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Learnings from BPI Trade’s 2014 Year-End Conference Part 2

This is the second part of the article, Learnings from BPI Trade’s 2014 Year-end Conference, where I will be covering Tony Herbosa and Salve Duplito.  This is not meant to be a summary of everything that was discussed, but simply a reflection of the things I’ve learned from the distinguished speakers.

What I learned from Tony Herbosa

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Tony is the founder of the 10,000 strong Traders Apprentice Pilipinas (TAP) and has been a trader for more than two decades already. He was previously the CEO of PNB Capital.

Of all the speakers, it was Tony’s presentation which I found hard to grasp because of my investor mentality since he was talking from a trader’s perspective.  Before, I never would have thought of setting aside “play” money for trading because it was our hard-earned savings I’m putting into the market, but I’m hoping even old dogs can learn new tricks.  I do see the wisdom in his words, it was just that my mind had its biases at that time so I apologize, because I know I haven’t done him justice in this article since stock market trading was a foreign concept to me and I wasn’t able to absorb everything that he said.

1. What is TAP?  As Tony put it, it is a mentoring program, because without a mentor, you’ll just listen to anybody.  Ever since the conference, my husband has started following Tony and it’s been quite educational for us.  Their lingo’s quite funny, with terms like SUBARU (for basura stocks), BOBO (buy on breakout), etc.  Still don’t know what the terms mean since we haven’t attended their seminars, but we’re planning to, within the next quarter.

2. Think non-linear.  Be like water.  While TAP is a mentoring program, at the end of the day, you must have a strategy.  In stock trading, don’t expect a one size fits all strategy to work for all stocks.  Look at the waves

3.  It’s not what you buy, it’s also how you buy because even good stocks have their bad days and bad stocks have their good days.  That’s why he doesn’t give a direct answer when you ask him what stocks to pick, because to him, it’s about riding the waves, be it from a good or bad stock.  It’s also not enough to say you had a 200% or 50% return, you have to consider the volume as well.  What if the 200% return was only for stocks worth P10,000 pesos versus the 50% return on a P100,000 pesos.  Which is the winner here?  It’s clearly the second one.  Because of volume, he doesn’t really advocate having a portfolio since your losses will negate your profit from the good stocks.  Yes, you can start with 4 or 5 stocks but watch them closely and  dispose those non-performing stocks so you can build on your good stocks.

While this was hard for me to digest, I knew he has a point here. I hate seeing a mix of red (loss) and greens (profit) in my trading account, wishing they were all green, because the reds just pull down my profits.

What I learned from Salve Duplito

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Salve is the financial advisor in ANC’s On the Money Show.  As the last speaker,  there were topics which she discussed that were similar to the topics covered by Marvin, so I’ll just highlight those that were new to me:

1.If you want to speculate, just use 10% of your money for that and resist the urge to add.  Chances are, if we see our trading portfolio in green, we’d we tempted to allocate more to it.  Don’t, if you can’t bear the risk.  Maintain the balance you want to strike between being a trader and investor.

2. Mister Market vs the Intelligent Investor.  This is an allegory of Benjamin Graham (the father of value investing, author of The Intelligent Investor, and teacher of Warren Buffett), , which underlies the fact that mister market (referring to the stock market itself) will always quote you buy and sell pries, sometimes, they’re expensive while at times they can be low when the market is depressed.  The goal is not to be swayed by mister market because you are an intelligent investor.  Don’t be afraid by market volatility, instead use it to your advantage to find value stocks.

3. Invest with a margin of safety.  Again, this assumes that you are an intelligent investor, which is the same as buying a value stock, which is a stock that is priced below its true value or at a discount. What is the right price? Look at the company earnings and identify its intrinsic value.
This concludes my 2-part article.  Hope you learned something from it.

Learnings from BPI Trade’s 2014 Year-End Conference Part 1

Learnings from BPI Trade’s 2014 Year-End Conference Part 1

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This article is about what I learned from BPI Trade’s Push Mo Yan Year-End Conference last November 2014.  It’s not a summary of everything that the speakers said, just those things which had an impression on me.  It was my first trade conference and I’m glad I signed up for it even if it meant shelling out Php 750 for a VIP seat.  It was still a bargain given that it included morning snacks, lunch, a free book (Stock Smarts by Marvin Germo),and a better seat compared to the Php500 seat at the back which didn’t come with a free book.  I allocated this expense to my education fund, since I  had a number of takeaways from it.  When it was over, my husband and I agreed that the Php750 charge was probably just to cover the expense, which is why I like BPI Trade.:)

To do each speaker justice, I’ll break this article in two parts.  The first part will include my learnings from  best-selling author Marvin Germo and BPI Securities’ very own Mike Oyson, while the second part will be from TAP (Traders Apprentice Pilipinas) Maestro Tony Herbosa and ANC’s On the Money host Salve Duplito.

With its lineup of speakers, the conference provided a wholistic and balanced perspective since each of them covered different topics.  Marvin provided a background of the stock market in general and gave advice on what do when deciding whether to buy or sell a stock.  Mike talked about stock market investing while Tony discussed stock market trading.  Lastly, Salve talked about the purpose of wealth and social responsibility.

Stock Market Trading vs Stock Market Investing

Before I begin, I’d like to differentiate a stock market trader and investor, as I have made this distinction above.  A trader is one who buys and sells, hoping to gain from price volatility.  He’s the one who’s constantly monitoring the market, looking at his computer all day, doing technical analysis.  To him, it’s about timing so he can buy low and sell high.  An investor buys and holds the stocks for a longer period of time, hoping to gain from price appreciation and dividends.  He’s in the market for the long haul and looks at the market and company fundamentals.  To him, it’s about time and compounding.

A few words of caution: please do your research (read, read, read if you don’t have a background on the stock market) if you want to get started.  Don’t be swayed by greed and what others say, because more often than not, newcomers who lose their money get burned, leave the money and never come back.  It would be foolhardy to think that stock prices will always go up.  Know your risk appetite.  Define your goals and time horizon. There are online trading platforms which allow you to simulate trading, if you just want to get the hang of it.  You buy and sell stocks at their current prices real time but don’t lose or gain if the prices fall/rise. It’s just simulation, which should give you experience on how to keep your emotions in place.

What I learned from Marvin Germo

Marvin’s a Registered Financial Planner and author of several stock market related books which have become best sellers in National Book Store.   He also trades, writes, and has appeared in national television promoting financial freedom.
1. The Philippine stock exchange market is dominated by foreign funds.  Our market goes down when they pull out their money by selling stocks and it goes up when there’s a high volume of foreign buying. This is because less than 1% of the population is investing in the stock market. At around 100million Filipinos , that equates to only 1 million Filipinos trading and investing in Philippine equities. That’s why financial literacy programs are a must in our country,  because while the stock market is quite volatile with its ups and downs, it provides better returns than the usual saving instruments in the bank.  On the average, since the late 1920’s, despite the volatility, the market has provided a 15% annual return.
2. Invest methodically. You must have an entry (price at which you buy) and exit (price at which you sell) strategies when you trade or invest. You have to leave the emotions out the door whenever you do prework (aka research) when  deciding to buy or sell.  Why?  Because we are irrational decision makers in the stock market. We buy when everybody’s buying but by that time, the stock has become too expensive. That might be because we dont really know what to do and that’s why we just join the bandwagon.  Remember law of supply and demand? The greater the drmand, the greater the price.
3. How do you select stocks?
First, follow where the government is going. Where is it spending money on? Check out those companies which are involved in PPPs (public private partnerships). These are the private corporations (Ayala, San Miguel, Metro Pacific, etc) with government contracts to build infrastructure ( e.g. roads, expressways) and provide services to the public.
Second, read so you’ll know what’s in the news today.  Any mergers and acquitions?  What company is aggressively expanding in the market?
4. Do ratio analysis on the company. Check the return on equity for its profitability, debt equity ratio for its leverage, price earnings ratio to identify it it’s cheap or not, and current ratio for its liquidity.  You also need to check if the company is in a growing industry and if the government puts money in it.

What I learned from Mike Oyson
Mike Oyson is the Chief Executive Officer of BPI Securities.
1. Push vs pull. This analogy is similar to the first point discussed by Marvin. Push relates to foreign funds, money from the outside going inside. Pull is the opposite, which is local money being put into the market.
2. Buy when people are scared and sell when people are confident. Really like this advice from Mike,especially since I still consider myself a newbie in the market even though I’ve had a BPI trade account since 2009, because it was only in 2014 when I started focusing and building my stock portfolio. I still don’t know how to do fundamental and technical analysis, so I read and choose my stocks based on BPI Trade’s reports and Bo Sanchez’s Truly Rich Club stock updates which is from COL’s research.

