Author: Admin

  • The Lack of Retail Investors Amongst Youths in Malaysia

    The Lack of Retail Investors Amongst Youths in Malaysia

    The Lack of Retail Investors Amongst Youth in Malaysia

    The retail investing scene in Malaysia has grown and matured in recent years (Toh and Ahmad, 2010). This is in line with the trend seen in Malaysia’s Asian neighbours such as Hong Kong and Singapore. Technical analysis has always been preferred over fundamental analysis in Malaysia (Figure 1) – in recent years, a large portion of the market strongly believed in Technical Analysis, with many books published on the subject-matter, and new businesses have surfaced parallel to the growing interest in technical analysis. For example, the Fred Tam Bookstore was established to exclusively sell books related to technical analysis such as ‘The Power of Japanese Candlestick Charts’ and ‘Charting the Stock Market: The Wyckoff Method’ .

    Figure 1: Google Search Trends – Malaysia (18th March 2011 – 18th April 2017)
    (Source: Google Trends, 2017)

     

    Institutional players, both local and foreign, unsurprisingly dominate the value of transactions in Bursa. However, counterintuitively, the volume of trades by local retail investors are almost double of the local institutional investors (Bursa Malaysia, 2017). This shows that there exists sufficient infrastructure for most to get started. Therefore, the lack of investing among youth is unfounded. Through informal surveys and experience within the field, we have broken down the youths into five main categories:

    Figure 2: Classifications of Youths

     

    Ultimately, we should work on converting the black section, followed by the orange section, then the blue section into yellow. To do this, a more in-depth understanding of the causes are required. Fundamentally, we believe that youths have four main reasons as to why they do not invest:

     

    1. Youths lack interest

    Through informal surveys and interviews conducted with retail investors, we have identified a common theme. Youths often express disinterest when engaged with ideas of investment and finance, and it is this lack of interest that contributed to the void in financial literacy among youths. Indeed, most cite investing as ‘boring or not related to their ambitions’.

    As most developing countries still focus on traditional jobs, such as doctors, lawyers, engineers, and accountants, many believe that investing is not related to their desired career path. We believe that this is fundamentally due to a lack of literature, or awareness raised by their parents and teachers. For the most part, their parents either push them towards focusing on academics or extracurricular activities that will gravitate towards a traditional degree, without understanding how knowledge in the stock market would impact their future financials. (The Star, 2017).

     

    1996 1997 1998 1999
    RM Bil RM Bil RM Bil RM Bil
    GDP at constant prices 183.3 197.1 182.3 193.4
    Real GDP (% change) 10.0% 7.5% -7.4% 6.1%
    Rate of national savings (% of GNP) 38.9% 39.4% 41.9% 40.8%
    Rate of investment (% of GNP) 43.5% 45.3% 28.2% 23.9%
    Investment Saving ratio 1.12x 1.15x 0.67x 0.59x
    Balance on current account -11.2 -15.8 36.8 47.4
    Net international reserves 70.0 59.1 99.4 117.2

    Figure 3: Real Economy Indicators for Malaysia (Source: Hasan, 2002)

     

    Hewawasam Puwakpitiyage (2017), in his research report for FLY: Malaysia, notes that some parents were hit hard by the 1997 Asian Financial Crisis. This led to a psychological barrier where they believe that the stock market is something not worth investing. Hassan’s (2002) research complements our argument as he showed that there was a significant decline on the investment saving ratio post-crisis (Figure 3). This same mentality is being passed down to today’s youths. The fear to fail, a culture commonly found in Asian societies (Ranasinghe, 2014), paired with the perceived higher risk from stocks lead to youths sourcing for safer investment vehicles with real estate being a common example of safe investments.

    The Malaysian equity market is one of the fastest growing in Asia and has the highest number of listed companies in the ASEAN region with a total of 905 as at 31 December 2014 (Capital Markets Malaysia, 2017). This is partly a result of domestic conditions, which are conducive towards retail investor participation. For example, Malaysia benefits from relatively low transaction costs similar to countries like the UK and US with no capital gains tax (Figure 4). Indeed, Malaysia is also awash with multiple investment vehicles with extremely attractive risk-reward ratios. An example would be Amanah Saham Malaysia, which offers attractive rates of around 5-6% while being relatively low risk. However, the level of youth participation is not comparable to these countries.

