What the FTX Fraud Teaches Us About How We Should Invest

Wednesday, 21 December 2022
Written by MYTHEO

There are many lessons that can be learnt from the collapse of FTX, but here at MYTHEO we want to focus on one point in particular when it comes to investing:

You need to understand where you are now and where you want to go, before you can decide what you are going to use to get there.

Many people get taken in by the allure of new and seemingly profitable investments without considering their individual profiles and financial goals. Understanding your current financial position and goals will help filter out what investment products are appropriate for you and what aren’t.

So let’s break this down, starting with:

1. Covering the Basics 

Before going into any speculative or newer assets, it’s important to have your financial basics covered to protect yourself should something go wrong.

What are these basics? Emergency funds and adequate insurance protection.

With emergency funds and adequate insurance protection, you will have some level of protection should something bad happen, say if you lose your job or happen to need surgery.

While these are not the most exciting things in personal finance, they can be the difference between being able to build long-term wealth and ruin.

Consider this, medical insurance can cost around RM1000 to RM1500 a year for a 30-year-old, depending on the sum assured. Let’s say a removal of a kidney stone costs around RM9000, this would wipe out 6-9 years of the “savings” if you skipped on medical insurance or forgot to take it into consideration.

Ultimately, having emergency funds and adequate insurance can help manage the risk of unexpected financial events.

This in turn can allow you to invest money for the long term, without worrying about the fluctuations of the market. This is because you know that there are reserves that can help you through tough times, without having to potentially sell your investment assets in a down market at a loss.

Now let’s talk about:

2. Having A Basic Plan

With the two foundational elements above covered, you can then start looking ahead to build wealth as you have established a basic safety net.

Next, you will need a basic understanding of your financial needs now and in the future in order to invest appropriately and effectively.

You need to have an idea of:
- How much you can realistically afford to invest.
- What financial goals you would like to achieve in the future.
- What the priorities of these financial goals are.

Once you have this information, you will then be able to plan out where your money should be going and more importantly, what the appropriate amount of risk should be, along with the associated expected return. This will then allow you to estimate how long it might take to achieve this financial goal.

This may sound like a lot of work, but it’s essential to have this understanding so that you have an idea of what you need to do and why you are doing it.

For example, if you are saving up RM1000 for no particular purpose, it may be easier to withdraw that money and spend than if you were saving that money up for retirement or a child’s education.

On top of that, you will have a better idea of where to invest your money based on the goal.

If a goal, say a wedding fund, needs to be achieved in 2-3 years, then you know that you shouldn’t be taking risk on this given that 2-3 years may not be enough time to recover from market volatility or a market downturn.

However, if you have a 20-30 year time horizon, then it could be more appropriate to invest in assets with higher risk and higher expected returns, because there is time to recover from bear markets and downturns.

It’s for this exact reason that MYTHEO asks clients 5 key questions before building a personalized Omakase portfolio that’s not just about one’s risk tolerance.

It’s important to understand other criteria before the appropriate investment portfolio can be tailored for the particular time horizon, individual risk persona, and age profile.

3. Remember That Speculating And Investing Are Two Different Things

There are many ways to invest and build wealth over the long term.

Some swear by property investing, others love their unit trust funds or index-fund ETFs, but above all else it’s important to understand whether you’re investing or speculating.

Investopedia notes that “the primary difference between investing and speculating is the amount of risk undertaken. High-risk speculation is typically akin to gambling, whereas lower-risk investing uses a basis of fundamentals and analysis.”

Speculation is not for the faint of heart.

In general, it should be reserved for knowledgeable, high-net-worth or highly skilled individuals. More importantly, it should only involve money that will not have a detrimental financial impact if lost.

While speculators try to make educated decisions to achieve abnormally high returns, they are buying into assets, businesses, or projects with a high degree of failure.

As such, speculation should have a minimal-to-zero place in your core financial goals given the high-risk nature of it. 

MYTHEO - A Better, More Personalized Way to Start your Investment Journey

MYTHEO intelligently combines our three proprietary Functional Portfolios to build an optimised portfolio that is aligned with your risk appetite and focuses.

The Growth Functional Portfolio is made up of high-quality diversified equity ETFs which tend to yield higher returns over time.

The Income Functional Portfolio focuses on generating income through investments that offer dividends or interest payments. While it tends to yield lower returns, it can be used to balance out the risks associated with global equities depending on an individual’s profile. 

Finally, there is the Inflation Hedge Functional Portfolio which invests in assets such as property, gold, and Treasury Inflation-Protected Securities (TIPS), and others, that are resilient when there happens to be such as property or even gold. This helps to protect the real value of your assets and mitigates your risk when the market gets inflated.

With MYTHEO, structuring and diversifying your portfolio by combining an optimal allocation of the above three Functional Portfolios affords you the opportunity for a great start in taking care of your future.

More about MYTHEO

MYTHEO is a digital investment management app that helps you develop your personalised investment portfolio through logical investment reasoning.

With our automated rebalancing system to help prime your investment positions, your portfolio will be diversified through a wide variety of global ETFs to help you disperse your risk.

Sign up in just 5 minutes and get your free portfolio profiling today. Then just start your regular savings plan and leave the rest up to MYTHEO.

This communication is also subject to terms available at the following link: https://www.mytheo.my/MYTHEO/resources#legal-and-documents

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