PERSONAL INVESTMENT PLANNING FOR THE MALAYSIAN INVESTOR CONTENTS Part 1 - Understanding Investments What is an investment?

Types of investments Part II - Financial Planning Assess your own financial situation Diversify your investments Your risk profile Rational thinking Monitor your investments Do's and don't of investing wisely Be mindful of some trading rules

Part 1 - Understanding Investments What is an investment? Many of us think of interest-bearing deposits or fixed deposits when we think of performing the Haj or saving for that down payment for a car or a house. But in today's world, there are several other options available that could make your savings grow or as commonly said, "make your money work for you." Savings in banks generally do not grow far above the inflation rate but possesses the great advantage of being almost risk-free. Investments, on the other hand, when wisely planned can bring higher rates of return but the associated risks are higher than leaving your money in the bank. What then is an investment? An investment is a commitment of funds to one or more assets that will be held over some future time period, in the hope that it will generate more income. The asset could be tangible like real estate properties or non-tangible monetary assets like securities and you would invest in them based on your financial goals and objectives. By investing your money wisely you can enjoy greater returns. Wise investors constantly look for investment opportunities that will make their accumulated money bring higher returns. Let 's say you have managed to save some money every month and now, you have a tidy sum. What do you do with it? How can you make your savings work for you to generate even more income? As you know, RM100 hidden under the pillow remains RM100 ten or twenty or infinity years down the road. Placing your money in the bank may be almost risk-free but both inflation and taxation constantly erode its purchasing power. You should look for alternative ways to spread your investments and plan wisely in order to reap the best returns. Types of investments The Malaysian capital market offers an array of investment products in the form of shares, loan stocks, bonds, warrants and unit trusts. The type of products chosen by an investor to commit his capital depends largely on his financial goals, time frame, and amount of capital available. There are generally two forms of investments. Physical investments comprise real property, plant, machinery and other forms of tangible assets. Financial investments, such as securities are non-tangible monetary assets. Securities are formal documents, which are evidence of financial investments and states the ownership and repayment rights between the parties. Financial investments mainly comprise equity securities and debt securities. Equity securities e.g. shares of a company, represent ownership of the whole or part of a particular company or productive asset. Owners of equity securities, however have no guarantee of any regular return on their investment. This means that the equity investor takes a risk that returns will be made some time in the future.

Debt securities have a fixed interest rate and a specific maturity date. Hence, everything is fixed except the market value, which fluctuates in accordance with the general level of interest rates in the economy. The risks you accept as a debt investor include whether or not the interest payments will be made and the loan repaid. Bonds are examples of debt securities. Hybrid Investments Stocks and Shares Bonds Warrants and Transferable Subscription Rights (TSRs) Forwards, Futures and Options Unit Trusts Advantages of investing in unit trusts Understanding the risks and costs associated with unit trusts Types of unit trusts

Part 2 - Financial Planning Assess your financial situation Before embarking on any investment plan, you need to assess your financial situation, and decide how much you can put aside for investments, in addition to your cash savings. Some questions you could think about might include the following: What is your current income? How much savings do you have? How much can you save each month? What do you need to save for? What are your liquid assets such as savings in cash or shares? What are your fixed assets, such as properties? What loans have you taken out and how much are the interest charges you are paying or principal you are repaying? It is important to honestly assess your current financial situation, know where you are before deciding where you want to go. List down your quantitative data such as your income, the value of your current investments and your qualitative data, such as your preferences and lifestyle objectives. Once your current financial situation is evaluated, you could then set your objectives on whether you wish to save towards owning a home in perhaps three to five years or towards accumulating wealth for retirement. Or perhaps, for your children's tertiary education in five to 10 years time. Diversify your investments In general, avoid putting all your eggs in one basket, as it is difficult to predict the direction of the market. Imagine the unfortunate circumstance of having all your savings tied up in the stock market and needing immediate cash during an economic downturn when the stock market remains stubbornly bearish. Or putting all your money in one sector of the share market e.g. in the property or finance sectors only to have these sectors perform badly while others are booming. It is important to diversify your investments across different asset classes and across different types of investment products as well as different sectors. By diversifying, you will reduce the risk of capital loss and achieve better and more consistent returns over a longer period of time. Diversify your investments to reduce risks, where the non-performance of some investment can be offset by better performing ones. On the other hand, avoid over-diversification as it can also result in marginally diminishing returns. It will also be difficult to monitor your investments if they are too widely spread. Your Risk Profile The type of investments you choose, and how much risk you can take depends very much on your personal risk profile. Whether you can afford to take risks and to what extent is a subjective question. It really depends on whether you are sufficiently secure financially to take advantage of

