To contribute to the growth and development of the teaching profession in the country as well as to publicly express appreciation to mentors, both active and retired, Teachers’ Month Campaign (TMC) was conceived on July 2008 by the Metrobank Foundation, Inc. (MBFI), De La Salle Philippines (DLSP), Philippine Business for Education (PBEd), and Campaigns Social Response (CSR), with the special participation of the Department of Education (DepEd) and the support of key business institutions.

The TMC was launched once again in 2009 during the Metrobank’s 47^th anniversary celebrations last September 4, 2009, highlighted by the awarding of this year’s Metrobank Foundation Outstanding Teachers. It will culminate on October 5 which is World Teachers’ Day.  The theme is “My Teacher, My Hero!

To help commemorate the event, First Metro Asset Management, Inc. (FAMI) is waiving the sales load for all mutual fund investments of teachers from October 1 to 31 2009.  The special promo enhances the Save and Learn Monthly Investment Program that is currently helping teachers to save small regular amounts in the FAMI-managed mutual funds.

Our goal in FAMI is to make investments for the small investors, especially the teachers, as painless and yet as profitable as possible.  FAMI is a subsidiary of First Metro Investment Corp., the biggest investment house in the country, and part of the Metrobank Group of Companies.

 The first one should be easy enough for you to solve, the second may be tougher, and the third might seem impossible to hurdle at the present time.  Nevertheless, if you put your mind to it, there is no reason why you can not hurdle all of them. 

Lack of Know-How

The fastest way around this problem is to read on the topic.  The internet is loaded with tons of information regarding all types of investment vehicles.  If you find the jargons difficult to understand, call a financial planner or advisor and they will be happy to help (sometimes for a fee though).

Lack of Discipline

Instilling discipline on your self is not an easy task.  When you are use to a certain type of spending habit changing it will take some time and a lot of will power.  The trick is to slowly develop that saving habit until it becomes second nature to you.  Keep in mind that INCOME less EXPENSES is not equal to savings.  Even if your income increases in the future, chances are your lifestyle will move up as well hence, depleting all the extra income.  The best approach is to pay yourself first by following the formula INCOME – SAVINGS = EXPENSES. 

If you are lucky enough to work for a company that promotes personal investing by providing their employees with a savings program through salary deduction, enroll in that program.  By simply authorizing your employer to deduct from your salary, you are instilling discipline on your self.  If your company does not have such a program, try suggesting it to the HR manager.  You can also join formal organizations or cooperatives that advocate savings.  Just make sure you choose trustworthy organizations.

Lack of Resources

Now this is a tough one! Following the formula that we stated earlier should give you some amount of savings regularly.  The real problem comes when you look for investment vehicles to invest in.  Most of these investment instruments require a certain minimum amount to start with and these amounts just might be out of your reach. Among the viable instruments available to investors, mutual funds probably have the lowest minimum requirements (P5,000 to start an account and P1,000 additional; for most  mutual funds in the Philippines).

If the P5,000 minimum is still a bit high for you there are ways to hurdle that problem.  A company sponsored savings program can be very helpful on this regard.  Some of these programs pool the resources of the employees on a mother account under the company’s name hence eliminating the initial investment requirement.  If something like this is not available to you, you can always open a joint account with friends, relatives and other people that you trust explicitly.  If you can get together with four other individuals that also want to save, you can meet the minimum requirement by putting up P1,000 each. You can actually do this every month or every so often as long as everyone agrees to it.  This is also a great solution for students who want to start saving at a very early stage; certainly something for the parents to push for.

You can probably come up with hundreds of other reasons not save. Certainly, spending is so much more fun than saving. Nevertheless, if you put your mind to it and slowly develop that saving habit there is no reason why you can not secure your financial future today even if you think you have nothing to save.

D.  Gift Money:

As you go higher in the hierarchy of needs, you develop a need to provide for people or causes that you care deeply for.  This could be some kind of charitable institution or foundation or some family member that you want to take care of.  But the most common use for gift money is to provide for education.  Saving for education early on through long-term vehicles like mutual funds, note and bonds, or trust products, will make it more efficient and easier on the pocket.  Another typical example for this type of financial need is the desire of parents to leave a reasonable amount of estate for their children.  Again, this can be accomplished through long-term instruments.  For people whose investment horizon is short or those who may not have enough resources to accumulate a substantial estate, the best way to create one instantly is to buy life insurance.  On the other hand, for rich individuals who are more concerned with the inheritance taxes that their heirs will need to pay for, a good solution is to get a life insurance coverage equivalent to the taxes that will be incurred by their heirs.

