This is a good idea and a good risk management tool, well at least in theory.

My good friend Kendrick Chua in his blog has a great way of illustrating Peso Cost Averaging:

In a simple illustration, if you have bought 10,000 shares at Ps 10.00 for each share, you would have invested Ps. 10,000.00. When the value goes down to Ps 5.00 each share (and assuming you haven’t sold yet), your investment would have decline to Ps. 5,000.00. If you employed cost-averaging strategy and decided to buy at this level, your break-even point would be at Ps. 7.50

Proponents of this strategy insist that this is how you can minimize your risk. There is wisdom to their position. By doing so, your break-even point becomes lower and when the stock price reaches back to Ps. 10; your second investment would have earned 25% already! Had you not done so, you would have miss out the gain or worse, may not have broken-even.

Cost-averaging are for those who see themselves as long-term and value investors. They believe that the intrinsic value of the stock is worth more than what it is being traded. Hence, the lower it goes, the better the bargain is and if before it was a “buy”, now it is a “screaming buy”!

There have been a lot of arguments for and against Peso/Dollar Cost Averaging. Proponents claim it as a very practical risk management technique while its critics says its a recipe for disaster. With the recent financial markets crash not too long ago, this technique came into harsh criticisms and many argued that this popular method didn’t do much to save unfortunate investors. With the recent surge in the equities market, cost averaging has been given a lot of attention again and a lot have been advocating it.

Does it really work? Is it a good idea? My answer? It depends. It depends on how often you invest, on where you invest and the market you invest on. However, one thing is for sure: the individual who was faithful in investing using cost averaging will have more money that one who is not faithful in investing at all.

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So what is happening to the stock market? People have discounted the market as a place to invest money into partly because of the recent world-wide financial turmoil, but largely because of financial ignorance. Here’s what you miss… in the last 12 months, our local stock market index or the Phisix has steadily been increasing. A year ago, the index was at about 2200 points. As of yesterday, the market is hovering at about 3200 points. Simply put, had you invested P 1,000.00 in May 2009, your money would have grown to about P1,500 today – a whopping 50% annual rate of return.

Our local market has been performing positively and to the few who took a risk of investing a year ago, they are smiling today. I know of a lot of people who purposely stayed away from the market because they say that during an election year, one should stay off investing.  I don’t why we torture ourselves of doom and gloom scenarios every time we elect our leaders anyway. For those who were paralyzed with our periodic doom and gloom fantasies, you missed making your portfolio grow by a enormous 50% return!

Does this mean that you should go and empty your bank and head on to your stock broker? Wooah! Hold your horses. The stock market, though it gave a very good performance in the last 12 months, is still not for everyone. One should go through a process before making any investments regardless if it’s buying stocks, bonds, mutual funds, uitf, real estate or any other form of investment. Remember to be clear about a few things first: your investment objective, your risk tolerance, your time frame and your risk tolerance.  If investing in the stock market will help you achieve your financial goal, you can take the volatility of market, you are willing to leave your money for a while and you have rudimentary understanding of how the stock market works – then go! However, if you will lose a lot of sleep (and sanity) whenever the stock market moves south, don’t go there even if you can see surges in the market like 50% in a year.  Remember, an investment that can give you a 50% hike in a year can also make you lose as much in the same period. Returns will always be determined by the risks you take – always has, always will! I can’t believe there are still detestable beings preying on the innocent (or the ignorant) making them believe that what they offer is high yield but low risk. Whenever someone offers you an investment that will make your money grow with very minimal risk, he is either misrepresenting or he is scamming you.

Will the market continue on an upward trend like the last 12 months? I have no idea. All I know is that what goes up must come down at some point. However, if you are willing to be patient and will not mind the gyration of the Phisix, then go ahead and allocate part of your money but always be prudent and sensible. Do not put all your eggs in one basket and diversify. If you are not comfortable with letting go of your money, always remember that the money you do not invest will be safe but it does not mean that it will not lose value. Inflation is constant and an invisible risk we are all exposed to. Here’s a very sensible tip that I got from my good friend Efren Cruz: “Invest early, invest wisely and invest regularly”.

“After a long time the master of those servants returned and settled accounts with them.  The man who had received the five talents brought the other five. ‘Master,’ he said, ‘you entrusted me with five talents. See, I have gained five more.’”His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master’s happiness!’”

