Where to put your money

By Randell Tiongson on February 3rd, 2013

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

11 thoughts on “Where to put your money”

Very informative and helpful. We hope to have u here in EN brunei.:) Godbless.

hello randell,

i attended your seminar in vcf fort the other day, good seminar learned a lot. just wanted to ask you on what are your stock picks for 2013? or what sector do you think will continue to go up?

i’ve been investing since last april hehe thanks

Sir Randall, the question is really hard to answer as everyone is unique and subject to different circumstances. Nevertheless, your answer that “there is no best investment” and “choose one that will suit your objective” surely does not help your reader/s. The objective, to be sure, is to find the “best” or right investment. We are thus, back to square one.

I would submit that you are not advising clients to diversify by putting equal shares in banks, business, property and stocks. If yes, what factors then affect the choice of investments? And given the factors, where should one invest? It would be more interesting too if you could go out on a limb and share your bias or conviction, whether it be for conservative time deposits or high risk all equity mutual funds, etc.

Thanks and more power.

Dear footballer…

My investment advise is customized to a persons needs, risk tolerance, etc…. the whole nine yards. It will be irresponsible on my part to wantonly recommend any particular investment instrument.

Hi Footballer I think Mr. Tiongson is being careful not to lead you in the wrong direction because before he can give you advice he needs to analyze first your financial status, goals, and risk profile first. (please correct me if i am wrong).

For the purpose of helping everyone get a good start and I believe that generally before we can achieve financial independence we need to be financially secured first. Life insurance products I believe is the first investment that anyone should have. Not only that it gives lump sum of money to compensate in the event of death, disability, and critical illness it also have living benefits which can be used for various purposes like children’s education, retirement, or any financial goals like buying a house. There are 2 types of life insurance, the traditional which gives guaranteed returns in the form of cash value, endowment, and dividends for conservative investors. The second type is the VUL which is linked to mutual funds, this is for all types of investors as there are usually 3 funds to choose where to allocate your money, bonds for conservative investors, equity for aggressive investors, and balanced for moderate investors.

Let us divide our financial life into 3 stages, financial security, independence, and freedom

Financial security is the most basic stage but it is the most often neglected because everyone want to jump in to high yielding investments and get rich immediately. Although it cannot be avoided as the emotional factors mainly involved with money is greed and fear. It’s not all bad to invest in high yield high risk investment for growth but make sure that you build up your security first. Because it will be your back up when your growth investments don’t work out the way you expected. In fact you should only invest in high risk investments like stocks and business what you can afford to lose.

Let’s have an example, let’s say a person has been investing solely in the stock market for 5 years and has accumulated half million pesos. Suddenly he met an accident and become disabled. He now lost his active income and his passive income in the stock market is not yet enough to sustain his needs. Or let’s say he didn’t get into an accident but developed cancer. He will be forced to liquidate his investments so he could use it for medical expenses. It might not even be enough. Or let’s say he died, his family won’t even get the whole half million in, they need to pay first estate tax before they inherit it.

Although the chances that a tragedy may happen is low, it should be not taken for granted because once it happen the effects are devastating and permanent. There is no second chance to prepare for it. This is where the very important part of life insurance in a financial plan comes in. Next is the emergency fund which is preferably in the form of bank savings account as it is the most liquid. Recommended is 3-6 months worth of monthly expenses. Once you got that part secured you can now start investing in high yielding instruments as you now have money that you can afford to lose. But if you don’t have the time and interest to study the investment then maybe the safest thing to do is to have your money diversified and managed by professionals in the form of mutual funds or VUL. Anyway you can choose the fund which your money will be invested and can transfer fund from time to time so it’s not like you have no control over the investment. Using the power of what Albert Einstein called the human race’s greatest invention which is compounding interest, you will see how much your money can grow. When it is big enough you don’t even need to pay your premium anymore as the investment alone can fund itself.

Now if you don’t like the idea of letting other people manage your money you don’t have to do it forever. But while you are starting to invest on your knowledge and study different investment vehicles and strategies it’s not bad to be humble enough to accept that you need help from professionals. You can invest in mutual funds or vul until you think you are already better than them, you don’t have to wait until you are better because a lot of time will be wasted and your money will just sleep if you don’t start investing early. Remember that in investing the 2 main ingredients are time and money.

It is true that people are unique but most of our financial needs are common to each other. I believe before anything else we need to be secured. While most people want to get rich immediately, taking a shortcut is dangerous. Instead of growing your money you might be losing money. I believe that the first and foremost investment instrument that anyone should have is life insurance.

Let us categorize investments into 2 major type
1. SECURITY- this may comprise of life insurance, bonds, emergency fund, health insurance, house

2. GROWTH- examples are stocks, real estate, business, mutual funds

Being financially secured is the first stage we need to accomplish before we become financially independent. If we build our security portfolio first we now have money we can afford to lose to invest in high risk high return investments. Why? Because if something goes wrong in our growth investments we can rely on our security portfolio to support us.

