Investment 101: Beginners’ guide to investing for Pinoy

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Studies show that millionaires do not depend on only one income. They have at least seven streams of income. How do they do that? Simple. They invest.

This article is the beginner’s guide to investments that covers passive income, importance and benefits of investing, things you need to do before you put up capital, and the legitimate investment options that are available in the Philippines.

Understanding investing

Investing is using your money in a way that you can expect to earn extra income. It is like putting your hard-earned cash into work with the hope that you reap the returns later. Thus investing involves two things, the risk that you take when you commit money to an investment and the potential return that is expected in exchange for taking that risk.

Investing gives you the opportunity to get the most out of your active or passive income. Using your savings as capital to fund a small business is a type of active income; you need to put in the effort to keep the income going. For average Pinoy, most of the earnings are from active income either through employment or business. But we only have 24 hours each day, and that is a fact that puts a limit on what you can possibly earn.

That’s where passive income comes in, it allows earning to continue even while you sleep. An example is buying stocks of Philippine companies that give out annual dividends or setting aside your extra cash to a time deposit account that gives out quarterly interest.

Why invest?

When you do put your money to work for you, you open up multiple income streams. You get something extra on top of what you earn from work or from the business.

There are many benefits when you start investing including:

  • Meet financial goals faster. When you have other ways to earn, you can accumulate money quicker than when you only rely on one income stream. You can then be able to achieve goals and fulfill dreams in life.
  • Build wealth. Having an extra means to get money helps you acquire more assets that boost your net worth. By building your wealth, you’re prepared for any emergency and retirement, and you may even have a way to leave an inheritance to your heirs or the charity of your choice.
  • Money habits. When you’ve started early in life, you would’ve developed the skills in managing your personal finances well such as budgeting, saving, and setting aside cash for any opportunities to grow your money that come your way.
  • Compound earnings. Investing long-term takes advantage of compounding of returns, which are a way for you to get the most out of the growth of your money. As you save, the returns that you get pile up over the years.
  • Combat inflation. When you put coins in a piggy bank, the value of your savings remains the same but its worth lessens by the passing of time because of inflation, which is the general increase of prices that chips away your money’s ability to purchase goods and services. Investing allows you to preserve its worth by providing earnings that match or exceed the pace of inflation, making sure that you will still have the same purchasing power in the years to come.
  • Opportunity cost. Missing the chance to invest would mean that you’re depriving yourself of potential earnings that you get from your spare cash.

What are the risks in investing?

Risks are part of investing. They can never be avoided. Knowing this fact should not stop you from looking into any opportunity that comes your way. Rather, it should motivate you to learn about them and the ways to manage them.

Equally important too is to know your risk profile, which is a way to describe your appetite for risks. If you tend to avoid risks, then you can be considered a conservative investor and you are more suitable to investments with low chances of capital loss. However, that would also mean that the returns that you get would be modest.

An aggressive investor is someone willing to take high risk in exchange for expectation of high return. A stock investor, for example, understands that the stock prices vary in real-time; they can go up or down and when they go down, there is a chance that their capital is reduced. And they’ve managed to control their emotions when that happens, trusting on indicators or possibly business fundamental of the company that the price direction is going to swing up.

The nature of risks that you’d encounter would depend on the kind of investment. Generally, you can expect two types:

  • the risk of capital loss
  • the risk of not meeting expected returns

Risk of capital loss

Deposit savings accounts in the bank, long term negotiable certificate of deposit (LTNCD) and time deposit are usually considered low risk because half a million pesos is insured by Philippine Deposit Insurance Corporation. Savings programs such as Pag-ibig MP2 and retail treasury bonds are similar because they are backed by the government. They ensure that your capital or a portion of it remains intact, and the people who participate in them can be regarded as conservative investors.

As a comparison, owning shares of Philippine companies is for aggressive investors. The prices of shares are volatile, they change every trading day depending on the demand for them. Hence, there is a real risk that you lose a portion of your capital, investors and traders have to be knowledgeable and skilled so they can avoid or at least mitigate the loss. (Why are they willing to expose themselves to the risk? Because they may have studied the market or company profile and found out that there is potential upside.)

