Dollar-Cost Averaging Principle

The Principle of Dollar-Cost Averaging involves a diciplined regular investment technique which may be applied to maximum effect in unit trust investing. This investing technique intended to reduce exposure to risk associated with making a lump sum purchase. All an investor has to do is to invest a regular fixed sum of money with a selected unit trust fund over a period of time (daily, weekly, monthly, quaterly, etc.). This way, investor does not have to worry about market timing, or where shares prices or interest rates are headed. Regular investment will purchase less units when market is up, and more units when market is down. It safeguards against the market losing value shortly after making investment and limit the downside of an immediate drop in asset value after a lump sum is invested.

Illustration:



Let us assume Investor A decided to invest a monthly savings of RM400 with the fund over a period of 24 months.

In the first 12 months, Investor A thus managed to accumulate 8,026.47 units at an average cost of RM0.5980 per unit at market uptrend whereas the average NAV per unit over the period was higher at RM0.6008.

During the next 12 months, Investor A manage to accumulate a total of 9,270.36 units at an average cost of RM0.5178 per unit at market downtrend which is lower than the average NAV per unit over the period at RM0.5183.

Units will be bought at an actual cost which is lower than the average NAV per unit over the same period by regular investing the same amount of money in the fund irrespective of price fluctuations.

Also referred to as constant dollar plan. In the United Kingdom, it is known as pound-cost averaging.

In Malaysia, it is known as ringgit malaysia-cost averaging. *quote by kkchow23

Are You Trying to Time This Market?

By Andrew Massaro, CFP®, CFS
Senior Financial Planner

Are you a long-term investor? Many people think of themselves as such. After all, they say, they have been investing for a long time, and their goals are ten or more years away.

Yet, most people – maybe you, too – may not be long-term investors at all. You see, a true long-term investor is not merely a person who has been investing for many years, or who plans to invest for many years. A true long-term investor is one who owns the same investments for many years.

Those who buy and sell investments with any degree of regularity or frequency are actually speculators. And those who panic when markets fall, selling their investments and fleeing to bank accounts and money market funds, and who are flush with greed whenever the markets rise, racing to buy the very assets they previously sold, are market timers.

In fact, lots of people are market timers, although most deny it. Legendary money manager Peter Lynch had such individuals in mind when he said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

To make a profit when investing, all one needs to do is buy low and sell high. However, during the last three years, just the opposite happened: Many people who had eagerly bought shares at the high prices of the late 1990s sold them in the early 2000s at much lower prices – a classic case of buying high and selling low. These folks, currently on the sidelines with their cash, will one day buy the shares they previously sold, at prices higher than what they had earlier sold them for. Amazingly, most of these people will always wonder why they never make any money from their investments.

Even those who have resisted the urge to sell are acting a bit like market timers. While many of these folks are “holding on” (as they like to phrase it), they have stopped their systematic monthly investment programs or have switched from investing monthly into securities and are instead placing that cash into bank accounts. Ask them why, and they’ll tell you they’re just waiting for the market to become more attractive.

That attitude, of course, is pure folly. These folks were happy to invest monthly while prices were high, and they agree that prices will one day be high again (how else can you explain their willingness to keep the shares they already own?), but they are unwilling to invest new money at what they acknowledge are today’s temporarily low prices.

No matter how much we advisors promote dollar cost averaging and systematic investing, no matter how much we preach the long-term mantra, too many people insist on buying only when prices are high and rising.* Anytime prices are lower, they freeze. Can you imagine a shopper acting this way? “I’ll buy that suit only when it’s expensive. I’ll wait until the sale is over before I buy it.” Silly indeed.

In the late 1990s, many people lamented that they had not invested years earlier – when prices had been much lower. We find ourselves at a similar point in history. One day, you will tell your children and grandchildren that you had the opportunity to buy shares in the early 2000s. You will either be bragging to them that you did or bemoaning the fact that you didn’t.

* Dollar cost averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchase shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low price levels.

Public Mutual (Fund Performance Chart And Calculation) - PART 2

As I promised, now comes the 2nd part of the calculation for funds. What happens when there's distribution given by a particular fund?

Example 1
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Public Balanced Fund (PBF)
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At 17/05/07, NAV price is RM0.9970.

Amount Paid : RM 5,000.00
Sales Charge (6.5%): RM 305.15
Amount Invested : RM 4,694.85

Price (RM) : 0.9970
Units : 4,708.98
Total Cum Cost (RM) : 5,000.00
Avg Cost Per Unit (RM) : 1.0618

At 31/05/07, Rate of Gross Distribution Per Unit given is 9.00sen & Rate of Net Distribution Per Unit given is 8.59sen.

At 01/06/07, NAV price is RM0.9104.

Units (31/05/07) : 4,708.98
Distribution Reinvested : RM404.50
Price (RM) : 0.9104
Units (01/06/07) : 444.31

Balance units : 5,153.29
Total Cum Cost (RM) : 5,000.00
Avg Cost Per Unit (RM) : 0.9703

At 26/07/07, NAV price is RM0.9497.

Units : 5,153.29
Price (RM) : 0.9497
Amount Redeemed/Repurchase (RM) : 4,894.08
Profit/Loss = RM4,894.08 - RM5,000
= -RM105.92

Simple Estimate Return : -2.12%

The fund is just 2 months and has a lot of potential to grow. If we ignore the service charge, actually we're profiting already. That's the main reason why investor should invest at least for a year or more. Service charge won't be significant if you divide by the number of years investing.

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If you used Public Mutual(fund performance graph):

Simple Estimate Return : 4.67 - 6.5 = -1.83%

I’m not sure why there’s a difference of 0.29% using graph and calculation. This is probably due to the management/trustee, etc fees not yet deducted. Cause I’m not sure how the graph at Public Mutual website is compute.

Hari Pengguna MALAYSIA 2007 (Consumer Day)

On the 26th July each year, Consumer Day is celebrated to commemorate Consumer Protection Act 1999 and to actually create awareness and educate us to be responsible consumer who is aware of his/her rights as a consumer and practice them.

We should always stand up for our rights but never misuse them. These are the eight key consumer rights :

1. The rights to acquire fundamental needs.


2. The rights to acquire safety rights.


3. The rights to acquire information.


4. The rights to make a decision.


5. The rights to voice out.


6. The rights to claim for damages.


7. The rights to obtain consumer education.


8. The rights to acquire safe and healthy environment.

To find out more visit : Ministry of Domestic Trade and Consumer Affairs

Be a smart consumer and indirectly contribute towards an ethical economy.

Happy Consumer Day !!

Is Your Portfolio Properly Structured?

By Ric Edelman
From Inside Personal Finance

Do you know what the terms asset allocation, portfolio rebalancing, and diversification mean, and how to apply these concepts to your portfolio? You are not alone if you don’t. In a recent study of people who have $100,000 or more in investments, Hartford Financial Services Group found that few investors are familiar with the term “asset allocation.”

Of the respondents under age 24, none could explain the term. Only about 12% of those in their 20s and 30s said they knew what asset allocation means, and about 35% of those in their 40s and 50s claimed familiarity with the term. This lack of education is a big problem because asset allocation should play a crucial role in managing your investments properly.

Asset allocation refers to spreading your assets among different asset classes, such as stocks, bonds, CDs, real estate, gold, international investments, and natural resources. Within each asset class are sectors. For example, stocks can be parsed into growth and value; bonds can be split among government and corporate, and so on.

Therefore, educated investors know they should give equal consideration to how much money to place into an investment as well as to selecting investments that are appropriate for them. If you doubt the importance of asset allocation, consider this: Even if you buy the right investment at the right time, watching it double in value won’t do much for your finances if you had invested only 1% of your capital in that asset.

This is why smart investors focus on percentages, not dollars. The amount of money you have fluctuates daily. But the percentage never changes: You always have 100% of your money — never more, never less. Therefore, instead of trying to decide how much money to place into a given investment, focus instead on the percentage you want there. Once you decide, for example, that you want 20% of your money in a given asset class, you know when to buy and when to sell.

How you allocate the assets in your portfolio depends on your goals and the time it will take to achieve them. For example, two people might own identical investments, but the person who is saving for a retirement that is 30 years away will allocate money among investments very differently from the person who is planning to pay for college in five years. That’s why professional financial advisors create asset allocation models for their clients, and we’ll do so only after developing a thorough understanding of the client’s goals. If you find yourself talking with an advisor who touts investments without regard to your goals, and without regard to asset allocation, you’re really dealing with a product salesperson, not a genuine financial advisor.

When properly executed, however, asset allocation contains an inherent flaw: It becomes outdated. That’s because no two asset classes (or sectors within asset classes, or individual investments within sectors) ever perform identically in any given time period. As a result, during a given period, some investments will rise or fall in value more than others. After a period of time, some investments will comprise a larger portion of your assets than you wanted, while others will comprise less.

