Investing for Retirement - The New Way

One of the biggest myths in investing funds to your retirement portfolio is that the investor should stick to mainly conservative investments such as bonds and cash reserves. The idea is that as you grow older, you'll need money more readily, so playing it safe is the idea here. Interestingly, there's an old method of determining your asset allocation by subtracting your age from 100. The difference is the amount (percentage) that you should devote your assets to for stocks. So a 60 year old person would have 40% in stocks. Sounds like a plan? Not for many.

Today, the retirement investing may not have the same goals for various reasons. One, the age of retirement could vary dramatically. Individuals could retire in their 80s, or others may want to retire in their 60s, depending on their retirement assets.

There are also investors who have saved very little for retirement. Often they find themselves in a catch-up mode. This isn't the age-old pension plan that older generations relied on for their savings. More retirement plans are now defined benefit plans so the plan participant will have to provide how much they will contribute and how they will allocate their investments.

Sometimes, you'll find investors not willing to place part of their paychecks for retirement. It behoves individuals facing a close retirement to accelerate their contributions and place assets in more aggressive stocks. Since aggressive assets such as stocks can help you increase your returns, catch-up employees need to weigh investment risks and returns carefully.

Retirement participants also underestimate their longevity and as such, they assess their length of retirement incorrectly. As individuals live longer, retirement income may erode over time. Especially for the person that takes the conservative approach to investing, less money may be available during the later years of retirement. One must evaluate other sources of income and determine if these sources can contribute. Consider Social Security or income from a part time job. Such alternatives may allow the investor to rely less on the retirement accounts and allow the person to adjust the allocation accordingly.

The fact remains that the investor needs to assess time horizon, risk tolerance and retirement goals in today's environment, like any non-retirement portfolio. With people living longer, it makes sense to evaluate your investment portfolio for the long retirement. A 60 year old person thinking that he or she will retire soon may want to consider living in the 90s, a 30 year stretch for the retiree. How does one account this long duration? One would clearly have to account for the time horizon, which means allocate more to stock funds. Remember, stocks outperform bonds in the long run. A person at the age of 60 will be left out if their asset allocation is 40% in stocks. The long-term range may push the investor to take a more aggressive stance such as a 60% stock and 40% bond ratio.

Planning for retirement is not an easy step. One has to assess goals and other factors that will lead to proper asset allocation. More specifically, investors need to consider aggressive vehicles such as stocks, even at the beginning of retirement. There's still hope. Retirement asset allocation tools are available that can help you plan for retirement. Ask your investment company if they have online calculators, or, simply, go to one of the two largest mutual fund companies (vanguard.com or fidelity.com). Personal financial advisors are a good way to get professional help as well.

Michael Russell

Weekly Market View (September 1 - 5, 2008)

Economic
US: OECD revised US GDP08 up from 1.2% previously estimated to 1.8%, as growth in 2Q08 was stronger than expected. However, the OECD pointed out that the problem in housing sector would be a threat for growth.

Europe: The ECB kept its policy rate steady at 4.25% as expected, citing its concerns on economic slowdown. The Eurostat confirmed that the euro zone economy shrank 0.2% QoQ in 2Q08, as consumption and investment dropped. July’s producer price index (PPI) rose 1.1% MoM or upped 9.0% YoY, as oil prices hit its record high. Germany Economic Minister said that German economy probably slipped into recession as 2Q08 GDP contracted 0.5% QoQ. He expected a negative QoQ growth in 3Q08.

UK: The BoE hold its policy rate at 5.0% as expected. However, market worried about recession and expected the BoE would cut its policy rate before the end of this year.

Japan: Private capital spending fell 6.5% QoQ in 2Q08, confirming that Japanese economy was in trouble.

Thailand: A drop in oil prices and government measures help lowering August’s inflation compared to a month earlier. Headline inflation rose 6.4% YoY, but declined 3.0% MoM. Core inflation (excluding fresh food and energy prices) increased 2.7% YoY, but dropped 0.9% MoM. The BoT governor said that the central bank might change inflation targeting from core inflation to headline inflation as higher oil prices caused the gap between core and headline inflation much wider than before. The governor also commented that the Thailand economic fundamental remained strong, and she believed if political situation was back to normal, everything should move on smoothly. However, as direction of oil prices remained in doubt and government measures would give benefit for short-term only, the BoT suggested that inflation risks could not be completely sidelined, and the bank would keep a close monitor on it.

