Common myths about investing
MANILA, Philippines – The year is almost over and in many ways, notwithstanding the downturn in the second half of the year, it has been a spectacular one. Many first-time investors have entered the market as the economy grew. With more disposable income, they are looking for alternative investment vehicles where they can put their hard-earned money in.
The numerous articles on investing and preparing for life’s various needs such as education of one’s kids and retirement have helped increase Filipinos’ financial literacy.
Yet many misconceptions about investing remain. Being in the asset management and insurance industries, we encounter many of them every day. Below are some of the common ones.
Only rich people can invest. Gone are the days when one needed hundreds of thousands to even think of buying bonds or building a decent portfolio of stocks. There are many investment alternatives now. Some, such as mutual funds and retail treasury bonds, require as little as P5,000 initial investment. Certainly very affordable. With mutual funds, you can continue to invest easily as subsequent investments can be as low as P1,000.
If someone can earn from an investment, so can you. This type of thinking drove the herd mentality that led to large numbers of lechon manok and shawarma stands, many of which subsequently folded up. Just because someone made a lot of money from a stock doesn’t mean you will, too. Put another way, don’t join the bandwagon – more often than not, you’re already too late! And remember, don’t spend for something you don’t understand. Study the investment properly before you put in any money, otherwise you may lose all of it!
Invest when the market is positive. In fact, it should be the opposite, buy on bad news, sell on good news. For most people, though, timing is very hard as they simply don’t have the time to study all the economic and corporate data to make sound decisions. For the average person, you’re probably better off setting aside and investing a fixed amount every month. This is called “peso cost averaging.” You end up buying more shares when the market is down, less when it is up, but over time, you earn on your overall portfolio.
Trading in the stock market is investing. The latter allows you to take part in a company’s growth, whereas the former only deals with price movements – i.e. trying to time the market or take advantage of price movements by buying and selling stocks.
Real estate is the best investment. Many people often think real estate is the best and safest investment because it always goes up in value, and you have tangible property. On the contrary, the value of real estate goes up and down just like any investment. Property also depreciates, and sometimes can even become almost worthless – just look at areas prone to heavy flooding. You also have to factor in other costs, while holding on to the property like taxes, dues, and maintenance expenses. Real estate is in fact one of the riskier investments as it is illiquid and the price movement cycles are fairly long – unless the real estate is income-generating, you could end up holding your investment for a long time before it can make any money for you.
All expensive purchases can be classified as investments. People often justify purchases of artwork, jewelry and designer items as “investments.” As my husband always tells me, it’s not an investment if you’ll never profit from it!
If I hold a variety of stocks I’m diversified. Diversification refers not just to multiple stocks, but multiple classes of investments. While stocks tend to outperform other investments over time, in certain environments, bonds and even treasury bills may give better yields. Thus, it’s often advisable to have different types of investments. A mutual fund or unit investment trust fund, which offers a diversified portfolio, is a good alternative as it invests in various stocks, bonds and other fixed-income instruments. The fund manager actively changes portfolio allocation of the various assets depending on how he views the market. Do study the prospectus of the fund, though, as each fund will have its own investment mandate, and some may be more aggressive than others.
An investment poses the same risk for everyone. Risk very much depends on one’s own profile. A million peso investment in a startup company that has the potential to grow ten times in value but may also become absolutely worthless may not be risky for someone who has a hundred million and can afford to lose the money. It is however very risky for someone who only has that amount as life savings.
Financial security comes from having enough savings in the bank. This is surprisingly still the most common misconception about investing for your future. Savings accounts are not even investments. Investments need to beat inflation, and with 1% interest, savings accounts actually lose value over time. They are important for short-term needs, but if you want to secure your future, find an investment that will make your money grow in real terms.
A unit-linked insurance product is an investment. Not always! A single premium unit-linked insurance product (where the “units” are tied to the value of an underlying asset such as an equity fund, bond fund or a balanced fund, which has a mix of both) is primarily an investment as the insurance component is quite small. But a regular premium unit-linked insurance product is bought primarily for protection. The fund value does provide a savings component, but the product is meant principally to protect against unexpected occurrences such as sudden death or disability. But if one does manage to live to a ripe old age, the fund component would have grown over time and will provide a fund for one to use or to pass on to the next generation, so in that sense, it can be considered an investment. – Rappler.com
Riza Mantaring is the CEO and President of Sun Life Financial.