     

    Country Exchange Average cost Tax on capital gain
    Thailand Bangkok 0.28% x
    United States NASDAQ 0.26% 10%-28%
    United Kingdom London 0.26% 18%
    Hong Kong Hong Kong 0.25% x
    Singapore Singapore 0.24% x
    Malaysia Kuala Lumpur 0.24% x

    Figure 4: Online Transaction Costs (Source: Value penguin, 2017)

    2. Youths have an interest, but lack the knowledge.

    The media has managed to garner an interest in the youth demographic following  an increase in popular films such as the “Wolf of Wall Street” and “The Big Short”. Youths have begun to note how knowledge pertaining to stocks and its markets can build a platform to make money. However, there is no definitive guide that teaches Malaysians how to start investing in stocks. Most literature focuses on the NYSE or NASDAQ, while SEA books focuses on the SGX. We divide knowledge here into three parts, the means to get started, the technical expertise to choose stocks, and the availability of information.

    The prevalent perception is that there is no easy way for a person without any knowledge to get started in investing. Many assume that a lot of administrative work is required to get started, but in reality, this is not the case. The cause had primarily been a lack of knowledge or awareness in regards to such issues. Indeed, youths often cite difficulty in learning how to begin as the key reason for not investing.  They often lack ideas on how to select stocks and do not know how to begin the learning process. FLY attempts to contribute towards a solution through other means, such as debunking myths in regards to stock investing and educating youths in investment techniques.

    While workshops focusing on topics such as fundamental or technical analysis do exist, the majority would be priced in the thousands. This results in a situation where the return on investment might not be appealing for the general public. In fact, the cheapest provider that we can find priced their course in the high hundreds (Yee, 2016), thereby raising affordability issues for youths.

    Ultimately, the education system has contributed little in improving the standard of financial literacy among youths. The existing exam-oriented system is based heavily on memorization and has created students of the highest distinction but yet, lack the relevant knowledge and skills to start investing. So why are schools not teaching students about personal finance and money management?

    3. Youths lack the financial means.

    Figure 5: Y-o-Y Comparison between mean income and mean expenditure of Malaysian households (Source: Foo, 2014)

    Figure 6: Comparison between mean monthly expenditure and mean monthly income between income groups (Source: Zulkeffeli, 2016)

     

    Youths often cite that it is difficult for them to save up to invest (Weiss, 2016), possibly due to the fact that their main source of income relies on their parents ability to provide them with pocket money. Though it is hard for parents to provide them with cash incentives when they have not much surplus after paying off for necessities. Foo (2014) supported the statement by stating that the mean household spending is growing quicker than the mean household income, which leads to a further reduction in that surplus (Figure 5). Zulkeffeli (2016) further researched on this issue by segregating average household income and expenditure into different income groups and found that the bottom 80% of households are having almost none to pitiful levels of excess cash (Figure 6).

    However, the ability of parents making money should not be a main contributing factor to a lack of savings. We found that most youths lack the financial literacy to save any money to begin with. While students may find it difficult to save up, say, RM10,000, some stocks could be traded for as little as RM100, which is very feasible. However, the investing scene lacks representation from young professionals, and they quote this as their main reason. Therefore, we believe that this reason also blends in with the lack of knowledge.

    The combination of the three reasons above are the key reasons to why youths find investing daunting and therefore lacking in the stock market. FLY is attempting to change reasons 1 and 2 through research reports, speaker series, and interviews with key industry leaders, and thus optimistically rise the number of youths in the stock market.

    4. Societal influence

    Many still associate the stock market with a risky investment. The older generation is less accepting towards stock market, primarily due to witnessing the disruptive effects of many economic crises over their lifetimes. In addition to that, older generations who subscribe to conventional values such as earning through safe fixed income – actively discourage the young population to delve into risky investment endeavors, at least until they are financially able.

