Inviting the singles for a no holds barred discussion on personal finance this Saturday, Nov. 26 at the Victory Center in Promenade, Green Hills. This is for FREE but only limited slots are still available. To register, please send email to vbaguios3rd@gmail.com
Italy is a first world country by any definition. This country is known for many things like architecture, history, Ferrari, Gucci and pasta. This is also a leading nation that employs many of our Filipino workers bulk of which are domestic helpers. Recently, Italy has been in the center of a lot of talks with its ballooning debt & fiscal disarray. Many doom & gloom scenarios places Italy as a nation to follow the state of Portugal, Ireland, Greece and Spain (collectively known as PIIGS).
Just how risky is Italy? The worsening debt issue of Italy is scaring a lot of people, particularly financial institutions that owns a lot of Italian debt. Standard & Poors recently downgrades Italy from A+ to A but the downgraded rating still makes Italy’s debt ‘investment grade’. The economy of Italy is in a precarious state and the whole world is now looking closely as to how the Italians will handle their situation with much anxiety. Just recently, a new leader was elected in the Italian parliament, a technocrat who just might change the fate of a country rich in heritage.
The Philippines is considered an emerging market, a politically correct term for ‘third world’. Unfortunately, our country is considered a laggard even amongst Asia and not a favorite destination of foreign investments. Philippine sovereign debt is not a choice investment by many owing to many factors such as bad governance, debt issues, political instability, among others. The leading credit rating agency, Standard & Poors gives this Southeast Asian archipelago a rating of BB, two notches below ‘investment grade’. The Philippines is one of those countries that send thousands of its workforce to work for Italians.
In investing, yield is always a function of risk – the higher the risks are, the higher the yields should be – at least in theory. Following the credit ratings of S&P and owing to the nature of the economy of Italy and the Philippines, it would be logical that our country is a much riskier one than Italy. If we are riskier than Italy, then it is only logical to assume that investing in Philippine debt should give a much higher yield than Italian sovereigns. That is not the case today. Italian sovereign debts now give a yield of about 7% p.a. (Yield to Maturity or YTM) while Philippine debts (popularly known as ROP) now yields about 3 to 4% p.a. While credit raters, economists and the media say we are a very risky nation, the market has declared otherwise. Price is a function of value – if Italian debt is now cheaper than Philippine debt, I would like to think that the market has made its judgment. Another question in my mind is just how credible and relevant are credit raters today? Raters have been giving the Philippines below investment grade (also referred to as junk) yet we continue to be faithful in the payment of our obligations, no scenario of default and our debt to GDP ratios are twice better than first world nations. Go figure!
When an investment grade country’s sovereign debt gives higher yields (ergo riskier) way above the sovereign debt of a below investment grade country (ergo less riskier) – that is the new normal in a new world order.
Investment: The commitment of funds made in expectation of some positive rate of return. If the investment is properly undertaken, the return will be commensurate with the risk the investor assumes.
I like the above definition of what an investment really is – it’s not just about returns, it’s also about risks. If the investment is properly undertaken, the risks determines the return and vice versa. Before anyone parts with his hard earned money, he should first understand the relationship of risk and return which is very fundamental and states that:
Low Risk = Low Return
High Risk = High Return
Regardless of how people will claim, the fundamental truth about risk and returns will not change. No amount of financial engineering will alter the fact that returns will always be a function of risks. Further, to say ‘low risks’ does not mean ‘no risk’. I refuse to believe that there is any investment instrument that you can categorize as no risk at all. Recent developments have made the world realize that ‘no-risk’ instruments like debt of first world countries are not really ‘no risk’ at all, in fact many now question if they are in fact, ‘low-risk’ at all.
For purposes of discussion let me give examples of low risk instruments common in the Philippines.
Debt instruments: Savings, Time Deposits, Special Deposit Accounts, Treasuries, Corporate Bonds. The most common financial investments being transacted in Philippines are debt securities, also known as creditor claims. In essence, one lends and another borrows for these types of transactions.
