Investments Not Just About Returns
When you talk about investing, the main thing people talk about—and chase after–is returns. After all, who wouldn’t want a return higher than the banks’ or maybe beat inflation? Or ride the upswing of stock market when all are heading north? Or jump in on the Philippine growth story? Truly, who wouldn’t want returns?
But in the world of investing, returns are only the beginning. It’s just a part of the larger picture. Focusing just on returns would leave the investor blindsided on other factors to consider which, unfortunately, a lot aren’t aware of.
After returns, the investor must also look at these two: Risk and Costs because they also affect you investment’s performance.
Risks. One fundamental Rule of Thumb in investing is “the higher the return, the higher the risk; the lower the return, the lower the risk.” This is generally true for any stock, bond or portfolio holdings. For instance, stocks that give higher than average returns can also dip much lower than the average. It’s more volatile. One mining stock I know has its share price risen by four times in a matter of four months but has fallen to just a third of that share price when the market took a down turn. Thus, in selecting stocks for your basket or portfolio of investments, it’s best to manage risks.
Basic to this is diversification: spreading your holdings into different stocks such that over-all risk is minimized.
One good principle would be to invest in negatively correlated assets: such that when one goes up, another goes down and vice versa. That way, wherever the market goes, you have holdings that still emerge a winner.
Diversification should also be done in portfolio of investments as a whole: diversifying into stocks, bonds, and other asset classes such as real estate, hedge funds, or even forex.
Diversification may also mean going into foreign markets as well. Think about this: if all of your investments are just in Philippine stocks and bonds, then your portfolio’s performance is tied to the Philippines—one country only. And if some event negatively impacts the Philippine economy, then all of your investment would be affected also.
But if you invest in offshore funds—which are also available locally through various UITFs and Mutual Funds—then whatever happen to the Philippines, your investments would be relatively not as affected as you’re already investing outside of the country. That’s already managing your country risk.
Costs. These can be transaction fees, broker’s fees, management fees, taxes, and other fees and charges deducted to your investment after the returns.
For instance, in the stock market, investors pay brokers, clearing fee of gross trade amount, PSE transaction fee, sales tax, and even the 12 percent VAT on broker’s commission. For government securities, interest income are also taxed with 20 percent final withholding tax. In the case of real estate, there are capital gains tax, business tax, documentary stamps tax, transfer tax, registration fee, realty taxes and broker’s fees, depending if you’re the buyer or seller.
In the case of managed funds, fees may range from 0.5 percent to two percent, not to mention entry fees deducted up from your investment. They may be giving decent returns but if you add them up again to the returns that you’re getting, then these will redound to significant amounts, most especially if compounded over a long period of time.
That’s why foreign investors are very much conscious of management fees because they know it eats up on their returns. Recent studies in the US show that funds with higher fees tend to give lower returns.
With these tripod of investing: Returns, Risks, and Costs, investors can now be more effective, gain more returns, and be cost- and tax-efficient with their investments.
Rienzie P. Biolena is a Registered Financial Planner of RFP Philippines. He’s president and chief financial planner of WealthArki and Consultancy, a financial planning firm.
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