Covid-19, Financial Literacy & Investment Strategies

Global Pandemic and the Importance of Investment Literacy

For almost a year, Malaysia and many other countries all over the world have been battling the Covid-19 pandemic. Whilst the earliest case in the country was reported at the beginning of the year, the number of cases spiked in March, which forced the government to implement a nationwide lockdown. As we approach the end of the year, the number of cases is not decreasing but we are are experiencing a third wave of the Covid-19 pandemic.

Government measures to curb the spread of the virus have resulted in many businesses being temporarily and even permanently shut down. In addition,the number of customers in certain industries such as tourism, hospitality, airline and retail have drastically dropped. This has resulted in a series of chain effects in our economy which have ultimately imposed a serious toll on households of all income levels, a!ecting their ability to make ends meet. However, we are fortunate that the government has provided a variety of supports to the small and medium companies and individuals in need to alleviate their hardship. These include loan moratorium, allowances under the Bantuan Prihatin National scheme and tax reliefs, which were announced by the Prime Minister in his special addresses and also in the presentation of the federal budget recently.

In the midst of this crisis, numerous reports show that there has been a dramatic increase in scams and cases of fraud in the country. Scammers are taking advantage of people’s distress, and this has further exacerbated personal financial meltdowns especially for those who lack financial or investment knowledge. The current pandemic, therefore, has further reinforced the importance of investment literacy among the general public. In this article, we discuss the issue of investment literacy, outline the techniques being used by investors, and o!er insights into the current state of investment literacy in Malaysia.

Investment Literacy
Brief background
Investment literacy helps individuals brace themselves during tough financial times, taking informed actions through strategies that mitigate risk such as accumulating savings, and diversifying asset portfolio. Research shows that individuals with high levels of investment literacy are more likely to obtain information from credible sources such as financial advisers, helping them make better financial decisions. Financial or investment literacy is the necessary knowledge and skill that people should acquire way before they start earning, and before they are eligible to apply for a credit card and other forms of borrowing. Low investment literacy among the youth is high as reported by academic research. This is true even in a developed market such as the US. In short, investment literacy,as the name suggests,refers to the understanding of related concepts about risk, return, the time value of money, etc. and consequently how, whether, where and when to invest.

Household savings and investments in Malaysia
The majority of Malaysians, whether youngsters or adults, do not save and invest enough to support their standard of living. The low level of savings and investment among this population corresponds with a large number of bankruptcy cases reported for adults in the age group of between 25 and 54 years. Although a recent report by the Malaysian Department of Insolvency (MDI) showed a decreasing trend in the number of bankruptcy cases among this group from 2016 to 2019, the economic shock of Covid-19 is expected to increase further the vulnerabilities of low to mid-income groups who carry various loans or debt commitments and yet have low savings and investment. The government of Malaysia has taken the proactive step
of nurturing an informed investor base in the Malaysian capital market through the launch of InvestSmart® in 2014 by the Securities Commission Malaysia (SC). Its most recent event held this year speci”cally attempts to provide investors with the fundamentals of investment knowledge, in the light of increasing cases of “nancial scams and fraudduring this crisis.

Investment Strategies
Two strategies are primarily used in the “nancial market: fundamental analysis and technical analysis. The argument for these strategies, however, lies on the assumption that prices at times may deviate from their true values. More speciffically, the market is assumed to be ineffcient at the semi-strong or weak form. If the market is efficient, however, then one should instead diversify his/her portfolio in different assets (or asset classes). Yet to see whether pro”table opportunities really exist, biases such as survivorship and data mining, as well as frictions such as trading costs must be appropriately considered. Interestingly, many reports and much academic research tend to overlook these factors.

Fundamental analysis
This strategy is a stock selection policy which attempts to screen for undervalued securities based on some financial statement data. These include price-earnings ratio, return on equity, dividend payout ratio and earnings per share, among others. Basically, buy signals occur whenever the fundamental (also known as the true or intrinsic) value exceeds the prevailing market price. To put it simply, investors can buy the stock when its “true
price” is higher than the current market price. The reverse is true for sell signals, or alternatively, the stock is held for a predetermined time (say 1 or 2-year holding period) before it is sold. There are many famous practitioners of this technique, the most notable ones include Warren Buffett and Peter Lynch. It is also interesting to note that recent developments in Environment, Social and Governance (ESG) factors have extended this strategy beyond the classical financial information by looking into ESG components as a sustainable investment policy.

Technical analysis
The second rule, technical strategy, attempts to profit by discerning patterns in the historical prices (and sometimes volumes). This rule is further divided into two camps: subjective analysis (charting) and objective (quantitative) analysis. While the former is largely used inconsistently and is generally considered as an art rather than science, the latter allows for empirical tests, validation and application. Some popular rules include momentum, moving averages, relative strength index and stochastic oscillators. Famous practitioners of technical analysis include Charles Dow and John Murphy.

Portfolio diversification
If the market is deemed e#cient, arbitrage opportunities may cease to exist. The best way to invest, therefore, is by properly allocating investment capital into several different assets (or stocks). This portfolio diversification strategy, pioneered by Harry Markowitz, seeks to provide the best risk-return trade-o!, namely highest return for a given level of risk, or lowest risk for a given level of return. This is done by investing in a sufficient number of assets—some researchers argue at least 30 stocks are needed—and those in different sectors, to reduce the correlation between the returns of each stock. More advanced techniques have also been developed to optimize a portfolio and to capture different risk measures and distributions of asset returns. For instance, extending the mean-variance framework, models such mean absolute deviation , the Black-Litterman model and the three-dimensional framework incorporating ESG factors have been employed.

Moving Forward
Big data and artificial intelligence such as artificial neural networks, genetic algorithms and the rest are becoming more prevalent, not only in academic research, but also in the finance industry where several investment firms are actively using them for their unit trust products. Knowledge about how these are utilized and how to assess investment performance is also important, so that any decision made by investors matches their risk profiles. Measures such as Sharpe and Sortino ratios, annualized returns and valueat- risk, to name a few, are among the key considerations that must be taken into account, further highlighting the significance of investment literacy. Enhancing literacy and comprehension of the key investment areas is essential to move forward in the era of the ‘new normal’. Since the launching of the InvestSmart® programme, SC and its collaborating partners including the Malaysian Financial Planning Council (MFPC) have been actively engaging the public and university students in their investment literacy outreach programme. Despite all the hype, we know little about the e!ectiveness or at least the spillover e!ect of this investment literacy campaign. In a research project funded by the Fundamental Research Grant Scheme (FRGS), we gathered 500 responses to 17 quiz-type basic and advanced investment-related questions from Malaysian undergraduate students currently enrolled in both private and public colleges and universities. Sixtyseven per cent of our sample were Malay students; followed by 21 per cent Chinese and 9.6 per cent Indian students. We find that the mean (median) investment literacy score from this sample is 8.57(8.0) over 17, hence lower than 50% test score. Unsurprisingly, Chinese students scored higher than other two major ethnic groups, and so did students studying Business, Economics and Management as well as Mathematics and Science. The data implies that more efforts are needed from government agencies to promote investment literacy among young adults. A financially literate and investment savvy population should be expected to correlate well with financial inclusion, which is a desired outcome for a high-income nation we all aspire to being.

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