3. If you want to know how expensive a stock is, look at its price earnings ratio.  That’s the ratio of the price share to its earnings per share.  The higher the PE ratio is, the more expensive the stock is.  It is also your payback period in years, which is the time it will take for you to earn what you invested.  Jollibee with a PE ratio of +40 is one of the most expensive stocks in the market.
4. “The party is not yet over. It’s still 11pm”.   When I first heard that, I said huh?  I didn’t know he was talking about the bull run and how we can still ride the waves.  Til the clock strikes at 12am, we can still profit from the market.  When is 12am?  In our case, it’s the next presidential election.  So what are you waiting for?  There’s still more than 12 months left.

5. This is where it gets interesting.  His stock picks are backed by data gathered by BPI Trade’s analysts. For the bull run, the sectors which are said to outperform the market are consumer, power, and gaming, while banks, property, and telco are said to be bearish. Not saying that the other sectors are bad, just that not all stocks are created equal.  If you want to benefit from the current bull run, go for those sectors. Why?  Our economy’s growing and its mostly consumption-driven. Power companies have been increasing their capacity with the numerous power plants being built.  Gaming resorts (Solaire, City of Dreams, etc) will also benefit from integration and the new roadways being built to connect them with NAIA.  On the other hand,  the bearish outlook for banks is due to tighter BSP regulation, for telcos it’s the stiff competition (hurray for us consumers!), and for real estate, it’s the saturation of the condominium developments, albeit those which have horizonal projects (not high rise condominiums) are said to benefit from the bull run, especially MEG (Megaworld).

Apart from what has been said above, he also gave out stock recommendations, placing them in different categories.

a. Long term – these are blue chips which you can buy and hold, or better yet do peso cost averaging. These are the “pamana” stocks which you can leave for your family. Examples are TEL, ALI, GLO, AC, JFC, SM, URC, DMC.

b. Rising – these are stocks which have a huge potential due to their aggressive business strategies.  URC for one has been forging partnerships with international food companies. Megaworld has a huge landbank and is developing several townships to cater to the growing BPO industry. DNL is the oil supplier of Krispy Kreme, Max’s fried chicken etc (didn’t really know that at all). Examples are URC, MEG, RRHI, ICT, DNL, PGOLD, VLL.
c.Value – these are stocks which are priced lower than their historical levels or just lower than their peers in the same segment, but are fundamentally sound . Examples are VLL, MEG, TA, MERB.
d. Cameo – analogous to cameo appearances which are quick in nature, cameo stocks are companies which are seen to be profitable in the short run.  Good example is BLOOM & MCP. These can move to rising category depending on their performance.
e. Mainstay – these are your dividend or income stocks. Examples are GLO, TEL,AP, AEV, SCC,DMC, so if you’re the person who wants to constantly receive passive/ fixed income, these are your stocks.

Mike also briefly discussed the Minsky Model and Theory of Reflexivity, which are theories on the financial markets.  I googled them and found them quite technical so I won’t discuss them in detail here.

Presently, I’m more of an investor than a trader and that’s why I really liked Mike Oyson’s input.  I’d also like to have a mix of “play” money someday, when I already have a strong base to do technical analysis, but till then I’ll continue to buy stocks that are fundamentally sound, those which allow me to sleep well at night as Marvin Germo put it.

Why I decided to be a financial adviser

There are only two reasons.  First is because I wanted to have the freedom to do what I want with my own time.  After ten years of working the corporate life, I really don’t see myself cooped up in an office for the next thirty years.  I guess everybody who’s worked has felt that way. So how I did know I could be one?  It was when my sister asked me to check her life insurance proposal mid last year.  I evaluated the projected returns using the annuity formula, which allows you to compute the future value of annual payments made of a period of time given an interest rate (a good and common example would be loan payments or even those painful tax deductions).  Ever since I’ve learned that formula, I have used it to calculate the future value of my investments in mutual funds and stocks, which I put money into every month.  That’s also probably why I’m frugal, because I’m very much aware of the opportunity cost when I buy things that lose their value over time.

