Time to splurge or save?

By RASHVINJEET S.BEDI
sunday@thestar.com.my

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More companies are making profits this year and rewarding their employees with bonuses and salary adjustments. Sunday Star speaks to financial experts who say that apart from pampering oneself, it’s important to save for a rainy day.

IT’S bonus time! After a “barren” 2009, N. Sheila is looking forward to the one month bonus that has been bandied about through her company’s grapevines.

In the past, the 28-year-old engineer would splurge on a new wardrobe but this year, she intends to settle her credit card debts first.

“The money will come in handy,” she says, adding that recent hard times have taught her the value of money. If there’s extra cash to spare, she intends to spend it on a short holiday in Bali next year instead of a more expensive destination.

According to the Malaysian Employers Federation (MEF), an estimated 4.68 million private sector employees are due for bonuses over the next few weeks, while 4.4 million workers will benefit from salary increments.

Based on MEF’s latest survey, companies will pay up to an average of two-month bonuses.

“Generally speaking, things are looking much brighter,” MEF executive director Shamsuddin Bardan says.

Firms are doing much better this time around, he notes, referring to the economy that was previously affected by the global financial crisis.

Shamsuddin says their survey shows that the capacity for companies to pay out yearly bonuses has increased from 50% in 2009 to 80% this year.

Credit Counselling and Debt Management Agency (AKPK) CEO Akwal Sultan points out that bonuses given by companies are either contractual or performance-based, adding that the bulk will be based on the latter.

Akwal advises those who get contractual bonuses to plan their spending early on.

Rajen Devadason, a Securities Commission-licensed financial planner with MAAKL Mutual Bhd, believes that not all bonuses will be paid out this year-end, but at various points throughout 2011.

Regardless of when these bonuses are paid out, Devadason says it is imperative that working adults base their household budgets and cash flow projections on confirmed monthly income.

He believes the average Malaysian may end up squandering his or her bonus money.

“Three months after receiving the bonus, they will find it difficult to tell how exactly their lives improved.

“On the other hand, there are those who will wisely use the extra money to strike a balance between enjoying some short-term benefits and securing greater long-term financial strength through judicious saving and investing,” he adds.

Devadason says it would be unwise for people to use their year-end bonus to make up for cash shortfalls during the year.

Money that flows into their bank accounts in the form of contractual and especially ex-gratia bonuses should be treated with extra care and respect, as it will allow for significant long-term financial improvement.

1. Settle high-interest debts
Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui’s advice is for all credit card debts to be settled first because of the high interest rates for payments that range from 13% to 18%.
“It is not easy to get the same rates on any investment,” he adds.

Akwal concurs, saying that unpaid credit cards cause debts of individuals, especially youngsters, to pile up. He says people will start paying the minimum amount, leading to higher compounding effects.

Once credit card payments are paid off, we should look at settling personal and housing loans so that principal and daily interest are lowered, he adds.

2. Money in reserve
The general rule of thumb is to always have at least six months of living expenses in reserves, says Yap. For instance, if your cost of living is RM3,000 monthly, you should have at least a RM18,000 buffer.

“If there is an emergency, you will still have cash and won’t have to sell anything off,” Yap explains.
Akwal says that these savings could be in the form of saving accounts, unit trusts or even a gold investment account.

“The important thing is that you can withdraw quickly in an emergency.”
MIDF Research’s chief economist Anthony Dass, meanwhile, suggests a portion or 30% of the extra cash inflow be saved. One can also invest in inflation hedging instruments, given the expectation of higher inflation in 2011.

3. Treat yourself
Akwal believes everyone deserves a treat and depending on how much you get, this could be in the form of a holiday or a meal.

“This will be the last sum you get in the year and some part of it should be used to pamper yourself,” he says.
“If you can’t afford that overseas holiday, then bring your family to our local destinations. They are just as beautiful, and it will support our tourism industry.”

4. Give to charity
If you think times are hard, then spare a thought for charitable organisations that usually work on tight budgets. In uncertain times, individuals and companies generally cut down donations, making it more difficult for charities to operate.

In Malaysia, there are many charities and NGOs that require assistance in cash and kind.
“It is good for the soul to be generous towards those less fortunate. Well-chosen charities should be selected to receive anything between 1-10%, of the net bonus,” Devadason suggests.