 E.  Dream Money:

Dream money pertains to funds that you need to have for all the things that you dream of being, having, or doing.  These goals can pertain to your retirement, or the kind of lifestyle you want before or after retirement.  Normally these are funds that you will need after you have gone beyond your peak income years.  Therefore, these types of needs will require large amounts of monies.  Long-term vehicles like mutual funds, note or bonds are the best instruments for establishing your nest eggs for this purpose.  While more and more people are becoming aware of the need to save for retirement, very few people realize that a big portion of their retirement funds will be spent on medical needs.  In this regard, it is prudent to set aside funds specifically for the purpose of funding for medical expenses after retirement.

Having a structured approach in prioritizing goals will enable you to build an investment portfolio that’s tailor-fit to your needs and your available resources as well.  The important thing to remember in using this approach is that you need to establish (and maintain) your lower-end targets before going for the higher goals. Having a strong base results to a stable portfolio and keeps you away from situations where you are force to liquidated long-term placements in order to meet an immediate financial obligation.

B.  Safety Money:

These are funds needed to meet life’s unexpected turns.  Normally, safety monies protect whatever real assets you have accumulated in the past like your home for instance.  In this regard, fire insurance will be the best investment option to protect this type of asset.  General liability insurances can protect your business from unexpected developments.  However, while there is a need to protect your assets, it is even more important to protect the person that generates these assets.  This is where life insurance comes in. 

 C.  Freedom Money:

While it is important to save and invest for your future, it is equally important to have funds that you can use for your non-basic needs.  These are funds for activities that give you enjoyment and fulfillment.  After all, life does not start after retirement.  It started on the day that you were borne.  Certain activities like having dinner with old friends or going to the mall with your kids, or that all-important annual family vacation should not be disregarded in order to save for long-term needs.  We need to keep in mind that God did not put in this world to make a living but rather to make a life.  However, these activities will have substantial price tags attached to them and therefore it is important to actually prepare for them.  For this purpose, short term instruments like savings and checking accounts, treasury bills and money market funds will be your be your best options.

 Another life goal that gives you fulfillment and a high sense of security is home ownership.  This is probably one of the biggest single expense that you will incur in your lifetime.  Home mortgages can play a vital role for this purpose.  However, you need to keep in mind that borrowing money from the bank will require you to put up approximately 20% of the value of the property and this not going to be a small amount.  Therefore, it is an excellent idea to plan for this activity several years in advance so you can save for the banks equity requirement.  Medium to long-term instruments like mutual funds, government or corporate bonds will be the best option to maximize on this type of savings.

To be continued . . .

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One approach that you can take is to use the concept of Maslow’s Hierarchy of Needs.  Abraham Maslow has set up a hierarchy of five levels of basic needs (Physiological, Safety, Social, Esteem, Self Actualization). Beyond these needs, higher levels of needs exist. These include needs for understanding, esthetic appreciation and purely spiritual needs. In the levels of the five basic needs, the person does not feel the second need until the demands of the first have been satisfied, nor the third until the second has been satisfied, and so on.

Using the same concept, and translating the levels of basic needs into financial terms, we can come up with the Hierarchy of Financial Needs (Survival Money, Safety Money, Freedom Money, Gift Money, Dream Money) that can be a basis for prioritizing which of your many goals you should work on first.

                        Maslow’s Hierarchy of Needs                                                      Hierarchy of Financial Needs

A.  Survival Money: 

These are funds that you need to make ends meet.  The most basic type of survival money is the amount that your household needs for food, clothing and shelter.  Typically these funds should be in very liquid instruments for easy access.  Therefore savings or checking accounts are the best vehicles for this purpose.  A household that may have extra funds can go to short-term deposit placements in order to generate some return from these funds.

Another type of survival money is one you need for emergency situations.  A leaky pipe, the car engine unexpectedly conks out, or some minor home repair that needs to be undertaken immediately are examples of minor emergencies that you need to prepare for.  A good size emergency fund is around six to nine months worth of expenses.  Typically these funds will be in short-term instruments like, savings, checking, treasury bills, or money market mutual funds.  A stand-by loan facility from a bank might be used as part of your emergency funds.  Accident, health, and auto insurances can greatly reduce the need for liquid emergency funds.

So how do you differentiate yourself from a fund manager? – Basically you come up with answers to the same three questions (what . . . , when . . . ., and how much . . .) using different means.

What to Buy or Sell

In answering the question “what to buy or sell”, most fund managers use fundamental factors, technical indicators and mathematical tools.  As an investor all you need to do to answer this question is to set your goals (retirement, college funding, capital for business, etc.) and to know your risk appetite (aggressive, moderate, conservative). 

