Investing for ordinary Pinoy

“IF SOMETHING sounds too good to be true, it probably is!”

Nowhere is that adage more true than in investing. Yet, every so often, I would hear of more people being victimized by yet another Ponzi scheme promising to double their money in six months, three months or even a month!

Unsound investments aren’t necessarily scams. Some years back a friend of mine asked me whether she should buy an educational plan for her daughter, and I cautioned her about the ability of the company to pay the plan’s benefits.

Two years later, she came back to me, extremely distressed about the collapse of the issuing company and worried about how she would pay the tuition  of her daughter.

I asked her why she had bought the plan. She said she had calculated the returns based on the actual increase in tuition over the past years, and there was no investment available that could give her anywhere near those same returns.

I couldn’t help but think silently to myself, “Precisely!” If no investment  could give those types of returns, how could the issuing company possibly accumulate enough funds to pay her benefits?

Whenever it comes to making money, we often get caught in the trap of wanting to get rich quickly, either through need, greed or simple ignorance, making us easy prey for scams such as Aman Futures.

Understanding how to make your money work for you is critical to protecting your future and that of your family.

Expected, unexpected

You need to plan for the expected, such as retirement and old age, and the unexpected, such as sudden death and sickness. The sad fact is that only

2 percent of Filipinos are independent at retirement.

Most will be dependent on relatives or charity or will be forced to continue to work.  And when illness strikes, many end up depleting their savings or going into debt to pay their bills.

Review situation

Start by taking stock of your situation and your required cash flows. Do you need to prepare for your kids going to college in 10 years? Is there a wedding in the family on the horizon?  Are you nearing retirement and need steady income from whatever money you’ve saved?  Or do you simply want to save up for that dream vacation next year?

Depending on your investment objectives, time horizon, risk appetite, investment experience, age and income, there will be investments suited for you. You also need to determine your cash or liquidity requirement, which is the amount of money you need to set aside for emergencies such as major car repairs.

A rule of thumb is generally to set aside three months’ income for emergencies. All these taken together would be called your “risk profile.”

Generally, the younger you are, the longer the time horizon before you need the money and  the more stomach you have for temporary declines in the values of your investments. The more investment experience you have and the bigger your disposable income, the more  you can invest  aggressively.

STOCKS would be a good instrument in which to put your money. They generally provide better returns over a long period and you can tolerate the fluctuations, or “volatility” in the value of your investment.

You will need a fairly large amount of money to invest, however, as the key to successfully investing in stocks is diversification, or having a basket of stocks rather than just a few stocks.

But if you need your money in the next year or so and  are not really investment-savvy or have retired and are living off interest, you would be better off putting your money in safer instruments such as special deposit accounts (SDAs) of  Bangko Sentral ng Pilipinas, time deposits and bonds.

SDAs provide lower returns but their values don’t fluctuate as much, and some have guaranteed returns, so you’re more certain that when you need the money, the value wouldn’t be any lower.  Remember though that people are living longer, so even if retired, do set aside a small amount in higher-yielding instruments.

You will need this to beat inflation, as over time, the value of your nest egg could decline significantly—i.e. your P100 in 2012 may be able to buy only P50 worth of goods in a few years.

Higher return, higher risk

In general, investments which can give you higher returns also pose more risks. During the tech boom of the ’80s and ’90s, you would hear many stories of startup companies whose values went up a hundredfold after going public.

But for every such story, there were probably nine, or even 99 more which went bust, taking all their investors’ money down with them.

Study financials

Investing in stocks requires time to study the financials of the company with whom you are investing, their growth prospects, the quality of their earnings, etc.

Investing based on gut feel or tips rarely works and as mentioned earlier, you need to spread your money among a basket of stocks in order to spread your risk.

GOVERNMENT BONDS, on the other hand, are considered among the safest instruments as a government is always expected to be able to pay its debts, but the yield on such bonds tends to be relatively low.  You will sometimes hear the term “risk-adjusted return” or “risk-return ratio.”

