From Where We Sit

Investment 101: Comparing modern investment vehicles and risks

Seb Serrano
By:
Seb Serrano
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As the saying goes, when one door closes, another one opens. There is no doubt that the pandemic severely impacted the Philippine Stock Exchange, causing it to dip by 8.6% year-on-year and reach a low of 4,000-level in 2020. But the situation is not as bleak as the numbers present it.

The government has imposed continuous tax relief programs, such as the newly implemented Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, that help weather the losses of corporations as well as reinvigorate foreign interest back onto shore. Experts have also remained ever hopeful that faster vaccine rollouts, in addition to fair weather conditions and the easing of quarantine restrictions, will result in faster economic recovery, making it entirely possible to meet the 7 to 9% growth target for 2022.

In the meantime, though, the stock market has found an unlikely hero in these trying times. With stock prices on a downward trend and more people finding they had less expenses due to lockdowns, it’s been reported that the number of total stock market accounts jumped 13.7% in 2020 alone, amounting to 1.4 million total accounts. Of that 1.4 million, 97.9% were held by retail investors and 98.5% were locally owned. This increased activity comes at a time when analysts suggest there is likely no further downtrend and less selling pressure from foreign funds in the market, thus creating a good opportunity for current and potential investors to achieve decent earnings.

So, it seems now is the right time to invest, but exactly how does one start investing?

Importance of investments

Investing in a multi-currency, long-term, and diversified portfolio is a way to grow funds and grow the value of these funds through time. Compared to placing money in a regular bank savings account, certain investments may offer higher rates of return when the value of the investment grows, when dividend income becomes available, or when the investment or asset is sold at a higher price.

Young working adults might have already heard a few investments advice from their relatives such as to start investing in retirement plans and life insurance early, to buy land and real estate whenever possible, to save up capital and start a business, and to open a high-interest savings account. While these remain solid options for investments, they do not quite cover the expanse of investment opportunities available.

Traditionally, investments also include mutual funds, bonds, unit investment trust funds (UITFs), annuities, and so on. While these financial products might have fees attached to them, they are usually accessible as they do not require a large minimum initial investment, if at all. It would only depend on an individual investor’s financial goals and risk tolerance about which products are right for them.

As an example, though they might ultimately differ on process, mutual funds, UITFs, index funds, and exchange-traded funds share the same ability of allowing investors to buy small shares of different corporations and quickly diversify their portfolio at a relatively lower rate. The banks and insurance companies that offer these products would typically have them categorized depending on the risk level and aggressiveness of the investor, too, as a matter of ease.

Trading stocks safely

Of course, when the topics of investments and building wealth are brought up, stocks and trading follow immediately after. This is because trading of any kind usually has the allure of being “high risk and high reward”, especially considering the GameStop stock fiasco earlier this year, wherein traders with zero financial experience became millionaires overnight after investing a lot of money into an otherwise declining company. Unlike the GameStop stock, however, most trades do not peak at a record rate of $347.51 a month after a meme frenzy, and most stock investments do not have to be quite as risky.

Simply put, stocks are just shares of a company. It is easier to understand the risk of investment by understanding how well that company is run, how relevant are the products and services it offers, and what obstacles it might encounter in the future. While there are some predictions involved, like determining which companies will make it through the other side of the pandemic in a better position than before, an investor can mostly be assured that a top-performing company will correspondingly be a top-performing stock – and that’s the same logic applied when buying blue chip shares of stock.

Cryptocurrency as a modern investment

On the other hand, trading cryptocurrency comes with a different level of risk altogether, and that is before even considering recent news of hacking and theft in a community channel for Axie Infinity players. Still, the game itself has provided hefty earnings to early adopters and managers, and more people are looking to invest in underrated games and coins to gain that same “lightning in a bottle” effect of a high growth investment. So far, the SKILL token from the blockchain game, CryptoBlades, has emulated the success, achieving an all-time high of $184.46 in July before petering out to $15.80 today.

Though there have been records of high returns for cryptocurrency trading, at its core, it is still participating in a volatile market and investing in assets that have little to no value. Therefore, the only way to earn would be to have someone else buy the asset at a higher price. It is still an investment option; a potential investor just has to ensure they have the stomach to ride the highs and lows present in the market.

Factors to consider for first-time investors

Speaking of a strong stomach, planning out an investment strategy beforehand would help first-time investors avoid the pitfalls of “emotional trading” and potentially save them from a panicked snap decision resulting in significant losses. It is likewise important to note that most investments usually have some amount of risk involved. Low risk investments still carry the risk of devaluation or not meeting the target return by the set period, therefore resulting in loss for the investor. A good rule of thumb is to set aside an emergency fund beforehand, be clear in your financial goals and the length of time in which you would need a return on your investments and diversify your portfolio to ensure you can hedge any risk that might come your way.

 

As published in The Manila Times, dated 10 November 2021

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