WE all know that we need to set aside money for a rainy day. However, keeping large amounts of cash under your bed is probably not the smartest thing you can do. Aside from the vulnerability of the money being stolen or lost to fire and other calamities, it also does not earn interest. Another risk is, of course, the government decides to demonetize the paper bills you are holding on to and you forget to exchange it.
Assuming you are able to get over the major hurdle of actually accumulating enough savings to do some investing, the big question is where to invest your money in. The more popular choices are investing in the stock market, fixed-income securities, real estate, gold and the more traditional bank-deposit products. Let us discuss the upside and the risks of each of these alternatives.
Without a doubt, you have all heard about how fantastic rates of returns can be achieved by investing in equity stocks and how the stock-market index has quadrupled in the last 10 years. However, you may want to keep in mind that you could lose a lot of money in it, as well. You may have also heard that you cannot go wrong in investing in the stock market if you are in for the long term. Well, I guess it depends on what you had in mind as long term. Looking at the PSE index high of 1994 at over 3,000, over a 10-year period in 2004, the index was half of what it was 10 years earlier. Looking at that time frame, this is certainly not your idea of a good investment.
On the other hand, fixed-income securities give you a fixed rate of return on you investment, but it also has its downside. First is that the security could still default in making payments and even in the principal itself. This is the reason you would need to consider the credit rating of the paper or security. Typically, the rates of return would be higher for lower-rated securities and those with longer term maturities. The other factor that could affect the value of your investment in fixed-income securities is the market movement in interest rates. As an example, you have a 10-year bond that has a coupon rate of 5 percent, however a couple of years later the prevailing interest rates moved higher to 7 percent. This will mean that to make up for the higher interest rate, the market value of your bond will go lower. The reverse happens when the prevailing interest rates go lower.
Investing in real estate is another popular alternative. I like real estate because it has the upside of equity securities, keeping pace, if not actually doing better than the PSE index. Unlike other investments where you hold on to pieces of paper, real-estate properties come with both a title and the physical property itself—the condominium unit, house, building, land, parking space and so on. This gives you the opportunity to actually make use of the property, either by using it yourself or renting it out while you wait for the capital value to appreciate. On the downside, it has some carrying or holding cost, which includes real-estate taxes, association dues, maintenance costs and other expenses, such as insuring the property. Liquidity of real-estate assets is also a concern when immediate funds are required, not to mention the taxes and extensive documentation involved in the change of ownership.
Gold is another alternative investment, which some of us were able to ride on when it was under $300 an ounce at the start of this century. People like it because it is not registered, it has in-ternational acceptance and can be kept in forms that can be visually appreciated, such as jewelry or gold coins that I personally like. Gold in the form of coins is not only able to retain its intrinsic value as a precious metal but has the additional numismatic value. The downside of investing in gold is also the volatility of its market value, it does not provide any interest or recurring income beyond capital appreciation and once it is stolen, it can be melted into any other form, making it impossible to trace its origin.
Currently, most banks offer the safety of keeping your funds and liquidity, but offer very low interest rates. Unfortunately, the interest rates on traditional bank deposits, including time deposits and other special accounts, are not even enough to cover the inflation rate. This means that your money is actually being eroded and you purchasing power is diminished. The right investment choice depends on the individual’s specific situation and needs, which reminds me of another saying, “Don’t put all your eggs in one basket.”
Comments may be sent to georgechuaph@yahoo.com.