5. Repairs
That car of yours badly needs a touch-up? Or your house pipes are leaking? This would be the best time to do those repairs says Akwal.

6. Understand your investment
Those without investing experience or time should consult a professional financial adviser licensed by the Securities Commission or Bank Negara.

Whether you plan on investing in the property market, stock market, unit trusts, gold futures, you should always know how it works, says Yap.

“The most important thing is that you know how the investment operates and the risks involved.”

Yap points out that there are some risky get-rich-quick schemes that promise high returns where the methods of how the income is generated is not explained.

“Be cautious, especially if the returns are high,” he says, adding that many people have been stuck in quandaries despite the constant reminders on such schemes.

Akwal’s advice is to invest in something familiar and not because someone tells you to invest in it.
“Many people have lost money this way,” he cautions.

7. Investment
The golden rule of investing is to never put all eggs in one basket, says Akwal.
“People should diversify their investments – whether it’s in the stock market, investing in property or unit trusts.”

“For instance, if investing in the stock market, spread out the investments into different portfolios such as agriculture, plantation and the construction sectors.” Anthony also suggests investments in the form of forced savings like EPF, insurance, unit trust, equities or even properties to take advantage of assets inflation.

Devadason says it would make sense to flow a portion of your bonus into short-term bank fixed deposits of say one-month on auto-renewal, to catch any potential overnight policy rate (OPR) hikes by Bank Negara in the coming year.

Another portion, he adds, can be used as ad-hoc injection into existing equity unit trust funds (of good pedigree), which might currently show losses to significantly lower the average cost of your units and increase the chances of making larger percentage gains in the future when greater equity recovery kicks in.

More sophisticated investors can broaden the asset class exposure of their personal retirement portfolios by adding international equity funds to diversify away from excessive Malaysia-centric equity exposure.
One can also include carefully chosen money market and bond funds to add stability to those vital long-term portfolios.

“Those willing to do additional homework might consider increasing both agricultural and precious metals exposure in their portfolios,” he says.

Fallacy of insurance

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INSURANCE has been misunderstood for a long time and even today, many people still have the wrong notion.

A lot of pain and frustration can be avoided if more people have a clearer understanding of it.

To begin with, insurance does not offer any protection although the word is popularly used to sell insurance. It can only pay compensation to the unfortunate insured party.

It works by getting a large number of people to participate in a huge fund managed by an insurance company.
For most of the contributors, there is no monetary return as they are fortunate not to suffer any harm to themselves or their properties.

For the minority who are not so lucky, the compensation paid out to them is much more than the premiums they paid. It is an “odd” case of the winners losing their money and the losers gaining it.

However, compensation can never replace what was lost and very often the claimants would receive less than they hoped for.

The insured must always bear in mind that it is not practical for insurers to provide full and total coverage to keep the premiums at an affordable level.

Life insurance policies with just the basic cover popularly known as term assurance have proven to be unpopular, other than for mortgage cover.

As such, the majority of life insurance policies are those with loaded premiums, which allow insurance companies to invest and eventually return to the insured, more than what they have paid.

It is important to note that insurance companies must remain profitable, otherwise their operation is not sustainable.

The public should not be lured by low premiums or high returns as everything would be lost should an insurance company collapse.

From time to time, we come across complaints by senior citizens that they are not eligible to buy insurance and have their life savings wiped out by expensive medical care.

We must realise that life and medical insurance can only be bought with our health and paid by our wealth.
For those who continue to scorn at the quality of our public hospitals or find queuing unbearable; get your insurance cover now before it gets too expensive or beyond reach.

However, having an insurance company to underwrite your risks does not necessarily mean there are no further monetary risks to worry about.

It would be wise to read and adhere to the fine print as the insured may not be fully covered for all types of contingencies.

The best form of protection is to be careful, lead a healthy lifestyle and contribute to make this world a safer place.

Y.S. CHAN,
Kuala Lumpur.

Today's grads create their own jobs

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By Hannah Seligson (China Daily)
Updated: 2010-12-19 08:47

Successful young start-ups with no offices, addresses or expertise.

Five years ago, after graduating from college with a film degree and thousands of dollars in student loans, Scott Gerber moved back in with his parents in New York City. He then took out more loans to start a new-media and technology company, but it went broke in 2006.

