Q&A Session 1

1. Q: I fully agree with you that you can be a millionaire with the magic of compounding interest. However I wish to know what are the choices available for us in Malaysia that offers deals with compounding interest other that Unit Trust? -Usha

A: There are many other choices to benefit from compounding power. It’s all depending on your risk acceptance level.
a) The lowest risk is of course your Fixed Deposit (FD). It still gives you some interest, but it’s not good enough to fight the inflation.
b) Dividend stocks can be considered for compounding power, but you need to put effort to learn on choosing the right stocks. B
c) Bonds offer a lower risk and a better return than FD, but you have to buy them in big bulk in hundreds of thousand dollars in primary market. You could still possible to buy in thousands in secondary markets. You also must make some research before buying.
The reason I mentioned on trust fund is because it could give you a good return with slightly higher risk than bond and FD. Yet, you still have to do some research before you buy one.

2. Q: Disregard of pension (I can say it's an auto-passive income for government servants). How will I know my passive income can support me and my family for long term? Thanks. -Anonymous

A: I’ll give 2 point of view.

In financial freedom point of you, the easiest way to look into this is to see how much is your expenses or income. As long your passive income is higher than your expenses, ideally it would able to support your family. The main thing is you must grow your passive income throughout time as the inflation will erode the value.

Let’s say you have a passive income of $5,000 every month and your expenses are $4,500. 20 years later, due to inflation and additional expenses such as new born child and child education, your monthly expenses grown to $18,000 per month. Definitely your passive income of $5,000 won’t be enough. So, what to do about it?

Here are some ideas.
1. Get a passive income which will grow with inflation. For example, property rental. Property rental will definitely go up throughout time. Other example, stock dividend will also go up throughout time. The percentage will be about the same.
2. Continue to invest. Don’t stop looking for passive income after you reach your goal. Continue to invest. Continue to compound your returns. It will produce more passive income for you and your family.
3. Make sure your passive income not only sufficient for your family expenses, but also for your investments.

In retirement planning view, there are some calculation needs to be done to determine how much money you must have in order to retire successfully. It will also determine how much you must save every month and where to invest to build the retirement fund. It still use your expenses and/ income as a guide to determine how you will sustain in the future. I will post some simple examples on retirement planning in near future.

3. Q: I am interested in trading, but with little knowledge. Can you give me a general guide about forex trading and option trading? -bala

A: Forex and option trading is regarded as a quickest way to be rich, and it is also quick way to see the bottom. Before you want to trade, you must have some fundamental knowledge about trading. You can read my post, ‘Trading in high risk high volatile markets’ to get more ideas on the basic. Hopefully it will be useful for you. I’ll post some articles on forex and options for further understanding in near future.