Savings Account and Time Deposits : Simplest and most common form of a debt investment. A depositor gives money to a bank and the bank guarantees that the money is there after a stipulated period of time; and in return, the bank pays the depositor for letting it use the money for operations (lending, treasury, etc.). Since these instruments carry the guarantee of the bank and most of these are very short term in nature, hence highly liquid instruments (cash or near cash), the interest one gets from these transaction are really low, quite negligible if you ask me. The risk of said investments are really low and if the bank is a reputable and stable one, the risk of capital loss is minimal and none at all if the amount is covered by the PDIC (up to P500,000). The stability of the bank largely dictates the amount of interest it can give so the bigger/stronger the bank is, the lower the interest you can get. Smaller banks need to compete with reputation so they need to entice depositors with higher returns. This is a clear example of risk and return. However, investments in these instruments are relatively safe. Further, the Central Bank ensures that banks are solvent and must meet all its obligations through reserve requirements and other regulatory measures. Unfortunately, even good systems can be flawed and quite a number of ailing banks slips in to the Central Bank’s watchful eye. For savings, the market rates ranges from 0.5 to 1.0% p.a. (yes, per year!) and about 2.0 to 4.0% p.a. for Time Deposits. Smaller banks like Commercial Banks and Rural Banks offer higher rates, from 3.0 to 6.0% p.a. ranges.
Catch for more of these in my next blogs…
Question: Should I invest in a life insurance or use the money to expand my small business?—Mary Anne Maloles Tesoro via Facebook
Answer: I am a firm believer of life insurance. I make sure my life insurance policies are always in force as they give me and my wife peace of mind. With the way I travel and the many hazards I face like sleeping audiences and bored readers, life insurance is an important risk protection tool for me. Life insurance is first and foremost a tool for risk management by way of a risk transfer mechanism. Simply put, certain life risk such as untimely death or serious physical breakdown can be assumed by way of an adequate life insurance policy. Since I am married, happily at that, and have four lovely children, having the protection of a life insurance policy is a priority.
Life insurance as an investment is another story. The primary purpose of life insurance is to provide financial protection against life’s risk but investment can be a secondary benefit. It is difficult to compare life insurance with other forms of investments because of the nature of insurance itself. Life insurance needs to deal with actuarial tables and a lot of probabilities because of its primary tables. All those probabilities need to be accounted for and adequate provisions must be made. When you invest in a life insurance policy, not all the money goes to investment as some is allocated for insurance premiums. There are many types of life insurance but since you are referring to it as an investment, I assume you are talking about the variable universal life or unit linked insurance—an insurance policy with an attached investment similar to Mutual Funds or Unit Investment Trust Funds. Variable type insurance will not perform at par with a mutual fund or a UITF because not all the money is invested in the funds—premiums for insurance protection are allocated from the money invested and these are recurring charges. The bigger the coverage, the smaller the amount goes to pure investments. Its advantage, however, is when the insured (or investor) dies, the named beneficiaries will get both the insurance coverage and investments as well as some estate tax benefits.
Comparing life insurance and small business is like comparing apples with durian, which are worlds apart. Further, the issue of risk and return comes to play in this concern and business is always risky and speculative. Business is also where you can really earn a lot of income and it can substantially grow your capital, albeit all the risk it carries. I’d like to look at insurance as a way to protect future income while business or investments is a way to maximize income. Will business be better as an investment? Definitely! A good business idea coupled with a good business plan and impeccable timing can make your capital grow bigger and faster than paper assets. But, as the saying goes, the higher the yields, the higher the risks. Most start-ups fail and the percentage of those that succeeded is quite disappointing. Yet, I believe we should take a wee bit more risk with our money and be a tad more entrepreneurial—as cliché as it sounds, no guts no glory. Just be prudent and know what you are getting into.
Know your objectives. If your objective is substantial capital gain or adequate provision of income, life insurance products are not the answer—business or other investments are. If your objective is moderate capital growth with financial protection against life’s risks, then life insurance is something you can consider. Also, life insurance products are long-term in nature.
Should you choose between life insurance and business? I say you may need both. If you have loved ones depending on you and your income, you definitely need to assess your life insurance needs. If you are disappointed with the gains you get from other investments like time deposits or special deposit accounts (yields are lower than inflation) then do consider other investments, small (or large) business being one of them.
Just a friendly reminder: Before letting go of your hard-earned money, investigate before investing; check out your alternatives and if need be, talk to professionals. Remember, prudence is always a good virtue.
This article also appears at the Philippine Daily Inquirer
The biggest personal finance event in Davao for 2011!
Catch me, Francis Kong and Jayson Lo this November 11, 2011.
For inquiries, send email to jddoce@yahoo.com or visit www.stepstofinancialpeace.com
Catch me at Coffee Bean’s brunch series “Small Talks for Big Changes” as I give a short talk on ‘new financial habits for a brighter future’.