"It made me feel demoralized and humiliated," he says.

So Mr. Gerber considered his career options. Using his last $700, he started another company.

With Sizzle It, Mr. Gerber vowed to find a niche, reduce overhead and generally be more frugal. The company, which specializes in short promotional videos, was profitable the first year, he says.

Mr. Gerber, now 27, isn't a millionaire, but he has paid off his loans and rents his own apartment. In October, he started the Young Entrepreneur Council "to create a shift from a résumé-driven society to one where people create their own jobs," he says. "The jobs are going to come from the entrepreneurial level.

The council consists of 80-plus business owners across America, ages 17 to 33. Members include Scott Becker, 23, co-founder of Invite Media, an advertising technology firm recently acquired by a Google unit; and Aaron Patzer, the 30-year-old who sold Mint.com to Intuit for $170 million.

The council serves as a help desk and mentoring hotline for individual entrepreneurs. Each month a group of council members will answer 30 to 40 of their questions in business publications like The Wall Street Journal and American Express Open Forum, and on dozens of small business Web sites.

Council members assert that young people can start businesses even if they have little or no money or experience. But roughly half of all new businesses fail within the first five years, according to United States federal data. And the entrepreneurial life is notoriously filled with risks, stresses and sacrifices.

But American unemployment is at 9.8 percent. According to the National Association of Colleges and Employers, only 24.4 percent of 2010 graduates who applied for a job had one waiting for them after graduation (up from 19.7 percent in 2009). The lesson may be that entrepreneurship can be a viable career path, not a renegade choice.

"It's not a pure dichotomy anymore that entrepreneurship is risky and other jobs are safe, so why not do what I love?" says Windsor Hanger, 22, who co-founded HerCampus.com, an online magazine.

Thanks to the Internet, there are fewer upfront costs for entrepreneurs, who can build a Web site, host conference calls, create slide presentations, and host live meetings and Web seminars - all with very little capital.

For $300 a year, Mr. Gerber rented an address from ManhattanVirtual­Office.com, which forwards mail from a recognizable address. He says it saved him $100,000 in rent and gave Sizzle It credibility; his clients now include Procter & Gamble and the Gap. He does most of his work at home and in coffee shops and shared work spaces.

Open-source software can reduce or eliminate the need for tech support.

"All you need today is a laptop, patience and willingness," says Shama Kabani, 25, a council member and founder of Marketing Zen, a digital marketing firm in Dallas, Texas, with yearly revenue in the seven figures. Ms. Kabani hired all of her 24 employees online; 15 are in the Philippines. "I've never met any of them," she says.

But start-ups do need some financing. So Mr. Gerber, whose message is "No one will give you money," is also starting the Gen Y Fund, from which young entrepreneurs can seek funding.

The goal is not to find the next Facebook or sexy Web start-up, he says; instead, it will look for practicable, marketable business ideas. In fact, a favorite phrase of his is "boring is better.

Mr. Gerber has never taken a business or economics class. "I e-mailed people in my circle and figured who knew what I needed to know," he said.

Lack of experience can be an asset. When Ms. Kabani started Marketing Zen, she tried to hide her age. "Then one of my clients told me he hired me because I was 23. He wanted someone who spoke digital as a first language.

Ms. Hanger says being young helps attract advertisers like New Balance and Juicy Couture to HerCampus.com, which recently started turning a profit.

For many of these entrepreneurs, success didn't happen overnight. It took Eric Bahn, 29, another council member, several years to get his company, BeatTheGMAT.com, a community for business school applicants, off the ground. Now it generates close to seven figures in revenue.

Ben Brinckerhoff, 28, started Devver.net, an online tool to test computer software in 2008. It folded last spring.

"There are very real cons to starting a company," he said. "It can hurt your ego, and financially it's a big hit.

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The perils of the American dream

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HOUSING INVESTMENTS
By THEAN LEE CHENG

THERE was this tagline The American Dream is truly attainable! in a local newspaper advertisement marketing US properties.

The advertisement highlighted earning an annual rental income with a three-bedroom detached house of up to 20%, which in Malaysia, would be considered a bungalow.

The nice house and attractive proposition aside, is that American dream really attainable? And if it is, is it sustainable?

If it were, the US government would not need to pump nearly US$1 trillion into the economy and neither would US President Barrack Obama speak to CEOs to seek their help to ease unemployment which is running at more than 9%.

