Investing, according to HSBC’s head of Asia-Pacific wealth management Bruno Lee, is like going to school. You have to start with something, no matter how small, like going to elementary school. Then you grow more sophisticated and the investment grows with you. Here are some key points to remember.
By Doris Dumlao
1. Don’t wait till you’re rich before you start investing.
“Some people say, I will do wealth management when I have a large amount money. If I don’t have the money, what’s the point? But the thing is, if you don’t start investing when you are accumulating wealth, you don’t understand the markets. And when you finally have $1 million and you don’t have the investment experience, then it’s more difficult to do it,” Bruno says.
“Wealth management is not the privilege of the rich people. It’s for everyone who wishes to invest for the protection of the family, growing wealth, for children’s education or retirement,” he adds.
2. Know and understand what asset classes are available.
In this regime of low interest rates, people who were used to LOI (living on interest) will have to look for ways to make money work harder. It’s no longer advisable to keep all your wealth in simple bank deposits. For people not keen on going into entrepreneurship, there are a lot of options – buying real estate, pre-need products (like educational or pension plan), government or corporate bonds or listed stocks or investing in pooled instruments like mutual funds and unit investment trust funds (UITFs) or unit-linked insurance products with investment components.
3. Don’t put all your eggs in one basket.
It’s a cliché but it’s still true. A good investor diversifies his exposure to ride out market cycles. When fixed income instruments like bonds are underperforming, equities are usually doing well. But because it’s difficult to predict the beginning or end of market cycles, many professional fund managers simply offer a balanced portfolio – with half invested in bonds and the other half in stocks.
And before thinking of withdrawing all your money in the bank, bear in mind that it’s also important to keep cash in hand for short-term liquidity requirements. Otherwise, if you invested the money meant to pay the mortgage and the gamble didn’t work, you’ll simply add to the country’s poverty rate.
Real estate is usually a good investment for the long-term, especially if you acquire the property at the beginning of a boom cycle.
4. Look for safety and liquidity, not just yield.
Henry Herrera, president of Sun Life Financial Philippines, says a lot of people become victims of pyramiding scams because yield is all they think about. There is no such thing as a low-risk, high-yielding investment. The higher the risk, the higher the yield and vice versa.
5. Set your risk appetite and time horizon for spending.
A good fund manager will have a list of suitability questions for you to answer before offering any of their products. Last year, some banks over-marketed UITFs without thoroughly explaining the risks to clients so when net asset values fell, there was widespread panic among retail investors. There are different instruments suitable for different investor types – whether investing for the short- or long-term investors, willing to take higher risk in exchange for higher gains or wishing to stay conservative. The aggressive investor will put in more chips in stocks while the conservative will put more in bonds.
6. Deal with reputable financial institutions and study their track record.
Beware of fly-by-night investment companies especially those with pyramiding schemes or companies offering to currency futures margins trading. The Securities and Exchange Commission shut down the local commodities futures exchange in the Philippines due to unscrupulous practices over 10 years ago and if some unheard-of brokerage company claims to trade in some offshore markets, check its records at the SEC and overseas affiliation.
7. Invest only your excess money.
Don’t pawn your house to invest in stocks or bonds. Entrepreneurs do borrow but they get to control the business and make decisions in running it. But when investing in financial instruments, you can’t control the market. You make informed decisions but you wouldn’t want to lose the shirt on your back if things don’t go the way you expect.
8. Exercise discipline. Make an investment plan and stick to it.
“When people sell and take profit, they feel they sold too early so they come in again and that’s when the market reverses. You need rationale approach and discipline,” Bruno says.
Study market cycles instead of following the herd. Sometimes, the contrarian brings home the dough. Trust your own judgment instead of doing what’s everyone else is doing. As proven many times in the past in many parts of the globe, when everyone buys the same thing, that’s when financial bubbles are created and the boom turns into bust.
9. Reinvest earnings.
Just like corporations which plow back earnings to expand their businesses for future growth, reinvesting some if not all of your earnings broadens your capital base and increases opportunities for further wealth accumulation.
10. Seek professional advice.
Don’t seek sophisticated instruments right away. If you don’t have the time or expertise to manage your own funds, invest in pooled instruments like mutual funds and UITFs. That’s precisely why financial wizards invented these instruments so that every participant benefits from diversification and professional management and gets equal rate of return.
As you grow more sophisticated as an investor, you’ll find opportunities to do your own stock, bond, fund or property picking.
[This article first appeared on the January-February 2008 issue of MoneySense magazine]
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