Inquiry Posting - Advise To First Time Investor

The purpose of this article is to provide guidance to first time investor.

This guideline is useful as well for investor, who is working on restructuring current investment plan and strategy.

First time investor is advice not to jump into actual investment until a detail investment plan and strategy is formulated.

First time investor should follow the steps below:

☺ Step 1 : Formulate an investment plan
☺ Step 2 : Formulate investment and asset allocation strategy
☺ Step 3 : Develop procedure to monitor investment progress
☺ Step 4 : Review investment plan to incorporate latest changes in personnel objective and constraints


Step 1 : Formulate an investment plan

Investors are advice to formulate an investment plan by establishing risk and return objectives, personnel constraints and investment goal.

Investors should get started by determining

☺ Current income and projection of future income
☺ Taxes and statutory contribution
☺ Personnel or family spending plan
☺ Major item spending plan
☺ Fund available monthly for investment purposes
☺ Investment goal
☺ Risk tolerance (low , average or high)

Risk tolerance measures the capability to accept risk, is a function of both an individual willingness and ability to take risk.

Let’s assume Individual A, with sufficient insurance and cash reserve, with personnel profile below:

☺ Age 25
☺ Current income at $30,000 and expected to grow at 7% per year
☺ Taxes and statutory contribution at 20% of gross salary.
☺ 30% of gross salary to support personnel daily expenses
☺ Major item spending plan
☻ Buy a car today at $50,000. Down payment of $5,000 with annual installment of $6,500 for 10 years. Plan to change car every 10 years. Resale value at $15,000
☻ Wedding and honeymoon expenses - $30,000. By end of year 5.
☻ Buy new apartment at RM300,000 in year 5. Down payment $30,000, annual installment of $27,000. Plan to stay in the same house until retire.
☻ Children education fees - $200,000 per year, for 5 years , from year 26 to year 30.
☺ Surplus from income will be invested.
☺ Investment goal is to achieve $2,000,000 saving by age of 55.


Table below summarized income , expenses and saving available for investment.

Step 2 : Formulate investment and asset allocation strategy

Once investment plan is established , next step is to determine required rate of return to achieve investment goal and asset allocation strategy.

Table below summarized accumulated investment fund reference to different rate of return.

To achieve investment goal of $2,000,000 by end of year 30, the investor required rate of return is 6.86% compounded annually.

Once required rate of return is established, next action is to establish asset allocation strategy.

Assuming Investor A asset classes covers Certificate of Deposit at 3% annual return and Equity at 15% annual return. His asset allocation strategy will be 67.83% allocation in Certificate of Deposit and 32.17% in Equity.


Expected return = 67.83% x 3% + 32.17% x 15% = 6.86%


Investor A will then assess his risk tolerance against asset allocation decision.

If his risk tolerance is higher and able to accept higher risk by investing greater proportion in equity, he might able to accumulate higher investment fund by end of year 30 or spending more to improve life style while maintaining investment goal of $2,000,000 by end of year 30.

If his risk tolerance is low and not able to accept 32.17% investment in equity, he need to either reduce spending to free out more saving for investment or reduce his investment goal by end of year 30.

[ Remarks : Risk Tolerance will be share in separate article ]

Let’s assume that individual A with moderate risk tolerance and able to accept the risk of allocating 32.17% in equity.


Step 3 : Develop procedure to monitor investment progress

Step 1 and step 2 represent planning stages and now investors will move into execution stage.

Investors need to assess personnel financial and investment knowhow to determine either 15% required rate of return in equity investment is achievable.

If confident level is low , investor should develop a learning plan toward enhancing financial and investment knowhow , specifying a timeline ( recommendation is not more than 1 year ) and invest only in Certificate of Deposit until ready to invest in equity. This might require investors to increase allocation to equity at later stage to compensate for lower grow in early years.

If confident level is high, investors should proceed with equity investment while in parallel, continue to enhance financial and investment knowhow to increase probability of success.

As financial market is dynamic , the investment process is on going and required regular monitoring and review.

Investors are required to establish a format to monitor each indicator below and incorporated into investment plan.

☺ Actual income versus projected income
☺ Actual versus projected taxes and statutory contribution
☺ Actual versus projected personnel or family spending plan
☺ Actual versus projected major item spending
☺ Actual versus projected fund available monthly for investment purposes
☺ Actual versus projected investment goal
☺ Actual versus projected rate of return from investment


Formulate action plan such as reduce expenses , increase allocation to equity to boost required rate of return when investment goal is fall behind projection.

