Free Life Insurance with BPI's Get Started Account

DEAR INVESTOR JUAN

Dear Investor Juan,

I have a question about insurance. I can't decide which of the two is a better option for my husband:

Option 1.Term life insurance for 2 million coverage with premiums in the table below

Option 2: BPI's Get Started savings account with life insurance (5x your adb maxium of 2 million). My husband has 100,000 at present which function also as our emergency fund.  I'm thaninking of putting in addition 300k so that my husbands coverage will be 2 million.

Do you think its better to just do option 1 and invest 300k in uitf? or choose option 2 meaning total saving 400k with 2 million life insurance,at the same time it will funtion as our emergency fund?

Please excuse my grammar and spelling as I have just given birth two days ago and in a hurry to write this as I would like to email you asap so to help me decide which option is better.

Thanks,
Maxine


Dear Maxine,

Thanks for your email and the very useful information that you have provided us.

The first thing I did was review the details and conditions for BPI's Get Started account. Everything seems to be above-board--it does offer free life insurance with no strings attached. The only possible drawbacks that I see are that only depositors who are 15 to 70 years old are entitled to free insurance and the minimum monthly balance of 25,000 pesos for ATM accounts (75,000 for passbook) is higher than other kinds of accounts, but these are not deal breakers, in my opinion. Also, like other savings accounts Get Started pays interest, albeit at a paltry 0.25%, but I'm sure other banks offer around the same rate.

Thanks for sharing your insurance quotation, it's really helpful especially for people who don't have any idea how much life insurance costs in the Philippines. While the annual premiums are not very high, they are also not negligible. So based on your options (which you formulated correctly, by the way), to get a 2 million peso insurance coverage on the first year, you can either pay 7,900 to an insurer or maintain a 400,000 deposit in a Get Started account. I understand your hesitation in choosing Option 2--keeping 400,000 in a savings account seems to be a waste since it can possibly earn more in an equity fund? But if you can justify keeping 400,000 as an emergency fund--which to me is completely understandable, especially if it's for your entire household--parking the amount in an account that provides extra benefits makes a lot of sense.

How much more value is Get Started providing anyway? Using your insurance quotes, maintaining a 400,000 deposit in the account earns 0.25% interest and insurance that is worth 7,900 for the first year. Which means that your deposit would effectively be earning 0.25% + 7,900/400,000 = 2.225% in the first year. Given the interest rate climate nowadays, that rate is comparable to yields on T-bills and time deposit accounts--but with Get Started you don't lose liquidity, which is a necessary feature of an emergency fund. So yeah, Option 2, most definitely.

For other readers who think 400,000 is too high for an emergency fund, just figure out the amount that is appropriate to you and deposit that in a Get Started account.

Finally, I make these recommendations based on the limited information that I have. If anyone knows comparable benefits offered by other banks, please do share the information with us.

The DRREW Framework in Action

DEAR INVESTOR JUAN

Dear Investor Juan,

I have a few questions regarding investment. I'm a 24 yrs old, single and my current financial situation:
* Free of debt
* Emergency Fund (good for 6months of expenses)
* Life insurance and Health card (provided by my employer) 

Investment goals:
* Retirement Fund - invest in stocks (longterm), since I'm still 24
* Condo/House - I'm not yet decided on what to buy and I'm still searching for a nice place, but I want to prepare  the money that I will use for buying my own place. For the meantime, I'm planning to put the money in Mutual Fund (Money Market Fund) since I'm not sure when I will be needing the money.
* Future Personal Expense - I'll be using this fund for 3-5 years from now, but I can't decide if I will put it in stocks or Mutual Fund (Equity Fund)

Here are my questions:
1. Based on my current financial situation, do you think I can now proceed to my investment goals?
2. Is it okay to have a fund dedicated to each goals? 
3. Since I have 3 funds to monitor, I'm thinking if it could be costly for maintaining the multiple funds because of the fees. I'm not sure if I'm doing it correctly or not.

If you have any inputs to improve my goal, I am gladly to hear it :)

Thank you.

Best regards,
Jay


Dear Jay,

Dear Jay,

I completely support your plan. This is exactly what I proposed in this post about the "DRREW" framework. Congratulations--YOU GET IT. :)

Here are my answers to your questions:

1. Based on my current financial situation, do you think I can now proceed to my investment goals?

Yes. I assume that you already know what portions of your savings to allocate to your retirement fund, the property that you are planning to buy, and "future personal expenses."

2. Is it okay to have a fund dedicated to each goals? 

Since the three goals that you mentioned above involve different holding periods, funds for each must be invested in the appropriate type of asset or fund.

3. Since I have 3 funds to monitor, I'm thinking if it could be costly for maintaining the multiple funds because of the fees. I'm not sure if I'm doing it correctly or not.

Nah, you won't have to pay more since fees are charged as a percentage of the value of your investment--so given the same fee percentage, investing 900,000 in one fund would result in the same fee as investing in three separate funds of 300,000 each. Also, if you do it right you don't really have to monitor anything since your decision to sell or divest should be solely determined by need and not by how much money you are making or losing. To minimize hassle, though, you may want to buy funds from just one bank.

I have nothing more to add, really, given what I know about you situation. Thanks for your email, and good luck!

Why Even a 0.5% Difference in Fees Matters

DEAR INVESTOR JUAN

Dear Investor Juan,

Your blog is really a good find and very helpful for educating newbies. Thank you very much! Now I am seeking some opinion from you. While checking the UITFs of BDO, BPI and Metrobank, I came to know that BDO have the lowest fee - 1% while Metrobank charges the most at 2% plus others. Am I correct in this or I am missing something?

Regards,
Jovy

Dear Jovy,

Perfect timing, I've been planning to discuss the effect of differences in fees in investment returns. Maybe this illustration can help convince you that even a "small" difference in management fee matters.

Say there are two equity funds (UITF or mutual fund), A and B. The returns of the two funds, before management fees, in years t = 1, 2, 3... are as follows:

Fund A:

rA1, rA2, rA3, ...

Fund B:

rB1, rB2, rB3, ...

So that after 1 year, an investment in A will have grown by 1 + rA1 times, in 2 years by (1 + rA1)(1 + rA2) times, in five years by (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5), and so on.

If A charges an annual management or trust fee of 1%, then the after-fee value of an investment in A after 1, 2, and 5 years are:

After 1 year: (1 + rA1)*(1 - 1%) = (1 + rA1)*0.99
After 2 years: (1 + rA1)*0.99*(1 + rA2)*0.99 = (1 + rA1)(1 + rA2)*0.99^2
After 5 years: (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5)*0.99^5 = (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5)*0.95

Which means that if you invest in the fund for 5 years, 5% of the value of your investment would go to management fees. And if you invest in A for 30 years, your investment will have the following value at the end of the period:

(1 + rA1)(1 + rA2)...(1 + rA30)*0.99^30 = (1 + rA1)(1 + rA2)...(1 + rA30)*0.74

Let's say B charges a 1.5% management fee. A 30-year investment in the fund would result in:

(1 + rB1)(1 + rB2)...(1 + rB30)*0.985^30 = (1 + rB1)(1 + rB2)...(1 + rB30)*0.64

Assuming that the performance of an equity fund does not depend on the skill of the fund manager so that the long-term return (e.g., 30 years) of two equity funds on any given year is the same,

(1 + rA1)(1 + rA2)...(1 + rA30) = (1 + rB1)(1 + rB2)...(1 + rB30)

This means that compared to a fund that charges 1% per year, investing in one that charges 1.5% results in a 14% loss in value (0.64/0.74 - 1) over a 30-year holding period.

