2. Content
• Definition of investment
• The 5 basic principles of investment
• Types of investment asset
• 8 things to consider in investment
• The new alternative
3. What is investment?
In finance, an investment is a monetary
asset purchased with the idea that the
asset will provide income in the future or
appreciate and be sold at a higher price.
Source:
4. What investment is not…
Putting money into something with an
expectation of gain without thorough
analysis, without security of principal, and
without security of return is gambling.
Putting money into something with an
expectation of fast gain with thorough
analysis, without security of principal, and
without security of return is speculation.
5. 5 Basic Principles of Investment
• Diversify - do not put all your money in one type
of investment
Investment A Investment B
6. 5 Basic Principles of Investment
• Start early
“Compound interest is the ninth wonder of the world. He who understands
it, earns it ... he who doesn't ... pays it.” – Albert Einstein
9. 5 Basic Principles of Investment
• The higher the risk, the higher the potential for
higher yield
10. 5 Basic Principles of Investment
• Don’t let market slump change your long-term
investment plan
• Buy when the price is down and sell when the
price is up
11. 5 Types of investment assets
1. Fixed income securities
2. Shares
3. Unit investment trust funds (used to be
called common trust funds – passe)
4. Mutual funds
5. Properties
12. 1. Fixed Income Securities
A group of investments that offer a
fixed periodic interest returns
(I.O.U.s/Promissory notes) on the
principal upon maturity issued by a
company or the government
13. Fixed Income Securities
• Types of Fixed Income Securities
i. Money market instruments
ii. Government bonds
iii. Corporate bonds
14. Fixed Income Securities
i. Money market instruments – short term, low
default risk, lowest returns
– Bank accounts, SDAs
• Interest income is subject to 20% tax
– Treasury bills
• bank commission fee of 1/8 of 1% (0.00125%)
• Interest income is subject to 20% tax
• Maturity is 1 year or less
– Commercial papers
• Higher yield vs. T-Bills
• The company uses its reputation as collateral
• Maturity is 1-30 years
15. Fixed Income Securities
ii. Government bonds – financial instruments
used by the government to borrow money
from the public.
– Key features
• Safest
• The lowest yields among FIS of the same maturity
period
16. Fixed Income Securities
iii. Corporate bonds – similar to government bonds
– Types
• Debenture stocks – no asset collaterals; backed only by the
creditworthiness of the issuer, not as secured as government
bonds
• Secured a.k.a. Loan stocks – backed by a collateral by the
issuer. In case of default, investors have the right to liquidate
the collateral pledged. The term and interest are fixed.
• Convertible stocks – can be converted to ordinary shares of a
company (e.g., part ownership of the company)
17. 2. Shares
Shares are different from stocks, as shareholders are
part owner of the company.
– A company can be private or publicly listed.
– Types of shares
• Ordinary shares – dividends are not guaranteed and the
company can choose the amount it wants to distribute.
• Preferred shares – shareholders are guaranteed a
certain amount of dividend payment.
18. 3. Unit Investment Trust Fund
4. Mutual Fund
– Both are open-ended investment
– Both are collective investment schemes
– Earns from
– appreciation in the value of assets owned by the fund (bonds and/or
stocks)
– dividends and interest
– Mutual funds are shares (NAVPS) and offered to the public
by investment companies
– UITFs are units of investments (NAVPU) and offered by
banks
– The formula to compute these prices is Net Asset Value, or
the market prices of assets less liabilities, divided by total
outstanding units or shares of the fund.
19. 3. Unit Investment Trust Fund
4. Mutual Fund
– In terms of regulation:
• As for UITFs, the Bangko Sentral ng Pilipinas (BSP)
regulates them since these are bank products.
• mutual funds are governed by Republic Act No. 2629
(RA 2629), also known as the "Investment Company
Act" and are regulated by the Securities and Exchange
Commission (SEC).
20. 3. Unit Investment Trust Fund
4. Mutual Fund
– Types:
1. Equity or Stock Funds - shares of publicly-listed corporations. The
fund objective is capital appreciation or long-term capital growth.
2. Bond Funds - fixed-income securities issued by the government or
large corporations. Examples are bonds, Treasury bills, and Treasury
notes. The fund objective is to provide income that is consistent
with preservation of capital and liquidity.
3. Balanced Funds - a mixture of equities and fixed-income securities.
4. Money Market Funds - money market funds provide the least
amount of risk. Its goal is to provide current income by investing in
short-term securities with portfolio duration of one year or less.
