It is one of the quintessential questions in personal finance.
Whenever I am in any forum, seminar or talk, this question always comes up: “Where is it okay to invest?” And the answer is as myriad as there are people being asked. Some say in the stock market, some say in real estate, or the forex market, while some others say ‘build your own business. But whatever the recommendation (or mix of recommendations) is, here is where you should invest: you should invest it in something that gives you the money when you need it, where you need it. This now gives us three distinct qualifiers in making an investment.
It gives you the money… This is the end-all and be-all of investing: to eventually make money. If you put your money in something that, when sold, will give you less money, that is not an investment…that is a loss. Of course, one could argue that there could be cut-loss provisions, but broadly speaking, you should be making more money than before you started investing.
Simply put, all investment decisions should have this as one of the primary qualifiers: increasing value over time. Think of it this way: you earn money today. Then you buy some thing: it can be a gadget or an investment. If you decide to sell it sometime in the future, would you get more money for it in return? If yes, that is an investment—and a good one at that. If not, then you would have lost money, which contradicts the concept of investment.
Given this, what are the things that you can buy and later sell for more money than the price you paid for it, or that can give you cash while holding onto it?
Here is where the usual suspects are lined up: stocks, bonds, mutual funds, UITFs, real estate, etc. And the one thing that must be beaten through investing is inflation: the devil of a number that eats up the value of our hard-earned money.
Now, this is where the discussion gets a bit tricky and slippery. A lot of advisers now talk about bank savings as some kind of a disease to be avoided: it gives you less than inflation so you are actually losing money with it, and thus you have to invest in anything other than that.
True. But that is not the whole picture.
You see, there are two ways of preserving the value of your money: preserving it for the short term, and preserving it for the long term. In other words, there are two types of capital preservation: capital preservation for the short term, and capital preservation for the long term, which are entirely two different things altogether. It now brings us to the next qualifier…
When you need it. Investing should give us the money when we need it. It would not have served its purpose if it could not provide the cash at the time of our need. A case in point: I know of someone who had to sell his piece of real estate at 40 percent of its market value because he needed the money for an urgent heart operation. That is not an investment—that is a fire sale—and you do not want to be in the same predicament.
But let’s go back to the concept of capital preservation. Banks truly do not give higher than inflation: you are losing money in a bank deposit—in the long run. But for the short term, you get your money intact. Similarly, investing will truly beat inflation for the long term but may give you losses in the short term.
To highlight the point further, answer this question: Would you still invest the pocket money you have set aside for your travel a few months from now in the stock market? Or in a condominium unit?
That is not to say that you should not invest in any of these as well. It just simply means that you should choose the right investment instrument that will match and meet the timing of your need for cash. In the world of personal finance, it is called the concept of matching.
For instance: money needed for the short-term (i.e., within 3-5 years’s time), should be put in short-term instruments such as savings accounts, time deposits, money market funds, some bonds; money needed for the medium-term can be put in a mixture of stocks and bonds, maybe even real estate; and money needed in more than 10 years would best be put in the stock market and real estate.
Where you need it. Imagine this: the night of Holy Wednesday, and you have an emergency that requires cash. Now, all of your money is either in stocks, UITF, real estate and a passbook account. Where will you get the money then?
This is where the value of an ATM account then manifests itself; you can practically withdraw from it anytime and anywhere (provided there is a machine and it is not offline, of course). Thus, it is also wise to leave some money in an ATM account to answer for emergencies such as this.
To wrap it up, you should diversify your money and investments so that they will give you the cash that you need when you need it, where you need it.
Rienzie Biolena is a registered financial planner of RFP Philippines. Attend the 62nd RFP Program this June 2017. To register, email firstname.lastname@example.org or text <name><e-mail><RFP>at 0917-9689774.