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: Is it good idea to invest on UITFs? Which bank has competitive rates so far? – Maria Agustin (@pretours) via Twitter

Answer:

UITFs or Unit Investment Trust Funds are pooled funds offered by the trust department of the major banks of the country.

But what is a UITF? As per the Trust Officers Association of the Philippines (TOAP), they defined it at their website (www.uitf.com.ph) as “an open-ended pooled trust fund denominated in pesos or any acceptable currency, which is operated and administered by a trust entity and made available by participation. Each UITF product is governed by a Declaration of Trust (or Plan Rules) which contains the investment objectives of the UITF as well as the mechanics for investing, operating and administering the fund. Most UITFs are considered medium to long term investments.  Clients considering to invest in UITFs must have the financial resources to stay invested in them for a reasonable period of time in order to maximize earnings potentials.  If the funds to be invested will be needed by the client in the immediate future, the UITFs may not be a suitable investment vehicle for such client.”

A few months ago, I wrote about pooled funds in this column. I mentioned that pooled funds are 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 to invest for them, subject to the objectives of the fund. Since there are many investors in the fund, the amount generated by the fund becomes sizeable and an investment manager will invest it for you. The investors actually own the funds and the investment manager (usually an institution) simply manages it. Ownership of the fund is through shares, much like owning shares in a corporation. Of course, the investment manager earns from this arrangement through the charging of management fees.

To answer your question if it is a good idea to invest on a UITF, my answer will be “it depends!” Like any investment instrument, you must first ascertain your investment objective, time frame and risk tolerance. UITFs (and Mutual Funds) are not short term investment vehicles. If the purpose of your investment is short term in nature, say less than 3 years then is not a good investment for you because UITFs are marked to market investments. The value of a UITF will be dependent on the performance of the market it is invested in. If the market of the fund you are invested in, say Stock Funds (Equities) are on a rise, expect the value of your UITF to go up, and vice-versa. Pooled funds, of which UITF is one of them, are not bank products and do not carry guarantees. They are not covered by the PDIC as well. However, having a non-guaranteed investment is not necessarily a bad thing because it also means that the yields you can get from investing in them is potentially higher.

If your investment is long term in nature and your risk tolerance is on the moderate to high, UITFs can be a good vehicle for you. Let’s assume that you are investing for retirement, a UITF is a good vehicle to help you build up your retirement funds because the long term nature of your need will allow you to weather the fluctuations in your funds. Even if there is fluctuations or gyrations, investments in UITF (or other pooled funds) are generally on the growth side. Performance is largely dependent on the fund you have chosen to invest in and the rules of risk and return relationship will dictate its performance. Riskier funds like Stock or Equity Funds will generate higher returns than lower risk funds like Bond Funds on good years and of course, expected to have negative growth on bad years. Good years is when the investments environment are doing well like growth in the equities market, bond market and generally when the economy is doing well.

UITFs allows you to invest according to your risk tolerance. Low risks for Bond or Fixed Income Funds, high risk for Stock or Equity Funds and moderate for Balanced Funds which can be a combination of both bonds and stocks. I also like the idea that you don’t need a lot of money to invest on UITFs, most banks will allow you to invest for as low as P10,000.00. BDO even has a program where you can invest as low as P1,000 per month under their Easy Investment Program which is a great idea for many of us. I am sure other banks will come up with a similar program soon.

A big advantage of UITFs is professional investment management. Those entrusted to invest UITFs are well experience full time investment managers who are trained to invest properly, objective and devoid of emotional investing which is a common mistake for newbie investors. Of course, the downside of UITFs is that there is management cost which is only fair. Another problem I see with UITFs is that the branches of the banks are not properly trained in handling inquiries on the UITFs and there have been reports that some branch personnel even discourage their customers from investing in UITFs because of its non-guaranteed nature.

As to which bank is the best performing, you may check out their posted performance in publications and the internet. However, do not look on performance alone. A fund with an aggressive fund manager will do well in good investment markets but will perform poorly on market downs. What you should consider are their long-term performances, like their last 3 or 5 years performance. Lastly, look at their charges too as not all banks offer the same charges.

To learn more about investing, consider attending my Steps to Financial Peace 2012 events on May 18 (V Mall, Green Hills), May 26 (Parklane Hotel, Cebu) and June 2 (Davao). Get in touch with Jen Magalong at 0939-1177856 or jcignacio.magalong@gmail.com

“But divide your investments among many places, for you do not know what risks might lie ahead.” – Ecclesiastes 11:2, NLT

 * also appeared in my Inquirer column.

The BRIC is so yesterday. Here’s another good reason why investing is now more fun in the Philippines. Sick man of Asia no more!

Watch this video.