These may include short-term government securities, special
deposit arrangements, and time deposits, among others.
21. 5. Properties/Real Estate
These are investments on the following:
– Agricultural property
– Domestic property
– Commercial/Industrial property
The price of properties depends on the following:
– Location
– The quality/quantity of the crops in the land
– The value of the buildings in the land
22. 6. Other investments
– Precious metals (gold, silver, platinum, etc.)
– Works of art (paintings, artifacts, jewelry, electric
guitars)
– Rare items (watch: Pawn Stars at History Channel)
– Fine wines (Burgundy and Bordeaux )
23. Things to consider in investment
1. Investment objectives
2. Life cycle stages
3. Funds availability/accessibility
4. Level of risk tolerance
5. Investment horizon
6. Taxation treatment
7. Performance of investment
8. Diversification
24. Investment objectives
• Provide a comfortable standard of living
• Improve financial situation
• Provide income in retirement
• Provide funds for rearing and educating
children
• Provide a fund for paying necessary cost and
taxes when a person dies
25. The Life Stages
Characteristics
- Early 20s
- Single breadwinner
- Increasing income
Pre-Family - Moderate Financial Commitment
- 30's to early 40's
- Married
- Moderate income
Young Family - High financial commitment
Where
- 40's to early 50's
are you
- Highest financial income now?
Growing Family - Highest financial commitment
- 50's to early 60's
- Moderate income
Empty Nester - Moderate financial commitment
- 60's and above
- Low income
Retired - Low financial commitment
26. The Life Stages - considerations
• Education planning for the children
– High school
– College
• Payment for loans and mortgages
– Housing
– Car
• Protection/income continuation
– Critical illness/impaired health
– Death and/or disability
• Savings and retirement
28. Level of risk tolerance
• The higher the risk, the higher the potential
for higher yield
• May be affected by the following:
– Age
– Investment objectives
– Financial conditions
– Personality
29. Investment horizon
• Investment horizon can range from a few days
(more of speculative rather than investment) to
several years
• A match between investment horizon and the
maturity of an investment asset is important
30. Taxation treatment
• Different types of investment enjoy (or suffer)
a wide range of tax treatment
• Consider different tax treatment on different
type of investment before making a decision
where to invest
31. Performance of the investment
• It depends on the following:
– Economic factors
– The competencies and the capability of the
management team
• Also consider the following:
– Past performance
– Life cycle of the investment
32. Diversification
• Diversification is the process of investing
across different asset classes and across
different market environment
– Spreading the risk into several categories without
sacrificing returns
• Stocks
• Bonds
• Money market instruments
– Investing in other countries
33. The New Alternative
Variable Universal Life Insurance (often shortened
to VUL)
• a type of life insurance that builds a cash value.
• In a VUL, the cash value can be invested in a wide
variety of separate accounts (funds) separate
similar to mutual funds, and the choice of which
of the available separate accounts to use is
entirely up to the contract owner.
34. For inquiry
Romy D. Cagampan
0919-271-8867
romy_cagampan@manulife.com.ph
romy.cagampan@yahoo.com
Editor's Notes
Investing VS Speculating: The Difference Between Building Wealth and Gambling How do we know when we’re investing—or speculating but thinking we’re investing? It’s not always obvious.One of the factors that can make it difficult to know the difference between investing and speculating is that both produce gains and losses. Some sound investment strategies can turn losses for a few years, while speculating rakes in high returns just long enough to earn some credibility.Since the lines between investing and speculating can often be blurry how do you spot the difference between the two?The Quick KillingPart and parcel of speculating is the quick killing–the chance to make big money fast. It may be the single factor that most separates investors and speculators.The speculator welcomes the potential for the quick killing, in fact his whole “investment strategy” may center on it. Find a stock or two that will double, triple or even rocket to the moon in a few weeks or months. Once it has, sell at a huge profit, then move on to the next stock. The problem with this approach is that not only can it produce large gains, but it can also generate losses—big ones. But a true speculator may see losses, even big ones, as part of the cost of making the quick killing.With true investing, limiting losses—especially big ones—is every bit as important as finding winning investments. An investor might shy away from anything that looks like a quick killing because he knows that making money through investing is tough enough, but overcoming losses is harder still.Patient CapitalInvesting involves the long view, sometimes known as “patient capital”. Gains and losses will vary from year to year, so the emphasis needs to be on multi-year performance. That requires positioning not only in the right investments, but also in the right mix of investments that will be likely to perform over the long haul.The investor buys right, then sits and waits for his investments to payoff. The results of an average return of 8-10% per year can be more profitable—and easier on the emotions—than a strategy of up 25% one year, down 30% the next.Speculating is often