Investing 101

Why invest? Can’t you just save and leave your money in the bank account? Well, here are a few reasons why investing might be a good idea: Firstly, you’re going to need money when you retire. And secondly, if you don’t invest your money, the cash you have will lose its value over time because of inflation. 

Guide

Summary

• Set investment goals
• Save and invest now!
• Invest early to beat inflation and to benefit from compounding
• Invest consistently every month
• Invest in different products, not just one
• Balance returns (how much you’ll make) with risk (the chance of you losing your money)
• Avoid high fees
• Don’t sell in a panic
• Don’t take on debt to invest
• Beware of scams

Infographic

10 Things to know

Before you get started, set some investment goals

Set some financial goals for yourself. This will help keep you focused on saving and investing your money. You can use our savings goals calculator to help you.

Here are some common examples of investment goals and timeframes:

Investment goals	Timeframe	Amount you need	Amount you need to save monthly to achieve that goal
Buying your first car
Buying a house – down payment
Paying for your dream wedding
Saving up for your children’s education
Retirement

Save and invest now!

Start by saving at least 5-10% of your salary! The day your salary comes in, take aside 5-10% of the total and save it. If you earn RM2,500, then you put aside RM125-250 or whatever you can afford to start with.

Now to make your savings work for you, you need to invest it. There are many investment options available including Fixed Deposits, EPF,Amanah Saham, REITS,ETF,Unit Trust Funds, and Stocks.

Invest early to beat inflation and to benefit from compounding

Why?

Because compounding matters.

When you invest, you benefit from compounding. Compounding allows you to grow your savings more quickly. The sooner you start investing, the quicker your money will grow.

Feeling brainy?

Imagine you’re earning a 3% return on RM1,000 after one year, the result is just RM 1,030. Now, imagine you leave the money there and you earn another 3% that year. You do this for the next 50 years. Guess how much you’ll have in the bank?

Just take: RM1,000 + (RM30 x 50 years) = RM2,500

Not bad, you think?

Well, the actual number is much, much better. It turns out you’ll make RM 4,384 by just keeping your money in the bank where it earns 3% interest. The secret is that in the second year, you aren’t earning 3% on RM 1000, but 3% on RM1,030 (the amount you had first put in plus the interest you earned) which works out to RM30.90. Your interest earnings will then increase by even more as the years go by.

Check out the graph below to see exactly how your money would have grown in that 50 year period.

Because of inflation

If you don’t invest your savings, it will be slowly ‘eaten’ away by what’s known as ‘inflation’, which is how our money loses a little bit of its buying power over time. You know the story, in 2018 you went to the market and bought fish for RM15, in 2019 you go to the market and it’s RM15.30. Next year, it’ll probably be higher.

Now imagine if you had put the RM15 in a savings account at 0.8% returns in 2018. You would have had RM15.12 in 2019 which means you can’t buy the same amount of fish as you did in 2018.

If instead, you had invested the same money in an FD at 3% returns, you’d have made RM15.45 which would have allowed you to buy the same amount of fish and have some cash to spare. This is exactly why investing is so important.

Invest consistently

So up top we said put aside a small amount every month from your monthly salary. You should be using this money to invest consistently.

Why? Turns out it’s very difficult to time the markets. By that we mean that it is almost impossible to know when to buy and when to sell. Even professional fund managers struggle to get a better performance than the index. That’s why you should keep investing small amounts no matter whether you feel the market is up or down.

For a more detailed explanation click here:

If you look at the graph below of an index tracking the Malaysian stock exchange, you can see that over a longer time period, you’d have made money regardless of when you invested. However, if you’d chosen to save all your money and make a large investment at only point A when you thought it was the perfect time, then you would have taken a huge loss, especially if you sold at point B.

Source: Yahoo Finance

This is why you should invest small amounts consistently. You’ll sometimes buy when prices are low and sometimes buy when prices are high. In the long-run you are more likely to make a safer average return on your investments by not timing the markets.

Balance risk and return

All investments carry some risk but different types of investments have different levels of risk. Below you can see which investment types are low and high risk as well as their level of returns.

Investments with high returns, carry higher risk. Investments with lower returns, carry lower risk.

*Figures use returns for the last 10 years (2009-2018).

If you don’t feel confident or have the necessary financial knowledge then you might be better off investing your money in EPF and Amanah Saham to collect consistent returns.

If you have the knowledge and skills to invest, then you may be willing to take on the additional levels of risk by investing on your own in something like stocks in order to achieve higher returns; but remember, most of us don’t have the skills to achieve those levels of returns (even most professional money managers struggle to achieve large returns every year).

