Appeared at the Business Mirror, 02.08.2010

You often hear the word “diversification” when investments are discussed. Diversification is important; in fact, it is considered one of the most effective risk-management tools, minimizing investment losses.

What does Investopedia (a favorite online site for investment stuff) say about diversification?

“A risk-management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

“Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.”

Diversification is often misunderstood and its execution has always been a mystery to many. To many of us, diversification is just putting your money in different banks or buying different pieces of property in different areas. However, diversification is much more than that and here are some ways to diversify:

1)                  By asset class—Cash or near cash (savings or checking accounts, time deposits, treasury bills or money market accounts); fixed income (government securities, corporate bonds); equities (stocks); real estate; collectibles (paintings, jewelry, etc.); enterprise (business)

2)                  By time frame—short term (about a year); medium term (up to about five to seven years); long term (over seven years)

3)                  By risk—conservative, moderate, high or speculative

4)                  By liquidity—highly liquid vs. nonliquid

Above are just a few ways to consider classifying your assets/investments regarding diversification. Here are some diversification tips: vary your asset classes; combine short-, medium- and long-term investments; combine highly liquid and nonliquid assets.

By practicing diversification, you are also practicing sound risk management. A properly constructed diversification strategy will minimize the risks of your investments and, at the same time, give you better yields as compared with taking an ultra-conservative position. With a good diversified portfolio, the risk of totally wiping out your wealth is highly unlikely, but at the same time, allow you to experience better growth which will be more than inflation.

But diversification also has its downside. Sometimes, a portfolio that is too diversified can also prevent you from earning properly, as the volatility of many of the players in your portfolio can cancel each other. However, having a very risk-averse position can be just as dangerous as taking a risky option, as inflation can erode the value of your wealth. The more prudent option then would be to learn diversification.

Do not be too afraid to try out diversification, it is not rocket science. Come up with a diversified program that is consistent with your investment objective, risk tolerance and time frame and you are on the road to achieving financial peace.

I really like the way the Bible talks about diversification. Yes, the Bible is a good source of investment wisdom and here’s proof: “But divide your investments among many places, for you do not know what risks might lie ahead.”—Ecclesiastes 11:2 (New Living Translation)

Since the Bible advocates diversification, I am assured that it’s a great idea.

As a financial planner, I always advocate for people to have an open mind when it comes to having other sources of income. In many cases, proper money management may not be sufficient to achieve financial peace; they really need to increase their income in many cases.

If you are not too keen on going into business or getting sales jobs, there’s another way for you to get additional income: Make Money On-Line.

Unfortunately, this is something you can’t learn from me — but you can learn it from the real experts in this field. Carlo Ople leads a cast of ‘on-line’ experts and they can teach you how to make money on-line, for real! I’m looking forward to attend this one, you should too.

To learn about this program, visit http://catalyst.ph/makemoney/

INDEX  3,000 in November. The index finally got over the hump, breaking the 3,000 index level last November 11.

Bitten by the Gold bugs. Rising gold prices was a also a positive catalyst as it reached $1,174/ ozt in November, helping PX reach P20/ share

Outperformers. Universal Robina Corp (URC up 20%) which is finally catching up with its book value of P15.50/ share.

Ayala Land (ALI up 20%) also attracted foreign buying after 3Q09 results showed recovery in residential revenues (which accounts for 42% of Operating Income).

Underperformers. Laggards for the month were Megaworld Corp (MEG dn 4%) and Energy Development Corp (EDC fell 3.6%).

Strategy. Global equities suffered a setback from Dubai World’s request for a “standstill” on debts worth $60 bn.

ADVICE: Better be waiting in the sidelines than brave a potential storm brewing.

Do you really understand the risk you are taking with your money?

With regard to investment risk, it can be:

Low

High

Speculative

Before parting with your hard-earned money, take time to understand the risk you are taking.

Money is put into risky investments that turn sour, and everything is lost. In the end, there is nothing left to pass on to one’s children.