This refers to the fact that when assessing the returns you can get from an investment, you need to also look at the risk you are assuming, and make sure that the rewards are commensurate to the risk!

MUTUAL FUNDS and UITFs (unit investment trust funds) are a great alternative to investing in stocks, bonds or some combination of both. They allow you to invest for as little as P5,000 by buying shares of a fund, which pools the money of its fund holders and invests it according to the investment objectives outlined in its prospectus.

The fund can be a more aggressive one such as an equity fund, or a more conservative one such as a bond fund, and will be invested in a wide variety of instruments.

Diversification

A typical equity fund will have 30 or more stocks, which gives you the diversification you need.  It may also have bonds or other fixed-income instruments, and in a down market, the fund manager could opt to increase the proportion of bonds and even cash to cushion the impact of the market downturn.

I have never met a casual investor who has been able to beat the performance of professional fund managers over an extended period. Looking at the available tools, such as extensive research reports, sophisticated programs to analyze market movements, even international resources for multinational corporations, it is not difficult to see why they are able to make much more informed decisions.

By putting your money in a professionally managed fund, you are able to take advantage of its managers’ knowledge and get the benefits of diversification even with a small amount of money.

Regularly investing in MFs (mutual funds) or UITFs also allows you to take advantage of “peso cost averaging.”

If you put in a fixed amount every month, you will almost always end up ahead in the long term than if you tried to time the market.

When the market is down, you can buy more shares for the same amount. So as the market goes up, the extra shares also give you extra gains. Some companies offer salary-deduction services where you can have a fixed amount deducted from your salary every month and invested directly into a mutual fund.  Check if yours can do it!

VARIABLE UNIT-LINKED INSURANCE products allow you to put your money in a professionally managed fund while at the same time protecting your family with insurance. Insurance is one of the most basic components of any financial plan, yet often the most overlooked.

When a P1-million insurance policy is issued to you after you pay the first premium of P30,000 (premiums depend on your age, the plan you choose and other factors), should something happen to you the next day, your family gets P1 million.

All other financial products will still be worth P30,000 the next day and in many cases even less due to fees deducted. Remember, if you are the breadwinner and have dependents, making sure they are secure is your first priority.

Financial advisor

There are many types of insurance products and a good financial advisor can help you choose the right one.

In fact, for most of us, getting a financial advisor is important to developing a proper financial plan. A good one will sit with you and thoroughly understand your needs, determine your risk profile, explain the products he or she is recommending and make sure you understand all the risks attached to what you are buying, rather than simply try to sell you a product.

What about REAL ESTATE? I remember our elders saying real estate was the safest investment, because you have the land. In reality, real estate is considered one of the riskier investments as it is illiquid—you cannot easily dispose of it— and if its value goes down, it can take more than 10 years for its value to go back up.

If you have a large amount of money, real estate which generates income, such as apartments and office space, can be a good investment, but do remember it has a life span and you do need to maintain it. If you are banking on  its value to appreciate, be prepared to wait a looong time!

Track record

Lastly, make sure you research the company you are dealing with.  Make sure it has a solid reputation and track record, is trustworthy and provides good service. For financial services companies, bigger is generally better. But cheaper is not!

Remember that they may be holding your money for a long time. A company that is making little profit may no longer be around when you need your money.

And remember that a fund which gives you the highest returns will also most likely crash the most in a bad market— make sure you can tolerate that crash. And if anyone promises to double your money in 10 days, run away as fast as you can!

(Riza Mantaring is the president of Sun Life Financial Group of Companies in the Philippines. She was named by Money Sense magazine one of the country’s Top 12 Most Influential People in Personal Finance in 2011. That year, she also received a CEO Excel award from the International Association of Business Communicators. She has a  BS Electrical Engineering degree [cum laude] from the University of the Philippines and an MS in Computer Science from the State University of New York at Albany.)