Where do I put my money?

AFP FILE PHOTO

Question: Where should I put my money? In a bank, property, business or stocks?—Miccael Ibarra Naig via Facebook

Answer: I always believe that investing is a great idea and I pray that all Filipinos think and act the way you do. Before I answer your question, I encourage you to first consider three things: your investment objective (the reason why you are investing), time frame (how long you will keep the investment) and risk tolerance. It is critical that you know these three things before even selecting an investment option.

There is no such thing as a “best” investment. The investment instruments you mentioned have their advantages and disadvantages, their own merits and flaws. Let me discuss those choices that you are considering.

Banks are the most popular choice of many. Banks are everywhere and this makes depositing your money in banks a convenient option. When you say “bank,” I’m assuming that you are referring to traditional bank products like savings accounts and time deposits. These bank products are among the most liquid investments you can make and the risks are also among the lowest. The downside, however, are the yields. They may be the safest options but they give the lowest returns. As they say, low risk, low returns. Having low returns, especially if below inflation rates, will erode the value of your money in the long run. Banks today offer other products other than the usual deposit products. You can invest in the instruments they offer like Unit Investment Trust Funds, mutual funds, bonds and insurance. Take time to know what your bank offers other than traditional deposit products.

Property is the investment every Filipino wants. Your parents and grandparents had probably told you that the best investment was land. However, saying that land is the best investment may be too ambivalent. Real estate’s greatest attraction is its being a tangible investment—you can see and use it unlike paper investments. Land usually appreciates in value giving you capital growth, or it can generate a steady flow of income through rentals and capital gains, when you decide to sell it. There are times, however, when real estate investments do not appreciate or, in some cases, their appreciation does not meet your expectations. Also, there are recurring costs in property investments such as real estate tax, administrative or association dues and common area charges. When you sell a property, you will be slapped a hefty capital gains tax on top of the broker’s fees. When you sum up all the money you need to spend during the time you are holding your real estate investment, you will realize that your gains are not as substantial as you thought it would be. Another downside in real estate investment is its cost—you need to spend a huge sum to buy land. If you decide to borrow money to finance your real estate investment, the interest that you have to pay may just eat up the gains you will make. Buying real estate because you need to live in it is another story as it is not an investment.

Business—another Filipino dream. Everyone wants to be an entrepreneur and why not? Businesses can potentially give you the highest returns. A business that succeeds can make one a millionaire, even a billionaire. There are many success stories of people who started with little but are now very wealthy because of their businesses. However, business endeavors are the riskiest among all these investment options, as they are speculative in nature. There are more businesses that fail rather than succeed, which is not encouraging for a “newbie” in the business world. Further, putting up a business requires more than just capital—competence, passion, timing, market and a lot of studying are needed when you are considering to do business.

Stocks—today’s rising star. There is so much attention to the stock market today as more and more Filipinos are being enticed into investing in equities because of its stellar performance in the last two to three years. Many investors are very optimistic with our local stock market and you will find many experts predicting that our stock market will further go up this year. Investing in equities today is also more convenient. Even with only a small amount, you can buy stocks through brokers (and also online) or through pooled funds such as mutual funds or UITFs. Let me reiterate the risk-return relationship here—high returns, high risks, and vice-versa. While it is true that the stock market has been giving extremely good returns lately, there were also times when investors lost a lot of money. The stock market is not as predictable as people think it is and all the gains over the last three years can also be wiped out in a short period of time.  More so, investing in the stock market, especially when you plan to trade, requires a lot of competency and time. If you don’t have the competency and the time to trade in the bourse, you should keep your day job.

My advice is for you to consider all the pros and cons of all the investment options you mentioned and choose those that will suit your objectives the most. I also recommend that you diversify your investments. All these options have their advantages (and disadvantages), but if you have a diversified portfolio, you are spreading your risks. A common but very wise saying we often hear with regard to investing is this: “Do not put all your eggs in one basket.” Here’s an even wiser advice for you: “But divide your investments among many places, for you do not know what risks might lie ahead.”—Ecclesiastes 11:2, NLT

Randell Tiongson is a registered financial planner of RFP Philippines. To learn more about personal financial planning and how to become RFP, attend our free personal finance talk on Jan. 24, 7 p.m. at PSE Center Ortigas. E-mail [email protected] or visit www.rfp.ph.