Investing your hard-earned money

Look beyond regular savings accounts

(Ninth in a series called Take Charge of Your Money)

YOU’RE working hard with a specific goal in mind: provide well for your family’s needs today and in the future. That’s why you’re keen on saving, a key strategy in securing your financial future.
But where should you put your money? Are savings accounts enough? Savings accounts are good in that your money is easily accessible anytime, but the interest they earn can be so small that you’d be missing out on higher potential returns other investment instruments may offer. You may want to consider keeping some money in a savings account and invest the bulk elsewhere.

Here are a few suggestions on where you can invest your hard-earned money:
Time deposits. Your money will be kept by the bank for a fixed period (30 days, 60 days, 90 days or more) in exchange for an interest rate higher than that offered by a savings account. A time deposit is easily accessible, but early withdrawal may cost you a fee.

Some banks, however, have introduced time deposit products that allow partial withdrawals without touching the interest rate. For those who want to save and invest smartly, be more diligent in choosing banks.

Foreign currency. You may choose to invest in US dollar, euro or other foreign currency savings or time deposits. Be on guard though, since a foreign currency may weaken against the peso anytime. In that case, you may choose to ride out the exchange rate fluctuation or switch to another currency.
Stocks. Refers to buying shares of ownership in a publicly listed company“The stock market is very volatile therefore riskier-prices of stocks fluctuate in response to the times .but it can also be more profitable, as your returns can be anywhere from 20-30%. Stock investments should be held over the long term to ride out fluctuations. .

Mutual funds. If directly investing in money market, stocks and bonds seems tedious, time-consuming, and baffling, consider getting into mutual funds. A mutual fund gathers together investment placements from many investors, which the fund manager then invests in money market, stocks, and bonds based on their market study. It has become popular, with more investors in the US shifting from cash deposits to mutual funds in recent years. This is because mutual funds allow investors to diversify rather than just focus on one investment vehicle. Mutual funds also “have the potential for good long-term growth,” points out The Citibank Guide to Building Personal Wealth. Choose a mutual fund according to your preference — money market fund, equities fund, bonds fund, or balanced (mixed) fund.

Equity funds If results show that you are suitable for equity (stock) investments, you may want to consider investing in equity funds instead, rather than directly investing in the stock market. Equity funds are investment funds invested wholly in stocks and are run by full-time professional fund managers who watch over the portfolio and make trading decisions daily. They know which stocks are doing well since they analyze the market daily. Investing in equity funds will allow you to diversify your investments, since the fund invests in not just one stock, but in a mix. You will have access to otherwise hard-to-reach financial markets since the fund will be able to invest in equities not available to the small investor. You will also be spreading your risk, since you won’t be exposed to just one company stock. So even if one stock loses, others may gain and you will have a net gain. You will also be highly liquid since you can turn your investment into cash anytime you want by withdrawing from the fund, in some cases, at a small fee. Seen from a global perspective, equities have historically been the best-performing asset class over the long term.” Equity funds may be in the form of a mutual fund run by a financial company, or a unit investment trust fund you can access through a bank.

Bonds. A bond is a loan that you, the investor, makes -- you lend your money to a government, municipal authority, or company in exchange for a fixed amount of interest paid to you regularly. You don’t get to own a part of the lending entity. At maturity date, your investment is paid back to you at par value — the amount written on the bond certificate. Bonds have long been established in Europe and the US, where this type of investment has done better than cash investments in terms of returns. Bonds suit conservative investors since they can get a regular stream of income over a number of years. The risk lies in payment defaults, so choose bonds carefully.

Treasury Bills you loan your money to the government, to finance public expenses, for a short term, say 30 days a year, And are risk- free, since they carry the government’s full and unconditional guarantee, interest rates can go as high as 4% per annum.

Treasury notes similar to treasury bills, except that they require a longer investment-from 2 to 25 years,-but you can enjoy coupon interest payments, usually handed out in arrears, longer term equals a higher interest rate.

Derivatives. These are financial instruments based on the prices of equities, bonds and commodities. It requires more capital and investment know-how, since you deal in effect with the future prices of these assets. Trading is done in futures exchanges or privately through contracts. Financial institutions can do this for you.