Remember, these aren’t investment recommendations nor are they complete. It’s just so you can get an idea of what the average investment portfolio would look like depending on your willingness to take on risk:

• Conservative (less willing to take on risk)
  This is where most of us might find ourselves. We aren’t willing to lose our money and would prefer steady consistent returns. In this case, your investments would probably be in the following:
   
  • EPF savings (including additional amounts you can contribute)
  • Amanah Saham
  • The house that you are staying in
  • You may have some money in FDs for short and medium term expenses such as education or emergencies
     
• Moderate (willing to take on a bit of risk)
  Your investments would still look like a conservative investor except maybe for a couple of changes. 
  
  You may have chosen not to put as much money towards your EPF savings and Amanah Saham. Instead, you may have been a bit more adventurous and invested in Unit Trusts , ETFs or REITs instead.
   

• Aggressive or a more knowledgeable investor
  Again you would still have your basic EPF savings and have money invested in your home, but the aggressive investor would also be more willing to risk their money in the hope of better returns. 
  
  This investor might have investments in stocks or equity based unit trusts rather than putting more money into EPF or Amanah Saham as compared to the conservative investor. 
  
  So you see, the three types of investors might have invested the same amount overall, but would have split their investments differently to suit their risk preference (but remember, these aren’t investment recommendations)

  	Conservative	Moderate	Aggressive
  Fixed deposits	✓	✓	✓
  EPF	✓	✓	✓
  Amanah Saham	✓	✓	✓
  REITs*		✓	✓
  ETFs*		✓	✓
  Unit trust funds*		✓	✓
  Stocks			✓

*Risk levels differ depending on the type of ETF and Unit Trust Fund

Does what I invest in change depending on my goals? Yes, it does!

Two things to consider:

• Ideal time horizon for various investment products. Equity investments such as stocks and unit trusts tend to generally be more mid to long term by nature. If your time horizon is shorter, one should consider other investments such as FDs.
• Access to your investment money. Depending on what you invest in, it might be easier or harder to access your money. For example, if you wanted your money quickly, then you could look to put money in FD accounts with short tenures . On the other hand, investments such as stocks or even your EPF savings would be harder to liquidate (convert assets into cash or cash equivalents by selling them on the open market) or access for short-term needs.

Below is a table that provides further detail for the investment products listed above.

Product (link each name below to jump  to the respective content)	Investment timeframe	Key characteristics	Risk	Average Returns
Fixed deposits	Fixed predetermined time frame	Returns are low but consistent	Low	3%*
Employee Provident Fund	Long term investment as meant for retirement saving	Low risk profile and consistent returns Savings may be withdrawn for specific items (e.g., education, buying a home) before age 55 subject to EPF criteria	Low	6.2% pa*
Amanah Saham (Fixed price funds)	Short-to-long term investment Best returns will be seen when kept long term. However, no losses when only used as a short term investment.	Low risk profile and consistent returns	Low	6.9% pa*
Real Estate Investment Trusts (REITS)	Can be a short term or long term investment	High dividend yields Capital returns are still dependent on share price	Medium	Depends on portfolio of funds
Exchange-traded Funds	Long term investment	Low fees Returns are not consistent and dependent on market conditions	Medium	Depends on portfolio of funds
Unit trust funds	Long term investment	High fees  Returns are not consistent, dependent on market conditions and managers skill	Medium	Depends on portfolio of funds
Stocks	Can be a short term or long term investment	Returns are completely dependent on portfolio	High	Possibly medium to high depending on market and company

Invest in different products, not just one!

Invest in different products or “diversify your portfolio”. By dividing your investments across several different products instead of putting all your money in just one product you spread your risk and reduce the chances of losing all your capital if something goes wrong.

This means investing your RM 1,000 across several investment products e.g., investing your RM 500 in Amanah Saham and having the remainder RM500 invested in a different investment product. Click here for our diversification calculator.

To help explain diversification, let’s say that you split your investments across 4 different products like Amanah Saham, ETF, REITs and Stocks. Your combined returns won’t be as bad as your worst-performing investment nor will it be as high as your best performing investment.

Scenario A:

In Scenario A above, you decided to split your investment, your returns are higher than if you had only invested in ETFs but lower than if you had just invested in stocks.

But in Scenario B:

If you had just invested in stocks, you would’ve had pretty major losses. By splitting your investments, you’ve contained your losses and still made some returns.

Avoid high fees

Fees are like barriers holding you back from gaining investment returns. These fees usually come in the form of one off sales fees and annual fees such as management and trustee fees.

