Maze of Investing

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“Risk comes from not knowing what you are doing” – A quote from Warren Buffet, the famous and most successful investor of the 20th century.

INVESTING, as defined by Investopedia, is the act of allocating resources, usually money, to generate an income or profit. Society is in constant pursuit of high returns for their hard-earned money. This quest had led to many cases of scams, including investment. The SEC (Securities and Exchange Commission) released an Investment Scam Checklist to warn people and promote due diligence. Sadly, even with the enormous effort of the agency, many still succumbed to unscrupulous individuals who prey on novice investors.

Investing has an emotional aspect of being heedful. I, myself, was guilty of uncontrolled emotion that caused me substantial financial loss. The bad experience taught me to set aside feelings instead think rationally of the situations, risks involved, time horizon, and the financial goal in mind. Perhaps you would ask; Is there a silver bullet to the risks in investing? Sadly none, there are always risks. The cliché, “The higher the risk, the higher the return” conversely “The lower the risk, the lower the return.”

In the Philippines, the typical way to invest is through stocks, bonds, mutual funds (MF), unit investment trust fund (UITF), Variable universal life (VUL), and time deposits. Stocks/Equities ownership is where you become part of a publicly-traded company; in return, you may gain through stock price appreciation and dividends. Dividends are portions of the company’s earnings given back to the stockholders. Leading investors employ their fundamental and technical analysis skills to pick the promising stocks that will deliver the best returns.

Bonds are fixed-income securities; they provide loans to the bond issuer (borrower), typically the government or a corporation. Bond earnings come from the interest (coupon rate) for the borrowed principal (par value or face value). The bondholder (investor) receives the fixed income as per the contract (bond). The bond issuer shall redeem the principal amount to the bondholder at the maturity date. The common types of bonds available in the Philippines are treasury bills (T-Bills), treasury notes, retail treasury bonds (RTB’s), and corporate bonds. T-Bills are government security with shorter terms, typically from months to a year, purchased at a discount and redeemed at the full par value. The maturity periods for T-Bills are 91 days, 182 days, and 364 days. Treasury note is another type of government security with a tenor of three to 25 years redemption at 100 percent par value. An RTBs is a government borrowing through the Bureau of Treasury (BTr). March of this year, BTr offered the RTB-25 that matures in March 2024. A corporate bond is a form of borrowing by large private companies and publicly traded in the stock exchange. Brokerage companies and big banks acting as the selling agents offer this security.

The MF, UITF, and VUL manage pooled funds invested in securities such as stocks, bonds, and money market instruments. MF itself is a company managed by the fund manager who decides what and when to buy particular securities and subsequently sell them to lock in profit. The share price is express in net asset value per share (NAVPS). The potential gain is through a positive price difference between the selling value and acquisition price. The SEC regulates it.

The UITF is similar to MF; the big difference is net asset value per unit (NAVPU). Big banks offer these through their Trust Companies, regulated by the Bangko Sentral ng Pilipinas (BSP). The earning potential is through prices appreciation of NAVPU. The VUL is a unique type of investment; it is a combination of living and death benefits. The insurance integrated it with investment (living benefit). VUL products in the Philippines started in the year 2002; the Insurance Commission regulates it.

Time deposit is an investment that keeps your asset in cash value. It is a better deal than a savings account that earns very little interest. The money deposited is locked in for some time, like 90 days, 180 days, one year, or longer, with earnings subject to 20 percent withholding tax.

The above explanations have scratched the surface of various investments; there are still many financial securities not mentioned in this article that sophisticated and high-net-worth investors comprise in their portfolios. I’ll end with the quote from Warren Buffet “The most important investment you can make is in yourself.”

Jose Rodelio Paruginog is a registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 92nd RFP program this October 2021. To inquire, e-mail [email protected] or text at 0917-6248110.