36. Does "peso cost averaging" really work?

 

as illustrated, peso cost averaging improves effective entry price by going into the market at regular intervals, this allows the capture of different price points that is inherent in volatile markets such as the stock market

35. Tracking GDP, does it really matter?

 

Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period. As such, it also measures the income earned from that production, or the total amount spent on final goods and services (less imports).

whether we deposit money in a bank or or buy stocks, we are in effect providing funding for borrowers including businesses

and the level of economic activities (all the buying and selling of goods and services) may affect the volume of a company's sale of its goods and services, naturally we would like to see it selling more as this would translate to more profits, the GDP is an indication of the level of economic activities

latest reports show a very encouraging number, up 11% for the second quarter of 2021

34. Timing the market? analyze it first!

 

33. Life insurance application - Is an "Education Plan" better than investing?

 

This is one of the most common question I get from parent's wanting to build a college fund for their children.

is it better to invest and maybe make more or just buy as education funding life insurance policy?

I would then ask how important is it to them that their children has a college fund? 

most would say very important

if this is the case, would they feel more secure knowing that no matter what the market condition is, the funds would be there when the time comes?

in the end, I let the client decide

32. Life insurance application - Create liquidity

This application I first heard from Boss Rex in one of our agency rounds during our PAMI days

He has a client who has extensive property holdings, these are not liquid and she is short of cash most of the time as she is retired and is a senior citizen, she intends to leave these properties to her children as inheritance

Boss rex suggested that she sell the property (worth 10m) and buy a 10m life insurance policy as her inheritance instead, boss rex reasons that her children may most probably sell the properties anyway as they have their own already

the client now has liquidity (10m selling price less premiums) and still leave a 10m inheritance

this can also apply to other illiquid assets intended for inheritance

31. Life insurance application - Create an adequate health fund

 

Let's say you have already set aside 500,000 as your family health fund, considering the exorbitant costs of medical treatment today, this may only be sufficient for minor and non-critical illnesses

you can use a life insurance health policy to augment your family's coverage by covering them against critical (and very expensive to treat) illnesses

so for minor illnesses, your family health fund can cover it

pass along to a life insurance company the cost for critical illnesses by getting health insurance coverages

30. Don't let emotions affect your investment decisions

 

one of the most insightful advice on investment management, from one of the best stock market investor of all time Jessie Livermore (on a side note, he died penniless, quite ironic..) 

more often than not, we tend to make "wrong" decisions at the spur of the moment as a knee jerk reaction to market volatility

markets go up and down, we should accept that -  a well diversified portfolio of high quality stocks almost always goes up over the long term, this should be our mental anchor

32. Four signs of financial well-being

control of your finances over the short term means you have a healthy balance in your "liquidity fund", your bills are paid on time and you don't have debt collectors calling on you every so often

financial shocks are unexpected expenses such as illnesses or accidents, this is referred to as your "emergency fund"

you have investment funds allocated to most of your financial goals like funding a child's college education, your retirement, etc

extra resources that will enable you to take an occasional recreational trip, buy gifts for friends, lunch outs with family, etc

this is the objective of the advocacy of financial literacy, to help more people achieve financial well-being
 

28. When emotions (or maybe pride) rule over reason in investing

Mr. Newton is hailed as one of the most influential scientist OF ALL TIME!

and yet he became "victim" of one of the first bubbles in the history of investing

He was already doing good when he got out with profits, but when he saw his friends continuing to make money (maybe thinking I should be making more because I am smarter than them? - a case of pride?) He plunged right back in and doubled/tripled his investment, only to lose out BIG in the end

Stock Certificate of South Seas

27. Diversify according to your spending intentions

 

the money that we save today; we will spend in the future !

using this as a guide, a practical way to diversify is to diversify according to your spending intentions and preparations for contingencies.

First is to keep an amount as income buffer, this goes to your savings account.

Second is start articulating your financial goals, these are big ticket life events that you need to prepare for such as funding for a child's college education or your retirement, construct a portfolio of stocks and bonds that can outpace inflation over time.