Let us have for example someone who is investing solely in the stock market and let’s say he already have half million. If he meet an accident and become disabled he will lose his active income and will cash in his investment in the stock market to support his needs until it runs out. If let’s say he didn’t meet an accident but acquired cancer, he will now be forced to liquidate his investment to support his medical needs and not to mention unable to work and loses active income as well, he will now be in deep financial trouble having no source of income and nothing to support his medical needs. Or let’s say he died suddenly, his family won’t even get the whole half million, they will have to pay estate tax first before they inherit it.

Life insurance can cover those things, death, critical illness, disability. Although the probability of a tragedy happening is low, the effects are devastating and permanent and you will not have a second chance to prepare for it. That is why it is vital to include life insurance in any financial plan even for singles. Because singles won’t remain single forever although in rare cases it happens but life insurance can cover also disability and critical illness.

Now life insurance is not only useful in times of tragedy. It also have living benefits which can be used for various purposes like education, retirement, or any other financial goals like buying a house. There are two types of life insurance, traditional and VUL. Traditional is the type that has guaranteed returns in the form of cash value which increases overtime, endowment which is a regular fixed income given at a certain time interval, and dividends which is part of the earnings of the company being shared to policyholders. This is great for conservative investors who want to have guaranteed returns while being protected by it’s coverage. Some plans have very high returns that beats inflation and can be encashed for a lump sum of money.

The VUL or the Variable Unit Linked life insurance is simply life insurance + mutual funds. Here the investor enjoys the protection of life insurance while being able to invest for growth. Talk about hitting 2 birds in one stone. Investor can choose among a variety of funds where to allocate his money depending on his goal, time frame, or risk appetite. This is a big pool of money of investors being managed by professional fund managers and invested in a diversified portfolio for controlled risk and maximizing returns through using the power of what Albert Einstein called human race’s greatest invention which is compounding interest. Investors can choose usually from 3 funds- Bonds for conservative investors, equity for aggressive investors, and balanced for moderate investors or a combination of the 3. Investors can also change the allocation of their money for a certain number of times a year.

If you don’t like the idea of having other people manage your money then you can invest in your knowledge so you can do it yourself. But you have to be humble enough to accept that you need help from professionals at first. So while you are studying the technicalities of investing and gaining experience, it’s not a bad idea to invest first in a professionally managed fund until the time comes that you think you are already better than them. Because if you wait until you become better, a great amount of time will be wasted and your money will not grow. Remember that in investing the 2 main ingredients are time and money. You would want to have both. Start investing as early as you can.

Now it depends on the person’s appetite how to allocate his money. For conservative investors then it will be good to build up your security portfolio first. Life insurance, emergency fund in the form of savings account (at least worth 3-6 months of monthly expense), bonds-corporate or government, time deposits. For aggressive investors then maybe you can start with 40% of your money to build up your security portfolio and 60% for growth portfolio like equity(stocks), real estate, capital for business. For more aggressive investors you can lower down the security portion but don’t put nothing or else you will have to start from zero when the time comes.

Just minor correction.

“There are two types of life insurance, traditional and VUL.”

The two type of insurance:
1. Pure insurance – Renewal Term, Level Term insurance
2. Insurance with any form of cash value – traditional (whole life), endowment, VUL

“The VUL or the Variable Unit Linked life insurance is simply life insurance + mutual funds.”

Well, VUL is really insurance + investment of the insurance company, where you just put your money on their “investment fund”.. Which simply mean that you don’t have a shareholder’s meeting, you don’t have voting rights, can’t choose a fund manager like a “true” mutual fund company provide to its shareholder.

A mutual fund is an asset management company duly license by SEC to sell securities.

I apologize for any misunderstanding and thank you for taking time to correct my mistake. I failed to realize not all companies are the same and I was talking in the terms of our company Sunlife Financial. To us the term insurance or pure insurance is part of traditional life insurance and the VUL is another form. We actually have 3 licenses, 1 to sell traditional life insurance, another 1 for VUL, and another for mutual funds. I believe we are a “true” mutual fund company since all our investment funds are managed by our own fund managers and we also have purely mutual funds product with no insurance. Most probably shareholders of our company hold meetings and have voting rights depending on the amount and type of shares they are holding. But let us be clear with the term shareholder because some people might be misled that if they invest in mutual funds they are automatic shareholder of Sun Life, buying stocks of Sun Life will make them shareholder and the voting rights depend if what they own is common or preferred stock. To gain authority to participate in shareholder meetings I believe you need to own at least 10-20% of the company’s shares.

The reason why I divided VUL from traditional life insurance is because instead of “cash value” it has “fund value” and the returns are variable since it is investment linked.

The traditional life insurance(with the exception of term insurance) has cash value, dividends, and for most plans endowment as well. The cash value and endowment are guaranteed so I considered it fixed income with the dividends as bonus.

The purpose why it was categorized that way is to classify that traditional life insurance is suited for conservative investors since the living benefits are guaranteed and the VUL is suited for moderate to agressive type of investors.

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