Investment Guide: How To Protect Yourself From The Weakening Ringgit Malaysia?
In the past month, the value of our Ringgit has plummeted against the US Dollars to a 5-year low of MYR3.4955/USD (As of December 8, 2014), being the weakest since the 2008/09 global financial crisis. Primarily due to the drastic decline in the world crude oil prices, leading to the worsening of Malaysia’s current deficit, resulting in losses as majority of our country exports are derived from oil exports. If the oil prices continue to fall, our Ringgit may follow the oil prices and plummet even further.
According to The Economist, the low demand for oil due to weaker economic activity, increases in oil consumption efficiency and switching from oil to other alternative fuels have been the contributing factors of the decline.
The US have also emerged as the world largest oil producer, relying less on oil imports. Added with failure to reach an agreement to curb oil supply by the oil producing economic countries (OPEC) to protect their own market share, this has created an oversupply of oil which caused the fall in oil prices.
How does this affect us
The weakening of the Ringgit has caused our purchasing power to shrink. For those of us who are looking forward for year-end holiday vacations overseas, this means that it will cost us more to convert into foreign currency, and we can’t spend as much as we could before! You may have to give a shopping trip in Milan a skip with the current currency situation. With the implementation of goods and services tax (GST) just around the corner, our cost of living may increase as well, leaving us struggling even harder to grow our wealth — and for some to survive in this economic climate.
Fixed deposits are not making the cut
Despite the current fixed deposit rates offered by banks being relatively higher compared to historical trends, putting all your money into fixed deposits as a primary vehicle of investment is barely enough to protect your money against inflation. Furthermore, with the rising house prices and cost of living, it is pretty much impossible to attain financial freedom just through investing in FD. At best, fixed deposits are considered as saving for your emergency fund rather than an investment.
The need to start investing
If you want to live a financially comfortable life and to keep up with the ever escalating cost of living, it is high time to start putting your money somewhere you can grow and provide you with higher returns compared to conventional FD accounts. Here are a few suggestions you could look into:
Exchange traded funds (ETFs) not only provide diversification as index funds have a composite of firms in different industries, they also offer lower fees compared to unit trusts and mutual funds.
As an ETF follows an index, it can be passively managed (you don’t have to look at the market everyday) which appeals to passive investors. ETFs also provide healthy dividends and market capitalization growth over time.
Note that ETFs can be broken into two types: one is the standard or physical ETF’s where you hold the underlying assets like a firm’s share; and another is known as synthetic ETF’s where they have a mixture holding of the underlying assets and complex derivatives.
Investors of synthetic ETF are exposed to counter-party risk as these funds use swap contracts. This means that there’s a possibility that the fund can be defaulted, and investors might face unrecoverable loss of their investment.
Bonds are another safe instrument to invest in compared to equities and provide a steady stream of income in the form of coupons. Bonds are normally issued over-the-counter by private firms, government and quasi-government institutions, such as Khazanah, and can be traded like regular stocks on the market. They come in a few types: commercial paper, medium term notes and long-term bonds.
One advantage of buying Malaysian bonds is that our bonds such as Malaysian Government Securities (MGS) and Malaysian Treasury Bills (MTB) are exempted from interest income tax and capital appreciation tax by our Government.
A good reason to look into bonds in this period is that the recent oil price slump and interest rate hike of 0.25% by Bank Negara Malaysia (BNM) have caused bond prices to fall and yield (returns) to increase. If you’re cautious in the bond market and confident that the trend will reverse in the long run, perhaps going into bonds might payoff well.
Buying bonds can be quite affordable and accessible for those who don’t have a lot of money. Only a minimum initial investment of RM1,000 and RM100 of subsequent investment is needed to get a piece of the action. A bond fund is a collected pool of money by fund managers from retail investors like us, and the accumulated capital pool is used to buy physical bonds as mentioned above.
Equities are direct holding of a firm’s share, meaning that you have a stake on the firm’s performance. Although compared to other investments, equities can be more expensive and risky, this avenue could potentially provide higher returns; and there may be some investors coming out as victors from the current oil price slump. For example, the manufacturing industry are poised to gain from cheaper Ringgit currency which makes exporting to be more attractive.
4. Foreign exchange
Contrary to popular belief, foreign exchange (forex for short) trading is actually legal and available from authorized dealers under the Money Service Business Act 2011 set by BNM. If your appetite is up for it, forex trading can be an avenue to make lucrative returns in a short period. However, the forex market by nature is very volatile and risky, and it requires you to have a good degree of knowledge in technical analysis and also strong financial discipline to stomach the volatile currency price movement.
Investing in forex differs quite a lot from other trading based investments like equities as long-term projections are extremely difficult to make as there are significantly more factors involved.
The weakening Ringgit Malaysia on top of the escalating cost of living have caused worries for Malaysians, especially in times of economic uncertainties. This is why upping our game on managing personal finance and be solely dependent of our pay cheque is crucial. We have to find new avenues to sustain and grow our wealth and these are just some ways we can do that if we want to achieve financial freedom and to be prepared for any adversities.