S-M-A-R-T investing

Marvin Fausto

Veteran fund manager Marvin Fausto has made it his lifetime advocacy to help educate Filipinos  on how to handle their hard-earned money.

Fausto and wife Mary Rose, also a financial literacy advocate and prolific writer, have raised their three boys—Martin, Enrique and Anton—to be high-FQ (financial quotient) kids who regularly save and invest.

In 2014, Fausto retired as chief investment officer of the country’s leading lender, BDO Unibank. He left banking at 52, seen “old enough to retire but young enough to pursue other things.”

Last year, Fausto joined leading online stock brokerage COL Financial to help create a mutual fund supermarket, using the same online trading platform of COL to distribute 26 major mutual funds managed by six of the country’s biggest mutual fund companies – Sun Life of Canada, Bank of the Philippine Islands’ ALFM, Philam Asset Management Inc., First Metro Asset Management Inc., Philequity Management Inc. and ATR Kim Eng Asset Management.

In the next five to 10 years, cross-selling of mutual funds is seen to become COL Financial’s new bread and butter.

In this day and age when the new norm is having low interest rates and lofty stock market prices, Fausto believes anyone can reach financial independence. For him, the best approach is to follow the basic principles of S-M-A-R-T investing:

S – Stay invested

M – Manage your risk

A – Asset allocation strategy

R – Regular investing

T – Targets review

Stay invested

“Stocks have been proven to outperform all other asset classes in terms of returns, and this time is no different. Leaving your money in a bank, as most Filipinos do, only results in inflation reducing the value of your savings with bank interest rates so low.

But let’s set the record straight: stocks are for the long term, as in 10 years. And looking at the bigger picture for the next 10 years, the Philippine growth story is expected to be even stronger compared to the past decade.

For instance, the country’s nominal GDP (gross domestic product) in 2005 was P5.7 trillion. Last year, nominal GDP more than doubled to P13.3 trillion. If the economy moves at the same pace, nominal GDP can again double to P26 trillion by 2025.

As for the stock market, the PSEi increased more than threefold from 2,096 to 6,952 on the composite index from 2005 to 2015. That was a compounded annual growth rate of 12.7 percent for that 10-year period. Even assuming a more conservative 10 percent compounded annual growth rate, it is not hard to believe that the stock market can move to 18,000 by 2025.”

Manage risk

“Investment growth does not move up in a straight line, especially in the stock market. That’s why it is important to manage inherent risks when investing for the long term. Managing risk does not mean completely staying away. It is more risky not being invested, as I mentioned earlier.

How do you manage risk? You have to diversify your investments in different asset classes like bonds, stocks, and mutual funds to reduce overall risk. This means you can easily diversify your investments into these different asset classes.”

Asset allocation

“The next question is how much to put in each asset class. Using an asset allocation strategy based on one’s profile, temperament, and age, is key to managing risk. Have a mix of bonds, direct stocks, and mutual funds to diversify a portfolio. We suggest, as a rule of thumb, to allocate based on each person’s stage in wealth building.

For aspiring wealth builders aged 35 years and below, an 80-percent equity fund and 20 percent bond fund may be ideal. For wealth builders aged 36 to 65 years old, a 50-50 percent sharing of bond funds and equity funds may be ideal. For wealth managers 66 years old and above, an 80 percent bond funds and 20 percent equities portfolio can be ideal.”

Regular investing

“After diversifying your portfolio in different asset classes, the smarter way of investing is to make investing regular and automatic. Peso cost averaging method is a simple and convenient way to invest.

Peso averaging is the strategy of buying the same stocks, typically blue chips or the most solid and liquid companies, at regular intervals regardless of the price.  As it is difficult to catch the market’s peaks and troughs, peso-cost averaging is typically recommended especially for those who are just beginning to learn about investing.

“It is a time-tested and reliable investment method that is easy to understand and apply.

Because the market can be volatile, it is hard to avoid being emotional when making investment decisions. That is why a strategic implementation that is automatic and regular is very important, so that emotions do not get in the way. Design your investments so they are on auto-pilot.”

Target review

“For the last principle, set targets and review them regularly. If you are uncomfortable with the things that are happening around you that may affect the stock market, or maybe you find the market expensive, or you feel like you’re taking on too much risk, it is best to revisit your portfolio asset allocation. You need to do this regularly. Check your portfolio and see if it still reflects your willingness and capacity to take on risk. Make sure you’re not over-exposed in one asset class. Have an anniversary date for your portfolio review in order to keep track of where you are in your goals.”