That’s why asset allocators turn to portfolio rebalancing. If someone wanted, say, 65% of their assets in stocks and a review of the portfolio now reveals that stocks comprise 70% of total assets (because stocks rose faster than other asset classes), they’ll sell some of the stocks to bring the allocation back to the desired 65% level. Simultaneously, they’ll use the sale proceeds to buy more of the asset class that became underweighted (and we can guarantee that something is underweighted, since the total portfolio always equals 100%).

Rebalancing is important because if you don’t do it, your portfolio could eventually comprise too much of one asset class and too little of another. That could be devastating to you if something bad happens to the overweighted asset class — as those who had placed all their money in tech stocks in the 1990s eventually discovered. Conversely, people who have too much of their money allocated to bank CDs could miss out on the potential profits available from other asset classes; in the worst case scenario, it could prevent them from being able to afford to retire.

The final element is diversification. How many securities should you own in a given asset class? After all, buying a single stock would be dangerous; buying two is half as dangerous, and buying four half-again as risky. At what point is enough, enough? A recent study in the Journal of the American Association of Individual Investors shows that a properly diversified stock portfolio is one that holds shares of 400 companies; doing so, the study says, reduces diversifiable risk by 95%.

Since ordinary consumers are highly unlikely — or unable — to own so many stocks (the security analysis, transaction expenses, paperwork, record-keeping, and tax reporting burden would be overwhelming), the approach preferred by most investors is to buy a stock mutual fund instead of individual stocks because this investment may provide the diversification an investor seeks.*

People who build and maintain portfolios based on asset allocation, portfolio rebalancing, and diversification may be likely to be successful investors.

*Asset allocation/diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a diversified portfolio will outperform a non-diversified portfolio.

21 Steps To A Great Retirement

EDMOND Cheah, immediate past president of the FPAM says, “If we’re fortunate to live long enough, we all have to retire one day. So, make realistic decisions on the timing of your exit from the workforce.” Here are 21 steps to help you plan well for the golden years.

1. Face your future honestly

Extensive retirement studies show that those who exercise control over when they retire live happier lives than those who wait to be put out to pasture by others.

It is important to not make dangerous assumptions about the future. U Chen Hock, President of the FPAM observes, “Malaysians generally still harbour expectations of their children looking after them in retirement. However, I advise parents to be pragmatic in planning for their children’s education to the extent they can afford it without jeopardising their own retirement funding plan.” Of course, there is no harm in aiming to tilt the odds in your favour (see recommendation 18)!

2. Exercise delayed gratification

Financial planner Rajen Devadason says, “Those who adopt a delayed gratification mentality early in life often discover a decade down the road that this mindset is the most dependable key to future wealth.”

3. Start yesterday, failing which start today

The time value of money tells us money today is worth more than the same amount tomorrow. This is best understood by realising RM1,000 today will be worth RM1,030 one year from now if it is deposited in a 3% one-year fixed deposit (FD) account. This ability of money to snowball over time is termed compounding. Mike Lee, managing director of CTLA Financial Planners Sdn Bhd, says, “Compounding your savings and your returns early in life is always a better strategy than hoping to catch up later.”

4. Save your money

Two effective ways to save money are to first set aside savings before allowing any other outflows each time you receive your salary, and second, to manage your cash flow effectively.

Even those who have let time slip by can benefit from saving money. Wong Loke Lim, honorary secretary of the FPAM, explains: “While it’s obviously better to start saving early, it is never too late to start even if you’re already close to retirement. This is because every ringgit saved will help cover retirement expenses.”

5. Teach yourself about financial planning

Take personal responsibility for educating yourself about financial planning. The bookstores are filled with awesome resources. Cheah says, “It is vital that those who are serious about succeeding in retirement begin thinking and reading about it as early as possible.”

6. Write down your goals

Retirement specialist Devadason says, “Over many years of consulting, I’ve discovered that my most successful clients have goals that are clearly written in personal, positive and present tense terms.” It is therefore wise to write down your own retirement planning goals in the same way.

7.Fine-tune your preferred future on paper

The earlier you begin writing down your dreams for the perfect retirement, the more time you will have to tweak those aspirations into concrete written goals. It is important that personal control is exercised in this matter. FPAM honorary secretary Wong says: “Loneliness, loss of respect, expensive medical bills – these are just some possible negative aspects of retirement which must be taken care of.”

As for the financial dimension, Cheah elaborates, Be practical; know that you will have to compromise and adapt to possible changes to your lifestyle.”

8. Beef up your net worth

Your net worth is measured by your net worth statement. This lists all your assets and all your liabilities. If you total each column, the difference between assets and liabilities is your net worth. In corporate terms this is equivalent to a company’s net book value. We should focus on boosting our store of productive assets that generate passive income for us in the form of dividends, rental and interest. At the same time, we should eliminate all forms of bad debt that suck up our financial resources.

9. Create your own pension

Some government servants can look forward to a lifetime public sector pension that’s equal to half of their final drawn salary. Others contribute to EPF, just as most private sector workers do. K.P Bose Dasan, Securities Commission-licensed financial planner with Standard Financial Planner Sdn Bhd, maintains, “Retirees must have a pension. No pension, no retirement!” So, those without a government pension must take personal responsibility for creating their own. Devadason says, “The goal for everyone should be to proactively create multiple sources of income from investments and, perhaps, privately-held businesses to channel through a future pipeline of passive income.”

10. Purchase appropriate life insurance

Ultimately, people should aim to be self-insured. But the road toward such a large level of wealth is not easy. Along the way, those who are gradually building their net worth (see recommendation 8) ought to ensure they’re managing disability and premature mortality risk appropriately. Michael Tan Lib Chau, CEO of RHB Unit Trust Management, says: “Besides setting aside some savings for investment, it is also crucial to protect the loss of earning capacity. In other words I would encourage them to seriously look at life insurance coverage.” Toward that end, many financial planners believe a “buy term and invest the difference” approach is the most cost-effective route.

However, the danger lies in a possible lack of discipline being exhibited by some adherents of D-I-Y financial planning: They might choose to buy relatively cheap term life policies but then squander the rest of the money. In many cases, then, it would be wise to work with a reputable financial planner

11. Prepare for future inflation

A major factor in retirement funding calculations is future inflation. Saving money in the bank, while a great initial step toward financial freedom, is unlikely to generate returns greater than inflation. Therefore, focus on educating yourself on the damaging effects of inflation and the need to accept some level of investment risk.

12. Manage your investment risk

It is unwise to take on so much investment risk that you lose sleep and begin to develop ulcers. On the other hand, accepting too little investment risk is likely to hurt your long-term portfolio returns. Educate yourself to gradually elevate your risk appetite to at least moderate levels. Tan Beng Wah, CEO of CIMB Wealth Advisors Bhd, explains why the quanta of accepted risk should change with age: “In funding for retirement, the investor may start with an aggressive portfolio, then switch to a moderate one half way toward retirement, and then to a conservative portfolio when he or she is a few years from retirement.”

Knowing how to do this wisely requires either active self-education or the help of a trusted advisor or, preferably, both.

13. Enslave your money

Don’t always work for your money. Make it work for you. Steve L. H. Teoh, deputy president of the FPAM, notes, “Failing to plan is planning to fail!” This piece of advice is relevant to those entering retirement. Teoh explains, “From that point on, the wealth a person has accumulated throughout his working life will now have to work for him instead.” The larger that pool of resources and the harder it works for the retiree, the better the quality of life in retirement.

14. Hone your career skills

Do what you can today to extend your employability through enhanced skills development.

15. Target greater tax efficiency

Bose, a tax specialist, notes, “To retire well, you have to accumulate a healthy sum in your retirement portfolio. It helps, therefore, to take advantage of all possible tax incentives available in Malaysia.” A tax specialist in retirement planning can be of great value in this endeavour.

16. Tame the credit beast

Unnecessary interest spent on consumer debt instruments, particularly credit cards, sucks money away from possible retirement plans. Manage your total liability situation well.

17. Aim to be debt-free

While there is such a thing as good debt that ends up enriching us, most people are wired in such a way as to benefit from living a debt-free life. Therefore, if the prospect of one day becoming free of all liabilities appeals to you, make it a written goal and then act in a manner consistent with that desire. Teoh says, “Work toward attaining zero gearing in as short a period as is practical. Certainly settle all credit card monthly dues promptly and in full! Remember, there is always a cost to borrowing.” He recommends settling all liabilities by age of 50, or earlier.

18. Train your children well

In the decades ahead, it will be difficult for even the most filial of children to fully fund their parents’ retirement needs. But if you are able to instil even a partial sense of responsibility in your children as they mature, you might be able to derive a steady, modest flow of income from them. This possibility should not in any way alleviate your own responsibility for funding your own retirement through intelligent saving and investing.

