A Practical Way of Understanding Asset Classes

When we invest; we are delaying the enjoyment of our current assets (most probably in cash). It has been said that to minimized investment related risk, it helps if we diversify in terms of asset class. Opening time deposit accounts across several banks does not count as diversification.

One practical way to understand asset class is to look at when an investment will allow you to enjoy the returns.

Interest bearing instruments in general will allow you to enjoy your interest immediately, earnings in terms of interest income are paid out to you and you have the option of enjoying it immediately or put off the enjoyment to a future date, this is the premise behind the compounding effect of interest. That by putting off the enjoyment of your earned interest income, it now forms part of your account and future interest will apply to it as a whole.

On the other hand, earnings in equities are generally due to the appreciation of its value. You have to sell an equity instrument in order to enjoy the increase in value. Some equities may pay dividends but the bulk of the benefits from an equity investment are due to appreciation. Now this is where we need to differentiate on how to better manage our expectations.

Let’s say I bought a share of Ayala Land Corp. Today at Php 11/share. From my current standpoint, I would not be able to determine with certainty on how much will I earn in the next twelve months. I may be able to form an intelligent guess if I refer to its historical performance, but I still would not sure on exactly how much will I earn. My earnings will only come if in some future date the price of Ayala Land shares went above my purchase price of Php 11/share, so between that time and the present, i would not be able to enjoy the benefits of my investment in Ayala.

Having said these, we can now conclude that an interest bearing instrument is of a different asset class as compared to an equity investment.

The three (financial) portfolios you must have to achieve financial independence

Apples to apples; oranges to oranges;

When you dream of achieving financial independence, it helps to group the financial assets you accumulate into 3 general groupings (portfolios) to help ensure that you are using the appropriate criteria in its selection, the correct performance measurements and the right mindset in its review and monitoring. We will define a portfolio as a group of financial assets with similar characteristics.

1. Your current needs portfolio: (for financial goals one year or less)

This is what I suggest you build up first once you have established a regular savings program. Surplus income should go straight to a separate savings account, as liquidity (for the discussion on the trade-off of liquidity and growth, please see http://www.acgadvisors.net/2008/02/liquiditygrowth-trade-offs.html ) is and should be your main criteria in the selection of securities, I would suggest that you choose a bank that gives you the most number of access points for ease of withdrawals, never mind the expected low rate of interest, this is your “buffer” for the uncertainties that you may encounter like emergencies, loss of income, minor illnesses, etc. The ideal target level for comfort is a level equivalent to 3 to 6 months of your average monthly expenses. Personally, I prefer a savings account with online access, there may still be some doubts on the security of online transactions, but the benefit of being to settle payments or send funds at the comfort of home far outweigh against lining up in the bank.


2. Your contingency (risk management) portfolio: For life’s major uncertainties

Some risk you can assume and prudence requires that for we pass on to an insurer some major risk that would have a devastating impact on our finances. Imagine being hit with a Php 400,000 medical bill when you are only saving Php 5,000/month (it would take 80 months of continued savings to recover this). The basic insurances that we need are life, health and property insurance. For me, I would rather get this from reputable insurance companies that may charge a little more than try to skimp on costs only to have difficulties when the need to collect arises.


3. Your Future needs portfolio: For your financial goals two years and beyond

You invest in the capital markets when you invest for growth. You don’t set aside funds for your retirement by placing the money in a 30-day time deposit. Remember that liquidity comes at the price of the giving up on growth, and we need to be consciously aware that we have to give up the liquidity feature of an investment vehicle if we are investing to grow our funds. Liquidity in this context however does not mean illiquid (the lack of a ready market), it is taken as a prerogative on your part on not selling if the doing price should be below your purchase costs. I would suggests that when you are starting to build up a capital market portfolio of stocks and bonds, start with managed funds (mutual funds, unit investment trusts, exchange traded funds etc.), try to avoid buying individual stocks as the risk of holding on to individual stocks is far more than the diversified risk of a managed fund. The typical minimum investment requirement for mutual funds is the same or even lower than the minimum requirement to open a stock trading account.

Derivatives as an Asset Class

OPTIONS – As a futures contract entails an obligation either to buy and accept delivery or sell and deliver the physical stock, an option is a financial instrument that gives the holder the right but not the obligation to buy or sell the underlying instruments.

Let us say that you have a strong conviction that the price of San Miguel Shares will go up from Php 50 to Php 80, you have 2 ways to take a position; First if you have Php 100,000 for example, you can buy the "real" shares at Php 50 and this would give you 2,000 shares. or you may write a call option (an option that gives you the right to buy at a pre-agreed price within a pre-agreed time frame (say three months)) for 200,000 shares (100/shares per option, 2,000 options)

On the third month, if the price of SMC is really went up to Php 80, buying the real shares will give you a profit of Php 60,000 (2,000 shares x Php 30) while exercising your option will earn you Php 6,000,000 (200,000 shares x Php 30), the downside is that if the price does not move or is lower than your strike price, your option will expire worthless (good bye Php 100,000).

Derivatives as an Asset Class

DERIVATIVES are financial instruments that “derive” its value from an underlying security. As an asset class, it is primarily used by an originating party to transfer pricing risk; the two most common types of derivatives are futures and options.

FUTURES: Let us say there is this sugar plantation owner in Bacolod who expects to harvest his cane crop in six months. After a careful review of his costs, he estimates that his production costs for every pound of sugar is around 8 US cents. He reckoned he would be happy to sell it at the current spot price of 10 US cents.

Now comes the tricky part: As raw sugar is traded in the world market, its spot price (selling price for physical stocks) and the resulting “futures price” fluctuates in reaction to changes in the supply/demand expectations for sugar. A typhoon hitting a major sugar producing area normally leads to a lower supply expectation, thus a higher price while bumper crop expectations leads to oversupply expectations, hence a lower price.

To protect himself from a possible price drop below the current price of 10 US cents per pound by the time his sugar is ready for delivery in six months time, the sugar plantation owner may opt to “sell” a raw sugar futures contract at a price of 10 US cents for delivery in six months.

A sell contract should be matched with a “buy” contract to consummate the deal. (How can a selling transaction be completed if nobody’s buying...), in this case the buyer can be an end-user for sugar or a speculator willing to take the opposite bet that the price of sugar may go above US 10 cents after six months.

After six months, two things can happen; the price of sugar will either be below or above 10 US cents. If below, the sugar plantation owner will still be able to sell his harvest at 10 US cents, the buyer in this case will lose (the difference of 10 US cents and the price drop), if the price is higher than 10 US cents, the sugar plantation owner still gets 10 US cents, while the buyer will “earn” the difference of 10 US cents and the price increase.

Futures makes good economic sense as a mechanism for price protection, but data from the Chicago Mercantile Market (one of the bigger futures market in the world) shows that majority of trades (around 80%) are now speculative by nature. Futures trading transactions are now based on expectations of price changes rather than real interest in the physical product. Common commodities that have a futures market are precious metals (gold, silver, platinum, etc) and agricultural commodities (sugar, coffee, soybeans, etc).

A Futures contracts obligates the buyer to accept delivery of the physical goods, he may however offset his obligation to accept delivery by “selling” the contract. A seller on the other hand is obligated to deliver the physical goods at the agreed price; an offsetting transaction is to buy back the contract. Offsetting transactions either a close “buy” or “sell” may entail a loss as the price difference of the buying and selling price must be made out in cash.

Stay Hungry. Stay Foolish.

This is the text of the Commencement address by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios, delivered on June 12, 2005 at the Stanford University

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?

It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.

And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.