    Millennials who possess necessary skills to conduct trades are demoralized by their parents who have witnessed cyclical stock market crashes, leading them to fear investing. There is a constant fear of a big-scale financial crisis happening, as many expect the next one to occur soon. This deduction is based on the 1987 Black Monday, 1997-98 Asian Financial Crisis and the 2008 Global Financial Crisis. Therefore, many deduce that with a 10 year economic cycle, the next crash is due to occur soon; some analysts are already forecasting another crash to happen to 2018-2019 (Kaur, 2016). This further strengthens the conventional thinking of the older generation where they expect their children to be safe on their income and not to meddle with the stock market.

     

    Possible Solutions

    Theme 1: Active student-led organizations

     

    • Organizations which share the goal of eradicating financial illiteracy among youths should collaborate in providing education on the various facets of stock investing such as opening a Central Depository System (CDS) account, implementing fundamental analysis, and  technical analysis to provide a holistic view of investing in the stock market.

    From our past experience in conducting numerous seminars in Klang Valley universities, a concise structure and content is vital for the public to learn. This helps to ensure that beginners to stock investing will be able to fully comprehend and to not be deterred.

    Utilization of visual aids such as videos can be used to provide a clearer flow of the required activities, which includes a step-by-step guides on opening bank accounts and trading using mobile platforms. It is of particular importance that a guide on setting up a Central Depository System (CDS) account, a brief introduction to Technical Analysis indicators, and some Fundamental Analysis techniques are taught to the participants so as to equip them with the basics of stock investing.

    In addition to just purely theoretical knowledge, it is also important to provide the participants with practical knowledge, thereby ensuring that the seminars are relevant to potential retail investors. This can be done by making use of various virtual trading and charting platforms that are available free-of-charge.

     

     

    • Publish more elementary guides, focusing on investment-related topics, on visually-appealing mediums in order to attract readers from the youth demographic.

    A large number of currently available materials takes the form of blocks of text. This may be unappealing to the target audience – youths. From our experience in producing research reports and infographics, we have found that presenting information through visual aids are effective in attracting youths and improving their retention. This is particularly true when it comes to youths from a non-finance background since these youths would find a multi-page and text-only report intimidating and would be less interested in reading the article. Hence, it may be more effective to publish and circulate infographics or posters that could clearly guide youths in matters of investment analysis and provide them with guided instructions on the do’s and don’ts of the stock market.

     

    Theme 2: Partnership between SC and student organisations

                 The SC possesses the expertise and knowledge in investment as well as relationships with the financial institutions but lack the distribution means. We propose that a greater number of partnerships should be made between student-led organizations such as FLY: Malaysia and the Bursa Young Investors Clubs, and the financial institutions and regulatory bodies. Such a move would allow these regulatory bodies to reach the youth demographic at a more efficient and effective manner.

                Furthermore, through such partnerships, these regulatory bodies could hold a larger number of events such as seminars or workshops that aim to educate youths regarding the ins and outs of financial markets. By partnering with student organizations, the regulatory bodies will have access to stronger grassroots support which could potentially provide them with logistical aid and marketing facilities that would make the process of holding seminars or workshops considerably smoother.

               The aforementioned visual materials could also be take advantage of the distribution networks created by partnerships. Effective distribution of literature and advertising materials, either created by the student organisations or financial institutions, increases exponentially with every increase in universities/colleges it is present in. Among the methods that the partner organisation can employ at the university-level include posting informative posters and infographics on bulletin boards, physically raising awareness through engagement at booths within the respective campus.

                 In conclusion, it is safe to say that as the number of partnerships with student organisations increase, there will be a rise in events that are jointly organised, and hence, the aim of improving the financial literacy of youths can be more easily achieved.

    Download Report Here:

    [download id=”1283″]

    [tw-toggle title=”References “]

    Bursa Malaysia (2017). Trade Statistics: Local vs Foreign March 2017 [online].
    Available at: http://www.bursamalaysia.com/misc/system/equity_market_statistics/securities_equities_trading_participation_investor2012.pdf [Accessed 18 Apr 2017]

    Capital Markets Malaysia. (2017). Financing The Future. [online] Available at:
    http://www.capitalmarketsmalaysia.com/wp-content/uploads/2015/06/factsheet-financing.pdf
    [Accessed 19 Apr. 2017].

