Question: Given the wild fluctuation in investment values, is there a recommended currency denomination of investment that could best minimize risk?—Sent via “ask a friend, ask Efren” service on www.personalfinance.ph
Answer: When I was a teenager, I developed a liking for playing the guitar. When I began to work, I put that aside for a while. But when I reached mid-life, I revived my guitar playing and even enrolled in guitar classes.
I came across this brilliant guitar teacher who agreed not to compel me to read musical notes and, instead go straight to playing solo guitar pieces. But there was something unusual with this guitar teacher. He owned over forty guitars, all of them expensive vintage issues. He is so passionate about guitars and teaching people how to play them that he would go to his daytime hobby of teaching guitar playing straight from his night job at a call center.
Some even think my guitar teacher is too passionate, as he was more than willing, at one time, to exchange his car for a vintage guitar. But that’s how he is. His currency is denominated in guitars. Once, he even paid for his medical checkup with a guitar.
My guitar teacher effectively transported himself back to the time of bartering. People didn’t always trade in notes and coins like we do today. In olden days, people physically exchanged goods and services. But because a person didn’t always have what another wanted—i.e., not too many doctors will accept guitars as payment—an intermediate object of value was needed. At one point in history, salt was that intermediate object of value since salt was in great demand as preserver of fresh food, much like what a refrigerator does today. In fact, one theory states that the word salary originated from the word salt as soldiers in ancient times were paid in bags of salt, which the soldiers used to trade for other commodities.
But salt does not last forever. And since people in olden days were increasingly trading over greater distances, they needed an intermediate object of value that would last longer. This need led to the use of coins made from precious metals. Eventually, the use of precious coins gave way to fiat money.
Fiat money is currency that is declared by a government to be legal tender even if the physical currency itself does not have much intrinsic value. Take the case of the one thousand peso bill. While the bill can buy goods and services worth one thousand pesos, the actual paper used for the currency is probably not worth as much.
Legal tender, on the other hand, is something that when offered for payment extinguishes debt or financial obligation. The New Central Bank Act provides that: “All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private…”
Please note that checks, debit cards and credit cards are not legal tender as they do not immediately extinguish a financial obligation, i.e., the seller of goods or service still needs to receive or be credited the physical cash for the financial obligation to be settled.
The thing with currencies is that they often fluctuate in value. More than that, the value of a currency is steadily eroded over time by that financial moth we call inflation. So the trick is to be able to put currency in an outlet that allows it to increase in value not only to beat inflation but also overwhelm the forces of supply and demand that cause volatility to a currency’s value.
From the years 1945 to 2004, the value of the Philippine peso vis-à-vis the US dollar had been on a downward trajectory. This is why, for the longest time, Filipinos hoarded US dollars as a currency that was more valuable than gold. But the Philippine peso has been known to also appreciate versus the US dollar, making US dollar hoarding not as risk free as some people would like to think. As Robert Frost once wrote, “nothing gold can stay.”
Going back to your question as to what denomination of investment you should hold to protect the value of your investment, you should first articulate your goals because these would dictate what kind of returns you need to earn from your investments to meet your goals. Without goals, investing will just foster greed.
If what you need to earn is high, you may engage in cross-currency investing to augment your investment income. What that currency is will have to be the subject of careful study based on prevailing market conditions. Just know that cross-currency investing also requires a higher risk appetite.
Now if you don’t want to take on the additional risk from cross-currency investing, invest more money in outlets that are denominated in the same currency as your goals. Simply put, if you will spend in pesos in the future, then invest in pesos.
If you want to learn more about investing, please visit www.personalfinance.ph. There are more free resources there for you to benefit from. You may also attend EnRich™ personal finance training on Sept. 28 in Baguio City, and Oct. 26 in Pasig City. Details for EnRich™ may be found on the website.
Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to email@example.com. To learn more about RFP, attend a FREE personal finance talk on Sept. 12, 7 p.m. at the PSE Center. E-mail at firstname.lastname@example.org to register or text <name><email> <RFPinfo> to 0917-3464126.)