Don’t go after best-performing investment
Question: Can you tell me where best to put my hard-earned money? Some say I should put it in mutual funds. Others say unit investment trust funds, or UITFs, are better. And how about investing in real estate? People say that land is a solid investment.—An individual in the medical profession
Answer: Recently, the world witnessed a ring of fire solar eclipse, wherein the moon passed in between the sun and the Earth, blocking around 94 percent of our view of the sun and leaving only a golden ring around the moon’s edge. While there could be two to five solar eclipses in a year, no more than two can be total eclipses. Moreover, total solar eclipses are rare at any particular place on earth since total solar eclipses appear only along a narrow path on the earth’s surface that is traced by the moon’s shadow. The same goes for an investment being best-performing all of the time; this is rare.
In fact, I am often asked the question, “Where is the best place to put money now?” The question has reference to time because deep inside we know that investments can be like fashion that changes every season. So rather than tell you the best place to put your money in, I will just provide some pointers in choosing the best investment.
Do not chase after the best-performing investment. Regardless of investment, the performance that will be shown is history. Past performance for pooled funds, for example, is a great guide to see how well the investment manager did. The longer the period in which performance is measured the better. But reading past performance is like looking at the résumé of a job applicant. He may have been a genius in school or previous job. Nevertheless, that only gives the likelihood, and not the guarantee, that he will be one in the future.
And while we are at the topic of looking at past performance, please take into consideration two more things, the trend of the returns during the period in review as well as costs that might have been incurred in buying and maintaining such an investment.
Even if the return of an investment is “annualized” or computed on a compounded annual growth rate, this can mask the level of risk in the performance of that investment. If we were to compare two pooled funds, both with a price of P1 five years ago and a price of P5 each today, the effective return for each fund would be equal at an annualized 38 percent. However, we would still get the same 38-percent annualized return even if say fund A’s price moved up by P1 every year while fund B’s price stayed at P1 for the first four years and jumped to P5 only in the fifth year. The wild fluctuation in fund B makes it a riskier investment. And as I have written before, it would be best to go after an investment that gives you moderate and steady profits than another that gives one-time, big-time returns.
The other things to consider are transaction costs. While real estate prices appreciate, gains would only be gross if taxes, broker’s commissions, maintenance fees and the like were not netted out. While pooled fund returns are computed as often as daily and even published in the papers, the entry, administrative and exit fees are not always included in the computation. Your return is not what is reported for the general public. Your return would be the price now plus whatever intermediate income you received versus your actual cost of buying and maintaining the investment.
Instead of running after the best-performing investments, go after those investments that best suit your needs. I recently conducted a training program where I ran the “Pwede Na! Retirement, Mortgage and Estate Planning” calculator for the participants (the calculator comes with my book “Pwede Na! The Complete Pinoy Guide to Retirement and Estate Planning”). For this particular audience, the calculator produced a retirement computation where the participants needed to save only 12 percent of their periodic income until retirement age and that savings would need to be invested in instruments that could return 10 percent a year. So the task at hand is to find investments that have a good chance of producing an average return of 10 percent annually even if there are others out there that could produce much higher returns. Going after investments with potential returns close to your need will not only help you avoid being in a constant race for the best returns but will also take you far away from GREED.
To paraphrase the Good Book, investments were made for man and not man for investments. Just like a hammer, investments are mere tools. If you were building a house, you would be focused not on the type of hammer to use but on the home that you will be living in with your loved ones for the rest of your life.
If you want to know more about investing as well as effective personal cash, debt, risk and wealth management, attend the EnRich training scheduled on Aug. 14, 2012. There are limited seats being given away to HR practitioners. Visit www.personalfinance.ph, e-mail [email protected] or call 2161541/3593094 for more details.
Remember that investments are not ends in themselves. They only serve to help achieve the loftier goals in life.
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, investment adviser and best-selling author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to [email protected]. To learn more about the RFP program, visit www.rfp.ph or e-mail [email protected].)
