Question: The world is so unfair. It seems the rich get richer and the poor poorer. What can an ordinary person do to break out from this inequitable distribution of wealth?—asked at “Ask a friend, ask Efren” free service at www.personalfinance.ph
Answer: You have heard it said that money begets money. The truth of the matter is that money is inanimate, lifeless. It is only the proper management of money that begets money. That is why money can be made to grow even with very little to start with.
One of the more important component-strategies of begetting money is to be aware of the power of human capital which, for all intents and purposes, is initially given to us for free. But let’s talk about the return on this human capital in some other article.
The other is the strategy on keeping a lid on costs. Remember this: nobody is too rich to cut on costs.
Being rich is not a license to spend wantonly and throw away all the lessons on prudential financial management. Why, even companies, small and large, resort to streamlining of operations to ensure that their costs are kept in check. Read our previous article entitled, “Pay yourself second” to see the portion where we talk about operating at a target cost level to produce earnings.
The lifestyle of the rich is an aspiration of the poor. But to get to that dream life, the poor must emulate the actions of the rich before the latter became rich, foremost of which is reigning in costs through a tactic known as haggling.
Do you want proof that the rich still haggle? You will see the rich shopping in places like Divisoria and outdoor markets in plush subdivisions because they know the value of every centavo saved, especially when purchases are to be made in huge volumes.
The rich can very well haggle because of their financial muscle. When it comes to investing, a high net worth individual can open his own investment management account (IMA) with a bank’s trust department and dictate what kind of investment objective and risk-taking level the IMA will have. The account can be on full discretion (the Trust Department makes all the investment decisions), on partial discretion or can be directional (on the part of the IMA owner). Management fees can be much lower than those of other types of managed funds while there can be no entry and exit fees.
But the poor have to contend with the offer that is already on the table; they either take or leave the suggested retail price or off-the-shelf product/service features. In terms of investing, for example, the poor will not always get the best deals.
Take the case of initial public offerings. Issuers will hire undertakers to distribute their offerings to the public. Undertakers will in turn hire stock brokers to ensure the widest distribution as much as possible of the offering, especially of the hot ones. But it cannot be helped that these distributors will give priority to their clients who have in the past given them or who currently give them considerable business. The ordinary investor on the street will find it difficult though not impossible to get an allocation of the offering.
One effective way to get the poor to also employ the tactic of haggling is to band together. With the pooling of their money, the poor can flex the financial muscle that only the rich have individually. This is the appeal of pooled funds like mutual funds, unit investment trust funds, variable unit linked insurance, pre-need plans and even real estate investment trusts.
Pooled funds are nothing more than cooperatives focused on investing. Cooperatives themselves have been in the country for more than a century. In fact, the Cooperative Development Authority lists Dr. Jose P. Rizal and Teodoro Sandiko as those who started cooperatives in the Philippines, the latter earning the title “Father of Cooperation” in the country.
Just like the other pooled funds, not all cooperatives succeeded in the country. The main reason cited is the “lack of proper understanding of the principles and true aims of cooperative associations, and the nonadherence to them in actual operation of cooperative enterprises.”
Today, with the help of strict regulations and the pursuit of global best practices, pooled funds have grown to be a formidable force in the Philippine capital markets. Pooled funds have grown so large that their investing power, apart from affording them better deals, can now counter the instability caused by the sudden entry and exit of the so-called “hot money” or short-term portfolio investments in the country. Plus, they make it easy for the small guy to participate as initial investments can be as low as P1,000.
Today, pooled funds present a great equalizer for the poor in their pursuit of wealth creation and preservation.
To know more about pooled funds, visit www.personalfinance.ph. There is a wealth of free tools to allow you to hit the ground running with financial planning, whether you are a financial products consumer or a financial planner. If you are from Northern Luzon, you may want to attend our Baguio EnRich™ cash, debt, risk and wealth management training run on Jan. 3, 2015. Details can also be found in www.personalfinance.ph.
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 09175050709 or emailed to efren@personalfinance.ph. To learn more about the RFP program, attend a free orientation on Dec 18, 7 p.m. at the PSE Center. E-mail info@rfp.ph or text <name><e-mail><RFP> at 09173464126 to register.)