EPF: Statutory Retirement Savings Fund

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Am sure many EPF contributors have had made their decisions regard to whether to heed the Gov's call to reduce their statutory retirement savings fund (EPF) contribution from 11% to 8% effective January 2009. The call was made with the aim to increase the circulation of cash in the economy to mitigate recession. The suggestion no doubt may increase the people's purchasing power as they have the extra cash in their hands to spend but at whose expense later? Would the Gov that has encouraged its citizen to reduce their retirement fund now (which every one knows is insufficient due to the effect of inflation) bail the same group of people out later from poverty when they are unable to support themselves due to old age/health/lack of savings? Am sure those who decide to reduce their contribution are those who belong to the lower income group as their current take home pay may not be enough to support the ever increasing cost of living but is this wise?

Of course it does not mean that we should not support the Gov's effort to "save" the country from recession, but am sure there are better alternatives than to look for a quick short term solution which may lead to greater problem for its citizens in the future. The Gov needs to put on their thinking cap and work hard on solving this economic crisis otherwise what's the use of electing them and remunerating them with the tax payor's money?

Furthermore, there are numerous articles written regards to the same issue and there was one
(1) The writer did not mention at all about the inflation factor in his article which all of us know is higher than EPF's average return thus is insufficient if we are to rely soley on EPF's conservative investment approach with a return of about 5%. If EPF which is meant for our retirement (say 20-40 years later) does not address the inflation factor but prefers a "safe approach" it ultimately means that we are allowing our EPF value to shrink caused by high inflation rate!

(2) the amount allowable to be withdrawn from EPF to invest is very little. Therefore the risks that EPF contributors are subject to is low as the negligible amount is used to invest in different portfolios which no doubt has more risk than EPF's but pottentially has higher return (high risk, high return or no risk, no gain)

(3) in Unit Trust investment, customer is able to switch their funds from one to another fund depending on their investment objective, strategy and risk profile. They are being assisted by a trained UT Consultant to achieve this.

(4) being a responsible person, investing using EPF is a necessity (not an option) to ensure that we have sufficient in the future instead of relying on our loved ones to support us or to continue slaving till we reach our grave? When does one actually retires?

(5) investment is a necessity to protect the value of what we have been working for 30 - 40 years which if left unattended will deminish in value due to inflation (a silent killer)

(6)EPF is also a fund manager who seeks ways to earn income for its contributors and one of the method is through equities acquisition.

(7) UT investors are advised to invest for the mid (min 3 years) to long term. Therefore, investors are usually advised to wait for their investment value to improve in the event the market is not performing even after the age of 55. However, prior to their golden age, their investment portfolio may have already been changed to reduce their exposure from equity market to income type of funds eg bond/money market and some into equity which are dividen in nature.

On the other hand, if a retiring investor has opted to do some investment, he would have been advised to choose those funds that do not have much equity exposure or dividen in nature in order to safe guard his retirement fund.

As a reminder, there are basically 3 types of funds namely

(a) equity fund (60-95% in share mkt, 5 - 40% in money market, bond, treasury bills)
(b) balance fund (60% in share, 40% in money market, bond, treasury bills)
(c) bond and money market

To reiterate, as a person nears his retirement age, his equity exposure would be lowered. However, it depends on the person's risk profile and strategy - which he has to discuss with his UT Consultant or financial planner.

As all of us know, we need to diversify our investment to create/protect our wealth and UT is one of the best managed investment tool that you could have/use.

Always think long term and ponder on the effect of inflation on your retirement fund and the benefits of compounded interest.

Savings and investing is a necessity. One has to undertake it to create and protect his wealth from inflation. Instead of tapping on your savings / retirement fund to support your current lifestyle, try managing your expense better (reduce it if needed) and increase your income by increasing your own productivity or supplementing it.

The Basics of Unit Trusts

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I feel it is timely to remind the general investors especially the Unit Trust investors how UT works.

Currently the equity market is very low (as a matter of fact is so...cheap as its PE is 9x compared to 7 years average of 16x! In layman term, it requires at least 9 years to recoup your profit compared to 16 years for the same amount of investment).

