Tomorrow's Expense Is Today's Investment

Tomorrow's Expenses is Today's Investment. Yesterday's Savings is tomorrow's Liability.

We meet again!

If you look at the top of this page, you will notice that the blog's title description is the same as this post's title.

Please allow me to briefly expand the meaning of it.

In the first sentence, the word "Tomorrow's Expenses Are Today's Investment" has profound meaning attached to it.

Here the word brings the reader to explore the meaning of future 'expenses' and 'Investment'.

Investment is explained as a portion of disposal income that have been allocated or parked in an investment scheme that generates an above average rate of return which is inflation adjusted. This simply means that the interest income from this scheme grows higher than the inherent risk of inflation. Here is an example.

If the published current inflation rate is 3.20%, and interest income bearing scheme of the investment generates a rate of return at 6.20%; than this is called an investment or also known as inflation rate adjusted interest rate.

What good then?

Well, undoubtedly your current cost of living will balloon in future due to inflation factor and if you have allocated some contingent funds to cover for the future expenses, than that fund should earn an interest greater than the inflation rate, otherwise you will get a negative net interest rate should the investment rate of return is lower than inflation rate. This will definitely deteriorate your future value of money and derail your anticipated contingent future funds that you have planned.

"Tomorrow's Expenses" means all current living cost brought forward to a date in future. Inflation rate plays an important role in determining the future living cost based on current scenario.

"Today's Investment" simply means that in the course of planning to cover the future living cost, some money needed to be invested (not saving) in an investment scheme that projects return more than the inflation rate.

Well, in the following second sentence, the word "Yesterday's Savings Are Tomorrow's Liability" in reality reflects back the first sentence in contrast. The difference between Investment and Saving is that, the former carries a return that is inflation adjusted, while the latter bears a non-inflation adjusted return. In a Saving scheme, the net return will always be in a negative regime. Hence, your contingent fund to cover all your future living cost will not be met, thus bring rise to a financial liability scenario.

So as you can see, the 2 key words in this context are "INVESTMENT" and "SAVINGS". And now that you are aware of their differences, decide well before investing!

Happy investing!!

HOW I MANAGE YOUR INVESTMENT.< Part 3 >

What you see above is the blank actual table currently i am using to summarize what fund and

how much allocation is chosen for my clients. It contains 2 tables, one on top of the other.

The top table consists of  3 broad columns tagged as Primary strategy plan, Current Strategy

and Current Return. In the Primary strategy column, i will input your proposed asset allocation

consistent with your Expected Return table (See sample in Part 2 article). The Current strategy

column will show actual dispersion of the portfolio from time to time. I can better manage your

proposed allocation by looking at this dispersion and should it rail-off from the initial allocation,

some corrective measures can be taken. The last column 'Current Return' enables me to see

the actual dispersion from the value perspective. Value here means what the market is giving us.

In conclusion, this top table is actually a representative of asset allocation seen in 3 forms, i.e.

proposed, current invested and current value. This table doesn't assist me to know the invested

value but rather supports me in way of monitoring the asset allocation of all your unit trust funds.

The bottom table, on the other hand functions differently.

It will show all the funds i have chosen consistent to your Expected Return table in Part 2 article.

From the previous example cited, your portfolio of unit trust investment will look something like

the one displayed in the table below.

I have chosen ( example only) 4 equity type funds and 2 passive types. This diversification of

funds is in tandem with the Expected rate of return table displayed in Part 2 which would

anticipate a return of 6.20% (moderate type profile). See carefully the table above. Notice

that it also conforms the amount dispersed for equity and Bond/MM which is RM 15000

and RM 35000 respectively. Look also the top table on the strategy plan column and current

exposure column. The current return column is left empty obviously! Figures will appear in this

column once the value invested is shown on the lower table.

Why you may ask, i choose 4 equities and not 1? Well, it a question of mitigation of RISK!

It means i have leverage the inherent risk of the aggregate equities exposure to minimum. 

Confused??? Don't worry. It is my job to maintain your investment therefore it is suffice for me

to know and not you. Cheers..!

This is the end of Part 3. In my subsequent posting, i have embedded the similar chart
as above but with invested value. Please ZOOM yourself in there now!

