Ten pesos a day keeps bankruptcy away (Part 2)

Happy Easter to all of you!

This is a continuation of my reply to Comments to my April 2008 blog.

“Litong Lito?” continues:


Sabi nyo po:
"Since the return is high, the risk is also high. Invest only amounts you can forget for years. Surely, you can forget Ten Pesos per day. You might even be able to forget One Hundred Pesos a day if you are determined. In which case, you can just multiply your returns as described above by 10!"

Wala po bang ibang alternative na less risky? Sabi po nila mas okey sa "lupa" and the like. Of course, kadalasan hindi namin kaya ang cash, pero marami ding hulugan na lupa lalo na kung Pag ibig or SSS member ka. Para ring 10 peso a day savings.

I remember, 1998 may hinulugan akong lupa at PHP200 per square meter. Today, after 20 years, ay more than P2000 per square meter na ang presyo (99.9% risk free).

Ibig sabihin ang hinulugan kong 1000 square meter noon na nagkakahalaga ng PHP200,000 ay 2 million na ngayon. Hindi pa kasama dito ang paggamit mo sa lupa. Pwede po bang mangyari ito sa Mutual Funds (MF) at Unit Investment Trust Funds (UITF)?

We have our hard earned savings and we want to make sure that we will have the right decision before investing? Kahit na po piso lang araw araw ay malaki na para sa aming mahihirap.


My answer:

There are many kinds of investments just as there are many asset classes. The risks differ for each type of investment.

Government securities like Treasury Bonds and Treasury Bills have the lowest risk. However, the returns are fixed and usually lower than other investments.

There is no chance for extraordinary profits like there could be in mutual funds and UITF.

Moreover, government securities are very liquid. You can buy and sell them anytime.

Real estate or land as financial asset is another sound one.

However, this does not mean that you can put all your investible funds in real estate.

Allocation of assets is key in managing risk in investing.

Income-earning real estate is an excellent venue for investment as in addition to regular income, you have appreciation of the property as a good source for capital growth or increase in value in the future.

Note though that investments here are relatively large amounts and may therefore not be suitable for most ordinary income earners.

Land may feel safer to most people but it certainly is not 99.9 percent risk free.

In the case of the example of "Litong Lito?”, his land value grew by 1000% over 20 years or on simple average 50% p.a.

This simple average return is equivalent to about 12.5 percent annual compounded rate of return.

If the land he chose was really good, then he chose well or was really lucky. But here are the problems of many who invest in land:

Relatively big initial cash investment needed.
Fake titles.
Squatters in your actual property or near it that will lower land values.
Maintenance expenses like taxes and the costs of keeping the land clean.
Liquidity is not so easy. Will there be a buyer at the price you want when you want to sell it? Sometimes when your need for cash is immediate, you end up selling at a big discount.


Pag-ibig and SSS members are only entitled to housing loans and not to buying raw land.

For those who buy houses for investment, there are other risks in addition to the foregoing to look out for.

For example,

For every month of vacancy, you actually suffer an annual 8.3 percent reduction in income
Worse if your tenant does not pay, you will have to find a way to eject him and could end up paying for litigation costs.
As a general rule, each time you change tenant, you need to have a fairly big budget to repair the place.
Maintenance of the house from termites and other pests and taxes add to the cost.
When you want to sell, the house would have a depreciated value while the land may have an increase in value.


As you can see, there is no way that real estate investments are risk free.

Whether windfall profit can happen for Mutual Funds and UITFs, the answer is yes if there is a big boom in the economy and if you are able to buy at the low NAV and sell at a high NAV.

For example, if you bought from the best performing Mutual Fund in February 2009 and sold in March 2010, your return for the one-year would be 34 percent.

As you will note, these months were generally not good months for the economy.

I know what hard-earned money is all about because whatever I have today was slowly hard-earned.

I come from humble beginnings and I was blessed with the right teachers through the years.

I only want to pass on what I have learned to anyone who wants to listen.

Part 3 of 3 will follow soon.

We invite you to our Pisobilities Seminar Call 6373731 or 6373741 for details.
Article:
http://blogs.gmanews.tv/francisco-colayco/archives/32-Ten-pesos-a-day-keeps-bankruptcy-away-Part-2.html