BASICS OF FINANCIAL INVESTMENT

How would you like to spend your later years, (still) working for money? or making your money work for you?

THINGS TO CONSIDER: (NOTE: WHILE ALL OF THEM IS OF EQUAL IMPORTANCE, THIS IS STILL ARRANGED ON A “FIRST THINGS FIRST” BASIS)

1.) Investment Objective the first thing to consider, and just to clear a common misconception, YOU DO NOT INVEST simply to make money, you invest to achieve aparticular financial goal or objective, it could be your child’s future education, your retirement fund, even a future travel abroad (yes). It’s better than savings, because your money works and earns at the same time, (that’s why it’s called investment) thus maximizing its value. A good illustration would be dollar investments, most Filipinos (especially OFW’s) invest their dollars with the intention inventually taking advantage of it’s rising value (vis a vis the peso). And that makes sense, but still much better if you invest your dollar with a future objective that is denominated in dollars-it could be your child’s future studies abroad, a planned overseas trip 5 years from now, your retirement fund, (you can just imagine the advantages if your pension is in dollars, at least you can include a once in a lifetime dream trip abroad). A word of caution however, investments also involve risks, while your money will earn, it might also suffer a loss, especially in a crisis.(like the one we’re having now) That’s why there is such a thing as, Financial Planning, and why investment is only a part of it.

2.) Time Frame Investment tools work best over time, and that is at least 5 years or more, anything less than that and we’re talking savings, like time deposit and savings accounts. Because by their very nature, (the imbalance between your present income and future expense) your investment goals should be in the distant future. The general rule is: the more time you have, the more risk you can take (with your investments, since as the logic goes-you have more time to recover in case of a downturn, and more risk equals more gains, ) but I prefer the other one: the more time you have, the less amount you need to set aside, making it more affordable for you, which makes it the best argument for starting early, starting NOW.

3.) Amount to be Invested A good starting point should be at least 10% of your income (gross if possible) that should erase your "I can't afford excuse", provided of course, that you start cutting down on unnecessary expenses. And as your income increases (it should) you could then diversify (another reason why you should do financial planning or hire someone to do it for you).

4.) Risk Profile (YOURS) When it comes to money, are you averse to taking risk? Or are you aggressive, and willing to take CALCULATED risk? After all, you worked hard for it. As a rule, if you’re the conservative type, so should your investments be, and vice versa (supposedly).

5.) Investment Tool This pertains to the type of instrument ideal for your needs, taking into consideration all the three factors above. As rule in Financial Planning, your investments should look like a pyramid (the one in Egypt, not the scam) with savings like, insurances-accident and health, educational plans, pension plans, Philhealth, SSS, (even memorial plans) etc. serving as a foundation and making up the bulk at the bottom, with the higher yielding and riskier tools, like stock market investments, at the top.


SOME COMMON INVESTMENT TOOLS

BONDS A bond is a loan that you, the investor, make -- 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.

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.


EQUITIES 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 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. 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.

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. Investors can choose where it will be invested-equities, bonds (fixed income), or balanced (mixed) fund.This is also allows investors to diversify rather than just focus on one investment vehicle (to spread the risk). With a potential for good long-term growth, it has become the better alternative to Time Deposits offered by banks (which is why banks came out with their own version called the "Unit Investment Trust Fund")

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, (and all the government has to do is collect money thru taxes to pay it back) 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.

UNIT INVESTMENT TRUST FUNDS (UITF’S) Mutual Funds exclusively Offered by banks.


Investments should be viewed as a long-term strategy for achieving financial goals, and to build up wealth. The more you leave it alone, the more it will grow and work for you. (“Take Charge of your Money”; Citibank)

FINANCIAL PLANNING

“Long-term profit planning aimed at achieving financial goals, generating greater return on assets, growth in market share, and at solving foreseeable problems.”

Businessdictionary.com


Financial Planning evolved from the old and tried (simple but effective) method of acquiring (read buying or purchasing) something priced beyond your present income, which is, you save until you have enough to afford it. (the other one is thru financing either by loan or term payments) Financial planning is just going several steps further, instead of merely purchasing something, your savings is used to help you with future expenses such as tuition fees, hospitalization, pension etc. it is called planning instead of just merely saving because you’re no longer intending to buy something, but weighing your options, utilizing different instruments, based on your present income, in order to achieve a future financial goal.

For comparison, think of fitness training, (after all, it’s your also financial health were talking about here) It is made up of several programs (endurance, strength, flexibility speed etc.) so it is with financial planning (savings investments, insurance, estate planning etc.) you could say that savings is the equivalent of a diet, investments (whose purpose is to make your money work for you-“generate greater return on assets”) is akin to resistance or strength training, and so on…each program has its own purpose, and both takes time and discipline.

And just like in fitness training, A financial planner serves as your trainer, who will prepare the right program for you based on your goals, and your budget. (A good gym instructor will prepare a program that is based on your daily physical activity or sport-which is a good reason that you should choose for both, someone with the right credentials) while your accountant, auditor/bookkeeper serves as your doctor. Of course there’s no guarantee that you won’t lose money, such as in a financial crisis (like the one we’re having now).much in the same way your doctor can’t guarantee that you won’t get sick in the future. Incidentally the financial crisis that hit in the late 90’s was called the Asian flu. Then there is the smart-ass objection-“that we’re not even sure if we might die tomorrow, so why save”? Which (in physical fitness) is the same lame excuse smokers give for not quitting.

Financial Planning is not about creating wealth, it’s about maximizing the value of the ones you already have. It’s not just about savings, but expenses as well. It’s not about predicting the future, its preparing you for it ( “solving foreseeable problems”) it’s not about making you rich, but to make you financially independent (the former has something to do with income statement, while the latter has everything to do with balance sheet).

And more importantly-it’s not just for the rich, but most specially for us, the working class, since we can never be sure if our present income will be enough to get by in the near future. It is a sad fact that most Filipinos earn barely enough to get by on a day to day basis, and therefore are too busy just trying to survive and cannot afford the luxury of financial planning, but, it is also true, that there are those who can’t afford simply because of having a wrong set of priorities when it comes to our finances. We can never tell what the future holds, which is all the more reason to prepare for it.