Investment Planning
Prudent investing requires information of key financial concepts and an understanding of your investment profile and how these work together to affect investing decisions and results.

The Difference Between Saving and Investing
"Saving" and "investing" are often used interchangeably. However, there are differences between the two.

Saving refers to funds kept for making specific purchases in the relatively near future (usually three years or less) and for emergencies. Preservation of the principal and liquidity of the funds (ease of converting to cash) are essential aspects of savings. Consequently, savings generally yield a low rate of return and do not maintain purchasing power.

Investing, on the other hand, focuses on increasing net worth and achieving long-term financial goals. Investing involves risk (of loss of principal) and is to be considered only after you have adequate savings and have done proper risk management.
In short, investing is more concerned on the return of investment, while savings is on the return of capital.

Risk
All investments involve some element of risk because the future value of an investment is uncertain. Risk, simply stated, is the possibility that the actual return on an investment will vary from the anticipated return or that the initial principal will decline in value. Risk implies the possibility of loss on your investment.

Investment Return

Total return is the profit (or loss) on an investment. It is a combination of current income (cash received from interest, dividends, etc.) and capital gains or losses (the change in value of the investment between the time you bought and sold it). The published rate of return for a selected investment is usually expressed as a percentage of the current price on an annual basis. However, the real rate of return is the rate of return earned after inflation, which is further reduced by income taxes and transaction costs.

The Risk / Rate-Of-Return Relationship
Generally speaking, risk and rate of return are directly related. As the risk level of an investment increases, the potential return would increase as well.

The greater the potential of reward is, the greater also is the potential of risk. There is no such thing as a riskless investment. It is all but impossible to increase the performance of an investment without also increasing the risk. You may be able to reallocate your investments among different types of investments or swap one stock or bond for another to take advantage of mispricings in the market. But beyond that, if you want to increase your return, you'll have to take on more risk. The longer the time period you intend to leave your money invested, the more risk you can afford to take.

Diversification
You can do several things to offset the impact of some types of risk. Diversifying your investment portfolio by selecting a variety of securities is one frequently used strategy. Done properly, diversification can reduce about 70% of the total risk of investing. Think about it. If you put all of your money in one place, your return will depend solely on the performance of that one investment. Alternatively, if you invest in several assets, your return will depend on an average of your various investment returns. Here are three basic ways to diversify your investments:

By choosing securities from a variety of asset classes, e.g. a mix of stock, bonds, cash and real estate.

By choosing a variety of securities or funds within one asset class, e.g. stocks from large, medium, small and international companies in different industries.

By choosing a variety of maturity dates for fixed-income (bond) investments.

By diversifying, you won’t lose as much as if you invested in just one security right before its market value goes down. However, if the market goes straight up from the time you started, you won’t make as much in a diversified portfolio either. Historically, most people are concerned about protection from dramatic losses than making huge returns.

By investing in several different individual stocks, industries, and/or investment types, you reduce your risk exposure to the good or bad performance of any one investment. The best and easiest way to diversify your portfolio is by investing in unit trust funds.

Dollar-Cost Averaging
Another technique to help soften the impact of fluctuations in the investment market is dollar-cost averaging. You invest a set amount of money on a regular basis over a long period of time regardless of the price per share of the investment. In doing so, you purchase more shares when the price per share is down and fewer shares when the market is high. As a result, you will acquire most of the shares at a below-average cost per share.

As most investors know, market timing . . . always buying low and selling high . . . is very hard to accomplish. Dollar-cost averaging takes much of the emotion and guesswork out of investing. Profits will accelerate when investment market prices rise. At the same time, losses will be limited during times of declining prices. For most people, dollar-cost averaging is not so much a way of making extra money as a way to limit risk.


The Time-Value of Money & Compound Interest
The time value of money refers to the fact that a ringgit in hand today is worth more than a ringgit promised at some future time. The reasons for this are two fold. Firstly, today’s ringgit could be invested to earn interest and thus be worth more than a ringgit and secondly, the effect of inflation would make the ringgit worth less in the future.

The process of leaving the initial investment plus any accumulated interest in a bank for more than one period is reinvesting the interest. This process is called compounding. Compounding the interest means earning interest on interest so we call the result compound interest.

Asset Allocation
In a nutshell, asset allocation is the strategy of spreading your savings out across a variety of investments to reduce your risk. The idea is to control risk and improve your total return over time. Asset allocation does not guarantee that your investments will earn more. But investing in different asset classes can help shield you against the possible poor performance of a single investment.

