Thursday, October 4, 2012

Investing 1 Million Pesos: Keeping it Simple


Dear Investor Juan,

I am a seaman, 37 years old and I've saved a lot for my 13 months "on board ship" amounting to one million pesos. Before my money runs out due to mismanagement and invest in other means I seek your financial advice and correct me if I'm wrong to the things I planned to do when returned home in the Philippines by 1st week of October. Actually, I made research on investment on different vehicles available in our country, I read a lot of sites giving emphasis on how to start making an investment until I searched your very informative blogs regarding this matter.

By the way, if you ask me about my profile as an investor I can say that I can take any risk and can afford whatever to lose, in fact an aggressive type seeking for high returns with high risk. My financial objectives are for retirement, college funding and accumulate enough money for my financial freedom, which all goes with long-term investment. Since this is my very first time to make investment like these and I don't aware that they really exist thus lacking my know-how until I realized if ever I started as early as received my first green bucks I can somehow say I've owned a lot nowadays.

The following are my planned investment with this 1 million.

100,000 FAMI Equity fund
25,000   FAMI Balance fund
25,000   FAMI Fixed Income
25,000  Sunlife Equity Fund
25,000  Sunlife Balanced fund
25,000  Sunlife Bond fund
25,000  Sunlife Money market
50,000  BDO Equity
10,000   BDO Bond fund
10,000   Money market
80,000  Philam strategic fund
100,000 MBTC TD (additional)
50,000  SMC preferred shares (if available till October)
250,000 Downpayment to avail BPI autoloan promo
30,000   Starter fund to open BPI online for stock market to learn the market
160,000 Budget/emergency fund
10,000  Fees when I attend seminars on this investment

One thing more also, I will receive 5,000 USD leave pay which I planned to invest in MBTC dollar fund which please advice.

Sincerely Yours,

Dear Marcelo,

Congratulations! 1 million pesos is a very good amount to start investing with. Now let's take a look at your plan.

You have 1 million pesos and 5,000 USD at your disposal or a total of around 1.2 million pesos. First, the car loan and the emergency fund are not really investments. Second, paying 10,000 pesos for investment training is, in my opinion, a waste of money; the only ones who earn for sure from such seminars are those who organize them. If you want to learn the fundamentals read articles online (such as what we have here) or books by reputable authors. Lastly, if you feel that you need to attend a seminar before you can trade stocks, then you're better off investing in mutual funds or UITFs instead of picking stocks. All that leaves us with 790,000 pesos of "investable" funds.

You have allocated a bulk of this amount to the different kinds of UITFs offered by different banks and in doing so, perhaps you were trying to manage risk through diversification. I see three problems with this strategy. One, you're not really diversifying when you invest in the same kind of fund (e.g., equity) offered by different banks; even if there are differences in the fees and the compositions of these funds, you'll see (from this website or Bloomberg, for example) that they more-or-less move in step with each another, so risk is not significantly reduced. Two, since there's no real advantage in doing it, the additional hassle of having accounts in different banks and monitoring different NAVPUs is not worth it. And third, you're missing out on some returns by not concentrating on the best performing fund in every class.

In allocating your funds, you have basically chosen three asset classes: equities, bonds, and cash/cash equivalents (such as time deposits and money market funds). Based on your allocation (let's assume that the 10,000 freed up from training will go to cash and that balanced funds are a 50/50 mix of bonds and equities, and let's treat the SMC preferred shares as bonds), your implied asset mix is 30% equities, 20% bonds, and 50% cash and cash equivalents. I'm not sure how you actually allocated your funds, but at first glance I actually agree with the mix (if you want a more precise and objective allocation, you might want to use this method to allocate between equities and bonds, and subjectively adjust the amount invested in cash and cash equivalents based on your risk aversion).

So let's say you want to maintain this mix. I suggest you get historical prices of the funds that you're interested in and compute for the Sharpe Ratio of each fund. Then for each fund type, choose the mutual fund or UITF with the highest ratio. The three funds that you're left with (one equity fund, one bond fund, and one money market fund) are all you should invest in, using the 30/20/50 mix you indirectly chose or whatever mix you think is appropriate. This portfolio will now be diversified across asset classes, be more manageable, and offer a bigger bang for your buck.

I hope you find this helpful. Good luck!

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