Real estate. This is familiar to many Filipino investors, since a house and lot is often one of the first things we save up for. It is a sound investment, much better than renting a place where the family can stay. But there are some things investors have to consider:
1. It may not earn income if the family lives in it.
2. Maintenance costs will go higher as years go by.
3. It does not sell as quickly as other investments.
4. Its price fluctuates depending on the condition of the real estate market.
An investor is thus advised not to plunk all his hard-earned money on real estate.

Start a business you may also start a business. However, this demands much time and effort. If you don’t have the passion for it, don’t pursue. If you don’t know anything about the business you are looking at, don’t get into it. A business, to be successful, demands much of the entrepreneur.

Saving vs. Investing Money allocated for savings and deposit accounts are normally set aside for future expenses and emergencies, while cash invested in stocks, securities, or bonds provides opportunities for money to grow over time. The major difference here is that investments usually require higher risk-you either lose money or make tons of it through interest rates and changing economy.


Diversity is the name of the game
The adage “Don’t put your eggs in one basket” is a rule investors need to follow. Avoid investing solely in one form of investment. Allocate your assets to spread out your risk. How you should allocate your assets is answered by how conservative or aggressive you are in risk taking, and in how long you can hold the investment.
If you are still young and fairly willing to take on risks, consider investing more in stocks or in an equities mutual fund. You can ride out market corrections and earn a potential higher yield.

If you are conservative, or approaching retirement, experts advise you shift more to bonds or a bond mutual fund. Time deposits or money market placements are investments for the short term, which you need to have to meet any financial need arising out of emergencies. Having a good mix of investments will help you prepare for your future well.
Warning Signs

If you are being offered a proposition that seems too unusual or is promising extraordinarily high returns, stop and ask yourself a few questions.

• Am I being told that this is a once-in-a-lifetime opportunity? Is there pressure to make a decision immediately? - Investment is not about once-in-a-lifetime opportunities. These may occur in business but not in the financial markets. There is no need to make instant decisions.

• Is a very high return being guaranteed? - Some fraudsters hope that the promise of an unusually high return-for example, 10% to 20% a month return-will be so tempting that you will abandon your caution. Investments producing high returns are almost certainly risky, and don’t come with guaranteed returns. If a guarantee is on offer, further investigation will probably reveal it to be worthless.

• Who regulates the investment? - Check to see if the firm is registered and whether it is permitted to market the kind of investment it is offering. For example, a company selling securities must not only be incorporated with the Securities and Exchange Commission but must also have another set of papers from the SEC authorizing it to sell securities.
Some common Investment Terms simplified
Asset allocation refers to the method of deciding how much money to invest
And in which investment vehicle (i.e. stocks, bonds, mutual funds etc.)

Diversification A strategy where an investor puts money in several kinds of businesses
Or securities to protect his investments in case the market suffers a downturn. This could be a mix of shares in the stock market, mutual fund, or government securities like bonds and treasury bills.

Portfolio A person’s investment in stocks, securities, bonds, and treasury notes, consists of his portfolio – a term which refers to the investment collectively.
Fund manager A person who advises or helps manage an investor’s portfolio. Some financial institutions provide professional fund managers to clients as part of their investment package.

Liquidity refers to how fast investments or other assets can be converted to cash. Investments in the stock market and mutual funds are normally considered liquid because they can be easily sold to the stockbroker or issuer, while real state investments and jewelries take a while to dispose of .

Principal is the amount an investor originally uses to buy securities or stock shares. It also refers to the value where simple interest rates are computed, and so is the amount paid for the issuer of treasury notes and bills (usually the government) upon maturity.

Return on Investment refers to how long it takes to recover the amount of money an investor has put into a business or other money-making vehicles – higher returns at lesser time is ideal.

Term refers to the length of time your money has to be tied up to a deposit account or investment vehicle, which could either be for short, medium or long term. Terms could indicate the investment’s yield(interest or earnings – e.g., for bonds longer terms may offer higher interest rates) while pre termination (the withdrawal ,closing, and redemption of the investment before the agreed specified term, time deposits, and mutual funds for example ) may require you to pay a certain amount as fee or penalty.

Inflation refers to the increase in the prices of commodities in relation to the capacity of people to purchase such goods – it is said that money may no longer be able to buy in the future what it can afford today. Higher inflation rate diminishes the ability of the investment to yield higher returns. if the inflation rate is at 6-7% and your investment is earning you less than that, you’re basically losing money.