It will be this Saturday at the CBTL in Greenbelt 3 from 10 am to 12 noon. It is FREE but you will need to register and there are only limited seats still available.
Check out www.facebook.com/coffeebeanphilippines or send an email to itallmatters@coffeebean.com.ph
For the last 3 weeks, our church (Victory Green Hills) ran a series on manhood. It has been eye opener to many of us who have been attending the services and a more focused big group discussion for the last 3 weeks.
Today’s perception on what a real man is so obscure because of culture and media. When you talk about a real man, one would think of a typical half naked and unbelievably buffed model you see in EDSA billboards (are they really men to start with, me thinks). To others, the picture of a real man is one who is fierce, stoic, can take in a lot of alcohol and ready to jump into a brawl. Whether the image of a real man is one who has sculpted abs or a beer belly, our society has a twisted image of what a man should be and for us men, we seem to be clueless on how we should act, think and behave.
In a radio show I co-hosted (as a fill-in), we had a guest who had an incredible story. He is your classic rags to riches story and against all
odds, even on the brink of death, our guest survived, thrived and became very successful. He seems to be a nice person, kind, generous and willing to share his knowledge and even his wealth to better the lives of those around him. He truly is an admirable fellow and it was really a pleasure conversing with him. No person, no matter what he has achieved is perfect. This nice guest of ours has an incredible story, besides his rise to success. He is a father of 14 children with 14 different women. While many were amazed at his life story, more were impressed upon his virility and people started to call him ‘idol’. While I do not judge our guest, I am saddened that many will find his ‘adventurous romantic episodes’ as something to be admired and worse, emulated. Well, I guess it’s ‘to each his own’, I suppose.
If society has conflicting views and many of us have settled for less than what a man ought to be, the last 3 weeks have made me realize that God expects his men to be more than what society can ever define. Here are 3 critical learning on the role of real men I picked up from our Pastor Dennis Sy:
1) Provider: lead financially. While there is nothing wrong with women working and helping their family financially, the role of the man of the house is to provide for the needs of his loved ones. Man should go out and work for a living and provide a comfortable life for his family as best as he can. Providing doesn’t mean that men should give his family an ostentatious lifestyle that will make him a slave to work and be an absentee father as a result. Having a stable home and providing for such a home will always be the responsibility of the men. It is sad to see many women work hard and their husbands are left at home. Call it the modern family and call me old-fashioned but I believe there should not be reversal of roles in this case. I wrote about my thoughts on this in an earlier blog.
2) Warrior: lead physically and emotionally. In the family, the man is the head of the family and he should act as such. There is a reason that the men were created to be sturdier, stronger and maybe even less emotional as the women. Men should not abdicate his role as the leader and hold the family together. Being a warrior does not mean he canbe insensitive and push his weight around, that’s a sign of weakness. A real man would know when he should acknowledge the wisdom of his wife, accept his limitations and yet stand firm for his decisions. I don’t think women would like their men to be a push-over, indecisive or cannot take his responsibilities seriously.
3) Pastor: lead spiritually. While our faith in the Lord is an individual concern, the real man should act as the spiritual head of the family. As a husband and a father, the Lord has bestowed upon me the spiritual covering for my family. It is imminent for us men to pray for our loved ones regularly and with intensity. Our faith in the Lord is something our children can emulate, not from lengthy sermons but from what they actually see in us. I once had a friend who got concerned that his young children decided not to go to church; I gently reminded him his children only copies what they see from him and since he is infrequent in going to the church, they started to think they shouldn’t as well. The good news is my friend started going back to church regularly and is now walking with Christ. Our children read their bibles not so much because we tell them so, but more so because they see us read, especially me. Filipina women have traditionally been more pious but let me tell you that when the men exhibit a close relationship with the Lord, it is a totally different ball game. As the spiritual head, we can actually intercede for our loved ones and I am certain the good Lord listens to all our prayers.
Further, and more importantly, the real man submits to the real authority. He submits to the authority of Jesus Christ who is the real master of his life.
Whew, writing this blog has overwhelmed me if I am to be totally honest. The burdens of being a man, and a godly man at that, is not easy task nor for the faint hearted. However, it is also only by the grace of God can we do all these. Apart from Him, I can’t really do much. “For I can do everything through Christ, who gives me strength.” – Philippians 4:13, NLT
Be a man according to culture or society? Or be a real man in the image and likeness of the Lord? The choice is ours to make.