The table below compares the effects on value of different combinations of fees and holding periods.

Holding period	1.00%	1.50%	2.00%	3.00%	4.00%	5.00%
5	.9510	.9272	.9039	.8587	.8154	.7738
10	.9044	.8597	.8171	.7374	.6648	.5987
20	.8179	.7391	.6676	.5438	.4420	.3585
30	.7397	.6355	.5455	.4010	.2939	.2146

So to answer your question, for a 30-year investment, a 2% fee will reduce the value of the fund to 55%, compared to 74% for a 1%-fee fund. It means if you invest in the 2% fund, you'd be losing 26% more (55/74 - 1) of the value of your fund.

I hope this answers your question.

Short Answers to Unanswered Questions: Preferred Shares and Other Things

DEAR INVESTOR JUAN

Dear Investor Juan,

Am a regular reader of your blog and while you have some articles there regarding preferred shares, I would like to ask the following regarding the dividend rates that goes with the issuance of these shares:

• How does one company determine the dividend rates for these preferred shares? 
• What do they use as basis for the dividend rates?
• Do public companies have different basis for the dividend rates being offered ("as sweetener") vs.private, non-listed companies (if they wish to issue preferred shares to existing stockholders)?

Would appreciate if you can share your insights on the above matter.

Thank you and more power,

Vic


Dear Vic,

Here are my answers to your questions.

Firms issue preferred stock to raise money to finance projects or other uses. It's like a more expensive alternative to borrowing. The dividend rate on preferred stock is primarily determined by the market: the dividend yield on outstanding preferred shares issued by companies of the same risk serves as a benchmark. The dividend rate also reflects how much return investors are demanding for lending out their funds.

I'm not so sure about my answer to your last question because I'm not very familiar with preferred stock issues by private companies (as I think they are quite rare), but these should have a higher dividend rate than preferred stock issued by a listed company in the same industry and of the same size because of the following reasons:

• An unlisted firm would be subject to less stringent reporting requirements, and would be less transparent, and thus riskier, in the eyes of investors.
• Preferred shares of an unlisted firm would not be tradable in exchanges, and this lack of liquidity would prompt investors to demand a higher return.

***

Dear Investor Juan,

I would like some advise on investing in BDO UITFs. I am currently a college student and really interested in investing at an early age. I am willing to invest about more than 10K in a BDO UITF product. Could you please explain to me the ff.:

1) The fees/charges I have to pay in investing in BDO's UITF.
2) Do you recommend this EIP Program by BDO?
3) Is 10K enough to start investing?

Thank you. 

Louie

Dear Louie,

I would only suggest investing in an equity fund if you don't have any debt, you already have an emergency fund, and you can afford to invest long-term. So if all these conditions are met, then here are my answers to your questions:

1) You don't have to pay anything. All fees and taxes are automatically deducted and paid from the fund's assets and are already reflected by the fund's NAVPU.
2) I'm okay with enrolling in an automatic investment scheme. Deciding which bank you would buy a UITF from is all up to you.
3) Yes.

Good luck!


***

Dear Investor Juan,

Got any good recommendations for a first credit card? I really need to get one soon.

Marvin


Dear Marvin,

Local bank credit cards have lower interest than foreign bank credit cards, so I suggest that you just get one from a local bank that you already have an account with.

Saving and Investing for Your Child's College Education

DEAR INVESTOR JUAN

Dear Investor Juan,

Please don't laugh at my silly question but is it possible to invest 10,000 pesos on something (don't know what kind of investment - UTIF maybe). Long term, maybe 15 years long. would my 10 000 earn enough that it can send my son to college?? It is his birthday next week and I just kept on thinking about his future.

Thanks. 

Nice blog by the way. i just stumbled it today and i kept reading about stocks and investments!

Joriel


Dear Joriel,

It's not a silly question, there's no need to apologize.

Assuming that inflation would be 5% per year and diversified equity funds (such as equity UITFs) will grow at an average rate of 10% per year for 15 years, then the real rate of return of investing in equity funds is 5% per year (please see this post for some background on real rates of return). 10,000 compounded by 5% per year for 15 years is

10,000*(1.05)^15 = 20,789 pesos

At today's prices, would this amount be enough for your son's college tuition? (It's more than enough for some colleges and universities, actually).

If you want to send your son to a university which currently charges 150,000 pesos per year for tuition so that in 15 years you want to have 600,000 in today's peso, then you have to invest this much today:

600,000/(1.05)^15 = 288,610 pesos

If you want to invest in annual installments, you can use the PMT function in Excel using the arguments:

rate = 5%

nper = 15

FV = 600,000

And you'll get 27,805 pesos (please ignore that the answer in Excel is negative), the amount that you have to invest every year (before adjusting for inflation) to have 600,000 in 15 years, assuming that the annual real rate of return is 5%. It's perfectly doable if you ask me. :)

I hope I was able to help. Good luck!

Almost-Forgotten Emails (Part 2)

DEAR INVESTOR JUAN

As I was trying to reduce the number of unread emails in my inbox, I discovered a handful of emails from almost half a year ago. Here's my attempt to make up and apologize for the oversight.

***

Dear Investor Juan,

Helpful po talaga yung blog mo. Mejo nagiisip isip po ako ngayon. Kasi ang balak ko po is to invest or purchase ng units every month sa bpi equity ko, im planning 2k-4k per month. And Im planning to do it for a long time. Tapos I have a friend na gusto mg invest sa individual stocks, yung kuya nya kasi ganun yung gngwa. Citisec po yung broker nla and I saw there EIP na 5k ang starting investment then pwd rn mgaadd anytime na gusto mo. Im thinking of investing din sa individual stocks kng san alam ko n tatagal and lalaki p yung company. 

My question is, kung papasok ako sa individual stocks, baba po yung ilalagay ko sa equities ko, and sabay ko po silang lalagyan ng pera monthly ? Should I just focus on equities or I can also try individual stocks? And do you have feedback about Citiseconline? 

Thank you IJ. 

Rek
February 6, 2013


Dear Rek,

Stick to the equity fund. Investing in individual stocks is too risky. There's not fool-proof way to pick stocks that will consistently outperform the market index or diversified equity funds. Also, by investing in individual stocks, you subject yourself needlessly to unique risk, which I have discussed in this post.

Finally, try to convince your friend to move to an equity fund, if it's not too late already.

***

dear investor juan,

good evening sir.
i've been reading your blogs a lot since i stumbled into it last week. i love your blog! it's been a great help.
from reading your blogs, i was already decided this morning on investing 1M on bdo equity funds.
but when i asked for an opinion from a metrobank investment officer about investing in equity funds now,she said it's better if i wait for the market correction. and it's too expensive now.
when i checked bloomberg.com just now,it increased by 1.27%.
what is your take on this sir?
i'd love to hear from you.
thank you.

kristina

February 18, 2013

Dear Kristina,

Well, in hindsight, the investment officer that you talked to appears to be a genius since the correction that he mentioned seem to have happened just recently.

It's kinda funny that so-called experts have a knack of saying that a correction will happen, but fall short of saying exactly when it will happen and by how much prices will go down.

Anyway, with regard to investing in the long term, short term fluctuations--"corrections" included--does not really matter. And if you can't afford a long-term horizon, I suggest investing in something safer like bond or money market funds.

***

Dear Investor Juan,

I have bdo and metro uitf and would like to know if it is a good time to invest with pnb-allied uitf. Pnb-allied uitf performed well for 2012 and I was thinking of bdo-equitable/pci merger,  now the bdo equity fund which I believe was originally equitable-pci product is performing way ahead of bpi or metro equity fund. So my question is in such mergers, does the uitf become better, what do you think of pnb-allied merger in particular will it be good time to invest in its uitf? Though I have exsisting accounts with both banks, the bank personnels/manager is not much help when I inquire saying the merger has just taken effect (feb 9) so no info is given to them.

Thanks,

Maxine

February 19, 2013

Dear Maxine,

I don't have data to support this claim, but I strongly believe that events such as bank mergers have nothing to do with the performance of UITFs. 

The performance of a fund depends on the performance of its constituent assets, and the composition of the fund (of a particular type) is determined by the fund manager. However, US data shows that skill may not be enough to consistently beat the market index. Finally, high fees make it even more difficult for investors to earn market-beating returns. IMO, neither of these factors--the skill of the fund manager and the level of fees--has anything to do with bank mergers.

Almost-Forgotten Emails (Part 1)

DEAR INVESTOR JUAN

As I was trying to reduce the number of unread emails in my inbox, I discovered a handful of emails from almost half a year ago. Here's my attempt to make up and apologize for the oversight.

***

Dear Investor Juan,

I have been visiting your blog for the past few months or so.

I had just cleared all my debts I have incurred while I was in college and my not so fortunate first job.

I was just starting to build up some savings when I stumbled upon your blog.

It was very reassuring knowing I was on the right track while reading your "A Guide for Newbie Investors" posts!

Thank you very much for sharing the things that you know.

I'm slowly trying to read backwards from your oldest post to the most recent ones, I'm even reading the comments!

Currently I am debt free and about 80% on my emergency fund.

As I have yet to actually venture into investing I am still a green horn so to speak and can only hope that you would indulged me and my questions.

• Do you still think UITF's are good vehicles for long term investments? (Already asked on older posts, just checking to see if it still is the case now)
• On the "A Guide for Newbie Investors", its says the next step for me would be to invest in assets with relatively lower risk, I did some checking comparing different funds, and it seems BDO outperforms its competitors every time (at least on the dates I've checked, as far as 2008 and even recent histories). Logically I would choose to invest on BDO, but seeing that their unit price for their balanced fund is currently valued at 3400~. It seems a bit steep and has a high chance that I would lose money even if I intend to invest on a long term basis. Am I wrong?
• Secondly, why is it that BDO balanced fund is valued so high compared to the other balanced funds and yet they still managed to out perform their competitors?   
• This is a silly, please humor me. Should the bank go under, would I still be able to claim my investments?
• Let's say I invested some money at 1000 pesos per unit and opt for the 5 year term, when maturity date came I discovered that the value per unit is 800 pesos. Naturally I wouldn't want to withdraw my investment just yet. Would they(banks) be able to force me into withdrawing my investment? What would happen in this scenario?

Regards,

Green Horn
December 28, 2012


Dear Green Horn,

In general, UITFs are still the best investment vehicle for the "ordinary" investor since they offer a convenient and relatively inexpensive way to diversify. At least until something better becomes available (like lower-cost index ETFs... hopefully).

• Evaluate UITFs based on fees, performance (% change in NAVPU over time), reputation, etc., but not on the actual NAVPU on any given day. It's misleading to compare NAVPUs of different UITFs because even if they are of the same type, their exact composition may be significantly different. If you're concerned whether a UITF is overpriced or not, then you should evaluate whether the stocks and/or bonds that comprise the UITF are overpriced.
• There is evidence that superior fund performance is as likely the result of expert fund management as plain dumb luck.
• If the bank whose UITF you have invested in goes bankrupt, you're still entitled to your units. You are the legal owner of your investment, and the bank is just the trustee of your funds and the UITF is not part of its assets.
• I'm not sure if I completely understand your last question, but if you're talking about a UITF investment, then no, I don't see how the bank can force you to divest from the fund.

***

Dear Investor Juan,

First and foremost, thank you for making planning for investments and future financial security easy to understand. I would just like to ask for your opinion regarding the best possible course of action for me to take right now. I am a 22 year old student and I have recently invested a bulk amount of Php 200,000 in an Equity UITF (November). I have also invested in an Easy Investment Program for the same Equity UITF.

Given the continuous growth of the stock market and the upcoming release of the first ETF's in the Philippines, I would just like to know if I should cash out my UITF's and/or

1) Invest in different company stocks listed in the PSE
2) Redirect my funds to the ETF's expected to be launched during the first half of this year
3) Keep my UITF investment as is

Which do you think has the largest potential for  long-term growth, especially for a student like me?

Thank you very much!

More power to Investor Juan!

Stephanie
January 12, 2013


Dear Stephanie,

There's no infallible proof that fund managers can consistently outperform the index over a long period of time, and we are 100% sure that a 0.5% trust fee is better than 1%. So if a lower-cost (i.e., has lower fees) fund such as an index ETF becomes available, I suggest transferring your investment to that.

Until then, don't redeem your units until you need the money, or have some better use for it.


***

Dear Investor Juan,

I just started last 2011, I all ready have at least Php 200,000.00 in the bank and currently Php 100,000.00 is in a time deposit. I also have a sun life mutual fund I current still paying. My dad want me to put the other Php 100,000.00 in a time deposit but in the current percentage the bank is offering its not worth it (it too low). The bank offered me to invest it in Peso Money market fund , peso bond fund , GS fund , Peso fixed income fund , Peso balanced Fund , Equity Fund. 1st off , I don't really know all of that. I would like to invest if possible but since i can't understand it. I kind off hesitant to invest.

Can you give me an idea on how should i invest? I know that the Philippines economy is getting better and will get better in the near future. I think it is good to invest in stocks. What direction should i go?

Also will the peso dollar exchange rate decrease? I would like to buy dollar if possible and also invest it.

If you have article i can read for reference it would help me a lot. I would like to risk my money but since i don't have an idea I can't. Also that some of the mention fund and bond that the bank is offering the minimum is 100,000.00 and 10,000.00.

Regards

Carina
January 21, 2013


Dear Carina,

It's impossible to accurately predict how the economy will perform in the near future. So-called experts can't do it, and mere mortals like us can't as well. Same goes for exchange rates.

The very LONG term is a different story, however. In 30 years or more, it would be safe to bet that advances in technology and increases in productivity will result in significant economic gains and greater wealth. In 30 years, life should be significantly better than it is today. Well, if it doesn't turn out that way, then we'll have more serious concerns than investment returns.

Given this premise, your investment decision should be determined by your risk preference and your investment horizon.

If you want zero chance that you'll lose principal, then invest in time deposits, t-bills, or money market funds. Also, these investments would be best if you'll need the money soon, like in five years or less.

If you can afford a bit of risk or are investing for the short or medium term, then invest in a fixed income fund or individual bonds.

Finally, if you have a long investment horizon, like at least 10 years, although longer would be better, then invest in an equity fund.

Short Answers to Unanswered Questions: "Stocks" vs. "Equity" Funds and Comparing Investment Strategies

DEAR INVESTOR JUAN

Dear Investor Juan,

I was also second guessing myself about retirement savings. Most of my retirement funds are in stocks. I was already thinking about transferring it to BDO Equity UITF and wasn't really sure if that's the way to go. Is it?

How exactly do I do this? Since the value of stocks that I have is about 850. Do I take out 50 per month and transfer that to the UITF? and how about the monthly savings that I have? (around 35/month) 

Sorry po kung maraming tanong. >_< I am just confuzzled now. I really thought that going into the stock market was the best way to earn make my money grow.

Ning


Dear Ning.

When you say that your retirement funds are mostly in stocks, how many stocks exactly? If your funds are spread across ten or more stocks, then your portfolio may already be sufficiently diversified (within the equity asset class) and you can choose to keep your funds in those stocks. To improve your portfolio's level of diversification, just invest future savings in an equity UITF.

If your funds are invested only in a handful of stocks, then you have significant exposure to unsystematic risk. To lower your risk exposure, sell some of your holdings and either invest in many other different stocks or in an equity UITF. How you do it--"one time, big time" or in installments--is arbitrary since there's no indisputable proof that "dollar cost averaging" is a superior strategy, contrary to popular opinion.

Finally, there's no reason to be "confuzzled." You're right, "going into the stock market" is arguably the best way to make your money grow. "Stocks" are the same as "equities"--investing in an equity fund is basically the same as holding a basket of individual stocks. The only difference is that if you invest in a few stocks you needlessly expose yourself to risk that can easily be eliminated with diversification. Again, I emphasize that for retirement savings, investing in a low-cost equity fund in the long term (20 to 30 years) is the way to go.


***

Dear Investor Juan,

Thank you very much for a very informative blog. 

I started investing only last year with a reputable global insurance company, so what i have is an insurance link investment. lately, i have been hearing a lot about mf and uitf, and my curiosity is awakened. thanks for blogs like yours and tv shows which explain everything, i now understand the pros and cons of these better.

I have been trying to do a mock computation of yields through bdo online, and i noticed that if i put my money, say 500k, from Jan. 2 - May 31, 2013 (method a), my gain would be more or less 68k. but, if i invest from Jan. for 30 days (method b), take it out, then reinvest it again for another 30 days, and so on until May 31, my gain would be about 82k. 

what is your take on that?

thank you so much. may God bless you in your advocacy. more power!

Anonymous


Dear Anonymous,

I'm not sure where the problem is, but you should earn the same returns with the two strategies since in Method B, whenever you reenter the fund you would be buying at the same NAVPU as when you last exited. Actually, if you're talking about an equity fund, then you should earn less with Method B because of early redemption charges.

Add-on Rates Revisited

DEAR INVESTOR JUAN

Dear Investor Juan,

I just got a loan for 450k 36months to pay.. I see a per annum rate of 28.58% but she was saying something about 1.29% per month add on rate.. Im confused, mind explaining it to me the add on rate?

Thanks,
Mon


Dear Mon,

I have already discussed the difference between add-on rate and the monthly compounded interest rate (such as in credit card debt or home and car loans) in this post, but I will try to explain in again and apply it to your situation.

With add-on interest, the quoted monthly add-on interest rate is multiplied to the principal or loan amount to get the monthly interest payment. For the monthly principal repayment, the loan amount is divided by the loan duration. In your case, therefore, the monthly interest payment is 1.29%*450,000 = 5,805, while the monthly principal repayment is 450,000/36 = 12,500, and the total monthly payment is 5,805 + 12,500 = 18,305, an amount that you would have to pay every month, as seen in the spreadsheet below. If you scroll down to the bottom of the sheet, you'll see that at the end of 36 months, you will have paid a total of 658,980, of which 208,980 is for interest. Further down, you'll see that the internal rate of return or IRR, a way to compute for return or interest while considering the timing of payments, is 26.72%. This is not exactly what your bank representative quoted, but this may be what she was talking about.



Now if we were to take the same monthly interest rate of 1.29% but this time apply it as a monthly compounded rate in an amortized loan, then we'll see a different payment schedule. Please refer to the spreadsheet below.



To get the monthly payment (or "amortization") of this kind of loan, we have to use the PMT function of Excel or any spreadsheet program, where "rate" = 1.29%, "nper" = 36, and PV = -450,000. The resulting figure is 15,705, which is the amount that is paid every month until the 36th month. In the first payment, 1.29%*450,000 = 5,805 goes to interest, same as in the add-on loan, so 15,705 - 5,805 = 9,900 goes to principal. The following month, the principal goes down to 450,000 - 9,900 = 440,100, which will then become the basis for this month's interest payment of 440,100*1.29% = 5,677. Do you now see how this kind of loan is different from your add-on loan?

With monthly compounded interest loans, principal repayments are deducted from the principal, the lower principal balance becomes the basis for interest computation, and interest payments decline (and in the case of amortized loans where the monthly payment is constant, principal payments increase) as the end of the loan period nears. With add-on interest, monthly interest payments stay the same even as part of the principal is repaid every month. And this is why, at the same "monthly interest rate," add-on interest loans are more expensive than monthly compounded debt.

I hope I was able to explain the add-on rate sufficiently, Mon. Good luck.

Concerns about Early Retirement

DEAR INVESTOR JUAN

Dear Investor Juan,

I've been reading your blog and I find it entertaining and at the same time educational. I have a few questions for you but let me give you a little background about myself. I am 27 years old and single. Been working as a caregiver and my goal is to quit work by next year and follow my long time dream of becoming a lay missionary. I wasn't able to follow my dream coz my family needed me financially and now that I settled them already, it's time for me to follow my heart's desire.

Let me give you and idea on my financial life and please tell me if you think I can  follow my goal or if I should extend a year or two before quitting work for good.

Net worth: Php 4 Million
Mutual fund : Php 150k
Stocks:  Php 1M
Debt : 0
Other investments : Small land
Home: owned

I am a frugal person and live simply. I am also a minimalist and I don't dabble in consumerism. I'm planning on not touching my paper assets till I'm old. I also have emergency fund worth 6 months of living expenses. However, I don't have insurance and would like to avail one. Please take note that I'm single and with no beneficiary.

You think it's possible to quit work and "forget" about my paper assets and just move on with life without adding to it? How much you think my money would grow in 40 years considering inflation? I'm still investing 70-80 percent of my income as of the moment. How am I doing financially. I am a voluntary celibate and don't plan on marrying in the future so please consider that too esp with health care cost with no one to share the expenses when I'm old.

Sorry if I have tons of questions. I just needed some advice on where I stand financially or if I can quit work by next year coz I feel so empty. I keep thinking if next year is the time where I can say to myself that " My earning days are over. Time for me to follow my dream"

Good luck and thanks so much,

Cory

(Additional information in response to a follow-up email.)

4 million consist of emergency fund, mutual fund, stocks and the townhouse  in Cebu (subdivision) which actually appraised at 1.3M and its in use (that's where I will live once I get home). My other land is totally small and idle that I did not count it in my asset. I consider my townhouse an asset, though.

My expected expenses is P15k (scrimp) - P25k (splurge). I'm totally used to simple life and would like to live frugally. I am planning to live on my townhouse that I own when I grow old which is situated in Mactan, Cebu or I'll probably move somewhere quiet depending on the cost of living as long as its safe. I'm not maarte :) (Emphasis is mine. - IJ)

Thanks a bunch.

Cory


Dear Cory,

Choosing to retire early compounds the "retirement problem" because the longer retirement period increases funding requirement, and at the same time, the smaller earning window makes it harder to meet the higher retirement fund target. It's still possible, though, if one starts saving early enough and earns (and saves) high enough. And from the information you've provided, I think you meet both criteria to a certain degree, we just have to see if you meet the criteria well enough.

It's time to crunch some numbers (since we can't really use the 30-60-90 framework that I introduced a couple of posts back).

Let's start by assuming that your assets will earn just enough returns to be able to beat inflation so that the spending power of your assets is constant throughout the planning horizon. Speaking of planning horizons, the typical end-of-horizon age planners use is 90 years, so let's start with that.

Retirement period = 90 - 28 = 62 years * 12 = 744 months.

Net worth = 4,000,000/744 months = 5,376 pesos per month. Can you live on this amount?

Honestly, 90 years may be a bit conservative since it's well above the estimated life expectancy of Filipinos (or people living in the Philippines?) of around 68 years. If we use 80 years, we get:

Retirement period = 80 - 28 = 52 years * 12 = 624 months.

Net worth = 4,000,000/624 months = 6,410 pesos per month. Better, but maybe still not enough.

Things don't look so good given the above assumptions. But if you subscribe to the concept of long-term passive investing, something like Jeremy Siegel's "stocks for the long run" argument (to which I completely adhere, but that's for another post), then the returns on your assets should be able to reliably beat inflation year-on-year and give your assets more spending power. The question is: how much more?

Click to enlarge

Please consider the timeline at the top of the image above. Say you withdraw an amount X from your assets for your expenses on your first year of retirement. The following year, you withdraw a higher amount, X*(1+g), where g is the average annual inflation rate. You keep on doing this until age 89, where you withdraw an amount equal to X*(1+g)^61.

The sum of your withdrawals should of course be less than or equal to your total net worth of 4 million plus your investment returns, if your assets earn annual average return of i. Then, what would be the largest value of X given that you have 4 million in assets today, your assets can earn an annual return of i, and annual inflation is g? There are several approaches in solving for X, but the most straightforward is to get the present value of the withdrawals and equate it to 4 million using the formula:

The final equation is boxed in the image above.

The average annual inflation rate in the Philippines in the past 10 years is around 4.5% (I thought it would be lower for outside the NCR, but it's not. This figure is for the entire country), so let's use that for g. Let's assume that you'll invest your assets in a diversified portfolio of stocks such that you'll earn the average annual return of the PSEi. I don't have exact numbers at the moment, so let's just use i = 7%, which I believe is a conservative estimate (given that the S&P 500 has had an annualized return of close to 10% in the past 25 years). Solving for X as shown in the image above, we get:

@ g = 4.5%, i = 7%, X = 122,394 or 10,200 per month. More workable?

Of course, higher assumptions for i would further improve the situation.

@ g = 4.5%, i = 8%, X = 149,695 or 12,475 per month

@ g = 4.5%, i = 9%, X = 178,797 or 14,900 per month

You'll notice that this last estimate almost meets your "scrimp" budget, so I think your plan is workable. To make it really work, though, you would have to keep most of your assets in equities so that you'll have a higher chance of beating inflation every year, and beating it by a higher amount. Also, I still strongly encourage you to stick to the DRREW plan--particularly, always have some amount ready for unexpected expenses and get some form of private health insurance.

Finally, you may want to delay retirement for a few years and maybe build up your funds to 5 or 6 million. Try to play with the equation, change 4 million to a higher amount and instead of 60 change the exponent to years of retirement - 1, and see by how much X will increase.

An Introduction to the DRREW Framework

DEAR INVESTOR JUAN

Dear Investor Juan,

Hello po and good day!

I have been reading about financial freedom, investing and mutual funds (through Francisco Colayco's book) but it was only until very recently that I put things to heart and thus stumbled upon this blog.

I am 23 years old and just recently gave birth to a healthy baby girl. My partner is 26 years old. I've only really been working full time for a year now and my partner for half so perhaps you can give me some slack and skip on the sermon on why we have not saved much.

We are still on the process of building on our emergency fund and only have around 10k in time deposit. I guess that would pretty much be our net worth (maybe perhaps a little higher if you include the 7k (9k worth, I think) air conditioner plus a few books, some baby stuff and a 1-year-old netbook that we could sell just in case).

Anyway, here is an overview of our monthly expenses:
Utilities/Home Expenses - 10k (we still -shamefully- live with my parents)
Budget for baby - 10k
Daily allowance for me and hubby - 4k
VUL from PRU Life - 3k (I got this for myself before I got pregnant)
Leaving us around 5-6k for savings

Perhaps you could give us advice on what you think of this plan. We used your Budget Planner excel sheet, by the way. We want to build up on our emergency fund but I am also contemplating about investing in mutual funds as well (at least just the initial 5K) since we will be expecting a midyear bonus come June 2013. My plan is to save at least 6K a month, perhaps get the 1k and place it in mutual funds. What do you think?

I know you would not suggest having the VUL but I already got it anyway. My hubby and I are both covered by HMO (plus baby will be soon, as well) and I'm thinking about making the emergency fund as a health fund, for the mean time.

We are also thinking about getting a Volkswagen Beetle which is around 35k-50k - I think it could really help us lessen transportation expenses as we ride the taxi when taking our baby with us. We also have to save up for baby's first birthday February next year (haha) and then eventually for her education, which maybe 50k a year in today's money and rates.

We do have plans of investing in an agricultural lot in the future - in five years, maybe? And then perhaps an apartment in ten. Anything that generates passive income.

Well, my letter is quite long now and it's probably giving you a headache. Compared to your other letter senders, I think we are quite low on money, no? But hey, it's never too late, right? We're still quite young and I also have my parents with me (hehe) whom I can ask for help if really needed. I also keep telling myself that, at least, as early as now, I am already thinking about having financial goals and changing the way we handle our money.

PS. I believe we could really achieve our financial goals - we were able to save up around 50K in just 3 months (and that doesn't count the monthly expenses we had to deal with) in time for my delivery.

PPS. I work as a freelance writer once in a while and I was wondering if you could refer me to the friend you were talking about in one of your blog posts. 

Thanks in advance, Investor Juan and more power! And thanks a lot for teaching me so many invaluable lessons in personal finance. :)

Pam


Dear Pam,

First, let me get one thing out of the way: you and your partner are actually doing quite well. You have a positive net worth and presumably not in debt, you're still young, are both employed, and so have plenty of time and opportunities to prepare for the future. And perhaps what's most important is that you are aware of the need to take control of your finances, and have started to do something about it. Believe me, you guys are off to a very good start.

Now let me address your other concerns.

Over the years, I have been developing a framework for managing personal and household finances, an early version of which you  may have already come across in this series of posts. The latest version, which I'm presenting for the first time in this post, looks like this:

Stage 1: Eliminate (expensive) Debt
Stage 2: Manage Risk with health and life insurance and an emergency fund
Stage 3: Save and invest for Retirement
Stage 4: Save for discretionary future Expenses
Stage 5: Build-up Wealth

(I hate acronyms, but I guess they're okay if they can help people remember important things... so there you go--DRREW).

I'll explain this framework in a dedicated post in the near future, but for now I think the only item that needs a bit more explaining is "discretionary future expenses." This item consists of high-priced purchases (home or car) and future needs that require a substantial amount of money (wedding, child's future education, European holiday, etc.). Depending on the actual item or need, planning for the purchase or expense may take priority over saving for retirement. For example, you might want to prioritize saving for your child's education over your retirement savings.

So right now, you are in Stage 2. You're employed, so you're amply covered by insurance, and you're starting to build up your emergency fund. Regarding this, I suggest that you take out the 10,000 from the time deposit account and just place it in a savings account. The purpose of an emergency fund is to have money in hand for emergencies so that you won't have to rely on debt (which tends to be expensive if taken on short notice) or selling your assets at a loss. Emergency funds need to be accessible any time, and it's okay if you don't earn interest--remember, you're not saving to get rich, you're saving for emergencies. Since you're spending around 25,000 per month, you have to continue adding to your emergency fund until you accumulate 150,000 to 200,000 pesos.

Regarding the VUL, if it's impossible to get out of the deal without incurring fees or losing more money, then just stay. But please just stick with your premiums and don't invest any more than you have to.

Once you have your emergency fund taken care of, the proceed to Stage 3 and save and invest for retirement. You have determine how much you have to save for this (it's something that I've talked about in the last post and in a future follow-up post). And this is where your plan to invest in property comes in: retirement savings need to be invested in long-term vehicles such as real estate and low-fee equity funds. So you have the right idea, just remember what you are saving for.

I guess that's pretty much all I can offer now. Thanks for the email and congratulations on the great start. I'll email you in private about that writing "racket." Good luck!

Invitation for the First Philippine Junior Finance and Investment Summit

DEAR INVESTOR JUAN

This request is from one of my former students. Since CFA Philippines is a non-profit entity, I feel that promoting one of their events on the blog does not violate my self-imposed ban on advertising.


***

Dear Investor Juan,

Good day!

The Chartered Financial Analyst Society of the Philippines (“CFA Philippines”), a non-profit professional membership organization of finance and investment practitioners will be holding its “First Philippine Junior Finance and Investment Summit” on July 6, 2013, Saturday, from 9:00 A.M. to 5:00 P.M at the SMX Convention Centre. This event aims to enhance financial literacy and elevate the quality of the finance profession in the country. This finance career and educational campaign will help students and young professionals prepare for a career in the finance and investment industry through presentations and discussion forums. 

So far, we have invited well-known and seasoned speakers to talk in this event. I believe the admission fee will be less than Php 500 including packed lunch and snacks (emphasis is mine - IJ). Hope you can help us promote the event! :D

Confirmed speakers are:
           
Philippine Economy: Asian Perspective
International Monetary Fund
Peiris, Shanaka Jayanath

Stock Market Investments
COL Financial Group
April Lynn Tan, CFA

Trust Products
Banco de Oro Unibank
Marvin Fausto

Discussion on Careers in Finance and Investment Industry

Ayala Corporation
Ginaflor Oris, CFA

Bangko Sentral ng Pilipinas
Mary Jane Chiong, CFA

HSBC
Maria Corazon Dela Cruz-Purisima

(There are some other important speakers who have been invited, but I have removed their names from the list since their attendance has not yet been confirmed. -IJ)

Regards,

Jane

***

The registration procedure is still in the works, so until it is finalized feel free to visit the event's Facebook page for updates.

Housing Loan Lump Sum Payments

DEAR INVESTOR JUAN

Dear Investor Juan,

I hope everything is well with you.

Are you familiar with loan amortization? My wife and I have a housing loan with a term of 20 years. Our goal is to shortened that to at most 15 years. We have discussed this with our bank and they said that they don’t usually reconstruct loan. We can try but it has a high probability that we will not be approved. So they suggested to us to pay in lump sum every annual repricing. There is no minimum amount for the lump sum payment but their suggestion is it has to be at least 6 times of our monthly amortization if possible so that it can also somehow lower our amortization. It will probably take us 2-3 years to save that amount of money (around 100k). Is it wise to do that or paying in lump sum every year even if it is only 30-50k a wiser move?

We got a fixed interest rate for the first 3 years. I can easily compute the amortization in Excel via the Loan Amortization template. I don’t know what will be the computation for the repricing in the 4th year and onwards that is way I can’t come up which is better. J

Here is the sample data that I used in computing for the amortization for Year 1 to 3 using Excel.

Loan Amount: 2,000,000
Annual interest rate: 7.88%
Loan period in years: 20
Number of payments per year: 12

Is this the correct computation for year 4?

Loan Amount: 1,860,550.26
Annual interest rate: 8%
Loan period in years: 17 ???
Number of payments per year: 12


Thank you so much.

Danison


Dear Danison,

So your objective is to shorten the term of your housing loan from 20 to 15 years by either paying a lump sum of 100,000 on the fourth year or annual payments of 30,000 to 50,000.

Using the information you have provided me, I have reconstructed your loan amortization schedule here. You have a 20-year loan with an annual interest rate of 7.88% (we'll get back to this later). Using the PMT function of Google Spreadsheet (same as in Excel; "Current" worksheet, double-click cell B4 to see the inputs), we can compute for the monthly amortization of your loan: 16,580 pesos per month. If you  paid down payment on your loan, you should actually deduct it from the loan amount, and it will give you a lower amortization. Also, the resulting amount does not include insurance and other fees, so it may differ a bit from what your bank quoted.

The monthly amortization amount is what you have to pay every month to pay off your loan. Every month, a portion of it is used to pay for the interest of your loan, and the remainder goes to the repayment of principal (see the formulas for the cells in the "Interest payment" and "Principal payment" columns. So every month, a portion of the principal is repaid, the loan balance gets smaller, the interest payment correspondingly decreases, and a bigger portion of the amortization goes to principal. In the "Current" worksheet, you'll see how much of the amortization goes to interest, how much goes to principal, and what the loan balance is every month. At the end of 20 years or 240 months, you'll see that the ending balance is zero and the loan will have been completely paid off.

Now go to the "Lump Sum" worksheet to see how much impact a 100,000 peso payment will make. If you make a lump sum payment, the entire amount will go to principal and this will accelerate the repayment of the loan. To see how it will affect the schedule, just manually add the amount to the "Principal payment" cell for the month of your choice. Here, I assumed that you will make the payment at the end of Year 3.

If you go to the bottom of the worksheet, you'll see that with this lump sum payment you will be able to completely pay off the loan at the end of Month 219, or near the beginning of Year 19. So it seems that you would have to make more lump sum payments if you want to completely pay off the loan by Year 15 (Month 180). Feel free to play with the spreadsheet and add whatever lump sum amounts you think you can afford to achieve your goal.

In another email, you mentioned that the interest rate of your loan will be readjusted for Year 4 onward. In the "Adjusted Rate" worksheet, you'll see how a different rate will affect your subsequent payments. You're currently in Year 3, so with the recent credit rating upgrades, you should expect a lower readjusted rate next year (I assumed 6%).

Anyway, I know that I did not really answer your questions, sorry about that, but rather gave you a tool that can hopefully help you find the answers yourself. Good luck!

In case anyone missed it, you'll find the spreadsheet here.

How UITFs Work

DEAR INVESTOR JUAN

Dear Investor Juan,

patulong naman, nagugugluhan kasi po ako kung bakit sa mga comments nyo sa UITF's particularly equity funds na bakit na tratrade nila yung units nila?dba passive to?nag iinvest ka lang tapos ang mga profesionals na ang bahala mag laro sa money mo? 

Anonymous


Dear Anonymous,

Thanks for your question. Let me start by briefly explaining how UITFs work.

The trust/asset management arm of a bank creates a fund with a pre-defined objective, which mostly depends on what kind of fund it is: equity, bond, money market, etc. This objective limits the kinds of assets the fund manager can invest in.

At the start, the fund is divided into a certain number of units at an arbitrary initial price: say, 1 million units at 1 peso each. The bank then sells these units to investors like you and I; using our example, by selling all 1 million units of the fund at 1 peso each, the bank collects 1 million pesos. These funds are not owned by the bank or its asset management department, but rather just held by it "in trust"--basically for management and safekeeping on our behalf as investors. The fund manager then invests our money in assets that meet the constraints defined by the fund objective, while trying to make decisions that are good for us at the same time. These decisions include buying and selling assets like stocks and bonds at any given time. For this service, the bank charges a certain percentage of the fund that is called the management or trust fee.

So depending on how well the fund manager's decisions turn out, the total value of the fund may go up or down at any given day. The fund's per unit price--its net asset value per unit or NAVPU-- is just the fund's total value minus all expenses (including the management fee and taxes) divided by the total number of units, so that may also go up or down. Since Philippine UITFs are a form of "open ended" fund, the bank may sell more units to other investors at the current NAVPU: while the total fund value will go up because of this, the number of units would increase in such a way that the NAVPU would remain the same.

So in the world of UITFs, there really are two kinds of investors. The first is the fund manager, who we entrust with our money, who we assume knows what he is doing and will do things with our interest in mind. The second type is us UITF investors. The same way our fund manager make buy and sell decisions depending on how prices go up and down, you and I can also buy and sell UITFs depending on how NAVPUs go up and down.

So yeah, the fund manager gets to play with our money. And we can play with our money, too, if we so choose. Or not, it's all up to you and I. :)

Investing Lump-Sum Pension Proceeds

DEAR INVESTOR JUAN

Dear Investor Juan,

I would like to take a chance this to ask you, if you have a post /recommendation regarding on what to do with SSS pension once claimed. 

My mother will receive her SSS pension this, I am not sure of how much would it be.(but I think it will be 100K++) 
I would like to help her , by putting 
-at least 60% in a Mutual Fund (index fund, since it is not that risky compared to equities), so it will earn interest much higher than banks. 
-20% - Putting up a business, see is unemployed for 5 years. 
-10%- on bank for emergency purposes 
-10% - for herself. 

I would to ask for any options that I/ we can take. 
I believe my parents do not have retirement fund, since all their life they have been working for us and helping other relatives as well.. 
I want to help to utilize this money very well. 

Thank you very much. 

PS: Thank you for guiding/helping to be an Investor Juan. Godbless! 



Best Regards,

Maria

Dear Maria,

I don't think you should invest a bulk of your mom's pension in an equity fund. Even if it's an index fund, it's still exposed to risks that affect the entire market, and the chances of losing principal would still be considerable. At this stage, since your mom is not earning anymore, capital preservation should be the primary objective of her portfolio. Also, since she'll (presumably) need to withdraw portions of her portfolio from time to time, her investment horizon might be too short to weather the short-term up and downs of the market.

Generally, at retirement a person's portfolio should mostly be invested in safe instruments like time deposits or money market funds, so I normally would advice against starting a business, which is even riskier than equity funds--unless you can think of one that you're 99% sure will work. Or maybe something simple, something that requires minimal capital outlay, something that won't break the bank if things don't go as planned.

I don't know what your specific circumstances are, but I hope you're not just going to rely on the SSS pension proceeds to support your mom's retirement--it's obviously far from being enough. Even if you can reliably earn 10% per year on a 100,000 peso investment, that's just 10,000 per year in earnings, and that's assuming you won't spend a cent of that principal. 

Anyway, I wish you and your family well and I hope you find my reply helpful.

Short Answers to Unanswered Questions: Advice for a College Student and Insurance Questions

DEAR INVESTOR JUAN

Dear Investor Juan.

I am Michael, a 2nd year college student and I am planning to invest some of my savings in a bank. What should I do then?

I am still ignorant about these finance stuff but I am really eager to know how to invest.

Thank you for helping me out. 

Michael


Dear Michael,

It's hard to answer your question without knowing specifics, but given that you're a second-year college student, I assume that:

1) You're still living with your parents
2) You don't have a job and your income just comes from allowance

Honestly, at your age and given the above assumptions, it would be best to just save and accumulate as much cash as you can--and yes, a simple savings account will do. Don't worry about not getting high
interest on your savings, that will come in due time, like when you get a job and have more disposable income.

As soon as you get a job after graduating, you can refer to these posts from a while back about getting started with investing:

http://www.investorjuan.com/2011/03/6-steps-guide-for-newbie-investors-part.html
http://www.investorjuan.com/2011/03/6-steps-guide-for-newbie-investors-part_28.html

I hope I was able to help. Good luck!


***

Dear  Investor Juan

I would like to ask your advice regarding HMO’s /Health Insurance. I have read a few articles regarding about it but I am still confused.

When is it necessary to have a health care plan / insurance? Isn't it enough to have a Life Insurance as well as Philhealth? Or would you advice to put the money on some investment instead?

Thank you very much. Your blog has been a lot help in straitening out my financial plan.

God Bless

rocloyd


Dear rocloyd,

When is it necessary to have a health care plan/insurance? In my opinion, we should be covered our entire lives, if possible. Work compensation packages usually include a decent health insurance
coverage, so you don't really have to worry about it if you're employed full time. If you're unemployed or underemployed, however, you have to make sure that you're covered with PhilHealth at least.

Life insurance is also usually a standard non-cash employment benefit. The need for it differs with a person's circumstances, however. For example, a person with a family would need it more than, say, someone who is single and is living independently.

And yes, to make it clear, I strongly suggest that you make sure you're adequately covered first (and have an emergency fund on top of that) before you invest in "risky" assets (such as stocks and
investment funds). Why? In a nutshell, because most likely you can only borrow at a higher interest rate than the return that you can earn from investments, so in case of emergencies and other situations
that require a significant amount of cash, you'd want debt to be your last resort.

I hope that makes sense. Good luck!

Short Answers to Unanswered Questions: Revisiting Share Types and Converting from a USD to a Peso Short Term Investment

DEAR INVESTOR JUAN

Dear Investor Juan,

I know that to be listed at the PSE there is a 10% float requirement. But for other share categories are there associated percentages required.

For example if you have an Authorized Shares (example only) 1,000,000 shares what percentage of that can you keep as Treasure Shares, For Outstanding Shares what percentage can be Restricted Shares,...and so on...

I hope my question is clear to you.

Anna


Dear Anna,

As far as I know, a firm can issue shares up to the number of authorized shares and can buy back publicly owned shares (resulting in treasury shares) up to what the minimum float requirement allows (since buying back publicly-held shares reduces the firm's float). The float percentage requirement also affects the proportion of restricted shares; in the case of the Philippines, it implies that the percentage of restricted shares relative to outstanding shares of a publicly-listed company cannot be more than 90%.


**

Dear Investor Juan,

Good day, I have Dollar Time Deposit in BDO. But then the % interest is not that good. (.3750%/mo.) minus the tax. I was thinking if I will move it to UITF Money Market. But since Money Market has an average yield of 3.26%/year, I really cant decide if I should continue to transfer it. Thank you very much.

Also, congratulations for making good blog about investments. This is a good sample of reference. God bless and more power. 

