In the previous issue of Money Compass, I wrote about the most practical way to meet your saving shortfalls is to increase your investment return rate. Increasing your annual investment return by a few percentage is a lot more effective than just increasing your saving rate and prolong the period or delaying your retirement.
This time, we are going to study how to actually do that. How do you get better return that’s way better than Fixed Deposit? How do you get at least double digit investment return rate? And the most important of all, how do you do it safely without risking your capital?
First, let’s debunk the myth of the saying that the higher the return you’re expecting, the higher the risk you might need to stomach. Somehow this statement is true, only if you are referring to those passive type of investors, who don’t know what they are doing.
If you have no idea of how to invest your money, and opt to just invest blindly, the statement is absolutely the truth. You want no risk at all – put money in FD. Without investment knowledge, if you are expecting a much higher return that FD rate, you will definitely need to tolerate with higher risk and volatility.
1. Getting 3% p.a. Return is Easy
American entrepreneur and investor Robert D. Arnott said, “In investing, what is comfortable is rarely profitable.” I think when Robert said about “comfortable is rarely profitable”, he didn’t merely mean the risk tolerance. I think what he is referring us to take some calculated risks. In order to be able to make calculated risk, you need to be competent.
To increase your investment return, it is a gradual process. The more you learn something outside your comfort zone and become more competent in the process, the better you will be able to access the risk, control your investment and also apply suitable leverage.
For example, let’s take the example of Susan. After being in the workforce for a few years, she only saves in FD. Without any investment knowledge, putting money in FD is the only comfortable option. Of course getting 3% a year will not help in the long term.
2. How to get 4-10% p.a. Return
So she heard about unit trust. After talking to several unit trust consultants and reading as much as she could about these managed trust funds, she gets more comfortable to put money there. First, she started with bond fund or fixed income funds, which has low upfront fees and safer in the short term. She started to get higher return, around 4-8% a year, which is really not bad compared to FD.
Later on, Susan switched to equity funds when she understands how equity fund works. An equity fund invests principally in stocks, which can be actively or passively managed (like index fund). As she knows more about unit trust, she is more comfortable to let fund managers to manage her money as part of the pooled investment capital.
Then Susan keeps on learning more about other various types of funds, which are categorized by whether they are domestic (Malaysia), regional, or international. These can be single-country funds or a specific region. There are also so-called “specialty” stock funds that target specific sectors such as green energy, commodities, properties, technology etc.
Anyway, unit trust investment is generally passive to the investors. You don’t have to worry reading research or company report. The job has been passed on to the fund managers. You believe that they will do a better job than you. So you also agree to pay them the fund management fees, the agent’s commission, and also the trustee fees.
According to FundSupermart website, the top five equity funds over 10 years had garnered annualized return of more than 13% p.a. If you’ve invested in these funds for the past 10 years, your return is at least 4 times better than fixed deposit.
What if you want even better return?
3. How to Get Double Digit Return (>10% p.a.)
Warren Buffett, from 1965-2005, has produced an annual average return of 21.5%, which is double the return of the S&P 500 – including dividends – over the same period of time. Meanwhile, George Soros generated an annual return of 30% through his Quantum Fund from 1970-2000, nearly three times the average return of the S&P 500.
Of course both Buffett and Soros are the greatest investors still alive today. They are fund managers and they do “active” investment. “Active” means they are doing it seriously, as a full time job.
In order to save cost, which is as high as 5% upfront fee (equity fund) and 1% per year recurring management fee, you might as well manage your own stock portfolio. In other words, you will need to step out of your comfort zone of being a passive investor, to become an active investor. Just by doing half a decent job compared to Buffett and Soros, you might get 10-15% return investing in the local stock market.
Other than stocks, you can also look into real estate. For the past few years during the property boom, many had made more than 20% capital gain per year. Becoming an active investors let you call the shot. You have more control over your investment. By learning the right knowledge, you are able to minimize the risk too.
Nowadays, it is much easier to learn. You’ve got the Internet. You’ve got so many investment gurus in the market, providing all sorts of investment courses – value investing, chart trading, swing trading, FOREX trading, property investment with no money down, real estate tycoon club, smart investors clubs etc. Other than all these, you’ve also got thousands of books already written about many different topics, both by international and local authors.
If you are willing to put in extra effort, you can be an active investor. I have no doubt about your ability to do so in this positive environment! In fact, we have an online course that show you how to do it, in details.
Well, there is still one big problem most youngster face. To invest, you need capital. Imagine that if you only have RM1000 investment capital now without further capital injection, it will take 30 years (assuming that you can double your capital every 5 years) to make it RM64,000. If you can start with a bigger capital and do extra investment regularly, it makes much difference to the total return you’ll get at the end.
4. How to Get Magnificent Return
So the next logical step is to get magnificent return not just from the capital, but also from your effort, especially when you are still young and energetic.
I am talking about entrepreneurship here. Businesses generated the most millionaires and billionaires nowadays. And normally within a much shorter period time frame, comparing to getting rich through other types of investments.
In Malaysia, the environment for entrepreneurs to thrive is getting better, ever. Government give out grants. There is tax relief for angel investments. There are international venture capitalist supporting the local scene. You’ve also got site like Founder Method and also startup incubation program, which can assist you to get the right network, right distribution and much needed funding.
You might get 100%, 200% and even infinite return in the case where you don’t fork out any money to start a business. However, as good as it sounds, entrepreneurship is never easy. It takes a lot of time, effort, planning, courage and guts to meet your end goals.
As a conclusion, I want to echo Robert Arnott’s saying “In investing, what is comfortable is rarely profitable.” It is about YOU getting out of your comfort zone, keep improving and learning, and ultimately achieving magnificent return.
Wish you all the best!