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.

A mutual fund is a company whose capital is invested by a professional fund manager in investment-grade instruments like stocks, bonds, and so on.  If you invest in a mutual fund, you’re buying shares of that company, and your money is included in the pool of capital that is being invested by the fund manager.  The price of buying (or selling back) your shares is based on the market value of the investments of the company at that time.

The job of a fund manager is to maximize the value of the fund while taking into account the risks involved.  Your investment will go up (or down) in value, depending on how profitable those investments are which the fund manager is making on a day to day basis.  Everyday, the value of your capital is computed based on how much money the fund manager made, or how much worth the investments are in the market at the end of the day.

Your investment in a mutual fund does not earn a fixed interest; instead you earn money when you sell back your shares at a price, or value, that is higher than when you bought those shares. 

There are risks involved in investing in mutual funds.  The value of your funds could temporarily be down from the time you purchased it, depending on capital market situations, and depending on the kind of mutual fund it is.  A bond fund (invested in the bond market) does not fluctuate in value as quickly and as dramatically as an equity fund (invested in the stock market).  On the other hand, a bond fund does not increase in value as fast as an equity fund.

You may withdraw your investment, or sell back your shares, in a mutual fund anytime you wish or need the funds.  You may, however, end up losing money when you sell at a time when the values are declining.  In the long run, say, more than two to three years, the value of a mutual fund improves at a rate much higher than if you were investing in specific individual savings or investment instruments yourself.

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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.

 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 …