19. Clarify your legacy

Write a will. Consult a reputable will writer or a lawyer familiar with probate matters. Ong Eu Jin, chief operating officer and director of OSK Trustees, and author of Can Wealth Last Three Generations, says: “It is important to have a will. Also, parents with minor children should consider creating a testamentary trust under their will.” Such a trust may be used to set aside specified liquid assets like bank deposits, unit trust funds and life insurance proceeds to meet children’s maintenance and education requirements in the event of an untimely demise by one or both parents.”

20. Make a difference

Aim to retire from work, not from life! Always focus on continuing to live a life of significance. This requires careful long range planning.

21. Engage the right financial planner

Sue Yong, executive director of Equity Trust (Malaysia) Bhd, notes, “To enhance your chances of succeeding in retirement, focus on building a good working relationship with a financial planner for the long-term. Such a professional may also act as a coach when we have gone astray from the agreed plan.” Financial planner Ken Lo of Money Concepts Corporation adds, “Because most people have little time, discipline, knowledge or expertise to manage their own financial affairs, they need to work with professionals to reach their financial goals.”

The first step in becoming adept at financial planning is focusing on self-education. That commitment alone will help most people enormously. For those who might want to pursue things further, please visit FPAM’s website at www.fpam.org.my for a free downloadable copy of “Insights to Choosing A Financial Planner”.

Price Of Unit Trust Funds (Single Pricing)

Public Mutual buys from and sells units to unitholders during Business Days (Monday-Friday). This ensures that there will always be a market for the units.

There is a single price for the buying and selling of units of the funds which is at NAV per unit of the respective funds. Upon the purchase of units of the funds by investors, a service charge of up to 6.5% of NAV per unit is levied (equity/balanced), whilst a service charge of up to 0.25% of NAV per unit is levied (bond/money market).

Unit prices of the funds are published daily under the Unit Trusts Column in major newspapers or Public Mutual website.

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Securities Commission (SC), Malaysia

1. Guidance Note 20 (15 May 2007) is published pursuant to Section 158(1) of the Securities Commission Act 1993 to notify a new policy in relation to the pricing of units of a unit trust fund currently stipulated under Chapter 11 of the Guidelines on Unit Trust Fund (Guidelines).

2. The new provisions under this Guidance Note shall take effect on 1 July 2007. From that day onwards, pricing of all unit trust funds shall be based on a single price (i.e. the Net Asset Value per unit of the fund).

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Previously, the rule stated by Securities Commission, Malaysia (SC) is that every unit trust company must publish the selling and buying price for the funds available. The selling price (purchase) and buying price (repurchase) actually make investor know the price and value of their investment from time to time.
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From the calculation example PAIF:
18/12/06
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Buying price (RM) : 0.2511
Selling price (RM) : 0.2674 (investor purchase)

19/06/07
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Buying price (RM) : 0.2987 (investor repurchase)
Selling price (RM) : 0.3181

*Buying price = NAV (RM)
*Selling price = Buying Price + 6.5%/0.25%
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Public Mutual (Fund Performance Chart And Calculation) - PART 1

Let’s begin with the basic, what investor have to pay when they purchase unit trust/mutual fund from Public Mutual?

Upon the purchase of units of the funds by investor, a service charge of 6.5% (equity/balanced/dividend) while 0.25% (bond/money market) is deducted from your initial investment. For Public Mutual does not impose any repurchase charge on the sale of fund units by investor.

Other charges involved are for switching and transfer transactions. (Mutual Gold member free of charge)

The rest of the fees such as management/trustee fee, etc.. are all calculated and could be obtained from Accountants’ Report in prospectus. That’s the reason why investor should read to understand more. But if you don’t, can always ask agent. Management/trustee fee is calculated and accrued daily, and payable monthly to the Manager/Trustees. There’s where the source of income come from for Fund Manager and Trustees. So don’t worry, obviously they’ll try their best to make sure the fund performs.

I think many have been mislead to think that the profit still need to deduct any other management fee. To make simple, investor only need to pay service charge.

Example 1
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Public Asia Ittikal Fund (PAIF)

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At 18/12/06, NAV price is RM0.2987.

Amount Paid : RM 5,860.00
Sales Charge (6.49%): RM 357.21
Amount Invested : RM 5,502.79

Price (RM) : 0.2511
Units : 21,914.73
Total Cum Cost (RM) : 5,860.00
Avg Cost Per Unit (RM) : 0.2674

At 19/06/07, NAV price is RM0.2987.

Units : 21,914.73
Price (RM) : 0.2987
Amount Redeemed/Repurchase (RM) : 6,545.93
Profit = RM6545.93 - RM5860
= RM685.93

Simple Estimate Return : 11.71%

This is true if there’s no additional investment or any distribution reinvestment/unit slip etc (any transaction between both dates).

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If you used Public Mutual(fund performance graph):

Simple Estimate Return : 18.96 - 6.49 = 12.47%

I’m not sure why there’s a difference of 0.76% using graph and calculation. This is probably due to the management/trustee, etc fees not yet deducted. Cause I’m not sure how the graph at Public Mutual website is compute.

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Example 2
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Public Far-East Balanced Fund (PFEBF)

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At 05/03/07, NAV price is RM0.2232.

Amount Paid : RM 5,500.00
Sales Charge (6.5%): RM 335.51
Amount Invested : RM 5,164.49

Price (RM) : 0.2232
Units : 23,138.41
Total Cum Cost (RM) : 5,500.00
Avg Cost Per Unit (RM) : 0.2377

But because of promotional period (offer 1% free units):

Units : 23,138.41 + 1% = 23,369.79
Total Cum Cost (RM) : 5,500.00
Avg Cost Per Unit (RM) : 5,500 / 23,138.41 = 0.2353

At 12/07/07, NAV price is RM0.2524.

Units : 23,369.79
Price (RM) : 0.2524
Amount Redeemed/Repurchase (RM) : 5,898.53
Profit = RM5,898.53 - RM5500
= RM398.53

Simple Estimate Return : 7.25%

This is true if there’s no additional investment or any distribution reinvestment/unit slip etc (any transaction between both dates).

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If you used Public Mutual(fund performance graph):

Simple Estimate Return : 13.08 - 6.5 = 6.58%

I’m not sure why there’s a difference of 0.67% using graph and calculation. This is probably due to the management/trustee, etc fees not yet deducted. Cause I’m not sure how the graph at Public Mutual website is compute.

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How To Strike A Balance

GROW YOUR MONEY

Saving up for retirement and the education of young children can be quite taxing even on successful professionals, says The Financial Planning Association of Malaysia (FPAM).

PERSONAL retirement planning is often an intense challenge for parents with young children. Their key problem is balancing current lifestyle needs (and wants) against vital long-term future goals like retirement and children’s university education funding.

Even those with hefty incomes face this problem. Here’s a case study involving Charles and Claire – successful professionals and the doting parents of five-year-old Cherry and three-year-old Chester. Charles and Claire enjoy a combined net monthly income of RM15,000, which is several times that of the average Malaysian household.

Claire, who brings in a third of their total income, has been toying with the idea of quitting her job to raise Cherry and Chester full time. While Charles is supportive, he suggests they meet with a financial planner to discuss their long-term goals and to see if their tentative plan of having Claire quit her job at the end of 2007 is viable.

They set up a series of meetings with a reputable Securities Commission-licensed financial planner. After their third meeting, they ironically find themselves both relieved and stressed!

They’re relieved because they have a much better sense of what they need to achieve if they are to retire comfortably and to educate their children in the ambitious manner they’ve always dreamed of.

They’re stressed because hard numbers don’t lie. They face the fundamental choices of having Claire continue to work or of dramatically scaling back their retirement and education funding plans.





In their first meeting with the financial planner, they were asked to list all key financial goals and dreams. They came up with items ranging from the prosaic to the extraordinary, including retiring well, educating their children abroad, travelling abroad each year, buying a mansion with a swimming pool and owning a Ferrari.

Then, when the financial planner asked them to select the essential, non-negotiable goals, Charles and Claire settled on retiring well and educating their kids abroad.

(Wong Boon Choy, treasurer and founding member of the Financial Planning Association of Malaysia, explains, “If funds are limited, we have to face the harsh reality of revisiting goals that may have been set earlier.”) Charles and Claire initially set the education goal as their number one priority and relegated retirement to number two.

But their financial planner explained that in the decades ahead our entrenched philosophy of Asian filial piety may give way to more Western ways of thinking.

Also, the economic climate prevailing three or four decades from now may make it impossible for even the most caringly nurtured children to fund their parents’ retirement while paying for their own needs and saving for the next generation’s education!

(Even financial planners who are comfortable with parents putting their children’s education ahead of their retirement advise caution.

