Last Sunday, I asked my friend who was a businessman if he was still renting an apartment or if he had already bought a home for his family. He asked me if it was really a good idea to buy one, assuming he had the money to pay for the house in cash.

“You see, my Chinese friend pays P85,000 to rent a house in Greenmeadows and says it would be stupid for him to take out his P50 million in the bank to buy a house. He buys a house; his P50 million is gone,” says my friend.

“After all, he tells me, would anybody know that house is not mine?” he adds.
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By CFA Institute*

Investing is fun and very rewarding, especially, if you know the “rules of the game.”

There are some simple rules to follow. Ignoring them, or making mistakes in applying them, can be very risky. Making mistakes repeatedly could drain your assets very quickly.

“Creating a program to confidently boost investment success is not easy,” said Mark Yu, CFA, president of CFA Philippines, the local affiliate of CFA Institute, which administers the CFA® (Chartered Financial Analyst®) Program worldwide. “Investors are sometimes their own worst enemy by making common mistakes.” CFA Institute asked selected members to come up with 11 frequent and costly pitfalls that individual investors should avoid.

1. Having no investment strategy. Every investor must develop an investment strategy that will serve as a guide. A well-planned strategy considers time horizon, risk tolerance, amount of investable assets and planned future contributions.
2. Investing in individual stocks instead of in a diversified portfolio of securities. Investors should keep a broadly diversified portfolio incorporating different asset classes and investment styles. Failure to do so leaves individuals subject to fluctuations in a particular security or sector.
3. Investing in “stocks” instead of in “companies.” Invest in finance enterprises that are likely to have a positive long-term growth potential. Analyze the fundamentals of the company and industry, not day-to-day shifts in stock price. To avoid difficulties, examine a company’s corporate governance profile to ensure that it has basic corporate governance protections.
4. Buying high. Many people commit the mistake of investing in stocks that did well in previous years or in “popular” stocks of the day assuming that these will also do well in the future. Remember that the fundamental principle of investing is to buy low and sell high, not the other way around.
5. Selling low. Not every investment will increase in value. Even professional investors have difficulty beating the S&P 500 index in a year. Always have a stop-loss order on a stock that might fall in price. It’s better to take a small loss and redeploy the assets toward a more promising investment.
6. Churning your investments. Too much trading cuts into investment returns, because of transaction costs. The solution is to adopt a long-term buy-and–hold strategy, rather than active trading.
7. Acting on “tips” and “soundbites.” Veteran investors gather information from several independent sources and conduct their own proprietary research and analysis before making an investment decision.
8. Paying too much in fees and commissions. Investors should be well-informed with the associated expenses that accompany every potential investment decision.
9. Unrealistic expectations. Take a long-term view when making investments. Don’t allow external factors to cloud your actions or to cause a sudden shift in strategy.
10. Neglect. Individuals often fail at investing, because they don’t know where to start, or because they neglect their holdings.
11. Not knowing your real tolerance for risk. Investments always come with risks. Don’t wait for a sudden drop of value of assets to determine your level of risk tolerance.

About CFA Institute
CFA Institute is the global association for investment professionals. It administers the CFA® (Chartered Financial Analyst®) and CIPM (Certificate in Investment Performance Measurement) curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 95,600 members, who include the world’s 82,400 CFA charterholders, in 134 countries and territories, as well as 135 affiliated professional societies in 56 countries and territories. More information may be found at www.cfainstitute.org

About CFA Society of the Philippines
In 1995, the CFA® (Chartered Financial Analyst®) exam was first introduced in the Philippines, with the support of the Capital Markets Development Council, Inc. (CMDCI). On July 1997, a group of CFA candidates, practitioners from the investment community and members of the academe gathered to form a society in response to the growing need to set higher standards in the investment community - in terms of knowledge, competence, professionalism and, above all, ethics. Thus, CFA Philippines, formerly known as the Association of Investment Professionals – Manila, was established.

CFA Philippines is the local affiliate of US-based CFA Institute. Its mission and vision is to be the premier association in the Philippines’ investment and finance profession by promoting competence, professionalism and the highest ethical standards.

Mutual funds are sold as the investment for the masses, allowing ordinary Filipinos with as little as P5,000 to get their feet wet in an instantly diversified portfolio of stocks, bonds, or both.

