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Showing posts with label Investment. Show all posts
Showing posts with label Investment. Show all posts

The COST of delaying your invesment

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Jake





"Money can always be retrieved or recovered, but time cannot."

What could possibly affect your financial goals when you delay investing?










  1. Retirement
    Let us try to consider 3 people Aged 25, 35 and 45. All of them desired to retire at the age of 60 and will live until age 85 (25 years of retirement life)

    Their current monthly expense is 15K a month.

    Inflation Rate: 5% p.a.

    Investment Return 10%
  
Age 25 
Age 35 
Age 45 
Current Monthly Expense 
15K 
15K 
15K 
Retirement Fund Needed (at age 60)*
15.3M  
9.4M  
5.7M  
Investment needed to reach desired Retirement Fund 
4.5K/month 
7.5K/month 
14K/month 

*Based on 5% inflation rate
Even though "Age 25" requires a larger retirement fund (due to inflation rate), he has the smallest investment monthly requirement among the three since he/she started early. It also shows that the later you start setting aside money for your retirement, the larger you need to invest monthly.
A lot of retirees who were unprepared always tell "I should have saved more".

2. Getting Life Insurance
There are two things you need to be concerned of when delaying your insurance.

a. Insurance cost
Take note that the insurance charge will be based on the age where you start your policy and will remain fixed throughout your life.
i.e.
Policy type = Variable Universal Life (Life Insurance with Mutual Fund component)
Insurance Coverage = 1 Million
Male
  
Age 30
Age 40
Age 50
Qtrly Contribution
6,750.00
8,835.00
13,281.25

 b. Health Uncertainty
Life insurance is a blessing and not all insurance application is being approved. Insurance is a risk sharing business. Why would the company insure you if you have a high probability of dying?
I have two prospects who applied insurance from me. Their age is below 35 years old. Even with their interest to apply for life insurance, they were declined by the insurance company due to their health condition. The sad part was they delayed their intention to get insurance for 7 years. Now that they are no longer healthy, they can no longer be insured.

For my last quote, I will share a classic one: "Asa huli and pagsisisi". Financial Ignorance can be tolerated, but not arrogance.





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Multi-level Marketing: Not a SCAM

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Jake

Multi-level marketing or MLM is a marketing strategy in which members of the MLM could profit either by selling products or by recruiting new members.

For optimist, MLM is closely associated with the word business opportunity, or life-changing opportunity.

For pessimist, they associate MLM with the words "SCAM", or "PYRAMIDAL SCHEME"

It pains me to hear people who have perception on MLM as a scam or laugh on the members who struggle on recruiting down lines.

New models of MLM are currently facing a lot of challenges to be accepted as legitimate business models due to the SINS of previous MLM. Recruited members without entrepreneurial spirit often change their perception of MLM on the first sign of production downturn. And when they gave-up, they tag it as a SCAM. Shame on you!

6-Digits a week

This is true. It's not a joke, and they are consistent with this production. But always take note on the story behind their success. No one becomes successful overnight. Before they even reached this level of income, they were consistent with their hard-work. Not just days, weeks, or months, but years of consistent effort.

Don't believe in easy money

Recruiters love to show off their pay checks, their luxury bags, cars, watches and Euro trip vacation pictures. Most of the time, prospects are enticed to join due to their upgraded lifestyle. But be careful, prospects often perceive this as an 'Easy Money'.

For recruiters

Be careful on the words you use when presenting to prospects. Do not just show the perks of being part of MLM, but also show to them the challenges they need to face to become successful on this business.

For prospects who are thinking of joining

This business is not for the faint heart. You must have the entrepreneurial spirit to endure challenges on this kind of business. The perks are real, these are not SCAM, but expect that you have to deliver consistent effort for you to become successful as your recruiters.

For those who are already part of MLM

Kudos to you. Don't give up. Continue on what you are doing. Don't lose your heart when your prospect rejected your proposal or invite. You have to treat this as a business. You have to be creative when selling this opportunity to your prospects.
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Stocks or Mutual Fund? Which one

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Jake


Part time investors still dwell on the aspect on where to place their hard earned money that would yield higher returns.

Those who would like to invest on corporations are thinking of two methods: either to invest personally on stocks through a broker OR to invest on Mutual Fund.







