Dividend Magic

Saving and Investing towards Financial Independence in Malaysia

FI/RE

Share Bonus Issues, Stock Splits and Free Warrants

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Filed Under: Dividends, FI/RE, Investment 2

What is a Bonus Issue?

A bonus issue is an offer of free additional shares to existing shareholders. They’re basically gifts to shareholders of the company, rewarding you and me with additional shares at no cost.

The bonus shares are issued and paid out of the retained profits of a company.  They’re issued as a ratio, based on the number of shares held by the shareholder. As an example below, Cypark handed out bonus shares at a ratio of 2 : 1. For every 1 share held, shareholders get 2 bonus shares for free.

Why are Bonus Shares Issued?

  1. To reward shareholders
  2. Boost investor sentiment and market confidence
  3. Increase liquidity
  4. Adjust the stock price to a reasonable range

As an existing shareholder, you may immediately sell the bonus shares the moment they are issued. This is why companies sometimes issue bonus shares in lieu of cash dividends. Or if you’re investing in the company for the long term and do not have immediate liquidity needs, you keep your increased shareholding.

It is however important to note that a share bonus issue does not involve cash flow. It increases the company’s share capital but not its net assets. It does not impact you as a shareholder materially.

In addition to this, a bonus issue increases the number of outstanding shares in the market. This in turn, will result in an instant decrease in the stock’s price, making the stock more affordable for retail investors.

What Should You Do with Your Bonus Issue

If like me, you’re a long term investor in the company and business, you’ll want to do nothing with the additional shares from the bonus issue.

Selling the bonus shares will lower your percentage stake in the company, giving you less dividends and fewer shares in terms of percentage in the stock. If this is difficult to understand, imagine every other shareholder, like you, receives the same bonus shares. If you sell yours and nobody else sells theirs, your holdings are less compared to everyone else.

So if you’re investing in the company for the long term, do nothing with the bonus issue, and be happy.

Difference Between a Bonus Issue and Stock Split

Both have many similarities as well as differences. Stock splits only serves one purpose – To increase the number of shares. Ie. To adjust the share price of the company to a lower level.

Many Malaysian investors still believe a company like Nestle whose share price is RM145 per share is “expensive”. Investing RM10,000 into Nestle or a low price share is the same thing. You’re investing RM10,000. End of story. 

When a stock is split, there is no change in the company’s cash reserves. In contrast, when a company declares a bonus issue of shares, the bonus shares are paid for out of the accumulated profits of the company, depleting reserves.

Similar to a bonus issue, if you do not have immediate liquidity needs, you should just hold on to your split stocks to maintain the status quo in terms of your percentage holdings in the company.

Warrants, Free or Otherwise

Scientex Bonus Issue and Free Warrants
Scientex-Berhad-AnnouncementDownload

Above is a 2020 example of Scientex’s announcement for a bonus issue plus free warrants.

In the example, as an existing shareholder, you receives two bonus shares for every one existing share held. In essence, splitting one share into three.

And in this particular instance, the company is also awarding free warrants. One for every five existing shares. However, it is important to note that the bonus shares are not entitled to the free warrants.

The warrants in this case are given as a bonus for investors, you can keep it to exercise at a later date or sell immediately.

Now, I won’t be touching the warrants you see on the exchange where small price swings can earn you big amounts of money or lose you the shirt on your back. If you’re new and just starting to invest, please do not touch those.

End.

I hope this clears the air on bonus issues, stock splits and a little on warrants.

TL;DR – Bonus issues are a plus for the company, stock splits are neutral. Do nothing with both if you’re investing in the company for the long term.

Happy investing!

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Investing in Malaysia – Your 7 Investment Options

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Filed Under: Dividends, FI/RE, Investment, Portfolio - Freedom Fund 19

What can I and should I do with my savings and excess funds? What are my investment options in Malaysia. That ought to be the question in the back of our minds, constantly.

My train of thought has always been as follows.

Savings – Investment – Passive Income – Reinvestment – Financial Independence

I know, Dividend Magic is almost always about Dividend Investing. And, I’m aware it can be somewhat intimidating for most of you to start dabbling in the stock market and investments in Malaysia.