an in-and-out process. The speculator is a trader, moving quickly in and out of investments as trends and opportunities dictate. It could be said that where the investor acts, the speculator re-acts.DiversificationInvesting involves building a portfolio of mutually exclusive investments centered on the question “what if?” As in what if I’m wrong? The speculator is sure he won’t be wrong, and doesn’t bother to diversify. The investor never assumes as much certainty—and protects himself by diversifying his portfolio.Investing means never having too much money tied up in a single investment or investment class, as a way of protecting from sudden reversals. Even if stocks are doing well, the investor still has a substantial percentage of his money in cash equivalents and bonds.The speculator, always looking to maximize potential returns, is more likely to see diversification as a reduction in the amount of capital available for speculative investments.Buying value versus buying into trendsSpeculating often involves betting on trends. If energy stocks have been rising for the past few years then that’s where you put the majority of your money. And you stay in that sector until a similar trend emerges in another.The problem with trends is that once they reverse, losses can be sharp and relentless. If those reversals are part of a general market trend, the speculator may be stuck riding the market down. The effect however may be greater because stocks that rise the most in rising market usually fall the hardest in a slide. The speculator may lose most or even all his money, forcing him to rebuild his capital base for another try.The investor knows how fickle trends can be and concentrates his capital on value instead. He looks for stocks that have above average growth trends, a steady track record on profits and are strong performers in their industry. He may also seek companies that are undervalued—otherwise solid businesses with relatively low stock prices, often for no other reason than that they aren’t favored by the trend du jour.Because of the emphasis on the underlying value of the companies behind the stocks he buys, the investor isn’t as subject to market swings the way the speculator is. In this way, the investor is likely to have much higher long term returns on the money he invests.Creating real value versus raw speculationInvesting seeks consistent cash flows, and that can only come from businesses and industries that create real value in the economy. The investor looks for companies with successful track records as leaders and innovators in their industries, the kind of businesses that are likely to survive and thrive even in uncertain times.Speculating seeks to make more money—where it comes from usually isn’t a factor. This opens the door to betting on upstart companies, new industries, crisis plays, future price increases or takeover rumors. All of these are pure gambling because they’re either based on events that haven’t yet happened or on businesses with no established track record. We can call that buy-and-hope! And it can either win big—or lose big.Is all speculating bad?All of us probably have a little bit of a speculator inside of us waiting to get out, and that’s not necessarily a bad thing. There may even be times when it’s worth letting our inner-speculator loose!If you do decide to take a chance with your money—to take a gamble on something you “feel” but can’t justify objectively—just keep a few rules in mind…Never gamble with money you can’t afford to loseMake sure you have a solid mix of cash equivalents, bonds and investment quality stocks and mutual funds as the vast majority of your investment portfolioKeep the speculating percentage of your portfolio in the low single digits—if the gamble is a success, it might return several times your investment, but if it flops you’ll only be out a littleDon’t do it too often—there’s a saying in the investment world, bulls make money, and bears make money—but traders go broke!
Advantages and DisadvantagesCommercial bills have a higher yields than Treasury bills because of the difference in credit quality. The credit history of the issuing firm is an indicator of the likelihood that the company will honor its obligation in full. The company issuing a commercial bill uses its reputation as collateral. Because of the inherent risk involved in such debt, corporations are able to borrow using commercial bills by offering high yields. On the contrary, Treasury bills are secure because they are government backed. The government has the highest credit rating in the market because of its ability to generate revenue through taxes, but the return on a Treasury bill is lower than on a commercial bill.T-bills purchases (in BPI) are subject to bank’s commission fee, which is 1/8 of 1% (or 0.125%) of the cash-out while interest income is subject to 20% tax – like other time deposits. There are other fees but based on actual calculation, an investment of Php99,684.22 for example, will become Php 105,000.00 on the maturity date (after 363 days). In T-bills, you can get your interest income in advance or at the maturity date.With true investing, limiting losses—especially big ones—is every bit as important as finding winning investments. An investor might shy away from anything that looks like a quick killing because he knows that making money through investing is tough enough, but overcoming losses is harder still.
If you choose an equity fund, your money will most probably be invested in listed stocks. If you choose a bond fund or fixed income fund, usually it will be invested in interest bearing instruments.
