Financial Planning Q&A Part 2

Question:

Miss A is 30 years old with an annual income of RM40000. She has been in the work force for 5 years now, and she would like to buy a house for herself. Can she afford a house in KL?

Answer:

In Malaysia, most house purchasing is through financing from banks. Hence, whether Miss A can afford a house depends on whether she can obtain a mortgage loan from the bank. In general, there are various ways for the banks to approve a mortgage loan, one way is the 1/3 rule, which is RM4000/3 to get the monthly affordable instalment of RM1300 for Miss A. 

Based on the table below, if Miss A’s monthly affordable instalment is RM1000, she can afford a RM220000 house. In KL, with rising house prices, Miss A can only afford a house in the subsales market in the suburban region. 

Question:

Like most women, Miss B is a shopaholic. She is 26 years old and she love to shop online. She knew clearly the culprit was her credit cards but she could not control herself and she was in great debt. Suggest ways to help her to change from a shopaholic to a savvy investor.

Answer:

Online shopping indeed brings us convenience, however if we abuse it, it may bring us disasters! Miss B’s problem is twofold. First, she is addicted to shopping; Secondly, she has the wrong attitude towards credit cards.

It is widely believed that addicted to shopping is a form of behavioural problem. The victims believe shopping may bring them happiness, at the same time releases their stress and other problems. However, psychologists think otherwise. The doctors claimed that happiness derived from compulsive shopping can only be short-lived, it does not solve problems at all. A better way is to go out, engage in meaningful activities with friends, work place or even charitable organisations. This way, Miss B will shift her focus onto other people instead of “herself”, and the satisfaction derived from doing charity work is more meaningful.

Next, Miss B should learn how to control her compulsive buying behaviour by drafting a purchase list every time before she buys. This way she is able to differentiate clearly which items are the “needs” and which are the “wants”.  In addition, she should record all her expenses so that she can keep track of her own spending.

Finally, Miss B should understand that credit card is a tool for “payment”, not for “financing”. For a start, she should use cash to make payment instead of credit cards to control her purchases. With all these measures in place, I’m sure Miss B would transform herself from a shopaholic to a money savvy queen.

Financial Planning Q&A Part 1

Recently I was interviewed by a local Chinese women magazine - Citta Bella (January 2015 issue), and I thought I should translate the script into English to benefit more readers.

Question:

There are various investment products such as unit trust, bonds, equities, real estates, gold, and forex that are available to us, which type of investment is most suitable for lady beginners? What are the basic rules and myths that we need to pay attention to?

Answer:

To rank the risk level for the above investment products from low to high are: debt securities, real estates,  unit trust, equities, gold, and forex. The lower risk instruments such as bonds and real estates may require huge capital of investment, while higher risk forex requires smaller capital as forex is traded on margin. Does that mean beginners with small capital are forced to invest in those higher risk forex, futures and penny stocks? Not really!

I would recommend the greenhorn ladies to go for unit trusts, blue chip stocks and physical gold investment.

Firstly, let me talk about the unit trusts. There are a wide variety of them with different investment themes, the most common ones are the local equities funds that invest mostly in the Malaysian equity market. Since 1999, the Malaysian equity market has been performing steadily compared to the regional markets. There are also some unit trusts that invested in government bonds and corporate bonds with annual returns close to the fixed deposit (FD) rate, so I wouldn’t suggest you to invest too much into these funds, just put your money in the FD, as there is not much difference. 

Alternatively, there are unit trusts that invest in foreign equity markets, these funds are more risky. Although the potential returns may be high but I would suggest not more than 30% of your portfolio into this type of unit trust.

Next, let’s talk about stocks! I would like to emphasize that not everyone is suitable for the stock investing. I have seen too many bad cases, for example, many beginners when first entering into the stock market, they would think that they are the Warren Buffett type – value investor. They would choose some blue chip stocks for a start, hoping to win big money! 

Usually the biggest mistake is their attitude! They always wish that the stocks would appreciate within the short term, but in reality, unless we are in a strong bull run, otherwise these blue chip stocks hardly move, sometimes they may drop in prices. These inexperience greenhorns get panic and they would sell off these good value stocks, in returns, they would listen to rumours and bought into “penny” stocks. Hence, they lose even more in the end, and they ended up paying heavy price for that!

Finally, let’s talk about the gold and forex. I would suggest to the beginners not to invest in forex as it is high risk and prices fluctuate a lot, you may end up having sleepless nights!  However, I do recommend gold investment, especially gold jewellery for the ladies! Last year I did mentioned gold price was volatile and it’s price has fallen quite a bit, this year, I believe the gold price may fall to a bottom this year, and that it would be a buying opportunity for those gold bugs again! Start buying gold in the 2^nd half of 2015 or whenever you see a substantial fall in the gold price.