Fear Factor

By Malaya Laraya, RFP

A common sentiment I hear from people these days is that though they would very much like to invest, they are afraid to do so. They are afraid that if they invest in things like stocks, mutual funds, pre-need plans or UITF’s, they will lose their money. Consequently, they keep the majority of their funds in savings accounts or time deposits since those are the products that they are familiar with. Unfortunately, this type of thinking only ensures that an individual will never be able to accumulate enough cash or assets to ensure a prosperous life. To illustrate, let me use this brief analogy.

Let’s say you live in Fairview and would like to go to Enchanted Kingdom for a day of fun and relaxation. Ideally, the best thing to do would be to wake up early and drive there. That way you get to spend the maximum amount of time at the park before it closes. If you don’t have your own vehicle or don’t want to have to deal with the hassle of driving but still want to spend the most amount of time at the park, the next best thing would be to wake up earlier and commute to the park. I don’t think anyone would consider going to Enchanted Kingdom from Fairview by walking there. Not only would you arrive very, very late but I doubt you would be in much shape to enjoy all the attractions the park has to offer. Actually, there’s a very good chance you will be unable to reach the park at all due to sheer physical exhaustion.

Now, regardless of the method of travel you choose, there is a realistic chance that something will go wrong and you will either arrive at the park late or not at all. Your car’s radiator could overheat or the bus you are riding could get a flat tire. As a worst case scenario, the vehicle you are riding in could actually get hit by another car and mess up the trip completely. All of these events could happen and not a day goes by wherein someone, somewhere, gets a flat tire, an overheated radiator or gets involved in a collision. But would you actually let these things stop you? Would the possibility of being involved in a vehicular accident dissuade you from either riding or driving a motor vehicle forever? Would you let the fear of a possible accident determine where and what places you can go to?

Believe it or not, the process of investing is very much like the situation I just described above. To begin with, we all have our own vision of Enchanted Kingdom – the life we would like to have wherein we are free from the day-to-day cares and worries of life.

Second, the time at which we wake up and begin the trip is the time wherein we begin to invest actively for our personal goals. Simply put, the earlier you start on your journey, the earlier you will get to your destination. Furthermore, starting early gives one the luxury of taking things slowly. We don’t have to rush and can take the time to enjoy the trip. Most importantly though, starting early gives one a buffer zone that can definitely come in handy should a flat tire or some other emergency arise.

Third, the mode of transport we use equates to the investment methods and products we pick – running a business, investing in stocks are like cars (fast and expensive); mutual funds, pooled funds are like public transport (slower but cheaper) and savings accounts / time deposits are akin to walking. Of course, much as there is no intrinsically “best” form of transport, there is also no intrinsically “best” form of investment. Instead, there are “suitable” or “efficient” investments. To be more precise, much like it would be more efficient to walk short distances, so are time deposits and savings accounts more efficient than stocks for short-term needs.

Fourth, the type of transport we select determines how involved we have to be in the investment process. For example, if we regularly travel by car, it would be in our best interest to keep the car well maintained. However, as any car owner will tell you, properly maintaining a car takes time and money. It simply will not take care of itself. Running a business requires the same amount of involvement. Ask any successful entrepreneur- trader and they will tell you that maintaining a business takes quite a bit of time and money. One cannot simply enter the market and expect everything to work as they expected.

Fifth, much like something can always go wrong on a trip, no investment instrument is 100% risk free. There is always a chance that, no matter how carefully you’ve planned things out, something somewhere will go terribly wrong and mess things up. For example, let’s say you decide to drive to your destination. Now, you’ve properly maintained your car and you drive as carefully as you can. Unfortunately, there is very little you can do to prepare for the drunk driver on the other lane who decides to slam his vehicle into yours. The same thing holds for investing. No matter how well you plan your portfolio, events outside of your control can suddenly just step in and wipe out most of your holdings. (Example: Asian Financial Crisis of the 90’s.)

With all of that said, what can we then do to eliminate or minimize whatever fear we have of investing? Well, much like we would learn to drive a car or memorize the different routes jeeps and buses ply, so must we exert the effort to learn more about the business and/or stocks and other investment tools. To put it bluntly, it is only through education that we can master our fears and prevent them from limiting the kinds of lives and the kinds of dreams we can achieve.

Links:
www.business.inquirer.net/money/personalfinance

www.pinoysmartsaver.com
www.colaycofoundation.com
http://www.apersonalfinanceguide.com/
www.accounting4u.com