Alfred Sek, CEO of Standard Financial Planner explains, “A common mistake parents make is overlooking their own retirement plan while planning for their children’s education. As a financial adviser, I would not recommend they put their future retirement plans in the hands of their children.”)

If in later decades children are unable or unwilling to provide retirement funding for aged parents who haven’t taken care of their own retirement needs, tragedy can ensue.

Wong, an SC-licensed financial planner and CEO of unit trust management company MAAKL Mutual, says, “People usually have two choices then: To reduce their annual expenses in retirement or to delay the start of retirement by continuing to work.”

Taking the time to run appropriate analysis will help them figure out possible future courses of action. Wong warns grimly, “Someone planning his retirement should think now, ahead of time, of the key difference between eventually being considered an ‘old man’ and an ‘elderly gentleman’ – the amount of money he possesses!”)

So you’ll be relieved to learn Charles decides their appropriate number one financial priority should be retirement funding.

Chart 1 shows the suggested funding path toward that goal.

The analysis yielding that solution was based on 12 assumptions:

1. Although they earn RM15,000 a month in net income, Charles and Claire are willing to settle for a RM4,000 (in 2007 terms) a month lifestyle throughout their long projected retirement period.

2. Charles and Claire assume, at least at this stage of their analysis, that they will both continue working until they turn 60. As they’re both 35 now, they have 25 more years before retirement begins.

3. They assume they will live until 2056, just before both turn 85. So, they’ll spend a projected 25 years in retirement.

4. Between now, 2007, and the year they retire, 2032, inflation (meaning their personal average inflation rate as opposed to the official CPI rate) runs at an average of 4% a year. (By their first year of retirement, it will cost RM127,961 in future 2032 ringgit terms to afford a RM48,000 a year lifestyle in 2007.)

5. To generate the required savings and investment growth, we will assume they utilise bank fixed deposits and unit trusts encompassing money market funds, bond funds, domestic equity funds and international equity and property funds. It seems likely if such a well-diversified, pre-retirement portfolio is regularly and intelligently rebalanced, it should yield an average compounded growth rate (CAGR) of 8%.

6. We certainly don’t assume they will retire at the current 55 or 56 official retirement age because, with lengthening life spans, it is a certainty that conventional retirement ages will creep up by perhaps two years for every decade we move into the future. Once they stop working at 60, all active income inflow ceases. Then their ability to stomach investment risk will fall. The rational thing to do then is to restructure their portfolio to lower its inherent volatility. This should yield lower, but more stable, returns. In specific terms, both their equity and international exposure will be reduced while their fixed deposit, money market and bond weightings will rise. Their new target compounded annualised growth rate (CAGR) is assumed here to be 6%.

7. Throughout their anticipated retirement period of 25 years, medical expenses will become increasingly important. Specific inflation affecting medical treatment tends to run higher than general inflation. So, we’ll assume their retirement inflation runs at 5% a year.

8. Taking all those points into consideration, we find based on the software used to carry out our analysis that just over RM 2.8 million is needed to fund their joint retirement, using a capital liquidation method. (Their joint EPF savings at 55 may grow to more than RM700,000; as this amount is NOT taken into account in this analysis it can be used as a massive cash cushion to make achieving this goal and that of educating both children abroad more likely.)

9. As we assumed earlier that Charles and Claire will earn an 8% yield on their portfolio, obviously they will require a lot less than RM2.8 million today.

Calculating this smaller number is the mirror image of conventional compounding, which causes money to grow when we move from the present to the future. Instead, we discount that large future sum back to the present by 8% a year and discover a much smaller total theoretical sum of personal savings today is needed to reach our future goal of RM2.8 million. That currently “needed” sum is RM413,926 in 2007 ringgit.

10. They don’t have that much. We’ll assume they have a total of RM30,000 today in savings that can be committed to initiating both their retirement funding programme and their kids’ tertiary education plan. Because their number one goal is retirement funding, we’ll further assume they choose to allocate RM20,000 of their RM30,000 available cash toward starting the retirement programme.

(Chart 2 shows RM5,000 is set aside to begin each child’s university funding portfolio.)

Charles and Claire also opt to take advantage of the excellent EPF Members Investment Scheme to use a portion of the money in their respective EPF Account 1 to augment their initial investment. We’ll assume a total of RM12,000 can be utilised from both Charles’ and Claire’s EPF accounts for this purpose.

11. So, their present day shortfall for the entire retirement funding programme is RM413,926 minus RM20,000 minus RM12,000 or RM381,926. The retirement planning software used for this analysis indicates an annual investment of RM35,778 will make up for the RM381,926 initial sum shortfall.

12. It appears as though Charles and Claire need to channel about RM3,000 a month – on average between now and when they retire – to meet their retirement funding needs. Since they currently earn a whopping RM15,000 a month, it seems they can either enjoy a RM12,000 a month lifestyle and meet their retirement savings requirement or Claire can quit her job to spend time with the children if they settle for a RM7,000 a month lifestyle, since she presently brings in RM5,000 in net income each month. Unfortunately, neither conclusion is correct.

Remember that Charles and Claire don’t just have one important financial goal – they have two (or three, if we count each child’s education funding requirement as a separate goal).





Chart 2 outlines the analyses for Cherry to be able to study in the UK for a three-year honours degree, and for Chester to study in the US for a four-year honours degree.

Assumptions made in the respective education analyses include anticipated exchange rates for the pound and the US dollar. (Here we’ve assumed the ringgit will continue to track sterling at about RM7 = £1, but that the greenback will continue to weaken on the back of seemingly irreversible US trade deficits and thus average RM3 = US$1 between 2022 and 2025.) Obviously, there is no way of knowing what the true future tuition and living costs will be, but the purpose of such analyses is to provide at least a logical framework for long-term planning.

Financial planning itself includes but goes beyond wealth accumulation initiatives.

According to Securities Commission-licensed financial planner Rajen Devadason, “Financial planning also includes wealth protection using insurance and the power of asset diversification, and wealth distribution using wills and trusts.”

With regard to caring for young children, Ong Eu Jin, chief operating officer and director of OSK Trustees, explains, “Education planning for couples with young children is never complete without addressing the ‘what ifs’ and the worst case scenarios.”

Ong, who believes each adult should write a will, adds: “Parents with minor children should consider creating a testamentary trust under their will.” Such a trust comes into effect upon the demise of the testator, the person whose will it is, and can be structured to protect the goals and aspirations of loving parents who recognise the possibility of their not living long enough to see their children graduate. (We will take a closer look at this important facet of financial planning in an upcoming article.)

Returning to our case study, it’s clear Charles and Claire’s current goal of setting aside enough money to educate their two children in the UK and the US necessitates saving and investing about RM5,400 a month.

Once we add that sum to the RM3,000 a month Charles and Claire need to set aside for their primary goal of retiring well, we see their initially sizeable net income of RM15,000 a month doesn’t appear that large.

Retirement funding specialist Devadason says ruefully, “I often sound like a broken record when I repeatedly urge my clients to aim to move up toward a long-term targeted savings rate of 40% to 50% of their net income.

“Number crunching exercises like these aren’t meant to depress people but to drive home the reality of our need as a nation to consume less and to save and invest more – much more.”

Are You Earning the Total Returns Your Mutual Fund Offers?

By Ric Edelman

From Inside Personal Finance

Let’s turn to data provided by Dalbar, a research organization in the financial services field. For years, Dalbar has tabulated the performance of investors rather than investments. Its findings are so important that Morningstar has adapted a similar approach for its mutual fund rating system.

How can it be that a mutual fund’s investors don’t earn the returns generated by the fund itself? The answer is simple: Mutual fund performance data is based on the returns earned from January 1 through December 31, with no cash flows occurring between these dates. In other words, the data assume you invest on January 1 and that you withdraw your funds on December 31, and further assume that you don’t add any money or make any withdrawals during the year. If you follow that protocol, then your return will indeed be identical to the returns posted by the fund.

But that’s not how investors behave. As Dalbar discovered, and as Morningstar agrees, you’re far more likely to invest in a fund on a date other than January 1. You might later make an additional deposit, and perhaps withdraw some of the money at some future date. Because investment prices fluctuate, your investment results cannot possibly match those who are basing their data on January 1 and December 31 prices.

Doesn’t this mean that investors might actually earn returns that are higher than those claimed by mutual funds? Theoretically, yes: It’s possible that you’ll buy at prices that are lower than January 1’s and higher than December 31’s. But, in reality, that’s not what happens.

By studying cash flows (tracking the movement of money into and out of mutual funds), Dalbar’s and Morningstar’s data clearly show that the vast majority of people buy investments when prices are high, and they sell when prices are low.

For example, consider the returns of a fund that (according to Morningstar) averaged 15% per year for the ten years ending December 31, 2006. Morningstar says the average investor of that fund earned only 2.6% per year. In another fund that posted an 8% annual return, investors earned only 0.6%. A third, which posted a 7% average return, has an average investor return of –15%.

