A lot of Filipinos plan to start investing in the stock market every new year. However, only a few successfully keep this new year’s resolution since many don’t even know where to start.
Luckily, there are ways you can invest in the stock market even if you are a conservative or risk-averse investor, or someone who is busy and doesn’t have time or the knowledge to pick stocks.
If you are a conservative investor who prefers placing your money in bank deposits or buying bonds, consider investing in preferred shares and real estate investment trusts (REITs). These asset classes provide dividend yields that are higher than interest rates on bank deposits (currently less than 1 percent), and bonds (currently ranging between 2.8 percent and 4.3 percent for three to five-year corporate bonds).
Presently, the median yield on preferred shares that are callable in three to five years is 5.4 percent, while the median yield on REITs is 4.6 percent. Dividends paid by REITs can also go up if the company enjoys higher occupancy, rental rates or acquires more assets. Moreover, dividends on preferred shares and REITs are taxed at a lower rate of 10 percent versus 20 percent for interest income on bank deposits and bonds, providing additional returns to investors.
Preferred shares and REITs are also less volatile compared to common stocks since investors buy them for their dividends. In contrast, investors buy common stocks for their capital appreciation potential since dividends of common stocks are usually smaller and less stable.
Admittedly, preferred shares and REITs are riskier compared to bank deposits and bonds, explaining why their returns are higher. For example, payments of preferred dividends can be delayed if a company isn’t profitable, while dividends on REITs can go down if the issuer suffers from higher vacancy rates or lower rents. However, you can control your risk by buying only preferred shares and REITs issued by companies belonging to growing industries and are managed by people you know and trust.
If you are willing to take on more risk to generate higher returns, but don’t have time or expertise to pick stocks, consider investing in mutual funds or unit investment trust funds (UITFs). Mutual funds and UITFs are pooled funds that are professionally managed by fund managers. Because of this, you don’t need to do any stock picking. And since it is a pooled fund, your portfolio is automatically diversified even though your capital could be small because you are just starting out.
Right now, there are many types of mutual funds and UITFs that focus on the stock market. The most basic type is an index fund, which just aims to mimic the performance of the Philippine Stock Exchange index. There are also actively managed funds, where the fund manager aims to outperform the index by choosing the best stocks to buy, regardless of whether the stocks are index members. Then there are funds that invest in foreign markets such as the United States which make them most suitable for investors who would like to diversify away from the Philippine market.
Buying mutual funds or UITFs is also a great way of accumulating wealth for young investors. Since these funds are very affordable and can be bought for only a few thousand pesos, you can set aside a certain portion of your salary every payday to buy funds. In fact, you can automate the process so that you won’t forget to invest despite your busy schedule. This process will enable you to participate in the stock market’s attractive long-term capital appreciation potential, allowing you to accumulate wealth over time without you even noticing it.
Buying preferred shares, REITs, mutual funds and UITFs is one of the easiest ways you can begin your investment journey. However, as you gain more confidence, knowledge and experience, you can always start investing more actively and buy common stocks directly, allowing you to capitalize on more opportunities to grow your money. INQ