Read This before Buying any Financial or Investment Products

A recent read of The Millionaire Teacher: Nine Rules of Wealth You Should Have Learned in School got me thinking on the prevalent conflict of interest in the financial industry selling you financial products in Malaysia. The author, Andrew Hallam ultimately delivers a smack down to financial agents who is selling you hideously expensive financial products, earning them fat commissions at the expense of your real investment return.

Layeth the smacketh down - ala The Rock

But that's how product sales in financial industry operates, like it or not.

A Dilemma: Child Education Cost versus Your Personal Finance

In my previous post on child's education cost in 20 years time, I calculated an estimated amount of no less than one third of a million ringgit  based on the future value of money and annual inflation rate of 4%.


Mind you, that is just the cost of one of your children's tertiary education.


We have not factored in all the expenses for raising a child from the day you brought them into this world.  

Bad news: Debit Card Fees

If your bank need to charge you an annual or monthly fees for the debit card you own, what would be your first reaction?

Absurd.

The Good News: That is what just happened in US.

Apparently, Bank of America will start charging debit-card users $5 a month if they use their debit cards for purchases in any given month, starting next year. The fee will not be triggered by transactions at automated-teller machines.Paying to use a debit card was unheard of before this year and is still a novel concept for many consumers.

Of RIM Blackberry, Value Investing and Leverage

I am sure you read of longest ever worldwide Blackberry network outage last week. The three-day blackout interrupted email and Internet services for tens of millions of frustrated users and inflicted more damage on an already tarnished brand. It is definitely threatening to cost the granddaddy of all smartphones more business when it's already struggling to keep up in a crowded marketplace. Even for many Blackberry loyalists, this could be the straw that broke the camel's back.

BlackBerrys get their email through RIM's centralized setup, allowing the company to offer a high level of security. But when something goes wrong, it affects millions of people at the same time. Blackouts are not localized to one company or one carrier, as other outages are.

When I read this, I personally feel the sentiment - no, I have never used any Blackberry but my relationships with RIM stocks had been turbulent to say the least.

When I first delved into the world of stock investing, value investing is only belief I held on. It still is, but that's just one among the many things in my list. 

Business Conditions Index: BCI3Q2011

In my previous post, I did mention that if BCI continues to trend down for Q3, a double dip recession is likely in Malaysia.The BCI for Q3 has just been released by MIER. 


The gist of it: Business is still expanding but slower. 
The highlights:

1. Index down a marginal 9.5 points to 104.5 q-o-q. 
2. Sales, production and new export order has dropped q-o-q as predicted in Q2.
3. A further slump in sales and production is anticipated as we move into the final months of 2011.

Signs of 2008 economic recession approaching?

BCI for Q2 2011

Is Modern Economy going backwards?

It is quite enlightening after reading Graeme Maxton interview with Personal Money regarding his third book titled The End of Progress: How Modern Economics Has Failed Us. A summary of his thoughts below.


Men's greed led to mass over-consumption in modern economics. Commodities are not infinite. There are already numerous future depictions of world conflict which arises due to scarcity of resources - food,water and liquid gold. Debt crisis in the US and Europe - it is just a time bomb. The rich become obscenely richer, and the gap widens between them and the poor. How much further the debt ceiling be raised? How long can this be sustained? Progress and intellectual development are stagnating - instead of being concerned about the major global issues, people are more concerned about designer handbags and the latest gadget. In today's age, freedom often means - do as you like regardless of its consequences as opposed to freedom of thoughts and expressions in the 18th century Age of Enlightenment.

Graeme suggested that we start protecting our resources and change the way we approach consumption. No more wasting. Ever ponder how our life would be if sweet crude oil costs $1,000 per barrel instead of $100? [Author]: That's like RM 18 per litre for RON95 here, and it would take RM 720 to fill up your car 40 litres tank.


Wealth should be distributed evenly, not just concentrated on a few. Live should not be made terrible for the poor, but nowadays, the rich becomes richer, while the poor sinks further. This, of course, is in contradict with a free market - with minimal government intervention. But before things goes spiraling out of control, perhaps it is prudent to raise tax on consumption and undeserved income. Undeserved income from doing nothing which comes to mind includes profit gain from financial speculating. On the contrary, productive work tax should be reduced.
[Author]: A statement made by Warren Buffet recently echoed this sentiment. He urged US lawmakers to raise taxes on wealthier Americans to cut Washington's budget deficit. In other words, tax the rich more while tax the middle class and the poor less.


What's your take?

Stark Reality: Child Education Costs & The Endowment Policy

Create Now, Save Later
So I read a reader contributed article (Personally Speaking by Hazel Leong) in Personal Money Sept issue, on why she felt that generic endowment insurance plan is insufficient to meet her child's education funds requirement in 20 years. 


The key takeaway here: Guaranteed lump sum rate of return in 2 decades time is even less than the current risk-free rate of return for Fixed Deposit of 3.15 percent.

In Excel, use the formula: Rate(20,4800,0,-120000) and you get 2%. 

And she further illustrates that an engineering degree currently costs about RM 150,000, with the assumption that the cost of education doubles every 10 years. I do not know how she came up with RM 150,000; but it could not be anywhere in local public or private institutions. An engineering degree at Multimedia University, my Alma mater, is currently tagged at RM 50,000. Therefore, let's take this as baseline for calculation below. Overseas studies are really, the privilege of the rich, and they are not any man on the street like the rest of us. Moreover, there are factors such as exchange rate fluctuation which we could not anticipate in the future, so let's be realistic and keep things simple.