Read more?

http://news-service.stanford.edu/news/2005/june15/jobs-061505.html

THE ONLY WAY

I have read lots of books and materials on the topic of financial planning and wealth building, and the common tack taken by the authors is that: “hey look, I am rich, this is how I have done it, and if you are really serious in getting rich yourself, you have to do it the way I did...” And then comes the endless litany of how smart they are, how from being penniless they became the poster boys of our materialistic society, that from their investment acumen they are able to parlay a small amount of money into riches that even King Solomon would envy, that they have this fool proof formula of amassing great wealth ad infinitum.

But are all of these really “helpful” to you?

In the book “Fooled by Randomness” by Nassim Nicolas Taleb, there is this assertion is that we humans have a natural tendency of identifying patterns where none really exists, we underestimate the randomness and we attribute success not to luck but to our perceived “skills”.

In behavioural finance, these are defined as emotional biases; one example is the “overconfidence bias –in which people have this tendency to attribute good outcomes to their abilities and bad outcomes to external events. A lot of these claimed successes are just a result of: being in the right place at the right time.”

I was interviewing this applicant for a IT position the other day, and this guy claims he is very familiar with the original code that launched Bill gates and Microsoft to the behemoth it is today, the only difference between him and Mr. Gates is that he was not where Mr. Gates is twenty years ago.

What works for others may not work in the same way for you, although all of these get-rich books are good recreational reading, there is no secret or magic formula in getting rich except the traditional slow method of patient asset accumulation that is the result of your conscious monitoring of your income and expense. This may sound “boring” and “unexciting”,

but this is the only way.

YOU DON’T HAVE TO BE AS RICH AS BILL GATES TO ACHIEVE FINANCIAL INDEPENDENCE

A personal financial goal is really what it is, a “personal” goal. I have encountered a lot of people who seem to have difficulties in setting financial goals, its because they based their definition of “financial success” from what other people has achieved.

Mass media has a role in this distorted sense of wealth by openly encouraging the wanton emphasis on material things as signs of prosperity. The 6 bedroom weekend rest house for a family of 4, an eight-seater gas guzzling SUV for the urban professional, a 6-course French gourmet meal for dinner with a Php 25,000 bottle of fine wine to wash it down, are all of these necessary for you to feel the comfort of financial independence?

The Concept of Marginal Utility

This economic concept says that after you have attained “critical mass” (enough to satisfy all your needs) in your wealth building endeavours, any extra peso accumulated will be of lesser and lesser importance to you.

What is critical mass for you? For practical purposes let us define this as a level of wealth that is large enough to generate passive income to enable you to stop working and enjoy indefinitely your lifestyle of choice. This is where we need to fine tune our preferences as it would be a factor in our determination of our lifestyle of choice.

My lifestyle of choice:

• Three decent and healthy meals everyday
• A comfortable dwelling place
• Occasional travels
• Etc.

Then compute how much wealth you need to maintain this lifestyle, and this should be for practical purposes your “first” financial goal, after you have achieved this, you may want to aim for the SUV?

To give you an idea on how much is the wealth level required to sustain your lifestyle of choice, please see table below.

If your lifestyle of choice costs Php 50,000/month to maintain, to have enough to last you for 20 years you need Php 10.66 Million.

PORTFOLIO MANAGEMENT FOR SMALL INVESTORS – PART TWO

Some portfolio management concepts we need to understand in order to appreciate how the Modern Portfolio Theory (MPT) can help us attain our investment goals are as follows:

EXPECTED RETURNS – this is the historical return of a class of securities. For example, you might have been told that the historical return of a stock portfolio is 12% per year. Does this now mean that year-in and year-out, your investment will earn 12% annually without fail? How does this claim explain the current year-to-date drop of the PSEi of around -20%? Mathematically, do you know that we need an appreciation of 25% the succeeding year just to offset a 20% drop in the preceding year? 25% is more than double the historical average of 12%, and to get back on track in our financial projections, the market should go up by at least 40% next year. (To recover the missed expected return of 12% last year, plus to recover the actual market drops of 20%).

