Janet, a wage earner in her mid 20s is a typical conservative woman who wishes
to build a strong financial foundation. She has worked hard for the past several
years to save for her own house and her retirement.
She only keeps her money in "safe" investments such as savings and fixed
deposits. Her principal concern is "safety of principal". Taking unnecessary
risks is not her lifestyle. She dislikes volatile investments such as stocks since
stock prices could move up as well as down over a short period of time. She also
does not prefer managed investments as they are generally too affected by stockmarket
performance and their growth is slow in nature.
Although less volatile than stocks, she turned down bonds as she heard from her colleagues
that rising interest rates will shrink the price of bonds - although that is something
that she does not really understand.
Current economic turbulence further convince her to be more conservative in order
to weather any possible financial storm. The key question is how safe and effective
is her investment strategy?
Will keeping money in bank accounts or fixed deposits be enough protection for you
and your hard-earned money? There are many people out there with cash in hand doing
exactly the same as Janet. They are afraid to invest in anything and prefer to put
their money in banks. Are they doing the "right" thing?
NO! While interest rates in the country are currently at high levels, and fixed deposits
looks like it could serve as a viable investment alternative, when you consider factors
such as rising costs of living, you will notice that your money in the bank will
be worth less in the future. Higher interest rates also mean inflation and that the
impact of inflation is likely to overshadow the interest rates that are gained. Thus,
the money you store in the bank is not as safe as it appears. A fact not given much
thought by many.
If you had invested RM 10,000 in the bank ten years ago at an average interest rate
of say, 6% your investment would now be worth RM 17,908. A tidy sum you may think
- your investment has nearly doubled in ten years. However, if you factor in an inflation
rate of say, 3.5%, your investment is actually worth RM 13,018 - more than half your
returns were "eaten" by inflation.
You will also find that you will not have enough to maintain your current standard
of living. It is a fact of life that the same bowl of noodles which used to cost
you RM 1.50 ten years ago now costs you RM 2.50. It is more likely for the noodles
to become more expensive in the years to come.
Depending on your risk profile, you should pursue a more aggressive approach to beat
the inflation at least. You should be seeking to shelter your money from being eroded
by inflation, the devil of any economy.
During difficult times, one should not be afraid to invest. Your assets should be
spread out in a balanced manner in order to counter any unexpected sharp volatility.
Remember, you want your money to "work" for you and the best guideline
is to be cautious and look around for alternatives. One should not however be too
eager to take unnecessary risks in the hope of realizing big gains.
Different forms of investments have different characteristics. Table 1 outlines the
characteristices of a few different types of investments. The table should serve
only as a general guide. Investments vary greatly in risk. Regardless of the varying
degree of risks and your personal objectives, you should have one common purpose
- to make your money "work" hard for you.