‘Hi, I’m Shane. I have accumulated RM 100,000 in excess cash where I intend to have them invested. My question is: ‘What should I invest into? How do I start?’
First and foremost, the fact of a person having RM 100,000 in investable cash is truly remarkable and thus, deserving two thumbs up!
Before I share my views, I like to point out a mentality where investing is simply treated as a means to park money. It is evident among new investors who think that investing is a matter of knowing ‘what to buy today?’. Often, this leads to a desire to ask for tips on investments. It happens in all markets, be it stocks, real estate, businesses, commodities … and so on and so forth.
Personally, I have adopted a different approach towards investments. Instead of answering the question above with ‘Oh, you should invest in Maybank or Public Bank today.’ or ‘You should consider real estate.’, I believe all of us should invest only after we have a better understanding of ourselves in terms of our financial status, family background, education, investment skills, objectives… and the list goes on and on. Differences in circumstances would lead to different wants and needs, which in turn, lead to different investment objectives and thus, resulting in one investing differently from the other person.
Remember: One man’s meat is another man’s poison.
So, to Shane’s question above, my reply would be a series of ‘questions’ back to Shane and from his reply, I may discuss a handful of options on how Shane may choose to invest his money. Hence, here are 5 key questions that one should be asking first before investing:
Question 1: Do You Have an Existing Plan?
Months ago, I have shared Investment is a Plan … not a Procedure or a Product.
So, what is your investment plan? If your answer is: ‘Hmm …. What Investment Plan? I believe, that is the first sign indicating that you are not ready to make an investment as you are not yet an ‘investor’. In this case, the best investment for you is to park your money in fixed deposits (FD) and begin by finding yourself a suitable investment plan.
But, a handful of you may opine: ‘Ian, finding a plan is boring. I want something hot, sexy, and exciting. If I start by finding a plan, I think I would probably never start investing into anything! Can’t I just start ‘investing’ into something first as I now have the ‘passion’ and the ‘enthusiasm’ for it?’
If that is you, my answer is: ‘Investing is about building one’s wealth sustainably over the long-term. It is not about chasing highs and lows aimlessly. Generally, I find most who bought investments based solely on guts and emotions are truly not ‘investors’ but are ‘speculators’ who think they are real investors. For most, it is one of the fastest way to lose money in an investment – be it, stocks or real estate or business … etc. So, if possible, please refrain from investing’.
But, how do I find myself a plan? Please read on. Let us start with Question 2.
Question 2: How Much Money are You Making every Month?
Here, I have prepared a series of questions:
- What are your main sources of monthly income? Job or Business?
- If you are self-employed or a business owner, how long have you been in business?
- Are you receiving passive income on a monthly basis? Rental income or Dividends or Interests or Royalties or Passive Business Income … etc
- How much active income and passive income you are making a month?
- Are you servicing any debt obligations on a monthly basis? Car loans or Mortgages or Credit Card Debts or Personal Loans or PTPTN … etc. How much are you servicing every month?
- Do you have any fixed expenses per month? Rent or Insurance or Utility Bills or Day Care or Kid’s Education or Memberships… etc.
- How much money are you able to save per month?
Why do I ask?
- Leverage: First, if you are a high-income earner, you may borrow from the bank to invest in real estate. However, if your monthly income is low currently, I think, it is better for you to focus on generating higher monthly income so that you can apply the same leverage which is available to those in a higher income category.
- Level of Commitment: Second, if you are a high-income earner but have already committed to a handful of expensive ‘doodads’ like fancy cars and houses, Ouch! You would have lesser form of leverage as compared to one who makes the same amount of money as you but have lesser debt obligations. Rather than investing, your Step #1 in investing could be to ‘do away with your doodads’ first to free up monthly cash flows for your investments. If so, please consult a qualified financial planner to assist you on this matter.
Hence, the focus here is income as it brings an option to leverage. But, the next question is: ‘How much leverage can I use for my own investments?’ That leads us to:
Question 3: What is Your Current Age and Family Background?
Here, I’ll share with you a couple of scenarios:
- If you are 30 years old, you have the option to borrow from the bank to invest in real estate. The maximum loan tenure that you could obtain is 35 years. Thus, Shane who has RM 100,000 in excess cash could opt for a subsale property priced between RM 300,000 to RM 400,000 located in the Klang Valley.
- If you are 60 years old, you would not enjoy such leverages by yourself as an individual. But, if you have children, you may purchase a property jointly with your children where you place its down payment while the property’s mortgage is under your children’s names.
- If you are 30 years old and have already bought more than 2 properties in Malaysia, you may choose to invest into a brand new property jointly with your wife or siblings or friends if you wish to enjoy a higher loan to value (LTV) margin to finance the investment property.
Thus, my question is: ‘Do you wish to invest as an individual or as a team which involves your family and friends?’ How you would invest your money would be very different if you choose to invest as an individual or as part of a team. Thus, please take time to do some soul searching on it.
Question 4: How do You Intend to Gain from Your Investments?
Is it capital gains? Or, is it cash flows? Most understand the difference between the two. But, what most fail to realise is this: Which of the two is your priority?
My question is: ‘How do you intend to measure your investment success?’
Let us start with capital gains. Assuming that you are interested to invest in unit trust or stocks for capital gains, how exactly do you intend to measure profits or gains from your investment made? If your answer is: ‘Hmm …. I don’t know.’, let us try this. Please fill in the blanks below:
I intend to achieve capital gains of ___ % in ___ time.
If you intend to achieve 10% capital gains per annum for the next 10 years, you would invest differently from one who intend to make 10% capital gains in 3 – 6 months. Agreed?
Alternatively, you may like the idea of investing for passive income (cash flows). Personally, I prefer cash flows over capital gains as it is easier for me to track & measure its success or failure. For instance, I intend to generate a minimum of 5% in dividend yields from stocks or 4% in rental yield from properties. Hence, my decision to invest or not to invest lies in the investment’s capability to earn me (the investor) the 5% dividend yield or 4% rental yield sustainably over the long-term. Therefore, if you choose to invest for capital gains, please do know and acknowledge that I would be investing very differently from you.
So, which is it for you: Capital Gains or Cash Flows?
Question 5: What is Your Set of Investment Skills?
Many want to make money from their investments, but most do not have skills.
So, do you have any investing skills? Let us start with stocks. Assuming that you are Shane and have RM 100,000 to invest in stocks. So, in Malaysia, out of 900+ listed stocks, how do you pick which one to buy and which one to avoid? What would your answers be?
If you have no idea, great! Please do not invest in stocks. If I am Shane, I would place all of my excess cash into Fixed Deposits (FD) because I am not ready and fit as an investor for I lack skills to profit consistently from the stock market.
But, you may ask: ‘What skills are involved to be a good stock investor?’ Here, I believe the set of skills are mainly accounting skills and valuation skills. The two skills are of equal importance. Personally, I relied on my accounting skills to set apart companies that grow profits consistently from others that don’t. Then, I’ll rely on my valuation skills to find great bargains from my pool of good stocks. It would be risky for me to invest in stocks without having these two skills.’
But, you may ask: ‘What if I don’t have the time to learn?’ My reply is: ‘For you, please do not invest in stocks. It is not for you yet. Please also do not invest into unit trust for, in most cases, you may not know what you are getting into. If you wish to build long-term wealth sustainably from investing, it is better to have a change in mindset in regards to investments. Investing is not just about: ‘What Do I Buy Today?’ but rather is a journey of self-discovery, planning, continuous learning and improvements into the future.
Conclusion: So, What Should I Do with my RM 100,000?
If you do not have an investment plan, put that temporary in fixed deposit and start crafting a plan. A plan is one that considers your age, marital status, level of income, present commitments, life goals, investment objectives and skills of investing, be it stocks, real estate, businesses, … etc.
Here, we have written a mouthful on the subject of crafting your financial plan. They are as follows: