Savings mean the road to financial freedom

2009/01/10

YourMoney: Savings mean the road to financial freedom
By : Yap Ming Hui


THE discipline of being able to save consistently and on target would make or break our financial freedom journey. There are three main reasons why is saving important.

- The more we save, the more we accumulate

The first reason is simple and obvious. The more we save, the more we can accumulate. Obviously, we would have more resources to invest to grow our assets.

- The more we save, the less we spend

When we force ourselves to save more, we would definitely have less to spend. As such, we are able to control the standard of living and live below the mean.

Throughout my practice, I have come across clients who are able to accumulate substantial amount of assets through prudent spending and disciplined saving.

When we do not have too high a standard of living, it makes our job of maintaining a living standard during our retirement easier to attain.

On one hand, I have seen people who do not make much but save a lot. On the other hand, I have also met people who earn high income but save very little.

Many years ago, when I had just started my profession, I met Eugene, a chief executive officer of an American multi-national corporation, who earned more than RM50,000 a month.

At that time, he was the highest income-earner person I had ever met.

In my heart, I was overjoyed as I believed that I would have a big case on which to do financial and investment planning.

However, after the fact-finding process, I discovered that Eugene had assets worth only about RM2 million.

And about RM1 million of this asset was his forced savings in the Employees' Provident Fund.

The balance was the worth of the house he was staying in.

I was very surprised to find out that he had so little assets despite his high income.

So, I asked him: "Eugene, how much do you save every month?"

Eugene said: "Well, I did want to save every month. However, at the end of the month, there is always not much left."

So, if you just want to wait till you have more income to save more, you might as well forget it.

It is never about how much you make. It is always about how much you save.

- How best can we solve this problem?

Yes, you are right. Before you start spending and paying bills every month, pay yourself first.

Determine how much is the right amount of saving for you and save that amount first. It is even better if you can have a regular and automatic saving scheme.

- The more we save, the less rate of investment return we need

In fact, the more we save, the less risk we need to take in financial freedom planning.

Let's take an example of RM5,000,000 accumulation goal.

Let's assume that you are 45 years old, and planning to retire at 60.

If you can save RM50,000 per annum, you need to achieve 23.9 per cent of rate of interest (ROI) for RM5,000,000 goal.

If you can save RM120,000 per annum,you need to achieve 13.4 per cent of ROI.

If you can save RM180,000 per annum, you need to achieve only 8.3 per cent of ROI.

Of course, RM5,000,000 is only the example.

The lesson to be learnt is that the more we save, the less ROI is required to achieve the same accumulation goal.

When we do not need to achieve a high ROI, we do not need to stomach too much risk and volatility.

The less risks we take, the more peaceful life will be.

- How much to save?

I believe most of us understand the importance of saving. In fact, almost every time I was interviewed by the media, I would always be asked, "How much of their income should Malaysians save?"

To some financial planner, it is not a very difficult question for them to answer. Some would say 20 per cent. Some would say 30 per cent. Some would even say 40 per cent.

However, this is quite a tough and tricky question for me to answer.

Based on my experience of developing many tailor-made financial plans for clients, I know that the right saving rate varies from one person to another.

For example, if you have a monthly income of RM3,000, the right savings rate for you may be 20 per cent.

This is because you need to spend majority of your income to sustain your standard of living.

However, if you have a monthly income of RM50,000, the right savings rate for you may be 50 per cent.

This is because you don't need to spend the majority of your income to sustain your standard of living.

Of course, this is just one of many examples, but it shows that there is no standard "right saving" rate for every one.

Therefore, each of us should have a tailor-made financial plan to determine the right savings rate for us.

Only then, would we know that we are saving enough to meet our future commitments.

- What if your saving is under target?

If the savings and contributions are less than target planned, you may fail to achieve your financial freedom.

If the gap continues, chances are that you may not be able to achieve your original financial goals set.

In the situation whereby the actual saving is less than planned, we must review our cash flow statement to identify the discrepancy and take necessary recovery measures.

If we have confirmed that the planned saving target is unrealistic, it is important that we readjust some of our financial goals and asset allocation strategies.

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Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2446987/Article/index_html

What is your optimum ROI?

2008/12/13

Your Money: What is your optimum ROI?
By : Yap Ming Hui


RETURN on Investment (ROI) is an important ally in attaining financial freedom. ROI can help us overcome the threat of excessive spending and inflation. If we are serious about achieving our own financial freedom, it is important for us to understand and know ROI better.

Power of compound ROI

Table 1 shows the compounding effect of RM100,000 invested at different compound ROI compounded over 36 years. From the table, we see that differences in ROI that may appear moderate in the short-term can, with compounding, multiply into very large differences in the long term.

For example, if you don't do anything with your saving which earns about two per cent ROI then. your RM100,000 will multiply by two times to RM204,000 after 36 years. If you transfer the money into fixed deposit, you may earn about four per cent ROI and multiply your RM100,000 by four times to about RM410,000. If you grow your money at eight per cent ROI your RM100,000 will multiply by 16 times to about RM1,597,000. With a slight increase of your ROI from two to eight per cent, you end up having a huge difference of RM1,393,000. (1,597,000 - 204,000). If you grow your money at 15 per cent ROI, your RM100,000 will multiply by 153 times to about RM15,315,000.

Of course, increasing the ROI means you may face higher risk of losing your money.

The price of making a mistake

Most people fail to realise the high rate of ROI required to make up for money lost in investment. For example, if you start with RM100 and lose 50 per cent of it, you would have to earn 100 per cent on the remaining RM50 just to get back to where you were at the beginning.

Table 2 shows the ROI required to overcome various losses. The time period is five years, and there are two scenarios: an ROI target of 10 per cent and of 15 per cent.

For example, you plan to increase your money for the next five years with 10 per cent ROI. Unfortunately, instead of getting 10 per cent target return, you ended up with a 25 per cent loss. In order for you to still achieve your original target, you would need to achieve 21 per cent ROI for your money for the next four consecutive years. Now, that's the price you will have to pay for making 25 per cent loss in first year. Do you think it is easy to achieve 21 per cent for four years continuously? Of course, it is not easy.

In addition, you will also notice the spread between the amount of the loss and the required ROI over the next 4 years widens as the magnitude of the loss is increased. The larger the losses, the more difficult it is to overcome.

I believe you now understand why the first rule to investing, according to Warren Buffett, is "Never lose your money".

Inflation-adjusted ROI

Our money is subjected to the depletion of inflation. Therefore, to effectively grow our money, we need to attain an ROI higher than the inflation rate. For example, if the inflation rate is four per cent, the 3.7 per cent interest rate for your fixed deposit will not help your money grow. In fact, in the long run, you lose your money safely. In this case, the inflation-adjusted ROI is actually -0.3 per cent (3.7-4).

Therefore,to grow our money, we need to seek inflation-adjusted ROI.

To achieve financial freedom, you have know what rate of ROI you actually need.

There is an optimum ROI rate to target and achieve. This optimum ROI rate should be higher than the inflation rate but not too high that will risk losing money.

Therefore, the challenge for all of us who want to achieve financial freedom is to find out what that ROI is? Do you know what is your optimum ROI? If not, it is always better to find out earlier than later.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2426202/Article/index_html

My comment: Aim for 15% compound annual return per year. This translates into 100% return on your investment every 5 years.

Five elements to achieve financial freedom

2008/10/05

Business: Five elements to achieve financial freedom
By : Yap Ming Hui


WHEN you ask people what is financial freedom to them, chances are that you are going to get different answers. Some may say that financial freedom means having RM1 million in the bank. Some may say it means no more debts and loans. Some say it means having enough money to do whatever you like.

I define financial freedom as a controlled financial position, whereby there are sufficient financial resources to meet your needs and wants at any time and in any circumstances.

The amount required to achieve financial freedom will vary from one person to another. For someone who has less needs and wants, he will require less money to achieve his financial freedom. For someone who has more needs and wants, he will require more financial resources.


For example, a multi-millionaire may not have financial freedom yet if his needs and wants are more than what his financial resources can meet.


Five essential elements of financial freedom


To achieve financial freedom, I believe one has to understand and manage the five essential elements of financial freedom effectively. Let's do a quiz to see how much do you understand the following essential elements that I share.


- Spending


Spending is one of the five essential elements of financial freedom. Unless and until you understand the impact of your spending to your achievement of financial freedom, it is unlikely you will achieve it. The more we spend, the less we save. The more we spend, the more money we need to maintain our life style in retirement years. Based on the definition of financial freedom, your spending level measures your needs and wants.


- Inflation

Inflation is another essential element that will make or break your financial freedom planning as it will not only deplete your accumulated capital, it also reduces your purchasing power. This is one of the most challenging elements to understand and manage because it is intangible and difficult to see. You can only feel it over an extended period of time.


- Return on investment


Despite the negative effect of spending and inflation, one can count compound interest to help achieve financial freedom. The higher the return on investment (ROI) rate, one can achieve, the better he can make his wealth works for him. As far as achieving financial freedom is concerned, we are not talking about ROI in isolation. It is not that you have a choice as to what ROI you want. If you don't achieve certain ROI for your money, your effort to achieve financial freedom will be very much discounted by the impact of inflation and spending.


- Time


Time is another essential element for you to consider and integrate in your financial freedom planning. We need to know the time when our financial needs and wants appear. For example, at which year will you need to finance your first child's tertiary education. We also need to know the time horizon that you have to accumulate your financial resources. Only then, you are able to structure your investment properly to achieve your funding target.


- Saving


The more we save, the less ROI we need in order to achieve the same accumulation target. For example, if you can save RM16,000 per year, you will need an annual ROI of 18.3 per cent to accumulate RM1 million in 15 years time. However, if you can save RM36,000 per year, you only need to achieve an annual ROI of 8.3 per cent.


Applying the five essential elements to your life


After examining the five essential elements of financial freedom, you will find that the five elements are closely related and inter-connected. One element will affect another. For example, how much you spend will affect how much you save. How much time horizon you have will affect the ROI you need to achieve an accumulation target. Therefore, you need to understand the combined result of these five elements.


Each one of us will have our own financial freedom target. Therefore, each one of us will also have our own code for our financial freedom. We need to find out what combination of spending, ROI, inflation, time and saving is the right code to achieve our own financial freedom.


Have you found out what is your code to your financial freedom? If you haven't, you better start now before it is too late. By then, without the essential element of time, it is going to be very difficult, if not impossible, to achieve your financial freedom.


* Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2364354/Article/index_html

Danger of excessive spending

BUSINESS/YAP MING HUI: Danger of excessive spending
By Yap Ming Hui

2008/03/16

THE founder of one of the largest investment fund in the world, Sir John M. Templeton, once said: “Those who are thrifty will grow wealthy, and those who are spendthrifts will become poor. During my first 15 years after college, I made a game of adhering to a budget that included saving 50 cents out of every earnings.” In fact, the discipline of being able to control our spending and save consistently would make or break our wealth maximisation success.


Case study


Many years ago, I met Joshua in a business seminar. He was then the managing director of a multinational corporation. He was in his late 40s. Over a conversation, he shared with me that he was earning RM600,000 per year. I must admit that I was impressed. I was still new to the industry then.


RM600,000 annual income was really big.


I expected him to have accumulated a substantial amount of wealth over the years. However, when I added up all his assets, I found that his total asset was less than RM2 million. His net worth was less than RM1 million. More than 70 per cent of his net worth was from his EPF saving.


Iwas really shocked.I asked him where all his income has gone to.


He told me that he didn’t know.


Every month, his family and he spent the income to maintain their life style. At the end of the month, there was nothing much left to accumulate and invest. Every time there was an income increment, he just increased his spending accordingly. This is a classic example of excessive spending.


The problem Joshua is definitely the classic victim of Parkinson’s Law. The law states that your expenditures rise to meet your income.


Remember the time when we started working, we earned about RM1,500 per month. Then, we barely had enough money to sustain our monthly expenses.


However, we were not worried.


We knew that when our income increased later, we would have some saving. After a few years, our income rose to RM3,000 per month. Did you really end up having a lot of saving? The answer, of course, is no. You discovered that your expenditures actually went up to meet your income. As a result, you didn’t have much to save. To most people, the same thing happens when their income increases to RM5,000, RM10,000 or RM15,000. In the case of my friend, Joshua, his expenditures rose to meet his income of RM50,000 per month.


When you suffer from excessive spending disease, it will cause the following problems to your wealth maximisation:


•The more we spend, the less we save
The first problem is simple and obvious. The more we spend, the less we can save. As a result, we would have less resource to invest.


•The more we spend, the more we need to sustain during retirement
When you spend the majority of your income to maintain your current life style, you create a huge challenge to maintain your life style in the event that your active income stops.


We can see the picture better by using Joshua as an example. He spent almost all of his income almost every month to maintain his RM30,000 life style. Should he retire, he would have to maintain a retirement life style of RM30,000 per month without his active income.


This would present a very huge challenge. However, if he were to control his living expenses to RM20,000 per month, not only would he have extra RM10,000 to save, also he would need only maintain a life style of RM20,000 per month during his retirement.


•The more we spend, the higher rate of investment return we need The more we spend and the less we save, the more risk we will need to take in wealth accumulation planning.


Lets take an example of RM5 million accumulation goal in Table 1. Assume that your are 45 and plan to retire at 60. If you can save RM180,000 per annum, you need to achieve only 8.3 per cent of return on investment (ROI). If you can save less at RM120,000 per annum, you need to achieve a higher ROI at 13.4 per cent. If you can only save RM50,000 per annum, you need to achieve 23.9 per cent of ROI for RM5 million goal.


Therefore, the lesser you save, the higher ROI is required to achieve your accumulation target.


As a result, you will need to take higher investment risk to achieve the same goal. When we do not need to achieve a high ROI, we do not need to take too much risk and volatility. The less risk we take, the more peaceful our life will be.


Alternative solutions


•Acknowledge the danger of Parkinson ’s Law
To avoid the problem of excessive spending, you must be aware of the impact of Parkinson’s Law. You need to know that saving would not come naturally unless you make it an effort to control your spending. Unless you acknowledge the danger of Parkinson ’s Law, it is very difficult for you to tackle excessive spending

•Spend after you save
The most effective practice to avoid excessive spending is to spend after you have provided for saving (Income –Savings = Expenses. NOT Income –Expenses = Savings). By forcing yourself to save more, you would definitely have less to spend. As a result, you are able to control your living expenses and live within your means.


• Conduct a life-long cash-flow plan
In order for you to know your optimum life style (living expenses) and savings required to support that life style without active income, it is important that you conduct a life-long cash-flow plan.


This cash-flow plan will project your annual income and expenses until the last day of your life.


By doing this exercise, you can find out what living standards yo u can afford and determine the savings needed during your active income years.


As a result, you can appreciate how challenging it is to sustain high living expenses without active income.


Hopefully, you can also recognise the urgency and importance to start saving now.


Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-family office in Malaysia


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© Copyright 2009 The New Straits Times Press (M) Berhad. All rights reserved.

http://www.nst.com.my/Current_News/NST/Sunday/Columns/20080316084555/Article/pppull_index_html

Managing wealth

YAP MING HUI: Managing wealth like a business
By YAP MING HUI

2008/09/20

MANAGING and maximising wealth is a vastly different kettle of fish from creating wealth. However, all entrepreneurs and business owners who have successfully mastered the art of creating wealth will need to know how to maximise their created wealth, or risk losing it. Managing created wealth becomes even more challenging when it grows tremendously, usually due to the sale or listing of a business.

When business owners sell their enterprises or take their companies public, they will have a huge amount of cash to manage.

Indeed, the task of managing such wealth is similar to managing a company. In other words, you might have sold one business, but as a direct result, you have now gone into the business of managing your wealth, with the goal of maximising it.

Being in the "wealth maximisation business" involves more than simply hiring investment fund managers to invest in listed shares, bonds, real estate, commodities or hedge funds.

In addition to investment, this business involves other critical components like developing a family philosophy concerning the goals for the wealth, establishing an investment policy, selecting good professional advisers and getting family members interested in and educated about the process.

As with any other business, you need proper planning and effective execution for your wealth maximisation.

Where should you start? It makes sense to go over some general issues. Since your family will be directly affected by any decision you make, make sure you get input from your family through family meetings when asking questions like those below:

- What are the goals for your wealth maximisation? Figure out your priorities and take all the financial, mental, physical, family, social and spiritual dimensions into account when formulating your goals. Clearly defining your core values for the family and goals for the shared wealth are critical elements for sustaining the family legacy. Where do you envision your family a generation from now? What are your goals for the wealth?

- Do you want to preserve the "purchasing power" of your assets, striving for returns that outstrip inflation and taxes? What level of risk are you willing to face to gain these higher returns?

- Which ownership structure is appropriate for you? Structuring assets properly has a greater long-term impact on your wealth. At times, its impact is greater than some of your investment decisions. How will the decisions you make about asset ownership structure today affect your children's grandchildren?

- How do you diversify your wealth so that not all your eggs are put in the same basket? What dimensions and levels of diversification should you consider? What alternatives are available out there for you to effectively and efficiently diversify and preserve your wealth? Is your current wealth allocation well diversified?

- Every family faces its own unique set of risks that may deplete or even wipe out its hard-earned wealth. Discussing, identifying, documenting and developing measures to address the risk factors prepare the family with the necessary competencies to weather distressing events.

- How active can you and other family members be in the wealth maximisation process? Documenting the family's mission and a process for decision-making are critical first steps in developing a wealth maximisation framework. How involved will family members be in the wealth maximisation process? Who will make important decisions and how will these important decisions be communicated to the rest of the family?

- How will you ensure the financial education of younger family members? Great wealth carries great responsibility. Family members who are taught that they are stewards or protectors of the family wealth are usually far-sighted in making decisions that are best for the family in the long-term.

- What positive changes do you want to affect in society? Is it important for your family to create a foundation or to develop a philanthropic programme to support your social aspirations? How do you involve your family members and align your family values with your charitable goals?

- What are the benchmarks of successful wealth maximisation? It is important to periodically assess actual performance relative to wealth maximisation goals and the family mission. How does your family incorporate the latest changes in the family and environment to achieve mid-term and long-term goals? How often and how should an assessment be conducted?

- Where can you find professional advisers with the expertise and integrity to work on your behalf and to represent your interests? The most critical issue is to find intelligent, strategic thinkers whose judgment you can trust in advising you about financial decisions. They can facilitate the setting of objectives, the formulation of a strategy and plan, and the correct choice of structures and people to implement and monitor the plan effectively.

How do you identify, engage and motivate the professionals you need to pursue the family's agenda?

According to Sara Hamilton from the Family Office Exchange (FOX), managing wealth successfully, like managing a business, requires thoughtful planning, diligent research and the construction of a fully-integrated plan to coordinate all the components of the process. The steps include documenting a family mission statement, articulating investment goals, and providing beneficiaries of the wealth with the financial information needed to make good decisions. Managing wealth properly is as complicated as managing a business properly.

The ultimate challenge is to synchronise the goals of family members with the necessary strategies and structures required to maximise wealth.

To achieve this, you will need to coordinate a team of experienced professionals to ensure that decisions are made with the goals of the family in mind.

To succeed in your new business of wealth maximisation, it is important that you take enough time to think through the important issues listed above, learn from the experiences of other families who have gone through the experience with success and get your family members to be involved in the process.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia


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© Copyright 2009 The New Straits Times Press (M) Berhad. All rights reserved.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2354018/Article/pppull_index_html

Set clear investment policy statement

NST Online » Focus
2008/09/07

Business: Set clear investment policy statement
By : Yap Ming Hui


The great Greek philosopher and mathematician Plato said: “The beginning is the most important part of the work.”

After you have developed a financial plan, you are ready to start investing for your financial goals — almost, but not quite. It is time to have an investment policy statement where you set parameters within which the portfolio is to be managed over time.

Why have an investment policy statement

The principal reason for an investment policy statement is to protect your investment portfolio from ad-hoc revisions of sound long-term policy.

The investment policy statement is used to keep our selves from taking those unwise actions that seem so “obvious” and urgent to optimists at market highs and to pessimists at market lows.

As human beings, we like best those upward market movements that are most adverse to our long-term interests, and most dislike those downward market movements that are, in fact, in our long-term interests

As such, investors need protection from their human proclivities toward unrealistic hopes and unnecessary fears. Therefore, the best shield against the outrageous attacks of acute short-term data and distress are knowledge and understanding — committed in writing.

We can think of an investment policy statement as a letter of understanding between the investor and the investment manager.

In the absence of professional investment manager, it is a letter of understanding between you and your own self to protect the investment portfolio. The problem, as Santayana so aptly put it, is that “those who cannot remember the past are condemned to repeat it.”

The benefits of investment policy statement

The benefits of a proper investment policy statement are as follows:

- It provides a written description of the investment decision-making process from objective setting through implementation and ongoing monitoring of progress toward the goal

- Is a model against which to measure performance

- Provides a framework for evaluating new investment opportunities as they come along

- In the case of using a professional investment manager, an investment policy statement can provide for continuity in investment approach as new investment manager replaces those who are stepping down

- Serves as the non-emotional tether that you can use to ground yourself when markets are misbehaving and the temptation to act impulsively or irrationally is high. This is particularly important during extremely good or bad stock market environments

- Can be made part of the financial or estate plan. This could be particularly important for older investors who have build sizeable portfolios. When the investor dies, the estate executors or administrator won’t have to second-guess the intended investment strategy of the portfolio. It can be left intact for the heirs for many years if that was the deceased’s wish. This might be desirable when the heirs are minors or have spendthrift habits.

Content of an investment policy statement

A complete investment policy statement must be able to establish useful guidelines for investing that are appropriate to the realities of your objectives and the realities of the investments and markets. As such, there are two main components of an investment policy statement. First is your objectives and tolerance of risk. Second is the external realm of investment market.

In short, investment policy statement is the linkage between your long-term investment objectives and the daily/ weekly investing home works.

A proper and complete investment policy statement is set out as follows:

• Background and purpose.

- Why the investment policy statement was written — by whom, for whom and when.

- Who has the responsibility for what

• Objectives

- Projected financial needs — how much and when

- Present asset allocation — where are you today?

- Risk tolerance and time horizon of the investor

- Risk profile and investment time of the portfolio

• Investment policy

- The “rules” by which the investment strategy will be implemented

- Acknowledgement of the uncertainties of investing

- Investor preferences for asset classes or securities

- Desired rate of return

- When and how to re-balance

• Security selection

- Criteria for choosing securities

- List of types of securities not to be included in portfolio (eg, tobacco, alcohol, gambling)

- List of types of transactions not permitted (eg, leverage, options, commodities)

• Duties and responsibilities (if engaging professionals)

- The investment manager

- The custodian

• Manager selection (if engaging a professional investment manager)

- Results — cumulative and year-by-year

- Risk — volatility

- Rank — peer group performance

- Resources — Who is running the show? Services?

• Control procedures — monitoring

- Monthly — current holdings, market value and transactions

- Quarterly — How is the portfolio doing against the benchmark? How is the manager doing against his or her peers? Is the asset allocation being followed?

- Annually — Review investor’s risk tolerance, desired rate of return, asset class performance and time horizon to major financial needs. Analyse expenses and fees paid.

• Appendix

- Modeled return, standard deviation and correlation statistics for the asset classes used to diversify the portfolio

The test of a good investment policy statement

A well-written investment policy statement should be able to let anyone reviewing the investment portfolio to follow what was done. Guidelines should be specific enough to make it clear what was intended, yet give whoever is charged with implementing the strategy authority to actively (but prudently) manage the portfolio.

The litmus test for a well-written investment policy statement is whether there is sufficient detail and clarity for the investment portfolio to be implement by an investment manager who is unfamiliar with you (whether professional is engaged or not).


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Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/20080907092919/Article/index_html?query_start=26&query=''

Dollar Slams Up Against a (Great) Wall

Dollar Slams Up Against a (Great) Wall
by Robert Lenzner
Friday, March 27, 2009
provided by

The People's Bank of China flexes its muscle in call for a new reserve currency.

Move over Ben Bernanke. Step aside Tim Geithner. There's a new power in international finance: Zhou Xiaochuan, governor of the People's Bank of China, the $2 trillion central bank of China. It has the tools and the financial interests to be the new power player on the global financial stage.

Zhou Xiaochuan--better learn how to spell it and pronounce it--threw down the gauntlet this week at the Obama-Geithner-Bernanke financial regime. His remarks can only be interpreted as a slap in the face of U.S. policy during the severe financial crisis that has swept the world. His prescriptions are bound to be debated in London next week at the G-20 parley and for years to come.

Boldly stated, Zhou--backed by Russia, Brazil and India--wants to break the dollar's hegemony in global finance. In a paper grandly called "Reform the International Monetary System," Zhou has called for the creation of an international currency unit that he admits will require "extraordinary political vision and courage." He suggests that we start with a blend of the dollar, pound, yen and euro--the so-called Special Drawing Rights (SDR) created by the IMF in 1969 that borrowed a concept first recommended by famed economist John Maynard Keynes.

Zhou's provocative remarks come only days after Premier Wen Jiabao demanded U.S. action to safeguard China's holdings of U.S. bonds--some $740 billion of Treasuries and $600 billion of other debt.

"We have lent huge amounts of money to the U.S. [and] we are concerned about the safety of our assets," said Wen. Indeed, China has bought $200 billion of Treasuries while selling agency securities over the past six months. But it also lost about a third of its equity holdings, including $5 billion in the Lehman bankruptcy.

Zhou's rationale appears reasonable to Croesus. "A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity," writes Zhou. "This will significantly reduce the risks of a future crisis and enhance crisis management capability."

By the way, don't dismiss Zhou as just a voice in the wilderness. His plan for a global reserve currency is backed by multibillionaire trader and economic wiseman George Soros, as well as Martin Wolf, an influential columnist for the Financial Times. Geithner, queried at the Council on Foreign Relations on Wednesday, said he hadn't read Zhou's proposal, but praised his counterpart as "a very thoughtful, very careful, distinguished central banker." Geithner added that he was "quite open" to the suggestion of expanding the SDR's role.

Zhou has surprised the experts by suggesting that international financial institutions such as the International Monetary Fund should manage some nations' currency reserves. The IMF uses its funds to prop up nations in financial crisis. Expanding the SDR would give the IMF the potential to "act as a super-sovereign reserve currency" and to increase the IMF's resources, Zhou emphasized. "The scope of using the SDR should be broadened so as to enable it to fully satisfy the member countries' demand for a reserve currency," adds Zhou.

This would be a shocking change in a system where central banks maintain control over their reserves and many keep their operations entirely secret and non-transparent. Zhou makes a telling point when he insists that "the centralized management of part of the global reserve by a trustworthy international institution will be more effective in deterring speculation and stabilizing financial markets." In other words, Zhou is saying that the recent vicious meltdown might have been avoided if the world's financial system was not tied solely to the American dollar, the currency at the focal point of the global economy.

"For a country like China that prizes its sovereignty and to date hasn't even been willing to report the currency composition of its reserves to the IMF [something most other countries do], this would be a big step," says Brad Setser, a fellow of the Council on Foreign Relations and former Treasury official in the Clinton administration.

In a second address Thursday, Zhou took an even tougher whack at some American institutions and financial concepts. He blasted the way "the global financial system relies heavily on the external credit ratings for investment decisions and risk management." Having three U.S. ratings agencies dominate the world results in "a massive herd behavior at the institutional level. Moreover, the rating models for mortgage-related structured products are fundamentally flawed." All true. The massive write-downs across the globe were the result of these flaws in the American way of doing things.

Then, Zhou goes on to blame the American fair-value accounting system and especially the mark-to-market model for the intense market fluctuations and disorderly trading. Take that America. China described the "negative feedback loop" as the most toxic American export ever. Zhou also crowed about how China's "macroeconomic measures," including a massive stimulus program, have produced "some leading indicators pointing to recovery of economic growth, indicating that rapid decline in growth had been curbed."

Then, Zhou really stuck it to Obama-Geithner-Bernanke, as well as to Europe and Japan. "Facts speak volumes and demonstrate that compared with other major economies, the Chinese government has taken prompt, decisive and effective policy measures, demonstrating its superior system advantage when it comes to making vital policy decisions." Talk about gauntlet dropping.

Copyrighted, Forbes.com. All rights reserved.

http://finance.yahoo.com/banking-budgeting/article/106817/Dollar-Slams-Up-Against-a-Great-Wall;_ylt=AoJCjKtUf1TYF.q1mz7X1yBO7sMF

G20 summit: blow for Gordon Brown as £1.4 trillion spending blueprint is leaked

G20 summit: blow for Gordon Brown as £1.4 trillion spending blueprint is leaked
Gordon Brown's preparations for this week's G20 summit in London got off to a bad start last night when a British blueprint for a £1.4 trillion worldwide spending boost was leaked.

By Patrick Hennessy, Political Editor
Last Updated: 11:20PM GMT 28 Mar 2009


In an embarrassing disclosure, a draft of the final communiqué to be signed off by world leaders at the end of the one-day gathering on Thursday appeared in the German magazine Der Spiegel.

There were suspicions that the leak was a deliberate act of sabotage by sources within the German government, where Chancellor Angela Merkel is adopting a more cautious approach to fiscal moves to boost the national economy than Mr Brown, who will chair the summit.

A Downing Street spokesman said the leak was an "old document with out of date figures" and that the £1.4 trillion was an estimate by the International Monetary Fund (IMF) of stimulus measures already introduced by G20 countries. No new money was included, the spokesman added.

