Time Value of Money: Finding the Rate of Return to Meet Financial Goals

In order to be smart and calculative in personal finance matters, understanding the time value of money is an essential part of the learning process.
Starting today, I will be posting a series of computation method related to time value of money on every Wednesday. Today, we will learn to find the rate of return required to meet a financial goal.

Common Problems

• You have set aside RM10,000 for your future dream home down payment. You want to have at least RM15,000 after 5 years time to purchase your dream house. What is the rate of return required if you were to invest the initial RM10,000 in order to get RM15,000, 5 years later?
• You invested RM5,000 in a balanced unit trust fund that gives an average of 10% return per annum. How long you must keep the money invested in order to have RM10,000 to fund your child’s tertiary education?

Photo by wmjas

Theory

Use this formula:

FV (Future value) = future value of investment at the end of period
PV (Present value) = present sum of money set aside for the investment
i = rate of interest/rate of return
n = number of periods
It can be modified to determine the rate of return required. In this case, we know the value of FV, PV and n. What we want to compute is i.
You can use the interpolation method or the trial and error method using excel spreadsheet. But I would prefer the easiest route using financial calculator.
Use this Financial Calculator provided by Money Chimp

Solutions

Example 1:
You have set aside RM10,000 for your future dream home down payment. You want to have at least RM15,000 after 5 years time to purchase your dream house. What is the rate of return required if you were to invest the initial RM10,000 in order to get RM15,000, 5 years later?
PV = RM10,000
FV = RM15,000
n = 5 years
i= ?

i = 8.45%
Example 2:
You invested RM5,000 in a balanced unit trust fund that gives an average of 10% return per annum. How long you must keep the money invested in order to have RM10,000 to fund your child’s tertiary education?
PV = RM5,000
FV = RM10,000
i = 10% p.a.
n = ?
Use this financial calculator:

Input the value as shown in the image above. Click NP.

n = 7.27 years

Exercise

1. A unit trust agent told you that one of his customer who invested 5 years ago had achieved 200% total return this year. What is the rate of return per annum?
2. Your mother told you that a cup of coffee at the local kopitiam costs RM0.10 only when she is 20 years old. Now she is retired at age 55. The price of a cup of coffee now is RM1.00. What is the average inflation rate per year?
3. Let’s say you have RM100,000 in your investment portfolio. Due to consistent monitoring and investment research, you are able to get an average return of 15%p.a. for the past 5 years. If everything goes according to plan, how long will it take for you to become a millionaire?

Investing in Stock Market: 7 common mistakes and their remedy

Though investing in stock market has emerged as a great resource of making money, it always has some risks involved, just like any investing activity. There are some common investment mistakes which can easily be avoided if someone follows the footsteps of the investment legends.
As preached by many gurus and teachers, the fastest way to succeed is to copy the methods of those who had done it. The proven tactics learnt from investment experts are very helpful to achieve quick success in investment. Generally, you should go for some investment books written by the most renowned investment gurus or experts like Peter Lynch, Warren Buffett etc. In the local market, we don’t have many books to refer to. But you still have some very well-written books on share investment by Ho Kok Mun, Martin Wong and some other bloggers who regularly share their findings on the Internet.

The 7 most common mistakes in stock investment

In addition to the lessons from the investment experts, someone can have great knowledge from the common mistakes made by other investors, especially those who make retail investments. When we have sufficient knowledge on the most common mistakes and the key factors behind losing money, it becomes very easy for us to get rid of such mistakes that our fellow investors have previously made. It can even help to maximize our profit by applying the opposite strategy.
Let’s have a look on some of the most common investment mistakes:

1. To Hurry to Take Profit

It has been observed that in a hurry of taking profit, most of the investors sell out the money-making stocks instead of the loss-making stocks. In this process they run out of quality stocks and become a typical accumulator of “rubbish”.
When the investors take early profit they are exposed to a number of mistakes. Hence, the right approaches are as follows:

• Taking early profit should never be applicable for investment-grade stock but may applicable stocks meant for trading.
• The investors need to preserve quality stocks instead of the poor quality stocks.
• It is important for investors to adopt a cut-loss strategy as the profit-taking strategy alone doesn’t make any sense.

