For the average investor in Asia, including Filipinos, saving money in cash is the common and preferred practice despite its “limiting” effect on the growth potential of their assets.
A report by Manulife Asset Management, “One step forward, half a step back: Meeting financial goals in Asia,” cited the Filipinos’ inclination toward saving hard cash rather than putting the money in other investment instruments as a “key factor in limiting investment growth.”
The study analyzed the top five financial goals in Asia—saving for retirement, paying for children’s higher education, meeting current living expenses, buying a home, and saving for the rainy days, which included unexpected healthcare costs—as well as the savings and investment strategies that investors use in relation to these goals.
The outcome: growth in savings in cash is outpaced by the increase in the cost of retirement, living expenses, homes, education and healthcare.
“In the Philippines, we looked into the goals of saving for a rainy day and for children’s higher education. We found that healthcare costs have risen 11.9 percent annually over the past five years. Meanwhile, the cost of education has risen an average of 8.2 percent a year over the past four years,” said Michael Dommermuth, executive vice president and head of Wealth & Asset Management Group at Manulife Asset Management Asia.
The cost of retirement, education, healthcare and living expenses in the Philippines rose by 8.1 percent in the past five years, or 3.5 percent ahead of the average returns of Filipinos’ investment portfolios, which grew only 4.6 percent in the same five-year window, according to the study.
“While P10,000 invested today has the potential to grow to more than P15,500 over 10 years, P10,000 in the cost of a basket of the top five financial goals is expected to grow to more than P21,500 in the same period—resulting in a potential shortfall of about P6,000,” said Aira Gaspar, Manulife Philippines chief investment officer.
“Looking further ahead, the potential shortfall stands to increase more than 350 percent to almost P23,000 after another 10 years and then almost triple again to about P65,000 by the 30th year.
Investors should seriously consider what this means, particularly as retirement was reported as one of their top financial goals,” she added.
Further broken down, the study filtered out that limited growth in investments is primarily a result of the higher cash portfolio that investors hold compared to other investment assets.
According to a survey, which is a part of the study, the average Filipino has 38 percent of his assets in local currency, while 4 percent is held in foreign currency. In a nutshell, cash takes up 42 percent of the pie of their assets.
Dommermuth said saving in cash is not only a habit of Filipinos, but is also predominant in Asia.
He said 37 percent of the assets of an average Asian investor are in local currency while a further 5 percent are allocated to foreign currency.
“Our research reveals that this level of cash holdings is the key factor preventing investors from generating returns that match or exceed the growth in the cost of their five leading financial goals,” Dommermuth said.
For her part, Gaspar said reallocating a portion of these cash investments would lead to higher returns and shorter gap between investment earnings and growing cost.
“We found that shifting 50 percent of local currency holdings to higher yielding instruments could allow Filipinos’ savings to grow more rapidly and possibly reduce, if not eliminate, the potential returns shortfall,” Gaspar said.
“In our view, one of the most effective ways for Filipino investors to improve the returns on their investments would be to diversify their investments across multiple asset classes and geographies.
“This will give them access greater opportunities for returns while helping moderate the level of risks. A well balanced asset allocation has always been important, but these days investors need to be even more thoughtful and vigilant in managing their investment portfolios than in the past,” she added.