Second reason, I didn’t know it at first and it’s the people who I’ve talked to that have pointed this out but I’m really quite passionate about personal finance.  I’d rather talk about how my stocks are doing than gossip about local celebrities.  I’d rather read books and listen to people who talk about business and how to make more money than talk about the latest fashion trends.  I guess I’m geeky that way.  That has inevitably translated to how I spend and look at money. I’ve always been the practical one. My phone is pretty basic (never owned an Apple and the only Samsung I had was the one handed down to me by my brother) but I do splurge on footwear since comfort is a priority to me.  I have clothes which have been with me since high school and college (either because of sentimental reasons, they just fit me, or are just too comfy to let go). As for my bonuses, I just spend 10-20% on my wants while the rest would go to my financial freedom account (insurance, mutual funds and stocks).  I know that will all change when I have a baby of my own, and that’s exactly the reason why I’m maximizing my savings now.

Five months into it and all I can say is, it’s damn hard because it doesn’t mesh with another side of me: my shy side (haha!).  I don’t like approaching people and selling to them.  What I do like about it is that I get a chance to share my thoughts on savings, investments, stock markets, etc.   What I do like about it are the number of trainings I’m able to attend about the stock market and investments in general, especially those held by Sunlife’s very own fund managers and tenured unit managers. I know that if I were to make it here, I’d have to thicken my skin, and that’s quite a challenge for me.

To me, being a financial adviser is not just about selling life insurance.  It’s about educating the ordinary man how he can move out of the rat race to achieve financial security and freedom.  It’s about teaching them to plan and save for the rainy days.  It’s about changing their mindset about money.  After all, schools didn’t teach us about money, which is why many Filipinos are financially illiterate and struggle financially.  More than just being a salesman, it’s a service rendered by every financial freedom advocate out there.  If you’d like to be a  Sunlife financial advisor, let me know.  There’s a business opportunity forum at Sunlife Bonifacio Global City office next Saturday, February 28, 2015.

My Take: Seven bright choices you can make today for a brighter tomorrow

I’m featuring this personal finance article from Sunlife’s brighter life website because I like its graphics and since the content is lacking in detail, I’m sharing my thoughts :

http://brighterlife.com.ph/2013/08/27/7-bright-choices-you-can-make-today-for-a-brighter-tomorrow/?category-ref=personal-finance

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1. Set goals- The goals you set have to be SMART: specific, measurable, attainable, realistic, and time-bound.  For example, it’s not just enough to say I want to retire comfortably, I want to travel, I want to build a college fund for my child, or I want to buy a house.  You have to define what a comfortable life is for you. If that means living the same way you do right now, then use your current monthly expenses as your reference and multiply that with the number of years you expect to leave after you retire.  You have consider the rate of inflation in your computation.  For your travel fund,  don’t you do research and compare prices on the cost of airplane tickets, accommodation, tours and attractions? The same applies when planning to purchase  your dream house. Various factors come into play such as location, size and number of rooms, if you’re buying from a developer so you get to enjoy a few amenities, the amount of equity you need to shell out and the monthly amortization you can afford for bank financing, etc.  In building your child’s college fund, you have to know the tuition fees by the time your child enters college and save up for that amount.  You want them to go to top universities twenty years from now?  Below table shows Sunlife’s projections on college fees of top universities in five to twenty years from now, at a 12.25% rate of increase (the rate of increase per CHED’s 2008 data).

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You need to plan, prioritize, and be specific in what you want because there are so many things to consider.  If you’re keen on knowing how much you need to save and invest for your dreams, you can use Sunlife’s dream calculator, http://www.itstime.com.ph/brighterlife/.  It’s very easy and simple.  First, you have to select the dream you’re prioritizing: own a car, build a home, open a business, travel abroad, or setting up  retirement or college fund.  Once that’s done, you have to input how much you need, how many years you plan to save and invest for that goal, and how much you have saved already.  It will then calculate how much you need to save monthly when you put your money in a bank account versus other financial instruments such as mutual funds, variable-unit linked insurance (VUL), stocks, etc.

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2. Begin a saving habit. T. Harv Eker suggests a jar system of money management.  It’s called a jar system because it’s a method of allocating one’s money, much like putting money into different jars which serve different needs and taking money from that jar to fund that specific need.  Once money from that jar is depleted, you stop spending and don’t take money from other jars.  The five categories are necessities, financial freedom, education, long term saving for spending, play, and give.

