Buyer Be Aware


Question: I have trouble navigating through the maze of information that I have to read and documents I have to sign just to make an investment. Why do they have to make it difficult for me to invest?—asked at “Ask a friend, ask Efren” free service available at, Facebook, and SMS.

Answer: Are you familiar with the term caveat emptor? I will quote Investopedia so I don’t get anything wrong: “Caveat emptor is a neo-Latin phrase meaning “Let the buyer beware.” It is a principle of contract law in many jurisdictions that places the onus on the buyer to perform due diligence before making a purchase… The phrase is an ancient principle that is intended to resolve disputes arising from information asymmetry, the pervasive situation in which the seller knows more than the buyer about the quality of a good or service.”

In the modern age, laws and regulations have tightened up on the principle of caveat emptor in an effort to protect buyers’ interests, especially those who are not that sophisticated to understand fully the minimal information on the investment products that are initially presented to them.

Disclosures have to be made on the part of sellers to make buyers more informed. On the other hand, buyers are quizzed particularly on their ability to take on the risks that are inherent in the investment products they are buying, hence the suitability assessment tests.

As I have said in the past, I do not give out advice on which investment is the best. I always say that all investments, provided they are legal and moral, are good. Instead, I ask people to look for that investment that best suits them, which the buyer must be best aware of at the very least.

So, if a 38-year old investor, for example, wants to enjoy a retirement lifestyle costing P600,000 a year in today’s money for 20 years after retiring at the age of 60, and targets to earn 14 percent a year from age 38 to age 49 and just a time deposit rate of 2 percent a year from age 50 to 80, and given an inflation rate of 5 percent a year, he will need to save about P92,000 a month until he retires to achieve his goals. And on the assumption that he is able to save that amount, he will now have to find investments capable of producing the said target returns.

But as we all know, the higher the return, the higher the risk. Targeting a 14 percent a year return requires investing in the Philippine stock market where the risk of loss is also high. If our investor cannot stomach the high level of risk in the stock market, he can do one or a combination of four things to reach his goals.

Our investor can set aside a large initial fund for his retirement, something that the foregoing computations did not assume, and/or lower his retirement lifestyle goal, and/or increase his periodic contributions. Otherwise, he will have no choice but to level up on his risk-taking. The resulting return-risk combination with a little tweaking by a financial planner will lead our investor to the investment product that is suited for him. But the buyer must still be aware of the inner workings of such investment product.

So, before you head out to invest, be aware of the details not only of the product but also of your own investment objectives and risk preference, both will unavoidably make you go through a maze of documentation for your own protection.


Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines. He is the best-selling book author of Pwede Na! (A Complete Guide to Personal Finance) in 2004, and is the chairman and president of the Personal Finance Advisers Philippines Corporation.


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