Risk of not meeting expected returns

The other risk is not meeting expected returns. Of course, bank deposit products such as savings account or time deposit have minimal chances of running into such risk (unless the bank goes into default),

It can be a factor in non-guaranteed gains, such as in a mutual fund. You might expect that it is going to post the returns it had the previous years or the returns based on a projection. Thus, it is important to always be reminded that historical data does not predict future returns, and projections do not guarantee actual performance.

How do you manage risks in investing?

So if risks are part of investing, what are the things that you can do to manage them? First, understand them. The more you know about them, the better informed you would be in making a decision. For example, index funds have good and bad years, and experts recommend that you invest long-term to get the average returns over the years.

Second, make sure that you know and understand your risk appetite. How much of it can you take? The best investment out there is one that is a perfect marriage of the inherent risks and your risk appetite.

A good way for you to find out is to walk into any bank that is offering unit investment trust fund (UITF) and ask for an investment rep. Request information about their UITF products as well as check if you can take their risk profile assessment. It is a series of questions to determine what kind of investor you are, with the results ranging from “Aggressive” to “Conservative.” These questions would be about your time horizon, your reaction to capital loss, how soon you’re going to withdraw the money, etc. (You don’t have to invest right away, just tell them that you’d like to know more details before making that decision.)

What to do before investing?

What are the things that you need to do as beginners? What you’ve read so far may sound like there are a lot of things to watch out for, and that might somehow dampen your eagerness to invest. Don’t worry. These are the things that you have to do to ease yourself into it.

Build a financial plan

Don’t go into investing for the sake of it. Put in a financial plan. You have to know why you’re doing it, for how long, and what you’re expecting to get out from it. Otherwise, you’re just wasting your money into something that you barely understand and end up regretting going into it blindly.

  1. Determine your goals. What do you want to happen in your life? What personal ambitions do you want to achieve in the future?
  2. Understand your financial status. You can’t know how you can attain your hopes and dreams unless you know your current finances.
  3. Develop a financial plan. This is the stage where you’re finding ways and means to improve your present situation in order to achieve your goals. This can range from putting up a budget, saving, working a part-time job, or engaging in a small business.
  4. Protect your plan by building a solid financial foundation. Make sure that you have adequate insurance and emergency fund, and find ways to manage your debts.

How much capital do you need?

As you’re drawing up your financial plan, it is important that you understand how each of your goal would cost and how long you’re planning to attain them. This combination of cost and timeline puts your plan into action, so your next concern would be how much capital you’re going to put up for your goals.

Some recommendations would split your income to 50-30-20, where 50% is for your needs, 30% for your wants and 20% for your savings where you can get your capital. Or you can also follow the 70-20-10 rule, where 70% for your needs and wants, 20% for your savings, and the remaining 10% for tithes and charity.

And it is fairly easy to compute how much growth or rate of return if you have already determined the cost of your financial goal, the length of time you want to achieve it, and the capital that you’re willing to commit. So for example, you’d want to buy a car worth half a million pesos in five years and you have ₱250k right now, then you’d need to look for an investment with can consistently deliver 10.67% growth per year.

CapitalGoalYearsRate
300,000500,000510.67%
YearCapitalTotal
1300,000332,270
2368,011
3407,597
4451,440
5500,000

Due diligence

It is important that you do your due diligence so you can avoid investment scams. Know the details of an investment option that you’re interested in, whether it’s an investment fund, a business franchise, or savings program by the government.

  • Business model. How does it make money? What assets does it have? What is its business operation?
  • Company. Is it registered by the government? Is it allowed by the Securities and Exchange Commission to solicit investment? Does it have a good reputation and history of success? Is it managed by executives with proven track record? Who are their competitors?
  • Risks. What are the risks? Are they being disclosed?
  • Returns. How does it compare to industry average?
  • Capital. How much capital is required? How easy is it to get your money back?
  • Red flags. Are you being promised of easy and high return on your investment? Does it sound too good to be true?
  • Charges. What are the charges, fees, and taxes involved? Are there similar investment options in the market with lower fees?