2. Not Prepared to Take Losses

Generally, the local investors are very much reluctant to cut losses and it can be considered as one the greatest mistakes made by the investors. Apart from the emerging investment markets, this phenomenon exists even in the developed markets like that of US where the investors appear to be savvier.
As a matter of fact, the intensity of pain goes higher when someone is confronted with a loss. It is evident from a study that the intensity of pain due to suffering a 30% loss is about 2.5 times higher than the pleasure from having a 30% gain.
As the investors are reluctant to face the pain, they keep their loss-making stocks year after year. They don’t feel the pain until they sell these loss-making stocks. It does sound silly but that is the way people deal with pain and pleasure. Sooner or later, you will kind of “forget” about the losing stocks and also the pain associated with it.
It is not surprising at all to find a long list of loss-making low quality stocks in an investor’s portfolio. They make the delay in selling these stocks as they believe that it would be able to recover its cost in the course of time. The hope remains alive until the stock is sold. In fact, there is no underlying principle other than hope in holding on these poor stocks. The odds of a profit-making company to continue making even more profit is much higher than a poor-performing company to turn the company around.
But the most dangerous thing is that the poor quality stocks may ultimately delisted as the fundamentals go on deteriorating. The investors may eventually find all their hopes ending in smoke in such a situation where 70% deterioration in price may result in 100% loss.

3. Lack of Specific Goal and Strategy

The lack of specific investment goal and strategy can be considered as one of the most common mistakes among the investors. Despite having different characteristics, investors generally mix up the investment stock with trading stock. It is highly recommended to treat these two types of stocks separately when investment strategy is concerned.
Investors generally purchase trading stock depending on rumor or predictions which ultimately may not turn out to be fruitful. On the other hand, the investment-grade stocks are purchased after reviewing fundamentals which include business potential, earning outlook, growth prospects etc. So, a trading stock needs to be monitored based on the dependability of the information source. The study of charts reflecting the trend of a stock can be very effective for an investor to decide when to sell, to hold on or even buy more.
On some occasions, investors get involved with a low grade stock knowingly with an intention to make some quick gains. But once the stock comes to a loss position, they treat it as an investment-grade stock by holding on for a long period. This is how a gamble of making some quick profits ends up as a pain of holding up some poor stocks for several years.
It has also been observed that some investors initially go for investment-grade stock with a view to make a long term investment after evaluating fundamentals or dividends of such stock. But they become panic as the price goes down a little bit. They sell out the stock in a fear that the price might go down further. In this process a long term investment now evolves into a short term trade when early profit is concerned.
As long as the investors fail to specify their goals and remain confused between trading and investment stocks, between short term speculation and long term investment, their investment will be in danger. Of course, there are different kind of investors in the market today and regardless of your investing style (trading, buy and hold, buy based on dividend yield, buy based on profit growth etc), you will eventually make money if you know what you are doing.

4. Going for Penny Stocks

Fundamental value has a great significance when investment is concerned. Undoubtedly, the main objective of purchasing stock is to ensure future earnings. In general sense, a stock of RM0.50 is cheaper than a stock of RM10.00. But the perception is quite different in investment market where a RM0.50 stock appears to be more expensive than a RM10.00 stock in terms of profit obtained from per share.
The penny stocks are generally known as retail stocks which obviously lacks fundamentals. This type of low priced stocks are popular among retail investors but not among the institutional investors. The gamblers and syndicates target these stocks as it is very easy to exaggerate or move up. In fact, the price of these penny stocks is unable to move up without help of the so-called syndicates as no fresh money is involved in lifting the prices of such shares.
On the other hand, price of heavyweight stocks goes up with the improvement of fundamentals which in turn attracts more money including foreign funds as well. Moreover, these prospective stocks having the characteristic of more demand than supply and are generally benefited by strong price support, results in a steady price appreciation over time.

5. Easily Influenced by Tips

It has so far been a popular practice among the retail investors to depend on tips to prosper in investment market. Unfortunately, the tips didn’t work for most of them and the loss was such a huge amount that some of them left the market for good. Though trading on the basis of tips seems to be exciting, the experienced investors would definitely acknowledge that it is not so easy to make money just only relying on tips.
At first, we need to know about ‘tips’. It can be a piece of news or information obtained from an insider who has a clear perception on the things that are going to happen. The insider could be someone like company directors, senior member of a management team, corporate lawyers, auditors or even bankers. These types of individuals generally have access to some confidential information. Even the lawyers, analysts, fund managers on any person who have a close contact with senior management of an organization, can be a great source of tips.
Few tips might be very useful but the most are pure speculation and the rest are fabricated by the so called syndicates as a part of their gamble. The tips are generally spread in market through an insider. It is not firsthand information to an investor as it passes down over several hands. If there is any change to the information, the investors are the last person to know it. By the time they become aware of the scenario, it is too late for any remedy.