How important is asset allocation? Experts agree that up to 92% of your investment's performance depends on where you invest your money. You can think of investing in terms of the three "W's"*:

Where (Asset Allocation):   92%
Where you put your money, the type of investments you pick, has the most significant effect on your investment results.

Who (Specific Investment Manager):   6%
Most qualified investment managers achieve similar results with similar types of investments, when averaged over time.

When (Market Timing):   2%
The market moves so fast, that it is too difficult for most people to gauge. By the time you decide to switch investments, the market has probably changed again.

* Source: Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, "Revisiting Determinants of Portfolio Performance: An Update," 1990, Working Paper.

Here are several factors to consider in choosing your asset allocation.

Your Investment Goals
Goals are specific things that people want to do with their money (e.g., buy a house, go for a holiday etc). As people move through the various stages of life, their needs and financial goals change. Your selection of investments should relate closely to your financial goals; each goal will define the amount and liquidity of the money needed as well as the number of years available for the investment to grow.

What do you plan to do with the money you are investing. How much of a return do you require to reach your goal in the time you have allotted. By setting your investment goals prior to making any investment decision, you arm yourself with the knowledge needed to reject inappropriate investment ideas and to accept good ones.

For example, you would like to purchase a house ten(10) years from now and you plan to use RM30,000 as your down payment. You already have RM15,000 saved towards your goal. By entering the numbers into a financial calculator (or using the rule of 72), we find that you need an annual return of approximately 7.2% compounded annually to reach your goal. An investment with a projected 10% return would mean taking on unnecessary risk. While, investing your funds at an estimated rate of return lower that 7.2% would cause you to fall short of your goal.

Your Time Horizon
Time is a very important resource to investors. Young investors with a long time horizon may choose investments that exhibit wide price swings, knowing that time is available for fluctuations to average out. Families investing for a specific mid-life goal (e.g., funding a child’s education or purchasing a home) may choose a more moderate course which has opportunity for growth, but guarantees more security of the principal. Individuals nearing retirement and those with the need to depend on investment income to cover daily expenses, may wish to select investments that lock in gains and provide a guaranteed income stream.

The relative performance stability of an investment, such as stocks or bonds, must be judged relative to the time horizon of the investment. For example, stocks historically return more than twice as much as bonds over a long time period. The returns over a short period of time can be quite different. Some investments, particularly stocks, can have wide price swings over short time periods. Bonds, on the other hand, generally exhibit much less volatility over the same time period. This volatility in stock values can make it almost impossible to compare the relative value of these two investments over a short time horizon.

Your Risk Tolerance
A person’s risk tolerance relates to a person’s emotional state in respect of his financial capacity to ride out the ups and downs of the investment market without panicking when the value of investments goes down. Risk tolerances vary widely. Some are associated with personality factors, while others are based on changing needs dictated by your stage in the life cycle.

If you won’t sleep well at night when the principal value of your investment goes down, you should select saving and investment options with lower risk. On the other hand, it’s important to realize that investments which guarantee the safety of principal will not grow your money quickly and may not maintain purchasing power in times of inflation or over a long time span. In reality it’s necessary to take some risk just to maintain purchasing power. The question is: "What kind of risks are you willing to take?"

RISK PROFILE

Conservative
You're not comfortable with risk or don't need to be aggressive with your money. The predictable rates of return in fixed-income investments — bond funds, money market accounts, and fixed accounts — make sense for you.

Moderately Conservative
A measured level of risk is okay with you. A small percentage of stocks can be mixed in your portfolio along with the fixed-income options.

Moderately Aggressive
You're somewhat cautious but in search of higher returns. Stocks, particularly large, blue-chip domestic stocks, should play a big role in your portfolio.

Aggressive
You're looking for the highest possible return in spite of short-term risks. Most of your portfolio should be in stocks, with a high percentage in small cap and international stocks.

If you're ready to map out your investment strategy, consider talking to one of our financial representatives. They'll take your goals, time horizon, and risk tolerance into consideration and help you structure a portfolio that fits your needs. As mentioned earlier, one of the best ways to allocate your assets and spread your risks would be to invest in a wide range of unit trusts funds. For direct investment in the stock market, please contact your remisier or licensed investment advisors or if you do not have one, we may suggest contacting our associates who are licensed to offer such advise.