Fixed Income Market
Government bond yield edged up 0 - 0.10% with the steepening trend, short term yield (1 - 3 year) stayed still while long end (7 - 10 years) increased approximately 0.10%. The key factors of market correction this week were expectation on significant higher supply in FY09 due to jumping government budget deficit from THB165bn in FY08 to THB249bn in FY09, and profit taking flow after market rally for the past few months.

Equity Market
SET Index plunged to the lowest level in 20 months amid political clash between Prime Minister and protestors as well as concerns on global economic slowdown. Selling pressure on Thai stocks intensified as State of Emergency in the Capital was declared right after battle between the pro and anti-government supporters broke out. S&P said to cut Thai rating outlook if violence worsened. Global sell-off persisted as signs pointed to further economic slowdown i.e. deteriorating US consumer spending and higher unemployment. Oil prices continued to drop this week largely as hurricane damage lesser than expected and as Euro hit its year-low. Hence, energy sector bore the brunt of selling this week. Whilst domestic names i.e. banks held up relatively well with much lower-than-expected CPI reported. Rate-hike talk ended with inflation falling sharply from 10-year high as a result of slide in commodity prices and government subsidies.

Start Your Tax-free Investment Early

Some local investments need time to get tax privileges

To protect your wealth, you need to find all legal avenues for enhancing your investment return. The key to success is to spend sensibly, use all the tax-deductible items that you are given, and invest prudently in tax-free vehicles.

The Thai government has given individual investors some tax incentives when investing in a number of instruments. The most common are contractual bank deposits, stocks listed on the SET and mutual funds.

Contractual bank deposit accounts

While the Revenue Department takes away 15% of your interest earned from normal bank deposit accounts as withholding tax, it gives a break on some accounts.

Interests earned from contractual bank deposit accounts are tax-free. These require you to place deposits equally every month for 24 months and prohibit you from withdrawing early. A number of local banks offer this type of accounts and even give you a higher interest than normal fixed deposit rates.

Its only drawback is that the maximum you can deposit is 25,000 Baht per month or 600,000 Baht for the whole program. That is, you save only a few thousand Baht per year on taxes. Clearly, the government simply does not want to give the rich all the tax benefits.

Stocks

When you invest in stocks listed on the SET, profits from sales of those stocks are tax-free. However, this does not apply to unlisted stocks or listed stocks that you do not trade on the SET. So, when you actually sell or transfer shares to someone else, you have to be careful with the price you declare as the selling price.

In addition to the capital gains, dividends that you receive from stocks can also be used as tax credits. That is, when you include the dividends as part of your taxable income, you may use three-seventh of them as tax credits, which will subsequently reduce your overall tax burden.

While most people think that investments in the Thai stock market are risky, they tend to overlook some companies that continue to be profitable and pay high dividends. These stocks, if held for a medium-to-long term, can provide yields that outperform the bank deposit rates, and give you a tax break as well. You should also know that most listed companies pay dividends in April and May.

Note that you will only reap this benefit if your overall disposable income is below the 37% tax bracket. If you belong to the top-most bracket, you will be indifferent whether you include the dividend income as part of your taxable income or you don’t.

Mutual funds

Mutual funds are forms of indirect investment. That is, you may put your money in a bank or buy government bonds and corporate bonds directly. However, such direct investments don’t give you any tax breaks – you still have to pay 15% withholding tax on the interests and discounts that you receive from those instruments.

Investment in those assets through mutual funds gives you a tax-free status. Mutual funds in Thailand can transfer the tax-free interests that they receive into a rise in their prices, or NAVs, which is also tax-free for individual investors.

This is why fixed income mutual funds have become more popular in the past one year, even though it carries higher risks than bank deposits. Most high-net-worth individuals find that they can save a lot of taxes by investing in bonds and other money market instruments through these funds.

