EXACTLY a year ago, I kick-started my column by saying that 2015 was a year of uncertainties. As it turned out, it was a rough year for all. The outlook for 2016 looks set to continue along the same veins, except it would be ... a lot tougher.
Let’s look at the facts.
On the macro level, the world stage looks set for some gloomy outcomes in the next couple of months as crude oil prices continue to head south with no signs of abating. This could potentially signal another round of job cuts for all those in the industry and those related to it.
Meanwhile, China, plagued by persistent slow growth, has left the market reeling over the steep drop early this year.
On the local front, we are faced with Moody’s revision of our sovereign rating outlook, further hikes in cost of living due to subsidy cuts, and an unfavourable exchange rate with the ringgit at its worst performance against the US dollar.
Against such a backdrop of negative news, one can’t help but wonder how investors, let alone anyone, will be able to make any inroads to grow wealth.
But grow we must. Here’s how:
The key to doing well financially in 2016 is to focus your attention on areas within your personal influence, which is your personal financial situation. Refrain from paying too much attention to all the negative macro economy news which is outside your personal influence as it may derail you from doing what actually matters.
By following these eight guidelines, you should be able to get your personal finances in order and capitalise on any emerging opportunities that the year brings with it.
Eight money optimisation strategies
1. Set savings target
The biggest financial mistake you can make in 2016 is not saving.
With the weakening of the ringgit and the ensuing higher inflation rate expected in 2016, your household and personal expenses are bound to increase substantially – possibly leaving little or no savings.
To overcome this challenge, one should always save first before spending. You can start by setting a savings target and making sure that you put money aside towards it before spending the balance on household expenses.
2. Keep a cash reserve of at least six months of your expenses and monthly commitments
For retirees, put aside a cash reserve of at least three years. If you happen to be in a badly-hit sector like oil and gas, for example, increase your cash reserves to 12 months in the event of any unexpected downsizing.
Cash reserves are necessary – it helps pay the bills when you have no income for a few months. On the other hand, from an investment perspective, cash reserves can grant you holding power over your investments. Say, for example, you happen to buy into a good investment at the wrong time, just before it takes a steep plunge.
Without cash reserve, you would have no choice but to sell out at a big loss should you be in dire need of money. But if you have holding power, you would be able to hold your investment and sell it off at a high profit – at best – or at a smaller loss – at worst.
3. Diversify your investments into various asset classes.
Don’t put all your eggs into one basket. This may sound so common sense, but you’d be surprised. It is almost human nature to put all your trust and money into one proven market based on past experience.
However, concentrating your money into one particular investment class like real estate opens you up to a big risk. What happens if the property market takes a sudden hit? All your efforts at growing your wealth would go down the drain.
Allocate your wealth across other investments such as bonds, stocks, real estate, cash and commodities. That way, if one risk factor translates to reality, not all your investments would suffer.
This strategy is especially important when the investment environment is highly volatile and unpredictable. Two years ago, no one would have predicted that the ringgit could drop more than 30% against the US dollar and cause chaos to Malaysian investors.
4. Be proactive – be on the lookout for good investment opportunities
Your return on investment (ROI) must be higher than the inflation rate. As long as you put your money into something that is performing better than your current inflation rate, you are already optimising your money.
Set a bar for your ROI. For example, if you are looking to invest money from a fixed deposit, logically, your goal should be to look for something that gives you higher returns than the fixed deposit.
On a more cautionary note, the investment environment for 2016 is expected to continue being volatile and unpredictable. Therefore, avoid high-risk investment deals such as small-cap shares, currency trading, speculative properties and high-risk unit trust funds.
Look for opportunities that invest into solid underlying assets with medium-to-low risk exposure to avoid serious losses to your capital.
5. Question everything
Assess your risks before parting with your hard-earned money. Does your investment guarantee the return of your capital? Does the Government regulate the investment company? If it is a foreign government, is it credible? Is there a trustee in place to hold and protect your investment in the worst-case scenario? Do you know what percentage of your investment the trustee holds? All these are questions that you should ask and get answers before putting your money into an investment.
6. Compare, compare, compare
Make apple-to-apple comparisons with other similar investment opportunities. In the case of unit trust investment, if another fund in the same categories (for example, global equities fund) is doing better than your current investment, don’t hesitate to sack existing fund manager and move your investment.
Optimising your money is about tapping into the best returns possible without taking extra risks.
7. Cut your losses and move on
Unless you are very lucky, you are bound to come across an investment that may lose money. When this happens, it is essential to acknowledge the mistake, cut your losses and move on to something that is better performing.
Many Malaysian investors tend to wait it out, hoping that the investment will rebound, only to end up suffering from bigger losses, and losing out on the opportunity to optimise their money somewhere else.
8. Optimise returns on idle money
Review your balance sheet to find idle money that is stagnant which could be put to better use, and invest this money into performing investments. A good example of idle money is the money in your fixed deposit.
Although the idle money is generating interest income, it is still not productive from the money optimisation perspective. Effectively, your money is shrinking because it is growing slower than your inflation rate.
While you are working hard to make money, it is important that your money works equally hard, if not harder, than you.
I would like to highlight that the above-suggested strategies act as a general guideline for the year. While it is advisable to follow the recommendations mentioned here, do understand that everyone has different lifestyles and financial goals that they want to achieve.
To ensure you grow your wealth effectively, it is highly recommended to develop a tailor-made and holistic financial plan to help you optimise your money and meet your financial goals. With that, I wish you all the best for your money optimisation in 2016!
Yap Ming Hui (firstname.lastname@example.org) is a bestselling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm.