Why Invest?
Before we get into the question above, let's understand what would happen if one did not choose to invest in. Let's say you earn $ 20,000 a month and spend $ 15,000 on your living expenses, which include housing, food, transportation, shopping, care medical, etc. The balance of 5,000 is your monthly surplus. For the sake of simplicity, we ignore the effect of income tax in this discussion.
To get the message across, let's make a few simple assumptions. Your employer is kind enough to grant you a 10% raise each year. Cost of living is projected to increase 8% year over year. You are 30 years old and planning to retire at 50. This gives you 20 years to earn. You have no intention of going back to work after you retire.
Your expenses are fixed and do not cover any other expenses. The remaining cash of 5,000 per month is held in the form of cash. By deciding to invest the surplus money, your available cash has increased significantly. Cash balance has increased from 5% to 5000%. This is a staggering 5000 times the normal amount of. This means that you are in a much better position to face your life after retirement. Invest at 5% Compounding Going back to the original question, why invest? There are some good reasons to invest.
- Fight Inflation: Investing is a better way to deal with the inevitable rising cost of living
- Create wealth: through investments you can aspire to a better aggregation of savings at the end of the defined period.
In the example above, the period was until retirement, but it could be anything: educating your children, getting married, buying a house, retiring, and so on. To fulfill life's financial aspirations.
Where to Invest
Now that you have discovered the reasons to invest, the next obvious question would be: Where would you invest and what returns can you expect from an investment?
When it comes to investing, one has to choose an asset class that matches the risk temperament and return of the person. An asset class is an asset class with special risk and return characteristics.
Below are some of the most popular asset classes.
- Fixed Income Instruments
- Equity
- Real Estate
- Exchange Traded Funds (ETFs)
- Fixed Income Instruments
They are investment instruments with minimal risk for the Principle and the return is paid to the investor as interest on the respective
Fixed Income Instrument
The interest paid can be quarterly, semi-annual, or annually. At the end of the deposit period (also known as the term), the principal is returned to the investor. Typical fixed income investments include:
- Time deposits offered by banks
- Banko Sentral Government Bonds
- Local Government Treasury Bonds
- Mutual Fund Bonds
In December 2011, the typical yield of a fixed income instrument fluctuated between 4% to 8%
Equity
An investment in stocks involves the purchase of shares in publicly traded companies. There are 271 listed companies in the Philippine Stock Exchange (PSE). Unlike a fixed income instrument, when an investor invests in stocks, there is no capital guarantee. However, as a compromise, the return on equity investments can be good if you can do your homework to choose the right company to invest in that offers good value. Investing in some of the best and best managed companies in the Philippines has produced a good percentage of long-term returns. Identifying such investment opportunities requires skill, hard work, and patience. Capital gains from the sale, exchange or sale of shares in domestic corporations are subject to a final tax rate of 15 percent.
Real Estate
Real estate investment comprises the transaction (purchase and sale) of commercial and non-commercial real estate. Typical examples would be transactions in land, apartments, and commercial buildings. There are two sources of income from real estate investments, namely: rental income and appreciation of the amount invested.
The transaction process can be quite complex and involve a legal review of documents. Cash outlay on investment property is usually quite high. There is no official metric to measure real estate returns.
Commodity
Investing in gold and silver is considered one of the most popular investment options. Gold and silver have increased in value over a long period of time. Investments in these metals have paid off for the past 20 years. There are several ways to invest in gold and silver. It is possible to invest in Exchange Traded Funds (ETFs). Going back to our initial example of investing excess cash, it would be interesting to see how much you would have saved at the end of 20 years, considering that you could invest in investments and fixed-income stocks.
Investing in fixed income securities at an average interest rate of 48% per year will multiply your savings or hard-earned money with compound interest if you do not withdraw the interest and transfer your interest to principal.
Investing In Stocks at an Average Interest Rate of 15% Per Year
Obviously, you get the best returns on stocks, especially if you have a multi-year investment perspective. Not depending on the sale of the shares, but on the long-term holding that generated dividend income. You can transfer the dividend income to your capital and do it over time in, say, 20 years. You'll be surprised at the compound interest you get on.
A Note on Investments
Ideally, investments should have a strong mix of all asset classes. It is advisable to diversify your investment between different asset classes. The technique of dividing money into 4,444 asset classes is known as "asset allocation." For example, a young professional may be at greater risk given his age and the years of investment available. Typically, investors should invest about 70% of their investible amount of in stocks, 20% in precious metals and the rest in fixed income.
For the same reason, a retiree could invest 80 percent of his savings in fixed income, 10 percent in stocks and 10 percent in precious metals. The ratio of, with which investments are distributed among asset.