-– Matthew 29:19-21, NIV

Louis and I have regular chats, over coffee or over the keyboard – in our latest chat, he was complaining about how difficult his exams are … stochastic matrices, markov chain, fractals, modern portfolio theory, CAPM, APT… etc. I told Louis a few things I know about his subjects; for instance, I said “modern portfolio theory is a theory of investment which tries to maximize return and minimize risk by carefully choosing different assets; or in other words, the concept of diversification in a mathematical formula.” Nose bleed alert!

After a few more nose bleed discussions, I told Louis… “wanna know a secret?” All those stuff doesn’t really work in today’s environment! Those investment theories will require very high IQs but will not mean squat in the real market. Theories assume that people’s behaviors are rational … the more you study the market’s history, the more you realize that rational behavior is always missing in the market. The more you try to understand what’s going on, the more you see things are fundamental… the more things go back to the basics like supply and demand. The market is a representation of people’s sentiments – and people’s sentiments are either overly optimistic or disastrously pessimistic.

So will I advise Louis to quit school? Never. Louis will need to learn all the nose bleed stuff for him to have a more intelligent view of things that are fundamental in nature. If you’re reading this Louis, go hit the books!

For this blog, I will be writing about what to do with your preneed plan.

First, if you are considering purchasing one, it would be very prudent that you thoroughly scrutinize the product you are buying and the provider of that product. Not all preneed companies are shaky; there are a few that remain strong, so it would be unfair to make a general statement. However, many preneed companies are in limbo, and if you decide to get any plans from them, you have to accept the risks that come with it. Consider why you are buying a preneed plan first; why do you want to invest on it? Consider alternatives, as well; if it’s for savings, try other programs like time deposits, treasury bills and, if you have a higher tolerance for risk, try unit investment trust funds or mutual funds. If it’s for protection purposes, get life insurance. You can actually make your own preneed product by combining different programs out there. In fact, I believe you can even come up with a program that is less risky and will yield you a higher growth. If you are thinking of buying preneed at this time, think hard about it.

For those who already have an existing preneed product, what should you do?

If you already have a fully paid plan, there are some options for you. The first is for you to wait for maturity…it really is up to you if you want to take the risk of waiting, or you feel comfortable with your provider. If your maturity is very near, say, next year, you may want to consider holding your plan until maturity. Your second option is to sell your plan. Prior to the preneed fiasco, there was a flourishing secondary market for fully paid preneed plans. You may want to try selling your preneed price at a discount and see if there are any takers. Be prepared to price your plan at a low price, as the appetite for preneed plans today are not too good. Last, you may opt to call your preneed provider and surrender your plan. They usually have a buy-back facility that offers you surrender values. Unfortunately, preneed companies will always give you less than what you have paid for the said plans, so be prepared to take some heavy losses.

If you are still paying for your pre-need plan, you are limited to just three options. First, you may wish to continue paying for your plan. If you are confident your preneed provider is stable and you trust them, you can always brush aside the so-called preneed scare. Second, and depending on how long you have been paying, you may opt to ask your preneed provider for surrender value of your product. Preneed plans have a mechanism in them for surrender value—the longer you have been paying, the higher the percentage of surrender value (from what you have paid). If you are just on your first year, you probably can’t get any money back and charge your investment on “experience.” Last, you may want to cease from paying your preneed plan, and cut losses. If you are very uncomfortable with this whole preneed issue, don’t lose sleep over it.

What I wrote here are the options for those who have preneed or are thinking of getting one. Like any other investment, preneed, despite its hype, is not spared from the rudiments of investment realities. What can be a great investment today can be a horrible undertaking tomorrow—that’s just the way the cookie crumbles! We can always blame providers and the regulators, but that will not bring your losses back. So what’s the solution? I believe the only real solutions will be financial education. Sour investments will always be part of our life, and we must deal with them. In the end, not all our endeavors will yield a negative result, some will be positive. If you have more positive investments than negative ones, then you come out of it okay.

Filipinos must familiarize themselves with financial literacy. We must be comfortable with ideas like asset allocation, diversification, cost averaging, risk-return relationships, etc. Financial information is everywhere, but seeking financial wisdom is really up to you. Dedicate yourself to learning and understanding. You can take a course like the Registered Financial Planner program (www.rfp-philippines.com), join forums like www.income-tacts.com, read blogs, buy books and talk to other people.

Seek knowledge and, as you seek it, you will eventually build wisdom. “Do not forsake wisdom, and she will protect you; love her, and she will watch over you” (Proverbs 4:6).

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.

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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.

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)

• 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 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

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