There’s such a large discrepancy between investment returns and investor returns because investors tend to buy funds only after they’ve risen in value. Funds attract media attention only after they do well, and fund companies place ads in magazines and newspapers only after the funds produce a great record they can tout. Investors agree that the results are terrific, and they assume that a fund that made lots of money in the past will continue to do well; so they buy. When those profits fail to materialize, they sell. Then they scratch their heads and ask, “How come I’m not making money with my investments?”

The solution: Buy and hold for years and years.

A High IQ Is No Financial Guarantee

Yes, smarter people make more than someone with an average IQ. But they pretty much end up with the same amount of money.

By Karen Aho

You don't have to be a genius to manage your money.

That's the take from a new study of intelligence and wealth, which looked at thousands of baby boomers and found that those with average and low IQs were just as good at saving money as those with high IQs. At the same time, smart people were just about as likely to run into credit problems.

"If I were a person with low intelligence, I shouldn't believe that I'm handicapped in any way, shape or form in achieving wealth," said the study's author, Jay Zagorsky, a research scientist at Ohio State University's Center for Human Resource Research. "Conversely, if I'm sort of high intelligence, I shouldn't believe I have any kind of special advantage.

"I don't care what your IQ is -- you can do well."

It's important to note that the study focused on only one population group. Using data from the Labor Department's National Longitudinal Survey of Youth, it looked at 7,403 Americans born between 1957 and 1964, and their financial data from 2004. Another age group might have revealed different spending habits.

Nor did the study, published in the journal Intelligence, buck the long-supported conclusion that high intelligence translates into high income. Zagorsky's subjects earned an average of $234 to $616 more per year for each added IQ point, meaning someone with an IQ of 120 (top 10%) made $4,680 to $12,320 more than those crowded in the middle of the bell curve with an IQ of about 100.

Where the study did differ -- and it could be the first to do so -- was in analyzing the relationship between intelligence and two additional factors:

• Wealth, or net worth, the difference between one's assets and liabilities. Zagorsky added equity, pay, cash, stocks and any valuable goods, then subtracted all debts.



• Financial stress, determined by three questions: Any maxed-out credit cards? Missed a payment or been two months late in the past five years? Ever filed for bankruptcy?

Zagorsky adjusted for outside factors that affect wealth, such as education, divorce, inheritance, smoking and psychological well-being (yes, people with high self-esteem and a sense of control earn more) and, to his surprise, found:

• While those with above-average IQs were three times more likely to have a high income as those with below-average IQs, they were only 1.2 times more likely to have a high net worth. "Simply put, there are few individuals with below-average IQ scores who have high income, but there are relatively large numbers (of those with below-average IQs) who are wealthy," he wrote.



• No IQ group had built up "a significant financial cushion." The median baby boomer's wealth equaled 18.6 months of income, while the highest-scoring group, those with an IQ of 125 or above, had little more than two years of income saved.



• Subjects with a 105 IQ had the same median income as those with a 110 IQ but had a greater net worth: $83,918 compared with $71,445.



• The likelihood of financial difficulty peaked with IQs closest to the 100 average.

"I was expecting that smarter people would have greater wealth," Zagorsky said. "And you kind of expect people with higher IQ to make fewer mistakes. . . . I thought, 'Wow, I must have made a mistake.' "

No mistake has been found, but there are possible explanations.

The study doesn't include factors that can influence a person's desire to save in the first place, said economist Sherman D. Hanna, who teaches financial planning at Ohio State University and read the report. People with high IQs could have jobs with good pensions and feel financially secure for many reasons. Or they just might choose to spend what they have, like everyone else.

"An economist would say your goal is not to maximize your net worth; your goal is to maximize your satisfaction from your money and other resources," Hanna said. "So it may be reasonable."

Zagorsky's university colleagues have told him the same, saying: "We are incredibly 'wealthy.' We don't work many hours, and we get to work on whatever projects we want."

• Video: Study says men slightly smarter than women

As to the missed payments, Hanna pointed out that people with low IQs and a corresponding low income probably get fewer credit card offers and are financially tentative. On the flip side, he's seen his bright students take giant financial risks, confident in their future high-earning potential. Why not max out the card in Italy? I'll have a good job when I get back.

And before we leap to the image of the absent-minded professor -- so consumed with deconstructing existentialist philosopher Martin Heidegger that he can't pay his Visa -- remember that the sample size is very small, said Hanna. Only 2.3% of the population has an IQ of 130 or above -- in this study, some 170 people. Less than one-half of 1% has an IQ of 140 or above.

Still, the research does a good job of proving that the basics of money management are fairly simple, attainable by anyone with a minimum level of intelligence, according to Hanna. "It's not rocket science," he said.

Published July 10, 2007

The Best Financial Advice Ever

Prince Charming isn't coming. Live like a college student. Never co-sign a loan. Money experts like David Bach and readers like you share the best nuggets of wisdom they have ever received.

By Liz Pulliam Weston

If you're doing well financially, chances are you had help.

Someone, somewhere along the way passed along a nugget of financial wisdom that you took to heart. Maybe you absorbed the messages over time from some role model, such as a parent or grandparent. Or perhaps you just heard the right thing at the right time from a friend, an adviser or even a total stranger.

If you're not doing well financially, maybe you're finally ready to hear some advice that could make all the difference.

With that in mind, I asked experts and readers alike to share the best financial advice they ever received. The results were varied and enlightening.

Advice on saving

"No matter how much or how little you make, always save a little bit."This is a variation of "Pay yourself first" that Your Money poster "kesslergk" heard from a grandfather. It's a reminder that whatever money comes into your life, you can (and should) be setting aside some of it.

If you don't think you can, read "Too broke to save? Never."

"Save hard for the first 10 years of your married life."

This is the advice Your Money poster "Talk2Me2"received from her mother (although to apply it to more people, I might amend it to, "Save hard for the first 10 years of your adult life" or "Keep living like a broke college student for as long as you can").

"Saving hard means having to make a lot of the right choices," Talk2Me2 wrote. "We researched every purchase, learned how to do lots of things ourselves (car repair, hair cutting, sewing, cooking, home maintenance, etc.) and we could not only save money but we also used these skills to make money. When you are young, doing with less isn't a struggle because you aren't used to the luxuries yet. We also had more time to bargain shop.

"Mom's advice certainly paid off. We still save money even when we don't try to because we are in the habit of trying to do things ourselves, doing without if we can't find it at the right price, researching, waiting to buy, etc. We made a game out of getting what we want for less money."

Advice on spending

"Know the difference between needs and wants."

Several posters also mentioned different versions of this advice, which is key to controlling your spending. When you can't distinguish between real needs and mere wants, you're constantly talking yourself into spending too much.

Poster "ARCHIEtheDRAGON" recalls his mother asking, "What do you need that for?" whenever he bought anything as a kid. Annoying? Maybe. But "now I hear her voice in my head whenever I am spending money. It keeps me from buying a lot of crap that I don't need."

"JennysMom" illustrated it this way: "You need food. You want prime rib. That example is perfect for the want vs. need debate in my head!"

Poster "Clara Bear" said she heard similar advice from her grandmother.

"Whenever I would complain about not having the newest coolest clothes or whatever when I was younger, my grandmother would always say, 'We have everything we need and most of what we want, too.' That would make me realize that even though we weren't the richest family in town, we really did have plenty. I still think about that today when I'm lusting over some ridiculously expensive item at the mall. It makes me remember that I have a place to live, plenty to eat and a great family as well as much of the stuff I want. I (usually) put the item back on the shelf and walk away satisfied with what I already have."

"Think of the true cost."

Anything you want to buy involves a number of costs. The price tag is just the start.

"I see something that would look great on my table," poster "Mamasita99" wrote. "I have to give up the cash for it that won't be able to work for me somewhere else. Then I have to think of all the time and energy I'll waste cleaning this item, keeping it out of my kids' hands, and packing it up and hauling it somewhere else when we move in a year. Most of the time, the true cost of the item is too high for me."

"Buy quality."

Sally Herigstad knows what it's like living on a tight budget. Before she became a certified public accountant and author, she was a stay-at-home mom who at one point fended off calls from collection agencies (an experience she recounts in her book, "Help! I Can't Pay My Bills: Surviving a Financial Crisis."

As Herigstad and her husband rebuilt their finances, though, she remembered her mother's advice to buy quality when it counts.

"My mom can stretch a dollar farther than anyone I know, but that doesn't mean she doesn't buy nice things. Mom taught us to buy high-quality things at stores that stand behind what they sell. That way, if anything wore out or quit working before its time, she knew she could take it back -- and she often did. You actually save money by buying things of higher quality that last than by getting cheap stuff you have to throw away in no time."

"If your outgo exceeds your income, your upkeep will be your downfall."

