Mutual understanding

It is difficult to escape clichés—at work, at home. In almost every aspect of your life, you will hear them, even use them.

Clichés, regardless of your stand on their use or abuse, serve to deliver a message and a purpose. Even in personal finance and investment speak, there are overused phrases. “Don’t put all your eggs in one basket” is mouthed in just about every financial planner or consultant’s discussion.

Is it the lack of an alternative that makes us use it over and over again? There is a divergent idiom, supposedly quoted by great American capitalist, Andrew Carnegie. He said, “The wise man puts all his eggs in one basket and watches the basket.”

All these clichés with eggs! Even a retirement fund is called a nest egg. Someone should coin a new phrase that has nothing to do with eggs and baskets.

Diversification is a part of portfolio theory that put forth the hypothesis that spreading your money across various asset classes will improve your risk and reward ratio. A portfolio shouldn’t be 100 percent in equities or 100 percent in bonds if it is to balance out the reward and the risk. Furthermore, diversification doesn’t end with just the asset type.

An equity portfolio spreads its investments in companies spanning various business sectors. If you watch business news, you will often hear fund managers saying, “We are heavy on [sector].” You won’t hear, “We are 100 percent in [sector].”

Similarly, a bond portfolio will invest in different tenors. It wouldn’t be wise to put all the money in long-term bonds.

For an average investor, it is a daunting task to have to understand portfolio management. It takes knowledge and a lot of time to be able to do it well. A cliché comes to fore: “Leave it to the professionals.” And thus, mutual funds were born.

Mutual funds are professionally managed pooled funds that provide the retail investor the opportunity to gain access to a diverse portfolio at only a minimal investment. Another pooled fund, unit investment trust funds (UITFs), although similar in concept, have a higher entry investment.

Mutual funds generally come in three types—an equity fund, a bond fund or a balanced fund, which is a combination of equities and bonds. In terms of charges, there are generally three charges—the front end, the back end, and the front- and back-end fee. They are called as such because they refer to when the fee is charged on your investment. Don’t think that UITFs don’t have any fees. The fee is already deducted from the NAV that you see.

The NAVPS in its entirety is net asset value per share. This is the value of the mutual fund at the time you see it. This is an important number as this will determine the yield that you have. This is computed daily and can be viewed from the web site of the Mutual Fund Co. or the web site of ICAP (http://www.icap.com.ph).

Just because pooled funds are professionally managed, it does not preclude the fact that you are still exposed to risk. Most individual investors go for mutual funds because of the potential return that they can generate. Take note of the word “potential” because there are two maxims (clichés, maybe?) that you have to remember:

Historical performance is not a guarantee of future returns.

Higher returns also mean a higher level of risk.

Historical two to three years’ yield has always been the battle cry of mutual-fund marketers, and the yields of the past two to three months its swan song.

For people who are used to returns that beat inflation by a mile, it’s difficult to acclimate to the current “below-average” returns.

Investors must understand that everything in the business world moves in cycles. The yield curve was called a curve precisely because returns don’t fall on a straight line going upward.

Smart investors will do what is known as peso cost averaging. The term is an ode to the Americans’ dollar cost averaging. How is this achieved? To give you a better perspective, let’s call upon another financial cliché, “Buy low, sell high.”

No one has perfected it because it’s neither an art nor a skill. You’ll be lucky being able to buy at the absolute low and then selling it for a profit at the absolute high. What is possible, though, is to buy near the low and sell near the high.

If you want to do that with mutual funds, a good suggestion is to spread out your investment over a period of time. I’ve encountered a lot of people who ask me, “I have this amount of money, could you tell me when it is a good time to invest in the mutual fund?”

There really is no good time, best time or perfect time to invest than now, tomorrow or yesterday. In short, any day is a good day to invest for as long as you are investing for the long haul. To at least filter out the volatility of the NAVPS, make an investment plan by investing on a set schedule, usually a monthly plan. This way, you average out all the NAVPS throughout the year.

Clichés are like verbal admonishments from parents or superiors. They have to be repeated ad infinitum to drive home a point. Hopefully you’ll listen to investment maxims and take them to heart.

These clichés will stick around longer than your life span, anyway. As economist John Meynard Keynes succinctly puts it, “In the long run, we are all dead.” 

****

Sherwin Chan is a member of Sun Life of Canada Philippines and provides protection and investment products. He also trades in the stock market and is a member of Absolute Traders. He attended the 7th RFP Program. He maintains a blog at http://guerillainvesting.blogspot.com. You may reach him at guerillainvesting@yahoo.com. Join the 9th RFP Program (January 19 to March 8, 2008). Visit www.rfp-philippines.com or inquire at info@rfp-philippines.com/tel. no. 634-2204. 

Why do we have this nagging feeling that the short-lived rebellion by Sen. Antonio Trillanes IV and Brig. Gen. Danilo Lim at the Peninsula Hotel in Makati on Thursday would certainly not be the last?

I spoke too soon.  I mean, I wrote too soon. Less than a month ago, the Congressional Committee on Justice slammed the door on the Tamano supplement to the original Pulido impeachment complaint.

It is difficult to escape clichés—at work, at home. In almost every aspect of your life, you will hear them, even use them.

The Entrepreneur: 7% GDP growth in 2007: Can we do it again?

The Senate should be able to finish its work on the proposed budget for 2008 before the end of the year, so that we can start the New Year with a timely spending package. The Senate has temporarily suspended legislative inquiries so it can concentrate on deliberating on the proposed budget.

It is well that Congress and the newly established Procurement Board have decided to look deeper into the whys and wherefores of that World Bank board decision deferring consideration of the second tranche amounting to $232 million of the bank-funded National Road Improvement Program (NRIP).

People speak of the growing problem in hushed tones, respectful of cultural diversity. For some, the encounters are limited to the supermarket line where some South Koreans brusquely cut in as they do at the airport where police shrug in subservient deference.

In the bedroom of my apartment in Honolulu, I watched the Filipino Channel news coverage of the reported walkout of Sen. Antonio Trillanes IV and Brig. Gen. Danilo Lim from the court hearing in Makati.