Contingencies are large expenses associated with unforeseen events like accidents, critical illness and worst, an early demise of the breadwinner. These are best covered with insurance.

#acgadvice

26. The "simplest" explanation for Diversification

Imagine a stock market with just two companies!

a company selling Ice and a company selling umbrellas.

Because of seasonality, the umbrella company may perform better during the rainy season because of higher sales while the Ice making company may outperform during summer.

this is diversification in its simplest.

25. Is market volatility your friend?

This chart shows the daily volatility of the Philippine Stock Exchange for the period covering 1987 to 2016, at the extreme it can go up as much as 17% in a single day but can also drop by as much as 12%

This volatility is what is tempting traders to try to time the market by attempting to catch the lows to sell at the high, while there can be some traders who can claim success, the odds of timing it in a consistent manner is very elusive

This table shows the average annual return (9.11%) of the Philippine Stock Index if held for the whole period from 1987 to 2019, attempting to time the market and just missing the best 10 trading days would be returns fall to 5.4%, missing the best 30 days would see returns dropped below a typical time deposit rate, missing the best 50 days would bring returns to negative territory

23. Diversify according to your spending intentions

Diversification is one of the hallmark of prudent fund management, simply stated it cautions against putting everything in one basket

The rationale for this simple but profound insight is that dividing your funds among different baskets will reduced the possibility of them losing money at the same time

Baskets should be defined in terms of Asset Class (see post on asset Class), a time deposit from Bank A is completely the same as a time deposit from Bank B as they belong to the same asset class

24. Does Foreign Funds dominate the PSE?

Foreign Funds comprises more than half the trading volume of the Philippine Stock Exchange

Taking note of what they are buying or selling may give an indication of future stock winners

  Positive fund flow = foreign buying

  Negative fund flow = foreign selling

The PSE website has a day-to-day report on foreign fund flow per stock, below is a report from Philstocks Research

I have however noticed that lately the market still climbed in spite of Net Foreign Selling, does this mean that local investors are now dictating market trends?

22. Think of investing in the stock market as if you are going into business.

The great Warren Buffet is known to have said that we have to think of investing in the stock market as if we are going into business.

As businesses even the best ones usually do not grow in a straight line, its share price will be affected by its actual business performance, economic conditions etc.

Because of this, there is volatility (see post on volatility) in its share price and may cause inexperienced investors to worry.

Let's say I decided to buy Meralco Shares today, following Master Buffet's insight - I have gone into the power distribution business, the business will fail (hence lose money) if Meralco losses all its customers.

You and I are customers.

Can you imagine the day you will decide not to use electricity?

Is the customer base of Meralco growing? or contracting? (See post on possible reason why the stock market has an upward bias over the long term)

#acgadvice

21. Possible reason why the stock market rises over the long term

Consumer spending is one of the key components in the growth of an economy, most countries including the Philippines see at least a 60% contribution (see explanation of consumer spending in the Economic Indicators page)

Looking at the stock market as a venue to purchase business catering to this growing number of consumers, it follows that as consumption increases with the increase in population, the share price of these "listed" businesses grows as well

20. Market Indifference - Not letting the market dictate your productivity.

As the future value of most product solutions we offer clients are tied to market performance, some of us can't help but worry every time the market is experiencing a downturn like what happened in early 2020. While it is really difficult to predict how the market will perform in the coming weeks or even months ahead, most data have shown that over the long term, a managed portfolio of diversified stocks almost always goes up. 

One trait we need to develop as financial advisors is "market indifference", that no matter what the market condition is we will confidently go out and spread our advocacy.

(See post on long-term upward bias of the market)

18. What is an acceptable investment return?

You are given an investment proposal that promises a return of 8.0%, is this acceptable?

most of us will decide on the basis of comparing this return to what we normally received.