In light of that, allow me to introduce the 7 viable, long-term investment options in Malaysia that might suit your needs.

When I say investing, I mean investing and not speculating. The difference?

Investors seek to generate a satisfactory return on their capital by taking on an average or below-average amount of risk. On the other hand, speculators are seeking to make abnormally high returns from bets that can go one way or the other.

The list is arranged from safest to riskiest.

Fixed Deposits (“FDs”)

Returns per annum: 3 to 4%

CIMB Unfixed Deposit
CIMB’s Unfixed Deposit

Let’s start with the simplest of them. Fixed deposits or FDs if you will.

Now, I wouldn’t even classify fixed deposits as investments. They’re more of a financial instrument where you place your money while waiting for investment opportunities.

Most of you may have heard of fixed deposits but I know for a fact that most Malaysian youths have their money in savings accounts. And they leave it at that. So instead of earning 3-4%, they earn that miserable 0.1 – 1% provided by most savings account.

And yes I know M2U savers gives you 2%.

Where can you place FDs?

I’d suggest going to your own bank and opening an online FD account. It is important to have an online account as it will save you time. You’ll be able to handle all fixed deposit placements and upliftments through the click of a button without having to be physically present be at a branch.

Treasury Notes and Bonds

Returns per annum: 4 to 6%

Before everyone starts making a fuss about how bond returns can go up to 8-9%, let me remind you that this article focuses on long-term and calculated investments in Malaysia, for the masses.

And the term used for high-risk, high return bonds is Junk Bonds.

Moving on, treasury notes are actually safer in comparison to fixed deposits because they’re issued by the government. However, they’re usually issued in the millions and not for most of us.

Bonds, if you don’t already know are a fixed income investment in which you, as the investor loan your money to a company. In the event that the company goes broke, you as the bondholder gets paid first, before the company’s shareholders.

In the past, the way I invested and put my money into bonds was through mutual funds via Fundsupermart. I’ve been told that they’ve recently started offering bonds right off the bat broken down into lower values ie. RM10,000. This makes it easier for the average Malaysian to get a piece of the bond action.

Gold and Silver

Returns per annum: N/A

Look, there’s no way I’m going to give you an estimate on the returns of trading in precious metal. One thing holds true, however, during times of uncertainty, the price of gold and silver goes up. They, therefore, serve as a good defensive asset.

If you time it correctly and buy them during economic booms, you’ll have an investment that will see you through the decades ahead.

Silver Coins

Personally, I chose to invest in silver years ago. The way I invested was by buying and collecting silver coins offered by various governments around the world. My favourite is the American Eagle and Canadian Maple coins. The Chinese Panda coins are also part of my collection.

My coins cost a total of RM2678 back when I purchased them in 2013 and in 2015. They’re now worth about RM2975. About RM95 each. Cheapest I found on Malaysian sites.

That’s about a 10% gain for me over 5 years. It’s nothing to shout about but I’ve seen my silver increase to 50-100% during recessions. Still, I don’t plan to dispose of them anytime soon.

Stocks

Returns per annum: 3-10%

Welcome to my neck of the woods.

Investing in stocks in Malaysia has always been viewed as a risky business. Why? Because Malaysians confuse investing with speculating.

In my personal, honest opinion, Dividend Investing is a really safe and sound way to invest and achieve financial independence.

Dividends are like the gift that keeps on giving because as the company you invest in grow and increases its profits, the dividends they pay out increases every year subsequently.

But guess what? You would have still paid that same RM10K initial capital and your dividend yield will continue to increase every year. A quick look at my portfolio – the Freedom Fund would show that sweet increment in dividends.

Of course, to enjoy these kinds of returns and yields, you’ll have to get some legwork in and pick only financially sound companies to invest in. And you’ll have to invest for the very long term. Think 10 – 30 years.

I’ve compiled a list of the Best Dividend Stocks in Malaysia here for your perusal.

