Sounds Greek to Me

People who invest and trade in the stock market, mutual funds, and UITFs, would know what I'm talking about just by the title alone.

Those who don't, can just refer to the definition of that phrase.

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It's about what's happening in the stock market lately - locally and globally.

Three years after Lehman Brothers, we now have another banking system problem, this time from Europe, with the origins coming from Greece.

According to Wikipedia, Ancient Greece is considered by most historians to be the foundational culture of Western Civilization. So, Modern Greece will now be considered as the foundation of the second crisis crippling the globe. The first one was the States just three years back.


I won't offer to conjecture further about it. There are people more qualified to give their opinion about the situation. Further, there's enough news on the web, print, and TV so I am sure you've at least a bit of an idea as to what is happening.

However, I think locally, no one - outside the financial industry / and the investing public anyway - really cares about it.

The up side of having so many domestic problems is that you don't have time to worry about issues outside your national borders. Of course, that doesn't mean we won't be affected by it.

Plus, you still have a job, so I don't think that you'd be minding the prevailing crisis that much - yet.

But, if you're someone who's been investing (or just started to), you'd be worrying about what's happening to the values of your investment holdings.

If you're someone who invests, you are doing what most financial advisors and planners would term, increasing your passive income.

Active income is the money derived from blood, sweat, and tears - i.e. your job, business, your sidelines and moonlighting, etc.

Passive income produces blood, sweat, and tears if your stocks/UITFs/mutual funds falls below your cost of investment.

Just kidding. =)

Most people would like to have a high active income in the form of big paychecks, then also spend massively. It's a vicious cycle.

Others resort to multiple sources - sell beauty products, tutor, teach, etc. - to increase the income coming in.

Of course, if you are someone who is an employee earning just above the minimum wage, you will be doing the latter example. Or, you may have opted to work on foreign shores.

Nonetheless, the precondition to going into increasing your passive income, is to have an adequate active income with spending for expenses that's just right. Unlike Greece and most other nations, you should have a personal budget surplus.

Now, where do you put this surplus in?

You must find something that makes your money grow while you work, eat, sleep, play, etc. In short, without increasing your work load, you have an instrument where your money works for you.

I would like to think that a lot more people are going into the investment bandwagon. Bank deposits are not considered an investment, but they serve a purpose because they provide liquidity AND capital protection (unless you put your money in LBC Bank).

If you would like to know what an investment is, at least to me, it is something that generates returns higher than the inflation rate. Ideally, it should not be too liquid so that you are not tempted to spend it right away. And, usually, the returns are not guaranteed.

So, until then, appreciate the risk, then appreciate the capital.

Childhood Allowance: Inflation Gauge

Economics, along with Chemistry, Physics, and other Science and Math subjects are one of the most sought after subjects in the country if you want to have a fit of headache or want to sleep in class.

I've only met a few people in my life who can honestly and sincerely say that they rather enjoyed these classes. I've met fewer teachers who made these subjects interesting. Most of them just talked to the blackboard and lifted materials from the textbook.

Thankfully, there's the Internet and there are loads of books that explain these topics more interestingly. Perhaps not listening to your teacher gave birth to the book industry's "guide for dummies" series of books. Watching CNBC and Bloomberg also helps. So it's not entirely true that the television is an idiot box.

Recently, I had my hair cut and I was given a kiddie magazine to read. I suppose it was randomly given to me and it did not mean anything. In a short article contained in the magazine, there was a topic on the amount of allowance kids these days get, compared to what their parents were getting in the past.

That got me thinking.

Kids these days supposedly get about 150-250 a day. It sounds a lot to someone (like me) who received between 50-100 during my time. My parents had even "less", and most of the times, none, during their younger days.

At 250 a day, that's about 5,000 in a month. Even if we use 150, that translates to 3,000 a month. So assuming you have a child that's in high school already and your salary is about 25,000 - 30,000 (gross) a month, I'm amazed we Filipinos are still able to survive. Imagine, you still have to pay the tuition, your rent, utilities, etc. Frankly, I'm surprised some even have anything left to invest with.

If you don't read (or ignore) business news and skip on important data like inflation, just look at the allowance example. Your 50 pesos then is worth a third today (if your allowance is 150). Therefore, put another way, what you could buy for 50 pesos then, you have to pay 3x more today. Of course, this is just a simple straight computation. You can still purchase decent meals at about 50.00.

So how much of an increase in allowance (or inflation) was that? Assuming the climb in minimum allowance from 50-150 took about 15 years, that's about 13% annually. That's much higher than the inflation rate published by the government. If I'm not mistaken the average inflation rate is about 6-8% annually.

Of course, this simple computation does not take into account possible increases in spending power of Filipinos. For all we know, the increase in allowance means that parents today earn more than their parents a generation before.

So, while foreigners still look at the Philippines as a Third World, or, a Developing Country, in my opinion there is quite a substantial middle class in the country. However, the middle class are those easily wiped out during economic crises. They are also one of those who stand to benefit right away in an improving economy.

What's the relevance of inflation? As you can see, whatever you spend today, you will likely pay more for the same services a few years from now. Given this (frightening) set of numbers, I wouldn't be surprised to see children receiving 500 a day in my lifetime.

You also have to think about yourself. If you want to retire respectably and be able to afford future expensive healthcare expenses, then you better start saving... and investing for the future.

Going back, as you can see, you don't have to have an economics degree or any degree for that matter to know about critical information that directly affects your money.

