The 10-Minute Investment Checklist
Now that you have an idea where you can invest P100,000, how do you decide then which is the right one for you?
Before anything else, ask yourself two things:
- What are you investing this for? (for retirement, for education, for travel, for a car) This is your investment objective or goal.
- When do you need to achieve your goal? (this year, next year, 5 years from now, when you're 60) This is your investment horizon or time frame.
This will guide you in making investing decisions. Once you know what you want and when you want it, you can start evaluating your options.
Here's a useful checklist. Run this through the investment options I listed last time and any other investment products you'll find in the market. It shouldn't take more than 10 minutes to figure out if the product matches your objectives.
Rate of return. Obviously, this is probably the primary consideration we have when investing. So what rate should you look for?
Here's a rule of thumb: Beat inflation. If your money grows less than the rate of inflation (the change in the prices of a basket of goods), then you're actually worse off. So, if inflation has averaged 6% a year, the returns on your investment should grow more than that.
What's the big deal about inflation? Inflation eats up the value of your money. Your P100 now can buy a lot less stuff 5 years from now. We all know that. So, make sure your investment grows faster than inflation.
Also, check if and how often returns are compounded. A fixed-rate Treasury bond (FXTN) gives you a fixed interest every quarter called a coupon. It doesn't compound, so it's straight interest.
On the other hand, a time deposit or a bond fund generates interest which, along with your principal, earns interest. So, the interest earns interest. That's compound interest. And that's the secret of successful investing. Compounding becomes even more powerful the more frequent it is. If it compounds daily instead of monthly, then the faster the growth.
Guarantee of return. If your investment returns 1,000%, is it guaranteed? That's why for "fixed income" investments like T-bills, time deposits, and bonds, returns are generally conservative because they are generally fixed. If you're promised returns of 4% a month, then start wondering. That's equivalent to 48% a year. Where do these guys invest or lend their money that allows them to guarantee you 48% a year? Here's another rule of thumb: If it's too good to be true, it probably is.
But if an investment grows by 48% this year, 30% next year, 1% the next, -20% later, and then 15% thereafter, the the rate or return is obviously not guaranteed. Is that bad? Of course not. Investments like stocks, real estate, and commodities act this way. They are considered riskier because no one's promising you anything. But here's yet another rule of thumb: the higher the risk, the higher the return.
So, when evaluating an investment instrument, check if the rate of return is guaranteed, in which case, expect a relatively conservative rate. If it's not, then demand a historically high average rate because you deserve a higher return for the extra risk you take.
Safety. Are you willing to risk everything, including the original amount of your investment? Or do you want to make sure you keep your principal intact?
Well, the bad news is anything can happen. There is all sorts of risk that affect investments. But generally, fixed-income instruments keep your principal intact, that is, if you keep them until they mature (they reach the end of their term). So, if you're a bit conservative, placing your money in T-bills, RTBs, or time deposits will give you some peace of mind. The government will sure to pay you no matter what. Even if it goes bankrupt, it can just print more money. Your bank, well, that's another matter. But here's their guarantee: your investment is insured and safe up to P250,000.
Now, if you're primary concern is to make sure you don't lose your principal, then stocks and mutual funds are not for you. On the other hand, you'll be sacrificing growth for safety. Not a good thing if you're investing for the long haul. But very much fine for short-term objectives.
Liquidity. Once you place your money, how soon can you take it out? That's liquidity. Regular savings deposits are liquid because they're easy to get into and out of. You can withdraw them anytime.
But for time deposits, you need to keep your money a bit longer, otherwise you won't earn as high an interest. Mutual funds and unit-investment trust funds are a bit less liquid, because they generally require a one-year holding period (although you can withdraw within a year for a fee).
Stocks are relatively liquid in the sense that you can buy and sell anytime. However, if the price of your stock goes a lot lower than the price you bought it for, and you don't want to sell at a loss, then it's not very liquid, is it? Real estate investments are not liquid because it's harder and takes a longer time to sell them.
So, how does this affect your investing decision? If you'll need the money quickly, you want to place it in liquid instruments.
Affordability. There are investments out there that earn a lot. The catch: you need a million bucks to get access to them. The good news is, there are a good number of investment instruments that you and I can afford. Basically, all the ones I listed last time.
You only need P5,000 to buy RTBs and P10,000 to invest in mutual bond funds. The lesson: even if you don't have a lot right now, don't let that stop you from investing. Because you can. So this is another factor to consider when investing: the initial minimum investment required.
Diversification. You know this rule of thumb: Don't put all your eggs in one basket. That means spreading your money across different investment instruments and different institutions.
So, ideally, you should have money in stocks, bonds, government securities, money market instruments, etc. This way, even if prices for stocks go down, you wouldn't be hit too hard if you have bonds, time deposits, etc. that offset your losses. Diversify across institutions also. So even if one bank or pre-need company closes down, your life's savings don't go down the drain.
Most investments don't provide built-in diversification. You have to spread your money yourself. However, mutual funds promise instant diversification since they invest in a whole lot of stocks or bonds, spreading your risk.
Fees. There's no such thing as a free lunch. You pay a broker's fee when you buy stocks and an entry load and an annual management fee when you invest in a mutual fund. Fees also come in the form of commission. When you get an endowment or pension plan, part of your premium goes to commissions.
Fees eat up your returns because instead of earning for you, the portion of your investment that could have generated a return instead when into the pocket of the broker or institution that sold the product to you. Is that bad? Well no. It's a product which has a price. The fee or commission is that price.
What you need to watch out for is how much is the fee or commission. Even if it's small, it all adds up.
Taxes. Most investments are taxed. The government taxes bank deposits, stock transactions, even government securities.
Mutual funds are tax-free and so are investments that are long-term (at least 5 years). So, when comparing investments, compare the returns net of tax.
But like fees, don't get obsessed about taxes. Even if the fee or tax is relatively high, but the returns are consistently higher than competing investments, then that should take precedence.
Convenience. Do you want to actively manage your investments yourself by trading regularly? Or do you want to just dump your money and let it grow on its own?
You can trade stocks or foreign currency yourself, but that means you have to be watching the market constantly. In contrast, you just leave your money to a mutual fund or UITF manager, a pro who's hired to think, plan, and implement for you (that's why there's a management fee).
Do you want to put a lump sum every year or do you like putting a little aside every month? For example, there are so-called lump-sum endowment plans and there are plans that are 5 years to pay.
The institution. Check what institution is issuing these investments. Is it the government? Then consider it practically risk-free (or at least low-risk). Is it a top-notch corporation like Ayala Corporation whose corporate bond is highly rated?
Is it a bank? A mutual fund company? An insurance company? A pre-need company? Which one? How stable is the company? How has it performed in the past? Who are the directors and officers? Where does it invest or lend its money?
This shouldn't preclude you from buying or investing from a new company of course. Even the big and old ones fail and close shop. The whole idea is to investigate. And then diversify.