Blue-Chip Defensive Stocks

Now, blue-chip defensive stocks like NESTLE are stable stocks you can hold for the rest of your lives. You’ll receive increasing dividends every year without ever having to work for it.

And because blue-chip companies are huge and stable by themselves, they won’t be as affected by the volatility of the market.

Another fine example would be investments in Malaysian banks. My  RM26,527.86 investment in Maybank alone since 2016 has brought in a total of RM4,685.36 in dividends alone. That’s a 17% return in passive income for me. I’m enjoying a 7% yield this year with Maybank and hope to see this value increase in the near future.

Real Estate Investment Trusts (REITs)

Another type of stocks that I always encourage beginners to invest in Malaysia are Real Estate Investment Trusts.

My all-time favourite Malaysian REIT right now is IGB REIT. They’re mainly in charge or Mid Valley Megamall and The Gardens.

The dividend yield from IGB REIT has skyrocketed to RM2,865.43 which translates to 7.09% for me this year.

My gross investment is RM40,417.74 (at RM1.3563 per share).

Market value (as of 9 Dec’18) is RM50,660.00 (at RM1.70 per share).

My capital gain is RM10,242.26 or 25.34%.

A comprehensive review of the company can be found hERE.

Real Estate

Returns per annum: 3-10%

Property. This is a tricky one for Malaysians.

The current mentality of Malaysians is to purchase your first residential real estate right off the bat. If your monthly salary is RM5K, get a home that’ll cost your RM4k in monthly repayments. They’ll tell you to hold on to that and in 10 years time, sell it and double your money.

This isn’t investing. This is speculation. A savvy investor would look to a property that can not only cover your monthly repayments but give you a positive net income every month.

And from what I’ve seen and from personal experience, the only two types of real estate that can give you positive returns right now are low-cost residences and commercial properties.

If you’re looking to buy and hold and bank on the real estate’s value skyrocketing, you’re better off purchasing a piece of land.

Low-cost Residences

I personally own 2 low-cost flats. How I manage and my returns are all detailed hERE.

TLDR: They net me a positive income every month. But they’re giving me a headache in terms of maintenance and tenant management. I’d rather have invested my money in REITs.

Commercial Real Estate

Specifically, shop lots and offices. Having companies and registered businesses as tenants is a much less risky affair compared to low-cost residential tenants.

The cons. You’ll have to fork out a huge sum to get yourself a commercial lot.

Unit Trusts and Mutual Funds

Returns per annum: 1-5%

I am for all intents and purposes anti Unit Trusts and Mutual Funds here in Malaysia. Why? Read this article here and you’ll come to realize how the exorbitant fees charged by funds in Malaysia will impact your financial wellbeing.

Private Retirement Schemes (PRS)

Nevertheless, I’d recommend investing and putting your money in Private Retirement Schemes. If you’re a Malaysian youth, you get an extra bonus from the government. If not, there’s always that extra tax-deductible afforded when you put your money into PRS. More on PRS hERE.

Robo-Advisors

You’ll also want to check out Stashaway. You pay much less fees compared to Unit Trusts and Mutual Funds. And you get access to the global markets.
Less fees!

More on Stashaway hERE.

P2P Lending

Returns per annum: 10-12%

Funding Societies

I’ll never recommend investments and services I wouldn’t use and/or purchase myself. I’ve put up some of my own funds and tried P2P lending with Funding Societies.

My experience and the review can be found hERE.

All you need to know about Peer to Peer Lending and Funding Societies can be found there. My annualised returns have reached 13.12% per annum.

Which actually beats the returns from my stock portfolio last year. Go figure.

The risk with P2P lending here in Malaysia isn’t high at all contrary to popular belief. It ranges in the 0.1 to 0.5% right now. The key is to diversify and place RM100 in 100 different loans, as opposed to RM1,000 in 10 loans.

End.

I’ve personally invested in all 7 of the aforementioned investment options here in Malaysia.

I’m sure many of you will have additional investments not listed above that you’ve put your money and faith in; Do drop me a comment letting me know what they are and why you think they’re investments worth considering.

I’m both excited and eager to hear what Malaysians invest in.