The low market sentiment has affected the prices of the stock market as prices of shares are determined by Supply and Demand. Should the demand of a particular share is lesser than the supply (as we are experiencing now) the price of the share drops irregardless of whether the company is fundamentally strong or otherwise as right now human emotions are running gamut instead of the practical approach of staying focused on personal objectives for the long term. Sigh....

Those who are able to analyse a particular company's account will look at the company's income PROJECTIONS, FUTURE development/marketing plan, the current management team, the POTENTIAL of the product/services or even industry,etc to determine the feasibility of investing in the company. You will note a smart investor will look for the company's potential as investment involves putting money into a company's potential/future not its histocal performance (no doubt it does have some impact). Because it requires a professional to undertake the analysis task which some viewed as tedious, most "investors" follow hearsay or whatever free advice readily available from friends, neighbours, colleagues, etc who may or may not be qualified to dispense such advice. This, somehow, further aggravates the current poor market performance or rather as the saying goes "follow the herd" mentality prevails.

As you will note, monitoring the market's performance requires much time which many working professionals do not have due to their work commitment. Furthermore, investment requires capital and good counters are quite expensive. A majority of investors are small time investors due to their capital limitation. Those with high risk appetite used to contra their purchases or even take loan to invest! No doubt in the short term they may benefit but in the long run with wrong timing, some investors may get hurt, badly as occured in 1997/8.

Those who are able to invest directly into the equity market must be able to withstand the low periods which may take a while to correct. In other words, the investor's holding power must be strong enough to weather the storm. Investing in the Bursa Saham limits an investor to the local market which poses greater risks as the market may be affected by political and economic policy which directly affects the local industry, people's sentiment,foreign investors, etc. Moreover, to diversify the investment portfolio into various local industries require huge capital outlay which many people are unable to do so.

Due to the limitations from direct investment, UT is an alternative investment tool to address its weaknesses.

A UT company pools money resource from the investing public. It consists a pool of fund managers who are qualified professionals responsible for analysing and recommending the purchase of shares of companies that they believe are under valued, has income or capital appreciation potential, growth potential or even economic sector/industry that has potential to grow. Based on their recommendation, they will pick or dispose shares of companies in order to meet their fund's objectives using their investors' money. Most fund managers' decisions are collective decisions which benefits the investors.

A particular UT fund is liken to a basketful of shares. In a fund, it may consist between 50 - 80 shares from various sectors or even countries. The advantage being that the risk exposure is much lower due to the diversified nature of the fund. I have been asked numerous times whether a fund's value or NAV could be equal to "0" . What do you think? For the NAV to be "0" it would require ALL the 50 - 80 shares to be "0". Is it possible? NAV which is the Net Asset Value of the fund represents the value of the shares in the basket/fund. Its value co-relates to the average value of the shares in a fund.

Furthermore, the accounting works, shares log, distribution computation, administrative matters relating to the shares purchased/held for a particular fund are placed with a trustee company which is not a member of the UT company eg Amanah Raya, etc. A trustee company also ensures that the UT Company complies with the objective of a particular fund which is clearly stated in the fund's prospectus. A copy of the prospectus is also filed with the Securities Commission to ensure compliance.

Unit trust involves sales of shares by unit to the public. One lot of share is equal to about 700 - 1000 units. Sales in unit enable the investing public to participate in the equity market as it is cheaper compared to direct investment in the share market.

Since it is affordable, UT investors are able to do a regular savings/investment in their chosen fund/s. The advantage of doing a regular investment/savings is that they are able to lower their average investment cost thus enable them to realise their profit / break-even point faster. This is useful especially during volatile market condition. You could read this in my previous blog on Dollar Cost Average.

As UT funds are managed by the fund managers, this allows their investors from having to monitor their investments and enable them to concentrate on their own profession/work. It is similar to outsourcing your investment to the fund manager.

UT allows individuals, especially those who does not have the time nor knowledge, to participate in the equity market thru a third party. To me, it is the stepping stone for young investors who does not want to miss out on the investment opportunity whilst they are equipping themselves with its knowledge or chasing their dream profession or etc, etc. The advantage of investing for a long period of time is the benefit of compounded return. It would be good to check with your UT Consultant who would be able to advise you on this powerful benefit.

Saving using UT is very flexible as a person is able to invest or save according to his affordability and objective. It is always advisable to invest using the extra money that you have no plan to use within 3 years. Please be reminded that UT investment requires you to look at a period no lesser than 3 years. The duration depends on your objective and the amount that you are currently saving to achieve your goal. Please discuss with your UT Consultant to come out with a proper saving/investment plan.

