Investing is Simple – Get Started!

You want Financial Freedom? Save, Invest and Start Early.

There are countless ways to getting rich here in Malaysia. For the average and majority of Malaysians, I urge you all not to get caught up in the many get-rich-quick shortcuts out there. Instead, opt for the long winding but proven path of hard work, savings and consistent diligent investing.

The crucial and key thing is to get started and get started early . It’s best to save and begin investing at an early age. You should even start saving and investing on behalf of your kids the moment they’re born to give them an edge in this dog eat dog world. And trust me, saving as little as RM100 a month for your children the day they’re born will help them start off with about RM50K in their accounts on their 18th birthday. If I had RM50K to start with, I’m sure my portfolio would be much much bigger now. Start early!

Yes, saving money isn’t fun. Investing in boring index funds and the stock market for the long term isn’t sexy. And yes, it takes years, decades even, to build wealth this way. But trust me, it’ll all be well worth your while when you realize you have enough passive income to sustain your lifestyle.

One advantage I had was learning about the importance of investing at an early age. I was fascinated with the concept of passive income during my university days and started learning how to value stocks. I read tons of books on investments and decided at an early age to embrace frugality and diligent investment. I devoured and poured through books on investing and personal finance. Every day I checked the share prices of stocks I was watching in the newspaper. I loved it!

Investing isn’t just for the Rich

Because I’ve been asked this a thousand times over, I’d like to emphasize – Investing is simple and you can start with ANY amount. The crucial part is just to GET STARTED!

I’m 28 this year with a portfolio (my Freedom Fund) of RM300,000 in stocks. I started out with just over RM10K saved up from my university days. Too many people around me have put off their finances because they claim not to know a thing about investing. The most important step for you to take is to get started. Save up, pick a stock you can understand and invest in it. It doesn’t matter if you have a million dollars or only RM1,000. Just get started.

Dividend Magic - Investing is not for the rich

Investing Analogy

Here’s an analogy on investing I love.

Let’s say you are a farmer, you buy a little baby calf for RM2,000. It eats a lot of grass and over time grows into this big, beautiful, strong cow that’s now worth RM10,000. On a nice Sunday morning, you walk your cow down to the farmer’s market in town, and you sell it for RM10,000. Boom, a RM8,000 profit (and you didn’t even have to pay for the grass). This is your capital gain. Now, the period before you sold off your cow, your cow produced milk which you consume and sold off to your neighbors. This is your dividends.

  1. Your cow – Stocks (Asset)
  2. Your milk – Dividends (Cash flow)

Investing is really that simple, and you can start with any amount of money.

Now, lets take it to another level. You could’ve kept that RM2,000 you had at the beginning in your savings account. Over 20 years based on the 3% interest rate banks are paying now, your RM2,000 is now worth RM3,612.22.

OR, you can invest RM2,000 in the stock market. The KLSE index rose from 838 to close at 1813 on 29th November 2013 from 4 years ago for a total gain of 116%. On average, the compounded annual growth (CAGR) each year is 11%. Historically the markets around the world earn about 10% per annum, so here’s how much RM2,000 might be worth over 20 years, compounded at 10% per annum – RM13,455.00. (Note, this is the simplest illustration and example I could come up with, of course, many other factors come into play when one invests.)

Now compare investing to saving. Which one of these looks like the option to build wealth? Right, investing.

Mutual Funds and their Damned Fees

You’ve probably heard of investments like mutual funds, target date funds, or index funds. You might even own some of them. All of these funds have fees (also called the expense ratio), and if you’re smart you can save money on them.

Dividend Magic - Mutual Fund & Unit Trust Fees

Mutual funds are the worst (especially in Malaysia) because they rarely beat the market and usually have the highest fees, the average in Malaysia is a whopping 3%, I’ve seen some as high as 5%. These might all seem like insignificant numbers, so why does it even matter? It matters. Here, I’ll do some calculations to show you.

Let’s say you invest RM10,000 and earn 7% over 50 years.

0.0% fee: RM10,000 grows to RM294,570
1.0% fee: RM10,000 grows to RM184,202, and you lose RM110,369 in fees
2.0% fee: RM10,000 grows to RM114,674, and you lose RM179,896 in fees
3.0% fee: RM10,000 grows to RM71,066.83, and you lose RM223,503 in fees

I cannot emphasize how fees can kill your investments. I hope the above illustration will get through to my fellow investors out there. With a 2% fee, you’re essentially losing more than 50% of your investment to fees alone. What’s even worse is that the above example assumes you’re earning a 7% return p.a., what if you’re losing money? The funds still collect the fees from you! Isn’t that outrageous?

By investing in your own portfolio of shares, it means more money for you, less for the fund houses. Also to note are low cost Index Funds from companies like Vanguard that serve to mimic the market. The day that they come to Malaysia is the day I’ll dump most if not all of my savings into them.

(I understand some of you may be mutual fund agents and investors here so if you disagree, please do provide me your reasons for it. Don’t just send me hate messages and emails.)

Hacking inflation

Dividend Magic - Inflation

People love to get really worked up about inflation. Here’s what I think about it.

The best savings accounts earn about 1-3%. These accounts are great to stash money for an emergency, or to save a down payment for a house. The best Fixed Deposits (which you can only get if you deposit about RM10,000 and above for a few years) usually earn just less than 4%.

With Malaysia’s official inflation rate averaging roughly 3% (we all know it is much higher, I reckon its close to 4.5%), keeping money in a savings account or FD are both bad for building wealth because they don’t even keep up with inflation.

However, I always recommend keeping roughly 6 months of your take home pay in FDs as your emergency fund. The rest should be invested.