(Ecclesiastes 5:14, New Living Translation)

EQUITIES MARKET OUTLOOK: (Wednesday , NOVEMBER 11 ’09)

• Philippine stocks expected to remain buoyant after nearly reaching the 3,000-mark yesterday
• For the first time in months, the financial index showed life as banks received foreign buying interest.
• This could escalate further on potential merger and acquisition stories that will emerge in the coming months
• Breaking out of index 3,000 could spread wildly to recently lagging sectors such as Property and Conglomerates

The Dow Jones closed at 10,092.19 last night (10.19.2008). This is definitely big news.

The stock market has seen a big recovery in the last year from a low of about 6500 about half a year ago to above 10,000 last night. In just 12 months, you’ve seen the Dow go from about 9000 to 6500 to 10,000. It has been on a generally upward trend in the last half year and many are saying that the market has already reached its low point and it is now on its road to recovery.

By looking at the 1 year chart, one can easily assume that the upward trend is indicative of future. Is it? The chart below reflects the Dow Jones index for 1 year.

Here’s my contrarian view. Price is a reflection of value – at the rate things are going, stock prices may seem to be over-priced. The market reacted positively on news about companies making a profit in the last quarter. What about the losses of previous months? When we go into business, we need to look at a sustainable flow of profits and not just on a seasonal spike. Have the corporations recouped all their losses of the past? I’m one who always wants to hear good news and news of recovery is always good for everyone to hear. However, we must always look at the big picture of things and from a wider vantage point.

Is the stock market really heading for recovery? That can only be answered by looking at how the economy is doing. The stock market can be looked as a mirror of the economy but not all mirrors reflect its true picture. Some mirrors reflect a distorted view (I want one that makes me look 50 kilos lighter!) and from my point of view the stock market is that kind of a mirror. The stock market is a reflection of the people’s sentiment which is always exaggerated. If you study human behaviour, you will see that people can be overly pessimistic (bearish) or extremely optimistic (bullish).

People say that the stock market, though volatile is generally on an upward trend. So if you placed your money in the market 10 years ago, you should have made good money by now. The chart below reflects the Dow Jones index for 10 years.

Has the market really reversed it’s trend? Has it really bottomed out? Personally, I don’t think so. Ultimately, the natural forces of Economics will eventually reflect the true state of the stock market and I will be going out on a limb here by saying I don’t see a rosy picture. In a make or break statement, I’ll be going on record here by saying that there is a very big possibility that the market will go south between 1 to 3 years. Not just a minor correction of about 1oo to 200 points in the Dow… hmmm, something below 600. If I am wrong, then it’s good news to everyone. If I am right, then woe to all of us… this is one time I pray I am wrong.

So does this mean that you should totally forget the stock market? By no means.  The stock market will always be a viable asset class for one to invest in. It’s volatility allows for people to lose money but can also do the opposite. Had you entered the market 6 to 8 months ago, you would’ve made a lot of profit already.  You need to look at the stock market as one of the avenues for you to put your hard earned money but it should always be consistent with your investment objective, time frame and your risk tolerance. Stocks will always be an asset class for people to consider but to think of the market as the only place for you to grow your money is foolish.

Understand your needs and the purpose of your investments. Growing money just for the sake of it is not a purpose worth pursuing. Think about your goals and the purpose of those goals, then act on it accordingly.

“Money is put into risky investments that turn sour, and everything is lost. In the end, there is nothing left to pass on to one’s children. We all come to the end of our lives as naked and empty-handed as on the day we were born. We can’t take our riches with us.” – Ecclesiastes 5:14-15. NLT

Learn about Investments the right way. Attend the No Nonsense Seminar on Finance: How to Invest for the Future!

My earlier blog (Should you start buying US Dollars?) may has spurred a lot of discussion on alternatives to the US Dollars and one of them is Gold.

Gold has been a financial instrument for the longest time, even predating minted money by a mile. Every time there are reversals in the economy and the market, you will always here that gold is a better investment as they really rise in value. Do they? Yes… but by how much? Like any form of investment, you will see good years and bad years but when you look at the long term performance of gold itself, one will really wonder if it’s really a better investment after all.

From the data I gathered, the 30+ growth rate of gold was just about 5% p.a. It doesn’t really look like that great of an investment to a lot of people. But then again, the value of gold doesn’t really collapse especially during financial reversals so it does have its strong points too.

