How to find the right investment for you
By Mark B. Aragona for Yahoo! Southeast Asia | BDO Money Matters – Tue, 23 Apr 2013
Investment has become a hot topic in the Philippines lately due to the plethora of positive economic news: the recent Fitch credit upgrade, the stock market hitting high after high, and the real estate boom. It seems to make perfect sense to start putting your money to work, but how to choose the right investment? With so many financial instruments out there, it’s quite difficult to decide. So before sinking your hard-earned savings into any investment, take a few moments to consider these questions.
What are you investing for?
In the rush to make money, it’s easy to overlook this most basic of steps: thinking up a clear financial goal. Putting your money in any instrument without deciding where you want to go with it is like going on a roadtrip with no destination in mind—you and your money could wind up just about anywhere, and rarely the place you want to be at.
So decide: is your money for emergency funds? Is it savings for a big purchase, like a car or a home? Is it for your children’s future, or your own retirement? Are you building a business? What kind of lifestyle do you want to create for yourself?
Whatever your goal is, it certainly carries a price tag. Take time to determine that amount as it will save you a lot of trouble later on. The clearer you are about what you want, the easier it is to realize it.
How long do you need to invest?
This is a follow-up question to your financial goal: determining your time horizon. Investments may be short-term, medium-term, or long-term. Some investments, like bank deposits, are liquid, meaning they can be converted to cash in short notice. Others, like real estate, require time to make a return. It pays to be clear about what you need. You don’t want to be in a long-term investment if you’ll be needing your money back in a year or two, and short-term investment for a long-term goal may leave you short on cash in the end.
How much risk can you afford?
Understand that there’s no such thing as a risk-free investment. Even bank accounts carry the risk of loss however small, and the risk that your cash’s value may be eroded by inflation. There are both low-risk and high-risk types of investments. The general rule is: high returns equals high risk and low returns provide low risk. It’s always a trade-off of risk-reward. Decide on what you prefer. If you can’t afford to lose your entire capital, it’s not advisable to invest in high-risk investments.
How much will you invest?
Of course, the size of your capital determines what kind of instrument you can choose. Certain kinds of investments, like special deposit accounts, require a minimum amount. The larger your capital, the more options you have to choose from. If you find you’re short on cash, invest in instruments with a smaller requirement and work your way up to the big ticket ones.
What kinds of investments can I choose from?
Here’s are just some examples.
Bank Instruments. These include savings accounts, special deposit accounts, time deposits, and certificates of deposit. The quoted rate depends on how much you can deposit and how long you want to maintain the account. Note that as of this writing, interest rates for bank instruments are trending down.
Bonds. These are promissory notes, essentially loans lent to either the government or corporations. The rate depends on the issuer’s risk rating (their capacity to pay) and the length of the bond’s tenor. Government bonds are seen to be unlikely to default and thus are among the safest investments around.
Stocks. This means investing in shares of a company, making you part-owner of it. You can make a profit by selling shares when their value appreciates. Some stocks also pay out dividends to shareholders whenever the company makes a profit, but this is not guaranteed. Stock prices rise and fall quickly over time and are generally considered risky investments.
Mutual funds, Unit Investment Trust Funds, and Variable Life Insurance funds are sold by investment companies and provide funds that are handled by professional fund managers. Clients pool their money and the fund managers invest them in a basket of bonds, stocks, and other cash instruments. You can have a choice between different mixtures of these funds depending on your risk appetite.
Foreign Exchange. This means investing in currencies, making a profit with the rise and fall of that currency’s value. Forex markets are usually more volatile than the stock market and carry considerable risk. One should take time to study forex trading before plunging into this market.
Real Estate means buying and holding property (e.g. Land, condominiums, apartments, houses, lots) either for lease or to sell at a profit when the value goes up. A popular investment vehicle, real estate can be highly profitable but usually requires a large amount of capital to start with.
Businesses. You can own a business, buy into a franchise, or be a “silent partner” in either. Your return depends entirely on how profitable the business is, so you’d best be aware of how well the business is being run.
There are many other things to invest in: derivatives, art, jewelry, precious metals, and so on. Ultimately, only you can decide what the best investment is for you. So pick a goal, do your due diligence, diversify, and hopefully—profit!
What’s your preferred investment? Sound off below.