Save, invest and outpace inflation

WHEN it comes to managing personal finance, specifically investment, it is always good to start anew at the beginning of the year.

The outlook for the year should guide capital allocation, portfolio construction and investment decisions.

The Malaysian stock market for one, underperformed, mainly because of foreign fund outflows of more than RM20bil from our equities market. This led to the lacklustre return of 2.3% gain for the FBM KLCI last year.

Our small cap index and FBM100 fared much worse at minus 12.2% and minus 1.3% respectively.

How does this affect local investors, especially those who believe that Malaysia’s stock market is undervalued and doesn’t reflect its true fundamentals?

Once again, it was a disappointing year.

Domestic considerations

Malaysia has its own market nuances. The market valuation swings between two extremes: a high valuation based on price-to-earnings (PER) for the semiconductor-related names in the technology sector, and a depressed valuation based on earnings and book value for the property and construction sectors.

Recognising the market idiosyncrasy is the first step to making informed decisions on where to put your money.

If data centre play was 2024’s biggest winner, the top performing sector in 2025 for Malaysia would be consumer names (largely blue-chip consumer companies). They were and continue to be the beneficiaries of the government’s Sumbangan Asas Rahmah aid rollout nationwide.

The share price of 99 Speed Mart Retail Holdings Bhd has already hit RM4, about 2.4 times its initial public offering price, despite a high PER multiple.

Nestle (M) Bhd’s share price has also recovered from a low of RM64 to RM120 (a 30% return in one year).

Financials, led by banking, are the consistent yield performers in our market. Banks’ average dividend payout is 4% to 6% depending on entry price.

On top of the stable dividend yield, top performers like RHB Bank Bhd, Ambank (AMMB Holdings Bhd) and Malayan Banking Bhd delivered 25%, 18.5% and 7.7% returns respectively in the past year.

If you include the dividend payouts collected over the year, the absolute returns significantly outperform the market.

A major contrast would be the small cap index for Malaysia. Often a hotspot to find alpha, 2025 was a bloodbath when the FBM Small Cap ended the year in negative double-digit territory.

Whether it was the lack of interest of retail investors or foreign outflow, share prices in this space fared poorly.

Overseas investments

If all emerging markets are underperforming, it makes sense that the local bourse is also affected. However, when regional peers like Indonesia and Singapore are making 52-week highs, we must question what went wrong for our market.

More importantly, it may also reset the expectations of local investors and the time cost consideration of investing locally compared to other markets.

For context, just two years ago, our investment portfolio had been 90% domestic-centric. In the past year, we had to increase our overseas market investment exposure to 25%, with domestic market being 75%.

Despite that, the 25% overseas investment contributed more meaningful returns than domestic investment. This means the returns are far superior for markets outside of Malaysia.

This is of concern considering there are still many fundamentally good, listed companies on Bursa Malaysia.

An industry veteran told me something that struck me: “A top fund manager investing in a weak market will have a tougher time compared to a mediocre fund manager in a hot market.”

If market conditions are not favourable, ploughing more money into it may not save the portfolio.

It is essential to consider other alternatives while waiting for the existing investments to materialise. It would be beneficial for investors to consider this.

Portfolio construction

Regardless, it is never wise to be overweight in a single market. Concentrated bets work well if the market tailwind is with you but if you are against a headwind, it is wise to have a segregated portfolio. This is risk management 101.

Although overseas markets appear to have delivered better returns than the domestic market in past decades, valuations in markets like the United States are extremely pricey. The fear of a bubble forming is real, especially in the artificial intelligence (AI) space.

Arguments that AI is the greatest disruptor so much so that the Time magazine cover for the year was AI is a testament of the exuberance behind the theme.

Some have argued that this is the greatest innovation since the railroad or Internet and everyone should not miss the bandwagon. But like any significant innovation, 90% of the players would die off, leaving only 10% of the very best to survive when the crash occurs.

Would you be among those who correctly pick the 10%? Are you confident enough to unequivocally put your hard-earned money into the few names?

When there is a correction or a bubble bursts sometimes, the hottest names take the biggest fall. This is why it is important to plan with portfolio construction in mind.

The diversification of the portfolio minimises the risk of a total wipeout. It is the only way to ensure there is a retreat path when a black swan appears.

Choosing diversification across various sectors, markets and even strategies (dividend-based investing versus growth investing) with a cross combination between them is a failproof way to sustain long term in the market.

Invest you must

Although it is not easy, investment is necessary to outdo inflation.The only two methods to achieving financial freedom are saving and investing.

Saving without investing is a safe but long journey. Investing without saving is a dangerous journey. Saving and investing is a sustainable journey. To reap the full benefits of the compounding effects, you need to do both with great discipline.

My personal finance journey is to take necessary risks when the time is right but always ensure there enough is set aside for rainy days.

For example, I ensure that I maximise my Employees Provident Fund contribution (including voluntary top-up) before I think of fixed deposit.

I also make sure that there is enough allocation to dividend stocks before I think of chasing alpha through growth investing.

These simple methods may seem overly prudent but at least I sleep well at night. Hopefully this helps put things in perspective for 2026.