Can U Answer Three Simple Finance Questions?

Roughly half of the world can’t answer these three questions correctly:


1.  Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?
A) more than $102
B) exactly $102
C) less than $102

2.  Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy
A) more than
B) exactly the same as
C) less than today with the money in this account?

3.  Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
A) true
B) false


Even worse – 70% of Americans & 73% of Japanese can’t answer all three questions correctly. What about Malaysians? I did a short poll today (60% of folks couldn't get all correct answers so the findings are not far off) asking friends from different working backgrounds and various age profile (21 to 60). I asked 20 people.

These findings were recently published by two economists, Annamaria Lusardi and Olivia Mitchell, and the results reveal startling levels of financial illiteracy across the world. Their works can be found @ Most People in the World Have No Idea How to Manage Their Money. (the answer is in this link)

This is why most people that we know have so many persistent financial problems. We don’t even come close to understanding the construct of money or how it should be used. It is really unfortunate that most schools don't even teach basic finance but emphasize math and even additional maths! The fact is people need to become better educated on the topic of money, finance and economics. It is no rocket science, reading articles or asking folks who are familiar can be a good start. Although it seems to be a long road ahead for most of us it’s never too late to get started.

Weekly Market Highlights June (2)

Source: Amp Capital (here for full market update) & iCapital biz (subscription required)

United States
Economic data is good. ISM manufacturing conditions index rose, non-manufacturing conditions indexes remain solid, construction activity rose strongly, auto sales rose to their fastest pace since 2005, the trade deficit narrowed sharply and labour market indicators are strong; stronger than expected employment growth in May and a slight pick-up in wages growth. All of which indicates that the Fed is on track for a September rate hike albeit a very small hike. This will lead to more inflows of capital to the dollar. We are already witnessing the impact of such anticipation now: 1 US Dollar equals 3.75 Malaysian Ringgit.

Eurozone
Also saw some good economic data. Composite business conditions PMI revised up for May, retail sales up more than expected in April and unemployment falling more than expected. Inflation rose to 0.3% yoy in May and core inflation rose to 0.9% indicating that the risk of deflation is continuing to recede. Europe still has a long way to full recovery so it is good to see that ECB President Draghi reiterate the commitment to implement its quantitative easing plans in full (i.e. buying bonds out to September 2016). Negotiations on a “reform for funding” deal for Greece are continuing to drag on. Greece will likely continue to be a source of volatility through June. Whichever way it goes though, the threat of contagion to other peripheral countries is low compared to the 2010-12 period as they are in far better shape now and the ECB is buying bonds across Europe as part of its QE program.

Asia
The 140% surge in Chinese shares over 12 months. Another bubble that may be close to ending? The easy gains are probably over and a period of correction would be healthy. However, the Shanghai composite index on an historic PE of 21 times is still below its long term average and should benefit as further monetary easing comes through. China's official manufacturing PMI rose marginally in May, albeit it’s still at the low end of the range it’s been in for the last few years. More policy easing is likely required though to be confident.

In Japan there was a welcome rise in wages growth. However, at 0.9% year on year, it still has a fair way to go before the Bank of Japan (BoJ) can be confident it has broken the back of deflation.

In India, the Reserve Bank cut interest rates again with inflation being below target and growth in activity slowing in the March quarter. Further rate cuts are still likely.

In Malaysia contrary to what the government is saying a weaker myr is not helping our exports due to the decline of oil related exports and palm oil. As such the exports of major commodities continued to declined on a year-to-year basis for the 9th consecutive month. Imports would continue to stay low due to weaker domestic demand after the GST implementation. The broad trend in the Malaysian ringgit remains down as the Fed is likely to raise rates later this year unless BNM shores up support by selling foreign reserves. It is not likely to raise interest rates.

Savings vs Investments (Unit Trusts)

The primary aim of savings is to protect the real value of money you put away, while investments are meant to grow its value. In short I believe that you need both. Savings for short term use and as an emergency buffer or reserves. Investments for your long term goals and needs (>3 years).

Savings: Savings Accounts / Fixed Deposits
Pros of Savings:
Keeps value of money intact and provide small returns as determined by interest rates. Usually always available when you need it. Minimal risks and usually guaranteed by banks or by the government. Finally it requires very little financial knowledge.

Cons of Savings:
Little increase in value over time. Currency fluctuations and inflation may significantly diminish its value. **
** Banks use your money (from savings account or FD) to provide loans and in return distribute a portion of their profits in the form of interest on your savings. Central banks control the interest rate based on inflation numbers and therefore savings can only return a slightly higher than forecasted rise in cost of living otherwise known as inflation to ensure that the value of your savings does not. This is WHY it is only good as a short term use.


Investments: Equities (shares in company) / Bonds / Property / Unit Trusts
Pros of Investments:
Grows the value of your money and may return several times the amount of your initial investment.
Helps you build a nest egg for your retirement, children's education fund, vacation and etc. Most of the time the value of investment tends to correlate to inflation.

Cons of Investments:
Risk level varies but generally higher than savings. Money usually locked in for a period of time or at least not straight forward to cash out. Requires a good amount of understanding the product and market.


As you know 20% of my portfolio is based on Unit Trusts, a figure which I would like to see increased in the coming years. Here are the benefits I see (from highest order to lowest):

Portfolio Diversification - investor has access to broader range of securities (Malaysia / Asia / Global) than you could if investing on your own. this also minimizes exposure to any one type of risk.

Access to Broader Array of Financial Assets - in Malaysia a normal investors cannot directly invest in government or corporate bonds. Fund Managers have access to those.

Asset Liquidity - you can buy and sell units anytime as compared to trading shares of companies where prices and opportunities to transact depends on availability of both buyers and sellers.

Affordability - require minimal amount of investment as most funds accept both small (for as little as RM 100) and large investments.

Continuous Professional Management - funds run by full time and professional managers who have necessary skills, relevant experience and dedicated resources to maximize investments. **
** NOT all funds are managed well. One must know how to filter good ones out as posted previously http://aboiwealthpot.blogspot.com/2014/10/abois-updates-for-malaysian-equities.html. It will pay extremely WELL if you do your homework.

Global Fund on Equities (shares on company)

Asia Bonds (a type of corporate loan)

Asia Pacific ex Japan Equities (shares on company)

Malaysia only Equities (shares on company)