HOW I MANAGE YOUR INVESTMENT? < PART1>

How do you choose your Unit Trust Consultant?

If you want to invest in unit trust scheme, foremost you must start to shop for the best

UTMC (unit trust management company) in town. Assume that you have done that part and

now you are left to find the best consultant/agent whom you can entrust to manage your

investment throughout your aspired investment period. How do you go about with this task?

Word-of-mouth is the best information sharing tool that can fast disseminate information from

one source to another. In the International Bestseller book 'The Tipping Point' authored 

by Malcolm Gladwell, he mentioned that 'connectors' (people who goes around telling 

about another person's meritocracy) were vital pillars in social circle that promotes social 

epidermic. Likewise, if you want to pick the best consultant, start looking and start asking for

'connectors' around you!

Now, let me tell you how i manage funds of investors who have chosen me as their 

intermediary.

Initially, throughout my first meeting with clients, i will extract among other things, the investors' 

Risk temperament or their Risk tolerance profile. There are 2 ways i can do this task, namely

by letting them to answer the Risk Tolerance questionnaire or alternatively by allowing them to 

narrate to me of their behavioural pattern in finance. I conduct this because i need to understand my

client's attitude and feelings towards market volatility, and from here to enable me to pick the

best asset allocation strategy. All potential investors should know that there is always a trade-off

to return in any investment. Riskier investment promises high reward, vice-versa.

Subsequently, while still in the first meeting, i will require my clients to determine their proposed 

asset holding period or timeframe. By knowing how long they can part-away with their invested

money, i will choose the appropriate funds (asset). 

For an example, if clients can part away their money for approximately 3 years, i will ignore

picking high volatility types of funds as these funds require longer gestation period. Money

market or income funds are of better option in this context.

Now, since i know my client's risk tolerance plus their asset holding period, i am now ready to 

jump to my next task, i.e. to construct a simple 'Expected Rate of Return' table. 

You have reached the end of Part One, please go to the next article -Part Two; to

discover  how i construct a simple 'Expected Rate of Return' table for my clients.  

  

INVESTOR ALERT

It makes me feel really sad to read about news of people lost substantial amount of their saved money to con-men or to some irresponsible deposit taking institutions. The Enron and Madoff Ponzi cases are good real life lessons that we should have learned by now that there are many 'wolves under sheep's clothing' and that proper and dilligent screening must be undertaken before parting with your money into the hand of these deposit taking organizations.
Back in the Malaysian shores, quite a number of these illegal entities have mushroomed without being detected by the relevant authorities. Just about two days ago, i received a phone call from a good friend of mine. He told me if i knew anything about an organization called Geneva (M) Sdn. Bhd. I told him honestly that i don't and he mentioned that his sister-in-law had invested RM 23000 in this organization which deals with gold bars. The return was good and he has the notion to invest as well, but since he has a bit of doubt he decided to get a second opinion from me. Frankly speaking, i knew that Bestino Sdn Bhd and Virgin Gold Mining which deals with commodity gold has been declared an illegal deposit taking scheme, unapproved by the Bank Negara or Security Commission of Malaysia. I have advised him to run through a check-up with the Bank Negara and Security Commission to find out the status of Geneva (M) Sdn Bhd.

The website address are : http://www.bnm.org.my/   and http://www.sc.com.my/
Section 25(1) Banking and Financial Institution Act 1989 (BAFIA) and section 4(1) of Anti-Money laundering and Anti Terrorism Financing Act 2001 (AMLATFA) prohibits any person from receiving, taking, or accepting deposits without having a valid license.

DOLLAR COST AVERAGE - It's Your Call!! Part 3 of 3

CARTOON TIME

Hi! I am Stoogie. I am a material created by Vijaya Devan, a.k.a. Dave.

  Dave is spreading and sharing his 'mind' via me. He uses me as a  bridge  in connecting viewers to all his scriptures  posted in his blog. I don't mind of being used by Dave, as long as he keeps me alive. If you like me, please write something in the comment box provided below. Bye!

CARTOON TIME

When passing an important message to your subordinates at work place or  trying to convey some salient points of the investment products you are promoting, the targeted recipients of your messages would go nuts if you speak languages that only you can understand.  STOP!!