6. Becoming Impatient

Impatience of the investors can be treated as one of the most common mistakes. It is more common among the retail investors who generally want to make quick gains. They generally don’t have any interest in the stocks which yields 10% per year. They rather go for those stocks which make 10% within a week or become double within a year.
Moreover, the retail investors mostly rely on tips and keep monitoring the stock very closely immediately after purchasing it. They praise the person for his tips when the prices go up. On the other hand, if the prices don’t move up within a few weeks, they become very impatient. But according to the investment experts, investment grade stocks need to be kept for a long time with minimal monitoring for getting the best outcome.

7. Always Buy High and Try to Sell Higher

As the retail investors are very impatient, they are not interested to buy when the market is down and wait until the prices move up once again. They have a tendency to chase a stock. Since they are keen to make some quick profit, they always like to buy high and sell even higher. For being the fool, they are trying to find another fool to who are willing to buy at a higher price for something less worthy.
This is a common phenomenon in a bull market. This clearly indicates why the retail investors are seen in a huge number during a bull market. And, such investors are hardly found when prices are low.
Obviously, the risk is higher in a strategy of ‘buy high and sell higher’ than that of ‘buy low and sell high’. The strategy of ‘buy high and sell higher’ is not inappropriate indeed, yet the investors have to quit the market if they make even a single mistake. As a matter of fact, it is very painful for most of the people to cut loss and unfortunately many retail investors get caught in the same trap again and again.

The Lessons to be learnt for Remedy

Before you make any investment, you need to get prepared to accept losses as a business component. At the same time, you need to be rational and consider stocks from an impartial point of view. In case of any mistake, you should not hesitate to take losses and cut the stock as much as possible. You can also choose a small time frame to sell out the loss-making stocks at a slight higher price. You can trim down those stocks (if any) further, as your main objective should be to get rid of those poor stocks as early as possible.
Another important thing is that there is no alternative to a specific and solid investment plan. There should not be any mix up between investment stock and trading stock. You need to have different strategy while dealing with these two types of stocks with different characteristics. You can’t afford to make a blunder to keep a short term trading stock like a long term investment stock. It is unwise to sell out investment-grade stocks and accumulate speculative trading stocks.
Finally, it should always be remembered that speculative stocks are trading stocks and you need to specify a time frame to make proper utilization of tips. It is always helpful to have a close look on the tips or to make some simple analysis on stocks. This is like a game where win and loss are the natural phenomenon.
This post is originally written by Ang Kok Heng who has 20 years of experience in research and investment. He is currently the chief investment officer of Phillip Capital Management Sdn Bhd.

The Most Common Habit of Rich People

During a seminar I attended last year, the speaker asked,” Who reads the book Blue Ocean Strategy?”
More than half of the class raised their hands. It makes sense because it was a seminar about how to be successful in life. Most of the participants are business people and high level executives.
Last month, I attended the KL book festival. I was invited to attend my book launching ceremony at the main stage. I met Azizi Ali, the local best-selling author, who told me that the number of books published in a country is correlated to the wealth of the citizens. More books published in a year indicate that the country is more developed. Therefore, the people are richer too.
Last week, a friend who is quite affluent shared a business idea with me. He told me that the rich never eat alone. In fact, there is a business book entitled “Never Eat Alone”. He actually didn’t realize that he is doing what the book says naturally. By reading the book, it just reminded him that he was doing the right thing all these while.
From the three occasions I shared above, do you find the common habit of rich people?

What is the common habit of the rich?

Rich people reads. They read a lot!
Although the media might be different compared to centuries ago, ranging from newspapers, magazines, books and more recently – Internet! The rich people read regularly.
Another common habit of the rich is that they attend seminars and training. You shouldn’t be amazed that the rich people won’t hesitate to pay thousands dollars to attend courses by Anthony Robbins and Robert Kiyosaki even during a financial crisis. If you want to find the richest people, just go to the most expensive courses or seminars. I guarantee that you will see them there!
The rich learn from the super-rich. The super-rich learn from the ultra-rich.
They attend seminar not just to learn, but also to meet and network with other rich people.