They might seem small at first, but in the long run, they really add up. If you make a 6% return, your return without fees after 30 years is 474%. With annual fees of 1%, it’s only 332%. So you’ve lost one-fifth of your wealth away in fees!

Here’s what your returns would look like If you had started by investing RM1,000.

Do NOT sell in panic

Many investors panic and sell when they see their stocks losing money resulting in lower profits. Why? Because they are buying when the markets are good and selling when the markets are bad. You should really only make changes to your portfolio if there has been a fundamental change to your investment.

Some examples of a fundamental change include negative news about the company (fraud, management changes, declining earnings), a negative change in government regulations or the industry itself being disrupted by some new technology.

You want to understand what is truly changing with your investment and to filter out the short term fluctuations. Doing your research prior to making an investment minimizes the risk of you panicking or making a poor decision.

The graph below shows you KLCI Bursa’s performance since 1994. Over the last 28 years, you can see an overall improvement in Bursa’s performance.

Source: Yahoo Finance

But if we zoom into a specific period say 2007 to 2009, you’ll see it looked like the KLCI Bursa was doing pretty badly.

Source: Yahoo Finance

Say you had decided to take your money out on 1st January 2008 when the markets were doing badly, you would have made a loss or made less money than you could have since the markets rebounded quite soon after. That’s why it’s so important to be patient.

Do NOT take on debt to invest

Taking on debt to invest is like holding a ticking time bomb. Investments like Amanah Saham, EPF offer you returns of between 4-7%( a year. Your personal loan or credit card debt interest rates are around 10% to 18% *Source: click here). You are very unlikely to make enough returns from your investment to pay back your debt! And, if you can’t pay back your debt, you’ll end up in a cycle of debt which leaves you in a worse financial situation than you were in before you started investing. So don’t make yourself worse off!

Beware of scams

⚠ If something is too good to be true, it probably is!
If it sounds too good to be true, it is! No proper investment manager will claim to give you above-average returns of the same size, year in, year out, regardless of market movements.

The truth is that the average investor should be very satisfied with returns of 6% a year (which is considered good!). An exceptional fund manager (which is rare no matter where you go) can achieve higher returns depending on market conditions. Even a man like Warren Buffett, the world’s richest investor, has had average returns of 12.% per year in recent times*. So if someone comes up to you offering 30% in a year, or even 3% in a month, turn around and walk away!

*Source: 
https://www.forbes.com/sites/randybrown/2019/05/02/warren-buffetts-legacy-at-berkshire-hathaway-is-under-pressure/#cda527e7b1f7

Common investment scams in Malaysia to look out for:

• Macau scam
  • You are offered amazing opportunities to invest in stocks over the phone
  • You are guaranteed great returns in short periods
  • Read more here: https://www.thestar.com.my/news/nation/2018/09/28/99-arrested-in-macau-scam-bust-largest-made-so-far
• Money games or investment pyramid schemes (Malaysian equivalent of a Ponzi scheme). A Ponzi scheme is a type of scam where money from newer investors is used to pay high returns to earlier investors as a way to demonstrate or show success and to attract even more investors into it. However, since the returns paid are not coming from real investments, eventually the scheme will end in disaster. 
  • Pretends to be a legitimate investment opportunity (persuasive staff, uses technical terms)
  • Offers to pay you to recruit others into the investment
  • Read more: https://www.freemalaysiatoday.com/category/leisure/2019/04/15/beware-money-games-if-its-too-good-to-be-true-it-isnt/

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⚠ Avoid scams by checking if it is licensed.
Make sure an investment product is licensed by Bank Negara and the Securities Commission. You can call the Securities Commission hotline at +603-6204 8000 or Bank Negara’s hotline at 1-300-88-5465 to check or report suspicious investment activities.

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⚠ Just because someone sounds credible and intelligent doesn’t mean that they’re not trying to scam you.
You may have heard of Bernie Madoff. He ran one of the biggest Ponzi schemes in history, with $50 billion in losses estimated. But did you also know that Bernie was once the Chairman of the NASDAQ (an American stock exchange)? It’s this level of credibility that he exploited to cheat his victims.

*Sources:
https://www.forbes.com/sites/randybrown/2019/05/02/warren-buffetts-legacy-at-berkshire-hathaway-is-under-pressure/#cda527e7b1f7
https://www.maybank2u.com.my/maybank2u/malaysia/en/personal/loans/personal/personal_loan.page? 
https://ringgitplus.com/en/credit-card/