A 45 year old couple asks about improving FQ

A 45 year old couple asks about improving FQ

Mar 12, 2014


Dear Rose,

Hello. I’m Maria Santos of Paranaque. I read your article in Health Home-Money Matters about raising a child with high FQ. I hope you can enlighten me and give me some advice. My husband and I are both 45 years old. We have two daughters both in college (2nd year and 1st year). We have savings and time deposits and it was only last year when we started investing and placed some of our savings in balanced funds in BPI and Sunlife. Is this the same as the Mutual Fund wherein you will place an initial deposit, like P10,000-20,000, and then deposit a fixed amount monthly? I really have a low FQ. I tried reading online about mutual funds and trust funds, but ended up more confused. We got the balanced fund per recommendation of a relative that it’s a good investment. I haven’t deposited anything since we opened it because I want to understand it more. My purpose is for our retirement, in case we can no longer work. If balanced fund is a good investment, is it advisable to deposit a certain amount monthly? Thank you and God bless! – Maria Santos via email

Answer: Hi Maria, the Balanced Fund you bought from Sunlife is a Mutual Fund. However, the one you bought from BPI may either be a Mutual Fund or UITF (Unit Investment Trust Fund) because BPI offers both.

Before I get into giving you the differences between the two, I think it’s better to start off with some basic concepts of investing so I can make you more comfortable with your FQ.

First, you should give yourself a pat on the back because I think you and your husband have already developed the habit of saving. This is fundamental and essential in having a high FQ and a happy financial journey. I guess what you lacked was the knowledge on how to go beyond saving. You said that you only started last year when you bought Balanced Funds per recommendation of a relative, and that you haven’t made any additional deposits because you wanted to understand it more. Good. I will try to explain in simple terms.

I wish to discuss with you the concept of inflation, the general increase in the prices of goods and services. This is the main reason why it’s not enough for you and your husband to rely on your savings and time deposits. The inflation rate is usually higher than the interest rates you earn from these instruments. I assume you opted to keep your savings in these instruments because you felt that they are “safe.” Although it’s true that the principal amount will be safe, the miniscule interest will not be able to cover for inflation come your retirement years. Even if you’re able to keep the nominal amount intact, the purchasing power of your savings would be lower. So it is definitely “risky” to keep your retirement money only in your savings and time deposits.

This is not to say that you don’t need your savings and time deposits. You do. They are all part of your portfolio of financial instruments. You may keep your operating fund (what you need for your monthly expenses) in your savings/current account. Then keep your emergency fund (six months of expenses which you should only use in case of emergencies like losing a job) in time deposits. You may also want to add term insurance to your expenses in order to cover any untimely death of your family’s breadwinner(s). Just buy enough to cover until such time that your dependents become financially independent.

After all the above are in place, you can afford to put the rest in longer-term investments. There are two basic kinds of investment instruments when it comes to the earnings: Fixed Income and Equity.

Fixed Income, as the name expresses, gives you an assured rate of earning on your investment amount expressed in interest rate per annum. This is essentially a form of indebtedness you (the investor) extend to the issuer (the one whose instrument you buy). So in your existing time deposit arrangements with your bank, you are the lender and the bank is your borrower. At certain time intervals, the bank pays you interest for the use of your money. When your time deposit matures, you have the option to terminate it or roll it over for another term. When you terminate, you are sure that your principal is intact.

Other fixed income instruments are money market placements and bonds.

Equity is an ownership in a company. Once you put in your money, the “principal value” of your investment can no longer be ascertained at its original amount. This uncertainty is probably what made you shy away from this instrument.

But here’s a trivia I learned from my onging online course on Financial Markets under the Father of Behavioral Finance and Nobel Prize winner Robert Schiller: Ownership in a company is called Equity because shareholders own shares equally. One share is the same as the other share, usually with one vote. This reminds us that investing in equity is really getting into partnership with the owners of listed companies.

Therefore, it is important to choose your partners and companies well. If you invest in a healthy company, chances are, your original investment will grow over time.

