Many people say you should invest your money if you wish to be wealthy.
But what they don’t say is, how or where to invest.
Here’s my investing philosophy that has worked well so far, where I allocate 20% to investments that I can’t control and remaining 80% to investments where I can control.
Step 1: Figure Out Your Net Worth
To make things simple, assuming you have zero invested so far, your net worth is how much money you have in your bank account.
If you own a property worth RM500k and you have RM200k in your bank account, your net worth is RM700k.
In the following example, we will assume your net worth is RM100,000 to make the calculations simple.
Step 2: Allocate 20% of Networth to Investments You Can’t Control
20% is a safe yet reasonable allocation for things that are out of your control.
So with RM100k net worth, 20% of it, RM20k will go to the following investments:
Shares
While shares can give you good returns, they can also go the other way and wipe out your money as share prices can go up and down depending on news…
And you guess it, there’s nothing you can do to control news and human emotions.
Your investment is also dependent on the management team of respective listed companies, where each decision that they make during meetings regarding the company’s direction will either increase or decrease your investments.
However, there is a safer way of shares investing.
Invest in the S&P 500 instead of individual companies. It’s a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
Your risk and rewards will be lower by investing in the S&P 500 as the average annual return is 10.26%
The theory to justify investing in the S&P 500 is as follows:
When the US economy grows, the companies that would have contributed to its growth are likely to come from the top listed companies in the US, thus increasing investors’ confidence as profits increase. Eventually the share price will increase as well in the long term.
However, if other countries can overtake the US in the future due to changing world order, this S&P 500 strategy will not work anymore.
For now in 2024, S&P 500 is a steady investing strategy. If you have a higher risk appetite, you can go for individual stocks instead. If you are interested in shares investing, sign up for Interactive Brokers to start trading.
Cryptocurrency
If shares are too boring for you, Cryptocurrency or Crypto is another form of investing you can try.
Caveat: Crypto is super volatile and you may see returns of 50% or a drop of 50% in 1 day. Only invest in crypto if you are able to stomach the rollercoaster ride.
With thousands of different crypto available, if you are beginner I’ll advise to just invest in Bitcoin and Ethereum as these 2 are the most popular ones. Then again, crypto is an investment that you can’t control. Just be prepared and have this expectation before diving into crypto.
Personally, I use Luno Malaysia to invest in crypto.
Investing in Private Companies
There are so many ways to invest in private companies now.
You have Equity Crowdfunding (ECF), Peer to Peer Financing (P2P) and investing in friends’ business.
With 90% business failure rate, you will need to be lucky enough to invest in the 10% that succeed.
I would classify investing in private companies as higher risk vs investing in shares of listed companies. However, if you are an early investor in private companies and they go public, your returns can be crazy!
Step 3: Allocate 80% of Networth to Investments You Can Control
The easy part is investing the 20% as No Control = Less Effort from your end.
Here comes the interesting part of building net worth, focus on the 80% that you can control.
With RM100k net worth as our example, 80% of it, RM80k will go to the following:
Start A Business / Scale Existing Business
Whether you are starting or growing a business, you are in control as you can change things that are happening in the business and aim to continuously improve the state of the business.
Being in the business day to day, you would have a better idea of where to put the money to grow the business, giving you unlimited % of returns.
Besides monthly cash flows, the maximum value of a business is when you sell it as you will get a multiple of the profits.
For example, say your business profit is RM500k a year, which is already fantastic! If the acquirer offers 5x to 10x multiple of profits, you would be selling the business for RM2.5 Million to RM5 Million, making you an instant millionaire.
Real Estate
Real estate is divided into residential and commercial.
If you have the money, go for commercial as the returns are generally higher. Also you have the control to choose your tenants and set rental price, which you can increase every few years due to inflation.
When the rental price increases, the value of commercial real estate increases as well, giving you both capital appreciation and higher monthly cash flow.
Residential is a good option as well, but with the supply of condos exceeding the demand, your returns will be lower vs Commercial.
On the other hand, If you are going for residential landed, expect to get negative returns as the rental price of Landed is usually lower vs Condo. For landed properties, you will need to wait many years for capital appreciation instead of monthly returns.
Fixed Deposit (FD)
Many people hate putting money in FD, but I love FD as it give you a return which you can take it as pure passive income, unlike other forms of passive income like real estate investing where you still need to put in work.
FD also locks some of your money down for 1 year, ensuring that you don’t overspend, think of it as forced savings with passive income.
FD is something you can control and it’s the lowest risk among all investments as you are guaranteed the % after 1 year.
While FD won’t make you rich, I treat it as a defensive part of of investment portfolio.
Bonus: Time to RM100k
Another thing that I always try to do each year is my time to RM100k net worth.
Let’s say it takes me 5 years to reach RM100k, the following year I’ll aim to reduce it to 4.5 years or 4 years, and improve each year the time to RM100k via investments and savings.
Tracking your time to RM100k makes the personal finance journey as you can see the time taken reduce each year, giving you real satisfaction and ensure you will continue to build wealth.
Conclusion
TLDR: Invest 20% in things you can’t control (shares, crypto, private companies) and Invest 80% in things you can control (own business, real estate, FD).
Track your time to RM100k each year and aim to reduce the time needed to reach RM100k networth.