Before we compare, there are two ways on investing on stocks through a broker:
  • Traders or Day Trading – Requires extensive monitoring market. Profits by buying cheaper shares and sell it at a higher price.
  • Long Term Investing – Fixed and periodic investing on corporate stocks.
For Mutual Funds, there are three common types:
  • Bond – Government Loans and Corporate Securities
  • Balance – Mixture of corporate stocks and Government Loans
  • Equities – Corporate Stocks
For the purpose of comparison, we will be comparing only:

    Day Trading VS Long Term Investing VS Mutual Fund(Equities)

Market Monitoring
  • Day Trading requires extensive monitoring on the market. Even though trading period only last 3 hours, missing this period could cause high investment loss or opportunity of gain
  • Long Term Stocks investors require moderate monitoring in the market.
  • Mutual Fund investors require low or no monitoring the market.
Company profiling
  • Day trading – Extensive. Aside from the numbers provided to you on their assets and liabilities, you even need to consider several factors that could affect the company. i.e. Changing of CEO, weather affecting commodities, government policies etc.
  • Long Term Stock Investors – Looking at their numbers (assets and liabilities) and historical performance should suffice for a successful long term investment on stocks.
  • Mutual fund Investors – They only need to profile the investment company (Managing the mutual funds), not the companies being invested by the investment company.
Overall Risk/Return
  • Day Trading – Highest risk, highest potential return. There were some stories of traders who was able to profit 50%-300% I just one trading day. Of course, there were also traders who lose their bet on stocks. One story came from recent recession; a Stock Trader killed himself when the recession came. The return if investment is highly dependent on the skill, knowledge and experience as an investor.
  • Long Term Stock Investors – Moderate to high risk. Moderate to high return. The longer your investment stays, the higher the probability your investment will provide higher return. Investors under this category usually mitigated the risk by diversifying their investment to different companies. One advantage of choosing Long Term Stock investing is the freedom to choose which company to invest to.
  • Mutual Fund – Low to moderate risk. This investment simulates an experienced Long-term Stock investing. The investment also is highly diversified which further mitigates the risk. Due to several mitigated risks, it also provides the lowest return among the three. Based on 10 year historical returns on mutual funds, it averaged around 15% p.a.
Overall verdict: That depends on your financial objective and risk profile as an investor.

If you have the luxury of time to study the company profiles, monitor the market religiously and completely understand the risk/return principle on investing, I highly recommend go for Day Trading.

If you wish to think long term and would like to have a freedom to choose which company to invest to, go for Long Term Stock Investing.

If your financial objective is long term and doesn't like to worry about the day-to-day fluctuations in the market while it is being managed by a professional fund manager, proceed for Mutual Funds.

My Personal Choice

Mutual Funds. Why? I love my job and my 9 AM to 12 PM schedule is my most productive time of the day. Also, I do not have the luxury of time to review or to worry about company profiles and market fluctuations. I love the idea that my investment is being managed by an experienced fund manager and knowing that my investment is diversified.
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Types of Mutual Funds

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Jake


There are several types of mutual funds offered in the Philippines. But for this article, I will only tackle on funds that are commonly available in the Philippine market.





Common Types:

  
Investment Portfolio
Investment Objective
Risk
Potential Return
Equities
Corporate stocks and loansLong-term capital appreciation
Moderate to high
High
Balance
Combination of corporate stocks and bondsFixed income and capital growth
Moderate
Moderate
Bond
Government and corporate loansProvide interest income and principal preservation
Low to moderate
Low

Historical returns:

The historical returns showed below are based on historical performance of Sun Life Prosperity Funds.
Prosperity Philippines Equity FundProsperity Balanced FundProsperity Bond
2001
-10.05%
-1.44%
10.54%
2002
-17.68%
-12.76%
8.40%
2003
39.84%
31.51%
8.42%
2004
20.18%
19.09%
7.89%
2005
11.35%
9.98%
11.05%
2006
44.00%
34.29%
11.96%
2007
20.58%
17.21%
2.42%
2008
-37.60%
-23.73%
1.65%
2009
43.50%
21.70%
5.67%
2010
41.24%
30.67%
7.85%


You might be scared of investing on Equity or Balance due to the negative values. The negative values do not really mean that your investment will zeroed out. The negative values mean that the unit values you bought on the previous year, devaluated. It is just considered as "paper loss". The number of units that you bought is still intact.

In fact, if the unit values went down, for just an example "due to recession", you must take advantage of that one by buying MORE mutual fund units, because the unit values are lower.

I highly recommend investing on Equity fund for your long term investment such as Children's educational fund or retirement fund. I will show on the next table why equity fund is superior to any other fund if you are thinking long term.

i.e. Initial investment =10,000

Period = 10 years


Alas! At the end of the tenth year, Equity Fund showed it's superiority over other funds.

Which fund is best for me?