It was a little bit of a surprise to find out that the average mutual fund investor as of June 30, 2008 has a placement of roughly P483,820 in mutual funds — not your average Filipino, obviously. That’s an impressive little factoid.

Based on official figures from the Investment Company Association of the Philippines (ICAP), this figure is lower than the average investment size of P580,843 in December 2007, which is again lower than P622,079 in June 30, 2007.
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Savings account: P5,000
Checking account: P5,000
Time deposit: P10,000
Special deposit account: P100,000
Foreign currency deposit account: $1,000
Mutual fund: P5,000
Unit investment trust fund: P5,000
Treasury Bills and Bonds (through banks): P100,000
Account with a stock brokerage firm: P50,000 (but I just learned that at least one has no minimum investment at all)
Priority banking accounts: $50,000 (you will have access to different investment instruments at higher interest and the services of wealth managers or financial planners)

For first-time investors, read this guide: Investment 101 for the first time investor

(Check this spot again from time to time for more updates. The usual disclaimer applies: this is not a solicitation to buy etc. etc. and each instrument is attached to its own kind of risk).

It’s pure pain to watch someone suffer from losing all his investments due to a falling market. What to do?

It’s too easy to say, just hold on because markets recover all the time. Curious Capitalist over at Time.com points that the best response is no response, but active investors know that once you lose all the bets, you waste so much of the capital that you can’t get in when real opportunities come up.

Last week, I spoke with several investment guys who espouse peso-cost averaging. The moneysmarts definition of that is “pikit-mata” investing, where you keep setting aside the same amount of money regularly — monthly or quarterly — whether the market is up or down.
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Gotcha!

Here’s a snappy secret from publishers. Use words like “how to get rich in ten simple steps” or “secrets of wealthy people” in title and promotional materials. Never use “retirement.” Malayo sa bituka. (Far from the gut).

Like everyone else on this planet, Filipinos don’t like to think about the future. But think of this: it wasn’t too long ago when Bill Gates was a young upstart who started Microsoft in his garage at 17 years old. Yesterday, he clocked in his last full day of work at the office after 33 years of building that icon of technology.
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If you think your stock portfolio has been beaten to a pulp, wait till you hear what technical analysts have to say about whether we’ve already seen the worst.

“Has the PSEi reached the bottom? Hell, no,” said Fitz Aclan, head of investment strategy of the trust department of Banco de Oro.

Fitz gave his inter-market analysis and fearless forecast at the Chart Analysis Forum Tuesday night at the PSE trading floor in Ortigas. Fitz is one of the founders of Absolute Traders, the group that organized the forum.
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We answered this question in our personal finance feature today:

Question: I am one of the thousands of people who live in Quezon City but work in Makati City. That means I drive some 20 kilometers to work every day, and that’s just one way. I tried commuting but it’s impossible during rush hour. With the price of gasoline going up, travel to and from work makes a huge dent in my budget. Is there any relief in sight for us? – Josephine P.

We all will have to deal with the rising cost of gas, whether or not we are from Quezon City, Bulacan, Cavite, Cebu or Davao. The most terrible forecast I have heard so far is for a full tank to cost P30,000. That’s almost the take-home pay of senior call center agents.
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(This piece is written by Bianca, one of the readers of MoneySmarts who has been chosen for the one-year Money Makeover challenge by INQUIRER.net. Bianca’s real identity is confidential, so that MoneySmarts can share her family’s financials and the lessons she has learned with the rest of the world. Read more about Money Makeover here.)

A financial planner (not Joe Ferreria) told us: sell your timeshare. My husband and I communicated silently the way old lovers do – with a look (or a glare, but that is another story) – and made a decision.

We will not.
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Quote for the day:

People think they can invest P20,000 and grow that to a million if they are smart enough. That’s an urban legend. Truth is, you need money to attract money. Capital formation is very important.

– Augustus J.V. Ferreria, senior executive vide-president of Generali Pilipinas, in a MoneyMakeover session May 5, 2008.

The idea of investing is sexy. We are all in a hurry to do it. The more technical and highfaluting, the better. Stocks, bonds, forex, real estate – bring them on!

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