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55% of your income goes to NECESSITIES like rent, mortgage, utilities, food, taxes, or anything that you need to LIVE.  10% goes to your FINANCIAL FREEDOM account which is used for investments and building passive income to make you financially independent. You DO NOT SPEND money on this jar, never. 10% goes to your EDUCATION account for your personal growth.  Benjamin Franklin once said, investment in knowledge pays the best interest. Your growth in either work or business is limited to what you know, whether you’re a CEO, doctor, accountant, or a businessman, you have to continuously upgrade your skills.  This is not limited to formal education like getting a masteral or doctoral degree, it could also be seminars, conferences, or trade fairs you can learn from. 10% goes to LONG TERM SAVING for SPENDING account which is used to bigger expenses that you need to save up for like a house, education fund,  renovations, appliances, or trips. 10% goes to your PLAY account to reward yourself, like a spa treatment or dinner at an expensive restaurant because you need to pay yourself and enjoy your money now.  Lastly, 5% goes to your GIVE account. You could increase this to 10% if you are tithing, or you can just give it to a charity, or to help out a friend or neighbor.

This is the recommended breakdown but of course this varies for everyone.  For someone who earns a lot, the percentage for necessities could be smaller and there’s a bigger weight on the rest of the jars.  For an average-income earner, necessities may take up as much as 60-70%.  What you have to remember is that customizing your own jar system takes times and may require a few tweaks along the way as your needs or lifestage.

3. An emergency fund is a crucial aspect of risk management.  This is what you use if there’s an unexpected incident which requires you to shell out money for the short term.  This could be a temporary job loss/sickness/ market slowdown which deters you from earning the same rate of income for 1-6 months, or there’s a need to repair the house due to natural calamities.  This fund should be at least 3-6 months of your monthly expenses and put in liquid assets like a savings account or money market instruments, not in stocks or mutual funds, which are prone to fluctuations.  You don’t know when emergencies will arise and you don’t want to be cashing in your stocks when prices are down, just because you need the money.  That will just make the paper loss real.

4. I’ve already emphasized the importance of both a life insurance (and a health plan) on my first article about risk management so I’ll just keep this short.  Anybody who has anybody depending on them requires a life insurance.  This is to ensure that whoever gets left behind has something to continue living.  True, we all face risk everyday and the chance of you encountering an accident maybe small, but the probability of it happening is still there.  When you buy a car or a house, don’t you get insurance for these non-life assets, because you’ve worked hard for it?  In the same way, haven’t you also shed tears and sweat over the years to be where you are right now because you want a better life for yourself and family?  Without you, who would take care of your family?

5. Inflation rate in the Philippines ranges between 3-6%.  To beat it you need to earn at least 4-7%, otherwise, you’re just losing the value of your money.  What does that mean? My mom told me that at her first job in the 1970’s her monthly salary was three hundred pesos and you can already have a decent snack at one peso.  Nowadays, you can’t buy anything with just one peso and three hundred pesos is gone in a matter of days, or hours or minutes, depending on your standard of living. We need to beat inflation because we have specific needs and dreams we want to achieve over a specific time.  If you’re saving for a 3 million pesos condominium which you want to move into 3 years from now, saving 1 million pesos for three years is not enough because the value of the condo will increase and you’ll fall short.  Before you decide where to put your money, remember that you have to match your time horizon with the asset. If it’s a short term need, say you’re getting married next year, put your wedding fund in liquid assets so you can access them when you need to.  If it’s a long term goal, then put your money in stocks, bonds, or mutual funds, and even variable-unit linked insurance, which historically have yielded above inflation returns.

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6. If you don’t have a clue how to start your journey towards financial freedom, you can go to financial planning websites such as Flexscore (https://www.flexscore.com/).  It analyzes where you are now financially and advises you on the steps you need to take to be financially independent. The goal is to have a score of 1,000 to be financially independent.

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If this is too intimidating for you (as it requires you to input the amount of savings you have or life insurance coverage and other personal financial details), you can also consult with financial advisors (from banks or insurance companies) or hire a registered financial planner.  If you’re financially literate and can create a plan for yourself, all the better, just remember that a good financial plan begins with a self-check and continuous monitoring.  Personal financial plans are available in the internet, which you can use as reference in drafting your own.

7. Lastly, you have to be disciplined to persevere in carrying out your financial plan.  Wealth is built over a long period of time, not in a day.

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Getting Started on Wealth Accumulation

Here’s a great read from Huffington Post about personal finance which introduces various topics relevant to the second stage of personal financial planning, which is wealth accumulation.  I’m not going to discuss all of the points, just the ones which I feel strongly about.

#10. I’d rather have Php 2.00 tomorrow than Php 1.00 today.  Building wealth requires personal sacrifice and delaying gratification.  While you’re still young and able, you have to start thinking about the future because time is one of your best allies in wealth accumulation.  Look at this annuity table, with a monthly investment of P2,000, P3,000, and P5,000 based on a compounded eight percent annual return.

