage, one should not take too much risk in one’s investments because the need for liquidity could arise anytime. So, it seems ideal that they just stick to fixed-income instruments such as fixed deposits, bond funds or money market funds that provide more stable, albeit lower, returns.
However, CTLA’s Lee says: “If all investments go into fixed-income instruments, their returns would easily be wiped out by inflation.”
Lee adds: “Some allocation to higher risk instruments is still necessary, but this requires a careful selection of high dividend yielding stocks or even REITs. These instruments also provide investors the opportunity to make capital gains when the market is bullish.”
So, instead of using one’s age to determine one’s asset allocation, Whitman’s Yap recommends individuals to consider their needs and put their monies in the right buckets.
There are three buckets as Yap sees it. The first bucket comprises low-risk assets such as savings and current accounts, fixed deposits and bond investments. While this bucket generates relatively lower returns, it offers investors liquidity – hence, immediately available funds for emergencies.
According to Yap, a working adult should have at least six months’ worth of expenses invested in the first bucket, while for a retiree, the ideal would be three years’ worth of expenses.
The second bucket comprises moderate-risk assets such as balanced funds and selected properties that provide consistent above-average returns with limited downside risks. Yap says this category can be invested with money that will not be used for the next three to six years.
It is meant for long-term goals such as retirement, children’s education and wealth enhancement. And at least, this category of investment will not see its values depleted by inflation, Yap explains.
The last bucket comprises high-risk assets such as equities that could generate high returns. And for an older person, this category should only be considered if one has excess cash.
“Fill up the first two buckets first,” Yap says, “then only think about the third bucket,” he adds.