The comments, though, only served to increase speculation that Mr Brown was being forced to scale down ambitious plans because of international opposition, led by Germany and France.

Ahead of the summit, which will be held at the ExCel centre in London's Docklands, Mr Brown unveiled plans for a new crackdown on tax havens across the world.

Lord Owen, the former Labour foreign secretary, also warned that unless inflation was controlled, Britain's economy might have to be constrained by the IMF.

David Cameron's Conservative Party also widened its lead over Labour to 13 per cent in an ICM opinion poll for The Sunday Telegraph.

The leaked communiqué mentioned a figure of $2 trillion – £1.4 billion – in brackets, signifying it was a proposal for spending by G20 nations by Britain, as summit host, that still had to be formally agreed. According to the leak, this would boost growth by two per cent and employment by 19 million.

The draft also suggested that Britain wanted the G20 to come up with a target for global growth in 2010 – although no figure was mentioned.

The document stated: "We are determined to restore growth, resist protectionism and to reform our markets and institutions for the future.

"We believe that an open world economy, based on the principles of the market, effective regulation and strong global institutions, can ensure sustainable globalisation with rising wellbeing for all."

Insiders at Der Spiegel said the magazine had obtained the leak from German government sources.

British officials, however, declined to blame Mrs Merkel's inner circle directly, pointing the finger of blame instead at smaller political parties inside her ruling coalition.

A No 10 spokesman said the £1.4 trillion figure did not amount to "extra money" which Britain was calling for governments to spend to try to rescue economies which have been crippled by the credit crunch, but referred instead to estimates of expenditure which had already been made.

Mr Brown has faced claims that he wants to use the Budget, on 22 April, to unveil a big new fiscal stimulus for Britain while Alistair Darling, the Chancellor, and Mervyn King, the Bank of England Governor, are advocating caution.

The Prime Minister wants a main focus of the summit to be a clampdown on tax havens, with a three-point plan aimed at building on moves which have already seen Switzerland and Liechtenstein agree to abide by new transparency standards.

Britain will push for support on new moves to use tax incentives to stop companies and individuals trading with those who are resident in "non-compliant jurisdictions", Government sources said, while there will also be new measures requiring companies to disclose more details of dealings with tax havens.

The third part of the proposed clampdown involves a review of investment policies of institutions such as the IMF and retail development banks with a view to cutting the funds available to tax havens.

Amid the frantic preparations for the summit Lord Owen, foreign secretary under Jim Callaghan in the late 1970s, uses an article in today's Sunday Telegraph to warn that Britain's economy might have to be subject to "IMF disciplines" – which would require painful public spending cuts – to halt a "precipitate loss of confidence".

Lord Owen sounded the alert about the twin threats of a falling pound and inflation, which crippled Callaghan's government, being repeated under Mr Brown. "There is an air of breathtaking unreality in Westminster and Whitehall that reminds me of 1975," he wrote. "Hard choices need to be taken now, not postponed until after an election in 2010."

His comments are certain to infuriate ministers, Labour MPs and activists, many of whom still blame him for his role in splitting Labour by forming the Social Democratic Party (SDP) in the early 1980s.

In autumn 2007, two months after Mr Brown became Prime Minister, the two men held talks in Downing Street, leading to speculation that the peer was considering returning to the Labour fold.

Lord Owen's warning about the IMF echoed similar alerts sounded recently both by George Soros, the Hungarian financier, and Mr Cameron.

Meanwhile, George Osborne, the shadow chancellor, used a speech yesterday to Welsh Conservatives in Cardiff to taunt Mr Brown over his stewardship of the British economy.

Mr Osborne said: "When Gordon Brown sits down with the other G20 leaders in London next week, he will have to explain why he, of all the people sitting around the table, has the highest budget deficit – why the economy he presides over, of all the economies represented at the table, is forecast to still be in recession next year."

http://www.telegraph.co.uk/finance/financetopics/g20-summit/5067296/G20-summit-blow-for-Gordon-Brown-as-1.4-trillion-spending-blueprint-is-leaked.html

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It's time to admit inflation is going to be a major problem

It's time to admit inflation is going to be a major problem
I don't wish to be smug. But can we now agree that, despite repeated warnings from ministers and the City, the UK won't get caught in a "deflationary spiral" and inflation is a much greater danger?

By Liam Halligan
Last Updated: 5:11AM BST 29 Mar 2009

Comments 0 Comment on this article

For months, this column has argued that the spectre of deflation has been conjured up by those whose hubris and incompetence caused this crisis.

It's given Gordon Brown an excuse to indulge the Keynesian wet-dreams of his political adolescence, spending our money willy-nilly, with absolutely no regard for the impact on future generations.

Our economy is being held to ransom by deflation fear

Even before this sub-prime debacle, his borrowing was far too high.

But having failed to put the UK's fiscal house in order during the good years, Brown has now set fire to the whole shebang.

The reason, we're told, is that because deflation is imminent, "the danger of doing too little is greater than the danger of doing too much".

"Deflation is coming" has been the mantra of the City economists too.

Could their views be influenced by the institutions employing them?

Hyped-up deflationary fears have certainly led to an awful lot of taxpayer-funded "soft credits" being chucked towards the Square Mile.

Meanwhile, the supposed cure, "quantitative easing" (sic), is allowing banks that should fail, that need to fail, to rebuild balance sheets they themselves destroyed by years of wild risk-taking. So, if you're a washed-up, spendthrift Prime Minister, or a banking executive desperate to cover up past mistakes, "look out, deflation" is a useful message to get into the mind of the public.

Barely pausing to look at the evidence or question WHY our so-called leaders are saying this, the press has too easily obliged.

The UK economy contracted 1.6pc during the final three months of 2008 and 0.7pc the quarter before.

This is now a deep downturn – the worst since the early 1980s and counting. Retail sales growth was a perky 3.8pc in January, but slumped to 0.4pc last month.

Despite that slowdown, and the "deflation is nigh" warnings, CPI inflation ROSE in February – to 3.2pc, up from 3pc the month before.

So grave is the deflationary danger that the Bank of England has just written a letter to the Treasury explaining why inflation remains ABOVE its 2pc target – as it has been for 17 months.

RPI inflation fell marginally last month, to 0.0pc. But that measure stresses house prices – which, of course, have dropped sharply.

Desperate to drum up more free taxpayers' cash, City economists were only last week forecasting the February RPI number would be minus 0.7pc. How wrong can you be?

The RPIX – similar to RPI, but excluding housing costs – also rose last month and, while the deflationists tried to attribute February's CPI number to rising food prices, "core inflation" – which excludes items with volatile prices such as food – shot up too.

Why? Because, weighed down by lax fiscal and monetary policy, the pound has lost a third of its value in just over a year.

That pushes up import prices and overseas goods account for a very high share of UK household spending.

In my view, inflation will get much worse in the medium term.

By the time "quantitative easing" is over, the UK will have more than doubled its monetary base.

Deflationists say low lending offsets that but M4 – the broadest monetary measure, which includes bank lending – is still growing by 16pc a year.

Lending to households is 5pc down on last year. Lending to firms is still expanding but only by 4pc, compared with 15pc average annual corporate credit growth since 2005.

But credit to OFIs – other financial institutions – is now growing at a colossal 45pc annual rate, so banks are "still lending", as they say, but mostly to their own off-balance sheet vehicles
which they set up in previous years to take crazy risks.

That lending will find its way into the economy and is still inflationary – even if ordinary punters are "credit crunched".

So, both base and broad money are now expanding rapidly – storing up huge future inflation, despite the slowdown.