When to Buy or Sell

To answer the question “when”, a fund manager again uses many tools (mathematical, cyclical, trend followers, etc.).  To accomplish the same feat as an investor, what you need to do is to determine how much time you have to invest (this is almost automatically determined once the goals are set) and what resources you have available for investing (how much of your monthly salary can you set aside for investing?).  For an investor like you there is only on answer to this question – NOW.  Your success as an investor will not be a matter of timing but of how much time you have to invest.  So start early!

How Much to Risk

Finally in order to manage risk effectively as an investor, you don’t need all those ratios, alphas, betas, audits and what have you that fund managers use to evaluate risk. All you need to do is to choose the right fund and the right fund manager.  Nowadays with all the scams going around choosing the right fund manager is almost as important as choosing the right fund.  Once you have accomplished the first two steps you will realize that choosing the type of fund is best for you will be easy enough because you already know what type of returns (professional financial planners can help you determine this)  to look for in order to meet a specific goal. 

So, to develop that winning investor’s mindset just remember these four simple phrases:

1. You are not a FUND MANAGER! Think Like an INVESTOR
2. Know your GOALS (put them on paper) and RISK APPETITE.
3. Determine how much TIME you have to invest for each goal (the longer the better so start early).
4. Choose the RIGHT FUND, and the RIGHT FUND MANAGER.

Here is a typical telephone conversation between an investment solicitor/banker (Jill not her real name) and a prospective investor (aka Mr. Belle not his real name either). 

Phone rings…

Jill:  Hello, May speak to Mr. Belle please?

Mr. Belle:  This is he.  Who is this please?

Jill:  Good morning Mr. Belle.  This is Jill from JMC-Duart Investments, and I’m calling to ask if it is possible to see you in person regarding an investment proposition.

Mr. Belle:  What kind of investment are you carrying?

 Jill:  JMC-Duart is principal distributor for an assortment of mutual funds that have varying degrees of risk and potential returns.

Mr. Belle:    I already have mutual funds.  What is the average return on your stock fund?

Jill:  In the last three years our equity fund has averaged over 16% net for shareholders.

Mr. Belle:  Hmmm, that’s quite impressive but the market is really bad right now so I don’t think this is the best time to get into equities.  In fact, just recently, I decided to redeem my equity mutual fund shares to limit my losses.  The fundamentals are bad and the technical indicators are not very promising either.  I don’t want fixed-income investments either because interest rates are currently too low.  Call in a couple of months.  If the timing is right, I might consider meeting with you to find out more about your funds.

What went on during the conversation?  Well, in a nutshell, Jill tried to sell Mr. Belle mutual fund shares but Mr. Belle felt that the timing is not right.  Furthermore, Mr. Belle is an aggressive investor and considers only high yielding investment. He is also the type of investor who prefers to manage his own investment portfolio.

And what does Mr. Belle do for a living?  He sounds like a banker, an investment officer, perhaps a stock broker or maybe he is a fund manager.  Actually, Mr. Belle is a BALLET INSTRUCTOR.  He knows a lot of the investment jargons because he is genuinely interested in investments so he reads a lot.  But does that make him a professional fund manager?  Not quite.

A fund manager is a different kind of animal (no pun intended).  Upon waking up in the morning a fund manager would look for the morning paper before his sleepers so he can catch up on anything that might have happened while he was asleep.  He or she will have breakfast while reading the business section, somehow be able to take a shower while still reading, and drive to work still reading the paper (Don’t Try This at Home).  The only time he lets go of the morning paper is when gets to the office and he comes face-to-face with his best friend in whole wide world – his Bloomberg terminal. He then spends the whole day in front of the monitor to watch the markets go up and down, up and down, . . . . .  up and down all day long.  After work, he goes home, has dinner, maybe a couple of drinks and goes to sleep.  While asleep he will dream of the markets going up and down, up and down, . . . .up and down all night long.

 I am of course exaggerating.  My point is this.  A fund manager eats, sleeps, breaths, and lives in the markets.  He is capable of doing things with the markets that ordinary people can not do – like shoot an order to buy or sell a security at the snap of a finger (or at a click of a button if he or she does not have an assistant) and more importantly, stay emotionally unattached to the markets.

So if you are NOT a fund manager by profession then don’t fall into the trap of trying to think like one.  The best thing for you to do is to THINK LIKE AN INVESTOR and let your fund manager do his job.      

To be continued . . .

 Can PCA Improve A Current Losing Position?

Earlier, we illustrated that PCA can reduce your average buying price as long as you are able to buy more shares at lower prices.  Therefore, PCA can improve your losing position by pulling the average buying prices below the original.  Hence, a 3% improvement can be attained by lowering your average price by 3%.

 Therefore, in principle, PCA can improve your current losing position.  But there is a catch though.  One, you need additional capital to pull this off.  And two, the additional amounts in total must be significant enough to even make a dent on your original lump sum investment. 