    Google Trends (2017).
    Available at:
    https://www.google.com/url?q=https://trends.google.co.uk/trends/explore?date%3D2011-03-18%25202017-04-18%26geo%3DMY%26q%3Dtechnical%2520analysis,fundamental%2520analysis&sa=D&ust=1492591948544000&usg=AFQjCNFyZmDnB9IcX3u9eynaG4CwMzgpng
    [Accessed 19 Apr. 2017]

    Hasan, Z. (2002). The 1997-98 Financial Crisis in Malaysia: Causes, Responses, and Results. Islamic Economic Studies, [online] 9(2), p.3. Available at: http://www.irti.org/English/Research/Documents/IES/109.pdf [Accessed 18 Apr.
    2017].

    Hewawasam Puwakpitiyage, C. (2017). Asian Financial Crisis 1997 Explained – FLY Malaysia. [online] FLY Malaysia. Available at: http://www.flymalaysia.org/asian-financial-crisis-1997-explained/ [Accessed 18
    Apr. 2017].

    Kaur, M. (2016). Recession in Malaysia in
    2018, predicts expert. [online] Free Malaysia Today. Available at:
    http://www.freemalaysiatoday.com/category/nation/2016/05/06/recession-in-malaysia-in-2018-predicts-expert/ [Accessed 18 Apr. 2017].

    Ranasinghe, D. (2014). Why
    Asia needs to celebrate failure. [online] CNBC. Available at:
    http://www.cnbc.com/2014/04/27/why-asia-needs-to-celebrate-failure.html [Accessed 18 Apr. 2017].

    The Star. (2017). Survey shows young Malaysians prefer security overflexibility – Nation | The Star Online. [online] Available at:
    http://www.thestar.com.my/news/nation/2016/06/23/youths-want-9to5-jobs-survey-shows-young-malaysians-prefer-security-over-flexibility/ [Accessed 18 Apr. 2017].

    Toh, G. and Ahmad, Z. (2010). Do Malaysian Investors’ Judgement Exhibit Reference Dependence?. Asian Academy of Management Journal of Accounting and Finance, [online]6. Available at: http://web.usm.my/journal/aamjaf/vol%206-1-2010/6-1-6.pdf [Accessed 18 Apr. 2017].

    Value Penguin Singapore (2017). Best Online Brokerages in Singapore 2017. [online] Available at: https://www.valuepenguin.sg/best-online-brokerages-singapore [Accessed 19 Apr 2017]

    Weiss, J. (2016). Here’s why millennials aren’t investing. [online] CNBC. Available at:
    http://www.cnbc.com/2016/04/01/heres-why-millennials-arent-investing.html [Accessed 18 Apr. 2017].

    Yee, D. (2016). Technical Analysis Basic-Intermediate Course [online] Stockstradingmalaysia.com. Available at: http://stockstradingmalaysia.com/workshops/ [Accessed 18 Apr. 2017).

    Zulkeffeli, Z. (2016). Be Prepared for Subsidy-Free System. [online] Malaysian Institute of Economic Research (MIER). Available at: https://www.mier.org.my/newsarticles/archives/pdf/Zafri17_12_2016(FM).pdf [Accessed 19 Apr. 2017].[/tw-toggle]

  • Investment Linked Insurance Policy

    Investment Linked Insurance Policy

     Investment-Linked Insurance Policies at the Surface 

    Investment-linked policy (ILP) is just as the name suggests, it is an insurance policy that combines both protection and investment. Don’t let this statement fool you. Even though there are investment elements in it, ILPs’ main priority is always to provide financial protection against financial catastrophe – namely the 3Ds, Death, Disability and Diseases.

    Why Investment-Linked Policies? 

    Although investment-linked policies can be complex, they are very flexible and can be utilized to great extents. Not only can you readjust your benefits and premium from time to time (subject to certain conditions), you can modify your own policy to include or exclude any benefits you prefer. This will be discussed further in the Rider section below.

    Structure 

    Investment-linked policies, like most life insurance policies, offer death and total permanent disability (TPD) benefits. Unlike traditional insurance policies, part of your premium paid in ILPs is used to invest in funds of your choice. The profit from the investment accumulates and becomes your cash value.