I accept that, during the early summer, the RPI may go negative for a month or two. Oil prices were up above $140 in May and June last year, and will this year be much lower – weighing heavily on the index. But such "base effects" will be short-lived and very quickly reversed.

Oil was $40 a barrel in December 2008 and, as explained below, could easily be at $60 by the end of this year – 50pc higher.

That will send the inflation indices into orbit, just as the vast monetary expansion starts feeding through.

So, please, let's stop pretending deflation is a problem.

We need an honest, robust debate about fiscal meltdown, bank balance sheets and future inflation – the genuine problems we face.

West set for a crude awakening

AS THE G20 denizens battle to save the global economy, one positive they can point to is the price of oil. Since soaring last summer, the cost of crude has collapsed.

That lowers fuel bills and helps Western oil importers cut their (often gaping) trade deficits. How bad would things be if, as well as financial meltdown, we had high oil prices too?

Well, that could easily happen. Oil prices moved firmly above $50 last week – almost 40pc up from their February low. Until now, most economists have accepted the "demand destruction" story – assuming a slowing world economy would use less oil, keeping a lid on prices.

But crude has recently rocketed, despite the prospects for global growth being worse than at any time during this crisis. Across the Western world, GDP growth forecasts are being scythed. The US, the world's biggest oil importer, is now contracting at its fastest rate for three decades. In Japan, the world's second largest economy, oil imports are at a 20-year low.

So why is oil going up? Well, "demand destruction" was never as big a deal as economists in oil-importing countries wanted to believe.

The big emerging markets now account for a large share of world-wide oil use. Their population growth, and on-going economic expansion, is keeping global oil demand firm.

At the same time, recent low crude prices have caused production cutbacks. In the past six months, the number of active oil rigs in the US – still a major crude producer – has dropped nearly 50pc.

Even worse, high credit costs have led to much lower spending on future production capacity.

In Saudi, UAE, Russia and other leading producers, numerous oil infrastructure projects have lately been mothballed or axed.

That's one reason why oil markets are showing such a steep "contango" – with futures contracts way above today's "spot" price. Oil for delivery in December 2009 is now more than $60 a barrel, rising beyond $70 a year later.

Something else is going on too. Across the world, many sophisticated investors and money-managers have never believed the self-serving "deflation is coming" mantra being pumped-out of London and Washington. And as Western governments lose control and central bank printing presses crank-up, the "inflation not deflation" crowd is growing.

That's why oil prices are rising. As a tangible, scarce asset like gold, crude is increasingly being used as an easily tradable anti-inflation hedge.

http://www.telegraph.co.uk/finance/comment/liamhalligan/5066497/Its-time-to-admit-inflation-is-going-to-be-a-major-problem.html

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Deflation: How to protect your portfolio

Deflation: How to protect your portfolio
Should you be protecting your portfolio against deflation or inflation, or hedging your bets? Emma Simon looks at the options

By Emma SimonLast Updated: 9:37PM GMT 27 Mar 2009

Investors face some tough choices as "zeroflation" leaves them caught between the Scylla and Charybdis of deflation in the short term followed by the risk of inflation in the medium to long term.

Should they be turning to the safe haven of government gilts as a hedge against deflation and economic depression?

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Or is there a bigger threat on the horizon – with inflation gathering pace again?

Investors could be forgiven for assuming that rising prices are the last thing they need to worry about given last week's figures.

The retail price index – one measure of inflation – has fallen to zero. In other words, prices remain unchanged compared to a year ago. This has prompted fears that recession may bring about a period of flat, or falling, prices.

But the Government's preferred measure of inflation – the Consumer Price Index – jumped unexpectedly to 3.2pc in February, showing that some prices are still rising ahead of Government targets.

Why is there a difference between these two figures? Put simply, only the Retail Price Index (RPI) takes into account monthly mortgage repayments. These have fallen sharply, thanks to an unprecedented series of interest rate cuts. CPI ignores this data, so there has not been any corresponding decline.

Most experts agree that, for the short term at least, we are in a period of zeroflation or even deflation. But many are warning investors to look to the long term instead.

David Kuo, of the financial website The Motley Fool, said: "It's inflation that investors should be guarding against." Like others, he is concerned that the "bail-out" measures adopted by governments across the world to kick-start the economy, could be storing up future inflationary pressures.

"For example the Government in the UK is now effectively printing money in a bid to ease the credit crisis. Mr Kuo said: "It's likely that once quantitative easing [the printing of money] permeates through the economy, we'll see the rate of inflation begin to rise again."

So what steps should investors be taking now to protect their portfolios?

Protecting against deflation
If you think that the British economy is heading into a protracted downturn akin to the "lost decade" Japan experienced in the Nineties then now is the time to play it safe.

In a period of prolonged depression and falling prices, equities will underperform, as company profits suffer. Instead, investors should look at government gilts and high-quality investment bonds, as these are likely to produce the best returns.

Juliet Schooling, the head of research at Chelsea Financial Services, said: "Gilts are considered the safest market instrument and can provide a safe haven in a deflationary environment. This is because the gilt will pay out a fixed rate of interest which will increase in value as prices fall."
Investors can buy gilts individually or through a fund. Ms Schooling recommends City Financial Strategic Gilt fund, currently yielding 3.33pc.

But Gavin Haynes, the managing director of Whitechurch Securities, said: "Deflationary concerns have pushed gilt prices up and yields have fallen to historically low levels. So unless you think we are entering a long-term deflationary environment, then they are starting to look expensive."

Although equities typically perform badly in deflationary conditions, Jason Collins, a multi manager from Ignis, said investors should not step out of the stock market completely.
"The emphasis should be on selecting 'winning companies'. Look at very defensive sectors that are not sensitive to the economic cycle".

He added that investors may also want to target "the strongest companies in more cyclical sectors that will take market share from the weaker players that fail".

He added: "Deflation is particularly bad for those with big debts and physical assets – so property values are likely to fall and the real value of your mortgage debt will increase."

Adrian Lowcock, senior investment adviser at Bestinvest, said: "In the current climate there are a number of steps investors can take which will benefit them if prices fall, but also make good sense for the long term."

Given that debt increases in real terms in periods of deflation, Mr Lowcock said investors should spare funds to reduce the size of their mortgage.

He pointed out that investors should not overlook cash savings. "With interest rates so low, cash savings can look unattractive. But remember if we enter a period of deflation then in real terms your money is growing by 3pc a year."

http://www.telegraph.co.uk/finance/personalfinance/investing/5063248/Deflation-How-to-protect-your-portfolio.html

Inflation: how to protect your portfolio

Inflation: how to protect your portfolio
If inflation does kick off, then there is one place you want to be: equities.

By Emma SimonLast Updated: 9:35PM GMT 27 Mar 2009

Mr Haynes at Whitechurch said that those taking a medium- to long-term view should not ignore the stock market.

"I particularly favour equity income funds that invest in companies that can pay and grow dividends above the rate of inflation," he added. His preferred choice is Artemis Income or Newton Higher Income.

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Those on a fixed income, such as pensioners, should take care to hedge against inflation, as it can seriously erode future spending power.

It is possible to buy index-linked gilts and index-linked annuities, which typically rise in line with RPI. However, there is often a premium to pay for buying this protection which can leave investors out of pocket if inflation falls.

Interest rates tend to rise in periods of inflation. On the face of it this is good for those with cash savings. But remember, you want to look at real returns – the interest you are getting on your savings, over and above inflation.

A return of 6pc may sound a lot healthier than the 1pc people are typically getting paid today, but if RPI is significantly higher, you may be little better off.