Monthly investment 10 years 20 years 30 years
2,000 (Php365,892.07) (Php1,185,894.44) (Php3,000,590.36)
3,000 (Php548,838.11) (Php1,778,841.66) (Php4,500,885.53)
5,000 (Php914,730.18) (Php2,964,736.09) (Php7,501,475.89)

This tells you two things.  You can start small, with just a monthly savings of Php2,000 but if you persistently invest it in a financial instrument that generates eight percent return annually, you will be a millionaire in twenty years!  That million can be used to start your own business which would further add to your income stream.  The second thing this table shows you is just how important time is to an investor.  Even if you only invested Php2,000 for thirty years (equal to Php720,000), the return is much bigger compared to the future value of the Php5,000 monthly investment for twenty years (equal to Php 1.2 million).   Of course, Php5,000 monthly investment for 30 years beats Php2,000.  The point is, if you don’t have the financial capital, you have to make up for it with time and if even you had the money but had little time, the growth will be limited.  It’s not hard to save Php2,000 monthly right?  This is just the same as saving Php 67 every day, less than what a one piece Chickenjoy would cost.

If you do decide to start this habit, it’s going to be difficult at the beginning.  Why? Because this takes time and constantly requires you to be disciplined and be focused on your goal.  After all, it’s so easy to think of P2,000 as dispensable money, one you can always save up for month after month. No question about that. But the thing is, it’s not the money that we might run out of, it’s time.

#9. Millionaires typically don’t drive Lamborghinis and Aston Martin.   This is the myth that the book The Millionaire Next Door has debunked. Despite billions in their bank accounts, some of the world’s richest are also the most frugal men alive. Warren Buffett continues to live in the same house he bought in 1958. Ikea’s founder Ingvar Kamprad flies coach not first class and drives a 1993 car model. If you want to be financially free, it’s important to keep whatever money you make. Don’t spend it on things that depreciate in value.   Simplify your lifestyle by living below your means.  Looking rich is different from being rich.  If they can do it, why can’t we?

#8. It’s Okay to Splurge on Something Nice…at the Right Time. The key is balance. You can’t just live today like there’s no tomorrow when there actually is, and you also must not forego living in the present. This is one of the principles behind T. Harv Eker’s jar system of money management.  You need to have play money to pamper and treat yourself.  Don’t be too stingy on yourself because the time will come when you will feel too deprived, that it will push you to spend big time, which is what we’re trying to avoid.  Splurge if you must, but it must be planned.  Save up for it.  Make it count. Don’t just buy impulsively.

#7. Forget Nuclear…Compound Interest is the Most Powerful Force in the Universe.  Einstein once said that compound interest is the eighth wonder of the world. He was right. It is such as powerful force, which when combined with time, allows your investments grow at an exponential rate. So what is compounding? It is interest earning on interest.

Let’s go back to the example in the article: Which would you rather have: Php 1,000 every day for a month or Php 0.01 doubled every day for a month?  This is the table we get.  The first choice provides a constant return every day.  This is wealth building by addition and what you would get if you were to put your money in assets that only give you simple interest and does not compound. With the second, you start with a measly one centavo but because it doubles, it increases sharply.  This is wealth building by compounding, where interest is reinvested to produce higher earnings in the succeeding days, giving you an exponential growth. If you look at the table, you’ll notice that it was only on the twenty third day that compounding surpassed the linear growth from saving, but after that, it increased by leaps and bounds.  That’s why we need time.  Like a tree which takes years to grow and bear fruit, because it roots itself first to the ground, your wealth accumulates at a snail-like pace in the first few years, but once it reaches a certain point, it multiplies.

Day A B
1        1,000.00                          0.01
2        2,000.00                          0.02
3        3,000.00                          0.04
4        4,000.00                          0.08
5        5,000.00                          0.02
6        6,000.00                          0.32
7        7,000.00                          0.64
8        8,000.00                          1.28
9        9,000.00                          2.56
10      10,000.00                          5.12
11      11,000.00                        10.24
12      12,000.00                        20.48
13      13,000.00                        40.96
14      14,000.00                        81.92
15      15,000.00                      163.84
16      16,000.00                      327.68
17      17,000.00                      655.36
18      18,000.00                  1,310.72
19      19,000.00                  2,621.44
20      20,000.00                  5,242.88
21      21,000.00                10,485.76
22      22,000.00                20,971.52
23      23,000.00                41,943.04
24      24,000.00                83,886.08
25      25,000.00            167,772.16
26      26,000.00            335,544.32
27      27,000.00            671,088.64
28      28,000.00          1,342,177.28
29      29,000.00          2,684,354.56
30      30,000.00          5,368,709.12
31      31,000.00      10,737,418.24