STANDARD DEVIATION – this is the measure on the probability of a particular asset class not delivering on its expected returns. The difference between the actual return from the expected return is known as the “variance”, the standard deviation is the square root of this variance, the rule of thumb is that the higher the standard deviation-the higher the risk. 

OPTIMUM PORTFOLIO – This is the ideal mix of securities in your investment portfolio. Theoretically, this means that the expected returns of your portfolio is on the “efficient frontier”, it is when no other mix of securities offers a higher expected return with the same or lower risk or lower risk with the same or higher expected returns.

Using the concept of “Time Value” in constructing your Investment portfolio

Every investment that we undertake can be viewed as an exchange of current wealth for some future flow of payments. The time value of money is an effective gauge of knowing whether we would be properly compensated for our decision to defer consumption to a future date.It also helps in determining how much money we need to set aside to fund a future objective.

Investment risk in this context is the probability that we may not have save enough for a future objective.The basic steps in using time value in determining how much money you need to set aside are as follows:

List down all your financial objectives:

1. Establishing an emergency fund

2. Saving to buy a house

3. Saving to pay for a child’s education

4. Saving to start a business

Then access the cost and your remaining time frame in building up the wealth necessary to fund your objectives

1. Emergency fund – Php 50,000 in six months
2. House fund – Php 2 Million in nine years
3. Child’s Education – Php 800,000 in 12 years
4. Business start-up fund – Php 5 Million in 18 years

We can now use the PMT function in Excel to help us estimate how much money we need to set aside every month growing at an assumed rate to fund our objectives.

For illustration purposes, we will use 2% as the assumed growth rate for goals of one year or less, 6% for goals of five to ten years, 8% for eleven to fifteen years and 10% for sixteen years and above, these figures are on the low side.

The monthly savings required for the above illustrations are :

• Php 8,298.67/month for the emergency fund
• Php 14,011.50/month for the house
• Php 3,326.29/month for your child's education
• Php 8,325.52/month for funding your business

As you may not be able to afford funding all of these goals simultaneously, you may want to prioritize as to which one to build up first.

PORTFOLIO MANAGEMENT FOR SMALL INVESTORS – PART ONE

The fundamental concepts of portfolio management were pioneered by Nobel Prize Economics Laureate Harry Max Markowitz in a 1952 landmark work entitled “Modern Portfolio Theory”. The MPT lays down the basic structure for managing investment risk through diversification. 

To gain a feel of the relevance of MPT in our own investment portfolio, let us first agree on certain assumptions:

First is that you and me are basically “risk averse” (afraid of losing money), given a choice between 2 investments that pays the same rate of return, we would prefer the one with a lower implied risk.

Second is that given a choice of 2 investment with the same risk profile, we would prefer to choose the one that pays a higher return.

The basic idea is that we seek to maximize investment returns within acceptable risk parameters.

Investment risk can generally be categorized into Systematic and Unsystematic Risk. Systematic Risks are risks emanating from the investment environment as a whole, think - the price of galunggong (inflation rate), changes in interest rate, Ninoy Aquino assassination (political upheavals) and monetary policies to name a few, The MPT states that this risk is undiversifiable.

As investors, we have to impute the effects of these events into our financial projections as it normally affects our ability to liquidate our securities at will due to price volatility.

Unsystematic Risk is risks associated with individual securities. Think – Meralco common shares, Retail Treasury Bonds etc... These individual securities are affected in different ways by changes in the investment environment. This type of risk can be diversified to a point of tolerability. The challenge of portfolio management is finding the ideal mix of these individual securities to form our investment portfolio.

Diversification does not only mean that we choose different investments that fit our risk-return preferences, we also have to consider the relationship of these investments to each other. I once jokingly ask my class –“if I have Php 100,000, will allocating Php 20,000 each in time deposits to BPI, BDO, Metro, SCB and HSBC can be considered to be fully diversified?”

Diversification in the real sense of the word means choosing investments that are fundamentally different from one another, a useful rule of thumb is to use asset class differentiation (fixed-income, equities, foreign exchange, derivatives).