Poster "skywind" wrote that his grandfather often quoted this saying. It's another way of saying, "Live within your means," or, more elaborately, "Be careful of adding new expenses to the ones you've already got."

• Video on MSN Money: Budget your way to smarter spending

"So I'm always asking myself, am I putting out more than I'm taking in?" skywind wrote. "If I am, I know I need to turn that around, because it is unsustainable."

Advice on debt

"Don't pay interest on anything that loses value."

A bunch of posters cited variations on this theme of avoiding credit card debt and borrowing only to buy property or other assets that will appreciate.

Poster "dancinmama" was told by her parents "Never pay interest on anything but real estate." In 27 years, she and her husband have taken the advice to heart.

"We have never had a car loan or paid a penny of interest on credit cards. We have saved our money and invested our money. I have been a (stay-at-home mom) since 1986 so most of this time we did it on one income, under 6 figures, on the central coast of California (cost of living was not cheap). Our net worth is now in excess of $2 million."

Poster "Honey Bucket" and her fiancé are just starting out, but they're already living a variation on this advice, which is "save today for what you want tomorrow."

"We've both been saving for retirement, wedding and housing. The difference it will make is that we will be able to pay for things instead of borrowing or having (credit card) debt. Our lives together will be financially secure because of this!!!!"

"Don't co-sign a loan."

Co-signing puts your good credit in the hands of someone else -- who could trash it with a single late payment.

Poster "bookladyfdl" said her parents refused to co-sign a car loan for her after she graduated college, and today she's grateful.

"They lovingly explained that their credit report would show this loan, which could affect any loans they might need. They also explained to me that their rule of thumb was not to co-sign for any amounts they could not personally loan. If you can't afford to give it, you can't afford to pay the loan back, should you have to do so.

"This credo saved me early in my marriage. Without my knowledge, my husband agreed that we would co-sign on a loan his brother was taking out. The papers came and I discovered that we were co-signing on a large loan at 32% interest, and that the reason he was being forced to take it out was that his brother had defaulted on a credit card and this was the last step before court. . . . Out of love for his brother, my husband wanted to help out. However, I relied upon my parents' advice, put my foot down and refused to let either of us sign on the loan. Less than five years down the road, BIL and his new wife have a terrible financial situation, raiding 401(k) funds for car repairs, etc.

"If we'd have co-signed, I know we'd have been forced to pay off that loan to preserve our own credit. Not only would we not have been able to afford it, but it would have put an irreparable rift in family relations. Mom and Dad taught me that sometimes you have to take care of yourself and secure your future, even if it means friends or family members may have a more difficult time."

Advice on building wealth

"If you need more money, then go out and make more money."

There are limits to how far you can scrimp and save. Often the fastest way out of debt and into wealth is generating more income.

Poster "Avalon_2" learned this from parents whose educations stopped by the sixth grade.

"Neither (was) afraid of hard work and we never lacked for anything as I was growing up," Avalon_2 wrote. "They taught me that as long as there is health, anything else can be worked for. To them the word 'retirement' didn't exist. You work until you can't work anymore.

"I've worked 2 and 3 jobs at a time and often while going to school. To this day, I have a hard time not doing more than one thing at a time."

"You pay in advance for capacity."

Dr. Lois Frankel, a career coach and author of the New York Times best seller "Nice Girls Don't Get the Corner Office," heard this bit of advice from a small-business adviser at the University of Southern California.

"As the owner of what was at the time a small business . . . this meant I had to invest more than just hard work in the business to make it grow. I was trying to keep my overhead down and was doing everything myself and driving myself crazy. So when I could least afford it, I invested in hiring an assistant. (The adviser) was right -- this freed me up to do more marketing and sales calls which in turn led to landing more contracts. I've never forgotten this piece of advice and each time I've followed it it's resulted in another growth period for my company, Corporate Coaching International."

(Frankel is also the author of "Nice Girls Don't Get Rich" and the soon-to-be-released "See Jane Lead.")

"Own your own business -- including the building it's in."

David Bach learned this lesson as a money manager for Morgan Stanley before becoming the author of the New York Times best sellers "Start Late, Finish Rich" and "The Automatic Millionaire."

"My wealthiest clients were clients who owned their own business. The most important financial decision they made (that really made them rich) was they bought the building their business was in. In almost every case the building was ultimately worth more than the business at the end of their career.

"Today I own the building (commercial condo) that my company FinishRich Media is in. My building has appreciated more in two years than I earned on my first four bestselling books in royalties."

"Don't gamble more than you can afford to lose."

My colleague, MSN investment writer Jim Jubak, explains:

"When I was a kid, our big extended family would gather on Christmas Eve for a big dinner of fish and my grandmother's pierogi, followed by drinking, followed by singing off-key with my Uncle Eddie, followed by more drinking. The evening always ended with the oldest kid, yours truly, settled around a card table battling three adults in a game of 25-cents a hand pinochle. I almost always came out a big winner -- $4 or so -- mainly because by that time in the evening I was the only one who could accurately count the pips on the cards. One year, having puzzled it over in my head, I asked my Aunt Millie the logical question: Why do you play cards with me every year when you know you're going to lose? Swirling her vodka in her glass, she said to me: Because I never gamble more than I can afford to lose. And then she pinched my cheek.

"Hated the pinch. Appreciated the advice.

"Wall Street has developed lots of way more sophisticated methods for controlling risk. But I think my Aunt's has one very real virtue -- it keeps you focused on the real aim of the game, which isn't making money for its own sake, but to have enough of the stuff to get you where you want to go. It's helped me get over losses in bear markets and in individual stocks. And reminded me that I can occasionally take a flier, as long as the game in itself is fun and I'm not gambling more than I can afford to lose."

"Prince Charming isn't coming."

Barbara Stanny came from a wealthy family (her father was the "R" of the H&R Block tax preparation chain) and never learned much about handling money. After her first husband lost a good portion of her fortune and left her with a tax bill of more than $1 million, Stanny asked her dad to lend her the money to pay the IRS. He said no.

"That was the best thing he could've done," Stanny said. Though he never said these exact words, the message was loud and clear: 'Prince Charming isn't coming. To truly achieve financial security, your only protection is you.' That moment was the turning point for me. I not only got smart enough to manage my own money (in less time than I ever imagined possible), but I've written three books empowering women to do the same."

"Prince Charmings leave, Prince Charmings die, Prince Charmings aren't always such great money managers," said Stanny, whose books include "Prince Charming Isn't Coming," to be re-released May 2007, "Secrets of Six-Figure Women" and "Overcoming Underearning."

"Your job is to participate in financial decisions from a place of knowledge, not fear, ignorance or habit."

This advice isn't just for women, by the way. Anyone who's expecting a lottery ticket, stock picker or other outside force to bail them out is guilty of the Prince Charming syndrome. It's time to quit dreaming and start taking charge.

Insights Into Wealth Cycle

Most individuals and families go through a series of financial events during their lives. As they pass each of these stages, their financial strategies need to change to reflect their evolving needs and financial circumstances.

RALPH Waldo Emerson, an American author in the early 19th century, once said: “It requires a great deal of boldness and a great deal of caution to make a great fortune, and when you have it, it requires 10 times as much skill to keep it.”

Even back then, the West understood the importance and the difficulties of accumulating and preserving wealth. They discovered that everyone goes through a lifecycle that consists of different stages and each phase calls for certain financial needs and objectives they want to achieve.

These different stages are known as the “cycle of wealth”. Our Western counterparts have actively practised this concept, as they understand the significance of the cycle and the important role it plays in building and sustaining one’s wealth.

Via a simple research, we found that a majority of Malaysians has yet to adopt the wealth cycle formula. Instead, Malaysians tend to manage their wealth in fragments with most concentrating on wealth creation and enhancement, and often ignoring preservation and distribution.

Neglecting any of these cycles will impact on one’s retirement and can result in insufficient means to provide for family members or even future generations. Taking the right steps in accordance to the wealth cycle can reduce financial uncertainty and financial distress.

The wealth cycle is commonly known to consist of four pillars – creation, enhancement, preservation and distribution.

“Wealth creation”, also known as “start-up”, is the first pillar of the cycle. It plays a vital role in forming the base for the wealth accumulation process.

“Wealth creators” are individuals who are in the early stages of their professional career and they tend to have larger financial responsibilities such as mortgages and credit purchases. Typically, their liabilities tend to be higher than their income.





Financial decisions tend to be mostly short term and they often adopt the characteristic of an aggressive investor, seeking ways to maximise the returns on their assets.

Once wealth is established and created, these individuals – by now in their mid to late career life – would shift their focus to “wealth enhancement”. The primary objective of this cycle is to multiply or enhance the returns on the accumulated assets with lower risks or better capital protection.

