To those who read my articles, you might have realized by now that I am not able to reply to comments most of the time unless it is sent to info@colaycofoundation.com.

One good reason is that, sometimes, the person making the comment is not really after a reply but is merely venting.

Moreover, many times, my replies in themselves are too long and would be an article in itself.

Oftentimes, there is no way to answer without eliciting more of the same refusal to believe.

But as time passes, perhaps the window of opportunity presents itself to bring up the reply again based on actual facts.

Two years after might be a good time to reply to a comment made to my second article in a GMANews.TV blog dated April 2008.

“Litong Lito?” distrusted the principles that I have been espousing since 2001.

I am bringing up the issues as they were written in 24 April 2008. It will take several issues to explain them so I will cut them up by subject matter.

This comment arose from a portion of my 22 April 2008 blog:

“Saving Ten Pesos a day or Three Hundred Pesos a month invested prudently can earn you an average annual rate of 12 percent.

At this rate, if you leave your money alone, and just let it “roll” it will compound and grow to a value of PhP 66,600 in 10 years.

Look at what happened here?

Over a period of ten years, you actually saved only PhP 36,000 and it grew to almost double the amount.

If you are able to continue this process for another 10 years, meaning saving another PhP 36,000 over 120 more months, your savings will grow to PhP 273,400, or almost FOUR TIMES more than the total amount of PhP 72,000 you saved over 20 years.”

In the meantime, Litong Lito came up with this reply:

After ten years ... ano na kaya ang mabibili ko sa sampung piso?

Ano po ba ang "inflation rate" ngayon?

Naiisip ko lang po na kung ang makukuha kong tubo kada taon sa investment na papasukin ko ay steady 12 percent at ang "inflation rate" ay steady sa six percent (March 2008 = 6.8 percent), ibig sabihin ang neto ko ay six percent lang.

Ibig sabihin ang 10 peso daily savings ko for 10 years ay aabot nga ng PhP66,600 pero hindi na ito kasing "powerful" ng pera ngayon? Baka after 10 years ang PHP66,600 pesos ay parang barya na lang. Not considering the risks?

If I understand “Litong Lito?” correctly, he is saying that the P66,600 will be practically useless because of inflation. Furthermore, there are risks in the 12 percent p.a. investment to contend with.

My reply to “Litong Lito?”:

1) Note that you assumed inflation at six percent per annum and just to keep the example simple, that is half of the 12 percent per annum that I said you could earn over a period of 10 years.

Thus, to keep at par with the six percent inflation you only need to grow your money to P48,750 by the tenth year.

Therefore, the Php66,600 would still be able to purchase for you 36 percent more goods than if you had just managed to keep in pace with inflation. In other words, you would still have P17,850 left over after buying the same amount of goods with your P48,750 now adjusted for inflation.

2) If you still saved the 10 pesos daily but just kept it in your piggy bank and not invested it, you would have Php36,000 at the end of 10 years with a purchasing power of only about half or Php18,000.

3) If you don’t save the 10 pesos daily, you would have spent it along the way on practically useless things. At the end of 10 years, you would have exactly nothing.

4) On the risks of the investment, I reiterate that all returns are risk-driven.

The same is true with mutual funds and unit investment trust funds (UITF).

Though they are closely supervised by the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP), this type of supervision does not extend to the quality of fund management.

Regulatory bodies are focused on compliance with legal requirements and to ensure that fund managers do not run away with the investors’ money.

Actual performance of the funds are published the daily and may also be seen in selected websites. Thus, the risk of losing part of your investment could happen in the following cases:

• choice of a mutual fund or UITF with poor performance by the appointed fund manager. There are many choices and with a little research and analyses, you can find the right one for you.
  
  
• selling at a time when the Net Asset Value (NAV) is lower than your actual average cost per shape. This is unlikely to happen if you are regularly buying the same shares with the same amount of money, (i.e., you are peso cost averaging). This is why it is important to have a long-term outlook.

Here is a reminder for all would-be fund investors.

It is easy to get into a fund.

But the real challenge is when do you get out?

The idea of maximizing returns is never a practical one.

The best rule in managing your investment is to have a specific target amount you want to achieve at a specific time or date in the future and a specific reason or purpose on how this amount will be spent.

This roadmap will automatically tell you what kind of return you will need and what the attendant risks there are.

This defines your own personal benchmark in deciding when to redeem your shares or when you should put in more investments given prevailing unit prices.

I wish to reiterate that investing is very personal.

The key is knowing what investment instruments suit you best.

Don’t get carried away by tips from kibitzers.

Remember:

1) If you were ready not to even save the 10 pesos daily and will have nothing at the end of 10 years, logic dictates that you should not feel bad if you lost the entire investment and have nothing at the end of 10 years.

