From the net worth statement, the investible items are sorted as below. Due to the weight of the different classes of the investment tool, the return of the portfolio is calculated by using this formula:
Example:
Return formula:
Saving account return: (New – Old)/Old
Fixed Deposits return: (New – Old)/Old
Share: (New – Old + dividend)/Old
Unit trust: (New – Old + distribution)/Old
Whole Life Cash Value: (New – Old + Bonus)/Old, for cash value accumulation, not the total premium
Investment-linked product: (New – Old + distribution)/Old, in the investment allocation, not the total premium
EPF: Declaration by EPF during financial year end
Saving account: risk free rate, said 2.5% is higher than 0.9%. It is not worth to park money into it. However, it is only served as cash for emergency. It is recommended to transfer it all to fixed deposits account. Alternatively, if Ong has credit card with the credit limit of RM 20,000, thus he has no worry in holding so much cash in the saving account. He can park the money to higher return investment tool.
Fixed Deposit: Best method to curb the inflation rate. It is at very low risk, low return but very secure. Thus, it serves as emergency fund. If Ong has bought life, personal accident and hospitalization & surgical insurance for all his family members (parents, children and spouse), the amount shall be reduced to RM 15,000.
Share: Highest return doesn’t mean to be the best share. For financial planning, Sharpe ratio is used to gauge the performance of the investment tool. Consistency in generating the expected return is the first choice of the plan. Thus, to increase the portfolio return, switching from share#1, share#2, and share#4 to share#1 can drastically increase the share portfolio return. However, 2 to 3 shares shall be recommended in order to reduce the systematic risk or market risk. If possible, regional good share shall be recommended in order to reduce the systematic risk.
Unit trust: Does your UT agent provide the analysis before advising you to switch your fund from one to another? UT is a very diversify product, it is not recommended to have too many type of UT. Thus, Unit trust#1 and Unit trust#2 shall be allocated to unit trust#3. The consistency of the return has higher possibility to achieve financial goal.
Whole Life cash value: Traditional insurance product does a better security as the insurance company has to strictly follow Bank Negara guideline. The cash value from the whole life serves as the final resource of the liquid cash for Ong. This investment component in the insurance has a good cash value that always has higher return than the fixed deposits.
Investment-linked product: Choosing the unit trust by the insured is under insured liability. It does not have a better security as whole life insurance. Regular premium investment-linked product has a very low unit trust allocation that erodes the ability of the asset growth. The objective of the investment shall be studies before making any decision. Single premium investment-linked product has a higher ratio (e.g. 1.2 times, 1.25 times) compared with unit trust that coupled with free insurance (e.g. 1.0 times). However, Sharpe ratio shall be used to make the decision.
EPF: EPF is the best tool for retirement. With no confident that you can generate a higher return from the withdrawal, then you better not to withdraw it for investment, housing loan reduction, education etc. Most Malaysian “invests” in their children as the safety net for his retirement. What if the safety net fails to commit to return your retirement income? If you are an employee, you may request HR to divert your annual increment to EPF contribution (max 19% for tax exemption). This is a way of conversion from taxable income to non-taxable income in order to reduce your tax.
Diverted original posting from my facebook note dated 21-Nov-09.
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