It is quite ironic that such investment vehicle, which is originally created for small, inexperienced investors to pool their money together to become a large, diversified investment portfolio, is now owned mostly by wealthy, experienced investors. The first group often lacks understanding of the product and neglects its advantages whilst the latter has used it to maximize benefits.

Whether you are a small-time investor or a wealthy investor, it is important to always realize the importance of well-planned investment strategies. Remember that you have to always evaluate your risk profile and investment goals before deciding on your asset allocation. While investment in Thailand is still limited, there are a few tax-free possibilities for you.

Reprinted with modification from 'Money Matters', a weekly column written by Reungvit Nandhabiwat, former managing director of AYF, for the Bangkok Post.

January 10, 2001

Weekly Market View (August 25 - 29, 2008)

Economic
US: The US economy grew by 3.3% in 2Q08, higher than the first report of a 1.9% growth, as consumer spending and exports were stronger than previously estimated. However, the FOMC minute showed that the committee acknowledged that a downside risks remained, while weak housing sector, higher energy prices, and weak labour market would put pressure on the economic outlook.

Europe: The European statistic office reported the euro zone inflation rose 3.8% in August, eased from 4.0% in July, as oil prices slipped. Germany reported unemployment rate fall to 16-year low, implying that its labour market remained strong amid a weakening economy.

Japan: Core inflation (excluding fresh fruit, vegetable and seafood, but including energy) hit 10-year high at 2.4% in July.

Thailand: The Office of the National Economic and Social Development Board (NESDB) reported that high inflation dragged the Thai economic growth downed to 5.3% in 2Q08, below consensus of 5.7%. The NESDB expected the Thai economy would expand 5.2 – 5.7% this year, while inflation was expected to be around 6.5 – 7.0% in the third and fourth quarters this year. For July’s economy, the BoT reported the economy continued to expand from June. Private consumption expanded by 9.3% YoY, or +3.4% MoM. Private investment grew by 3.9% YoY, or +0.4% MoM. Exports rose 43.9%, while imports rose 53.4%, recorded a trade deficit of USD762mn. On the monetary policy, the BoT raise its policy rate by 0.25% as inflation and its anticipation remained high, while the direction of oil prices remained dubious. The central bank believed that a rate hike to 3.75% would not have much affect to the economic growth, but it would help delaying another hike.

Fixed Income Market
Government bond yield tumbled 10 - 40 bps for tenor 2-year onwards while short-term yield moved up toward a 3.75% policy rate. 2QGDP announced on August 25, weighed down market by negative surprise 5.3% YoY compared with 5.8% consensus. Demand for long duration bond was boosted by foreign investors and interbank after GDP results, and remained in a bullish mode after MPC decided to raise 1-day RP rate from 3.50% to 3.75% with a dovish statement hinted no more hike for the rest of the year.

Inflation peaked out on July and expected to ease from August onwards. GDP was forecasted to slow in 2H08 and some banks' analyst expected rate cut in the next year after core inflation start to decline.

Equity Market
Market plunged at the beginning of the week on escalating political tension after anti-government group vowed to stage their last attempt to overthrow the government as well as slower-than-expected 2Q08’s GDP growth. SET index hit its lowest level this week on Tuesday as protestors stormed into government’s TV station and laid siege of Premier’s Offices. However, the broader index managed to close higher this week as bargain hunters stepped. On brighter side, monthly economic numbers of July showed sustained strength in domestic consumption. Market turnover remained very light with local institutions leading the buying spree. Oil price is near unchanged level from last week, earlier gains from hurricane fears were pared as US authority ensured the supply from their strategic reserves.

http://stockmarketforbeginners.co.cc/for-the-beginners/weekly-market-view-august-25-29-2008.html

Weekly Market View (August 18 - 22, 2008)

Economic
US: Producer Price Index (PPI) rose 1.2% in July, whereas housing starts and construction permits decreased by 11%, and 17.7% respectively. Market was concerned about the inflation which stayed at the high level, while housing market continued to slow down.

Europe: The Euro zone economy recorded a trade deficit of EUR0.1bn in June due to higher oil import, but the export to the US reduced. In Germany, Producer Price Index (PPI) increased 8.9% in July, the highest increase in 27 years, due to soared energy prices.

