National Savings Bond by the Malaysian Government

Referring to the newspaper article by TheStar on RM5bil National Savings Bond on sale from April 14 , i was asked whether this investment is good or not, and whether should they invest in it.

The main features of the National Savings Bond is as below:

• Investment amount - ranges from RM 1,000 to maximum of RM 50,000, and in multiples of RM 100.
• Tenure - 3 years
• Frequency of interest payment - Quarterly
• Interest - 5% Guaranteed by the Government. So, it's "safer" than keeping money in the Bank.

Details of the Bond is available in BMN's website:

• News
• FAQ
• Key Features

So, back to the question, "Is it good?". The answer to this, depends on what you're comparing with.
"Is running fast?" That depends on whether you're comparing with walking, or driving.

Since Malaysian FD rates is going at 2.5% per year, then obviously this Bond is better.

However, is that the only choice we have for our money?

At 5% return, it'll take 14.4 years for our money to double (using the simple "Rule 72"). As our money earns interest (or returns), our money is also "eaten" up by inflation. Does it take 14.4 years for our expenses to doubled? I believe it'll take less than 14.4 years for goods to double in price due to inflation. I would estimate, between 8 to 12 years for goods to double in price.

Saying this, goods would double in price (due to inflation) BEFORE our money would double at the rate of 5% per year. I don't see anything safe about this. Infact, i don't see anything fun with getting poor slowly, but SURELY.

Most people would compare which product is better without understanding and knowing their needs. Truth is, which product, tools or medicine is better depends on your needs, and not on the product itself!

If you're having a headache, it doesn't matter whether Viagra is better, or Cialis is better. Both won't help much in your headache condition. What you need is a Panadol, and not choosing between Viagra or Cialis!

So, in what situation is this National Savings Bond good for you? I believe it's good if:

1. You need the money within these 3 to 4 years, or
2. You want to find a place to make your "Emergency Fund" earns higher return.
3. You have No Dependant, have set aside emergency and medical funding, knowing that your personal inflation rate is lower than 5% yearly, and have a Net Worth that is more than your remaining lifespan multipled by your current yearly expenses.
4. You know that you don't know how to invest, and don't trust anyone with your money. (Same analogy goes to driving a car: You know that you don't know how to drive, and don't trust any "driver" to drive you to Singapore, so.... you WALK from Penang to Singapore!")
5. Can't think of any other reasons why this is good.

However, i don't and won't invest in it because:

1. My needs within the next 3 to 5 years is in Bond Fund, which i will be using almost entirely within the next 3 months. So, the difference (if any), would be insignificant.
2. I'm happy with my current emergency fund, putting it in Bond Fund. And since my income is "safe", i feel comfortable with 2 month's expenses being set aside for emergency fund.
3. I don't have enough to retire on. I don't have RM 3.5 Million currently if my annual expenses is RM 50,000 and my remaining lifespan is 70 years.
4. I believe i know what i'm doing with my investments, and i choose something something which fits my long term needs. Just as Michael Schumacher believes he knows how to drive fast and safe, it doesn't mean that driving fast is not safe!
5. I trust Warren Buffett (thru Berkshire Hathaway) with more than 30% of my Net Worth, I trust Public Mutual with 90% of my Net Worth, and I also trust some of the CEO's of Public Listed Companies with my fractional ownership these companies.
6. I don't enjoy getting poor slowly but surely. I enjoy getting rich slowly but surely!.

Most important of all, I won't choose between Walking or Running if i want to travel from Penang to Singapore. I would rather choose between Firefly, AirAsia, MAS or Singapore Airlines (though i believe it doesn't make much difference in the speed and safety between them).

I don't foresee a need for more than 90% of my assets for the next 5 years or longer, so i rather choose other financial "vehicles" to reach my financial "destination".

What financial "vehicles" is the best for a person who won't be needing the money for the next 5 years? Definitely in Ownership (of Business, or Real Estate) ! I'll write more about it next time. :-)

Is BNM doing the right thing to reduce interest rates?

Seeing The Star newspaper today, i couldn't help but to blog on the "Your Opinions" column by one of the reader through sms. His title is "Have a heart". Below is his sms:

BANKS should not lower FD interest from 3% to 2.5%!. How do you expect retirees to survive? Heave a heart! BNM, please look into the matter. [adjusted for short form]

I do have a few comments regarding his comment:

1. Who "forced" that person to put his money in FD? Obviously, the answer is nobody, and yet, why is he blaming the Government for getting that kind of return? If he's not happy with that return, then why is he still putting it there?

2. If money is important, why didn't that person learn how to let his money work hard for him? If money is not important, then why does he send that sms in the first place?

3. When he wrote that sms, he's looking from his point of view (only, which i find it selfish), while BNM looks from the overall point of view for the benefit of the overall country! When a country is in recession/depression/ financial mess, BNM's main objective is to bring the economy back to stability, which means, to :

1. Encourage spending - so that businesses continue, which gives employment to people.
2. Encourage business growth - so that businesses will hire people, which ultimately reduces unemployment rate of the country.

Which situation would encourage spending (or discourage savings) more than the other ?
A) When interest rate is high (say, at 10% per year), or
B) When interest rate is low (say, at 2% per year)

So, to encourage spending, should the government increase interest rate, or reduce interest rate? I hope the answer is obvious to everyone.

Now, when interest rate drops, lenders (or called depositors, who lends money to the Bank) earns lower interest. On the other hand, borrowers pays lower interest! This again would encourage consumer spending, which helps businesses, who provides employment to the general public.

I believe businesses is one of the main borrowers of money. When interest rates drops, their cost of borrowing is therefore reduced. This would encourage business expansion as their risk of losing money is reduced because of lower cost (which would mean lower break-even, and higher profit). When businesses expand, they create employment to the public.

In conclusion, do not depend on the Government (or anybody to take care of you). Take responsibility, learn about Economics, Finance, Business and Investing. Then, you would know that :

1. Owning the Casino is better than gambling in the Casino.
2. Owning Tobacco companies is better than smoking Tobacco, and lastly,
3. Owning the Bank is better than keeping money in the Bank!
   (assuming you're buying a RM 1 business for RM 0.80 or lesser)