Tailor-made investments (part 2)

Question:  I am 25 years old, gainfully employed and looking for a place to invest my money. Can you help sort out my options?

Answer:  Last time, I talked to you about being a supplier of money to businesses with a condition that the businesses would return the money to you at a specified time (Money Matters, April 8, 2015).  Your money could be returned to you within a year (short-term fixed income instruments) or beyond (long-term fixed income instruments).  You will also be promised a fixed interest rate.  You could get your money back sooner but with the risk that what you’ll get back may be less than what you put in, particularly for money supplied for a long-term period.

Now let’s talk about supplying businesses with money with no guarantee of interest, return of principal or even the time when the money will be returned.  This may sound scary but it is nothing more than investing in shares of stock of a business.

People should realize what they are getting into when buying shares of stock. Unfortunately, this risk is glossed over by historical returns like those of Philippine stocks, which have enjoyed a bull run since 2008. Yet, wisdom tells us that past performance is never a guarantee of future return.

So how should you approach investing in shares of stock? Instead of buying stocks, you should buy companies. You should consider buying only those that match your return objectives and risk preference.  The best way to do this is to do fundamental analysis not only on the historical financial performance and condition of companies but also on their projected finances.

Making financial forecasts is not an easy task.  You could buy an SEC iView load for P100 and, with a laptop computer and Internet connection, access the financial statements of Philippine companies from anywhere in the world. Each page you view will deduct P0.20 from your P100 load.  Each page you print will deduct P5 from your load.  Analyzing financial statements requires a certain level of expertise. Also, you can only see historical figures.

It is a good thing that many stock brokers and investment houses provide these complex studies to their clients.  Of course, the service will depend on the amount of business you provide your stock broker or investment house.  An alternative would be to rely on researches by Reuters (www.reuters.com) and Bloomberg (www.bloomberg.com).  The two agencies will provide a certain level of research that is already “good to go.”  You can subscribe to their service for a fee if you want more in depth research. To look for a Philippine company, type in the search box the stock symbol of the company followed by “.ps” for Reuters and “:pm” for Bloomberg.

To a certain extent, investing in listed companies is still “RTW” investing.  The highest potential return is still to be had and that is from setting up your own business.  This is what I call tailor-made investing.

While setting up your own business can provide you the highest return, it will also come with the highest level of risk.

Investing in a stock exchange-listed company is investing in a company that has already stood the test of time.  Setting up a business is like breaking into new frontier.  You will need to do a lot of planning in the areas of PMPM or what I call Papa, Mama for easy recall.  These are the areas of production, marketing, people and money.  To help you take off, you may want to explore if you are eligible for benefits like income tax and minimum wage exemption under the Barangay Micro Business Enterprise Law.

There is truly a lot more to talk about when it comes to investing. For additional information, visit www.personalfinance.ph.  The free tools there will help clarify investing for you. You may also wish to attend our Financial Planner’s Training Program for the cities of Baguio, Davao, Mandaluyong and Cebu. Check our web site for the details.

(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Send questions by SMS to 0917-505-0709 or e-mailed to [email protected]. Also, attend the Accredited Financial Analyst seminar on April 25 to May 30, 2015. For inquiry, e-mail [email protected] or text <name><e-mail><AFA> at 0917-3464126 ).