UT caters to the various risk profiles of its investors. There are basically 3 types of funds ie equity, balance and bond/money market. Besides, a particular equity or balance fund does not mean that 100% of the investors' money are into equity as a certain percentage of it will be kept in the money market, treasury bills, bonds which generates income and provides liquidity to the fund managers or its investors. This feature also addresses the investors' concern on the possibility of the NAV being "0". Furthermore, a UT investor is able to switch from one fund to another in order to diversify/balance his portfolio, to lock in his profit, to reduce his risks in a volatile market, to cater to investor's risk appetite, investment strategy, etc.

The distributions earned from UT are paid according to the number of units held by the investors and is devoid of any service charge. Therefore, each time a distribution is declared and is being reinvested, the average cost per unit is lowered thus creating greater possibility of hitting break even point at an earlier date. This also explains the reason why as a responsible UT Consultant we usually advise our customers to top up their investment despite the market going downhill as the low price enables them to acquire greater number of units which lowers their average cost. It is a norm for the market to correct itself eventually. When? No one knows but if we are to refer to history, the market always comes back.

"Never time the market" is another piece of advice that you will usually hear from us. Well...I am glad to let you know that Warren Buffet is a firm believer of this adage too. No one knows when will the market hit rock bottom or hit sky high rate but being a long term investor, we should not be swayed by what is happening around us.

Always looks towards the future and potential of a company / country. To be successful in the investment world, hold on to your objective and act smartly. Be rational and devoid of emotions. As Warrent Buffet said, "Be Fearful When Others Are Greedy and Be Greedy When Others Are Fearful".

In summary, UT investment
(1) is managed by a pool of professionals
(2) is held in trust by a trustee company
(3) is affordable
(4) is well diversified whether in industry/sector or country or asset allocation
(5) caters to the needs of its investors according to their risk profile
(6) is flexible
(7) enable investors to enjoy Dollar Cost Average
(8) is for mid to long term investment period
(9) is suitable for young investors who may or may not have the time or knowledge to invest.

Managing $$ Part 6: GIV

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Part of the reasons for being rich is so that we are able to give to others who are in need. Mr T Harv Eker is of the opinion that it is our responsibility to be rich so that others may benefit as being poor would make us be a burden to other people especially our loved ones. Furthermore, being rich for yourself may not be a good motivator to success but if we are to include other people in our reasons for being rich, we may find the fulfilment for living.

Have you heard of this adage, "the more you give, the more you will receive"? I guess we could not have more if our jar is already full. Therefore, by giving, we are actually creating space for the universe to fill up thus creating more for yourself. It's difficult to describe here but I hope you could understand.

Click here to read about some multimillionaires who are great philanthropers

Therefore, in our quest to manage money successfully, it is suggested to allocate at least 5% of our revenue/income to charity/to those who are in need or for a cause which you believe/support. Those who wishes to allocate more is to take the extra amount from the Necessity Jar only. However, if the revenue / income that we are earning is insufficient for us to contribute for a good cause, we could trade it with our time. Time similar to money is precious. Therefore, for those who are unable to contribute cash, sharing your time with other people who either need assistance and/companion is equally honourable. Some of the causes which I used to or currently support are Malaysian Nature Society (MNS), All Women's Action Society (AWAM) and other impromptu requests.

Besides being a good giver, we must learn to be a good receiver too. All things comes in pairs, black/white, in/out, up/down, long/short, rich/poor, hot/cold, etc. This is to ensure balance and ability to create more.

How do you feel when you give something to someone genuinely? Happy? Great? In order to reinforce the good feeling of that giver so as to empower his/her power of giving, the recipient's ability to accept the gift with warmth and gratitude without returning the same favour (on the same day) helps. One good example that I could think of is when receiving a compliment. As a recipient of a compliment, a simple thank you to the giver is suffice. It is a norm for us to return a compliment to the giver but in actual fact, that reduces the giver's joy of giving and the reciprocated compliment becomes fake! Ouch! So, if you as a receiver needs to return the same, do it some other time and create a genuine compliment not because you have to!

Take it and own what has been given and be thankful!

Cheerio!