OPTION 1: Invest in the US, accumulate all the proceeds in dollars and convert these into pesos upon retirement. This keeps your options open until you stop working in the US. When the time comes to make the move and you choose to stay and retire there, then your savings need not be converted into pesos.If you choose to retire in the Philippines, you merely need to convert your retirement fund into pesos at your convenience. Illustration by Johnny Noe Ravalo.
OPTION 2: Periodically convert dollar proceeds into pesos and invest directly in the Philippines. You would need to get a broker to create an account for you and manage your cash and securities transfers. Most local investors find this to be a challenge and I suspect more so for those who are not physically in the Philippines. Illustration by Johnny Noe Ravalo.
ASK Dr. NOET Preparing for retirement in the Philippines By Dr. Johnny Noet Ravalo INQUIRER.net First Posted 08:37:00 04/02/2008
(Part five of a series)
Hi my name is Ann and I work here in the US. I am now a US citizen and I would like to know if I could invest in mutual funds in the Philippines since I am looking forward to retiring there in the future. I am only 29 years old but I have saved enough to start a small investment. I would appreciate your help. --- Ann
Dear Ann,
Your decision to retire in the Philippines will force you to face the challenge of being a cross-border cross-currency investor.
The Investment Company Association of the Philippines (ICAP) website would be a good place to start. The links to the websites of its members are very useful and information about the net asset values of the different funds come handy in making comparisons. Also, there are no restrictions on citizenship when buying into mutual funds.
Ann, regardless of whether you have decided to restrict your investments only to mutual funds, there is still the issue of converting your US dollars into investable pesos. For the reasons I mentioned in the last piece , the choice of currency is critical for someone in your position, particularly over the long haul.
The problem of monitoring and conversion
The complications do not end with the choice of currency. Despite its current weakness, the US dollar is a price-setter in the world market. The value of the peso, on the other hand, depends on the health of international currencies.
The investment challenge is also not so much choosing instruments as execution. For example, mutual funds, UITFs, other collective investment schemes, fixed income instruments and highly rated stocks are available in both the Philippines and the US, but I expect that peso-instruments would carry a premium over comparable US instruments.
But the real impact is the difficulty in investing in peso-denominated instruments directly within the US market. Acquiring peso instruments would have to be done in the Philippines itself and monitoring investments will be tough from the US even from a buy-and-hold investment strategy.
I assume that you -- and all OFWs planning to retire in the Philippines -- would choose instruments primarily to accumulate wealth in the long-term rather than profit from short-term trading. While it is true that day-to-day price changes would not be as critical, a long-term investment is not tantamount to a buy-and-forget strategy.
At the extreme, two options are available to you.
The first is to invest in the US, accumulate all the proceeds in dollars and convert these into pesos upon retirement. This keeps your options open until you stop working in the US. If you choose to stay and retire there, then your savings need not be converted into pesos.
If you choose to retire in the Philippines, you merely need to convert your retirement fund into pesos at your convenience.
We do not know what that future exchange rate will be so there is some amount of an opportunity risk here.
(See Figure 1 in the photo gallery).
The other option is to periodically convert dollar proceeds into pesos and invest directly in the Philippines.
(See Figure 2 in the photo gallery).
If you put these two options side by side, the critical difference is your capacity to monitor your investments. It may be easier to monitor investments in the US, but this convenience comes at a price. Nominal returns of US instruments are lower than those in the Philippines.
Any difference in expected return will compound over time with every investment and reinvestment. If you were to start today and invest $2,500 or P100,000 yearly, the difference between a four percent and a five and a half percent annual return will be P1 million for your retirement kitty.
As the spread widens, the potential extra in retirement funds also increases. The extra amount will also increase as the interest rate levels increase, even if the spread remains the same.
If you decide to invest here, then the requirements of law kick in. You would need to get a broker to create an account for you and manage your cash and securities transfers. Most local investors find this to be a challenge and I suspect more so for those who are not physically in the Philippines.
You can opt for US investments but forego the opportunity to take advantage of a premium that the international market exacts on countries like the Philippines. On the other hand, taking advantage of the interest differential will mean monitoring the investment remotely, either engaging the services of a registered broker or going through a collective investment scheme.
Whichever option you choose, the burden of monitoring still rests on you. Brokers can help but every investor has the final responsibility of keeping tabs on their accounts -- a special concern for OFWs who intend to invest here while domiciled abroad. In the end, there simply are some surprises you would rather not have.
(Have a question for Dr. Noet? Email personal_finance@inquirer.net.
(Noet Ravalo is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work. Since 1994, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos' personal finances.)
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