the investment world, and the extent to which you are personally comfortable in dealing with financial risks. In other words, the amount of risk you should take depends very much on your station in life, your net worth, your present earnings, your earning potential and thefinancial demands made upon you. Marry this against the needs you feel obliged to fulfill and what you hope to achieve in the short-, medium- and long-term plans. Here are some examples of risk profiles and the typical investments matching their personalities and objectives. Investor Profile Highly conservative Typical Investments Government securities, bank backed securities, trustee securities A broader range of income-only investments, debentures, corporate bonds, certain insurance products Ungeared property, growth shares, investment linked trusts (with growth emphasis), international investments Geared property, growth shares, investment linked trusts (with growth emphasis), international investments Options trading, futures, exotics, collectables

Conservative

Middle range

Entrepreneurial

Speculative

The range in the above table is indicative only. To be accurate, other characteristics and factors need to be taken into consideration. Some would disagree with the categories of investments matched to the risk profiles and there is also considerable overlap. Rational thinking Catching the right train at the right time is most important if you want to arrive at the right destination at the right time. However, deciding when to invest is easier said than done and it goes against the human grain not to follow the herd. It takes discipline to overpower human emotions with rational thinking and you must bear in mind that in any investment, there will always be short-term aberrations. You need adequate sustaining power to hold your investments for longer periods of time so that short-term fluctuations can be evened out. Avoid acting on rumours. Very often there is market talk about certain share prices on the rise. Everyone then jumps onto the bandwagon "pushing" the shares. The strong buying causes the price of the share to rise significantly, allowing the parties that started the rumours to unload their shares at a higher price. Can you guess who is left holding the shares at a high price? Check carefully all information received and act only on rational thinking and reasoning.

Monitor your investments A financial plan, no matter how brilliantly conceived and properly implemented, cannot remain static. Changing laws and regulations, movements in the economic environment, the effects of domestic and international markets require constant reviewing of your investments to ensure that existing investing strategies are still relevant to your financial goals and objectives. How often you should review and evaluate the performance of your investments depends on the size and time frame of your investments. It also depends on your investment strategies and on whether you have chosen high-risk or low-risk investments. Evaluating Performance Monitoring your investments is a continuous and dynamic process. You must be aware constantly of shifts in the circumstances and constraints that you are facing, and understand changes in the capital markets and how it relates to your situation. Among others, you should always track the macro-conditions of the country, the performance of the company whose shares you own, in order to determine whether there is a need to restructure your investment. For shares, monitor the performance of the companies by tracking its: Profitability Earnings growth Profit contribution by segments Dividends Gearing Read the company's announcements, shareholders' circulars, annual and interim reports and focus on closing dates of rights, warrants, take-overs, earnings, auditor's report and the directors' interest. You should also attend the Annual General Meeting to find out how the company is managed and to gauge its business propects. Total Income, Income Return and Capital Growth The performance of your investment should be measured by the total income earned. Total income comprises dividend income plus the capital gains upon disposing your investment. To get the percentage returns, divide the total return by the cost of investment and multiply by 100. This concept is important when evaluating how well your investments are performing. Do not consider the dividend income only as a measure of performance. Income return from an investment is the income it produces expressed as a percentage of the market value of the investment. In the case of a share, the income is represented by dividend payments; with debt investments such as bonds, the income is in the form of interest payments. Yields are measured usually over a 12-month period but may be measured over any period. The most commonly used calculation of yield is that found by dividing the income received on an investment over the last 12 months by its current market value. However, you must bear in mind there are other calculations of yield, which may be equally valid and useful.