As always, due diligence on your own part is required when deciding to invest. I urge you again to invest and not speculate. Invest for the long term and invest in the fundamentals.

This has been a particularly long one. That’s what she said.

As always, thank you for reading! Follow me on Facebook and Instagram for weekly dividend updates!

Onwards and upwards!

Unit Trusts & Mutual Funds vs DIY Investing

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Filed Under: Dividends, FI/RE, Financial Independence, Investment 13

F*ck the Funds, F*ck the Fees.

I’ve seen too many people investing in unit trusts, mutual funds, saving plans – whatever these fee-charging schemes call themselves. Some argue that a fund manager will earn better returns for you. Look at their overall performance. Ask the right questions, and the answers rarely justify the high fees.

Ask them some questions and it’ll all start to fall apart.
If you’re still not convinced, take a look at Warren Buffett’s 2023 bet against managed funds here.

When someone charges you a fee to manage your money, know that even a 1% fee can cost you dearly. Fees reduce the growth potential of your investments, and the effect of compounding can work against you. Fees ultimately impact your investment’s growth potential. In a huge, huge way. How huge? The following simple example will illustrate.

The Impact of Fees – The Magic of Compounding Working Against You

We have here, 3 female investors.

Consider three investors, each earning a 10% return per year on an initial RM100,000 investment in 2018. The only difference between them is the fee they pay:

  • Girl A: DIY invests on her own, with total fees of about 0.33%.
  • Girl B: Pays a 1% fee – a conservative figure for a fund.
  • Girl C: Uses a unit trust or hedge fund, paying an estimated 3% annual fee.

Now, long-term investing. Let’s have all 3 investors invest for 30 years.

Unit Trusts & Mutual Funds vs DIY Investing Dividend Magic Fees Impact 30 year

30 Years Down the Road

  • Girl A (0.33% fees): Portfolio grows to approximately RM1.6 million.
  • Girl B (1% fees): Portfolio grows to around RM1.32 million, a loss of about RM250K compared to Girl A.
  • Girl C (3% fees): Portfolio grows to roughly RM760K—a loss of about RM900K compared to Girl A.

30 years down the road, Girl A’s investment is going to be worth 2x more than her counterpart that invests at 3% fees.

Now let me show u the difference in value in 50 years. Still a reasonable time frame in my opinion.

Unit Trusts & Mutual Funds vs DIY Investing Dividend Magic Fees Impact 50 year

50 Years Down the Road

Over a 50-year period, the impact of fees becomes even more dramatic. Even a 1% fee can leave you with an investment value that is RM3 million less than if you had lower fees. For Girl C, the loss is even more staggering – she is at an RM7 million loss compared to Girl A. This example shows how fees can quickly erode your investment gains.

Girl C is probably going to be really happy if a unit trust agent tells her she will have RM3 million after 50 years IF her investments give her 10% annually. But, mention her girl friend A’s investment value of RM10 million? She’s bound to go ballistic.

How’s that for compounded interest? This time, compound interest is working AGAINST you.

Why Fees Matter

High fees act like a hidden tax on your wealth. They reduce the power of compounding, the key driver of long-term growth. Ask around—talk to your parents, uncles, or aunties about their unit trust investments. Many will tell you stories of returns that never met expectations. Now, imagine comparing that with an investment that grows free from high fees. The difference is striking.

A 1% fee could translate to a difference in the millions. Be aware of fees.

What Can You Do?

Invest on Your Own

Consider DIY Investing and managing your own investments in stocks and equities. This can save you from paying high management fees.

We’re fortunate to have local platforms like MooMoo that charge low fees and is regulated in Malaysia.
My review of MooMoo Malaysia can be found here.

Choose Low-Cost Funds

If you prefer professional management, look for funds with minimal fees. Go for international and US ETFs. You can start by taking a look at Vanguard’s VOO. Low fees and they mirror the whole S&P 500. VOO can be bought via MooMoo as well.

Ask Questions

Always inquire about fee structures and the impact on your long-term returns before you commit. As a general rule, forget all our local unit trusts and mutual funds. If you want to invest locally, DIY and invest in stocks. If you want exposure to international and US stocks, go for ETFs.