To learn more on being a real man, check out Act Like a Man
How can an investment make it to my list of personal finance champions? Here’s why.
As a personal finance advocate, I and many other advocates have been teaching people on the power of regularly saving and investing. Many of us will use charts and illustrations showing the power of compounding especially if we are doing it on monthly basis. However, there is hardly any vehicle for us to do such investment on a monthly or semi-monthly basis; if there is, the minimum amounts required will marginalize many of us.
I have been writing and speaking about the advantages of pooled funds, especially for long term investing (please check my other blogs on pooled funds). Mutual Funds and UITFs are good investment vehicles for the average Pinoy and one can expect better capital growth in the long term for such instruments. However, Mutual Funds and UITFs have minimum amounts and although they are relatively low, many Pinoys still find it difficult to cough up the initial placement that ranges from P5,000 to P10,000. Further, many of us will start on investing on said pooled funds but will stop making additional placements because we find it inconvenient and we lack the discipline for force savings. To learn more about Pooled Funds visit my previously posted articles: Pooled Funds 1 & Pooled Funds 2
When I received a call from BDO’s Chief Investment Officer Marvin Fausto to have lunch, he said that he has something that he wants to show me that I will definitely find interesting. Since Marvin is a dear friend and one I respect and admire a lot, I agreed to meet him provided he pays for lunch (always a cheapskate I am). Mr. Fausto told me about a new product BDO will be launching, a UITF program that can be deducted from one’s savings account on a monthly or semi-monthly regimen. It was interesting but I didn’t think it was really anything new… besides, there are very few Pinoys who can afford a monthly debit of P10,000. What Marvin said after really caught my attention – he smiled and told me that the monthly deduction can be as low as P1,000 a month and the investor can chose among 3 funds BDO is offering: Bond, Balanced and Equities. My jaw dropped and asked him “really, you guys are willing to let people buy into your funds for P1,000? Wow!” Further, the convenience of auto deduction will be good for many of us who are not necessarily well disciplined in savings. What I also like is that an investor just needs to go through the initial paperwork one time, no further documents, signatures, Know Your Client (KYC) questionnaires after.
Here’s the beauty of the EIP. If I am a conservative investor, I can opt to go for their Bond funds which are generally low risk investments. If I am aggressive and still have a lot of time before I need my funds, I can opt to be a risk taker and invest in their Equity funds. If I want to be in the middle of the ground when it comes to taking risks, I can opt for Balanced funds. While other banks can offer you UITF funds, I don’t think there is anyone that will let you invest for a small amount of P1,000 per month. Finally, there is a real product that is consistent with what we finance coaches teach, regular savings and investing over a long period of time and this time, even those with challenged incomes can now participate.
Truly, the BDO EIP is a Personal Finance Champion in my view. Pinoys should take advantage of investing through the EIP and other financial institutions should take queue from BDO. To Marvin Fausto, Ador Abrogena, Marily de Vera and the rest of the BDO Trust Department, mabuhay kayo!
Check out BDO’s EIP on their website
Question: With all the uncertainties in the world economy and markets, is it still wise to make investments in the stock market now?—Kris C. Lim, public relations practitioner
Answer: I have been taking note of all the developments worldwide particularly the economic woes of Europe and the United States. Downgrading banks, debt default scares, increasing unemployment, recession and political instability are becoming so common that many are referring to our present situation as the “new normal.” Egad, it sure feels that all the business and economic developments we are experiencing will result in the rewriting of all the books as we know it. I don’t blame you for being skeptical in investing your money—I would be, too, and I actually am.
‘New normal’
With the United States and Europe so far from us, should we really be concerned? Definitely. Today’s borderless world economy has resulted in more economies being interdependent with each other. The United States, Europe and Japan are the largest of all markets and even if Asian countries have better fundamentals (and yes, the Philippines is definitely included), we will all feel the pinch as we are all covered by the laws of supply and demand.
To simplify, when people start to make less money because of a weakening economy, they will buy less of the goods and services we offer and that will not be good. A weakened economy will usually have a negative effect on profitability of corporations, and stock prices will likewise go down. When economies are not robust, people are also fearful of the future and investment markets react negatively.
Make a killing or be killed
Now back to your question. Should you invest now when we are under the ‘new normal’ environment? Well, the answer can be tricky. There are two scenarios that can happen. First, you can actually take advantage of the low prices of stocks and start bargain hunting. When you properly select blue-chip stocks that are profitable, well-managed and have a lot of good potentials, you can be sure that their prices will rebound when the market starts picking up.