So where should you put your money? Well, that’s a tough question and the answer is always “it depends”. It depends on your financial objective, time frame and risk tolerance.

I would like to readers to check on their perspective – growth or security? More importantly, what is the purpose of your treasure to begin with?

“For where your treasure is, there your heart will be also.”

– Matthew 6:21, NIV

You will often hear the word “diversification” when you discuss about investmetns. Diversification is important, in fact it is still considered one of the most effective risk managment tool, minimizing investment losses.

What does Investopedia say about diversification? (a favorite on-line site for invesmtment stuff)

“A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.”

What does the Bible say about diversification?

“But divide your investments among many places,
for you do not know what risks might lie ahead.”

– Ecclesiastes 11:2. New Living Translation.

Both definitions are essentially the same but I like the one from the Bible better — I understand it better and I am sure it is the truth.

Ever heard the term ‘Burgernomics’?  Believe it or not, there’s actually such a term and it’s widely used by economists/investors.

The publication The Economist actually publishes an index that makes reference to the Big Mac PPP. Err, the Big Mac what? PPP is short for Purchase Power Parity.  PPP is a theory that states that currencies adjust according to changes in their purchasing power.  It is actually survey done by The Economist that determines what a country’s exchange rate would have to be for a Big Mac in that country to cost the same as it does in the United States. They use the price of the Big Macs in different countries and divide it by the price of a Big Mac in the US.  Let’s say that the price of a Big Mac in the Philippines is P100 and the price of a Big Mac in the US is US $ 3 — you simple divide the Philippine Big Mac cost by the US Big Mac cost, or 100 divided by 3. In this case, according to the Big Mac PPP, the exchange rate of the Philippine Peso against the US Dollars should be only P33.33: US$1, making our Peso undervalued.

Sometimes, Burgernomics makes some sense to me… but most of the time it just makes me hungry.

..con’t. (Part 2)

Let’s simplify this. Because of the fears of losing money brought about by the crisis, the preference for safer havens increased the demands for fixed income securities. Price of said investments has an inverse relationship with yield – so as price increases, yields go down. Yields of such ‘safe’ investments have plummeted to a point that they are starting to be very unattractive and are forcing many to look elsewhere. Central Banks all over the world are keeping interests down to keep money circulating in the economy so we can’t see any improvement in the yields of new fixed-income securities as well. All these makes investors go out and look for avenues where they can get better performances.

At a certain point when the markets are too liquid, money needs to be invested, otherwise money will actually lose value because of inflation. Staying out of the equities market is a knee-jerk reaction to cut losses when things become awry. However, it can’t be expected that people will totally forget about the market as they are just waiting for signs of some recovery before they start taking positions. The question in my mind is, are we really seeing recovery? The US equities market has seen a remarkable 30% increase from its lowest point and thereby also having a positive effect in the Philippine market. Is this a sign that the stock market is in full recovery? Only time will tell. It’s not that I am sceptical; I pray every day that we see some recovery and eventually growth. But we need to look at things from a more prudent perspective. Here’s the FACT: the global economy crashed and is in recession. The damage is so severe that it will take time for institutions to heal and recover.

I maybe reading too much into things but here is a thought that occurred to me — can it be that one of the reason why there is action in the stock market is that people are seeing that inflation will shoot up soon?  Equities are a good hedge against inflation, much better than the safer fixed-income securities (well, at least in theory). A high inflation is not a remote possibility; it’s actually a very real one. With the way governments are pumping money into the economy, it puts a lot of pressure on inflation. Are people speculating too much, too soon? I don’t know, maybe. Is it time to start investing in the stock market again? I’m not sure; I wish I knew the answer to that too.

I will stick to my rules before letting go of my money (if I had any): Investment Objective, Time Frame, Risk Tolerance and Acumen. There is also a view that the market is now ‘over-bought’ so there is an expectation of some correction. If you have invested in the market you can do two things, get your profits and leave or just leave your money there and wait for the market to recover – it will definitely recover, we just don’t know when. I am not a technical guy and I’m not a big believer of timing the market so you know what I would do if I have money in the market.

Well, just to remind people that all these are just IMHO (In My Honest Opinion) and HTH (Hope This Helps).