Re-engineer your spoken words, put it in simple English and avoid too many bombastic words.

Amanah Saham Malaysia (ASM)

The unit trust funds that Permodalan Nasional Berhad (PNB) distributes had vastly attracts many malaysians into owning a certain portions of units. To some, Amanah Saham Malaysia (ASM) funds is the golden opportunity they could not resist purchasing, as it generates a promissable stable and high return with contrast to other unit trust funds distributed by Unit Trust Management Company (UTMC). In fact, the returns outpaced the one year tenure of any prevailing Fixed Deposit schemes offered by local financial and banking institutions. Therefore, seeing a sight of long curving queue of people waiting infront of selected distribution agents of PNB ready to purchase the 'Dana' ASM is not a surprise to many.

But wait!! Think first before you decide. Is ASM the right fund to buy?

Below, i have pen down some salient points that you might not have known or told of about the characteristic of this ASM, in contrast to the other funds of UTMC's.

There are 2 major points which an investor should weigh prior to decision-making, and they are the fund's published selling unit price and secondly the fund's ability to declare distribution. Investors make a placement judging on this two sources of income.

1. UNIT PRICE

Amanah Saham Malaysia(ASM)

It is high and it is fixed!! The unit price stays throughout the life of the fund. And because of the price is high, the number of units purchased are always low.

With an initial capital of Rm1000, and if the selling price is Rm1.00, you will be given only 1000 units.

If you purchase a unit of ASM that cost Rm1.00, that fund will remain valued at Rm 1.00 at anytime in future.

We refer this as NO CAPITAL GAIN.

Other Unit Trust Management Company (UTMC) funds.

In contrast to ASM, other UTMC's funds carry a much lower selling price and the price does not remain stagnant indefinitely. The unit trust prices are quite volatile and it fluctuate based on the principle of demand and supply factor. As a result of this changes in price, the feature provides an investor the possibility of reaping capital gain, i.e. the growth of unit prices. In the same token, an investor may also face depleting unit prices, i.e. the fall in unit prices.

Suppose you buy an unit for Rm 0.2500 now, and the fund's price has the potential to move upwards. Lets say if it moves to Rm 0.3000 a unit, the difference of Rm 0.0500 a unit will be the gain for you! We refer this as CAPITAL GAIN!

If an investor with a capital of Rm1000 purchases a unit trust fund that sells at Rm 0.2500 (ignoring the sales charges), he/she will be earn 4000 units, which is 4 times more than ASM units of the same initial investment. Is not this great?

So, with regards to unit price, ASM scheme does not stand out to funds of other UTMC.

I will write about the other source of income, i.e. Distribution, in the next web blog soon.

Regards,
Dave

Between ASN funds and other UTC's funds - Which is better? RE-PUBLISHED

1. PRICE PER UNIT (also known as NAV) AND NUMBER OF UNITS.

          When a comparison is made, generally the Net Asset Value (NAV) of Amanah Saham Nasional
          (ASN) will always be greater than any other NAV of (Equity type) funds that belongs to other Unit  
          Trust Company (UTC)
          This in return will leave the account holder with lesser units than those who purchase (Equity type)
          funds from other UTC.
          Example: In reality the NAV of ASN is always RM1.00 per unit and the NAV of funds (Equity
          type)  of UTC will
          generally starts at RM0.25 a unit (new fund launch price). So if you invest RM 10000, your units if
          you purchase ASN, assuming sales charge is 5.50%, will be (RM 9478.67/1.00) = 9478.67 units.
          Alternatively, if you purchase a new fund from other UTC, and assuming the sales charge is 5.50%,
          your units now will be (RM 9478.67 / 0.25) = 37914.68 units.
          What it means?? It means, given a same invested amount, ASN gives lesser units
          than of other Equity type funds from any UTC.

          In Unit Trust Scheme, your return is directly related to the number of units you purchased.

•           More units = Higher return.
•           Less units = Lower return.

         Price per unit between this two types of fund also varies tremendously. ASN's price a unit (which is  
         normally RM1.00 a unit) is way too high when compared to RM 0.2500 a unit of equity funds from
         other UTC. So, if next time if you want to decide to buy unit trust funds, please observe the price per
         unit and with that price do check how many units you would be given!!
         