Simply said, rich people love to learn.

They learn through reading, attending seminar and networking with other rich people.

But I am not rich yet!

Should you focus on Increasing income or reducing expenses?

Cash flow chart involves simple mathematic calculation: Saving = Income – Expenses. Savings is the priority since it appears first in the equation. To increase saving, we can either increase income, reduce expenses, or doing both at the same time. Which option requires your most attention?

Focus on Reducing Expenses

If your main focus is on cutting down your expenses, it is all about frugality. I found that many of the personal finance blogs preach about how important it is to live frugally. Is it worth your effort? When you don’t know how to increase your income, cutting down expenses is the easiest route to increase your net worth.

50 things you can do to reduce expenses

1. eliminate cell phone
2. cancel newspapers, magazine and other periodicals subscriptions.
3. use energy efficient lamps
4. purchase generic prescriptions when possible
5. buy in bulk when shopping for grocery
6. terminate your gym membership
7. read books at library instead of going for movie
8. cut your vacation
9. stay at home whenever possible
10. stick to your budget
11. cancel your TV subscription
12. use email instead of phone whenever possible
13. compare before you make any purchase
14. plan menus for the week before you shop grocery
15. prepare shopping list to avoid impulse buying
16. go to the store just once a week
17. do not go to restaurant when you are hungry
18. plan the use of leftover food
19. buy clothing at the end of the season
20. shop at discount stores
21. buy used item whenever possible
22. use public transportation, if available
23. have good health habits
24. avoid smoking
25. avoid drinking alcohol.
26. play board and card games, they are cheaper
27. attend concert only if it is free
28. make your own home accessories
29. consider less expensive housing
30. Pack school and work lunches
31. review insurance coverage. Are you over insured?
32. reduce trips outside the home
33. use 10% less than usual
34. stop shopping… not even window shopping
35. change to cheaper brands
36. look for discount coupon
37. buy only when you are offered rebates
38. drink plain water only whenever you dine out.
39. don’t keep more than ten bugs in your wallet
40. cut all your credit card except one
41. do your own car maintenance such as changing oil
42. stop going to a hairstylist
43. rides bike instead of car
44. avoid silly bank fees
45. don’t buy a car
46. just rent a small room to stay
47. share room and split the rent
48. stay with your parents
49. start blogging and it will cut all your other entertainment
50. ask for discount every time before you pay for something

Hard work and no fun!
Wow !!! There is a lot of hard work. But do you really have fun doing all those frugal things? I can only agree with item no.49, which had saved me a lot of money.

How much can you save? It is limited.
No matter how hard you try, you can only cut down your current expenses completely. Most people will celebrate if they can cut 10%. 30% is already too much for most people to compromise their lifestyle. Crux of the matter is, by concentrating on reducing expense, what you get is hard work, no fun, and only be able to save as much as the amount you didn’t spend.

Focus on Increasing Income

If you change your focus to increase your income instead of reducing your current expenses, you will see a whole new world of opportunity.

25 things you can do to increase incomes

1. invest in stocks
2. invest in real estate
3. increase your knowledge
4. sell items you no longer need
5. get a part-time job
6. rent out spare room
7. join MLM
8. start a business
9. learn how to sell
10. make money online
11. get a raise or a second job
12. change your thinking
13. raise your rates
14. get extra work
15. get money from public aid or charities, if you are qualified
16. go back to school to acquire additional skills
17. buy an established small business
18. arrange a better feng shui at your home and your work place
19. start a make money online blog
20. invest in mutual funds
21. take your company public
22. pay less tax
23. learn forex trading
24. invest in ETF
25. get sponsorship from family members, if you dare.

Tough job but a lot of fun!
How much can you probably earn and save? It is unlimited!
Sky is the limit.

Credit card helps!

There are many advantages using credit card wherever whenever we can because:
1. our expenses are properly recorded
2. the credit card statement can be used as proof of payment when filing for income tax
3. get rebate on our expenses
4. emergecies : hospitalization, lack of cash when traveling overseas.
The best advantage is that it increase our cash in hand. Why do I say so?
Let’s say your fix expenses is RM5000 per month. You use your credit card to pay for all those fix expenses monthly. The due date to pay back your credit charges is 20 days after the statement date. Therefore, we can have the RM5000 put into our own saving account to earn interest for 50 days. Even better if you put the money in your homeloan-link account to reduce the interest charges! This means we actually have extra RM5000 in the bank!
Credit card really helps! (Only if you know how to use it)

How to save income tax?