• a bank depositor getting 2% will see this as an attractive alternative.
• while a seasoned stock market investor earning an average of 20% to 30% may not be interested

going back to the 8.0% (is this higher than inflation? - investment hurdle) proposal, let's say it's a long-term deposit with a large reputable bank (investment risk) with a 10-year holding period (investment tenor), is this now acceptable?

#acgadvice

19. Market conditions changes, so should we - Always be Learning!

Markets are always evolving due to changes in circumstances whether economic, political or financial stresses brought about by over speculation, the reason why the market is up last week may not be the same reason this week.

Financial advisors should always be learning to keep abreast of these developments, understand how these would affect their client's financial well-being and how best to move forward.

As most financial product solutions nowadays have their future value pegged on expected market performance, a good financial advisor should also have a working knowledge of portfolio management in order to minimize this uncertainty.

17. Clarify your investment objectives

Warren Buffet, John Bogle, Peter Lynch etc..

Popular media has lionized these great stock pickers that we the common investors has come to believe that beating the market is the ultimate objective of investing

The goal of investing to achieve a financial goal means attaining the annual projected returns of your portfolio over time

lets say you have set a growth target of 6% per year, you achieved 6%, but the market went up by 12%, would you still be happy?

16. Monthly investment plan - an automated "cost-average" investment plan

WHAT IS A GOOD INVESTMENT?

In front of you are two investment options, one promising a return of 4.0% while the other promises 8.0%, which one does you choose?

The more popular choice would be the 8.0% option, but is it the right choice?

Looking at the underlying security of the two options, the 4.0% turns out to be is a one-year government security while the 8.0% is a 20-year Fixed Rate Treasury Note, which one would you now select?

Investment planning in the context of a personal financial plan is not limited to the appropriate selection of investment vehicles, it includes the regular review and re-balancing of your portfolio to ensure it grows over time.

Appropriate in this sense means that “an investment should be selected to match a goal and not the other way around”. The rule of thumb is to match the tenor of an investment vehicle with the timeline of a specific financial goal (funds intended for a 10 year goal are best invested in a 10 year instrument).

A practical approach that can help in coming out with a sensible personal investment plan involves answering 3 questions: Where are you now? Where do you want to be? How will you get there?

WHERE ARE YOU NOW?

Assess your current financial status. Measures like personal net worth (your assets less your liabilities) and income/expense figures are computed to give us a sense on how much savings we can realize every month as it is the cornerstone of any investment plan; the hard reality is that we cannot invest the money we don’t have.

WHERE DO YOU WANT TO BE?

Do you want to be rich? Can you tell me how much money you should have to be able to say you are already rich?

In determining personal financial goals it helps if we can articulate and quantify our financial goals by setting financial milestones and timelines  to find out if we are on track.

If I am planning for my retirement 20 years from now, I need to articulate today  the type of retirement lifestyle I envisioned for myself and my family; specific issues like “where would I spend my retirement, what are the things I would do, places I would visit, etc.” should be carefully thought of, after which an estimate of how much money is needed to bring this dream to fruition is computed.  

HOW WILL YOU GET THERE?

Only after we answer the first two questions should we start our investment selection.

Assuming I need Php 20 Million to ensure a comfortable retirement, how much should I invest every month?

Three factors to consider are;  (a) time line, (b) amount of monthly investment and (c) assumed rate of return.

As the time line is already set (20 years), the amount of monthly investment would vary depending on the expected rate of return. This is where we narrow down our investment selection to the three main asset class (cash, bonds and equities); over a 20 year horizon an equity investment has shown the best risk/return profile, then the appropriate vehicle should be an equity investment.

At the assumed return of 4% per annum, I need to set aside and invest Php 54,529/month, Php 33,954 at 8.0% and Php 20,217 at 12.0%

Take note that the amount required goes up as assumed rate of return goes down, here, we may be tempted to pick the most aggressive choice (12%) thinking it would save us some money 

while there is no guarantee that that the assumed rate of return would be our expected return, an equity index fund projected to grow at 8.0% per annum over twenty years shows the best chance of success.