    Withdrawal – One benefit of ILPs is that you are allowed to withdraw from your cash value while still continuing your policy. This is useful to overcome sudden financial needs in the future. However, you should be aware that for ILPs, the underlying insurance charges increase as you get older. Hence, withdrawal especially at the early stages is not encouraged to ensure your policy lasts in the long term. Otherwise, a top-up can be done in later stage to replace the deficit value.

    Investing Funds – You can choose which type of funds to invest in for your ILP. The funds can range from the low-risk fixed income funds, to the high-risk equity funds. It is important that you understand your own risk appetite to choose the fund that suits you most. Funds invested are not finalized, so you are allowed to switch between different funds to fit your current needs and preferences. For example, below are fund performances from Great Eastern’s investment-linked policies. Regardless of insurance companies, all companies usually have a range of funds to suit different risk appetites and financial objectives.

    Riders 

    Think of Investment-Linked Policies as fruit baskets, you can place and arrange different types of fruits into the basket to suit your preference. Here are some of the most popular features you can choose to attach to your ILPs.

    Medical Card – This is why many preferred an ILP. The medical riders in ILPs offer coverages that are more comprehensive than most standalone medical plans. You can choose medical coverage that fits your needs and budgets, and with affordable premium, you have the privilege to enjoy unlimited lifetime medical limit. This feature is even more necessary now as medical inflation is rising by 15% on average per year.

    Critical Illness Coverage – You can choose to receive a lump sum payment of money in the event you are diagnosed with one of the 36 Critical Illnesses. Even better, you have the option on whether to receive the money in early stage or at late stages. Unlike traditional critical illness coverages, this amount of money is fixed.

    Waiver Benefit – Upon event of Critical Illness or Total & Permanent Disability (TPD), the insurance company will help you pay for your premium up to a certain age, even after recovery! This means, if life gives you a second chance, you get to enjoy money invested into your funds and life coverages for free.

    Payer Benefit – If you’re financing an ILP for your children, you may add on this feature to make sure their insurance is taken care of even if something unfortunate happens to you.

    When to purchase ILP? 

    The best time to buy an ILP is when one is young and healthy. This is due to medical cards having strict underwriting requirements. Any unwanted medical records happen may make you unqualified, excluded for certain coverages, or imposed extra charges for the rest of your life.

     

    [tw-toggle title=”References “]

    Matthew, Ismitz (2015b) Planning for healthcare costs in retirement – business news | the Star Online. Available at: http://www.thestar.com.my/business/business-news/2015/10/04/planning-for-healthcare-costs-in-retirement/

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    Download the Report and Infographic Here:

    [download id=”213″]
    [download id=”216″]

    Prepared by Will Tan.

  • Mortgage Insurance

    Mortgage Insurance

    mortgage-insurance

     

    Mortgage Insurance – MRTA at the surface

    You decided that you want to have your own house, your own rules – and because like the majority of people you aren’t born with silver spoons, you realise you have to pay with your own money. You apply for a loan and because you are uninsured, or underinsured, the banker suggests you to adopt an insurance plan to protect their interests. The banker told you that you need only pay once, and you will be protected throughout the entire period. One-time payment of RM9000 for a RM300,000 sum assured, compared to a traditional life insurance policy of yearly payment RM7000 for the same amount. ‘Who on earth wouldn’t take this offer?’, you thought.

    1.0 So what is MRTA?

    Mortgage insurance is an insurance policy assigned to protect your mortgage if you lose your ability to generate income due to Death and Disability (sometimes even Diseases). MRTAs are one such insurance, and it stands for Mortgage Reducing Term Assurance. This insurance policy allows you to pay a one-time premium and will assure your mortgage throughout your loan tenure. Such policies are often offered by banks to ensure they receive the loan settlement regardless of whatever is happening to the debtor. If you die before your mortgage is fully paid off, the bank would receive your house and your family members would not have been burdened by the mortgage repayments. A Mortgage Level Term Assurance (MLTA), on the other hand, is an insurance policy that has either fixed or increasing sum assured. The common life insurance policies which you normally adopt from insurance agents can be used to be assigned as your MLTA. We’ll talk more about MLTA some other time.