#1. It’s not about the money.  It’s about freedom.  This says it all. Why do we want to be financially free? To live the life we want!  The definition of freedom is different for everybody. For some it might be living a life where they can buy anything, go anywhere, and do whatever they want. For some, it’s about being their own bosses and the ability to have more control over their lives.  For some, it’s about giving back to those who have less.  Because financial success and freedom is different for everyone, you have to define it for yourself. But before you can be free, you have to work hard first to have enough money which will work hard for you.  To be financially free, you don’t need a lot of money or to be massively wealthy.  You just need to accumulate enough assets that provide enough passive income to cover your living expenses.

Personal Financial Planning: PART 1 – Risk Management

Since this blog is a diary about my advocacy for financial literacy and freedom, I thought I’d begin with personal financial planning- what it is and why it is important. In its simplest definition, to be financially free is to have money working for you and not you working for money. It is about leveraging your financial know-how and assets to get the best monetary return so you can live the life you want. In starting one’s journey towards financial freedom, it is crucial to have an awareness of where he is financially, where he wants to go and how to get there.

Let’s break it down: Personal means it is customized according to an individual’s needs and goals. Financial, pertains to money matters. Planning is the process of goal-setting, creating and implementing an action plan. Combining all these, personal financial planning is the process of creating and implementing a customized plan around your needs and wants which require money.

Why do we need it? We have INFINITE NEEDS & WANTS, yet everything about us is FINITE. We have a limited paycheck, which is exhausted from payday to payday. The number of years we work is also limited, putting a cap on our earning potential and income source. For those who have planned for their retirement, who have worked in companies or countries with a good pension plan, it is a welcome reprieve from at least forty years of back-breaking work. The rest dread it because no work means no pay. Our body is also limited. Over time our body deteriorates as part of a natural process or hastened by one’s lifestyle. We cannot stop growing old, and of course death is inevitable.

In the Philippines (based on Sunlife’s It’s time findings), out of one hundred people who retire, only two are financially independent. The rest depend on relatives (45%), charity (30%), while the remaining (22%) continue to work beyond the age of sixty years old. This is a very sad reality given that our country is dominated by a working population rather than an entrepreneurial one. It underlies the fact that while most of us have worked for more than half of our lives and spent much of our waking hours preparing for work and ensuring we deliver what our bosses want and paid us for, we are not prepared to deal with our own retirement. That the past forty years of labor only resulted in improving the bottom line of our employer, and not ours. That’s why we need to have a financial plan, because these numbers can be turned around.

A good personal financial plan contains these elements: risk management, wealth accumulation, and wealth preservation. I will discuss each of these in detail. Instead of merely looking at it as a pyramid, think of it as a financial house, with risk management at the base, followed by wealth accumulation, and wealth preservation at the top.

pyramid

  1. RISK MANAGEMENT

Risk management, also known as income protection is at the base of financial planning because this is where everyone should start. To be financially secure, you must protect your income, which is the same as protecting yourself. Why? YOU are your greatest asset. Do you think that if Warren Buffett lost all his fortune and went bankrupt, he’d remain poor? Eventually he’d get it back over a few years, because his knowledge and skills are his best assets. The rich know this, so do businesses. Airlines manage risk by hedging oil prices. They buy contracts that let them buy oil, their biggest variable expense, at a fixed cost, so that if the world’s oil prices skyrocket, they can buy it at a lower price. On a personal level, the biggest expenses are those which not only eat up your savings / income but also those that prevent you from earning, like illness or a disability. This brings us to our next point. More than education and skills, your income potential can only go as far as your health can take you. Ever seen highly-paid individuals (CEO’s, athletes) who are sickly? Not really, because income is based on performance, which depends on one’s health.

We have to manage risk because it is real and present, because there are so many things outside our level of influence and control. On a macro level, we cannot predict when the next depression will be, when outbreaks will appear, or when wars will break. On a personal level, we can’t say for certain our how day tomorrow will go, what’s going to happen to us in the next five or ten years, how and when we’re going to die. Though we cannot predict the future, we can at least prepare and mitigate its impact. The financial risk that we’re trying to mitigate is the loss of income.