This is where with proper asset allocation, they are able to determine areas of financial interest and investment products that suit them in order to generate more income. Managing the acquired wealth is also crucial at this stage, taking into account tax considerations and debt management.

“Wealth preservation” starts when one has built up a substantial amount of wealth. The key strategy is to ensure that wealth is well managed with protection being the key objective. At this stage, the portfolio is managed with greater focus to generate income, while minimising risk.

Many times, individuals or families fail to anticipate and prepare for this cycle. They focus on accumulating wealth only to lose almost everything in the end as a result of not having proper wealth management structure.

Finally, the “wealth distribution” phase is where one ensures that one's assets or wealth and even business are transferred or distributed in the most optimal way and according to one's wishes. This is also a stage most individuals and families often ignore.

Estate and succession plans should be put in place well in advance to ensure that the family wealth and the reins of the family business are handed over to the following generations in an orderly manner.

Too many people have learned that making a fortune is the easy part. “In the long run,” cautions multi-millionaire entrepreneur and educator Robert T. Kiyosaki, “it’s not how much you make, it's how much you keep, and how many generations you keep it.”

As such, wealth distribution through the use of mechanisms such as trusts and wills would make certain that one’s wealth will last over many generations, thus ensuring a legacy of prosperity that every individual dreams of.

It is every individual’s dream to have financial freedom at retirement or at the very least, most hope to be free from any debt obligation. This is achievable if one were to diligently practise the management of wealth cycle accordingly.

In essence, one needs to understand that the key to success in using the wealth cycle is to know what steps to take and in what order.

10 Easy Ways To Stash Away Thousands

Readers share their secret ploys to save cash throughout the year. These clever ideas make saving money easy and painless.

By Liz Pulliam Weston

Money guru Jean Chatzky knows her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," centers on a gimmick.

The thing is, gimmicks work -- at least when it comes to our often-irrational relationship with money.

Chatzky promises financial freedom for anyone who can scrounge up an extra tenner each day -- what you might spend on lunch, a car wash, a movie ticket. Someone who might feel hopeless at the prospect of paying off $8,000 in credit card debt can embrace this one-day-at-a-time approach, which makes debt repayment seem not only possible, but almost easy.

"It's a hook, kind of like 'no carbs' is a hook," says Chatzky, financial editor for NBC's Today Show. "This is a problem we need to get our hands around. . . . (We need) some sort of mental game we can play with ourselves that will help us solve the problem."

If we were entirely logical, of course, we wouldn't need hooks or gimmicks or any of the little self-delusions that in reality can be so helpful in giving ourselves a financial cushion.

Since we're not Mr. Spock, though, savings tricks can prove mighty helpful. Here are some of the things MSN Money readers say they do to get themselves to put aside a little extra:

Pad your accounts. If you use personal finance software, you can just enter a check to yourself for $300 -- or $500, or $1,000, or whatever you want your pad to be. The check needn't actually exist or ever be cashed, but the software will treat it as an outstanding obligation and deduct it from your balance.

You can do something similar even if you still balance your checkbook by hand.

"What I have done is to add $300 to my checking account, but not include it into the balance," wrote Gregory Hannon, a utilities administrator for the city of Longview, Wash. "Basically, the money is hidden. . . . This is my way of making sure that should it happen that I write a check without the funds (according to the checking account balance), then I know I am covered."

Cull your bills. Here's a twist on the classic savings tip of dumping your change in a jar: set aside certain denominations, such as fives or tens, whenever they make their way into your wallet.

Kirstiepie99 wrote on the Your Money message board that she and her husband decided to put any of the new, colorful $20 bills they received into a jar beside their bed.

"A new $20 bill can slip into your hands at any time, so it's like Russian roulette every time you go to the ATM," she wrote. "We did it for about seven or eight months, and it funded a trip to Latvia for a month (except for the airfare). It makes saving fun!"

Institute a family tax. Dawnna76's family has a Garfield piggy bank into which each family member deposits $1 a day. The bank can be raided for the occasional movie or latte, but mostly the money funds their Christmas shopping.

"We have around $1,000 each year in there and we only pay cash for Christmas presents," Dawnna76 wrote. "The nice thing is we usually never spend (all) the money on presents and what's left, we take a trip with."

Save your reimbursements. Employers can take weeks or months to pay you back for the expenses you incurred traveling or entertaining clients. By then, you may have already paid the bill. Instead of cashing the check, consider saving it instead.

Kirstiepie99 says she's saved $400 so far by depositing expense reimbursement checks from her job into a separate savings account.

Realize your rebates. Several posters recommended saving the money you get from rebates, shopping sales or using coupons and club cards at grocery stores.

Grocery stores tend to make this easy; they often print on the receipt exactly how much you saved. You can transfer that exact amount to a savings account or, if you still write checks, you can make one out for the amount of the savings and deposit that -- or simply round up.

"If the items ring up to the tune of $33.45 for example, I write a check for $35," wrote summerbreeze 98387. "When I get home, the change goes into the kitty (dollars and change both)."

Round it up -- or down. Another popular ploy, for those who balance their checkbooks by hand, is adding or subtracting a few bucks from each transaction.

MadWomanM says she never records the full amount of her deposit to her checking account and adds a dollar or five to any checks she writes.

"If I put in $105.38, I just write in $100," she wrote, "and I always subtract to the nearest dollar or sometimes, up to five dollars. I end up (with) a surplus almost every payday, which is handy."

Fee yourself. WryWit uses a slightly different method that also could work for folks who use personal finance software.

"I started imposing fees on myself," WryWit wrote. "In my checkbook register, there is a little column for fees. I use a check mark for $10 and a dash for $1. So for every $100 deposited I'll short $10, and every outgoing transaction I add a dollar. When the page is full I add them up and keep a running total at the bottom of the page. This makes it easy to reconcile the balance at any time, and when it gets up to a certain point, I transfer it into savings."

Saving raises. Some posters save all or part of every raise they get. Sweetnepenthe has lived on the same amount of take-home pay for the past eight years, dedicating every raise to increased retirement contributions and, when those are maxed out, to savings.

ImproperFraction saves half of each raise, noting that it doesn't feel like deprivation.

"Inflation is a gradual erosion of my dollar's buying power that I endure and make spending adjustments for throughout the year," the poster wrote. "But my pay raises don't creep up; rather they are sudden events. . . . So I'll save half of this sudden jump in income and add the rest to my spending funds.

"This has worked quite well for me throughout my working years; I am now in the position where the amount of money I save exceeds the amount of money I spend."

Divide and conquer your paycheck. Other posters save an amount equal to an hour's pay each day, or each week if they're just getting started.

"I have an automated transaction to pull $26.18 out of my account every week," wrote MusketeersPlus2, a union worker whose raises are known in advance. "I've even already set it up to change to $27.10" when his next pay hike kicks in.

Pay yourself last. The usual (and excellent) money tip is to pay yourself first by making sure a certain amount of your paycheck is deposited into savings or investment accounts. But Carolina Girl also pays herself last.

"I keep a pretty close check on monthly expenses," she posted. "If we have extra money due to less expenses (received a raise or bonus, gas bill goes down in the summer, less entertainment due to busy schedules, etc.), the extra is transferred to a savings account. I don't change my spending just because there's extra money."

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.

Save First And Spend The Rest

If young people delay gratification and start saving from the minute they have an income, they will have a superb retirement, shares The Financial Planning Association of Malaysia (FPAM).

THE Certified Financial Planner Board of Standards states: “Financial planning is the process of meeting your life goals through the proper management of your finances.”

Retiring well or better yet retiring in style is a crucial life goal. Securities Commissionlicensed financial planner Ken Lo of Money Concepts Corporation says, “The minimum basic requirements for a comfortable retirement are:

1. A debt-free residence;
2. A few sources of passive income to maintain lifestyle;
3. A long-term care programme;
4. Adequate life insurance;
5. A few good friends;
6. Regular family gatherings; and
7. Being in reasonably good health at least until the age of 75.”

»Retirement funding is often intimidating once real numbers are crunched. But those who proactively face this reality early on are more likely to survive than those who stick their heads in the sand!« RAJEN DEVADASON

Today, we’ll look at two case studies of young working adults, Alex and Betty. Alex is 25; his 24-year-old girlfriend is Andrea. She doesn’t know it yet but Alex is going to propose to her the moment you finish reading this article!

Individuals like Alex and Andrea, young working adults who plan to marry, face the immediate challenge of meeting wedding expenses.

According to retirement specialist Rajen Devadason, “The difficulty such lovebirds face is balancing urgent near-term goals like getting married against long-term ones like funding a superb retirement.”

A miscalculation in the expenses associated with a fancy wedding can lumber some young married couples with a load of debt that lingers for many years. The interest on such debt as well as the diverted cash flow to repay the principal sum borrowed reduces the total number of future ringgit available for retirement funding.