Mr Haynes added: "It may be worth considering commercial property funds again as a hedge against inflation.

"A lot of leases have upwards-only rent review and will increase rents in line with RPI. There could be further pain in the short term as the economic environment worsens, but if inflation rears its head it may be time to revisit these funds."

Hedging your bets

Paradoxically there is one asset that advisers recommend as a hedge against both inflation and deflation: gold. Mr Haynes explains: "Many investors believe gold is a good, safe bet in times of economic turmoil and falling interest rates. However, due to its intrinsic value and limited supply, gold has the ability to retain its real value over time, making it a potential hedge against inflation."

Ms Schooling agrees. "When prices are unstable people feel safer holding gold. Historically it has managed to keep its head in times of economic turmoil."

So whether we enter a period of deflationary gloom, or prices start to rise out of control, gold should be a safe bet. However, there is one word of warning.

Once we come out of the recession and the economic picture becomes more benign, gold is bound to lose is lustre. Investors are unlikely to want such a safe investment, and a change of sentiment could cause prices to dip sharply.

Those wanting exposure to gold can either buy gold bullion, invest in an exchange-traded fund that tracks the gold price, or buy into a fund such as Black Rock Gold and General, which invest in mining and other gold-related shares.

Mr Collins added: "Whichever wins through it's clear we're in for a difficult and uncertain time that will result in higher levels of volatility in financial markets.

"It won't be enough to simply buy an asset class to protect you from the ravages of inflation or deflation." Investors need to be nimble: diversification will remain key, as will keeping an active eye on your investments.

http://www.telegraph.co.uk/finance/personalfinance/investing/5063296/Inflation-how-to-protect-your-portfolio.html

How Do Banks Make Profits?

How Do Banks Make Profits?
Traditional Centers of Bank Profits
© Carmelo Montalbano

Mar 27, 2009
Bank earnings are derived from four main operations: Loans and fees from lending operations, trading profits in bonds, trust department activities, investment banking.

.The basis for a bank's importance is its power to lend. The lending function matches institutions with excess liquidity with those in need of capital on a temporary, or intermediate term. The bank acts as the arbitrator of credit, understanding risk in order to lend, showing economic resilience in order to attract lenders.

Spread Lending Creates Opportunity
The basis for bank lending is their ability to collect deposits primarily through checking accounts, savings accounts, and certificates of deposit. In the last few years short term borrowing have been a major source of funding. This is possible in part because the yield curve is positively sloped giving banks a further advantage if they borrow short but extend their lending horizon. This deposit base is then lent out at a higher interest rate for loan origination and trading and portfolio operation. This lending arbitrage is called the 'spread.' The powerful ability to lend fuels the profitability of banking activities because banks can provide immediate loan resources for any banking deal they originate that requires such financing.

It is the spread that funds credit card lending, mortgage lending, corporate lending, lines of credit and foreign credit. It is from the arbitrage opportunity that reserves are taken for bad debt and 'impairments' or the temporary inability of a creditor to meet interest and principle payments.

Banking Fees and Investment Banking Activities
Advising banking clients and aiding them in financing their strategic plans is a natural result of the bank's lending activity. Investment banking includes the ability to earn fee income from municipalities, foreign governments, corporations, and international agencies. Advising clients is a natural opportunity for banks because as part of the lending function banks know the intimate details of a company's balance sheet and plans. Banks serve as consultants in mergers, acquisitions, public debt issuance and restructuring, real estate construction and financing, and leasing and corporate loan origination.

The Trust Function
Separate from other banking activities are trust activities. Trust is the wealth building and preservation business where, for a fee, banks advise high net worth individuals and companies on their retirement plans and savings. In addition to advisement banks may offer trust services where funds are invested by professional advisers into wealth building assets. This function resembles that of mutual funds but it is usually done on an individual, customized basis. Banks also provide custodial services whereby the bank acts as the intermediary between stockholder and bondholder providing payment services for interest, dividend and principal payments.



Read more: "How Do Banks Make Profits? Traditional Centers of Bank Profits" - http://investment-banking.suite101.com/article.cfm/how_do_banks_make_profits#ixzz0B6tEiiDC

***Not making money to maintain his retirement lifestyle.

2008/08/09

YAP MING HUI: Hedging against inflation


IT was an anxious Jimmy that came to see me about a year after he retired. He had sold his factory to a US company.

At our first meeting, I asked him how his retirement life was. He said: "Everything is fantastic. I get to travel a lot and play golf."

However, there was a problem.

"I need to break my fixed deposit every now and then to maintain my lifestyle."

Jimmy has about RM10 million but most of his investments in property, unit trusts and shares were not making money to maintain his retirement lifestyle.

He has about RM4 million in fixed deposit. But the interest income from fixed deposit barely covers the impact of inflation.

If he were to spend the interest income, he will risk having the principal depleted over the years due to inflation.

What is the problem?

Jimmy's problem is a typical case of "asset rich, income poor" -- people who are good at creating wealth from their business or profession but weak at generating income from the created wealth. They are rich in assets which are not generating good investment income.

Jimmy's total wealth is RM10 million. His RM4 million generates four per cent of interest.

However, four per cent of interest is not enough to cover the four per cent of inflation provision. As a result, there is no net income for Jimmy from his fixed deposit asset.

His RM3 million of properties generates a RM50,000 income per annum. This can be considered a net income for him because inflation will be hedged by the capital appreciation of at least four per cent per annum.

His RM1 million of shares give him a total return of nine per cent. After the provision of four per cent inflation, his actual income is RM50,000.

His RM2 million unit trust investment didn't make him any money at all.

Therefore, the total actual income after inflation is RM100,000. Due to the fact that Jimmy needs RM400,000 to maintain his lifestyle, he is short of RM300,000 of annual income.

Solution

- Review the performance of each investment asset classes

Jimmy needs to review the performance of all his investments. He will need to get rid of poorly performing investments. He will need to look at each unit trust fund and property to decide if he should sell or keep them.

- Move fixed deposit into higher return investment

Jimmy's fixed deposit will be eroded by inflation if he continues to leave that much of his wealth under fixed deposit.

After calculating and providing for his short-term cash flow needs, the balance of his fixed deposit should be in other investments that are able to generate higher return to hedge against inflation.

- Diversify retirement income

Just because one investment asset gives you good income and a hedge against inflation, it doesn't mean that you must put all or the majority of your wealth into it.

Some people have been successful in property investing. They managed to generate good capital appreciation and rental income. However, rental income is not necessarily sustainable in the long run and is normally subject to a lot of changes.

Therefore, the best practice is still to diversify your retirement income so that it is not badly affected by any one source.

One should consider also share dividends and capital gains, unit trust gains, bond investment gains and retirement income products.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2315138/Article/index_html

If this rally is the real McCoy, most people will miss out

If this rally is the real McCoy, most people will miss out
Winter on the markets could finally be ending, but it will take time for investors to shed their bearskins.

By Tom Stevenson
Last Updated: 10:25AM GMT 26 Mar 2009

Comments 5 Comment on this article

Perhaps it was all that gloriously unseasonal weather last week. It's hard to maintain a bearish scowl in the face of catkins, daffodils and blue skies. Whatever the reason, investors have had a spring in their step on both sides of the Atlantic. The obvious question is whether the 22pc two-week gain on Wall Street, or the rather more subdued 13pc three-week rise over here, is just another bear market rally or the real McCoy.

The US reversal has certainly been spectacular, especially the Geithner-inspired 7pc surge in the S&P 500 on Monday. That was the fifth biggest one day rise and the best performance in a single session since last autumn's gyrations. Over here things don't look quite so special – we've been here several times already during this bear market.