10 signs of Financial Maturity

Ok, so you have been very diligent in your quest for financial literacy, you now can tell the difference between a common from a preferred stock, how inflation is constantly eating up on the value of your portfolio etc... But are you consciously aware on where all of these new learning is leading you? What is your end in mind? How can all of these new “knowledge” add value to your quest for financial independence? Financial literacy should lead to financial maturity.

Some signs of financial maturity, not necessarily in the order of importance:

1. You now have a clear understanding of your financial goals, when these would happen and how much money you need to fund them.
2. You have a regular savings and investment program.
3. You are debt-free or almost there.
4. You now have realistic expectations of investment outcomes; you are not anymore swayed by the siren songs of “get-rich-quick” schemes.
5. You are now consciously aware of the implications of any current spending decisions.
6. You are no longer terrified by the fluctuations of the bond and stock market, accepting that “volatility” is inherent in capital market instruments.
7. You are insulated from the “need” to sell your long term stock portfolio prematurely because you have a healthy level of short term funds.
8. You now have a healthy appreciation of the need to diversify your portfolio.
9. You are now adequately protected from life’s major uncertainties.
10. You are confidently looking forward to a comfortable retirement.

THE SECRET - of getting rich..

There is no secret in getting rich, the vast majority of personal wealth is built on the traditional patient process of steady asset accumulation, their are two and only two numbers to track and monitor to get a feel on how are you getting along, and these are your INCOME and EXPENSE.

Of the two generalized distinctions of income; active income is the reason why parents willed children to finish school - as a college degree will at least ensure a fighting chance at the job market. Active income is the first stage level of asset accumulation, its the first salary you earned from your first job and will earned for as long as you can. You may already realized by now that "active income" is not an infinite source of income as; you may get fired, you may be unable to continue to be actively employed for a myriad of reasons. So the final objective is to build up an asset base that would give "passive or investment income". How much or how fast you build up this asset base depends on the next number.

We earn to live and to live decently their are expenses required to support our lifestyle of choice. Managing our expenses is probably the first financial hurdle we need to overcome in our personal quest for financial independence, i say personal because it involves not only money but also a host of personal and emotional preferences.

Based on my own personal experience and the experiences of most people i encounter as a planner, the "culprit" of an unbalanced budget is usually the discretionary part of our expenses, we have heard terms like spending beyond our means... these spending is normally associated with expenses relating to things we want rather than on things that we need, these are the latest I-phones when our trusty nokia is still usable.. these are the dinners to impress.. the branded shoes for our sons because we don't want them to feel inferior at school..etc..

The SECRET of getting rich boils down to managing these two numbers, the challenge is to maintain an expense level that is lower than our income, then we should be on our way..

Will getting rich prevent you from getting to heaven?

In my younger days of working in the financial district of Makati (maybe about 20+ years ago), we normally have half-day work on Saturdays and afternoons was usually spent ogling the store front displays of the old version of Ayala Centre. I still remember going to this mall one Saturday afternoon to be surprised with a scene of sales ladies picketing in the sidewalks-apparently, this particular establishment has the practice of not “regularising” their employees, rank and file employees (sales ladies included) are only given 5-months work, then they have to re-apply again for another term, I was surprised to find out that some of them has been going through this seemingly unfair labour practice for years already..

Fast forward to today, this particular establishment had grown by leaps and bounds and has made the majority owner one of the richest person in this country. The listed shares of this company in the PSEi is a favourite among local and foreign fund managers and it is expected to do well going forward inspite of the financial challenges the economy is undergoing through now.

I can’t help but surmise that the seed of all of this current wealth has roots in a practice that may be considered to be questionable in terms of fairness. 

Will getting rich prevent you from getting to heaven?

For me, the pursuit of wealth should be a matter of course rather than the raison d'être of our existence. Our attitudes and beliefs with regards to wealth may have a bearing as to extent we will go in amassing wealth, too much focus maybe even lead to actions that may not be equitable to all parties concerned. Wealth should just be an enabler and not an end by itself.