In fact, in order to save yourself from paying too much income tax, you will need to increase your spending most of the time. Let’s break it down to two major categories – the first consists of strategies that won’t require extra spending, the latter consists of strategies that require you to spend more in order to save the amount of tax payable.

Strategies that don’t require extra spending

• Stop being employed
• Start your own business
• Become a business owner
• Become an investor
• Become a boss
• Set up a company

All the above methods give you a whole new perspective. Your income will be taxed differently. Most of your necessary expenses will be tax deductible.
Just in case you are wondering what is the difference of all the above, they are actually the same. Businesses are being taxed differently by the government simply because they provide jobs to the people who like to be employed and pay more taxes.
However, for personal income tax planning, there are still a few methods that don’t require extra spending. But you will have to park your money in the right place:

• Save education funds in Skim Simpanan Pendidikan Nasional (maximum RM3000)
• EPF contribution and life insurance premium (maximum RM6000)
• Education plan and medical insurance premium (maximum RM3000)
• Ask your employers to reduce your monthly salary but increase your EPF contributions by the same amount
• Change “Fixed allowances” to “reimbursement” based on receipt

Strategies that DO require extra spending

• Donation to registered and approved charities under Section 44(6) of the Income Tax Ordinance
• Take up further education or professional courses
• Buy books, journals, magazines and other publications
• Buy sports and exercise equipment
• Pay your parents’ medical bills
• Do a full medical examination
• Pay Zakat (only applicable to Muslims)
• Buy a computer
• Hire a tax consultant

Tips for how to save money for your future?

The second financial challenge that most people demands for solution is how to make more money. Most of the people have a dream of how to save much money. Dreams for you to travel the world or you send your children abroad for quality education, these only be possible if you have saved some amount of money.

I think these are the most important steps that guarantee you to accumulate your wealth seriously.

Early motivation of your elephant:

The cause for short term pleasure is the long term goals of some of your friends. By looking some high quality fashion at a deep discount, it is difficult for you to untouch your two hundred saving. And that's why you forgot now that these two hundred allocated for your trip savings and for your children's' education abroad.

The irrational part of your brain is controlled by elephant. If you follow this time your rational part of brain then you can save RM200 for a nice trip or for a quality education of your children but the elephant is so huge and very hard to be controlled by your rational part of mind. That's the reason to motivate your elephant. Try to go it to the directions you want, not following where it wants. You can early motivate it because collecting money takes time. The best chance to achieve your goals is the longer time you have.

First pay yourself:

First priority for saving is you. An important decision to make is at the time of money comes to you. You can save it or give it to other people. Paying to other people first is a big mistake by many people. They always put themselves at the bottom of the payees list. That's the reason of getting only peanuts at the end. How you can save before spend? The next part of having an effective saving system is so critical.

Have an effective saving system:

Riding Elephant at the time of danger is really so hard, you don't want to let those risky moment. The most emotional part of your brain is holding you back from your long term saving goals, that's why you should have a system that prevent your emotions to take part in financial decisions.

That's why an effective saving system (EPF) always works for most people. Every month when you see your salary statements, you may feel a pinch. As much amount from your salary has cut away for your future retirement savings. And you have been forced for participating in this program, so, you can't do anything now. Why not put this saving system to do more good for you? Taking up educational saving plan for their every new born child from insurance company is the sign of rational parents.

Survive on Low Incomes techniques:

A lot of people talk about saving money for the rainy days to come.

Most people will say" Only if I have an extra money will I save". People who pay their bills first and uses only whatever balance left will they pay themselves as a form of their savings.

Seriously most people can relate to this scenario. Many people when getting their paychecks will pay their living costs and bills first. What will be left will become their savings. This savings may fluctuate every month making it difficult to reach their savings goals.

The resolution to this is to earn higher by getting a higher paying job, which is within one's control, or paying one's self first before any of the bills. Surviving and managing to save money.

How do you cope with low income?

Several factors enable a person to save first before paying any of his living costs.
1. In beginning a career it is best to stay with your parents first, thus avoiding paying rents.
2. Using you old parent's car, if there is, when driving to work and paying only the fuel. No need to bring out money for servicing a car loan.
3. No subscription bills like phone bills, magazine subscriptions, internet subscriptions and others.
4. Joining a company that has medical and dental insurances thus gaining more savings than paying for possible expenses.
5. Using company uniforms makes it unnecessary to purchase work clothes.
6. Avoiding too much entertainment to pleasure one's self after several days of work. Mostly staying at home helps.