Malaysia's unemployment rate is 3.2%, which is technically considered as full employment. But this piece is not about the American economy, or the Malaysian economy.

It's about the pursuit of the American dream which Hollywood and savvy marketing have enticed us with over the years. That American dream constitues a nice house in a middle class neighbourhood, sons who drive to college, daughters who are trendily dressed in class.

They take annual holidays and are up to date with the latest trends and lifestyle. They go after the latest gadgets that technology has spawned. Sounds familiar? But that lifestyle has also incurred high household debts which in some cases has resulted in foreclosures in the United States.

The situation in United States today is due to choices made years ago. It did not begin with Lehman Brothers fall in 2008, it started way before because of materialism and consumerism.

The Americans have been so good at marketing and advertising, they have made consumerism and marketing into an art and the Americans bought into it.

They are selling that same dream to Asia and other parts of the world just as they have very successfully sold us the various gadgets that technology has spawn.

Out of a population of 28 million, Malaysia has a working class of 12.5 million, of which two million are foreign workers. Of the remaining 10.5 million, 1.5 million are in the public sector.

Only 5.5 million are formally employed in the private sector. The remaining 3.5 million are making a living as traders.

Of late, the authorities and the press have been talking about being in the middle income trap. The middle income group has a monthly salary of between RM2,000 and RM10,000.

Most of us belong to this group whose profile is a house, or several houses, in the Klang Valley and the major towns of Malaysia, with school going children in private or overseas schools and universities. It also includes young graduates who earn slightly less than RM2,000 but who within a short time, move from lower income bracket to the lower middle income group.

This middle income group comprises about half of the 12.5 million working population, who are in a way pursuing that American or Malaysian dream.

The resulting trend is that house buyers no longer seek to buy a house, but to buy a lifestyle.

And developers prefer to build lifestyle homes, because the margin is greater. Lifestyle housing also gives them the added edge of branding themselves.

If it is an apartment, the bigger the better. Buying a house is no longer enough, one has to buy a lifestyle house with designer fittings and sanitary ware.

Education for the children is a premium. Technologically advanced gadgets and branded attire completes the picture.

In short, technically we are geographically in a different location but the people and that American dream remains the same.

Some 30 to 40 years ago, the manufacturing sector was the mainstay of the American economy. It now accounts for 12% of US jobs. Today, services, creation and innovation accounts for a large chunk of it.

In Malaysia, manufacturing used to account for about 35% of gross domestic product (GDP). Manufacturers used to be the largest employers.

Today, contribution from that sector has dropped to 29% of GDP, giving employment to a third of the 5.5 million private sector salaried workers.

The service sector is expected to be the largest employer this year, constituting more than half of the total employment, followed by manufacturing.

For years, the problem in the United States was hidden by cheap debt. We have that today in Malaysia. Banks are pushing attractive mortgage terms. Another way to finance that lifestyle is to leach from the Employees' Provident Fund to finance home mortgages, children's overseas education and private investments in unit trust.

And so the baby boomers (those born in the the 1950s and 1960s) have to postpone their retirement because banks are now approving loans up to the age of 65 or 70.

Easy debt has become a millstone in latter years. Come 2011, house buyers who purchased properties with the 5/95 scheme and variations of it, will be getting the keys to their properties. They paid a downpayment of only 5% of their property price in the first quarter of 2009.

They will now have to cough out the other 95%. Americans are slowly relinquishing that American dream. We are aspiring towards it. Is the American or Malaysian dream sustainable? Food for thought.

Like other middle class wage earner, assistant news editor Thean Lee Cheng is herself a victim of the American dream.

Good year for Malaysia stock market

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By YVONNE TAN
yvonne@thestar.com.my

It has been a good run for the stock market this year with the key benchmark index reaching a record high of 1,528 points on Nov 10.

Year-to-date, the FBM KLCI has yielded a return of about 29% in US dollar terms (18% for the index alone), outperforming the Dow Jones Industrial Average and some Asian markets including Japan, Hong Kong and Singapore.

“It has been another good year for Bursa even after a strong rebound in 2009,” says Danny Wong, chief executive officer at Areca Capital Sdn Bhd

Bursa Malaysia emerged as the fourth best performing Asian market in US dollar terms, while in local currency terms, the market ranked fifth in Asia.