The capital growth from an investment represents the increase in value of the investment over a period of time. It does not take into account any income received by the investor from that investment. The capital gain or loss is the difference between the sale price or proceeds from the disposal of an investment and its purchase or cost price. Monitoring Unit Trusts For collective investment schemes such as unit trusts, you should also monitor your fund managers in terms of: Performance Strategy Portfolios You can request for information from your fund manager, such as: Performance of relevant investment markets Level of volatility associated with return Rate of inflation Performance of other similar fund managers Strategies employed over recent periods You should also bear in mind that the investment outcome is subject to a large number of random factors and short-term performance data may not accurately assess the fund manager's investment skills. Fund managers are reviewed on the services they provide, namely performance and reporting. Have your expectations of returns been met? Is the fund manager doing what is expected e.g. buying stocks in accordance with laid-out strategies and mandate? To begin with make sure you are dealing with authorised representatives and agents. Do's and don'ts of investing wisely Don't buy investments offered through unsolicited telephone calls or let salespeople pressurise you into buying investments. Ask for information in writing before you decide. Don't invest in anything you don't understand. Seek professional advice. Don't assume that the person giving you advice is impartial Don't make the cheque payable to the adviser Don't invest until you have read the prospectus and all other information regarding the investment. Do be skeptical of promises of quick profits or unusually high returns. High returns usually mean high risk. Do consider your attitude to risk. Different investment carry different degrees of risk. Can you hold should your investment fall in the short-term?

Do consider what you are trying to achieve. Are you trying to keep pace with inflation or aiming for quick growth? How long can you afford to have your money tied up in the investment. Do look at the charges. Are they reasonable? Are they comparable to what others are charging? Do remember that past investment performance is no guarantee of future returns. Do remember that investing with borrowed money could carry higher risks Do request for receipts and keep all paperwork and correspondence about your investments in a safe place. Do keep an eye on your investments. Be mindful of some trading rules Buying and Selling Shares Complaints received by the Securities Commission reveal that many investors are unaware of the Fixed Delivery and Settlement System (FDSS) Rules. When these rules were first established, it was for the purpose of standardising the period of delivery of scrips and settlement of prices. Traditionally shares were held in paper form known as "certificates" or "scrips". A certificate or scrip was a piece of paper which was the evidence that you were the owner of the shares. With your name on the share certificate or scrip, you were recognised as a shareholder and therefore entitled to vote at the company's annual general meeting and to receive the company's reports. However, today, under the current Central Depository System (CDS), the delivery of shares is now conducted through computerised book entry, and there is no longer any physical movement of scrips. Instead you will receive statements from time to time, similar to bank statements, which tells you the number and type of shares you are holding. The computerised system makes the delivery and clearing of shares more efficient and convenient. Opening a CDS account Before you can trade in the shares, you have to open a CDS account with a licensed stockbroking company, which is an authorised depository agent appointed by the CDS. You will also need to open a trading account with the stockbroking company. Only then can you buy or sell shares through the dealer's representative or remisier. Buying a share The purchase of a share begins when your buying order is matched in the market. A buying order is an instruction given by a client to a remisier to purchase a share at a particular price. The date on which the buying order is matched is known as T. Within five days from T, or from T to T+5 you will have to pay the price of the share to the stockbroking company. Settlement or completion of the transaction occurs only when securities and corresponding funds are credited to the appropriate accounts. If you fail to pay for your share by T+5, the stockbroking company will institute a selling-out on T+6. This means the stockbroking company will sell of the share you have failed to pay for and

you will have to bear whatever loss is incurred by the transaction. If a profit is made, it will also be accrued to you but basically, you have no control over the sale of the share. Selling a share Similarly, when you instruct your remisier to sell your share at a particular price, the date of contract, T begins when the transaction is matched. By T+5, you should receive your payment from selling the share, from the stockbroking company. If you do not have the share or sufficient number of the shares you sold, the Kuala Lumpur Stock Exchange (KLSE) will institute an "automatic buying-in" on T+5. This means it will offer to buy the share from the market at a higher price, and you will have to pay for the difference in price between what you have sold and what is bought from the market. Buying on Margin Margin trading means borrowing capital from a broker in order to buy more securities. Undoubtedly credit provides leverage to increase potential profit but it must be adequately controlled and constantly monitored. If the equity in a margin account falls below the required maintenance level, the investor will get a call from the broker. If the investor fails to respond, the broker may sell the securities from the account to pay off enough of the loan to restore the percentage margin. Be mindful of trappings incidental to margin trading such as interest payments and the collateralised nature of the transaction.