So how rich should you be? How much wealth should you strive for? Should you aim to be as rich as Croesus?

This definition on how rich you want to be is the fundamental basis of your personal goal setting, take time to find out “how much” you need to enable you to fully enjoy your life’s potential, it is only then that a workable financial plan can be developed.

More Beijing Olympics Thoughts..

The Olympics provides very specific measures for success. Seconds/miles per hour/kilograms, to name a few are some of the mathematical metrics used to determine who gets the gold and who gets booted out. The term "winning by a nose" never had more meaning for me till i found out that the time difference between first and last finisher in a field of 9 runners competing in the 100 meter dash is just about 0.948 seconds. This less than a second difference determines who is successful and who would be relegated to the long list of also-runs. Sad? yes, but it is the reality in competitive sports.

Measuring our wealth fortunately should not be subject to the same precise mathematical measures imposed by a outside body who does not even know you...

Our quest for financial independence should not be treated as a competitive sport, being wealthy is not a matter of having a larger bank account balance, not a matter of having a bigger SUV or the number of rooms in our mansions, for me, financial independence is a state wherein we are free to do the things we enjoy and cherish without the need for us to worry whether we would have money to buy our next meal. It is a financial state where we have enough financial resources to maintain our lifestyle of choice till the time we meet our maker.

A rich man is not the one who have the most, but the one who needs the least..

I think this is a very important consideration whenever we set personal investment goals. Do you aim for retirement in the Bahamas just because it is a very popular notion of "successful retirement"? or do you aim to buy the biggest SUV because your peers drives SUVs even if you are no longer comfortable with its costs of maintenance..

Personal investment goals leading to financial independence should be based on our own personal values, our personal needs, and our lifestyle choice..

"I AM RICH!, BECAUSE I SAY SO.."

Personal Finance Lesson from the Beijing Olympics: Your Retirement Is Not a 100 Meter Dash

It is not unusual to hear of Olympic class athletes spend years and years of training for their event; for the case of the 100-meter dash runner, long years of strenuous physical regimental preparation culminates in a 15-seconds event (less than 8 seconds if he is to break the world speed record), the question in my mind is; are these long hours, days, months and even years of preparation for an event that is going to be over in a matter of seconds worth it?

This is probably the reason why there are people who become champions and people who just dream of becoming champions. The difference lies in the “willingness” to go through immediate hardships in return for the promise of potential recognition in the future. Potential in the sense that inspite of all of these immediate sacrifices, there is no guarantee that it would be enough to win a medal.

Investing for your retirement has the same parallel in terms of preparations, most of us will spend years to build up a nest egg that would be enough for us to maintain our lifestyle long after we stop earning an “active” income, but the similarity ends there, because the reward of these immediate sacrifices will not culminate in an event that lasts for a few seconds, but in a continuous reaping of benefits for the rest of our life after retirement.

Personal Finance Lesson from the Opening Ceremony of the Beijing Olympics

WHY DO YOU WANT TO SAVE FOR THE FUTURE? What are some of the future events that you are looking forward to? Why would you prefer to defer the consumption of current resources to an uncertain future date? While all of us assumed that it is a good idea to save money; to set aside resources for planned and unplanned (unexpected) future events, do we really know why we should or want to do so?

I was watching the opening ceremony of the Beijing Olympics the other night, and I was amazed at the pageantry and minute detailed execution of a program that took seven years of preparations culminating in just over an hour of awe-inspiring, spectacular showcase of the coming of age of a dragon state. I would not speculate on the actual reasons why the leadership of the People’s Republic decided to pour enormous resources into the event but there is one thing I am sure of: THAT THIS IS AN IMPORTANT EVENT FOR THEM.