Tan Beng Wah, CEO of CIMB Wealth Advisors, notes, “People in their 20s rarely think about retirement; they feel there is a long way to go. But it’s advisable they initiate retirement planning now; even if it’s with a small amount because they can capitalise on the compounding effects of their investment portfolio.”

Devadason, a Securities Commissionlicensed financial planner, points out, “Most young couples like Alex and Andrea eventually plan to have children; so, a long-term goal they must prepare to fund is the tertiary education of their unborn kids.”

Bear that in mind as we move on to our second case study, Betty. She’s a 24-year-old who is contentedly single. Logically speaking, people like her should find funding retirement easier than couples such as Alex and Andrea.

However, a major pitfall for young, confirmed bachelors and bachelorettes is the erroneous, entrenched belief that forced EPF savings will be sufficient to meet all eventual retirement needs.

Also, without the countervailing priorities of looking out for a spouse’s best interests and caring for children who may come along, some single people become enmeshed in wealth-sapping yuppie choices like too frequent overseas holidays and costly designer clothes that burn up cash.





The two accompanying charts suggest how appropriate retirement funding plans might be structured for Betty and Alex. As Betty is just at the starting blocks of her career, her monthly salary is probably below RM2,500. In fact, it’s likely she’s struggling to make ends meet on a net pay package of perhaps RM2,000 (after EPF and Socso deductions; at that salary level she is not subject to tax deductions). In time her income is expected to rise, but for now we’ll assume Betty maintains her lifestyle on RM1,800 a month and is able to ferret away RM200 a month in savings.

In planning for her distant retirement, we’ll make 12 assumptions:

1. She would like to maintain a RM2,000 (in 2007 terms) lifestyle throughout her retirement.

2. She will retire at 55. As she’s 24, that leaves 31 years to retirement.

3. She comes from sturdy stock and believes she should live beyond 85. For planning purposes, we shall assume she survives until the age of 90 in 2072. As she will retire at 55, she will spend a projected 35 years in retirement.

4. Between now, 2007, and the year she retires, 2038, inflation (meaning her personal inflation rate as opposed to the official CPI rate) runs at an average of 4% a year. (By her first year of retirement, it will cost RM80,956 in future 2038 ringgit terms to afford a RM24,000 a year lifestyle.)

5. From a psychological perspective, we’ll also assume she has a moderate appetite for risk. This might mean she would be comfortable with a retirement funding portfolio comprising bank savings in the form of fixed deposits and unit trusts encompassing money market funds, bond funds, domestic equity funds and international equity and property funds. If such a pre-retirement portfolio is regularly rebalanced, it should yield an average compounded growth rate (CAGR) of 8%.





6. Once Betty retires at the age of 55, her active income flow will cease. This means her ability to accept investment risk will plummet. As such, the inherent volatility (aka investment risk) of her retirement funding portfolio should be geared down. Here, we’ll assume a reduction in the equity portion and a corresponding increase in her allocation of safer bonds. The new lower targeted CAGR of the revised retirement portfolio is 6%.

7. Throughout her anticipated long retirement stretching 35 years, medical expenses, which tend to rise faster than general expenses, will form an increasingly chunky portion of her total cash outflow profile. So, here we’ll assume the inflation rate averages 5% during retirement.

8. If we take all this into account, then based upon a capital liquidation method, a total of almost RM2.4mil is needed to fund her retirement. (Note: Betty’s EPF savings at 55 may amount to a few hundred thousand ringgit — a sum NOT taken into account in this analysis, which should thus provide an added cushion of safety for her.)

9. Because we assumed earlier Betty will earn an 8% yield on her portfolio, this means she would need a much smaller total theoretical sum of personal savings today to compound over 31 years to grow to RM2.4 million. Crunching the numbers shows the theoretically required amount is RM220,836.

10. However, we assume she has nowhere near that sum today. Instead, we’ll assume she has RM5,000 in savings with which to start her personal retirement planning fund.

11. Thus her current one-shot shortfall is RM220,836 minus RM5,000 or RM215,836. The handy retirement planning software used for this analysis indicates an annual investment of RM19,017 will achieve that target.

12. Thus it seems Betty needs to set aside more than RM1,500 a month — on average between now and when she retires — to meet her retirement funding needs. At the moment, this is patently impossible as she brings home RM2,000 a month, lives on nine-tenths of that and, initially at least, saves only RM200 per month.

For Betty to meet her longterm personal retirement funding needs, she’s going to have to work at increasing her income while learning to exercise one crucial personal discipline. According to Michael Tan Lib Chau, CEO of RHB Unit Trust Management, “That discipline involves the principle of delayed gratification.”

He shares this example, which might apply to Betty a decade or two down the road: “If she earns RM8,000 and receives an increment of RM2,000, she shouldn’t begin living like someone earning RM10,000 but should invest between RM2,000 and RM3,000 in an area of profitable return.”

Let’s now leave Betty and look at Alex’s situation, which includes taking into account his soon-to-be bride Andrea’s needs.

In their case, we’ll assume each earns a net monthly income after EPF and SOCSO deductions of RM2,000, just like Betty. But in this case, because they will soon be married, this brings their total net household income to RM4,000 a month or RM48,000 a year.

In planning for their retirement, we’ll make these 12 assumptions:

1. Alex and Andrea would like to maintain a joint RM3,500 a month or RM42,000 a year (in 2007 terms) lifestyle throughout their retirement.

2. Because they plan on having kids, the first 25 years of married life may necessitate saving and investing for the tertiary education needs of those children. From a practical standpoint this may require both choosing to work beyond the currently conventional retirement ages of 55 or 56 to permit more time to ‘play catch-up’ on their retirement needs. We’ll assume both work until Andrea is 59 and Alex is 60. Thus, they have 35 years to retirement.

3. International longevity studies indicate married couples live longer than singles. Here we’ll assume both Alex and Andrea plan for a retirement that extends until he turns 91 and she turns 90, in 2072. They anticipate having 35 years to prepare for a 31-year retirement period.

4. Between now, 2007, and the year they retire, 2042, their personal inflation rate is 4%. (By the time they reach their first year of retirement, it will cost RM165,736 in future 2042 ringgit terms to afford a current RM42,000 a year lifestyle.)

5. In this example, we shall further assume Alex makes the primary investment decisions and that he has a high or aggressive appetite for investment risk. So, while Alex and Andrea also build a retirement funding portfolio comprising the same instruments as Betty, its equity weighting is higher while its money market and bond weightings are correspondingly lower. Here we’ll assume their regularly rebalanced pre-retirement portfolio yields a CAGR of 9%.

6. Once they retire, their rebalanced ‘geared down’ retirement portfolio will have a target CAGR of 7%.

7. Like Betty, accelerating medical expenses suggest it’s wise to target a retirement inflation rate of 5%.

8. Bearing all this in mind, a target sum of just under RM3.9mil, based on a capital liquidation method, is required. (Also, both of them may have perhaps RM500,000 in total EPF savings that can be used to provide an additional cushion of savings in retirement.)

9. As we assumed they will earn 9% a year on their preretirement portfolio, discounting the target ‘size of fund needed at retirement age’ back to today by

9% indicates they will need a lump sum of RM188,759 in today’s ringgit to fully fund their plan.

You may notice this amount is about 15% less than Betty’s corresponding required lump sum.

This oddity arises for two reasons: Alex and Andrea are projected to earn 9% on their portfolio against Betty’s 8%; and they have four additional years of compounding to boost their retirement funds.

10. Because they’re likely to use most of their current savings on their impending wedding, we’ll assume here they have only 20% of Betty’s RM5,000 in savings, namely RM1,000, to begin their joint personal retirement planning fund.

11. Their theoretical initial funding shortfall is RM188,759 minus RM1,000 or RM187,759.

If all the assumptions above hold true, then some rather intimidating number crunching suggests an annual investment sum of RM17,769 is needed for them to meet their retirement funding target. (Again note this sum is lower than the RM19,017 Betty needs to invest each year because of Alex and Andrea’s higher level of accepted portfolio risk and the longer time they have opted to give themselves to accumulate funds and compound wealth!)

12. So, Alex and Andrea need to set aside just under RM1,500 a month — again, on average between now and retirement — to meet their retirement funding needs.

Since they currently can save only RM500 (RM4,000 minus RM3,500) per month, the best they can hope to do is exercise delayed gratification in the decades ahead and steadily expand their savings rate.

Such analyses are sobering. Alfred Sek, CEO of Standard Financial Planner, says, “I always advise young people to adopt a “save first and spend the balance” approach, not a more common “spend first and save the balance” approach. There is no limit to possible spending, and that’s why in most cases there is nothing left to save.”

Devadason adds, “Retirement funding is often intimidating once real numbers are crunched.

But at least those who proactively face this reality early on are more likely to survive, or better yet thrive, than those who decide to stick their heads in the sand!”