What is the best way to start an investment? - 2008/03/19 10:41
http://business.inquirer.net/money/advice/view/20080220-120014/What-is-the-best-way-to-start-an-inve stment
What is the best way to start an investment?
By Dr. Johnny Noet Ravalo
INQUIRER.net
I am Erick, 23 years old, and work in a call center. I earn P20,000 a month and barely spend this amount since I am single and live with my parents. But my problem is that I find my wallet empty at the end of the month inspite of having more than what I need. I am just wondering what is the best way to start an investment?
In the last six paragraphs of this piece, I share with Erick some financial instruments he may want to consider. However, the context of that short version starts from another question.
Does the name Jerome Kerviel sound familiar? How about Charles Keating Jr., Toshihide Iguchi or, John Rusnak? I would imagine that these names do not strike a familiar chord.
These names have been linked to celebrated financial difficulties much in the same way that we have heard of the name Nick Leeson. Kerviel is the futures trader in Société Générale who is reportedly responsible for a $7.09 billion loss. Keating was investigated for his participation in the US Savings & Loan crisis in the 1980s which cost the US economy in the neighborhood of $160 billion. Iguchi and Rusnak were the traders for Daiwa Bank and Allied Irish Bank, respectively, where a combined $1.791 billion in trades/losses were deemed unsound practice.
The numbers are not small by any stretch of imagination. Beyond the pure accounting of the dollars and cents lie either the saving of individuals who now find that their institution has closed or other stakeholders who must write off the losses against their capital holdings or of the general public who must, quietly and implicitly, bear the burden of a national bailout with future tax payments.
Investors need to be aware of the risks in different investment options and to know more about financial institutions. Investors are not --- should not --- be passive players in the market; it is our saving, our capital, if not our future tax burden, that is at stake.
The question is: How?
This is the question before Erick. People will advise him on how to make sure that his P20,000 a month is properly allocated into productive use. Some prefer rules, i.e. x-percent to pay yourself, y-percent for this need and z-percent on others. Some prefer a more flexible allocation which includes identifying --- and doing away with --- all the overlooked expenses that tie him down.
At the end of the day, given a fixed amount of monthly income, Erick needs to set aside a targetted amount of regular saving. Obviously, without some saving, the question of investment is academic.
Saving without a clear idea of where that saving will go often does not turn people into regular savers. Having funds laying idle somewhere is tempting. It is so much more fun to spend than to save, so I do not bet on self-control too much.
Erick simply needs a goal. After that comes the hard part. Admonishing investors to take due-diligence seriously is easy enough to convey. Making it happen is completely a different problem.
When we wonder about a bank going belly up, are there really tell-tale signs to watch out for? If a would-be investor in Palawan is interested in mutual funds, will he have to go to Manila to find out about the different funds? When we ask our financial agents to conduct "suitability tests" on the prospective investor, how do we know if these tests were properly conducted? If the agent says they were done accurately but the investor says --- after taking a loss --- that he didn't understand the subtleties and signed under implicit duress, with whom shall we side in the event of remedial actions?
At the heart of the issue is financial literacy and what drives that is information. The great majority of our investors --- existing and would-be ones like Erick --- do not have access to information on all the options available. Since money is comparatively tight and the complexities of the financial market can be intimidating, liquidity will be a primary concern. But in this situation, keeping tabs on market changes is important. Unfortunately, access to these information remain very uneven.
Being an archipelago presents its own added difficulties. Overseas, many jurisdictions have "best execution" requirement to be sure that investors are not prejudiced by any delay and/or information gaps. We also have that under our OTC rules but we don't have a nationwide electronic communication network to make that work.
Going back to Erick, it is important to first get a feel of what it is like to invest before you take on more challenging product lines.
A useful place to start will be Treasury Bills simply because they are a short-term placement and are guaranteed by the government (theoretically no possibility of default). You will have to go through a broker of your choice who can place the order for you. He should tell you what variants are out in the market.
Basic bank products provide another option. Time deposits, for example, are also short-term placements. If the bank, for some reason, is closed before your deposit comes due, you may recover up to the limit provided by the Philippine Deposit Insurance Corp.
But don't expect to get rich quickly from Treasury Bills or time deposits. The idea is for you to get into the habit of setting aside a part of your P20,000 a month so that it can fund your desired initial investments. Once you get the hang of it and better understand the nuances (for example, the tax laws or the requirements for 3rd-party custodians or working through brokers) of market operations, then you can start exploring other product lines and longer-term instruments.
The fact that you are asking is a very good sign. But for the question to have any real value, you will have to act on it.
Let me end by tempting your imagination. Can you imagine what the cumulative value would be if you invest P10,000 a month regularly for 1-month placements and continuously rolling over at a modest 3.0 percent per year for 30 years? It is P5,841,937.27. Not bad, don't you think?
(Have a question for Dr. Noet? Email personal_finance@inquirer.net.)
(Noet Ravalo is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work. Since 1994, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos' personal finances.)
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