MANILA, Philippines—Belt-tightening is the norm in these tough times but increasing the spare cash kept in the cookie jar is no longer deemed sufficient to cope with the rising cost of running a household or an enterprise.

“The rule of thumb is that at least 20 percent of disposable income should be set aside for long-term investments. Filipinos should see the value of disciplined regular investments even during tough markets to eventually average down their cost,” says Theresa Marcial-Javier, senior vice president at the asset management and trust group of Bank of the Philippine Islands.

Ricky So, senior AVP at Philippine Asset Management Inc. (PAMI), says investing is a necessity. PAMI is a leading mutual funds company in the country and part of insurance giant Philam group.

“People need to invest to cope with inflation and to attain a financial goal. Making money is only incidental,” he says.

This means that the P1,000 one doesn’t spend today—which could buy him gasoline for the family car for a week—could purchase much less gasoline after five years. So instead of keeping his cash idle, he must find ways for his money to work harder for him.

Javier says investors should maintain a well-diversified investment portfolio at anytime—and that means investing in bond and stock funds for long-term requirements and having a healthy mix of money market or short-term investments to smoothen out the overall return and to address unforeseen liquidity needs.

Jaime Gonzales, chair of Export Bank, keeps only up to 10 percent of his personal net worth in cash in a bank time deposit. “Cash is expensive,” he says. Half of the remaining 90 percent is invested in real property and the rest in shares of companies such as Export Bank and his son’s fast-growing IT, business process outsourcing and gaming company IPVG Corp.

“Given the increase in population rate in this country and given the growth in the economy, if you don’t borrow too much, or if at all, property is a sure bet—as long as you don’t buy in the swamp lands,” Gonzales says. “If you make a mistake in buying property, time cures the mistake, as long as you can sit on it.”

But only a small minority of Filipinos are like Gonzales, who has the ability to manage his own funds, has a relatively large portfolio to allocate and has sufficient resources to lock up money in real estate, which is not considered a liquid asset because in case of a sudden need for cash, there may not be a ready buyer. However, this asset can be used as collateral to raise money when borrowing from a bank.

Interest rates at historic lows

With interest rates dropping to historic lows in the last two years, more Filipinos are turning from savers to investors and learning about their options—aside from keeping all of their money in traditional bank deposits, where only up to P250,000 is insured by state-owned Philippine Deposit Insurance Corp. (PDIC) in the event of a bank failure.

But just when more Filipinos are learning more about financial investments, financial markets were shaken by the credit crunch in the United States which has caused a bloodbath on Wall Street and led to the collapse of iconic investment bank Lehman Brothers.

“Of course, I have trust in the resilience of our banking system and the direct impact of the US turmoil should be limited,” Javier says.

SDAs offer higher yield

Because of risk aversion across the globe, Javier notes that stocks have temporarily lost flavor. “Investors shift to the more secure forms of financial instruments, specifically short-term government securities and the BSP (Bangko Sentral ng Pilipinas) special deposit account,” she says.

The special deposit accounts (SDAs) are uncollateralized short-term fund placements at the BSP which offer higher yields (between 6.0625 percent and 6.125 percent per year for a maturity of two weeks to one month) compared with other short-term instruments.

By contrast, time deposits have lower interest rates (between 3 percent and 5 percent per year for one month) depending on the amount. The rates are lower because time deposits are subject to a reserve requirement.

Regular checking (current) and savings deposits offer interest rates of only 0.5 percent to 1.5 percent—too small in these times of double-digit inflation.

Banks’ trust departments also offer the SDAs to retail investors, with some accepting a minimum placement of P50,000.

Mutual funds, VUL insurance

The country has thus seen in the last few years a strong growth in professionally managed funds, such as mutual funds and unit investment trust funds (UITFs). Assets managed by the banking system’s trust departments, for instance, have recently hit the P1-trillion mark or equivalent to about a fifth of the industry’s total assets.

Even leading insurance companies have found wisdom in selling protection products linked to managed funds—the hybrid variable unit-linked (VUL) insurance, the performance of which is based on a fund that is invested in bonds, stocks or both. The VUL insurance is intended to be a long-term investment instrument with life insurance benefits.

Pooled money

Mutual funds, invented by financial wizards in the 1900s for people who have neither the time nor expertise to trade sophisticated financial instruments on their own, pool money by selling shares and invest the proceeds in diversified assets.

The UITFs offered by banks are similar to mutual funds except that they are not incorporated into a separate entity. They are managed by banks’ trust departments and made available by unit participation. Unlike simple bank deposits, the yields are not guaranteed and the placement is not insured by the PDIC.

The value of most professionally managed funds has tumbled because of tough global conditions, but for some it presents an opportunity to come in at a lower price.

Given the weak investor sentiment, Javier says the fund management industry is definitely coping by making available a wide variety of products that would suit clients’ varying risk appetites and provide them with a diversified portfolio that would allow them to navigate the troubled waters.

Pointers for investors

Here are some pointers from Javier for investors based on the amount of risks they are willing to take:

Conservative investors whose objective is to preserve their capital should invest in bonds as these provide fixed interest income.

Investors who aim for capital growth and returns that outpace inflation over the long run must diversify into equities but keep a portion of their investments in bonds as these add stability to the overall portfolio over time.

If one has the knowledge, technical expertise and access to up-to-date market information, the volatile equity market provides short-term trading opportunities for institutions and professional fund managers.

Understand risks

“But I have to caution readers on the advice to diversify into equities because portfolio allocation decision is different from market timing strategies. And the former is a decision that has to be determined by considering many factors such as current income, wealth, age, liquidity needs, risk tolerance and investment horizon. Timing the market is best left to professional fund managers,” Javier says.

Javier says investors have different levels of skill and technical competence and some like to dabble in the world of trading stocks and bonds. “What’s important is they understand the risks,” she says.

She adds that institutions and professionals must be left to dominate short-term trading. “An individual investor may find the price swings too costly for his budget or too unnerving that emotions may come into play while trading. Of course, investors have the option to choose the safety of deposit products and government securities,” Javier says.

Pyramiding scams

A lot of people become victims of pyramiding scams because yield is all they think about. There is no such thing as a low-risk, high-yielding investment. As a result, financial regulators and professional fund managers tell investors to look for safety and liquidity, not just yield. Filipino investors are also constantly reminded to deal only with reputable financial institutions.

“Nowadays, investors are choosing to stay on the sidelines and waiting for things to settle down, and that’s not a bad idea at all. But we see still appetite in long-term investments that offer fixed returns, particularly good quality Philippine credit (bonds),” Javier says.

Bumps

The problem with human nature is that people usually do not have the tenacity to realize the value of staying the course, according to Javier.

“In making investment decisions, one should understand both the journey and the destination—the ultimate destination is only reached if one sticks to the investment goal, but, it is equally important to understand that there will be bumps in the journey,” she says.

“So in this day and age of mark-to-market (valuing assets at market price), investors must stick to their long-term investment goals amid heightened volatility. Five years down the road, investors who see the value in certain assets will be looking back at today with a sense of fulfillment,” Javier says.