Question: I have been contemplating for months now on investing directly in the stock market. What I have right now is a Variable Unit Link (VUL), which I believe is more focused on insurance. I am now 29 years of age, with two children. I wanted to invest because I am just a regular employee who works eight hours a day,
and earning this kind of income would not suffice for my future needs, especially for my children’s college education. How can I get started? I have heard that investing in the stock market is too risky. How can I mitigate these risks and be successful in my investment journey? – Email received from firstname.lastname@example.org
Answer: Investing is everybody’s right, especially given the pace of growth experienced by our economy right now. Filipinos need not be left behind by the bandwagon to financial success.
Do not rely on your paychecks
Investment simply means: an asset or a current fund acquired with the expectation that it would deliver a positive rate of return, or that its value would appreciate in the future. In layman’s terms, it means making your money work hard for you.
If you are working eight hours a day, and you want to double your income, what should you do? For you to double your income, you need to invest more time in what you do. You need to double your input-hours, add eight more hours for you to get twice your income. However, doing that is tiring, besides the fact there’s a limited number of productive hours one can put in. We are also limited by the fact we are not getting any younger, and instead, we are accumulating age. The more we accumulate age, the more we can’t afford to spend more time working since our body tends to depreciate. That is the natural law of being human.
Allowing your money to work hard for you somehow makes more sense – even when you are asleep, it should be accumulating profit for you. Investing in companies with good potential is one safe, easy way of generating income for the small individual investors, and that may be done through investing in such stocks.
For new investors, investing directly in the stock market can be perilous at first. You need to have a guide on how to start before jumping into the hot water of stock investing. Here are six questions that will help guide you in your investment journey:
1. Why do I want to invest? If you were able to answer this question within 30 seconds, your immediate answer would determine your primary goal or may be considered the financial core that you value the most. The answer to this question would be your core, which will allow you to expect the best of any outcome. Your children’s college education may be considered as a good answer.
2. Is this goal congruent with my values? This will show you if your answer to question #1 is congruent with your values. If it is congruent, then it will be much easier for you to see things from a long-term perspective. As what Dr. Edward Banfield said, a “long-time perspective is the most important determinant of [one’s] personal and financial success in life.”
3. When do I want to receive it? This question will allow you to determine the length or tenure (investment horizon) for your funds. Your children’s age may be used as an example for this: let us say he/she is one year old. Based on the new education system (K-12), he/she would be in college by his/her 18th birthday, so your period of duration for the investment would be 18 – 1 = 17 yrs.
4. How much do I expect? This question should provide you the nominal value of your goal. Investors should forecast how much they want on the basis of their answer to question #2. For you to know the estimated target, you need to consider the inflation rate, or the rate of average tuition fee increase, to forecast the nominal value. You can use the Time Value of Money (TVM) to compute this – use Future Value.
5. How much do I have? The answer to this would allow you to determine how much disposable income you have right now to invest. Will you be investing that money now all at once, or on a monthly basis? You can determine the nominal value that you want to invest by also using TVM to compute it – use Payment for annuity or Present Value for the one-time option.
6. What is my risk appetite? This question will determine your risk tolerance, and will tell you if you are risk-savvy, moderate, or a conservative investor. To gauge this, ask yourself: If I was to bet P10,000 in a casino, how much am I willing to lose? If you can take the loss of the whole amount, then you are risk-savvy; If it’s just P5,000, you’re moderate; and if P2,000 and below, then you are a conservative investor.
In mitigating your risk, if you don’t understand the business of the stock, don’t invest in it; and don’t put all your eggs in one basket. Instead, diversify.
Also keep in mind the goals that you have set for yourself in your financial life: stocks are just tools to help you reach those goals.
Wishing you all the best and success toward financial freedom and peace.
Serge Barcenas Bargayo is a registered financial planner with the RFP, based in Cebu. He is managing director at Certa Inc. (Family Estate Planning and Investment Advisory), specializing in Risk Management. For your questions about personal finance, you can reach him through his email email@example.com or firstname.lastname@example.org.