“Compared to the start of the year when most market watchers were predicting the local index to close somewhere between 1,350 and1,450 points, the closing market level for 2010 (1,509.10 as at Dec 15) is definitely better than expected,” says Pankaj Kumar, chief investment officer at Kurnia Insurance (M) Bhd.

For foreign fund managers, the market’s gain of close to 18% this year was on top of the 11% rise of the ringgit itself during the course of the year and hence bumping up their returns for the year, he adds.

Market sentiment really picked up only in the middle of the year, driven by strong newsflow including the announcement of the Economic Transformation Programme (ETP) which was announced on Sept 21.

The ETP is a major economic programme encompassing mega projects and which is expected to propel the nation from a middle-income nation to a high-income one by 2020.

“That generated enough buzz and gave investors a reason to buy into the market as it could create a sorely needed new domestic investment cycle,” says Gan Eng Peng, head of equities at HwangDBS Investment Management Bhd.

“Secondly, political opposition faded (by mid-year), and with it a more stabilised view by domestic funds.
Thirdly, the return of foreign funds, attracted by the strong currency, decent economic outlook and the fashionable South-East Asian investment theme of the moment, this drove our market to new highs towards year-end,” Gan says.

Quantitative easing, which is basically the act of printing money to boost ailing economies, by the United States helped flood Asian markets this year as the money found its way into this part of the world in search of higher returns.

The latest “quantitative easing” by the Federal Reserve, also known as the QE2, will create US$600bil in greenback cash, likely to make their way here as well given the anaemic growth trend in Western economies.
It will add to the US$1.7bil the Fed injected into the economy between 2008 and 2009 under the first QE.

A lot of concerns have been raised as to what will happen when economic fundamentals change and the “hot money” is pulled back from Asian markets.

However, Prime Minister Datuk Seri Najib Tun Razak said recently the flow of “hot money’’ into Malaysia had not reached an alarming rate and that the central bank had enough financial instruments to manage risks.

Stock performance

Based on information from Bloomberg, the best-performing member of the 30 index-linked counters this year up until Dec 15 in terms of price appreciation is RHB Capital Bhd.

The stock has appreciated by 60.19%, outperforming the Finance Index which inched up 25% in the same period.

Not surprising, being a financial group and therefore a proxy to the recovering economy.

According to a recent Bloomberg report, RHB Cap’s RHB Investment Bank overtook CIMB Group Holdings Bhd to become the No. 1 adviser on acquisitions of Malaysian companies for the first time since at least 2005, working on US$11.5bil of deals.

Axiata Group Bhd is second on the list, with the stock appreciating some 55% .

Axiata has telecommunication operations in the less mature mobile markets of Sri Lanka and Bangladesh and has been benefiting from a higher number of subscribers in these countries.

In contrast, Maxis Bhd which only houses its Malaysian operations made it to the top ten list of worst performing index-linked counters.

The stock has shed 1.86% from the beginning of the year until Dec 15.

Genting Bhd was third on the list, appreciating 50.1% as it enjoyed healthy contributions from its Singapore operations.

Gamuda, which is a frontrunner for the massive RM36bil mass rapid transit project, also made it to the top ten performing stocks, ending the year more than 44% higher than at the beginning.

Also on the top ten list are the two biggest banks in the country – CIMB, whose stock price appreciated some 37% and Malayan Banking Bhd, up 24%, as well as another financial group AMMB Holdings Bhd which added 33%.

Completing the list are PLUS Expressways Bhd which was up 34% following the proposed RM23bil disposal of its business to UEM Group and the Employees Provident Fund, Kuala Lumpur Kepong Bhd, a pure plantation play and beneficiary of steady crude palm oil prices – which added 29% and Petronas Dagangan Bhd, which went up 39%, thanks to its market leadership share.

Some of the other worst-performing index-linked counters this year included Sime Darby Bhd which lost more than 3.5%, no thanks to its RM2.1bil losses it suffered due to mismanagement and wrongdoings at its energy and utilities segment, and Malaysia Airlines which shed 9.64%.

The national carrier reported losses for its second quarter this year following a net profit of RM310mil, the quarter earlier due to paper loss from derivative trading stemming from its hedging policy.

However, it reversed its losses in the third quarter, due to a derivative gain.