*assume the education doubles every decade

Second key takeaway here: Endowment plan payout in 20 years can only fulfill one third of your child's education cost plus living expenses in the same timeline.

Now, the contributor advocates properties investment but I am not going into details of her plan here although it is very ideal if you have the cash for at least 10% down payment of the properties value, plus other closing costs.  Whatever the investment vehicle, everyone has their own preference. Just be prudent to balance the risk versus return.


Anyway, below are my estimation of the investment needed now to cover education cost of RM 370k.

Save  Now, Create Later

If anyone starts to allocate RM 10k today into investment vehicle of your choice with moderate return of 6 percent per annum, with yearly top up of RM 9.6k, he or she will be able to cover his/her child education cost in 20 years. 

RM 9.6k per year translates to setting aside RM 800 per month, with father and mother each contributing RM 400. Do-able right?

And you still have surplus of RM 14k, which can be used as down payment for your child's first car when he or she starts working after graduating.

Bear in mind this is only for one child. What if...

a) You have more than one child?

b) You child desire to study medicine, and he/she is capable of - you don't want to kill their dreams right?

Securing a scholarship though, is an added bonus. But I will only using EPF Account 2 for children education as last resort, because it will surely jeopardize my retirement plan.

The Downside of Active Self Investment

There is no insurance element in it, unlike endowment plan. The insurance component of endowment plan will provide the insured amount compensation to the proposer (parent) in the event of death or total permanent disability of the child. I do not think this is critical. On the other hand, if the proposer passes away/permanently disabled/suffers from any of the 36 critical illlness, the policy will sponsor the child until maturity.

To mitigate the risk of parent not able to provide financially to their child, any parent should be sufficiently insured. Like my previous CFP facilitator mentioned, if you love your family, and being the primary income earner, you should buy more insurance for yourself, NOT for your spouse/children. I am not expert in this, but probably after CFP Module 2 this semester, I could analyze total insurance needs more objectively.

Disclaimer: I am not an insurance agent.

Who am I?

An advocate of financial literacy :)

Warren Buffet Invests Like A Girl...

I am not demeaning the value investing guru of all time here. It is the actual title of a book by Motley Fool.

Here's the excerpt from the review at Goodreads.


Warren Buffett and all of the women of the world have one thing in common: They are better investors than the average man, a fact proven by psychologists, scientists, and the value of their portfolios. In this well-researched, eye-opening, and wonderfully witty must-have book, the impresarios at The Motley Fool show that women, with their capability for patience and good decision-making, epitomize the Foolish investment philosophy, and the investment practices of the most successful investor in history: Warren Buffett. While men tend to be too confident, compulsive, and overly daring, women tend to be more studious, skeptical, and reasonable - traits that have led them to consistently outperform their male counterparts as investors. Unlike men, women spend more time researching their investment choices - knowledge that helps them avoid hot tips and trading on whims. Women trade less than men; their lack of confidence actually helps them choose more wisely and results in higher dividends and lower costs. And women consider more than just the numbers when making trading decisions. They invest in companies they feel good about ethically and personally -companies with good products, good services, and ethics that tend to have better long-term prospects and face fewer lawsuits. 


For those with XY chromosomes (myself included), drop your masculine armor and herd mentality right now.  Heed this advice and adopt a more 'feminine temperament' in investing.

There is profit to be made in a falling market

You don't get to see this often. The date is 4 August 2011.

Are you emotionally ready for such day? Do you...

a) cower in fear and pray that the market will somehow rebound the next day (or perhaps, never?).

b) execute panic-selling to prevent further sleepless nights.

c) spit it all out at your local mamak stall, be the know-it-all on the economy and what will happen in the next few months, but your money is still in Fixed Deposits, earning a measly interest of 3 percent per year.

d) take some calculative risk and be the contrarian.

If you tell put the phrases "making profit" and "falling market" in the same sentence few years ago, I wouldn't be able to comprehend.

I do, now. Having said that, it is not without its risk. Quite high risks actually. Not for the faint-hearted, but that's another post for another day.

The first is by short-selling.

Housing Loan Reduction from EPF Account II - To withdraw or not to withdraw?

Question I have been asking: Is it always wise to withdraw EPF Account 2 for Home Mortgage Capital Repayment or in layman terms, reducing housing loan?

In the The Do’s and Don’t’s of EPF Withdrawal during an interview session at ntv7, Mr Yap Ming Hui stated that generally, if the “mortgage interest rate far exceed 5% (EPF dividend return)”, then it is advisable to do so.

Next question is, how much is “far exceeding” in this case?

I have been doing some simulation.

Referring to the table here:

Personal Inflation Rate

This is perhaps a more important measure for comparing if your income increment matches your desired lifestyle.

Example, it really does not help if the overall reported annual inflation rate is 3% but you choose to obtain hire purchase for a more luxurious car every year. Your monthly commitment will increase, hence the income increment is quickly negated in this case. Then again, a vehicle is still a liability instead of an asset, we are knew that.

In a nutshell, personal inflation rate largely depends on the type and amount of your expenditure. Live modestly is my motto. I could have easily upgraded to a smartphone, just for the pleasure of it but no thanks, unless my good old Nokia stupid phone goes kaput, I do not think I need a new handset for now :)


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