That really depends on your risk appetite, your current financial situation and your financial objective. Always remember the simplest investment principle: "The higher the risk, the higher the potential return"

What do you recommend?

If you don't have any intention to use any of your investment on the next ten years, I highly recommend for you to maximize return of investment through Equity Fund. If you are about to use your investment, for just an example 5 years before your child goes to college or 5 years before your retirement, switch or transfer your funds to a more conservative type of investment like Bond Fund. This will protect your investment from any market fluctuations while you are doing periodic withdrawals on your investment.

What are the other MF available in the market?
  • GS Fund – Pure Government securities or loans. Lower returns than bond fund.
  • Money Market Fund – Short-term loans or commercial papers issued by corporations. Investment returns is almost as low as the bank.
  • Foreign Currency – Consists of either corporate stocks or foreign government loans. For me, I don't recommend investing on dollars. It's growth is just being nullified by it's devaluation.
If you have more questions about MF, feel free to email me or set an appointment to enlighten you in detail about this investment.
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Crazy over Mutual Funds

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Jake


You already heard a lot of people investing on condominiums, stocks, government bonds, businesses, loans and time deposits. Let me share to you, my personal favorite investment instrument: Mutual Funds.

I could not describe better than what is place on Wikipedia: http://en.wikipedia.org/wiki/Mutual_fund

So instead, I would convince you on why Mutual Fund is considered a sound investment.


See Figure below:





YOU as an investor trust you hard earned money in the bank. In return, the bank gives you a small percentage growth on your savings ranging from 0.5% to 2.75% p.a., guaranteed. This is one way for the bank to attract more investors. Sounds generous? Wait until you look at the 2nd figure.




The money that you deposited in the bank is used by the bank institution to invest on a higher earning investment instrument. i.e. Bonds, Loans, Stocks etc. This investment instruments gives an average interest yield ranging from 6% to 17% p.a., potentially even higher. If you ever wonder why the banks are confident to give you interest yield on your savings deposit of 0.5% to 2.75%, it is because the banks are confident they will be able to get higher interest yield out from stocks, loans, bonds, etc.

The purpose of Mutual Funds is that it gives investors an opportunity to have direct access on these investment instruments that gives an investment growth higher that what is returned by the bank.








So how does it work? It is best explained with this picture:



You buy Mutual fund units called NAVPS (Net Asset Value Per Share). The unit prices changes every business day, which depends highly on the market or economy. You earn on mutual funds by using the same principle as Buy & Sell, "Buy Low, Sell High".

Advantages of Mutual Funds:
  • Managed by a full-time professional fund manager whose main objective is to analyze investment products available in the market and select those who yield best.
  • Requires low capital to start your investment. Usually, it requires only Php 5,000 for your initial investment and Php 1,000 for you subsequent investment.
  • You have multiple funds to choose from depending on your risk appetite or financial objectives.
  • Fund managers ensure that the money you invested is diversified to mitigate the risk of losing all of your investments. Remember the saying "Do not put all your eggs in one basket". For equity Mutual Funds, investment is diversified not just on different companies, but different industries as well. This reduces the risk of losing all your investment to a mere NULL.
  • Liquid Investment. You could pull out your investment or sell your MF units, ANYTIME, either partial or full.
  • Highly regulated by the Securities and Exchange Commission
  • Potentially higher returns
  • You could easily purchase Mutual Funds directly through SEC-Licensed Certified Investment Solicitors.
  • Transparent. Your updated on your investment regularly either through mail or online
  • Flexible. You may switch you funds anytime and you are not obliged to invest regularly.
Risks of Mutual funds:
Before I enumerate the risks, let me emphasize that NO investment bears NO risk. But even though there are risks on investing on Mutual Funds, these are properly mitigated by the advantages stated above. You have several funds to choose from, depending on your risk appetite. Remember that he higher the risk, the higher the potential return.
  • Returns are not guaranteed. Fund value depends on the current unit prices of the fund you chose.
    • This is true; however, history shows that Mutual Funds, on a 5-year average, performed higher than time deposit, even higher than inflation rate.
  • Fluctuates with market or economy.
    • Especially if you chose equity fund.
    • However, on a 10-year average, equity fund shows that its investment return is superior to any other fund.
Summary:The objective of mutual funds is not to replace your savings in the bank. Your bank should only serve as an emergency fund and other short term financial expenses such as food or clothes. But for your long term investment, I really recommend go for Mutual Funds due to it’s higher potential return. It’s liquid, flexible, managed by professional fund manager, and most of all, it is diversified. Because of it’s advantages, it is considered as safe and secure investment.
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