Published: January 4, 2019 | Updated: October 9, 2020 | Posted by: Moneymax | Personal Finance
Investing allows you to make money work for you rather than the other way around. But with so many investment companies in the Philippines to choose from, you’re left wondering, “Where should I invest in? What should my investment portfolio look like?”
“Invest with a purpose,” says Marvin Fausto, founding President of the Fund Managers Association of the Philippines (FMAP), in an interview with MoneyMax.
“There is no one size fits all when it comes to investments. The right investment for you depends on your goals,” he adds.
Whether you’re saving for retirement, your child’s education, an overseas vacation, or any financial goal, MoneyMax enumerates the best investments with great earning potential in 2020 and beyond:
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Short-term goals include saving for your upcoming wedding or a baby’s arrival. If you need the money in three years or less, it’s best to invest in safer and liquid investments.
Liquid assets are those that are easy to buy and sell, such as time deposits and money market funds that make your money grow through set interest rates and maturity dates.
On the contrary, a house is an illiquid investment because it can take months or even years to sell it. Don’t go into risky investments, such as the stock market, if you need your money in less than three years. This will not give you enough time to recuperate your losses if you enter the market at its peak and then it crashes. You may end up losing your hard-earned money.
Time deposits are among the best investments for beginners who are afraid of risks yet want to earn higher interest than a traditional savings account. Most savings accounts have interest rates of less than 1%, while time deposits earn up to more than 4%.
Let say you put PHP 100,000 in a time deposit account with an interest rate of 3.70% per annum. After a year, you’ll get PHP 103,700.
Money market funds are ideal for newbie and conservative investors who want to earn a little higher than time deposits. They’re the best investments for capital preservation in one year or less. The funds are invested in corporate bonds, government treasury bills, and other risk-free, short-term securities.
Are you planning to buy a car? Saving for your child’s education? Or saving up a down payment for a house? These fall under your medium-term goals.
Four to nine years is too long a period for time deposits with a typical interest rate lower than 2%. With a longer time horizon, you can go into riskier investments where you can earn more in your set amount of time.
For your medium-term goals, it’s best to put your money in a mix of risky and safe investments. Balanced funds and equity-based UITFs are the best investments to consider if you need the money in four to nine years.
However, despite the higher risk involved in these funds, the risk is lessened since they are handled by professional fund managers. It’s the fund manager’s job to pick the holdings of the balanced and equity funds, and they aim to maximize returns while minimizing risks.
Balanced funds are composed of both conservative (bonds) and high-risk (stocks) holdings. They’re the best investments for conservative and moderately aggressive investors who are willing to keep their money invested for three to five years.
Here are the top-performing balanced funds over a five-year period as of January 2019:
For the more aggressive medium-term investors, equity UITFs (unit investment trust funds) are the best investments to make. Equity-based funds are made up of 100% stocks, making them high-risk yet high-yield investments.
Investing in equity UITFs is different from investing directly in the stock market. When you invest in stocks, you buy stocks individually at the Philippine Stock Exchange and create your investment portfolio on your own. But when you invest in equity UITFs, fund managers are the ones who manage your pool of stocks.
The Pag-IBIG Modified Pag-IBIG II (MP2) is a voluntary government savings program that allows Pag-IBIG members to invest for as low as PHP 500 every month over a five-year period.
What makes the Pag-IBIG MP2 one of the best investments for medium-term financial goals is its dividend rate that has grown from 4.58% to 8.11% since its inception in 2010. Through the years, this fund growth has been on an upward trend.
Retirement and funding your child’s college tuition are some long-term goals to save up for. Even if these goals are still decades down the road, it’s best to start early. Time is your most valuable asset, and Marvin Fausto, along with his wife Rose, instills this in their three sons, who started saving and investing in grade school.
When you start investing, time actually matters more than how much you invest. Look at the table below and see how a 25-year-old’s investments outperform a 35-year-old’s even if the latter puts in more money.
As the table above shows, a 25-year old who saves PHP 60,000 a year until the age of 55 earns more come retirement age than a 35-year old who puts in PHP 120,000. This is the power of compound interest and the importance of starting early. Don’t wait until you have a larger paycheck or more disposable income before you start investing. Start as soon as you can to make your long-term goals a reality.
With more than 10 years to make your money work for you, you can take on riskier investments such as investing in the stock market and buying real estate for your long-term goals.
When you join the stock market in the Philippines, you buy stocks of a publicly listed corporation and become one of its part-owners or shareholders. You’ll need only at least PHP 5,000 to open a stock trading account.
Investing in stocks yields high earnings when you purchase stocks at a low market price and then sell them later at a higher price. The stock market allows you to reap a larger return on investment than short-term and medium-term instruments such as bonds and UITFs.
However, stock market prices tend to rise and fall rapidly. If the market price goes down, you’ll lose funds.
Investing in the stock market is ideal for your long-term goals because an investing horizon of more than 10 years greatly minimizes your risks from market crashes, which can take years to recover from.
On Oct 1, 2007, for instance, the benchmark of the Philippine Stock Exchange Index (PSEi) was 3,597.92. At the time of the 2008 stock market crash, the PSEi benchmark was valued at 2,612.89 (Oct 2, 2008), a loss of 27%. A long time horizon allows you more time to recover when similar events happen.
You can limit risk by putting your money in different stocks and allocating only a portion of your income to stock investing.
Real estate is also among the best investments for your long-term goals—but approach this with caution. Unless you are rolling in cash, you’ll end up taking out a housing loan which can last well above 10 years.
In addition, the real estate market follows an up-and-down cycle. The uptrend is when people are buying properties left and right, and a downtrend is when people sell, driving prices down. If you buy during the peak of an uptrend, and sell during a downtrend, you can either break even or lose money.
Just like investing in the stock market for the long-term, buy-and-hold property investing allows you to minimize your risks. Aside from a buy-and-hold strategy, you can put your investment to work by renting your property out on online marketplaces such as Airbnb.
“Your goals will help determine your investments,” says Marvin Fausto. Your portfolio can be a mix of time deposits, stocks, and real estate.
The key is to use (or not use) the money depending on your goals. For example, stocks are for your long-term financial goals. Don’t use your earnings from the stock market only after a year. Leave it for at least a decade and let it grow. At the same time, once the time deposit matures after a year, you can take it out and use it to fund your short-term goals or put it in other investment vehicles.
Minimize your risk by diversifying your investments. But at the same time, make sure that your finances are in order.
Even if one of your goals is to own a home, but you’re only starting your first job right out of college, it’s best to hold off on buying property. You won’t be able to afford the monthly amortization. Instead, invest in other instruments with a low starting capital, and put your earnings from those into your future down payment for a home.
“There is no ‘one size fits all’ when it comes to your asset allocation. What’s important is that you invest with a purpose,” as Marvin Fausto reiterates. “Set your goals. Align your investments and strategy to your goals, and stick to your strategy.”
In short, keep your goals in mind when you invest. And what better time to start than now?
With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.