Which is more fun: investing or spending?
Judging from the way people use their money, I can tell that the answer is already very obvious –spending wins the game almost always every time. Spending money relieves stress (temporarily). It provides instant gratification. It shows the other guy that you can afford. In short, spending is fun.
Investing, on the other hand, is a form of torture. Or so it seems.
I’m writing this article to show you otherwise – that investing can be fun and profitable, too. After all, investing is just the same as diverting your money for other uses instead of buying the usual stuff that gives you temporary happiness.
The following tips help you to lay the ground work in developing your own personal Investment Plan without the assistance of an expensive Financial Planner.
It’s really very simple and fun, too.
1. Pay yourself first
“A simple fact that is hard to learn is that the time to save money is when you have some.” –Joe Moore
It’s not the first time that you hear it. But up to now, it’s still a struggle for most people. Here are three easy ways of doing it:
- Setup an automatic deduction from your payroll account to your other bank account.
- When paying your monthly bills, go to your Mutual Fund company and invest some money in there too. Some Mutual Funds allow for as little as P 1,000 additional investment.
- Contribute to your SSS and Pag-IBIG Fund. It’s mandatory for all employees in the Philippines and employers are also required to contribute to your fund. Your employer’s contribution is actually free money for you.
The thing is, you make it a point that you allocate something for your investment just like you would when you spend your money.
An Important Tip: Don’t touch your savings. More than will power, this requires financial discipline on your part. It is very tempting to withdraw your investment money for such toys as a new car, new TV set, a vacation in Paris… but hey, don’t.
2. Start Early
“The rich invest in time, the poor invest in money.” –Warren Buffett
According to some rumors, Warren Buffett has one great regret in life… and that is, he started investing late. After all, he made his first investment at an old age of 11 years. As of March 2013, Forbes Magazine estimates his net worth to be roughly 53 Billion USD. Imagine if he just started investing five years earlier, at age six! 🙂
Starting early in the game of investment brings a lot of advantages.
- Time is on your side.
- You can afford to risk more and therefore reap the greater potential rewards associated with that risk.
- You can start small and allow compound interest to work on your favor.
Many of us never know these things when we were kids. Our parents don’t know, either. Actually, this type of information was not available to them back then.
Of course, we can’t all be investing while wearing our diapers. But it’s not yet too late for us. If this is your first time to work, you can start investing now. The FAMI Save and Learn family of Mutual Funds can be started with little as P 5,000 as initial investment.
See? You don’t have to start with large amount of investment money! The most difficult part is really to start.
3. Inflation Is A Financial Enemy. You have to defeat it.
“Inflation is the crabgrass in your savings.” –Robert Orben
Inflation is the first enemy of money. It is the gradual loss of your money’s purchasing power. In layman’s term, it means prices are going higher and that you are paying more money for the same stuff.
The key to investing is to beat or outpace the rate of inflation.
Time Deposits, Regular Savings Deposits, Money Market Accounts and other “safe” deposit accounts in the banks are a lousy way of doing it. They simply can’t beat inflation. They are designed to be used for short-term cash flow requirement, not for long term investments. It’s no good to put your money there if that money is intended to be used for your retirement.
Instead, try to put your money in growth-oriented investment vehicles such as stocks and real estate. They are best known as hedge against inflation. As an alternative — the best one, I think — you may invest your money in a Growth Mutual Fund whose investment portfolio consists of equities in larger proportion.
4. Diversify Or Die
“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.” –Scott Cook
I have a friend who placed P 5 million Time Deposit in a rural bank. It was actually the money of their family-run business. Unfortunately, the bank folded taking all the depositors money. He was crying of course. If you know how hard it is to earn or save P 50,000, how much more P 5 million. Luckily, the PDIC at the time guarantees a maximum of P 250,000 for all the bank’s clients. It’s very small compared to the lost money, but that’s better than nothing.
There are two moral lessons here:
- Don’t think that your money in the bank is safe. If it is really safe, the Deposit Insurance will not be there anymore, right?
- Diversify your money across different types of investments.
To diversify simply means to spread your money around different investment vehicles. As they say, don’t put all your eggs in one basket.
A foolish way of diversifying is to deposit your money in several different banks. Or, worst in different branches of the same bank!
Smart Tip: Right now, the Philippine Deposit Insurance Corporation guarantees only up to a maximum of P 500,000.00 insurance for each bank depositor.
Good to know: One of the advantages of investing in a Mutual Fund is that it provides instant diversification of investment. An Equity Fund, for instance, would try to spread their investment portfolio into shares of stock from 30 or more different companies listed in the Philippine Stock Exchange (PSE). That kind of diversification is beyond the reach of ordinary individual investors in this country with only a small capital to start with.
5. Invest regularly
“Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” –Bernard Baruch
People who are new to investing in stocks or in a mutual fund would try to monitor the value of their investments on a daily basis hoping to get into the game when the price is low and get out when the price is high. That technique is called Market Timing.
Unfortunately, market timers are not always successful in catching the right time. The reality is, no one can time the market. It’s really foolish and a total waste of time. It’s a surefire way of worrying about your investment.
Don’t time the market. Instead, be in the market.
Invest regularly, say monthly as in a payroll deduction. Or, if you are an OFW who comes home to the Philippines regularly, do it every time you are here. That’s better than spending it all on your barkadas.
Before you know it, your investment portfolio has already grown. It’s no magic. That’s just the way it really works.
6. Get Rid of that Get-Rich-Quick Attitude
“In stocks as in romance, ease of divorce is not a sound basis for commitment.” Peter Lynch
Don’t be a short-term gambler. Gamblers are motivated by the desire for quick profit. Ironically, they are also afraid of the unknown.
If there is one thing that is really sure about investing it’s that markets will always go up and down.
Think long term and don’t be frightened by the short-term fluctuations of the market. The Risk-Reward Trade Off will tell you that the volatility of the Stock Market, for example, is also associated with its growth potential.
7. Know Your Risk Appetite and Your Time Horizon
“I’m a risk taker and I’ve always been like that, especially when it comes to fashion.” –Christina Aguilera
Do you consider yourself a conservative or aggressive investor? Are you somewhere in between?
To answer that question is to identify your Risk Profile, sometimes also called your Risk Appetite. You have to know yourself and pick an investment instrument that is compatible with your risk profile.
When you invest in a Mutual Fund, your Investment Solicitor can hand you a set of questionnaire to help you identify your risk profile and then suggest a mutual fund that matches your risk profile.
Another thing to consider is your investment time horizon. It answer such questions as:
- How long do you plan to stay invested?
- When will you be needing the money?
- What is your investment goal? Are you investing for retirement, to save for your next car’s down payment, or to set up college fund for your kids?
If your time horizon is short, you have to put your money in a more conservative investment such as Money Market Fund, Bond Fund, or the good old Time Deposit.
Contrary to Bo Sanchez’s view, I don’t think investing in the Stock Market is for everyone. If you will be needing your money next year, it would be a mistake to play the stock market. Unless you are really a gambler, in which case playing Lotto would be your best option.
However, if your time horizon is longer and you are still young, a greater portion of your investment portfolio should be allocated in growth-oriented assets such as stocks and real estate. These two asset classes offer the highest potential for growth over the long term. But then again, you have to bear in mind that equities investments tend to be more volatile over short periods and real estate is not a liquid asset.
“A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life” –Suze Orman
If there is one person in the world whom you can really count on to help you develop an investment plan, it’s you. You are your own the best financial and investment advisor.
Only you can tell how much money you can comfortably set aside for investment. And only you can tell what your priorities are.
Keep these things in mind as you start to develop your own investment plan.
However, your plan should not be etched in stone. You should review it periodically, say annually or every two years, and try to modify the plan to suit your over all financial goals. Here is one area where an honest and competent financial advisor could really help.