What happens if you don’t manage risk and have a rocky foundation on your financial house? As a fairy tale goes, the straw house which the pigs built was huffed and puffed easily when the wolf came. But when they built it on bricks, no matter how much the wolf huffed and puffed, the three little pigs were safe. The wolves in our financial journey are the natural (earthquakes, storms, eruptions, etc) and personal (accidents, sickness, job loss, death) calamities which are beyond our control. Yet, there are also financial traps we create ourselves: when we live beyond our means, when we enter into a new business without studying the market, or when we put our money in dubious sources and expect unrealistic returns (Ponzi scheme) or when we simply let greed and pride take over, that’s when the financial base crumbles. To manage risk, we need to secure our money and investments, create a savings plan, build an emergency fund, and reduce our debts.

Life insurance and health plans are the key instruments for securing income and wealth. Life insurance protects our family from income loss and enables your family to continue to LIVE, even if something happens to the breadwinner. To understand what income loss is, simply look at your monthly expenses and your liquid assets such as bank deposits and money-market instruments. Sum up your liquid assets and divide that by the monthly expenses. Say you have P500,000 thousand pesos of liquid assets and P50,000 monthly expenses. This means that your family can live comfortably for ten months, before they run out of money. At the eleventh month, they might have to sell the house, rent an apartment and use the proceeds from the sale of house to finance their living expenses. Ultimately, life insurance is a security blanket that provides an income stream to the grieving family, so that they can continue on LIVING. This is a MUST for every father and mother who wants to protect their family so that their children wouldn’t suffer because they didn’t plan for the UNEXPECTED. Single individuals also require minimum cover for life insurance so that if something happens to them, if they die or get disabled, their family wouldn’t be burdened.

Health plans pay for the high cost of hospital bills/ operations from dreaded illnesses. In the Philippines, heart attack, stroke, and cancer are the leading causes of death.   Five Filipinos die of cancer every hour. Two hundred seventy six Filipinos (yes in the Philippines) die from a fatal heart attack every day. When one gets diagnosed with a major illness, their first priority should be their health, how to get better and the treatments available and not how to pay for their medical bills, which could balloon to hundreds of thousands or even millions, depending on the severity. Skipping the base and proceeding directly to wealth accumulation leads to trouble since this means that when disaster strikes, you tap into your investments / properties. It would be good if the market was up and you sold your investments at a gain, but what if the market is down? You will be selling your investments at a loss just to pay for medical bills, just because you need it now and can’t wait for the market to take its natural course. Thus, health and disability plans, insure and secure your investments, so that you can use them for the purpose you originally intended for them (as your retirement money or a trip abroad or as education fund ).

We also need to have a savings plan because this instills discipline and also creates an awareness of our attitude towards money. Do you have the mindset of a consumer or an investor? Do you let your money go or do you let it grow? Instead of treating money as a means of exchange that allows you to buy your needs and wants, treat money as a seed, which you can grow and multiply. When you’re single, you have minimal expenses and can set aside more for investments. That’s why it’s best to start saving and investing early, because time and compounding allows you to build passive income. When you’re married and building a family, it’s best to have a savings plan that the couple agrees and will be committed to. After all, you wouldn’t want to save and invest, only for your spouse to spend it right? Both of you should CHOOSE and COMMIT.

We also need to have an emergency fund which will be used during short-term emergencies like calamities or short-term job loss or illness. The recommended emergency fund is 3-6 months of your monthly income, which should allow you to live comfortably for the same period when ever emergencies strike. When this is used up, build an emergency fund once again.

Lastly, we also need to eliminate credit card debts because of the high interest payments. When your credit card bills have piled up, settle them with your savings so that your future income stream goes to your savings and not debt servicing. To kickstart eliminating your credit card debt:  add up your latest credit card balances and settle the card with the largest outstanding amount. Ask your bank to reduce your interest rate. Even a little interest rate reduction helps, especially if your outstanding debt is already more than twice your monthly income. If you have a deck of credit cards, cut them up and leave one only for emergencies, preferably, the one with the lowest interest rate and credit limit. Commit.  Always remind yourself the high cost of not saving and investing today.

In summary, risk management is where everyone should start in their financial journey. We have already established why it’s important and the tools we can use to achieve this – life insurance, health plans, savings plan, emergency fund, and debt elimination. I will discuss the other two components in more details in the next article.