Question: Hi Rose I read your article How important is financial stability to a family? and I must say it impressed me a lot. Thanks so much for writing such an informative article.
My wife and I are regular office employees and thanks to a simple lifestyle and with a little bit of help from my parents during the early years, my wife and I have some savings, a fully paid and owned condo unit, an emergency fund for half a year, and a time deposit account with Chinabank.
I’ve been very interested in investing (especially with BPI) but something’s holding me back. I grew up in a traditional family where my parents think stocks, investment banking, etc. are a huge gamble and the only way to earn money is to work for it. Problem is, I don’t have a good head for business so I believe investing is the only way for me to accumulate funds.
What is your advice for me? Should I take the leap and invest? I think BPI has only a 10k minimum investment amount. Is there a minimum monthly investment amount? Or is it entirely up to me when I should add to my investment? Which investment fund is suitable for me? BPI has loads of different investment funds and they’re all so confusing. I would define myself as conservative to slightly aggressive.
By the way, my wife is giving birth to our first child this August, another reason why I want to invest so badly. It is also the reason why I can’t commit to add religiously to an investment every month since we’ll probably have a substantial increase in our expenses.
Thank you very much! Any advice would be welcome.
Luth Ong – via email
Answer: Hi Luth. Congratulations to you and your wife on the coming of your first born, and for being on the right path – i.e. living fugally, owning a fully-paid condo, having an emergency fund worth half a year’s expenses, and time deposit account. What can I say? You’re ripe for the investing phase of your life!
Now, I also hear you when you say that you grew up with parents thinking that investing in stocks is like gambling and that the only way to earn money is to work for it. “Making money work for you” was probably unheard of during their time. You see, the older generation grew up believing that the path to financial security was “study hard, find a stable job and retire well.” The entrepreneurial ones would say “establishing your own business is the only way to get rich.”
Of course, these paths still work. Moreover, the idea of getting rich from paper assets (stocks, bonds, mutual funds) may be something your parents are uncomfortable with because they’re not as “tangible” as salary and business ownership. However, a lot of things have changed that these traditional paths don’t always work anymore. For the first path, finding a stable job which will give you sufficient retirement pay rarely works these days. For one, downsizing, mergers, acquisitions and other corporate activities resulting in massive lay- offs, make it difficult for an employee to really stay for a long period of time with a company to accumulate sufficient retirement pay. Our SSS and GSIS benefits are usually not enough to get us by during our retirement years. The success of the entrepreneurial path is also low as there is a very high failure rate among new businesses, 80% to 90%.
So you’re right in contemplating on investing in paper assets for your future and I encourage you to take that “leap and invest,” as you called it. Please also see to it that you are adequately insured especially now that there’s a baby coming your way. I suggest you take term insurance only instead of the more expensive ones with investment add-ons and do your own investing.
The first thing that you and your wife should do is to determine what you are investing for. I’m happy that you already have your emergency fund. At least that’s done and you can focus on investing. By the way, you don’t have to put this in your savings/current account. You may park your emergency fund in higher fixed income investments like your existing time deposit or other money market instruments. Look for those without pre-termination penalty. I’ve encountered a few people who thought that their emergency fund should be in their ATM account for “emergency.” No, to maximize your returns, the only amount you need to keep in your savings/current account is your working capital or cash for monthly expenses.
Once you set your investment goals, you can determine the timeframe and amount for each. Is it for education? A dream vacation? A bigger house? Please don’t forget your retirement. Even if it seems like it’s still ages away, don’t delay because time is your ally in investing for this inevitable. The timeframe and size will guide you in choosing the instruments. For goals with short timeframe you can look at bonds and other fixed income instruments. For long-term goals, I highly recommend investing in blue chip stocks, which give you the highest return among all asset classes in the long run.
I think you are already familiar with fixed income instruments so I will just try to assuage your fears about stock investing. Investing in the stock market is like getting into business with the big business owners of our country (I’m assuming you would start with the Philippine Stock Exchange at the moment). In the vernacular, we say kasosyo. When you buy stocks, you buy shares of ownership in their companies. So instead of putting your money in a start-up business and being part of the high statistics of failures, just leave it to The Sys, Zobel de Ayala’s, Gokongwei’s, et al who definitely know what they’re doing. If their companies earn, you earn by way of dividends and price appreciation of the stocks. When they lose, you will also lose by way of decline in stock prices. But the probability of these blue chip companies losing money is way lower than the start-up businesses.
It’s important to know the value of the company you’re buying. Similar to how a consumer would hunt for bargains, it’s best to buy at a discount. You can look at their price earnings ratios and net asset values and compare them with similar companies in the market. You also look at their growth potential and the integrity of management. So you see, it entails study and it’s calculated risk that you’re getting into, which is definitely not gambling as what your parents think. You may want to check out the company studies available for free online at colfinancial.com. You and your parents may want to read my previous articles to take out the mystery and scare in stock investing. (Click the links) Are You Investment Conscious?andAre You Afraid of the Stock Market? (Here’s why you shouldn’t be).
If you love reading books I recommend you read Jeremy Siegel’s Stocks for the Long Run. This is a landmark book that shows how stocks have historically outperformed other investments such as bonds, gold, and real estate, in the long run. First published in 1994, the fifth edition of this book by Wharton Finance professor, who must really love studying historical data as his study covers over 200 years, is coming out in October this year to include the most recent collapse in the financial market.
Now, if these things are still too much for you to digest, you may want to start off with equity mutual funds and UITFs (Unit Investments Trust Funds) and just let the fund manager handle your investments for you. For those who are not interested to study the companies and charts, and monitor their portfolios, these are the best choices for you. Another advantage of these options is that you can start with very low investment amounts and be readily diversified because you’re buying into a pool of funds.
You mentioned in your letter that you want to invest with BPI but they have loads of options that confuse you. Try to be friends with your bankers so they’ll patiently explain them to you. Ask about their Equity UITFs. I personally invest with BDO so I know that their minimum for Equity Fund is P10,000. And you may invest anytime you want. However, they have this really great product called EIP (Easy Investment Plan) which allows you to invest as low as P1,000 per month, then they issue the certificate every time you complete P10,000. The beauty of this product is not only in the low minimum contribution but also in the fact that investing is automated. You sign up once with them and you’re set, no more excuses for not investing regularly. You mentioned that you’re hesitant to do a regular investment because you’re expecting your baby. But with the low minimum, I think you can still do it. Do you know that even our domestic helpers at home are stock investors via this Equity Fund? And you may opt to increase or decrease your regular contribution should there be a need to. The stock market has performed fantastically these past few years, and this fund has more than doubled in the last three years! Ask your existing bank they might have it too. It is best to do this investment scheme with the bank that handles your payroll account so “paying yourself first” is easy.
To spice up your investing, you may want to check out egroups like TGFI (The Global Filipino Investors) and MagInvest Ka Pinoy. These are groups whose members share their investment experiences and knowledge with each other.
One more thing, once your baby is born, I suggest you open a savings account for him (or her). This is what we did for each of our three sons. We deposited their cash gifts in their accounts. I’m sure your child will receive a lot of ang paos (red envelopes with cash) for the many occasions he will celebrate even before he starts asking about money. Later on, when you give him allowance, you can teach him how to save regularly, and later on invest regularly. You know, because of this technique our sons have reached asset levels that my husband and I reached at a much later stage in our lives! I wish the same for your baby. For more of the saving and investing methods we did for our children, read Chapter 6 of Raising Pinoy Boys. Tips are applicable to both sons and daughters.
Luth, you and your wife are living in interesting times. I sincerely wish you financial happiness and a wonderful family life.