4 stages of Financial Life

Do not get alarmed to hear of me mentioning of the term " Financial Life"! We all have only one single life to live on and that is the very life you and i are 'sailling' through at this very moment. The reason behind the usage of this term is none other than to help us to observe matters differently from the norm, thus hoping to shed some light in solving real financial problems in our everyday life.

With the advent of globalization for one instance, our cost of living skyrocketed exponentially and this imposes a serious repercussion to our purchasing power. Basically, in everything that we see and hear, the value of money diminishes over time. As a result it attracts serious attention in fighting over the problem and many people in the financial fraternity have emulated the principles of austerity and thrifty in handling money related matters. With regards to this, one cannot deny to ignore the emergence of the concept " The 4 stages of Financial Life".

Stage 1: The Wealth Creation Stage

It is a period where one exposes themselves to the challenging world of seeking their preferred career prior to comfortably settling down in their later life. Numerous jobs were to have been put in test until the right one clicked, and matches the skill and ability of that individual. This is also a period where a stable income is created and a great flow of anticipation is expected in an individual that promises a potential to support them financially, going forth. This stage reckons to give 'birth' to the importance of strengthening the base of wealth creation prior to moving up to the next value chain of financial stage i.e. The Accumulation stage. Although there is no hard and fast rule, generally the duration of this stage lasts from the early age of seeking a job until at about 28.

Stage 2: The Accumulation Stage

Hopping out from the first stage into the second, one is expected to start saving their money for the unexpected financial obligation in the future. To some, the saving process would have begun in the first financial stages. Here, the importance MUST be channelled to saving their hard earned money in various financial institutions in order to use it at a later part of life, especially for financing education or for retirement usage. While saving is a popular way to accumulate wealth, it is also known as the least effective way to let wealth accumulate. Why do i say so? Primarily, it is because savings will not hedge inflation, thus will only provide a marginal real return,or in most cases a negative real return. Money saved in savings account will deteriorate over time, and the effect of inflation will tear down the value of money indiscriminately. With a little bit of risk taking, money should be put in a save investment scheme that generates an interest that hedges the ugly sight of the inflation rate.

I will deal with the types of investment one shall indulge in my next blog. Having said that, we will move on to the next stage - The Preservation Stage.

Stage 3: The Preservation Stage

As mentioned earlier, the dreadful act of the merciless inflation rate could bring down the value of our accumulated wealth, thus making us poorer and poorer, than before. A total paradigm shift in rational thinking must take place within us. Besides the correct psychological frame, one must also remote themselves from thinking of saving when talking about accumulation and preservation of wealth. Saving money means putting our money in an interest bearing instrument, regardless of the effect of the inflation. On the contrary, investment concept puts importance of saving money in an interest bearing instrument that hedges inflation rate. Investment provides potential opportunity to accumulate and preserve our wealth. Unexpected debt, lack of financial support during daunting life, medical claim and education cost are some of the causes that may be a threat to us if we fail to implement the wealth preservation activity. A sound wealth preservation excercise is a tool that upon which if not implemented, accumulated wealth will be depleted in value and disasterous consequences might befall in the later period of life. The tools that can be used in this stage will be dealt with in my next blog. Let's go to the next and final stage.

Stage 4: The Wealth Distribution Stage.

Mortals like you and me will eventually 'kick-the-bucket', and when that day comes our dependants will mourn the loss of us, who have been supporting them financially. What happens to them after our demise? Who will look after them, how will they get the money which we left (estate)? How will the children be educated and from where will the spouse get the money to support the education cost?

The wealth that we created, accumulated and preserved, MUST be passed to the rightful beneficiary. Only upon this, the 4 stages of financial life will be complete. Wills and Trusts are used in estate planning to transfer wealth to the beneficiaries. It is a tool to transfer estate to whom we wish them to inherit, thus ensuring that the wealth is passed on to a preferred beneficiary, and not to anyone whom we do not want to be in possession of it.

A holistic approach in handling matters relating to personal finance shall encompassess the 4 stages briefed above. Get to know it,understand it and embrace it so that the new landscape change will benefit you financially. Happy trying!!