Question: HI, I’ve recently decided to start investing, but I don’t know which product I should choose. Should I invest in variable universal life insurance, a mutual fund, UITF or buy stocks? —Asked by Josiah via Facebook

Answer: First of all, congratulations on taking this important step in your journey to financial peace! But the question of which product is right for you depends on where you are in life and what your goals are. While I can’t make any specific recommendation because I don’t know more about your financial situation, I can give you a broad overview of each product you mentioned to help you make the right decision.

I’m an advocate of life insurance, which is something Filipinos sorely lack. Variable life insurance (or VUL) is a product you can consider if you need both insurance and investment. VUL will give you insurance benefits but it will also have a fund that is being invested according to your objectives, risk profile and other preferences. If there are already people depending on your income, you should get a life insurance policy. But if your sole objective is purely investing, then this may not be the right instrument for you at this time, because in the first couple of years of your policy, most of your money will actually go toward premium payments.

If what you want is to put all your money in investments, and your risk tolerance is moderate to high, UITFs and mutual funds can work for you. A big advantage of these is that they are professionally managed by experienced investment managers, who are trained to invest properly. Even if you yourself are not well-versed in investing, you can rest assured that you’re in good hands.

The main difference between these two is that UITFs are offered by banks, while mutual funds are their own companies. By buying into a UITF, you own units of this fund. By buying into a mutual fund, you own shares and become a shareholder in the mutual fund company. All your earnings are net of tax and fees as represented by the NAVpu (net asset value per unit) for UITFs and NAVps (net asset value per share) for mutual funds.

When it comes to these pooled funds, you can choose from a variety of investments for every risk appetite. You can also choose among actively managed funds, where a fund manager tries to beat the index, or passively managed funds, which simply try to match the performance of an index.

In more economically advanced countries, passively managed funds match or outdo the performance of actively managed funds because those markets are already efficient. However, in younger markets like in the Philippines, active fund managers can still perform better than the index because the market is not efficient yet and there are still advantages they can leverage.

However, investing in mutual funds and UITFs comes with some disadvantages. The management costs can be significant, going to up to 2 percent. For UITFs, sometimes the bank branch staff aren’t trained to handle inquiries, and some of them might even discourage you.

Mutual funds and UITFs will work for you if you don’t need the money right away and can stand risk, but don’t have the time to learn all about stocks. They’re also a good vehicle for retirement funds because the long-term nature of your need will allow you to weather the fluctuations of the market. I’m encouraged by the good performance of many funds over the last few years, but keep in mind that past performance is never an indication of future performance.

Now we come to the elephant in the room: stock investing.

Individual stocks come with a lot of advantages: you have direct control over what you buy, unlike in a pooled fund that is automatically diversified. You get residual income if you buy a stock which pays out good dividends. Your returns are maximized because you’re not paying management fees, and if your individual stock outdoes the market, you make money even if the market as a whole is going down. And if you choose the right balance of stocks, your portfolio’s growth can outperform the index.

But! Before you start counting your chickens, know that stock investing is not easy to get into. You’re going to have to spend a lot of time learning about how it works. You’ll also have to learn fundamental and technical analysis, spending time reading financial reports from the companies you want to invest in and learning market trends to make the best investment choices. And to be properly diversified, you’ll need to start with a big capital; otherwise, you’ll be limited in the kind of stocks you can add to your portfolio.

Bottom line: if you want the protection of life insurance, go for a VUL. If you want to participate in the growth of the Philippine economy but don’t have the know-how to go into stocks, choose a mutual fund or a UITF.

If you have the time to learn, money to invest, and aggressiveness to match, stocks may be for you.

There are a lot of options for you if you want to start moving your money out of a savings account and into a product that can work harder for you. If you are a new investor, I recommend you invest in a pooled fund first as you learn how the stock market works and develop your competency in investing. Once you’re confident that you’ve learned enough, then you can invest in the stock market.

Whatever undertaking you choose, it must have a good foundation—this is true for investments as well. Develop your base of good money management, savvy saving, and common sense, and this solid foundation will bring you real prosperity.