Centuries of investing records show that equities provide the best returns over the long term. In other words, this is your best bet in growing your retirement nest egg.

Pooled Funds:

I suggest that instead of buying your stocks directly, you just buy pooled funds managed by professionals. You don’t have to worry about picking the stocks and fixed income instruments, plus you are automatically diversified even with minimal investment amount. The fund may either be Mutual Fund (MF) or Unit Trust Investment Fund (UITF). Their basic characteristics are similar as their differences are more on the technical aspects:

1. MF is a company; hence, regulated by the SEC. UITF is issued by the Trust Department of a commercial bank; hence, regulated by the BSP.

2. MFs are sold by agents while UITFs are sold by bank personnel.

3. The instruments issued by MFs are the shares in the MF company while UITFs issue units of participation in the Fund.

4. The price of MF is expressed in NAVPS (Net Asset Value Per Share) while that of the UITF is expressed in NAVPU (Net Asset Value Per Unit).

5. When it comes to charges I notice that MFs usually charge more because they have a wider price range in their sales charge, redemption fee and distribution fees. Since it’s a case-to-case basis, it’s better to check out the individual funds.

Both MF and UITF invest in fixed income and equities. There are equity, money market, bond funds, etc. They can be in peso or dollar. There are index funds, which just mimic the stock exchange index, a way of taking out the portfolio manager factor that assures you that you earn just as much as the market does.

A Balanced Fund (either MF or UITF) is a combination of fixed and equity investments, giving the investor a level of comfort of owning a diversified fund at the outset. It’s good to invest in a Balanced Fund if you’re just starting out and can’t afford to invest in the minimum requirements of two separate equity and fixed income funds yet. However, once you can afford to purchase the two separately, you may be better off doing so. This gives you more control in your portfolio allocation.

Let’s say you need to terminate funds because you are now ready to buy that car you saved up for a couple of years but the stock market is down. If you had these two investments separately, you can just terminate your fixed income and allow your equity fund to recover. On the other hand, let’s say you’re already in your retirement years and the stock market just shot up to record highs, you may opt to terminate your equity funds to cash in and have some money used in your scheduled vacation or other needs. In other words, having the equity and fixed income in separate funds gives you more flexibility in responding to market conditions.

Whatever it is that you choose, do so regularly, if possible automatically. The amount should be the maximum you can afford to regularly invest. As you grow your income, increase the percentage of your investment. This can only happen if you have your expenses under control. Monitor your expenses and the growth of your protfolio.

Your college daughters. I’m glad that in a few years your daughters will be graduates and can soon become part of our earning society. Raise them well in all aspects including their FQ as this is their Economic Self Defense. A graduate who has a high FQ will likely succeed in life, as she knows how to make use and accumulate wealth. Check out previous articles I wrote that can help your girls: Crash Course on Finance for a College Student and Children’s Weekly Allowance: Best Training Ground to Raise a Millionaire. Prepare them before they even graduate and if your family values agree with this, you may wish to “cut their financial umbilical cord right away.” These are the words used by my oldest son when he graduated from college. Of course, the Pinoy values in us still want him to live with us during his early years of working, as long as he’s single. But all his expenses (except board and a bit of lodging) are now shouldered by him. I think this is a way to motivate our children to find a job right away. I was a bit concerned to observe that a lot of children of financially comfortable families seem to delay working, saying they want to rest first. I guess this is another “manifestation of entitlement” very common among our children’s generation.

The sooner your children become financially independent from you, the sooner you can concentrate in building your retirement nest egg. All the amounts that used to be devoted to your children’s expenses can be diverted to your retirement fund. You may wish to read the following: How Much Retirement Money Do I Need? and The H Fund and Other Questions About UITF and Mutual FundVisit the other articles in the archive and see what else can help you. Do it little by little. I don’t want to overwhelm you. I hope the simple discussions in these articles will help increase your entire family’s FQ.

Do update me on your improvement. Cheers to a wonderful financial journey!