Learn how to use your common sense. Unfortunately, common sense is not taught in school. It's taught by your parents and brought about by the experiences you go through. Too often people tend to stick to textbook style thinking and problem solving, failing to see that problems are simple if you just use a little bit of common sense.

So if you use your common sense, then you'd know that saving now is better than saving later. Further to this, it's better to invest now, than saving now. Ciao for now.

Three Rules of Thumb for Investing

My blog entry was supposed to have come out last Friday, as this is my scheduled updating day. Unfortunately, things came up once again, and moi wasn't able to update anything up until today.
While the financial fallout continues to be in the headlines (this yahoo link keeps on updating its headline) and Ben Bernanke warning that it could spill over to the US economy (hasn't it already?), what can us small investors do?

I read one local site's take on the issue, which I like. And I've got my four syllables for everyone -

DI-VER-SI-FY

Everyone, including this blogger, has forgotten the golden rule in investing. To joke about it, you'd be in better shape if you had investments in both Merrill Lynch and Lehman Brothers, than solely in just Lehman yes?

I've got another four syllable advice for you

TIME HO-RI-ZON

Oftentimes, we forget that investments take time to grow. Fast money? More like fast money down the drain.

People always follow the herd, and the last person to follow it usually ends up buying at the most expensive, at the highest peak of the asset's price. I always wonder how the poor guy feels now when he bought stocks in 2007. Herd followers most often make the poorest of decisions, oftentimes forgetting that when he bought the stock (or whatever asset for that matter), it wasn't supposed to be just for an overnight duration.

I am speaking from experience here. So learn from it.

Lastly, another golden rule is this 4+1 syllabic word, and that is

E-MER-GEN-CY FUND

Don't be enamored by the (attach noun here like real estate, insurance, stock, what have you) broker. I once posted an entry about it. Why do I say so?

One of the magical one liners these brokers use is this -

"Buying (my product) is also a (savings tool, investment, etc)"

This is true. But somewhere along the sales pitch, this person forgot that the prospect's salary goes to pay for his / her rent, food expense, utilities expense, perhaps his other mortgage, etc. That is why folks, in the off chance that you get suckered into deal by a sweet talking agent, it's best to have an emergency fund tucked into your investment portfolio. You never know when rainy days - or financial meltdowns - will come along.

The PERA Bill

Yesterday, I was late to my post, that is why it's coming out today. Yesterday was also the day PGMA signed the PERA bill into law. I've been hearing about the law since last year I think, but upon reading up on news, I realized that it took a decade to become law! Legislation takes that long, I suppose. I mean there are developments and progress in the country, it just does so snail pace.

Notwithstanding your inclinations and opinions about Philippine politics, this is certainly something to celebrate. I'm similar to you, just as excited but just as clueless. Information about the bill will slowly trickle in to popular media.

The implementing rules and guidelines have yet to be released, but let's not wait for that shall we? Let's pick out the data that is already out there and draw our conclusions from it.

PERA stands for Personal Equity and Retirement Account. One of its aims is to boost the country's savings rate, which is "pegged at 19 - 23% of the country's economic output, one of the lowest in the region". Let's compare that with our Asian neighbors, and you'll know why we're still far behind the curve.

Here are pertinent broad details about PERA which I got all over the net -

Under the PERA law, which was approved by Congress on June 10, a contributor with the capacity to contract and possess a tax identification number, may make a maximum contribution of P100,000, or its equivalent in any convertible foreign currency to his PERA annually.

All contributions and interest and dividends earned by these accounts — similar to 401(k) pension schemes in the US — will be tax-exempt provided the account owner or "contributor" does not withdraw the funds before age 55. A contributor can also claim an income tax credit equivalent to 5% of the total PERA contribution.

Contributors can open up to five accounts but with only one administrator, which can be a bank or a financial company. There will be separate custodians of funds and a designated investment manager. Administrators can be investment managers.

The contributions can be invested in mutual or unit investment trust funds, stocks, and other financial products.

A contributor can make a total maximum yearly investment of P100,000 or its equivalent in foreign currency. If the contributor is married, each of the spouses will be entitled to make a contribution of P100,000. OFWs are entitled to double the limit, which means the investment can be as high as P400,000.

A contributor may opt to contribute more than the maximum account but the excess will no longer be entitled to the tax credit. Employers can contribute to their employees’ accounts, as long as they pay the required Social Security System premiums.

Payments may be made when the contributor reaches the age of 55. This can be either in lump sum, a pension for a definite period, or for a lifetime. The account owner may choose to continue his PERA even beyond the age of 55, but complete distribution will be made upon the death of the contributor regardless of age.

Early withdrawals will be subject to a penalty, except in cases when the contributor is totally disabled for more than a month due to an accident or hospitalization.

There are already a number of viable instruments out there like mutual funds, uitfs, the stock market, etc. My question is - pending the release of the implementing guidelines - how soon will banks/financial institutions and company HR departments make an arrangement for employees to enjoy the benefit? My other question is, what is meant by a contributor can open 5 accounts? So the bank or the financial institution will have a new product called a PERA account?

Will the law be retroactive? Say, if someone already has an investment in mutual funds, stocks, et al, can he submit the receipts during the ITR filing in April?

I hope these questions will be answered within a few weeks' time. I am sure there are tons of other questions out there, but at least, that is a better question than asking, "When will the bill be signed as law?"