Let me ask you:
Is a plane a better transportation vehicle than a bus?
Well, I believe some of you may get the picture. A plane can travel at a speed of 1,000 km an hour, bringing you from Changi to Copenhagen in 14+ hours safely, securely, and reliably. It will take you ages if you take a bus ride. However, if you wish to just travel from Changi to Clementi, then, you can take a bus ride as you won’t be able to book a flight ticket to Clementi from Changi Airport.
So, the question is, ‘What is ‘better’ to you?’
Can you see that the word ‘better’ is very subjective?
How Not to Compare Investment Assets?
Some say FD is a lousy investment as its interest rate is 2% per annum.
Some opine unit trust is better as it can offer 8%-10% per annum in returns.
Of which, there are people who compare different investment classes based on their projected yearly returns, in general. This method of comparison, I believe, is rather misleading and is often used as a sales pitch to persuade or dissuade a person from investing his or her money into certain asset classes.
I believe it is more practical for one to choose his investment vehicles according to his objectives which is the same as to how we will choose our transportation vehicles to travel from one place to the other.
It is about using the right vehicles to reach the right destination.
Planning a Holiday Trip to Copenhagen
Let’s say, I’m residing in a HDB flat at Clementi and I would like to plan a holiday trip to Copenhagen.
I will start my trip by taking a bus from the nearest bus stop closest to my flat at Clementi to the closest MRT station, which is the Clementi MRT station.
Then, I will take a MRT ride from Clementi to the Changi Airport MRT station.
Next, I will catch a 14+ hour plane ride to Copenhagen.
Upon arrival, I will take a cab to my hotel in Copenhagen.
After I check in, I will rent a bike and cycle leisurely to explore the city.
From the above, I have a clear objective in mind and I have used five vehicles to bring myself from my HDB flat in Clementi to explore the city of Copenhagen.
Could I say a plane is better than a bus, the MRT, a cab, or a bicycle?
By itself, a vehicle alone could not fulfill my travel objectives.
It is the same with investing.
Your Copenhagen could be to become a millionaire, or to earn a passive income of RM 10,000 a month, or to fund your children’s tertiary education fees.
Of which, you may choose a combination of vehicles such as stocks, bonds, real estates, unit trust, ETFs, Robo-Advisory firms, P2P lending, Gold, Silver, Bitcoins, and so on and so forth to reach your desired destination safely and securely.
As such, I won’t say stocks are better than properties and vice versa.
Personally, I have invested in both and believe that both are vital vehicles which allow me to reach my desired financial destination faster safely.
I have an idea on what I intend to achieve and I encourage you to find your own path which is suitable to you personally.
But, if you don’t have a financial destination in mind, you may take time to do a little soul searching or you can explore around to see where is most suitable for you. The last thing you want to do is to hop on a cab without first knowing your intended destination.
Here, I’ll share what I wish to achieve from investing in stocks and properties.
Why do I Invest in Stocks?
Many opine that stocks are risky investments. Cash or FDs is less riskier.
In the short-term (less than 1 year), I agree.
But, in the long run (5-10 years), I disagree.
Cash has diminishing value. It is a fiat currency. RM 10,000 today shall definitely not be the same as RM 10,000 some 10 years from today.
Stocks are different. To me, they are businesses. If they are well-run, they could expand their value over time as they increase their sales, earnings, cash flow, … etc over time. As a result, they could pay out higher dividends to investors and I intend to be one of those investors who own such businesses.
Also, I intend to stash aside some money in other currencies than the Ringgit.
But, I do not want to just hold onto these currencies in foreign FD accounts as it is not income-productive. So instead, I choose to invest in foreign stocks.
Thus, with the above objective in line, I would:
a. Have local FDs for short-term liquidity (1-2 year worth of living expenses).
b. Build a foreign stock portfolio filled with fundamentally sound companies.
c. I hold for the long-term so that they have time to compound my own wealth.
d. I don’t trade stocks for short-term profits (below 1 year). It’s risky for me.
Why do I invest in Real Estate?
This is because I believe real estate is a safer, faster, and reliable vehicle to grow my net worth meaningfully through the leverage of low-interest debt. I find real estate to be an awesome vehicle with multiple benefits.
To illustrate, let’s say, I’m looking at a RM 350,000 subsale apartment located in the Klang Valley. The benefits are as follow:
I can place a 10% deposit on it and finance the remaining 90% with debt.
2. Instant Capital Gains:
It is possible to buy an apartment at a discount from its market valuation today. Let’s say, I’ve managed to secure the property deal at RM 320,000 instead of its market valuation of RM 350,000. Thus, I’d paid RM 48,000 (consisting of 10% in deposit and 5% in transaction costs) in initial capital outlay for the property. My net worth will increase to RM 62,000 (The property’s market value – mortgage), an instant jump of 29% from my RM 48,000 in initial capital outlay.
3. Rental Income:
Let’s say, I could rent my apartment out for RM 1,100 a month. It could be used to pay for the interest portion of my mortgage and all other property expenses, including its service charge, sinking fees, quit rent and assessment.
Presently, in most cases, you will end up with a small rental loss and hence, you will not be taxed for the rental income received. But, from the banker’s point of view, rental income is a legit source of income and it will add to your amount of loans that you are eligible to obtain in the future.
4. Loan Repayments:
The loan period is stretched over 35 years. I could borrow today and pay off the principal of my loan with Ringgit that is ever-depreciating in value.
5. Future Appreciation:
From above, the apartment I bought at RM 320,000 is worth RM 350,000 today and I placed RM 48,000 in initial capital outlay to purchase it.
Let’s say, the property’s value appreciates by 2% per year. By the tenth year, my apartment’s market value will rise to RM 426,648. The outstanding mortgage of my apartment will be RM 254,733. Thus, my net worth in this apartment works out to be RM 171,915 after 10 years of owning it.
Let’s also assume that I managed to break even in the 10 years period. My total rental income in the first 10 years equals all of my property related expenses, consisting of mortgage, service charge, sinking fees, quit rent and assessment. I would grow my net worth by RM 123,915 from my initial capital of RM 48,000.
Conclusion: How to Know What Assets I Should Invest Into?
Instead of focusing on their projected returns, it would be better for you to first determine where your financial end goal is.
Your objectives will determine how you would invest your money.
You don’t need to worry about the ‘how’ as it would come after your ‘why’.
Of course, if you are still exploring, that is okay.
After all, I too began clueless. What I did was to find myself a few people whom I look up to and learn from them. Let’s say, you want to have similar investment successes like Warren Buffett, you should study about him, his life philosophy & adopt his method of investing.
Personally, apart from Buffett, I did read about Robert Kiyosaki, Jim Rogers, and also local authors like Mark Chua. You too could study about them and decide if their style of investing is your cup of tea.
The worst is this.
It is to skip all the learning process and have yourself dive into investing with no knowledge, no plan, no structure, no direction and no guidance. It is a waste of time and money. So, don’t!