Top investments in the Philippines

So what kind of investments are available for Filipinos who are residing in the country or working abroad?

  1. Securities
    • company stocks
    • preferred shares
    • corporate and government bonds
    • treasury bills
    • long term negotiable certificate of deposit
  2. Managed funds
    • mutual funds
    • unit investment trust fund
    • exchange traded fund
    • Personal Equity and Retirement Account (PERA)
    • variable universal life policy
  3. Government savings program
    • Pag-ibig MP2
    • SSS Flexi Fund
    • SSS PESO Fund
  4. Bank products
    • High-yield savings account
    • Time deposit
  5. Trading
    • Forex
    • Cryptocurrency
  6. Small business
  7. Crowdsourcing
  8. Cooperatives
  9. Real estate

Securities

Securities are paper assets that are a proof of partial interest or ownership in a business, such as company stocks and preferred shares. They can also be debt instruments, such as corporate bonds, government bonds, retail treasury bonds, treasury bills and long term negotiable certificate of deposit.

Managed/investment funds

For most Pinoys, owning individual securities may require time and expertise that they don’t have. So they’re better off letting an investment house manage them on their behalf. This is what managed funds are for. Examples are mutual funds, unit investment trust funds, exchange traded fund, Personal Equity and Retirement Account, and variable universal life policies.

All of these managed funds are categorized according to the assets or combination of assets that they hold. See below.

FundAssetRiskInvestor
Index fundsBlue chip stocksHighAggressive
Equities fundsStocksHighAggressive
Balanced funds Stocks and bonds Medium Moderate
Bond fundsBondsLowConservative
Money market fundsShort-term fixed incomeLowConservative

Government savings programs

State-run entities have savings programs that are made available for Pinoys who want to earn passive income. The Pag-ibig MP2 is quite popular due to its dividends that are consistently higher than interest earned from some banking products. Social Security System also has two similar programs: SSS Flexi-Fund and SSS PESO Fund.

Bank products

Banks offer investment products too such as UITF and LTNCD as mentioned above. They also can offer to their conservative clients high-yield savings accounts and time deposit products that you can find in the market with better-than-average interest.

Trading

If you have the time of the day and the patience to learn, you can also engage in trading securities such as stocks, cryptocurrency and forex markets. You got to be ready to allocate time when the markets of these securities are open, and you will also need to have the expertise in knowing what and when to trade.

Cooperatives

Another easily overlooked alternative is the cooperative. There are many kinds of cooperative operating in the country, offering products and services to members including deposit accounts that can earn interest. You may want to check one located near you.

Crowdfunding

Crowdfunding is a way for small and medium businesses, social causes, and other enterprises to get the capital they need to pursue their ventures. The crowdfunding platforms allow the public to invest their money on selected projects, and they can earn when these projects become successful in turning up a profit.

Real estate

Acquiring real estate is also another way to invest. It may require huge capital and years for mortgage payments should you purchase a property on a loan. In exchange, you can earn from rental income or you may also engage in buying and selling properties.

Small business

Lastly, there is always the option to open a small business. It can be in the form of a brick-and-mortar store or an online shop selling goods and services. This may be a chance for you to pursue your passion project or turn your hobbies into income-generating side-hustles.

How much can you earn from investing?

So the next question that you might ask is, how much is the potential income can you get from investing? It really depends. Some savings programs have guaranteed returns (such as savings accounts and time deposit) and securities in the form of bonds and LTNCDs. The interest to be paid out is known from the beginning, and it is given to you usually every quarter.

Some investments don’t have any guaranteed returns. Pag-ibig MP2, for instance, provides dividends that vary every years depending on the income that it earned the previous year.

Next steps

Investing is an important part of financial planning.

  • Take the time to check the plans you have made with your goals, and see how investing can help you achieve them.
  • Make sure that you know your risk profile, and invest only in assets that you assets that match your willingness to take risks.
  • Get in touch with a financial advisor to help you make and implement financial strategies, teach you on products that you can invest in, and help you build a strong financial foundation.
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