Conclusion – Say NO to Fees

Next time someone tells you that a 1% or 3% fee is acceptable, show them these figures. Or tell them about Dividend Magic. The cost of fees is not insignificant, and over decades, they can crush your returns.

Pardon my language, but I feel strongly about this. If you want to build wealth, start by keeping your fees low.
You can start by learning how to invest on your own stocks and equities hERE.

The 7 Stages of Financial Independence

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Filed Under: Financial Independence, FI/RE, Financial Planning, Investment 8

Financial Independence (F.I.) in Malaysia

There are a lot of misconceptions about financial independence and early retirement (FI/RE) here in Malaysia. People think you have a high income if you’re able to retire early. No doubt, having a high income helps, but the crucial part of the whole F.I. equation, in my opinion, is our ability to save and invest.

As with all things in life, financial independence can be broken down and achieved in stages, even after you’ve retired, you still have to work at it to keep your money flowing in. It’s a lifelong process.

The Road to Financial Independence

Stage 1 – Dependence / Reliance 

We all begin here at this first stage. We start off being reliant on financial support from our families. They provide us with our daily necessities for the initial years of our lives. We then slowly being to chip away at this dependence when we earn our first salary.

Some of us may get a head start by having part-time jobs while still in school. Some may have gotten lucrative scholarships which gives an allowance. All of these help us break free from our reliance and dependence on financial support eventually.

Stage 2 –  Dependence (Continued)

After we are finally financially independent from our parents, guess what? We are still at the Dependence / Reliance stage. Moving out and living on your own doesn’t automatically make you independent. You are now in fact, heavily dependent and indebted to our various financial institutions.

The majority of us after ‘gaining independence’ from our families would have taken out a huge loan to buy their first home. You’re still in this stage if you spend more than you earn (if you’re digging deeper into debt). Basically, if you’re not earning a “profit”, you are dependent on somebody else. You are not financially independent.

After you start having a surplus — and again, this means you’re earning more than you’re spending — you FINALLY make your way down the path to financial freedom. One sure-fire way to do is to live frugally, which is how I was able to build my portfolio slowly.

Stage 3 – Solvency 

Stages of Financial Independence Solvency

Solvency is the ability to meet your financial commitments.

You reach this stage when you no longer rely on anyone for financial support. When you have surplus savings at the end of every month, you’re at this stage. This is where you’re no longer accumulating debt. You might still have loads of loan payments, but you’re not accumulating additional debt.

As a Certified Financial Planner, I’ve found that to get a person to go from the Dependence stage to Solvency is one of the toughest. It is not only taxing physically but also mentally exhaustive for someone to overcome Stages 1 and 2. But once a person finally finds themselves with a surplus at the end of the month, they will have the confidence to sail through the next 4 stages.

Remember, it varies from person to person how long it takes for us to reach stage 3. Some people reach this stage in their teens. Some never reach it. But even when it seems impossible, if you start taking charge of your finances,, I guarantee you’ll see the light at the end of the tunnel.

Stage 4 – Stability / Resilience

Stages of Financial Independence DEBT

You achieve stability after you’ve repaid your bad debts (ie. credit cards), established some emergency savings, and continue to increase your savings. 

You’ll feel an immense weight lift off your shoulders the moment you make the final payment to your debts. Trust me, it is a great feeling.

It is important to have your emergency fund built up to prevent yourself from falling back to stage 3 due to unforeseen circumstances. The usual recommendation is to save up to 6 months of your salary as your buffer. But if you’re feeling more risk-averse, there is no harm in going up to 1 -2 years.

Now you’ve built a buffer of savings to protect you from unfortunate events, you’re ready to put the extra funds to work by investing.

Stage 5 – Security

You reach the Security stage when your investment income can cover your BASIC needs. At this stage of financial independence, you have the ability to live and work as you choose. You have enough saved that you could quit your job at a moment’s notice without hesitation. I am still striving to reach this stage of financial independence. I estimate my basic needs as a young adult in Malaysia to be about RM1,500 per month. With the dividends from my portfolio – the Freedom Fund, I’m almost there.

