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

With all the good things we hear about the Stock Market, are we to expect that more Pinoys are now investing there? Not really. Data from the Philippine Stock Exchange (PSE) reveals this –

In 2011, there were 505,054 accounts registered among all active trading participants, up by 1.3% from the previous year’s total of 498,838 accounts. Of the total 505,054 accounts, 478,362 or 94.7% were considered retail while 26,692 or 5.3% were classified as institutional accounts.

Here’s more –

Of the total accounts in 2011, 157,535 or 31.2% were considered active. Active accounts are defined as accounts that have traded at least once during the year. The number of active accounts in 2011 rose by 31.3% from the previous year’s total of 120,016 accounts.

What the numbers are saying is this – only a handful of Pinoys are invested in the PSE! 500 K out of over a 90 M population makes that a very small percentage – roughly 0.5% of the population. With all the gains of the market in the recent years, Pinoys could have taken advantage of improving their financial situation… but unfortunately, only a handful did. While I don’t expect a staggering percentage of Pinoys investing in the market because of its risk and complexity, 0.5% is just way too miniscule. By contrast, some countries have 30 to 50% (or more) of their population investing in their Stock Market directly or indirectly through funds.

There are reasons why people stay away from the Stock Market but the top two reasons I would like to believe is ignorance and fear.

Admittedly, the Stock Market requires some studying before anyone should enter it. I always remind people not to invest in anything you don’t understand; but the Stock Market isn’t also rocket science and I have faith that the average Pinoy would be able to understand equity investing – or at least 1/3 of our population can. Reading a starter book, researching over the internet or better yet attending a seminar will do wonders to enlighten Pinoys on what the Stock Market is all about. Basic understanding of how the Stock Market operates is a worthwhile endeavor for us Pinoys because we can really benefit by investing in it – at the same time help the country grow its capital market (a discussion for another blog). A healthy and robust stock market that is sizeable in volume is very good for the economy. Currently, the PSE is healthy and robust albeit with very little volume.

Fear is another issue amongst us Pinoy. It has been a noted fact the Filipinos are risk-averse in nature, meaning we tend to avoid risks especially in investing and business. Proof of which is our huge money in Savings account and Special Deposit Accounts. BSP numbers pegs bank accounts (Savings, Checking & Time Deposits) at about P 5 Trillion while Special Deposit Accounts (SDA) at approximately P 1.5 Trillion. A big chunk of the money of the Pinoys is not really being invested and definitely not earning properly. While Bank accounts and the SDA are really safe investments, their yields are almost certain to be below inflation rates which means that most of our money are really eroding in value.

My recommendation is this – let us all learn about investing because it is one of those things that will bring us financial freedom and it can empowers us. Let us also not be crippled by fear because if we risk nothing, we gain nothing and I don’t mean speculating or gambling our hard earned money away – we can learn to diversify and practice prudent investment planning. If individual investing in the Stock Market may be too much for us to bear, then I suggest we look at pooled equity funds like the UITFs or Mutual Funds as well. Regardless of investing directly or indirectly, I believe it’s time for Pinoys to learn and invest in the Philippine Stock Market.

My 2 cents.

There are dozens of Mutual Funds available in the country and it can be confusing to chose from them. It’s a good thing that the Philippine Investment Funds Association (PIFA) lists the performances of their member companies.

Mutual Funds are great investment instruments for people who are looking for better returns. Mutual funds are long term instruments and are marked to market funds so volatility is to be expected when investing in the said funds. Further, Mutual Funds are not guaranteed. However, performance of the Mutual Funds are expected to outperform inflation rates in the long run, or at least in theory.

I’ve compiled the performances of the top 5 Mutual Funds using their 3 year return parameters. When investing in a Mutual Funds, there are many things to consider other than performance. I’d pay close attention to fee structures as one company differs from another. Other concerns should be investment track record, experience of fund manager, shareholder servicing, among others. In my experience, after sales servicing is a big must and not all Mutual Fund providers give the same effort in servicing.

Be careful on just looking at yields. Aggressive fund managers will have better performance during a bullish market but will have also have performed worse during a down turn.

Investing in a Mutual Fund is a good idea for long-term investors as one can benefit from professional fund management & diversification. Minimum investment amounts for Mutual Funds are also a big plus as most funds only require P5,000 minimum placements.

The Securities & Exchange Commission (SEC) is the government regulatory body that oversees Mutual Fund Companies.

Returns are Compounded Annual Growth Rates (CAGR), those are annual returns.