Some prices are now at their lowest in months and buying them may be a good idea. On the other hand, buying stocks today might also be like catching a falling knife if the market continues to plummet. There is always that risk and buying a lot of stocks today with the current market condition is tantamount to speculating. When one speculates, he can make a killing or be killed—that’s just the rule of risk and return.
Personally, I would probably start looking for good-quality stocks that are now trading near their 52-week lows; just make sure that these companies have strong fundamentals and continue to be profitable despite the condition of the economy. However, it is unwise to have a high exposure or a big part of your portfolio invested at this conjecture as the market can continue to go south with no real recovery anytime soon.
Investment options
The whole European situation continues to make people fearful and that will be a cloud over our heads for an indefinite period of time.
You may also want to just invest through pooled funds like the UITF or Mutual Funds and leave all the trading, buying and timing to professionals who are focused solely on investing the funds. Experts actively managing funds can minimize losses during bearish environment and improve gains on bull runs.
If you chose to invest now in the stock market, or at any time for that matter, it is always prudent to look at this asset class as a long-term venture to weed out the volatility, or spread the risk over time. Further, do not be in a hurry to invest the bulk of your funds just yet because when the market does recover, it will not do so overnight and you will have time to re-enter the market when the trends are more evident.
Just a friendly reminder whenever you invest in the stock market or any other investment—consider your investment objective, time frame and risk tolerance first and foremost.
Be wise, stay prudent and be patient.
Originally posted at the Inquirer http://business.inquirer.net/25557/do-we-still-invest-in-times-like-these
Efren is one of the country’s most notable champions of financial literacy. He is a best-selling author, columnist and one of the most sought after speaker/trainer in the arena of personal finance. You will find Efren giving lectures all over the country educating hundreds of participants each time. There are also thousands of people who have benefited much from reading his two books. More than being notable, I am proud to say that Mr. Efren Ll. Cruz is perhaps one of the most respected individuals in the financial services industry.
I first met Efren after in 2006 after a class in Registered Financial Planner (RFP). Henry Ong, RFP President invited me to join their lunch Efren and his friend Atty. Caloy Ocampo. My initial impression on Efren was that he was a tad timid and very unassuming. He mentioned that he just wrote a book entitled Pwede Na! The Complete Pinoy Guide to Personal Finance which I ended up buying from him that day. As I read his book, I was enamored at the wisdom of Efren and I can discern his passion to help ordinary Filipinos get financially literate and achieve financial freedom. That fateful lunch was the beginning of my admiration for Efren, in fact I am proud to say that I am one of his earliest fans and I continue to be a fan!
Efren has an impressive pedigree in his area of expertise. He holds an MBA from the University of the Philippines and has been in the financial services industry for over 25 years, 18 years of which is in fund management. Efren is no stranger to managing wealth, working for institutions like Far East Bank, Grepalife Asset Management, Standard Chartered Bank and others. He is also one of the driving forces behind the mutual fund industry, serving at the Investment Company Association of the Philippines (ICAP) twice as President and once as Chairman. He also co-founded the Fund Managers Association of the Philippines. Efren has definitely earned the respect of his peers because of his hard work and dedication.
Efren is a favorite of many publications; as a contributor or columnists for Business Mirror, Moneysense and the Philippine Daily Inquirer. He is also a frequent resource person for many Radio and TV shows, too many to enumerate. He is one of the directors of the Registered Financial Planner Institute and a regular moderator of the program where he teaches on personal finance and investments.
One of Efren’s main advocacies is financial education for the workforce. Efren and his company, the Personal Finance Advisers Philippines Corp. has been in the forefront of providing financial literacy to many employees. He makes employers understand that it is in their best interest that employees are financially literate to ensure competitiveness and minimize work conflicts that will have a severe impact on bottom line. Efren Cruz has been actively seeking corporations to allow him and his company to teach their employees despite the great odds they face.
Another area where I admire Efren the most is that despite handling and teaching money all these years, he remains to be God fearing and always remind his listeners, participants and readers about the real purpose of wealth and money – to honor God, first and foremost.
I am so proud to say that Efren is one my esteemed mentors, an ally, a colleague and a most cherished friend. Efren, is on the top of my list as Personal Finance Champion. My prayer is that the country will have more Efren Cruz. Mabuhay ka Kuya Efren!
Check out his company website.