But I am saying that it is really unlikely that you will lose the entire investment.

2) Do put your entire savings in one investment; only 10 pesos daily, which was really just an example.

In fact, the lowest investment in a mutual fund is an initial Php 5,000 and Php 1,000 additions thereafter.

After the first Php 5,000 investment, you would have to save 33 pesos daily instead of 10 pesos to reach your Php 1,000 additional investment per month.

If you cannot save 33 pesos daily, then this advice may not be something you can follow.

3) I am assuming that 33 pesos daily savings is something you can afford to invest and then forget. Let it just roll and be amazed what it can grow into in 10 years or longer.

4) Inflation rate went down in the past year and the average for the past five years is about 5.7 percent per annum but in the past two years, if you had taken my advice and chosen the best performing mutual fund, you would have earned 27 percent from April 2008 to March 2010 or about 13 percent per annum.

Note though that the first investment is the required Php 5,000 and Php 1,000 regularly thereafter.

For seven (7) stock or equity mutual funds, the average annual compounded rate of return over the last five (5) years ranges from a low of 8 percent to a high of 14 percent.

Note that this average already takes into account the horrible performance in 2008 where the stock market dropped by more than 50 percent.

I will continue with replies to “Litong Lito?” comments related to his real estate investment in Part 2 of 3 soon.

Thank you for your patience.

These coming months will be especially difficult for our country.

We have the El Niño drying up our water sources and creating havoc on our agriculture.

Campaigns and the elections will create a lot of stress in trying to discern who is best for our country and our respective communities.

The bright side of things is that whatever the result, for as long as the elections are conducted and concluded credibly, our economic future will be very bright.

However, if there is a failure of elections caused by the untested automated system, what will surely follow is a chaotic economic and social environment.

More jobs will be lost and each one will have to keep struggling to keep whole until better times come.

Yes, better times will come and we want to look ahead with this sort of parable of HOPE that someone shared with me.

The story has to do with the pear tree in a country, which had four weather seasons, namely, winter, spring, summer and autumn.

There was a man who had four sons whom he wanted to teach not to judge things too quickly.

He sent each of them on a mission to go and look at a pear tree that was far away.

The first son went in the winter, the second in the spring, the third in the summer and the youngest in the fall or autumn.

When they had all gone and arrived, he called them together to describe to him what they saw.

The first son said that the tree was ugly, bent, and twisted.

The second son said that the tree was covered by green buds and was full of promise.

The third son disagreed and said the tree was full of sweet smelling blossoms that smelled so sweet and looked so beautiful.

The last son said that he saw the tree full of ripe fruit ready to be picked and full of life and fulfillment.

The father explained to them that all of them were right because each of them saw the tree in only one and different season of life.

He told them that you couldn’t judge a tree by only one season of life.

The essence of what it is can only be measured at the end after completing all the seasons.

Therefore, if you give up on the tree during winter, you will miss the promise of spring, the beauty of summer, and the fulfillment of autumn.

We can apply this parable to our financial life where there are also these four seasons.

We are still probably in the winter of our financial options.

It has been very difficult for everybody whether an ordinary income-earner or a person with substantial wealth.

In fact, we have seen some take the radical solution in ending their lives simply because they are incapable of seeing farther than winter.

Just as sure as night and day, spring will follow winter.

The challenge though is that it is difficult to predict when each season will end.

It is especially most difficult to accept that “autumn” when all the big profits can be made will end.

Fortunately though, in the financial world, there can be little season cycles within the big season.

There will always be chances to save, invest and earn.

Every asset class has its time.

The challenge is to know which asset class rules in a given season.

This is why I always advise people to choose the right investment option only after making their personal financial plan based on their Personal Statement of Assets and Liabilities (SAL) and Personal Income and Expense Statement (PIES).

Mutual funds (MF) or Unit Investment Trust Funds (UITF) are usually right for most people because you need not invest all your savings in it.

It is also a long-term investment using savings that you can practically “forget.”

Just choose the best MF or UITF that will fit your objectives.

MF range from P5,000 minimum investment and UITF from P10,000 minimum investment.

Invest a small amount in it regularly, preferably monthly whether the market is up or down.

In this way, you will be averaging your cost over the years.

You do not have the look at it too often.

If you are buying regularly, your average cost will surprise you over the years.

Of course, the rule is always to buy low (during winter) and sell high (during summer and autumn).

But we cannot always be checking the market, unless it is our job.

MF and UITF managers know the seasons within the seasons and they will make their funds grow accordingly.

Don’t let the pain of one season destroy the joy of all the rest.

Do not judge life by one difficult season.

We still have the rest of our life still ahead of us.

For those interested in our Pisobilities Seminar on Saturday March 20 2-4pm, please call 6373731 or 6373741. For email inquiries, info@colaycofoundation.com.