UK: British retail sales unexpectedly jumped by 0.8% MoM in July (market expected a 0.3% drop) even as retail prices hit 10-year high at 1.6% YoY.

Japan: BoJ maintained its policy rate at 0.5% as expected.

Thailand: The Finance Minister said that the MoF were preparing to propose new economic stimulus measures to the economic policy committees meeting, which would be held on 27th August. The objective of the measures was to support 6.0% economic growth target. Reuter’s poll reported that analysts expected the NESDB to report an economic growth of 5.7% YoY in 2Q08, shrank by 1.0% QoQ, and they further expected the MPC to hike rate by 0.25% to 3.75% during the meeting. For July’s external sector, total exports rose 43.9% YoY, a value of USD16,957mn as exports to new markets expanded by 56.1%, resulting in increasing the proportion of new market to 50.7%. Imports, increased by 55.1%, accounted for USD17,984.3mn. Thailand imported more energy (98.2%), capital goods (36.3%), and raw materials (52.9%) causing July’s trade deficit of USD1,026.9mn.

Fixed Income Market
THB bonds retreated after six-week rally. Bonds tumbled as yields rose 15-20bps by end of the week as market expected the BoT would hike rate to fight with rising inflation. THB/USD strengthened back to 33.90 after the BoT intervention.

Equity Market
SET plunged this week with renewed worries about trouble at major US mortgage backers and more related write-downs to come. Baht weakness, which was in line with regional currencies, has partly led to foreign selling this week, though trading turnover pared to very low level. Political uncertainties at home also weighed down buying interest. Optimism driven by relatively strong 2Q08 results was over. Also, satisfactory banks loan growth could not encourage heavy buying interest. Meanwhile, commodities stroked back this week with oil price gaining as much as 7% to two weeks high on weakening USD as well as rising geopolitical tension between US and Russia.

Sources to Learn about Investing Basics

Thai investors need to learn more about investing in different assets, now

In the past one year, I have run into a number of my parents’ friends and relatives who have been affected by our government’s policy of low interest rates. These elders are suffering greatly as their interest income from bank deposits diminishes swiftly. What they receive now – at their retirement age – is only a fraction of what they used to get a few years ago.

I have sympathy for them, and a lot of other fellow Thais, who never had a chance to learn much about investing. They put most of their life-long savings in bank deposits and jewelleries or antiques, which have low liquidity.

Our government has shielded our economy from the global economic environment for so long that we never needed to learn about how to invest properly. For us, bank deposits were the only means to save and grow our money.

For those of you who still have time to study and make a difference to your personal wealth, I would recommend that you spend some time learning about investment. You will find that the sooner you know about it, the better off your future will be.

If you have access to the internet, the websites below are excellent starting points.

www.fool.com

www.money.com

www.schwab.com

www.thestreet.com

www.ici.org

Since these are all American sites, you will find that some of the terms and topics are irrelevant in Thailand. You may also notice that all of them discuss at length about investing in stocks, college planning and retirement planning, the concepts of which are quite alien to most of us here.

Locally, there are not many sites that provide basic lessons. The best one I have found so far is www.thaibdc.or.th, which gives basics on bonds. Others that either provide statistics or some original articles are:

www.bot.or.th (The Bank of Thailand)

www.sec.or.th (The Securities & Exchange Commission)

www.mof.go.th (The Ministry of Finance)

www.thaifin.com (personal finance site)

www.silkspan.com (financial superstore)

www.qthai.com (financial news and information)

If you don’t have access to internet, you can also find the following (English) books worth reading. (You should be able to find them in bookstores specialising in foreign publications.)

‘Investing for Dummies’, by Eric Tyson

‘Rich Dad’s Guide to Investing: What the Rich Invest in That the Poor and Middle Class Do Not!’, by Robert T. Kiyosaki and Sharon L. Lechter

‘The Wall Street Journal Guide to Understanding Money & Investing’ by Kenneth M. Morris, Alan M. Siegel and Virginia B. Morris

‘Mutual Funds for Dummies’ by Eric Tyson

Again, these books are written in the American context, but you can still learn a lot of basic investment practices from them.

