Should I just keep cash under my pillow?
By Ma. Salve Duplito
INQUIRER.net
First Posted 20:26:00 10/05/2008
Filed Under: Economy, Business & Finance
AS SMALL BUSINESS OWNERS, MARVIN and Melani Natores have a bright future ahead of them. This early, their company called Konsepto is already booked for the entire Christmas season and more requests for their fun photo booth service and souvenirs for weddings and events are still rolling in.
With global financial markets tumbling and the mother of all-Wall Street-still teetering, Marvin and Melani say they have become more cautious. "We want to be ready for any effect the crisis may have on our business. Like others we are closely monitoring the situation and are hoping for the best," says Melani.
The husband and wife team have made a conscious decision to stay liquid-meaning to have more savings in cash-and focus on essentials until markets have stabilized.
If you have a savings account, a time deposit, an insurance policy or a pension plan, what is happening in the world's premier financial markets is most likely causing you to question the stability of every financial structure you used to believe in like banks, insurance companies, pre-need firms, mutual funds, stock markets.
You might even ignore efforts from regulators like the Bangko Sentral ng Pilipinas, the Philippine Stock Exchange, the Securities or Exchange Commission or the Insurance Commission to calm the market, prevent panic and say they are just protecting their jobs as regulators.
Protecting money
Whenever trust in financial markets is eroded, the paramount concern becomes: Is my money safe? You may feel like the safest place to put your money is under the mattress, where you can take a peek at it from time to time.
It doesn't help that nobody seems to tell a compelling story why people shouldn't be afraid. Talks of another Great Depression turning the US economy into mulch, and a credit crisis in the US banking sector affecting many remittance-sending Filipinos from that part of the world don't really make things easier to bear.
When the central bank says the banking sector doesn't need a bailout and their reserves are big enough to spare them from the global crisis, depositors don't really stop worrying. Some have already given in to the fears and withdrawn their money, or set up different accounts in different banks just to make sure despite public reassurances from the government.
"The man on the street, and even the man in the office, all they read are the headlines," says Michael G. Manuel, chief investment officer at Sun Life Financial.
J. Edmond Garcia, director for investments in the same company explains that it's not a zero or one decision. "Some of your money might really belong under the mattress. But it doesn't make sense to put all of it there. I'll be fearful of a fire," says Garcia.
Hundreds of professionals working in mutual funds, insurance companies, investment houses, brokerages have been on edge in the last few weeks trying to manage their clients' fears. Even the biggest money managers had to liquidate millions even at a loss because of that fear.
"Your job is not really to manage the fear. The fear is real. What you need to do is put rationality in your own money," says Garcia.
The virtues of diversification-putting your money in different baskets-has again been placed in the limelight. Experts say most of the people who are scared have placed their entire savings in one particular vehicle, say a bank deposit, in the stock market, a mutual fund or unit investment trust fund, or in an insurance policy.
"There is always room for everything," says Garcia.
To meet the needs of jittery investors and allow them to diversify their money, one of the trends in the financial sector is to offer guarantees of capital protection, and for banks to reiterate deposit insurance guarantee from the Philippine Deposit Insurance Corp. up to P250,000.
Sun Life offers a capital-protected investment product that allows Filipinos to invest in the 60 biggest, most stable and profitable companies around the world, as well as in bonds of investment-grade countries. Both Garcia and Manuel said none of those companies are in the financial sector.
"We are trying to meet the need of our clients in volatile times. It's hard to convince people to invest in these times, and that's the reason why there is a capital-protect feature in this product for people who have become risk-averse," explains Manuel.
The product, called Sun Prestige Capital++, also has guaranteed return of 5 percent upon maturity of eight years. To sweeten the deal, there's a kicker at the end of the period for participating in global bonds and equities indices, but the kicker is not guaranteed.
"We know that eight years is a long period, and we would like to give our investors something if we are going to make them stay that long. So we thought that as a first step, we would give them something guaranteed," Garcia explains. The minimum investment starts at $5,000, for a one-time pay investment that Garcia says will not ask for more in case the indices don't perform as expected.
"It's a fire and forget product," Garcia says.
Diversifying is not just putting money in different instruments, it is also exposure to different markets. During the 1997 financial crisis, Asia was down but Europe and the United States were doing well. This time, it's the other way around. By divvying up your investable funds in different markets, you protect yourself from these market swings.
"This is really a good time to start looking for investments," says Garcia.
Trying to understand what is happening should also help you make sense of whether your money is safe. Panicking merely puts you closer to the situation you fear. Imagine if everybody closes their savings accounts and puts their money under the mattress. Even perfectly good banks will close their doors and thieves can get very rich.
Manuel says while the US economy may go into recession, the $700-billion bailout package have somehow restored confidence back into the markets. Locally, OFW remittances will continue coming in, and exporters are no longer as vulnerable because Philippine exporters have found other markets.
What's more, Philippine banks which have learned their lessons from the 1997 financial crisis are swimming in cash, are not likely to raise interest rates and will continue to be eager to lend to businesses like Marvin and Melani's.
"We think maybe the Philippines will be [growing slower than expected] but obviously there is still a lot of room to grow. We may not have stratospheric growth, but we are not going bust either," say Manuel and Garcia.
And that means your money will be safe, but only if you are well diversified, keeping a healthy level of cash for emergency purposes and the rest invested or saved for the long haul-crisis or not.
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(E-mail the author at lightdream@gmail.com. For more personal finance articles, visit MoneySmarts at http://blogs.inquirer.net/moneysmarts.)
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