It’s a sensitive issue when money is concerned. Many us will never find it enough, is reluctant to give some of it away but is more than willing to blow a lot of it away just so to fulfil our refined taste in the many luxuries of life. It’s true whether you are employed or in business. Which makes us instinctively jump at any opportunity (seemingly to good to be true) to make or grow our money in the shortest time, without understanding the actual instruments involved. That is one hell of a risky business.
For some who got burned before, fixed deposits are their best friend. After all, as the Chinese says,
“A prior encounter with ghost will make you afraid of the dark”.
But Malaysian are actually quite fortunate as the current fixed deposit rates do exceed inflation rate. As of year-to-date, Malaysia’s inflation rate is slightly under 2 percent, while fixed deposit rates hover just above 3 percent. Therefore, with zero risk to our capital, our money is actually growing, albeit at humble rate. Nothing to shout about but at least it IS better than putting it under your bed.
Then I read this article in Personal Money, and you Singaporeans are in a much more pathetic state. Fixed deposit rates are below 1 percent return per annum. The same article by Ong Shi Jie of OCBC Bank Malaysia states Singapore’s inflation rate is expected to be around 4.5 percent. Meaning, your value of your money just got OWNED by inflation.
Apparently, low interest rate is here to stay. And I think it’s just a matter of time before we face the same scenario like our friends in Singapore. If come one day, what will you do if….
- Fixed deposit rate only pays you a measly 1 percent
- EPF only pays you the obligatory 2.5 percent
…while inflation rate stays at 3 plus percent. We have not factor in personal and lifestyle inflation yet.
Don’t laugh or dismiss these hypothetical situations. It is certainly possible. You can bitch about it but at the end of the day, the more practical question we got to ask is – “What we going to do about it? Will these force you now to really learn about investing?”
“Dumb question la, LCF. Yes la, we invest in higher return assets la”
Aye. For many, FOREX trading comes to mind. Or some other high risk instruments which I am not going to list here.
I got tired of talking about risk-return profile, so let me give this concept a new perspective.
Felix Baumgartner, the daredevil who set the world record for skydiving from the edge of space, the first to break the sound barrier in his descent – did it like taking a stroll in the park.
I shudder at the thoughts of bungee jumping because I wasn’t trained for these high attitude jump.
See the difference?
Nothing is too high of a risk to you personally if you know it well enough.
But, the time to “know it well” and manage it is exponentially proportional to the risk profile of that instruments.
It means, if you are doing FOREX trading, for example, you would sit in front of your PC whole day looking for buy/sell opportunities.
Not my cup of tea. I enjoy more writing this article piece, coming up with stuff which deliver real value to people’s life or spending more time with my family. Especially the family part. How many of you feel the same?
But still, our money needs to grow right? Which is the topic today. And no, it wouldn’t be time to give up on investing yet.
- Put money in blue chips stocks with high certainty of paying relatively high dividends
- Put money in REIT which is property-backed, with guarantee of paying 90 percent or more of its net rental income as dividends
- Put money in property, which is natural hedge against inflation, both value and rental income-wise.
I do #1 and #2, am not savvy enough to be doing #3 yet. The one for own stay doesn’t count.
Does this make sense to you?
Thanks, and Yea Wil Liam, the worst thing is, you only don’t feel significantly happier only AFTER you bought it (not refundable anymore) 🙂
Hi CF, nice article to remind me the money that I have now is still far left behind of my retirement target. I am agree with what you have pointed out here but when I think deeply about how to archive my objective I realize that other than grow my money I also need to control myself to spend wisely due to my limited credit else if I had spend my money on some fancy products to fulfill my wants rather than my needs it will hit my saving badly. And I just won’t feel significantly more or less happy when I having or without it.
CF, good article.You had spoke out most people think about the resonable return vs inflation rate vs investment risk. My view most people can’t understand or ignore the risk involve in their investment & concentrate on return. How they define resonable return ?
Thanks TY, always being a supporter of my article :).
I’d say reasonable return would be a return which is higher than (nominal+personal) inflation rate, with personal inflation rate being the only variable we can control albeit people find it just so hard not to increase it as disposable income increases.
If personal inflation is kept under check (live simple, live frugal, etc and all the stuff we have heard by now but yet to implement), then reasonable return would be just say, a moderate 8-10 percent. Risk that come with such return should be manageable and acceptable by majority of us.
Then again, I might be oversimplifying things 🙂
Hi CF, great article indeed. In my opinion, the inflation rate is just a reference and it hardly meets the reality. The biggest expenses for normal citizens in Malaysia are housing and vehicles. As we know, the housing price is soaring for a a few years already. We are also driving the most expensive cars in the world (not luxury vehicles, but expensive cars in term of pricing).
So investing had become a necessity.
Thanks Lau, coming from you 🙂 And these are the 2 most basic necessities we need for shelter and transportation.