You will find that the above-mentioned websites and books have some similar lessons and concepts:

Before investing in anything, always set your investment objectives and evaluate your own risk profiles first

Diversify your investments in various asset classes such as bank deposits, bonds, stocks, gold and properties

Invest some of your assets for longer term to reduce short-term fluctuations

By learning about proper investing, you will be better prepared for cyclical economic downturns that will most likely hit Thailand again in the future. The sooner you start, the better. As I have read somewhere that “the best time to invest your money was yesterday!”

Becoming a wise investor in the SET

An introductory insight to creating a long-term wealth

Many people have asked me whether it is the right time to jump into the stock market. My usual answer is, “I don’t know”.

This is based on my having no information about the individual who has sought my opinion. I don’t know what he/she likes, what he/she expects from investing in the stock market, what his/her long-term financial goals are, and most importantly, to what degree of risk this person can withstand.

Investing in stocks is riskier than putting money in a bank or buying a bond. You may get richer, gaining a profit of over 50%, in a week, or you may become poorer, seeing your stock value tumbling down by 50%, in a week as well. So, unless you can ensure that such potential loss, if it happens, will not give you a heart attack or make you commit a suicide, you’d better stay away from the stock market.

I believe that wise investing in the stock market can contribute to everyone’s wealth creation in the long term. Amongst the different asset classes, stocks typically offer the best way to beat inflation. Earnings of most listed companies will keep increasing when their businesses expand. These will be reflected in higher stock prices and more dividends.

Many people would disagree with me and say that investing in stocks is similar to gambling. In fact, they are alike in many ways.

First of all, they both involve risks. That is, gamblers and stock investors cannot accurately predict the outcome with great confidence. If it turns out to be a profit, they would claim that they have done their homework well. However, if it turns out to be a loss, they would blame it on the stars and fate!

Secondly, you rarely hear the “bad news” or losses. When was the last time you heard people say they lost their money in a bet, be it a football pool, a state lottery or an underground one? Similarly, stock investors normally brag about their profits, but always keep mute about their losses. They often say their stocks are for long-term hold when the prices move south.

Thirdly, both gamblers and stock investors are addictive to their activities, which they claim to be their main source of income. They often spend time discussing about them with friends in hope for getting to hear more “predictions” from well-known astrologers.

To me, stock investment can be considered gambling or full-fledge speculation when investors buy only on hope and not on sound knowledge of the underlying stocks. Once they randomly commit their money into something based only on instincts, they are immediately engaging in taking unnecessary risks.

In Thailand, it is unfortunate that there are more stock speculators than investors. As reported by the Stock Exchange of Thailand (SET), over 60% of market participants are retail investors who seek quick profits. They rely very little on fundamentals of stocks and depend more on the “hot tips” that they receive from their brokers. We often hear about investors who trade a single stock 2-3 times in a day – they buy on rumours and sell on facts!

I doubt that these speculators can achieve their financial goals, either short-term or long-term, by trading stocks in the SET. Quick profits, if any, can entice them to go into the market more often. However, just like gambling, it is more likely that their luck will run out someday. In addition, few speculators would factor the brokerage fees into the calculation of net profits.

Having said all that, I find that speculation is not all bad if it is in the right proportion. In your stock portfolio, there can be a few stocks that you can hold for more than three years, a few that you hold for a year, and a few that you plan to sell in a month. As long as you know exactly why you buy or sell each stock, and the proportion of speculative stocks is less than 25% of your portfolio, you can consider yourself an investor.

Some of the basic knowledge you should have before investing in a stock:

• What does this company do? Why is it a good business to be in?

• How is the competition, locally and internationally?

• What is its earnings forecast? What has been its track record?

• What will impact its earnings; i.e. oil prices, exchange rates? To what extent?

• How is its management? How transparent and effective are its policies?

• How liquid is this stock?

• Is the current price attractive? Why?

• When will you sell the stock? Why?

If you have all the answers to the above questions, you can be certain that you are becoming more of an investor than a speculator. Prudent investing will reduce risks and give you a better chance of winning the war – or achieving your financial goals – instead of just winning a battle – or gaining short-term profits.

Reprinted with modification from 'Money Matters', a weekly column written by Reungvit Nandhabiwat, former managing director of AYF, for the Bangkok Post.

December 6, 2000