If investment fund is way ahead of return projected in investment plan , investors can decide to reduce allocation to equity investment, increase spending on major item , taking a luxury vacation or stay with the plan for early retirement.


Step 4 : Review investment plan to incorporate latest changes in personnel objective and constraints

In our life, our objective and constraints will change accordingly. This changes need to be incorporated into investment plan.

Few examples :

☺ An investor received a gift of $250,000 from parent will reduce liquidity constraint. Thus, able to accept higher risk.
☺ An investor who loss his job during economy crisis might face short term liquidity constraint and required to alter his investment plan to provide short term liquidity.
☺ An individual who decided to retire earlier; entering spending phase earlier than expected might decided to reduce allocation to equity or shifting investment from high beta stock to average beta stock.

Inquiry Posting : An introduction to Real Estate Investment 1

Real estate is usually considered to be buildings and buildable land, including offices, industrial warehouses, residential buildings, retail space and residential houses and apartments.

Real estate is a form of tangible asset, one that can be touched and seen, as opposed to financial claims that are recorded as pieces of paper.

Real estate investment represents investment in an immovable asset – land and the permanently attached building and improvement to it.

Real estate can be invested privately or through pooling of funds, such as in partnership or Real Estate Investment Trust (REIT)


Why invest in Real Estate?

Potential higher return through leverage. Leverage is the use of borrowed money to increase the rate of return earned from real estate investment. In average, real estate investors have been able to borrow up to 90 percent of the value of any property owned or acquired. Leverage can be advantageous when the investment earns a higher rate of return than the interest on the borrowed money.
Leverage also enables an investor to control more property with a given amount of money. An investor can leverage by stretching out the repayment schedule or by refinancing. By maintaining high leverage, an investor may pyramid investment more quickly. Pyramiding is controlling additional property through reinvestment, refinancing and exchanging. The objective is to control the maximum value in property with the least resources. Needless to say, pyramiding carries a high risk of a total wipe-out during a recession.


Purchasing power protection. Real estate usually offers protection against inflation. Whereas most capital assets tend to lose value in terms of purchasing power or constant dollars in inflationary periods, adequately improved realty, especially apartments, shopping centers and selected commercial properties, tend to gain value as measured in constant dollars. In the absent of rent and price controls , real property, like a ship upon ocean waters, floats above its purchasing power constant dollar line irrespective of depth or rise in the level of prices. For this real-value holding power to be true of a specific parcel of income real estate, the property must be well located, have rentals that can be adjusted periodically, and not be subject to sudden sharp increases in operating costs.

Pride of ownership. Many real estate investors gain identity by being” in the game” or by being “shrewd operators”. Some investors also realize great satisfaction from owning something tangible that can be touched, felt and shown to friends and relatives.

Control. The immediate and direct control of an owner over realty enables the owner or an agent to make continuing decisions about the property as a financial asset and as a productive property. This control enables the investors to manage property to meet personal goals, whether they are to manage property to meet personal goals, weather they are to maintain the property for maximum rate of return. Many owners experience a great sense of power and independence in this control.

Entrepreneurial Profit. A last important advantage is that added value may be realized by building or rehabilitating a property. Many investors also developed property. Other investors combine real estate investing with brokerage or property management.


Key factors to consider in real estate investments

☺ Planning and zoning effects – such as establishment of Specific Economic Zone which increases demand for lands and properties.

☺ Infrastructure improvement such as extending roads, extending LRT/MRT station or better electricity supply quality will increase demand at suburban area.

☺ Number of households and income levels. Higher number of households and with increasing income will increase the demand for property.

☺ Degree of local economy activities where location with active economy activities will attract more resident to “migrate” closer to work place which increases demand for properties.

☺ Prestige consideration – Property at location which considers as higher class residential area or develops by well known developer will potential increase the demand and price appreciation of the properties.

☺ Conveniences – properties located close to transportation terminal such as LRT/MRT station, shopping mall / retail stores and school will potentially faces increases in demand.

☺ Tax consideration – Return from investing in raw land will be in the form of capital appreciation whereas for retails spaces will be from both rental income and capital appreciation. Rental income is subjected to taxes while capital appreciation might not.

☺ Facilities and Management Services – Main consideration for service apartment and condominium. High quality management, adequate facilities with reasonable management fees will increase the demand and price appreciation of the property.

☺ Quality of building which influences long term value of the property. Lower quality building with higher wear and tear will increases operating cost in the future, which reduces the value of the building.