QUESTION: I am ready to start investing and I would like to invest in equities. Is it better to invest in stocks directly or through pooled stock funds like UITF or mutual funds? —Name withheld per request, asked via e-mail

Answer: As a financial and investment planner, we need to subscribe to the principle of suitability. Without sufficient information, it wouldn’t be prudent of me to categorically say one would be better than the other. The answer really depends on you—if you are knowledgeable enough to select your own stocks, size of funds, and if you have enough time for investing.

However, to help you make a more informed decision, let’s discuss the advantages and disadvantages of both types of investing.

On individual stocks

Advantages :

Control—Buying your stocks directly gives you control over what and when to buy or sell.

Residual income—If you buy a stock with a good dividend payout, then you don’t have to watch the price movement anymore. As long as the company is earning and declares dividends, you will get dividends.

Maximized returns—individual stocks that are growing may beat the market and can give you better-than-average returns. Jollibee beat the market last year, moving from P100-P170 while the entire market was down.

Potentially better returns—with proper selection and assuming that you are very good at selecting market performers, the growth of your own stock portfolio can outperform the stock market index and many stock funds.

Fees—buying your stocks directly from brokers usually means lower fees as fund managers charge a higher investment management fee compared to stock brokers.

Disadvantages :

Time-consuming—before investing, you should spend enough time thoroughly understanding how stock market investing works. You should also accumulate enough knowledge of both fundamental and technical analysis.  Fundamental analysis means you must be able to read and understand financial reports of the companies you would like to invest in, the general condition of the industries and market trends to which these companies belong to, general knowledge of macroeconomics and even the management of the corporations you would like to own shares of, etc. Technical analysis will require you to constantly study charts on price averages, trading volumes and a multitude of technical market theories like Dow theory, Relative Strength Index, Elliott Wave theory and more. While fundamental and technical analysis is not rocket science, it takes considerable time for you to learn them properly. Enrolling in a class like Marvin Germo’s Stock Smarts is a good way to start.

Diversification—all investment professionals will always recommend you to diversify. No amount of study and good performance in the past will guarantee the performance of a particular stock in the future so having several and properly selected stocks is always a prudent thing to do. Unless you have a very big capital for investing, you will be limited to the variety of stocks you can carry in your portfolio.

On stock funds

Advantages :

Professional fund management—this is perhaps the biggest advantage of pooled funds like UITFs and mutual funds. There is a dedicated team of investment experts that looks at investment opportunities and is investing the money according to the investment objectives of the fund. It is common to see CFAs or Certified Financial Analysts leading or being part of these investment teams. Good fund managers are clinical and logical investors and are not easily swayed by emotions as compared to individual investors.

Capital requirements—most of pooled stock funds have low capital entry requirements. One can invest in a fund for as low as P 5,000 to P10,000, with other providers requiring a monthly contribution of as low as P1,000 per month.

Diversification—all stock funds carry well-diversified stocks in their portfolio, usually blue chip or premium stocks. Since these are pooled funds, there are economies of scale in place; fund managers will be able to purchase different shares. Proper diversification will ultimately result in reduced portfolio risk.

Disadvantages :

Fees—While not all stock funds charge the same range of fees, these fees are usually much more than broker fees as there are costs involved in managing funds. Some funds even charges entry and exit fees, which can reduce the returns of your investments. Some funds are being sold through agents and advisors and commissions would need to be paid to them.

Control—you have no say on which funds you want or don’t want in your fund as this is already delegated to the fund managers. You also can’t modify the weight of the stocks inside a stock fund as fund managers follow maximum exposure limits per stock to ensure proper risk management practices. Even if you want more PLDT or Jollibee shares in your portfolio, your fund will only have a limited exposure to said stocks, like 10 percent.

The answer to your question is dependent upon you knowing the pros and cons of individual stock investing or through a pooled equity or stock fund. If you are a new investor, I recommend you invest in a stock fund first and as you get to understand how the stock market works and develop your competency in investing, you may want to start investing in individual stocks.

Do not forget, whether investing in stocks by yourself or through a fund, it pays to invest first in investment education.

