Question: I’ve been reading your articles and blogs for sometime now, which have been of great help to me. I think I am ready to make some investments now and I would like to know what investment would be best for me.
Answer: Thanks for reading my work, I am honored that what I write helps you. Your question is one that has been asked of me over and over again. If I had a hundred pesos every time I am asked that question, I would probably have enough to retire today.
The answer to this question depends on the person being asked. If you ask a real estate agent, he will say real estate; a stock broker will say blue-chip stocks; a banker will offer the latest bank products like time deposit or special savings accounts; a mutual fund representative will say mutual funds; an insurance agent will probably recommend a variable life insurance. The best investment for me? Well, I can’t really give an answer.
I must admit that many people give me a dumb-founded look whenever I answer them, “I don’t know, it depends.” For someone who claims to be a personal finance guy who has been in the financial services industry for more than two decades and a trainer in financial planning, I am pretty clueless ain’t I? I simply can’t tell anyone what the best investment is because there’s no such thing. My answer will always be “it depends.”
I have a simple four-rule guide that I recommend to people whenever they are perplexed as to where they want to place their hard-earned money.
Investment objective—What is the investment for in the first place? Where do you plan to use it? Is it for retirement, education, purchase of a house? Or is it just to park your money while you are scouting for other investments?
Time frame—When do you intend to use the money you are investing? Is it short (less than a year), medium (up to 7 years) or long term (more than 7 years)? It is unwise to put money in long-term investments when you will need it in the short term—you might end up realizing capital reduction or you may be levied with steep penalties should you liquidate your investment. It is also unwise to invest in short-term instruments when the purpose of investment is for the long term like education or retirement—you will not realize a good appreciation of your investments as short-term instruments give lower yields. In other words, your investment would be drastically reduced by inflation and you’ll find yourself with not much funds when you need it the most.
Risk tolerance—Investors can be conservative, moderate or aggressive. Determine your risk tolerance. Is liquidity and capital preservation an absolute must for you? Or are you willing to risk some potential capital loss in favor of potential capital hike? Remember the golden rule in investing—the higher the yield, the higher the risks and vice-versa.
Acumen—There are simple products and there are complicated products. If you are investing in the stock market and you are not familiar with some form of fundamentals, you might regret ever putting money there. If you can’t distinguish a structured note from a time deposit, you might want to reconsider your decision. I have a simple advice with regard to this—never ever invest in something you don’t understand.
Before parting with your money, you should go through the four-step rule first. Matching the right instruments with your needs will be the best investment for you.
Randell Tiongson, RFP is an advocate of life and personal finance. He is a director of the Registered Financial Planner Institute (Phils.). Attend our free personal finance talk and learn how to become RFP on October 10, 7 p.m. at PSE Center Ortigas. E-mail to reserve at [email protected] or visit www.rfp.ph.