Say you invested P200,000 at the start of the year in a mutual fund that has a price per share (NAVPS) of P10.  Assuming no fees are charged, you were able to purchase 20,000 shares.  Unfortunately the price started going down for six straight months with no signs of reversing.  After six months you found your  investment losing by 20% as the price hit P8/share.  You decided to apply PCA for the second half of the year by investing P10,000 at the start of each month for the next six months.   

An evaluation of your investment strategy shows the following results:

• You invested an additional P60,000 (+30%) to perform PCA.
• With PCA you were able to add 7,966 shares (+40%) to you original 20,000 shares.
• The result of being able to buy more shares at lower prices reduced your average price from P10/share to P9.29/share.
• As a result of the lower average price, you managed to improve your overall investment performance from a -20% to -14% when the price ended the year at P8/share.

Aren’t you just throwing away good money after bad with PCA?

Not at all!  As illustrated earlier, PCA can work regardless of whether you are investing fresh funds or just adding to your currently losing investment to average down your price.  As mentioned earlier, PCA is not a perfect system.  It does have its pitfalls particularly in terms of opportunity losses.  Other approaches like Value Averaging may, perhaps, be more effective in certain market conditions.  However, if you are comfortable with a simple, easy-to-implement, and light-on-the-wallet type of approach then by all means do PCA and stick to it.

Warren Buffet suggested that the best holding period is forever.  For the short-term investors looking to make a fast buck, PCA is probably not your cup of tea.  But if you are a conservative, long-term investor, with a buy and hold strategy, this may just be the edge that you need to turn the current crisis into an opportunity to surpass your investment goals.

In Scenario 2 the mutual fund price drops from P10/share to P3/share.  In the lump sum style of investing where P1,200 bought 120 shares at P10/share, the value would be P360 in December.  Through PCA we were able to buy 266 shares because of the declining price and therefore will have an investment value of P798 in December.  However, because of the big drop in the price of the mutual fund shares, bought styles lost money (-70% for lump sum; -34% for PCA) but PCA was able to minimize the loss.

So does this mean that PCA will always outperform lump sum investing?  Not really!  PCA is by no means a “cure-all” approach.  In a market that steadily goes up, lump sum investing will generate more returns than PCA.  In a third market scenario where the price steadily went up from P10/share to P20/share, PCA would have resulted to a purchase of only 82 shares.  Therefore our investment value at P20/share (December) would have been P1,640 for PCA versus the P2,400 in the lump sum approach.

Hence, the ugly side of PCA is that there can be opportunity loss in extremely good (or bullish) markets.

Let us weigh our options.  In good markets PCA can result to higher returns provided that there is some volatility in the prices that will enable us to buy more shares.  With out the volatility, then we earn less (but we still earn).  Aside from deposits, what other investments have zero volatility? – The answer is none.  On the other hand, PCA reduces the risk and consequently the losses during bad markets.  So in a nutshell PCA means reduced risk, with possibly higher returns, but not without possible opportunity loss.  Sounds like a pretty good deal doesn’t it?

To be continued . . .

What is Peso Cost Averaging (PCA)?

Peso-cost averaging (referred to as dollar cost averaging in the US and pound cost averaging in the UK for obvious reasons) is done by simply investing a fixed peso amount into your mutual fund (or other investment instrument) at pre-determined intervals (normally less than a year – monthly, quarterly, etc) . The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares at the time of a purchase. When the markets are up, you buy fewer shares per peso invested due to the higher cost per share. When the markets are down, the situation is reversed and you purchase a greater of number of shares per peso invested. It’s a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you don’t have to invest the time and effort to monitor market movements and strategically time your investments.  While the effectiveness of the concept has been debated on for decades now, even the skeptics agree that the PCA does really reduce risk and avoid the possibility of “investing all the money at a market high”.

To illustrate PCA let us consider three market scenarios and two investing styles per scenario.  The first investing style is the typical lump sum investing where you invest all your money on one price and wait for the price to go up.  The other style of course is PCA.  To simplify our calculations let us say that we have P1,200 to invest over a one year period. 

 In our first market scenario the price of the mutual fund moved from P10/share to P5/share and then to 20/share (over the one year period).  In lump sum investing, our P1,200 can purchase 120 shares at P10/sharein January.  Hence, at the price of P20/share in December, the 120 shares that we bought has a total value of P2,400.00. By applying PCA where we invest P100 at the start of each month (for 12 months) we can purchase 136 shares (16 more than the lump sum strategy).  This is similar to a lump sum investment of P1,200 at a lower weighted average price (P8.80/share). This means that the value of our investment in December at P20/share is P2,720.00.

To be continued …