A Simple Guide to Becoming a Good Investor in the Philippines - Part 2

This is the second part of a three-part series. If you've missed the first part, you can find it here.

The idea behind this series of posts stemmed from the misconceptions many of us have on how to become investors. Many of us go out to invest just because we have the money. But if we are in it for the long haul, we need a sound strategy to become good investors. There exists a need to educate potential investors on the appropriate steps which will lead them to the right path. Hopefully, these discussions will help fill that need.

Previously, we've completed the first three guidelines to becoming a good investor in the Philippines. They include the following:

1. Know the basics
2. Fix your financial issues
3. Establish a good financial foundation.

These three are actually the essential pillars with which the next guidelines will stand on. If you've got these three pillars in place, you are now ready to learn more about the different investment products available.

4. Learn about investment products

Here’s where it starts to really get exciting. There are many investment options available to the public in the Philippines. It would be great to learn all of them but it won’t be easy to do. There are professionals who spend most of their time just for this purpose. Not everyone has time in his hands to know everything about investment products.

But if you’re a serious investor, you have to know the essentials as much as you can. You should strive to learn about the particular investment product that you want to invest in. You don’t need to know all the details but there are some important things that you should cover.

If you’ve read anything about investments from business news and magazines, you’ve likely heard the terms stocks, bonds, mutual funds, etc. When you hear these terms and they don’t ring a bell, don’t fret. It just means you’ve got room to enhance your knowledge.

If you’ve covered your bases as we discussed in guideline #1, you’re on the right track. Specifically, your review of accounting basics should come in handy as you learn about stocks and bonds. These two are the most basic building blocks of many financial investment products in the market.

Stocks are basically shares of ownership of a corporation while bonds are debts that pay interests. They may seem hard to understand at first but they’re actually not that complex. As you go along, you’ll realize that investment funds are basically managed to earn from stocks or bonds or a combination of both.

Here are some basic articles I’ve written about different investment options that you may want to learn about:

5. Assess your risk tolerance

Investing without proper planning can leave out a very important preliminary step. An investor may be blind to the risks he or she is taking on. To know the different investment products out there means we should be aware of their associated risks. Each person’s tolerance for these risks should be a deciding factor before investing in them.

Stocks, for example, are quite risky because the stock prices fluctuate all the time. Bonds, on the other hand, are considered safer than stocks. The risks with bonds are mainly associated with the debt issuer and the maturity period. Government bonds are very low risk because governments do not normally default on their debts. Corporate bonds, on the other hand, will pay interest rates which are reflective of the risk associated with the particular company. On top of that, the longer the maturity the higher the interest rates will be.

If you decide to be an investor, you should assess your own capability to tolerate the risks before you invest. Risk tolerance is not something we guess from how we feel in our gut. Here are some of the factors that will affect our ability to tolerate risks.
  1. Age - the younger you are, the higher the risk you can tolerate
  2. Financial situation - the more stable your finances and cash flow, the higher the risk you can tolerate
  3. Investment horizon - the longer your investment horizon is, the higher the risk you can tolerate
To get a feel of how you may assess your risk tolerance, you can try this calculator. Follow the link below:

6. Plan your investment portfolio

Upon knowing your risk tolerance and the risks associated with different investment options, you can now plan on an investment portfolio that will reflect the appropriate amount of risk you can take.

You may think of your overall portfolio as basically a combination of stocks and bonds. Even if you invest in mutual funds or UITF’s you can still tell how much portion of stocks and bonds there are. I would think that an investor with a moderate risk tolerance can divide his or her investments between stocks and bonds equally. This means 50% stocks and 50% bonds.

As your risk tolerance moves up, your portion of stock investments may also increase. But as your risk tolerance becomes lower, your stock investments should also reflect that and be lower.

It’s true what they say about risk and rewards - the higher the risk, the higher the rewards. But that’s not an encouragement to take on more risks than you can tolerate. To be good investor, you have to know yourself and invest accordingly. Or else you could be taking more risks than you are capable of handling. It would be good if you can get the upside, but that will not always be the case.

Investing is not the same as gambling. Your financial well-being is at stake here so do it as carefully and intelligently as you can.

*Photo Credit: wonderwebby (Creative Commons)