Going from RM0 to RM1,000,000

I want to show you something. Assume you’re 25 right now, and by age 50 you want RM1 million. To accomplish this goal, assisted by a conservative 7% return p.a., you need to save and invest just RM1,235.24 a month. Think about what happens when you increase this amount as you progress in your career. RM1 million isn’t a far fetched dream, it’s actually very much attainable and we should in fact aim higher.

The key takeaway from all this? If you really want to build wealth, you need to start investing right now. The longer you put it off the harder it becomes. And for you people whose time is not on your side, you should start investing too, it is never too late. More importantly instill this lesson in your children and future generations.

GET STARTED!

If you find the above makes sense and you’re ready to start investing, I suggest taking a look at – A Guide to Stock Investment in Malaysia

If you’re interested in the stocks I invest in, you may find a full list of them in my portfolio – The Freedom Fund.

Again, be sure to read up and understand the company you’re planning to invest in. Keep it simple and consistent, and invest for the long term. Remember, start early and start now.

“The best time to plant a tree was 20 years ago. The second best time is now.” 

I’ll see you in 30 years.

Dividend Magic - Invest - "The best time to plant a tree was 20 years ago. The second best time is now."

 

Financial Planning for a Friend

Hey guys, I’ve always been an advocate of savings and sound financial planning. Whether you’re crumbling under substantial amounts of debt or you’re swimming in endless wealth, financial planning can and will have a significant impact. As I’ve mentioned several times before, I’m a certified financial planner (under the Financial Planning Association of Malaysia).

Financial Planning

Today, hopefully with a real life example of my friend, I’ll be able to shed some light on how solid and sound financial planning can help everyone.

Financial Planning for a Friend

At the beginning of February this year, one of my close friend, let’s call him Mr.S approached me for some financial advice, mainly on fixed deposits. You’d be surprised how many Malaysians don’t even know what an FD is. He was expecting a simple answer for a simple question: ‘How do I place an FD?’. As a concerned (and curious) friend, I pried a little about his current financial status and offered to help with his financials (at no charge of course). He basically had RM600 in his savings account, a RM50K car loan and no other assets to his name.

A little more digging and I came up with the following details:

  1. Net Income: RM1,800
  2. Monthly (necessary) expenses: RM900 
  3. Loan repayment: RM640
  4. Savings: RM600
  5. Remaining Car Loan: RM15,000

These are real life details which I won’t be substantiating with any picture of documents or anything like that for his privacy, you guys will just have to trust me on this.

Action Plan

First thing I set about getting him to do was:

  1. Open a M2U savers account which earns him around 2-2.5% if the amount was over RM2K; and
  2. Every time he receives his salary, RM500 MUST first be transferred to his M2U savers account without fail. This amount is not to be touched under any circumstances. (This is part of a pay yourself first plan where he saves first for himself and then forces himself to live on the remainder.)

I basically taught him the magic of compounding interests. Yes I know, 2% on RM2,000 is only RM40 a year, but with regular savings coupled with the compounding, one can build immense wealth in the long term. The RM2K requirement will serve as a short term and very achievable goal for him which at the time would serve to start him on the habit of saving. So for the less financially savvy readers, here’s what I basically showed my friend:

Firstly I asked him if he continued saving RM500 a month for 10 years, how much would he have saved? A simply multiplication of RM500 x 12 months x 10 years would give us RM60,000. Not too shabby right? Now add 2% interest per annum, compounded monthly, that gives us RM67,092. That’s an additional RM7K in interests earned. Next, I’ll put these figures in a table for better comparison. All will be based on RM500 saved monthly, compounded monthly an initial amount of RM600, and for a period of 120 months.

Interest Rate (per annum)Amount at the end of 10 years
0%RM60,000
2% (savings account)RM67,092
3.5% (fixed deposits)RM72,567
5% (conservative stock picks ie. REITs)RM78,629
10% (sound investing)RM104.046

Enough said. As you can see from the table above – the magic of compounding. Of course, a few caveats, the main one being – don’t expect your investments to compound monthly regularly, I did the calculations on that basis for more uniform comparison.

How he’s doing now

8 months later today, Mr.S has amassed RM6K in his savings account and he owes less than RM10K on his car loan. What I am always happy to see in certain individuals like him are that once they start saving and realize they can do it, they eventually take it upon themselves to increase the amount saved. He got a commission bonus for a sale he made recently and what did he do with the money? He saved almost all of it. As a financial planner and his friend, I can’t even begin to tell you how proud I am of him.

So what’s next you may ask? I’ll be getting him to place his RM5K into a one month auto renewal FD which should see him earn around 3%. Rinse and repeat until he saves up around RM10K, then we will see to his investing in the stock market. We will be taking it slow and at his own pace of course.

Conclusion

As a final word, again I stress the power of investing and the power of compounding. If you are complaining that you cannot afford to save RM500 a month, fine, start with RM300, if you still say you can’t do it, I call bullshit. Do what I did with Mr.S, save your RM300 and put it aside first, and find ways to deal with your other expenditures. A good starting point would be to start at 15% of your take home income. Increase that number if you want to be financially free quicker.

Having money saved up in your bank account, you will be able to feel a sense of freedom and security like never before. For the younger generation, time is on your side, start investing now, take care of your investments and reap the awesome rewards in the future. For the older generation, if your finances are not already in order you may need to consult a financial planner.

With all that said, if any of you have questions regarding your financials please do not hesitate to contact me through our FB page or you can leave your questions in the comments section. Don’t worry I will not be charging any of you for such questions.

If however any of you are interested in a comprehensive plan and a long term financial planner, do contact me as well.

As always, thank you for reading! Have a good weekend.