A useful Microsoft excel program to help you estimate the required monthly investment is the PMT function.

15. Investment wisdom from the masters

14. Savings! - the bedrock of a solid financial plan

Savings is the bedrock of a healthy financial plan, without savings what is there to invest?

Savings also gives a sense of emotional well-being, knowing we have something to dip into in case of income shortfall

and to quote P.T. Barnum

A penny here, and a dollar there, placed at interest, goes on accumulating, and in this way the desired result is attained. It requires some training, perhaps, to accomplish this economy, but when once used to it, you will find there is more satisfaction in rational saving than in irrational spending.

13. Is an ATM account an investment?

 

You have some extra money that you decided to save. 

Where did you keep it? 

• In your pocket? 
• In your bedroom drawer? 
• Under your bed? 

You retained physical possession of your money, so this is your savings.

• Did you deposit this money in the bank? 
• Did you place this money in a mutual fund? 

Did you transfer physical possession of your money? if you did, you are investing!

You are already investing if you transfer possession (even digitally) because there is now a possibility that you may not get it back, second is that you are given a return (interest) for taking this risk.

Is depositing money in a bank "investing"? This is a very important realization because accepting that bank deposits are investments will make you more conscious on how much you keep on it because of the returns.

12. Choice affects outcome especially for long term investments

You have set aside some money intended to fulfill a financial goal twenty years from now.

Because of the length of the time horizon, the choice of investment today will have a substantial impact of its value in the future because of compounding.

the key is to create three different portfolios (see post on diversification 1) as a guide to asset selection, money intended for long term goals are best placed with long term assets.

#acgadvice

11. Why am I afraid to invest in the stock market?

For most of us, our first foray into investing is by way of opening a savings account (see post "Is a savings account as investment?). 

We got used to its stability and predictability that it formed a belief in our mind as to how a "safe investment" should behave. 

This belief became our template for determining which prospective future investment is "safe" or "risky"?

The nature of an equity investment is completely opposite the behavior of a savings account; while a savings account is steady and predictable, equities are volatile and unpredictable, hence the fear of investing money in the stock market

We have to understand that different asset classes behave differently, they grow/fall in value in disparate manners and have to be appraise based on their respective characteristics

Comparing a savings account to an equity fund is like comparing apple to oranges.

#acgadvice

10. How to diversify effectively!

Don't put everything in one basket!

True! but make sure the baskets are properly defined!

The objective of diversification is to minimize the risk of losing an entire portfolio by separating funds into different investments (baskets=asset class)

The three most common asset classes are cash, bonds and stocks

The key is non-correlation - meaning they don't react in the same way and at the same time to changes in market conditions, 

for example the Central Bank announced a cut in interest rates

Cash Assets - effect is unfavorable as savings rate may fall further below inflation rate 

Bonds - effect could be positive as bonds with higher coupons may appreciate in value

Stocks - positive as lower interest rates means lower borrowing cost and this could translate to higher operating margins which may justify a higher stock price, may not be applicable to bank stocks though as lower interest may mean tighter spreads

9. NO FREE LUNCH - Low risk; low returns, High risk; high returns

The following chart shows a comparison of the volatility of the US stock and bond markets, note that the swing of the stock market is much larger than the swing of the bond market, this shows that stock market investing is riskier than bonds using volatility as a measure

The returns for the same period shows that stock market returns are almost double that of bonds

ergo high risk=high returns, low risk=low returns

Now close your eyes and try to imagine how the volatility of a time deposit would look like, flat? how much is the return?

8. Regular portfolio review conversations with your client may lead to higher sales!

Regular portfolio review and re-balancing have shown to deliver extra returns over time, this would increase the probability of investors hitting their objective

What Is Rebalancing?

Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state. In addition, if an investor's investment strategy or tolerance for risk has changed, they can use rebalancing to readjust the weightings of each security or asset class in the portfolio to fulfill a newly devised asset allocation.

 https://www.investopedia.com/investing/rebalance-your-portfolio-stay-on-track/

above is a framework on how to conduct a portfolio review conversation with your client

 

 

7. Financial advisors provide value through actionable insights

Our clients have the same access to news, facts and data, our value as financial advisor is to process these into actionable advice by explaining to the client the pros and cons of acting/not acting on a given market development, how this could impact his future financial wellbeing.

This would only be possible if we have a comprehensive understanding of the financial concepts and market knowledge.

One thing I learned as a financial advisor is when you demonstrate that you know how the market works and how to take advantage of opportunities within these markets, your credibility with the client goes up and maybe with it the size of funds the client entrusts to you.

To sell bigger cases; learn and know more!

#acgadvice

 

5. The cost of "withdrawable anytime"

Do you still recall the interest you are getting from your savings account? most of us would have not notice the interest because of its miniscule amount, even so, we are quite happy to keep our money there, why? because its "withdrawable anytime" and this gives us a sense of "safety" as we can take it out anytime! This is the benefit of "Liquidity"!

The average 30-day time deposit rate is around 2.0%, why do you think it is higher than your savings account?

it's because you have agreed to not withdraw your money for 30 days, you gave up liquidity in return for a higher rate.

The first trade-off (you have to choose one over the other) in investment is choosing between "liquidity" over "capital growth."

if you want your funds to be very liquid, forget about capital growth for it will not grow.

if you want your money to grow, be prepared to keep it invested for as long as you can.

#acgadvice

6. Negative compounding happens when you don't beat inflation

We save money today so we would have money to spend in the future, how much we can spend in the future (how much goods or services we can buy) depends on the prices of these goods and services in the future.

Compounding is a powerful way to build wealth over time, for as long as the factor is positive. This means we are earning a return that is higher than the "Inflation Rate".

It becomes negative if we are not earning enough to offset the increase in prices as measured by inflation, over time, this loss will snowball to a significant loss in purchasing power.

This happens when you keep too much of your savings in a very liquid but low yielding savings account.

Take note that liquidity is a benefit that comes at the cost of not being able to keep pace with rising prices (see post on the cost of withdrawable anytime)

Rule of thumb on how much to keep in a savings account is an amount equivalent to three months average monthly expenses, so let's say your average monthly expense is 50,000, keeping 150,000 in your savings account is more than enough to cover almost all income shortfall, invest the excess in other higher yielding assets.

#acgadvice

4. Gearing Up for a Strong Investment Conviction by Rex Mendoza

My takeaways

the investors chief problem-and even his worst enemy is likely to be himself (referring to the making of investment decisions)

right strategy, but don't have the patience to let it work.. (aray!)

confirmation bias - when you google something, the article that most interests you would be those that confirm what you already believe, this may be the reason some speculators hold on to losing position far longer than they have to

money is not technical, its behavioral (quote of boss rex)

on the question on how many rivets are there in the eiffel tower - you most probably will not give a large range but instead try to give an "intelligent accurate guess" because people may think " hindi ka matalino!" ha ha ha

halo effect - we try to make an "educated" guess even though we know its wrong (sobrang bilib sa sarili?)

the mind needs an excuse to change (quote of boss rex)

market drivers for 2022

• demographic sweet spot (our young population)
• election year (does this surprise you?)
• revenge spending (hope I can participate in this ha ha ha)
• economy re-opens (herd immunity?)

thank you boss rex! you're the best!

3. Benefits of managed funds - Most equitable way of profit sharing

 Of all the benefits of managed funds I think this is the most beneficial to retail investors.

Imagine this : Ten years ago, 2 investors bought into a newly launched equity fund at the starting Net Asset Value per Unit of 1.00, one invested 5,000 and got 5,000 units (assuming no transaction costs), the second one invested 100 million and got the corresponding number of units.

They cashed in at the same time recently at 2.00, both enjoyed an ROI of 100%!

(See post on critical mass)