Since the FTSE 100 peaked in June 2007, there have been four rallies of 10pc or more. The first was the phony war between August and October 2007 when we kidded ourselves that the problem was "over there" and could be contained in the financial and property sectors. Shares rose by 15pc.

Next was the 18pc Bear Stearns relief rally between March and May last year. Phew, we thought, that gets all the bad news out of the way. There was another 10pc rise in the holiday lull before the collapse of Lehman Brothers ensured that all bets were off in September and October.
Finally the year ended with a 15pc act of collective self-delusion when we thought the "real economy" might escape the worst effects of the credit crunch. Even as investors were crossing their fingers, the economy was in fact falling off a cliff.

So why should the latest bounce be any different? The rise so far is bang in line with the other rallies that came to nought. Why shouldn't it also peter out when investors find something new to worry about?

The first reason is that, with every downward lurch, the valuation argument becomes ever more compelling. Yes, shares have been cheaper but on increasingly few occasions. Buying shares when they have been available at the current multiple of earnings has in the past given investors a better than evens chance of achieving a 10pc a year return for a decade or more.

So even if this doesn't turn out to be the actual bottom of the market, on any sensible timescale for buying shares any further short-term losses are likely to be quickly clawed back. The more people who realise that this is the case, the more likely it is that this will indeed be the bottom.

The second reason to think the low point is near is the sheer length and depth of the bear market. The dot.com crash was longer but we've already matched the scale of drop. Only the 1970s and 1930s come close in size and duration.

Third, the market is holding up in the face of bad news, the best sign of all that the gloom and doom is already in the price. It is hard to imagine the market shrugging off Mervyn King's comments about the dire state of the public finances six months ago.

Finally, there are some tentative signs that the economy, if not exactly improving, is deteriorating less quickly than it was. Bear markets do not end when things get better but when they stop getting worse.

Signs to watch out for are things like the copper price – up by a third so far this year – and the Baltic Dry Freight index, which has risen sharply. Another straw in the wind is the very low level of inventories companies are holding. The smallest uptick in demand will immediately feed through into higher industrial production, so economic expectations might even be exceeded rather than endlessly disappointed later this year.

Another positive to note about the jump in share prices in March was the breadth of the rally. The ratio of risers to fallers exploded in this month's rally, a classic signal that we have seen a real low rather than what the traders call a "dead cat bounce".

Of course, no one knows whether March 2009 will mark the bottom or not, but if it proves to be the low point one thing is certain: most people will miss it. Data from the US shows that the ratio of cash held in money market funds compared to mutual fund assets peaked more or less as the market hit rock bottom in 2002. The stock market had risen by 30pc over the subsequent 15-month period before cash levels had returned to average so most people got back into the market way too late.

That wouldn't matter if bull markets were steady affairs adding value smoothly from trough to new peak. But they are not. It has been calculated that more than a quarter of the total return from all the bull markets since 1930 came within the first six months of the bottom of the market being reached. A third came within nine months.

One of these warm spells will really mark the end of winter. How long will you keep your coat on?

Tom Stevenson writes on investment for Fidelity International. The views expressed are his own.

http://www.telegraph.co.uk/finance/comment/tom-stevenson/5050205/If-this-rally-is-the-real-McCoy-most-people-will-miss-out.html

Gilts: what are they?

Gilts: what are they?
A guide to Government gilts.

Last Updated: 12:26PM GMT 26 Mar 2009

What is a gilt?

Gilts are bonds issued by the Government to raise money. The term originated in Britain and referred to debt securities that had a gilt (or guilded) edge.

Who issues them?

Since April 1998 gilts have been issued by the Debt Management Office on behalf of HM Treasury.

Is their more than one type of gilt?

Yes. Conventional gilts are the simplest form of government bond and are the largest share of liabilities in the Government's portfolio. They guarantee to pay the holder a fixed cash payment - or coupon in bond jargon - every six months until the bond matures, at which point the holder receives the final coupon payment and get his original investment back. An investor who holds £1,000 nominal of 4pc Treasury Gilt 2016 will receive two coupon payments of £20 each on 7 March and 7 September until it expires in 2016.

There are other types such as index-linked gilts (IGs), which form the largest part of the gilt portfolio after conventional gilts. Here the coupon is related to movements in the Retail Prices Index (RPI) - in other words, it is linked to inflation.

How do you buy them?

Gilts can either be bought directly from the DMO at its outright gilt auctions or through the secondary market. Bidders at auction can choose to participate through a Gilt-edged Market Maker (GEMM) - a form of broker - who can bid directly by telephone to the DMO on the bidder’s behalf, or by completing an application form, providing that they are members of the DMO’s Approved Group of Investors.

Who buys them?

Anyone can buy gilts. Pension funds are by far the biggest buyers as they need to meet payments when people retire. They are also used by individuals who are looking for a steady income or as part of a balanced investment portfolio.

Source: DMO

http://www.telegraph.co.uk/finance/economics/5054206/Gilts-what-are-they.html

US backing for world currency stuns markets

US backing for world currency stuns markets
US Treasury Secretary Tim Geithner shocked global markets by revealing that Washington is "quite open" to Chinese proposals for the gradual development of a global reserve currency run by the International Monetary Fund.

By Ambrose Evans-Pritchard
Last Updated: 8:18AM GMT 26 Mar 2009

The dollar plunged instantly against the euro, yen, and sterling as the comments flashed across trading screens. David Bloom, currency chief at HSBC, said the apparent policy shift amounts to an earthquake in geo-finance.

"The mere fact that the US Treasury Secretary is even entertaining thoughts that the dollar may cease being the anchor of the global monetary system has caused consternation," he said.

Gold price spikes as dollar falls Mr Geithner later qualified his remarks, insisting that the dollar would remain the "world's dominant reserve currency ... for a long period of time" but the seeds of doubt have been sown.

The markets appear baffled by the confused statements emanating from Washington. President Barack Obama told a new conference hours earlier that there was no threat to the reserve status of the dollar.

"I don't believe that there is a need for a global currency. The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world," he said.

The Chinese proposal, outlined this week by central bank governor Zhou Xiaochuan, calls for a "super-sovereign reserve currency" under IMF management, turning the Fund into a sort of world central bank.

The idea is that the IMF should activate its dormant powers to issue Special Drawing Rights. These SDRs would expand their role over time, becoming a "widely-accepted means of payments".

Mr Bloom said that any switch towards use of SDRs has direct implications for the currency markets. At the moment, 65pc of the world's $6.8 trillion stash of foreign reserves is held in dollars. But the dollar makes up just 42pc of the basket weighting of SDRs. So any SDR purchase under current rules must favour the euro, yen and sterling.

Beijing has the backing of Russia and a clutch of emerging powers in Asia and Latin America. Economists have toyed with such schemes before but the issue has vaulted to the top of the political agenda as creditor states around the world takes fright at the extreme measures now being adopted by the Federal Reserve, especially the decision to buy US government debt directly with printed money.

Mr Bloom said the US is discovering that the sensitivities of creditors cannot be ignored. "China holds almost 30pc of the world's entire reserves. What they say matters," he said.

Mr Geithner's friendly comments about the SDR plan seem intended to soothe Chinese feelings after a spat in January over alleged currency manipulation by Beijing, but he will now have to explain his own categorical assurance to Congress on Tuesday that he would not countenance any moves towards a world currency.

http://www.telegraph.co.uk/finance/economics/5050407/US-backing-for-world-currency-stuns-markets.html