What choices do we have with the impending OPR cut… again?
Analysts expect Bank Negara Malaysia to further cut the OPR rate before the year ends. Even RAM, a credit rating agency in Malaysia, expects the same.
In my previous post I have highlighted how it impacts our lives given the multiple cuts (4x this year alone).
We know that the purpose is to drive and stimulate the economy. However, one can’t help but wonder if we need to do anything to those savings we keep in bank accounts and fixed deposits.
What we notice is the flood of retail investors into the stock market, driving the rise and fall of share prices based on speculations and news. This is evidently so with the increasing interests in penny stocks. Granted, it is possible to make many times more a return than keeping those funds in bank accounts. On the flip side, there are also multitudes of retail investors who got burnt and reduced their savings balance instead.
I strongly discourage using savings to “gamble” in the share market, but you make your own choices.
Just very recently I was asked by a friend on what to do with the current state of affairs. Status quo? Move savings? Stocks? Gold? Crypto?
And this spurred me to share our discussion here.
Keep Savings and Investing separate
Firstly, it is paramount to understand that the funds meant for savings and investments are two separate buckets.
The reason for this is very simple: Risk Level.
Savings are meant to be money put aside for specific purposes such as retirement, education, family, emergency, big ticket purchase, etc. The risk appetite for these are very low and capital preservation is key. Liquidity is also important as you would want to be able to take them out when the need arises
Investments refer to growing your pool of money over time by acquiring assets / things that you believe will increase in value. However, you also take on a degree of risk of loss when you “invest”. With this, you should be ready to lose the pool of money committed in investments. In terms of liquidity, you can expect it to be low in most cases as it takes time to generate returns and sometimes can stay at a loss position for a long time (months or years or decades).
Risk tolerance for investments is definitely higher than savings.
With respect to my sharing today, I’ll be touching more on the savings part of your funds.
The choices for our savings
Choice 1: Do nothing (No – Low Risk)
Doing nothing is something.
In this case, it is almost guaranteed that you will get capital preservation for your savings because it is untouched as it sits quietly in your bank account collecting whatever interest rates your banks pay you. The biggest risk you have is the bank going bankrupt and then PIDM will protect your money up to RM250k only.
Seriously, if banks are going bankrupt (in Malaysia anyway), you have much bigger things to worry about.
The main downside to this is that you will lose out in time due to inflation (think of Nasi Lemak prices today vs Nasi Lemak prices 10 years ago) and minimal returns from the money kept in there.
Choice 2: Lock in FD rates NOW! (No – Low Risk)
This is one choice that I have taken at the beginning of the year.
Banks are throwing in a lot of promo FD rates nowadays to attract us to deposit money with them with lock up periods and some imposed conditions.
So the idea is to deposit your money into these promo rates so that you don’t have to worry for the next 6 – 12 months.
I have locked in to over 3% FD interest for my savings and won’t have to worry about them till later part of this year.
Choice 3: Money Market Funds (Low Risk)
Another step I took a few months back. I moved some of my savings out from banks to money market funds.
Money market funds are unit trust funds that invests into a pool of low risk low return and highly liquid investments. Depending on the fund, this could commonly comprise of a pool of FD with multiple banks, plus some short term investments with banks. More can be read about this in the post by StashAway on “Why banks don’t want you to know about money market funds“
Examples of these are: StashAway Simple, Unit Trust Funds (Just ask your unit trust agent or you may look for one in Fundsupermart)
The reason this is low risk is because it is FD without the lock up period. This has been sufficiently covered in my review of StashAway Simple.
What you need to take note of is that the reduction of FD rates WILL affect the returns of these money market funds, but the reduction in their rate of return will take some time to take effect.
Think of it as the Money Market Fund locking in the higher FD rates prior to the OPR cut. So even if banks reduced their rates now, it will only impact the Money Market Fund later when the FD is due for renewal.
Choice 4: Selected Unit Trust Funds (Low – Medium Risk)
There is a plethora of choices when we talk about unit trust funds. You may even be investing in some already.
However, for savings, you would want to only consider low risk funds, which are typically Money Market Funds (Choice 2), Bond Funds and Fixed Income Funds.
Take your pick by contacting your agent or search at Fundsupermart.
Word of advice: make sure you know what you are investing in. Check out the historical performance of those funds. You will be paying fees on these, so make sure that your returns can well compensate your fees.
Choice 5: High dividend yield stocks (High Risk)
This is yet another choice I have taken, for a part of my savings.
Since the stock market has been so hot recently, a lot of great dividend paying stocks have been neglected in favour of “momentum” stocks.
This choice pulls our attention back to these dividend champions, who pay good and consistent dividends (i.e. distribution of the profits the company make to the shareholders). Some of them are giving amazing yields of 6% and above. Obviously, investment in the stock markets are subject to share price fluctuations. This just means there is a potential of capital gain OR loss. Hence, the high risk.
Since we’re talking about savings that we won’t touch much anyway, there is no harm taking some of these and investing in quality dividend champions.
Do your research into these companies: Know who they are, be somewhat familiar with the industry and their prospects, the dividend track records (how long & how much). You can also take a look at the investment principles I use to guide my stock picking as reference.
Be ready to stay with these stocks for the long term, which can be years or decades.
Example: One sector that took a heavy beating this season is the financials (i.e. banks). If the banks are able to maintain their dividends from the past, then the yields will be something quite alluring.
What about Gold, Cryptocurrencies, Properties…?
No, no and no.
At the beginning I’ve mentioned to keep investing and savings separated. Given that we’re trying to preserve our savings and not lose to inflation, we have to take caution not to commit to too much risks.
Take your pick
…and go with it.
There is no right or wrong. Just what you are comfortable with.
The most important thing is that you can sleep soundly at night.
Addition: You may also consider Amanah Saham Nasional Berhad (ASNB) fixed priced funds if you’re a Malaysian
