So for example, you put in RM 5000, which is the minimum required for a 1 month FD placement. At an interest rate of 2%, you will only get RM 8.33 ( RM 100 / 12 ) per month. Quite pathetic. One can easily generate that much income if he or she is hardworking enough to write online articles.

Our FD interest rates are looking like this nowadays

That is why I don’t suggest people to invest in FD unless it’s their emergency fund (which you can withdraw easily and without penalty). For those who have extra money on their hands, try look into unit trusts since most of them are very cheap now but I would suggest you to look into bond and not equity. The equity market will only recover towards the end of 2009 or 2010 (my prediction), and that is quite a longggg time from now.

If you’re not interested in that, take a look at some defensive stocks such as Public Bank, F & N, Telekom Malaysia (TM) and others. These companies give a steady dividend yield to the shareholders and most of them are at a very attractive price now (TM is trading at a PE ratio of 4 – 5 while Public Bank’s PE is around 7 – . However, as with most investments nowadays, you must be willing to hold on for at least 1 year.

To conclude, if given a choice, I will not put my extra money into FD anymore due to the extremely pathetic interest rate. It’ll be better to put into unit trusts or defensive stocks. Or if you know about government bonds, then try to invest in those.

Hope it helps.

How true is this?

Apparently, it’s not very true. A defensive stock will give you a decent dividend payout and it is a good option during unstable time such as the recession period we’re having now. However, some defensive stocks can be quite pricey because who doesn’t want to have a stock which pays good dividend? In fact, a lot of people want to have these defensive stocks. Thus, they are normally very expensive due to the high demand…maybe more expensive than its actual value.

On the other hand, stocks which do not pay dividend cannot really be considered as lousy stocks. Some of them have a lot of cash and prefer to use the cash to expand or improvise the business, rather than distributing the extra cash out to shareholders in the form of dividend payout. Warren Buffett’s company Berkshire Hathaway does not have dividend payout. The company prefers to take the extra money, pump it into the Shareholders’ equity. From there, the fund will be used to further strengthen the company’s position in the industry. Same goes for local companies such as Resorts.

And if you notice, this theory does not apply to stock market only. Mutual funds are applicable too. Funds which do not distribute dividend normally use the earnings to further improve their portfolio. This sounds a bit like compounded interest…but not that good, of course. Otherwise, all of us will be super rich by now.

Conclusion, I can strongly say that a stock which does not pay dividend, or has low dividend payout, is not necessarily a bad stock. A stock which does not use its money wisely IS a bad stock (has a depleting shareholders’ equity aka war chest).

At the end of the day, it depends on you, the investor, to choose what kind of stocks you want to invest in – either defensive or not because I believe as long as the company knows how to use the money wisely and has steady earnings…then it is not a bad stock.

Just my 2 cents. Hope it helps.

About 2 months ago, I wanted to move my high-risk equity fund to bond fund but my uncle told me not to do so since China is still quite stable. Now, the bond fund which I was looking at has gone up and my equity fund has gone wayyyy down. Too late to sell or to convert to bond fund.

Then I decided to call up my agent and told her to help me stop the auto-debit. My plan is to stop the auto-debit, take the money and save it up, and then buy in again (with lump sum) once it drops further. I expect most equity funds to drop further in the months to come.

Just sharing with you my decision. I could be wrong and this might be a beginner’s mistake. I don’t know. But I feel it’s worth a try.