A book on surviving low income can be a great help. The important lesson is for a person "to learn to live without" and "avoid buying things you cannot afford or you do not need". Frugality is the key.

Personal Finance Course for Malaysians

Interesting Articles

Should you focus on Increasing income or reducing expenses?

Savings is the priority since it appears first in the equation. To increase saving, we can either increase income, reduce expenses,

10 easy tips to generate passive income

Passive income is income that does not require your direct involvement. It comes while we are sleeping . It is not actually too hard to get passive income. Here are a few easy ways to generate some passive income for

How to Survive on a Low Income

When people talk about saving money consistently for a rainy day, most often than not the feedback would be "If I had that extra money to save, I would." These are the people that pay their bills first and only

How to generate income from your blog?

As announced last week, I am building a series of lens about making money blogging in Malaysia.

Studying the bear market :

Initial stage:

Recalling the stock market before Oct'07, the global market has trended up tramendously until a sudden drop end of Oct'07. ( I am refering to regional market; Sh-comp, 'H' share, Tsec & HSI captured their highest somewhere mid to end of Oct'07 ). That has probably signaled the withdrawal of the institutional investor and the beginning of the bear market. The PER is always high, sometimes reaching above 40x.

Normally during this stage, the economy outlook has not really turned bad as institutional investors tend to sell before it is too late as valuation tells that the market has been overbought and becone expensive and risky. On the other side, there are still many retail investors trying to log in emotionaly thinking to make more money while price is rocketing.

Study the Bear Market

Second stage :

The initial stage of the bear market normally does not last long and creates few false rebounds to enter the second stage of the bear market. The false rebound attract more retailers to the market thinking the end of the bear market.

This is when the investor started to buy and sell along the up and down of the market until the economy outlook turn bad. Remember retail investor always act slower than institutional investor simply because there are bunch of emotional investor out there. This stage always last longer.

Third Stage

The market is feaful in the third stage. Economy outlook can hit historical bad. Confidence level drop dramatically. Any good news during this stage seems to be too weak to boost up the market.

Trading volume getting lower and lower. Most of the investor tend to sell off their stocks to cut lost. PER is approaching below 15x or even 10x. It is extremely important to identify the rebound signal as the institutional investor can anytime log in to the undevalued market.

Rebound signal :

In my personal view, as long as that has attracted the overnment attnetion to steps in to stabilised the market, just like what is happening now, it is believed that the end of the bear market will come soon. Through valuation, institutional investor is easier to boost up the market price when trading volume is low. Again it will be too late for institutional investor to log in to the market after the economy recovery as there will be no seller during good market outlook. We saw more than 3 buying signals since end of Oct' 08. We are now nearly 4 months away from the bottom. Can we say we could have passed the lowest of this round crisis? SH-Comp hits lowest on end of Oct'08 exactly one year after their highest.

And it has now rebound by 35% reaching 2300 from lowest of 1700 points. 'H' share has rebound by 40% passing the 7000 points from to its lowest 4990 points. HSI from its lowest 11000 points, only at 35% of its highest 31000, has rebound by 20% to pass 13000 points. Bad news from financial report and economy outlook seems not impacting much to the stock market any more as it is believe to be comprehended in the current low price.

We saw this situation frequently especially after the Deepavali on end of Oct'08. The market volume increase due to capital injection from the institutional investors. To further confirm, we can identify the next head is higher than the previous head. Likewise, the next bottom is higher than the previous bottom.

Every crisis creates opportunity

Benchmarking China stock market, while it has dropped from its highest of 6000 to the lowest of the year of 1700, and now rebound back passing 2300, with the increasing domestic consumption and the sustainable GDP growth, we believe China government should take not longer than 10 years to hit the 6000 points. i have mentioned that when it is below 2000 points.

Now the potential has drop from 200% to 160%. Of course, 6000 points would not be its permanent resistance. 160% over the next 10 years, which is equivalent to 10% annual return by 10 years is what i think convincing. Likewise the China 'H' Share from now 7500 to highes 20000 points. Does China need 10 years to be back to 6000 points?

Start investing now

as long as your emergency fund is there.

