Published: July 23, 2015 | Updated: May 15, 2020 | Posted by: Bea Bongat | Personal Finance
Last week, Moneymax.ph talked about investment vehicles perfect for beginners. This week, we’ll focus on determining the best investment according to risk tolerance. Your “risk tolerance” is your emotional preparedness when it comes to the highs and lows of investing. You should know by now that investments are not guaranteed.
If your risk tolerance is low, you’ll take the chance of gaining 10% along with the chance of losing 5% of your investment. If you’re a high-risk investor, you’ll prefer the chance of gaining 40% even if it comes with the risk of losing 30% of your portfolio. To know your risk tolerance, you can go to your local bank or investment broker, and they can provide you with an Investor Profile Questionnaire.
Here are various investments sorted according to risk tolerance:
Table of Contents
You’re conservative when you’re averse to the idea of losing your hard-earned money even if it means lower gains. If you can imagine yourself withdrawing your investment over losing a few thousand pesos, then your ideal investments would be money market funds and bond funds. Money market funds include bank deposit accounts, time deposits, certificates of deposits (CDs), and fixed-income government and corporate instruments while bond funds include corporate or government bonds.
Why are they low-risk?
These funds are low risk because investors are promised returns through the form of interest rates. Bond funds are debt instruments where money is lent to corporate and government institutions. These bonds have a fixed maturity date and fixed interest rates. As with bank deposit accounts, time deposits, and CDs where you earn money through interest rates, bond funds function in the same way. Below is a table listing the top five money market funds and bond funds (moderately conservative) over a five-year period (July 1, 2010-July 1, 2015):
Note: All data for UITF returns are from here.
Money Market Funds (ROI-Fund):
– 43.97% – BPI Money Market Fund
– 12.91% – PNB Global Filipino Peso Money Market Fund
– 12.42% – BDO Peso Money Market Fund
– 12.19% – Metro Money Market Fund
– 11.52% – PNB Dream Builder Money Market Fund
Intermediate-Term Bond Funds (ROI-Fund):
– 33.04% – East West Infinity Peso Intermediate Term Bond Fund
– 25.31% – BDO Merit Fund Short Term Portfolio
– 22.80% – BPI Premium Bond Fund
– 22.69% – Metro Max-3 Bond Fund
– 19.16% – PNB Plus Intermediate Term Bond Fund
If you’re a moderately aggressive investor, you want to have a higher return on investment (ROI) and are willing to expose yourself to ample risk. Moderately aggressive investments include balanced funds which is made up of both conservative and high-risk investments – a mix of bonds and stocks.
Why are they medium-risk?
Balanced funds are medium-risk investments because the presence of conservative funds lessens risk exposure from stocks or equities. See below for the top ten holdings of BDO’s Peso Balanced Fund (as of May 29, 2015). You’ll see that the portfolio is a combination of low and high-risk investments.
– Lopez Holdings (high-risk)
– Max’s Group (high-risk)
– Ayala Group (high-risk)
– SSI Group (high-risk)
– SDA (low-risk)
– SDA (low-risk)
– FXTN 11/22/2019 3.875% (low-risk)
– SDA (low-risk)
– SDA (low-risk)
– FXTN 07/19/2031 8.0% (low-risk)
The BDO Peso Balanced Fund had an ROI of 76% over a five-year period (July 1 2010-July 1, 2015) – much higher than the top-performing money market funds and bond funds. If you’re a moderate-risk investor, you will experience higher returns but are exposed to more risks as well. See below for the top five balanced funds in the country (July 1, 2010-July 1, 2015):
– 95.65% – SB Peso Asset Variety Fund
– 91.80% – UCPB Balanced Fund (formerly United Balanced Fund)
– 76.03% – BDO Peso Balanced Fund
– 74.06% – Metro Balanced Fund
– 72.34% – BPI Balanced Fund
Equity funds are not for the faint of heart since these are considered high-risk investments. If you invest in equity funds, your holdings include 100% stocks, also called equity securities. See below for the top ten holdings of the BPI Philippine Equity Index Fund (as of June 30, 2015).
– SM Investments Corporation
– Ayala Land, Inc.
– Ayala Corporation
– Universal Robina Corp.
– JG Summit Holdings, Inc.
– Banco de Oro Unibank, Inc.
– Bank of the Philippine Islands
– SM Prime Holdings,Inc.
– Metropolitan Bank & Trust Co.
Why are they high-risk?
Unlike conservative investments where the investor is promised a return through interest rates, equity funds do not offer the same promise.
If you bought one unit of the BPI Philippine Equity Index Fund last April 30, 2015 at Php 103.64, and sold it on June 30, 2015 at Php 101.66, you would have experienced a loss of -1.91%. However, equity funds give high returns as well. If you bought a unit of the same fund on Dec 1, 2014 at Php 98.63 and sold it on Apr 1, 2015 at Php 107.49, then you would have experienced a return of 9% in just four months. Over a five-year period (July 1, 2010-July 1, 2015), see the table below portraying how equity funds outperform less risky investments:
– 147.57% – UCPB Equity Fund (formerly United Equity Fund)
– 135.32% – BDO Institutional Equity Fund
– 133.98% – SB Peso Equity Fund
– 132.18% – BDO Equity Fund
– 130.25% – AB Capital Equity Fund
The price of equity funds is affected by the performance of the fund’s individual holdings, making them risky. Factors such as company earnings, management, future product prospects, and related news affect the value of the company’s stock, be it positively or negatively. The fluctuation in price of a stock, or volatility, makes equity funds high-risk investments. A word of caution: with the high returns of equity funds, you’re exposed to more risks.
Your age factors into your risk tolerance. If you are 25 years old, you have around 40 years until retirement. Because of the long time horizon, you can invest in riskier vehicles because you have a longer time to wait out bear markets. (A bear market is when prices fall, such as what happened with the 2008 US stock market crash). Bear markets usually last an average of 18 months. Having a longer investing horizon gives you more than enough time to ride out bear markets. If you’re 55 years old with only a decade until retirement, it’s best to invest in more conservative or moderate risk vehicles such as money market and bond funds.
Now that you know the factors affecting risk in a particular investment, you’re more confident when investing. With the help of an Investor Profile Questionnaire and this article, you’ll feel more secure and confident in the investment vehicle you pick.