The lessons we can draw from this in preparing for the important events in our life (our goals) are:

1. THE CEREMONY IS TIME-BOUND: AUGUST 8, 2008 – Setting a target date for a personal financial goal will give us an idea on exactly how much time we have to prepare. Let’s take a retirement goal for example, for myself, I have set a goal to retire at age 60 and that would be on November 25, 2023, this gives me around 15 more years to prepare.
2. THE ORGANIZER HAS ENVISIONED ALL THE ELEMENTS OF THE CEREMONY: from the little girl opening the program with a song to a man running in mid-air to light the main OLYMPIC torch – How would my retirement look like? For me, I want to live out my retirement in a country house in Tagaytay overlooking the Taal Volcano,; I want to wake up to the smell of the brewing Columbian coffee; with a steaming mug in hand go online to check on developments, update my blogs, then walk over barefooted to a nearby room where my favourite grand kids are staying... You get the picture. Envisioning our goals would make it more compelling.
3. THE ORGANIZER KNOWS HOW MUCH RESOURCES IT REQUIRES TO MAKE IT HAPPEN: How much money will I need to make my retirement as I want it? The house; Php 15M, Size of investment portfolio to sustain the lifestyle I desired; Php 10M. And to borrow from a credit card commercial-peering at my still sleeping grand kids in a nearby room – PRICELESS! 

Once we have the (1) “target date”, (2) our vision of the goal, (3) the approximate amount of funds that we need, we can now work on a plan that will tell us how much money we need to set aside now-based on the time we still have to prepare (15 years), the time horizon also would be the basis of our choice of where to invest the money (obviously not in 30-days time deposits), with regular performance review and re-balancing, I can already “taste” the freshly brewed Columbian coffee in an open terrace overlooking the Taal Volcano.

Your definition of a “safe investment” may have an impact on your wealth

In my “Evolution Lectures”, I normally ask participants to describe what a “safe” investment is, and the typical if not the most popular description is: “yung di mababawasan yung capital ko”. Sounds familiar?

Having the same mindset will ensure two and only two investment outcome; first, the absolute amount of your investment will probably remain the same or a little higher after the investment period. And second, the actual value or purchasing power of your investment would have declined over time.

One way to look at investment is to look at investment as an action to “store” your wealth for future consumption. For example you have Php 1,000 now and this amount of money will enable you to enjoy your favourite fresh seafood meal (one large crab for Php 500, half a kilo of shrimps for Php 300 and a medium size Lapu-lapu for Php 200). But instead of enjoying it now, you decided to defer this enjoyment to next year. 

You now have several options to ensure that you enjoy your favourite fresh seafood meal next year

• convert your cash now to crabs, shrimps and Lapu-lapu and store it for next year
• “store” your cash in your savings account for one year
• “store” your cash in a one-year bond

I am sure you would not choose option 1 because it would be quite challenging on how you can keep the crabs, shrimps and fish fresh for a year. If you have described a safe investment as “di mababawasan ang capital ko” then you most probably would choose option 2 (the PDIC guarantees that my Php 1,000 today in a savings account will be Php 1,000 next year). Very few would have chosen option 3 for reasons of non-familiarity with the instrument (bonds? Duh...)

Whichever option you choose will not negate the possibility that the price of your favourite seafood meal would have gone up after one year due to inflation. The only question now is whether your choice of a temporary “store” of your wealth (your cash) can outpace inflation.

How much of my income should i save?

I have encountered a lot of people who does not have an active savings plan for the reason of not having surplus income, some even has the notion that saving Php 100 or Php 200 a month might just be a futile exercise and may not really matter.

A better approach in deciding how much of your income to save is to look at it in terms of percentages, let us say you've decided to save 10% of your income, if you are making minimum wage then you should have at least Php 800/month, don't let the absolute figure of eight hundred pesos discourage you because in ten months time, you would have save one month worth of income. In practical terms it means that you now have the option of the luxury of "not working" for a month because of this.

Remember that : A journey of a thousand miles begins with your first step, and planning for your future is a journey.

Will your children take care of you when you get old?

