Article by Linda C. Corpuz
MANILA, Philippines – New year. New goal. All for the better, improved you. All for your brightest future. All for your financial growth. And for 2014, you committed to put a part or more of your hard-earned money into investing.
Regardless of where you are in your investment journey, the key is always to be armed: know or refresh your know-how of investment concepts and principles. Review or fine tune your investment plan. Revamp your portfolio if needed. How? Read what personal finance experts Jesi Bondoc and Alvin Tabañag shared with the audience of MoneySense Live – Investing 101, held this month at Megatrade Conference Center, Megamall Building B.
1. Differentiate among saving, investing, and gambling.
Saving is setting aside money for future use. Investing is growing your money wisely to meet your financial goals. Both gambling and investing intend to grow your money and involve risk. “Gambling relies solely on luck to grow money. [There is] no reliable way to reduce risk. Investing relies on rational, structured strategies and risk can be managed or reduced,” Alvin, the bestselling author of 12 Steps to Build Wealth on Any Income and founder of Pinoy Smart Savers Learning Center, stressed.
2. Measure your financial health.
“No matter how much money you earn, it is important to set aside some of it for savings and investments to help you attain financial security. That is an easy concept to grasp. The harder part is trying to decide how much income you should put aside. A lot depends on your circumstances. When you gather enough information, you wil have a better idea and can implement your financial plan,” Jesi shared. He also suggested to allocate your money for 60% necessities, 20% savings/investments, and 20% wants. “My personal rule of thumb is you have to keep your necessity expenses within 60% of your monthly income so you have 20% to spend on your ‘wants’ and the remaining 20% on your investments and savings,” he shared in an email response to Rappler.
3. Start the earliest time possible.
Alvin emphasized that a peso today is worth more than a peso in the future. “The time value of money is a fundamental concept in finance and it influences every financial decision you make, whether you know it or not,” Jesi, director of My Wealth MD and Partners, Inc., emphasized. “The time value of money is a concept integral to all parts of investments. An investor does not want to know just what an investment is worth today. He wants to know the total value of the investment,” Jesi added.
4. Know how interest and inflation affect your investments.
“Money can earn interest [and the] value [is] affected by inflation. Inflation reduces the purchasing power of your money. It buys less in the future,” Alvin noted. “First, a peso can be invested and earn interest over time, giving it potential earning power. Also, money is subject to inflation, eating away at the spending power of the currency over time, making it worth less in the future. Finally, there is always the risk of not actually receiving the money in the future—if you hold the money now, there is no risk of this happening,” Jesi explained.
5. Establish financial safety nets. Before investing, build an emergency/contingency fund first.
“Emergency fund serves as your financial cushion without touching your investments in case of emergencies like hospitalization, calamity, or job loss. Getting life insurance is also recommended for individuals with dependents as this asset class can immediately provide a sizable fund for your loved ones in case of premature death,” Jesi suggested. Alvin said that your emergency fund should cover three to six months of your monthly expenses while your life and health insurance for you and your family should be five to 10 times the equivalent of your annual income.
6. Reduce or pay off your debt.
In a series of SMS responses to Rappler, Alvin explained that sometimes, to feel good about himself, an individual may put a small amount in an investment even if he still has a high-interest debt. However, the priority should still be paying off the debt. “You will be losing money if you invest while your debt is high!” Alvin exclaimed. He further explained that if the debt charges have very high interest rates, like credit card debt, then it is best to pay it off completely because it is highly unlikely that any investment will have returns that can match or get even close to the 40% plus interest of credit cards.
If it is a long-term debt like a housing loan where interest rates are not so high, then it is OK not to pay it completely because there are investments which can possibly earn more than the 10% to 15% of housing loans. If a newbie investor has a debt but wants to invest, Alvin suggested, “he can invest P10,000 in a mutual fund then afterwards focus his attention to paying off the debt in full.”
7. Set, understand your goal, and define your level of involvement.
“When setting investment goals, it is helpful to know how long it is going to take for your investment to reach your target,” Jesi advised. Being clear with your investment purpose and period (as short as a year or long-term for 10 years) will help you choose the most appropriate investments to meet your targets,” Alvin said. “All investments carry risk of losing money … and being too aggressive or too conservative has a price.
Beginning investors usually have limited funds to invest so it would not be practical or even possible to put their money in different investments. If, however, at the start the beginning investor already has substantial funds to allow him to invest in multiple vehicles, then he should diversify to lower his overall risk exposure,” Alvin explained. Jesi said to diversify. “If you are into stock investing, spread your investments among different sectors or industries to manage industry risk. Add asset classes that are less volatile than your equities such as bonds and government securities. Income generating real estate is also a good investment vehicle to use in diversifying your portfolio.”
8. Balance your portfolio.
Both Alvin and Jesi agree that 2013 was a roller coaster ride, starting with a bang and ending with a whimper, as the first part of the year was greeted with positive returns only to be wiped out in the second half of 2013. Given the 2013 performance and the 2014 outlook, Alvin and Jesi suggest to include stocks to help you diversity and balance your portfolio. “As to what portion to put in stocks or stock funds will ultimately depend on the investors risk tolerance. Even if the outlook for stocks this year is rosy but the investor is by nature conservative, then he would not be willing to invest a large amount of his money in stocks,” Alvin illustrated. “I believe that we are still fundamentally sound and the recent decline in stock prices is a good opportunity for us to enter the market.
Thus, if your investment horizon is within 5 years or longer, the majority of your portfolio should still be in equities and some portion to be invested in conservative asset classes that provide regular income such as bonds, government securities, and TDs,” Jesi suggested.
9. Review your portfolio.
“It is recommended to at least review your portfolio once year to check if your investments are performing at a rate aligned to your goals. Any life changing events like marriage, change of job, and child birth are also cues for you to review your investment plan and portfolio as these events are expected to have major impact on your numbers,” Jesi advised.
10. Do not be greedy.
Beware of investment scams, Alvin cautioned. Greediness plays a major factor why some people still fall for investment scams. “The prospect of huge profits in a short period leads would be scam victims to abandon sound judgment and good reason. Some knowledgeable people invest in dubious investments even if they are aware it is likely a scam because they want to earn big bucks quick,” Alvin said and added, “do not put your money in something you do not understand. Know enough to make smart decisions. Seek professional advice.” “Be patient. Be educated. Start small. Start now,” Jesi encouraged. –Rappler.com
Lynda Corpuz extensively covered business, finance, personal finance, management systems, health, parenting, and women issues as a journalist and editor, with combined management experience for over 11 years. On free occasions, she blogs at lyndaccorpuz.wordpress.com and descovrir.blogspot.com.