As we start 2018, I would like to share with you some of my thoughts on investing and the various investment considerations that you need to take into consideration. These are scale, type, risk, return, tenor and cost. Even before you are able to consider investment options, we must first consider the scale of the investment. Obviously, the investment options available for P100 million are much more limited than say investing P100 million pesos.
Once you have determined the scale of your investible funds, you can now consider the type of investment you can put your money in. Should you just keep your money in the bank? The investment types would vary between physical assets, such as gold, jewelry, real-estate properties or even art pieces or investment instruments, such as government securities, corporate bonds, equities or other financial instruments. Many older folk, not fully understanding the financial world, end up investing more in physical assets rather than things like cryptocurrencies. Certainly these type of physical investments have been able to provide mind-boggling returns, as well.
With any investment there is a direct correlation to risk and return—the higher the risk the higher the expected return. You can think of buying a lottery ticket where the risk of losing is very high, but the potential rate of return would be astronomical that people are willing to take the risk in exchange for a potentially very high return. This is the same case with the returns provided on government securities, which are a sovereign risk, that would typically yield lower rates of return than corporate bonds. This is to be expected since the risk of a government default is lower than that of a corporation operating within the country.
The tenor or investment horizon of any investment should also be taken into consideration by the investor and would depend on his particular needs. For example, you would not want to invest the tuition money for your kids in a real-estate property. Liquidity, or the ability to sell your investment and get cash immediately is a key factor here. There are a number of instruments that have a fairly high degree of liquidity but suffer a sizeable penalty when sold before maturity. Typically, you match your investments with when you think you will need the money back. You may wish to invest in long-term instruments as your retirement nest egg while keeping some fairly short-term investments that are easily converted into cash for emergencies.
Many people fail to consider the friction cost of making the investment and keeping it. Real-estate properties are an example of having both a high transaction cost and maintenance cost. In property transactions, there is the capital gains tax, documentary stamp tax, brokers fees and a number of other miscellaneous fees. Once you have acquired the property, you will need to pay recurring annual expenses, such as real-estate taxes, associations dues, insurance and so on. This can be a serious drain on the investor particularly if the property is not earning rent and there are many instances that the government has forfeited properties from owners who were unable to pay their real-estate taxes.
Finally, I would like to remind you of the old adage of not putting all your eggs in one basket. (Comments may be sent to [email protected])