DEAR INVESTOR JUAN
Dear Investor Juan,
I just want to know your opinion and views on BDO's Easy Investment Plan.
By the way, awesome blog!
I kid. I kid.
Dear Clark, er, Vergel,
BDO's Easy Investment Plan (EIP) is an alternative way of investing in UITFs that offers several advantages over conventional lump-sum investments. It doesn't really involve anything newfangled or complicated, and other banks should offer the same option to their trust clients, if they don't already: by opting into the service, an investor gets to automatically transfer a fixed amount from his bank account, once or twice a month, into a BDO UITF of his own choosing. Here are some ways EIP can work to your advantage:
1. Prioritize savings
Perhaps the biggest challenge we face in building our emergency fund and investment portfolio is self-control. Midnight sales in malls on paydays reflect how conspicuous consumption has started to pervade our culture and psyche: every 15 days we feel we deserve to spend a bit more than we normally do for working very hard in the previous couple of weeks. This preference for short-term gratification over financial stability in the long run has led to very low savings rates among many Filipinos, a deficiency whose pitfalls unfortunately only become apparent after the fact, often when it's already too late. EIP helps you better avoid the temptations of overspending by automatically deducting a predetermined amount for investment, leaving you with less funds available for expenses. The good thing about this is that since you'd be investing in UITFs, which are liquid to a certain degree, you would still have access to your invested funds even during financial emergencies.
2. Face less hassle and stress
You enroll once, and that's it: your chosen amount will be invested for you automatically, unlike making periodic investments on your own where each instance entails going to the bank and filling out forms. Also, regardless of your investment horizon, you needn't worry about market timing and daily fluctuations in NAVPU (see item 4 below), which basically protects you from the stress and anxiety typically associated with investment decision making and monitoring.
3. Invest less than the minimum required
The trouble with UITFs is that the minimum additional investment is usually prohibitively high, at 10,000 pesos or more. For most people, setting aside 10,000 for investment would take more than a couple of months, which basically eliminates the opportunity to earn returns on what could be invested earlier. With the EIP, investors can invest amounts as low as 1,000 pesos per month, allowing them to benefit from time value of money by investing early and to build up their investments slowly but surely.
4. Benefit from cost averaging
"Cost averaging" is the conventionally used term for the investment strategy that EIP is based on; as was already described above, it involves investing a fixed amount regularly over a period of time into a particular investment instrument. If this were a perfect world and we have costless access to perfect information, then the best investment strategy would be to only invest when prices are at their lowest; unfortunately, the world is far from perfect and timing investments in risky securities, like bonds, stocks, and even UITFs, is essentially an exercise in futility. By spreading your investable funds evenly across your investment horizon, as you would with EIP, you are betting that you would be buying when prices are low about as often as you would be when prices are high, which averages the unit cost of your investment (your "buying" NAVPU, in this case) and gives you a better chance to earn higher returns.
Overall, the EIP provides several valuable benefits in exchange for very little costs (like having less spending money), so it's as close to a free lunch as we could ever get in the wonderful world of investing. It's the perfect investment scheme for intermediate investors, particularly those who are entering the systematic stage of investing, and for those who don't want to delve into the pseudo-science of market timing.
UPDATE 24 APR 2011:
BPI has a similar investment scheme called Regular Subscription Plan. An initial deposit of 10,000 pesos is required, and periodic increments of as low as 1,000 pesos per month or per quarter can be invested to the BPI UITF of your choice. Thanks to Anonymous for the heads up.
Disclosure: Again, while this post looks like some sort of infomercial for BDO, it is not: it is a plain and honest response to an actual query from one of our readers. I am not in any way connected with BDO or its affiliates. If you are aware of any similar products offered by other banks, kindly inform me so I can update this post accordingly. Thanks!