During a lull in a product orientation seminar of a life insurance company, the trainer noticed a participant who stood out as he was obviously the “oldest” among this batch of new recruits. Curious, he wandered towards the end of the room where the man was visibly struggling to come up with the solution to a computation problem he asks the class to solve.

“May I help you sir?”

“Yes please, this problem is sure difficult to solve without a calculator...”

“How old are you sir, if I may ask?”

“I’m 68...”

“The job of a life insurance agent is very strenuous as you may have to go all around to see a lot of people every day doing the computation for each of them, are you sure you are up to this? Should you not just stay home, relax; enjoy the company of your grandchildren...?”

In was then that he opened up..., He related that because of a recent incident in his daughter’s house where he is currently staying, he has to go back to work to try to make a living, as he is beyond the mandatory retirement age of 65, it seems that his only option of earning an income is to become an agent.

The old man with tears starting to form in his tired eyes disclosed that the other day, he overheard his daughter on the phone talking to her older brother, “Kuya!, ano ba yan! Diyan naman sa inyo si tatay! Two weeks na siya dito at sinumpong na naman ng sakit nya last week at kami ang nag-pagamot, nagagalit na ang mister ko!, Yung pinadala niyang pera na dapat pambili ni junior ng cell phone, di ko na naibili dahil naipambayad ko sa ospital, diyan naman sa inyo si tatay!”

IF YOU ARE THE OLD MAN, HOW WOULD YOU FEEL? 

Let us just imagine that we can turn back time and re-write the course of the old man’s life, let us imagine...What if the old man was able to save and invests during his productive time, this same conversation could have turned out like this.

“Kuya!, ano ba yan!, Two weeks na dyan si tatay, dito naman sa amin!, mabuti nga yung mga anak mo naibili na ng cell phone, tong si junior ko e wala pa!”

Why Having A Financial Planner Is Better Than Just Relying On Financial Planning Websites?

The explosion of information available online has enable information to be distributed freely and extensively, with just a click on a link anybody can have access to 8 different dissertation of the Modern Portfolio Theory by Harry Markowitz (this idea started the portfolio approach to investing) or maybe even a detailed roadmap and accompanying travelogue to the Lama Island in Hong Kong.

In our practice of financial planning advisory or any information advisory profession in general, the constant challenge is to be able to demonstrate continuously and consistently the value of our services, why would anyone pay for the services of a financial planner when the same information provided can be had for free in the internet?

The value addition of a financial planner is to take on available information, crystallize this information and relate it to a client’s specific circumstances, suggests changes (re-balancing of portfolio) If these new developments has any present or future effect on a client’s portfolio, monitor it until the next market moving development.

Of course anybody can also do this on their own, but there is a marked difference between information (available freely) and knowledge (how to react).

The weather report says it may rain today (information), i would bring an umbrella to work (knowledge).

The US FED cut rates by 0.75% (information), how would it affect your time deposit in a local bank (knowledge).

I rest my case..

If I could just earn Php 10K a month..

On the news one evening this week is a report on the rising poverty level in the country, which is contrary to official pronouncements of its alleviation. On the ground reports shows that maintaining a decent lifestyle for ordinary Filipinos is becoming more difficult in this time of high oil and rice prices.

A lady was being interviewed and she says that if she could only earn Php 10K/month, she would be able to provide her family with the basic 3 meals per day and then some.. the impression that developed in my mind is that for the lady and her family, earning this amount would be their "threshold" for their current financial security.

Investing is just one area of financial planning.

But a lot of the people i talk to seems to expect an "investment recommendation" after every personal consultation, i may have to work on my communication skills but i am always very conscious and consistent in emphasizing that the first important first step in financial planning is the setting of goals. We have to determined "first" what is our own "threshold" of financial security.

It is only after goal setting that an appropriate financial plan can be develop and the basic components are as follows: an asset/liability worksheet, income/expense worksheet, a budget worksheet, a goal setting worksheet and finally, the investment plan.

without going through this process, a person seeking financial security can be likened to a blind man walking in the middle of EDSA.