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Striving for good education requires time and money. Todays newborns may conservatively
spend as much as over RM200,000 per year on tuition fees alone ten years from now.
Fortunately, there are many options available for parents to grow their money and
ensure that their children's education costs are adequately covered.
Considering the complexity of financial markets, one needs patience. Investment management
is a continuous process whereby proper analysis of ones investment profile and goals
basically determines the success of any plan.
To be able to provide for your children when the time comes, parents should not
only save but invest. What is the difference between savings and investment? Savings
including money in your bank or simply holding cash in hand will not grow your money
over time. However investments products such as equities offer long-term growth necessary
to overcome the impact of inflation and tax.
The stability and interest rates offered by banks for your fixed deposits are
variable. Your money will actually shrink in value over time due to the adverse impact
of inflation. Do not be surprised if the money that you put in the savings account
20 years ago is insufficient even to pay for the college deposit let alone money
for education.
You would be fooling yourself if you do not account for real inflation and taxes
that you have to pay. Traditionally we think of inflation as the requirement to pay
extra because the price rises.
What in fact really happens is the Ringgit we have today does not buy what did years
ago.
To achieve your education goal, you basically need to go back to asset allocation
- a process of committing money to the various investment mediums such as stocks,
bonds, property, cash, commodities, collectibles, rather than picking individual
securities. How much you should hold in stocks, cash or others? A conservative individual
may favor a mix of 60 percent in fixed-income instruments and 40 percent in stocks.
Today the asset allocation decision is far more complex than simply selecting traditional
classes such as stocks, bonds, or cash. We have seen the emergence of different types
of investments. Clearly, each will have its advantages and disadvantages- different
risk-reward and correlation ratios.
Sophisticated investors are increasingly turning to asset allocation. The trend is
expected to grow over the years as more investors will realize the benefits - attractive
returns over the long-term with minimized risks.
Putting the asset classes together is not an easy task. There are a lot of factors
to consider and different stages to follow before kicking off the plan. The most
important thing is not to delay - start at once. Realize the magic of "compound
interest".
Try to determine where and what type of college or university will your children
likely be attending. This will allow you to estimate the cost. Work out how much
you need and the time left for you to get the money. Decide how much you can set
aside as the initial investment. Have you saved anything at all?
Set aside some amount to save on a regular basis. Pick investments that will likely
achieve your target - last but not least - selection of investments. When you have
made a model portfolio, test it for a period of time and review if necessary.
Wong aims to achieve a savings of RM100,000 ten years from now for his daugtherís
education. If he starts off with an initial investment of RM10,000, sets aside RM5,000
each year, with a forecast return of 10% per annum (based on his model portfolio),
he will likely achieve the goal at year 10.
Wong's model portfolio consists of 30% in managed funds, 20% in cash/fixed deposits,
10% in bonds, and the remaining in direct investments in both local and foreign stocks
for further diversification. Over a 10-year period, his money will grow more than
what he expected.
Table 1. Growth of Wong's Investments
|
Year
|
Initial
Investment
|
Annual
Investment
|
Total
Investment
|
Total Returns
on Capital
|
|
1
|
10,000
|
5,000
|
15,000
|
16,500
|
|
2
|
16,500
|
5,000
|
21,500
|
23,650
|
|
3
|
23,650
|
5,000
|
28,650
|
31,515
|
|
4
|
31,515
|
5,000
|
36,515
|
40,167
|
|
5
|
40,167
|
5,000
|
45,167
|
49,683
|
|
6
|
49,683
|
5,000
|
54,683
|
60,151
|
|
7
|
61,151
|
5,000
|
65,151
|
71,667
|
|
8
|
71,667
|
5,000
|
76,667
|
84,333
|
|
9
|
84,333
|
5,000
|
89,333
|
98,267
|
|
10
|
98,267
|
5,000
|
103,267
|
113,593
|
Source: Normandy Research
Clearly, deciding what and where to invest is a critical factor. A portfolio
may be a model for one but not for another. Some prefer a more conservative approach
while others may want higher returns which in turn attracts higher risk. Investors
will have to modify their portfolios to meet their objectives.
The approach should be to invest for high returns during the early years. As the
time for college approaches, reduce the risk element in the portfolio. Basically,
one should differentiate between aggressive and conservative strategies.
Overall, systematic planning, long-term commitment and discipline are required
to ensure a successful outcome. Take a long-term view especially during times of
market turmoil. It is not wise to adopt a trading strategy in the hope of reaping
fast profits.
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