Update Nov’2020.
Fortunately, I’m now at Stage 5. I’m able to cover my basic needs through my passive income from dividends. Stage 6 here I come!

Based on how much you have saved and invested, you could live a meager existence for the rest of your life without worrying about money. Even if you never worked again, you could afford shelter, basic food, daily essentials, and medical care.

Stages of Financial Independence Time > Money

Starting from Stage 5 on the road to financial freedom, your concerns are no longer just about survival. Money is no longer a safety net. It is now a tool to help you thrive and build the life you want. People who reach this stage will truly understand that money is just a tool. You will learn the value of your time. Instead of spending 8 hours a day for your monthly salary, you start to think about using money to free up your time for yourself and your family. Knowing what gives you meaning and purpose is a vital part of financial freedom and I believe it should be the starting point on this journey.

Stage 6 – Independence

Financial Independence

This is the Financial Independence we should all aim and strive for where your INVESTMENT income can support your current standard of living. At stage 5, you are merely able to cover your basic needs. At this stage, you can finally declare true financial independence. The money you have saved and invested would allow you to live like you do today until the day you die… and then some more.

It is the ultimate goal and dream of mine to reach this stage as I’m sure it is for many of you. All the savings and investments I’m doing has been to eventually be able to reach this stage. Financial independence varies from each person. For some of you, FI is achieved at RM12,000 per annum. Some will only be satisfied with RM24,000 per annum. For me, the sweet spot is RM36,000 per annum. Decide on your number now and start working your ass off towards it.

Stage 7 – Abundance

Financial Independence

In the final stage of financial freedom, you have more than enough. Your passive income will not only fund your lifestyle forever, you can even turn it up a notch or two. Now is the time to indulge in the luxuries in life and enjoy the fruits of your long tedious labour.

Here’s the bottom line: The more money you save, the more freedom you have, and the more risks you can take. As your financial independence increases, you chip away at the wall of worry. You’re able to make financial decisions proactively rather than reactively.

End.

There are tonnes of resources out there on Financial Independence each with their different stages. I’ve sifted through them all throughout the years and tried my best to compile them to best fit Malaysians.

The regular readers here are likely to be professionals (or at least semi-pros) of the personal finance world. We should take the time out to help others out of the financial binds they find themselves in. I think it’s in our best interest — in the best interest of everyone, really — to get more people into the ‘game’ of Financial Independence.

The more Malaysians we can get on the road to financial freedom, the better off we all will be. I hope I’m able to start cultivating the Financial Independence mindset here at Dividend Magic.

For the next article of the FI/RE and Savings Series, check out article 006 – Basic Financial Plan for Malaysians.

As always, follow my Facebook and Instagram to keep up to date!

Investing in Malaysia is Simple – Get Started!

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Filed Under: Investment, FI/RE, Portfolio - Freedom Fund 26

Do you want Financial Freedom? Save, Invest and Start Early.

There are countless ways to get 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 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 in Malaysia 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!

As of 2018, 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.

In fact my very own portfolio is built on frugality. Make savings a priority, get your emergency fund set up, and then get to investing!

Investing in Malaysia is Simple - Get Started!

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, an RM8,000 profit (and you didn’t even have to pay for the grass). This is your capital gain. Now, in the period before you sold off your cow, your cow produced milk which you consumed and sold off to your neighbours. 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, let’s 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%, and 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?

Investing in your own portfolio of shares means more money for you, and 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.)

I’ve written an updated article on mutual funds and unit trust here.

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 it is close to 4.5%), keeping money in a savings account or FD are 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, instil 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.

For the next article of the Investing Series, check out article 008 – DIVIDEND MAGIC Recommends: Stuff I Use.

As always, Facebook and Instagram. Follow, and keep up to date. Keep up to date and help support the blog by following and sharing this article. Thank you!

“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

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Filed Under: Financial Planning, FI/RE 26

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.

I’ve got a FREE basic financial plan for Malaysians for you to get started on. It’s a simple plan but all the essentials are included.

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