According to financial planner, as long as there is an emergency fund backed up for 3-6 months of our expenses, one should consider to start investment. Putting too much money in the bank will not help to grow our wealth. It is advised to allocate 10% - 20% of our income for investment.

With current expenses of RM32K per annum, which is about RM2.7K per month, assumming no additional expenses during the retirement age, because of 4% inflation, we will have to spend for RM85,307 per annum, which is not less than RM7K per month after 25 years. In other words, if you are spending RM2.7K a month, and you are now 33 years old, please make sure you have RM1.5M when retire at 58 years old with 75 years life expectancy. The number could be more with higher inflation, higher medical expenses and travel expenses.

Personally i do not wish to just stay at home in my golden years.

Inflation Efffect

At 4% inflation, RM100K will be worth only RM67,566 after 10 years. For a new born child, a local private university education which cost RM73,500 today, will cost RM235,935 in 20 years with 6% inflation. If we target to have half a million at the age of 55, look at the below table to see the consequences of delaying the saving.

Simple Mathematics

This is simple mathematic calculation base on 8% compounding return. So, if we are doing the saving in the bank with the very low interest, the monthly saving requirement would be 3-4 times higher.  Don't think that you will have better saving in future with the increase of your income because commitment will increase in tendem.

I have friends who are working as management level, earning 20K income per month buying big house and luxury cars and sending their kids to overseas for study, will face  financial challenge if they are not working for a year. In nowadays, the definition of 'rich' interpreted from how long one can sustain his/her life if not working, disregard how much saving he/she have. Of course their saving can be one of the passive income generator if this saving is put in any investment instrument.

Would you like money to work for you?

As at Dec 2006, there are RM224 Billion in EPF while average contribution amount for a 55 years old contributor is RM110K. If this EPF contributor expected to live for 75 years old, he can only spend RM475 per month. And he is categorised as 'poor' resident so long the monthly income does not exit RM530 in Malaysia.

This article is contributed by Hun Meng, a professional unit trust consultant from Penang.

Retirees' EPF exhausted within three years

A survey by the EPF found that a contributor on average, exhausted his EPF money within three years of withdrawing the lump sum. Thus we can often see many old folks continue to work even reaching 60 years old.

I know what you think; you should have much bigger amount than RM110K when you approaching retirement age, but bear in mind, the amount may not be a lot, say RM500K if we continue to make use of it for housing, education and medical. And who knows, the RM500K after 10-20 years, because of the inflation, could be as valuable as the RM110K today.

People forget about the inflation. Things has change generally, from one working father to support 7 kids, to 1 working couple to support 3 kids. The FD rate in Malaysia hit the highest of 9.06% in 1997, and drop ever since that to as low as 3.2% in 2002. And after another 7 years, FD rate drop to 2.5%.  Whereas the inflation hit high of 8% in last June and now at more than 6%. As no body can avoid the inflation, there is no other way than investing to overcome the inflation.

According to 'Investopedia', the definition of 'investing' is : you can't create a dupicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money to work for you. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher paying job.

The secret of investing in Unit Trust

here are 3 common strategies used in unit trust investment.

1. Ringgit Cost Averaging

Regularly invest a fix amount in a unit trust fund regardless of market trend is called the Ringgit Cost Averaging strategy. The actual market performance is fluctuating. When the equity market is high, you buy less unit with the same amount. When the market is low, you buy more unit. For long term, you will get much more unit in the lower price range.

2. Portfolio Re-balancing

Portfolio re-balancing is the process of bringing the different asset classes back into proper relationship following a significant change in one or more. More simply stated, it is returning your portfolio to the proper mix of stocks, bonds and cash when they no longer conform to your plan.
Example:
You start investing 50% in equity and 50% in fixed income fund.
1 year later, the equity rises and now your portfolio consist of 80% equity and 20% fixed income fund.
To re-balance your portfolio, you should sell 30% of your total fund in equity and invest it in fixed income fund so that the portfolio is maintained.
This is the simple principle of buying low, and selling high.
If you are investing with Fundsupermart, you can easily do fund switching of your unit trust portfolio by logging into your account online. There are no switching fees involved and you can switch between different unit trust companies.

3. Switching

Switching will lock in the gain you made in your unit trust investment. Switching fees are low and definitely lower than the upfront service charge. When you are making profit from an equity fund, you can switch it to some lower risk fund to lock the gain instead of selling it for cash. When the market turn low, you can switch it back to equity fund.