Anonymous

Dear Anonymous,

Given the higher peso interest rates and the expected further appreciation of the peso this year, I would choose investing in a peso money market fund over a USD time deposit account. That said, instead of moving your funds from the USD time deposit account to a peso money market account, you might also want to consider keeping the former and just investing in a peso money market fund in the future. Having investments in both currencies this way can protect you from future exchange rate fluctuations.

You also need to consider the currency in which you earn and consume since currency conversion entails significant costs.

5 Kinds of Stock Shares Explained

DEAR INVESTOR JUAN

Dear Investor Juan,

Can you help me on this, i had read a lot of docs but some have contradictory content, so im really confused.

Can you discuss these terms, Im sure a lot of readers would benefit on this.

Authorized Shares 
Outstanding Shares
Restricted Shares
Float

Thanks,
GTT


Dear GTT,

This is how I understand these terms.

1. Authorized shares - the maximum number of shares that a corporation can issue (e.g., sell or assign ownership to an individual or entity) without needing further approval from the Securities and Exchange Commission (SEC).

At the corporation's inception, the founders must decide on the number of authorized shares (pretty much arbitrarily) and state it in the Articles of Incorporation.

If at any point the firm wants to issue more shares beyond its number of authorized shares, it can file a request for more authorized shares with the SEC.

2. Outstanding shares - shares that are actually owned by individuals or entities. Corporations don't have to issue all their authorized shares at once, so at any given time a firm would have more authorized shares than outstanding shares.

Sometimes you'll encounter the phrase "issued and outstanding," which pretty much just means "outstanding." The qualification is important only because it distinguishes such shares from those that are "issued and not outstanding," a phrase that refers to...

3. Treasury shares - shares that were bought back by the firm, so had been issued but not owned by anyone anymore.

4. Float - is the term used for shares owned by the investing public and are traded in stock exchanges. "Minimum public float" defines the minimum percentage of outstanding shares that must be listed in the stock exchange; in the Philippines, it's 10%.

5. Restricted shares - shares that are held privately, usually by firm founders and insiders. Restricted shares cannot be sold in the stock exchange without meeting certain predefined conditions. If these conditions are met and restricted stock holders decide to sell their shares to the public, then the sold shares become part of the float.

One good recent example are the restricted shares of Facebook insiders that were only allowed to be sold some months after the Facebook IPO.

In one source, I saw restricted shares defined as outstanding minus float, which makes sense, but I would not be surprised if someone can find a differing definition.

I have come up with this simple graphic to help visualize how these different kinds stock relate to each other.

I know that it's not so clear in the graphic, but FLOAT is the area within OUTSTANDING outside of RESTRICTED.

I hope this helps.

"In the long run..."

DEAR INVESTOR JUAN

From my friend's Facebook post

Dear Investor Juan,

I am so lucky to have stumbled upon your blog and its very informative especially for a newbie investor like me. I was so amazed with your excel presentation regarding the amounts you needed to earn once you decide to go back to workforce and have a family.. I myself just got married, albeit no child yet.. I have a question and i hope you can share your thoughts.

I've been reading anything about investing and I always encounter the concept of delaying gratification so as to save in order to invest. Is this concept equivalent to being frugal or is it the extreme end of it? My problem is how do you remain faithful in investing for the future without necessarily sacrificing providing some sort of leisure to your wife or children? Ang hirap kasi mag budget ng pera lalo kung maliit :-) ang sweldo hehehe. I was just thinking whats the point of having lots of money many years in the future eh hindi naman natin hawak ang buhay natin, pano kung di ka na gumising bukas so hindi mo rin naenjoy ang pinaghirapan mo? Am i making sense here, I don't know please enlighten me with your wisdom.. How can I strike a balance with providing a quality life for my family in the present vis a vis securing the future? Thank you and Godbless!

Anonymous


Dear Anonymous,

First, thank you for asking the "right" questions, and for getting it, for seeing the "big picture."

I was just thinking whats the point of having lots of money many years in the future eh hindi naman natin hawak ang buhay natin, pano kung di ka na gumising bukas so hindi mo rin naenjoy ang pinaghirapan mo?

What's the point, indeed?

To answer this question, we need to understand what "saving" really is--postponement of spending and consumption to a later date. I mean, what else do we do with what we save now but spend it later? But why do we even have to save a portion of our earnings, why can't we just spend our money as soon as we get it? The "need" to save arises primarily because we are not sure what's going to happen in the future, both in terms of how much money we'll need and how much we'll be able to earn: a family member might get sick, we might lose our job, we might need to buy a new car. In such cases, saving becomes the easiest way to deal with uncertainty and risk.

It's easy to see how one extreme of the consumption-savings trade-off--spending all your money as soon as you earn it--has become the poster child of financial literacy advocacy. It has come to represent unflattering virtues such as conspicuous consumption, materialism, greed, and myopia. And while I'll be the first to say that indeed, it is a problem that needs to be addressed (one of the reasons why this blog exists, right?), I also say that we need to be just as concerned with the other extreme.

If you took that financial planning course from Coursera, you might remember one of the Week 1 modules saying how there's no such thing as "saver's remorse" (as opposed to "spender's remorse"). To this I say: NO, saver's remorse is real because saving involves giving something up, something that may not be very valuable to one person but worth a lot to another. We all know that it's important to be better prepared for the future and that planning, saving, and investing are some of the means to achieve that end--isn't that why we are all here for? But I think that many of us on the financial literacy bandwagon forget that it's also important to be able to live a "good" quality of life (however you want to define it) now while we're still alive. After all, the point of all that we do is to have a happy, contented, and comfortable life, not just now and not just in the future, but throughout our and our loved ones' lives. Isn't it?

My point is that living on either extreme of the consumption-savings are equally "bad," that spending your income all at once is just as bad as being a miser (there's a reason why the word shares a lot with "miserable"). The "sweet spot" then must lie somewhere in the middle; unfortunately, unless we know exactly what's going to happen in the future, it's impossible to find this perfect mix. Given the uncertainty, the best we can do is to avoid the extremes, plan with whatever information we have, and cross our fingers that the die rolls in our favor.

I've discussed some ways that can help achieve this balance throughout this blog, one of which is the financial planning post that you mentioned. Apart from these, I offer the following loose guidelines that can further help us along the way.

1. Live within your means. Choose a lifestyle that you can sustain with your earnings. In my personal experience, your chosen lifestyle can have as much impact to your "happiness" as how much you earn. If you find your credit card balance increasing from month to month, or you find it hard to reduce it by a significant amount, then you're living beyond your means. If you want a more luxurious or extravagant lifestyle, then find a better job or get an additional source of income.

2. Prioritize building your emergency fund and get insured. Get these taken care of as soon as you can; once you do, the need to save lessens dramatically.

3. Allocate some of your resources for leisure and other "life-enjoyment" activities. As soon as you are sufficiently protected from risk (see Number 2 above), you now have more freedom to use you excess earnings as you wish. In past posts such as this one, I've talked about how at this point you can now afford to invest in riskier assets with the promise of boosting your income. What I failed to emphasize is that you should use some of your excess income to give yourself and your family a good quality of life.

I end with two things from John Maynard Keynes. First, if you have time you might want to read his 1930 essay "Economic Possibilities for our Grandchildren" where he discusses the importance of leisure and the quest for the "good life." And second, I quote something from Keynes, what I think he would have told you if you asked him your questions:

"In the long run, we are all dead."