    2.0 MRTA – A deeper look

    The key word in Mortgage Reducing Sum Assured is the ‘Reducing’. As your loan term reduces, so does your protection. What is a RM300,000 sum assured in the beginning decreases eventually to zero at the end of the payment term. Why? Because for such policies, only the bank truly benefits. You are not allowed to nominate your family as your beneficiaries. Of course, the one-time payment seems to be worthwhile, not if you consider the compounding interests on it – as MRTA’s premium payments are often financed into your loan. What that means is, instead of choosing to pay the upfront RM9000 premium mentioned earlier, you can choose to pay it over the period of your mortgage. Assuming a typical loan interest rate of 4.7% per annum, and a typical loan term of 30 years, you end up paying ~RM36,000 for an insurance policy that yields you nothing in the end. Of course, you can choose to pay the premium in one lump sum. In that case, why not use the money to reduce your mortgage sum instead? In other words, if you have a spare RM9000 lying around, it could be more beneficial to reduce your mortgage from RM300000 to RM 291000.

    3.0 An alternative

    The emergence of investment-linked insurance policies has definitely offered much flexibility in financial planning. For the same sum assured of RM300,000, it is possible to pay a yearly premium 3 times lower than the one-time payment of MRTA’s. Not only you spend an extra RM6000 in the first year reducing your biggest liability to avoid the dreaded compounding effect, you spend RM3000 per year into an asset that may accumulate over time. The sum assured of RM300,000 not only remains, but increases over time, often at 1% per year. Towards the middle or later period of your loan payments, the cash value can then be partially withdrawn to shorten your loan tenure. It is also worth noting that should something happen to you, the money paid out goes to whichever family member you nominate first. And unlike MRTAs, your personal insurance policy is transferable as a new mortgage insurance should you choose to purchase another property in the future. If you have existing life insurance policy, remember that you can cite it as your mortgage insurance. Remember that MRTA is not compulsory.

    4.0 Why MRTA may cause you to lose your home?

    This is particularly worth noting for those who are underinsured or uninsured. If you have an MRTA, after a person dies, his estate and assets will now be frozen under the estate law to pay off debts and liabilities. This includes income taxes, other debts and loans, accounting and legal expenses etc. and his family will be the last in line to receive your asset. So what happens if his liability is bigger than his asset? In severe cases, the house will be declared insolvent in order to meet outstanding debts, and his loved ones are either forced to move out. Otherwise, maybe selling a car or two or forging out some life savings will do the job. Anyhow, it’s not a condition that I want to be in.

    5.0 Then when should I choose MRTA?

    Of course, there can also be situations where MRTA is more suitable. MRTA’s can be taken up only if your sole interest is to insure your property, you do not have outstanding liabilities and you are well-insured. Generally, to be well-insured is to be able to protect yourself against all major financial catastrophes, especially medical costs, and to protect your dependents long enough for them to live comfortably if you left too soon. However, considering how on average each Malaysian holds only half an insurance policy – we have a long way to go in becoming a well-insured community. Perhaps, choosing the right insurance to protect your mortgage and you are a right place to start.

     

    Download the Report and Infographic Here:

    [download id=”149″]
    [download id=”152″]

     

    [tw-toggle title=”References “]

    What is mortgage insurance and how does it work? (no date) Available at: http://www.consumerfinance.gov/askcfpb/1953/what-is-mortgage-insurance-and-how-does-it-work.html

    KCLau (2006) Why you may lose your house if you simply opt for bank MRTA? — KCLau.Com. Available at: https://kclau.com/insurance/mlta-vs-mrta/

    Lee, I. (2015) MRTA vs MLTA: Which do you need? Available at: https://www.imoney.my/articles/mrta-vs-mlta-need

    Life insurance industry records RM1.17 trillion coverage – business news | the Star Online (2015) Available at: http://www.thestar.com.my/business/business-news/2015/02/13/life-insurance-industry-records-trillion-ringgit-coverage/

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    Prepared by Will Tan

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