Question: Where should I put my money? In a bank, property, business or stocks?—Miccael Ibarra Naig via Facebook

Answer: I always believe that investing is a great idea and I pray that all Filipinos think and act the way you do. Before I answer your question, I encourage you to first consider three things: your investment objective (the reason why you are investing), time frame (how long you will keep the investment) and risk tolerance. It is critical that you know these three things before even selecting an investment option.

There is no such thing as a “best” investment. The investment instruments you mentioned have their advantages and disadvantages, their own merits and flaws. Let me discuss those choices that you are considering.

Banks are the most popular choice of many. Banks are everywhere and this makes depositing your money in banks a convenient option. When you say “bank,” I’m assuming that you are referring to traditional bank products like savings accounts and time deposits. These bank products are among the most liquid investments you can make and the risks are also among the lowest. The downside, however, are the yields. They may be the safest options but they give the lowest returns. As they say, low risk, low returns. Having low returns, especially if below inflation rates, will erode the value of your money in the long run. Banks today offer other products other than the usual deposit products. You can invest in the instruments they offer like Unit Investment Trust Funds, mutual funds, bonds and insurance. Take time to know what your bank offers other than traditional deposit products.

Property is the investment every Filipino wants. Your parents and grandparents had probably told you that the best investment was land. However, saying that land is the best investment may be too ambivalent. Real estate’s greatest attraction is its being a tangible investment—you can see and use it unlike paper investments. Land usually appreciates in value giving you capital growth, or it can generate a steady flow of income through rentals and capital gains, when you decide to sell it. There are times, however, when real estate investments do not appreciate or, in some cases, their appreciation does not meet your expectations. Also, there are recurring costs in property investments such as real estate tax, administrative or association dues and common area charges. When you sell a property, you will be slapped a hefty capital gains tax on top of the broker’s fees. When you sum up all the money you need to spend during the time you are holding your real estate investment, you will realize that your gains are not as substantial as you thought it would be. Another downside in real estate investment is its cost—you need to spend a huge sum to buy land. If you decide to borrow money to finance your real estate investment, the interest that you have to pay may just eat up the gains you will make. Buying real estate because you need to live in it is another story as it is not an investment.

Business—another Filipino dream. Everyone wants to be an entrepreneur and why not? Businesses can potentially give you the highest returns. A business that succeeds can make one a millionaire, even a billionaire. There are many success stories of people who started with little but are now very wealthy because of their businesses. However, business endeavors are the riskiest among all these investment options, as they are speculative in nature. There are more businesses that fail rather than succeed, which is not encouraging for a “newbie” in the business world. Further, putting up a business requires more than just capital—competence, passion, timing, market and a lot of studying are needed when you are considering to do business.

Stocks—today’s rising star. There is so much attention to the stock market today as more and more Filipinos are being enticed into investing in equities because of its stellar performance in the last two to three years. Many investors are very optimistic with our local stock market and you will find many experts predicting that our stock market will further go up this year. Investing in equities today is also more convenient. Even with only a small amount, you can buy stocks through brokers (and also online) or through pooled funds such as mutual funds or UITFs. Let me reiterate the risk-return relationship here—high returns, high risks, and vice-versa. While it is true that the stock market has been giving extremely good returns lately, there were also times when investors lost a lot of money. The stock market is not as predictable as people think it is and all the gains over the last three years can also be wiped out in a short period of time.  More so, investing in the stock market, especially when you plan to trade, requires a lot of competency and time. If you don’t have the competency and the time to trade in the bourse, you should keep your day job.

My advice is for you to consider all the pros and cons of all the investment options you mentioned and choose those that will suit your objectives the most. I also recommend that you diversify your investments. All these options have their advantages (and disadvantages), but if you have a diversified portfolio, you are spreading your risks. A common but very wise saying we often hear with regard to investing is this: “Do not put all your eggs in one basket.” Here’s an even wiser advice for you: “But divide your investments among many places, for you do not know what risks might lie ahead.”—Ecclesiastes 11:2, NLT

Appears at Inquirer