Knowing your alphabet in investing

Question: What do you expect will the landscape for investing in 2022 be? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook

Answer: Lake Superior State University comes up annually with its Banished Words List, an annual list of words from submissions around the world on phrases or words that have become overused to the point of uselessness. One of the phrases is “new normal.” This catchall phrase was used extensively to describe how COVID-19 had upended life for the past two years. People who wanted the phrase banished argued that something that is normal cannot be new.

That being said, which is also a banished phrase, there is a normal way of investing that will always be true regardless of the prevailing situation. Everything else would just be a fad. That way is the alphabet way of investing, broken down into ABCDE’s and FGHI’s. Let us start with FGHI or fear, greed, hope and ignorance.

The year 2022 will still start, as with 2021 with a big unknown and that is how and when SARS-CoV-2 will stop wreaking havoc on people’s lives. In the Philippines, for example, for the past two Christmases, no sooner was there an air of optimism that COVID-19 was on the wane that cases surged. Fear then arose, which led people to be reluctant to invest and consequently led to low economic output and relatively weak asset prices.

Not all were fearful of COVID-19. In fact, some did the right thing by investing when there was “blood on the streets.” However, some also became so drunk with greed when their unrealized gains skyrocketed that they forgot their selling targets and missed out on the opportunities to cash in.

Others were hopeful, and rightfully so, because they invested in companies with solid fundamentals that could withstand the onslaught of the virus. However, some had more wishful thinking, having invested in what was “hot” during the time and were left holding the bag when the markets cooled and prices dropped.

Related to having wishful thinking is ignoring both the fundamentals and technicals of what they were buying, gambling that the crowd could not go wrong.

So, to avoid the FGHI’s, follow the normal, which are the ABCDE’s of investing.

“A” or assess your risk-return preference. In investing, making money is but a secondary objective. The primary goal is to afford whatever you want for yourself and your family in the future (e.g. children’s education, a house, a car, higher studies, retirement, philanthropy). Remember that if you aim at nothing, you are bound to hit it. And if you aim at making money, you are focusing on the tool to reach your goals and not on your goals themselves.

You need to “B” or be aware if you have “sizeable funds,” “expertise or experience” and “time” for investing directly. In other words, be aware if you are all S.E.T. If you just are lacking in any one of those factors, then it would be best for you to have professionals manage your money than for you to do D.I.Y. investing.

You will also need to “C” or check out investments before plunking in your hard-earned money. As the Securities and Exchange Commission says, before you invest, you need to investigate. All legitimate investments are good. What you need to know is not whether an investment is good but what good an investment can do for you.

“D” or diversify your investments so that your returns are not too reliant on just a few. You can diversify in terms of asset classes, geography, currency and even time (i.e. by investing periodically through cost-averaging instead of just one time).

Lastly, you need to “E” or evaluate your performance on a periodic basis as investments cannot be put on autopilot. A quarterly, semestral or even yearly review should be fine. And if you are relying on professionals to manage your money, let them worry about the day to day challenges as that is what you are paying them to do. You need to focus on the goose that lays the golden egg for you, which is your job or business.

So, for 2022, follow the time-tested ABCDE’s of investing and avoid the FGHI’s. INQ

Efren Ll. Cruz is a Registered Financial Planner and Director of RFP® Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. To consult with a YAMAN Coach, email [email protected]. To learn more about personal financial planning, attend the 93rd RFP Program this January 2022. To inquire, email [email protected] or text at 09176248110

Copyright 2022 Efren Ll. Cruz, RFP®. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without the prior written consent of the author.