Question: How do you invest wisely in an unstable market? What are the criteria that one should look for?—Rigel Kent Tugade (@rigeltugade) via Twitter

Answer: What you asked me is one loaded question. There are many ways to answer that question so let me take a shot at it. There really is no such thing as a stable market, in my opinion. Markets go through cycles or seasons. There are many things that affect market movements but largely, they are responding to the law of demand and supply. What investors should be wary about are wild fluctuations in the market environment and, unfortunately, that is what we are experiencing now.

Market movements, to a great degree, are about perceptions and fundamentals. People have a tendency to be severely optimistic or extremely pessimistic with their reactions which the markets reflect. Fundamentals of companies, business, economy and even politics affect markets in general. If business environment is good, companies are profitable, the economy is growing and there is political stability, expect the markets to respond positively and vice versa.

Severe movements in the market have both positive and negative impact. On a positive note, opportunities can be found with volatility for those who are risk takers. The downside of course is that capital loss can easily be experienced just as fast as profit can be made. The relationship of risk and return always comes into play whenever you invest. Yields will always be a function of the risk you are willing to take and as the cliché goes: High risk, high returns and low risk, low returns.

When investing, it is always prudent to know your investment objective, time frame and risk tolerance first and foremost. Investment instruments should be able to match the three I mentioned before considering parting with your hard-earned money. If your objective is long-term in nature, like retirement or college funding for your young children, then you may consider long-term instruments even if they can be volatile, like stocks, mutual funds and UITFs [Unit Investment Trust Funds], or even real estate. Although they are volatile, they are expected to grow over time—well, at least in theory. You may also want to practice cost averaging when you are investing in those instruments. You can invest regular amounts periodically, thereby averaging your investment cost. When market is low, your investment will allow you to buy more shares and vice versa—you will realize that you have gained from your investment over a long period of time. Cost averaging only works if you have a long-term perspective, say more than five years. I usually recommend monthly or quarterly investments over a long period of time because it is practical and it allows you to fully realize the benefits of cost averaging.

However, the best advice I can give you is to practice “diversification.” No one can predict what will happen in the future. While technical and fundamental analysis helps one discern, there really is no way we can be certain as to what will happen. It is best to diversify your portfolio among low- and high-risk instruments, as well as high liquid and low liquid investments. Having a severely low-risk portfolio means your money is not growing efficiently and is most likely growing at a rate slower than inflation. Over time, the value of your money diminishes as it loses purchasing power.

A very high-risk portfolio, however, can cause you many sleepless nights as fluctuations in the market can severely deplete your capital. As a financial planner, my recommendation has always been to strike a healthy balance and avoid extremes.

The good book even recommended diversification and here’s the proof: “But divide your investments among many places, for you do not know what risks might lie ahead.” (Ecclesiastes 11:2, NLT)

I hope this answers your question. By the way, the best thing you can do is also to invest in financial education.

* Appeared at the Philippine Daily Inquirer

Question: I wanted to ask more about pooled funds, specifically equities and balanced funds. I would also like to know if I can invest in these with small amounts on a regular basis.—Val Baguios, International Organization for Migration (IOM) staff

Answer: In my last column, I gave a general introduction of pooled funds, particularly bonds or fixed income funds. I will now discuss other general funds—equities and balance funds.

Equity funds, sometimes referred to as growth funds, are pooled funds invested primarily in equities via the stock market. The bulk of the investments made, say 90 percent, is invested in stocks that are traded by the investment manager. In the Philippines, nearly all of the equity funds are invested in blue chip stocks, or those that are considered premium, seasoned and resilient such as PLDT, Ayala, San Miguel, SM and several banks. The decision on where and when to invest and when to sell is left with the investment manager, who may opt to take a passive approach of buy and hold or an aggressive stance. He may also opt for a combination of the two.

Generally, the objective of an equity fund (also known as stock fund) is long-term growth through appreciation of capital, although dividends may also be an important source of returns. It is believed that the stock market will give the most growth in investment provided there is enough time for stocks to appreciate and that proper trading of stocks are being executed. However, equity funds may also be the most volatile among pooled fund categories, as they mirror the gyration of the stock market.  Equity funds are the most risky among the pooled funds in the Philippines.

The Philippine Stock Market Index or Phisix is the benchmark when it comes to equity funds. I notice that the performance of the equity funds (in UITF and mutual funds) has generally been better than Phisix, that the fund managers are doing a swell job. Equity investing is a good way to hedge against inflation as its potential return should be better than inflation. However, I also have to emphasize that it also offers the most risk.

Balanced funds are funds invested in both equities and fixed income/money market securities. According to Investopedia.com, a balanced fund is “a fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation. In other words, balanced funds are combination funds that are designed to generate moderate returns with moderate risks. The funds normally have set limits on investments in asset classes, say a 60-40 mix in favor of fixed-income instruments vs stocks. Some funds have more flexibility …

Complete text found at http://business.inquirer.net/21783/all-about-pooled-funds-part-2

Question: I attended your seminar “Steps to Financial Peace” and you mentioned about pooled funds as a good way to invest. I wanted to ask more about pooled funds but was unable to, so I’m writing you and asking you about it. I would also like to know if I can invest small amounts but on a regular basis in those funds.—Val Baguios, International Organization for Migration (IOM) staff

Answer: Val, thank you for attending my seminar and I pray that you learned much from me and the other speakers. It seems the seminar achieved its objective since you are now asking about pooled funds for your investments.

Let me start by defining what a pooled fund is, borrowing the definition from Investopedia.com: “Funds from many individual investors that are aggregated for the purposes of investment, as in the case of a mutual or pension fund. Investors in pooled fund investments benefit from economies of scale, which allow for lower trading costs per dollar (peso) of investment, diversification and professional money management.”

It looks like the definition made it more complex than it really is. Pooled funds are investments where people put their money, with an investment manager handling the investments. To explain further, let me use this analogy: Assuming you want to invest but do not know the first thing in investing in stocks or bonds. You can join a “pool” of investors who allow an investment manager …

Read full article at http://business.inquirer.net/13315/all-about-pooled-funds