Sunday, June 23, 2013

Financial IQ: Mutual Funds Primer - part 2

Common Sense on Mutual Funds: New Imperatives ...
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (Photo credit: Wikipedia)
Financial IQ Philippines Quick Hit(s):

Introduction to Mutual Funds.  The concluding part... :)

Last of two parts

BEFORE we continue, let us recap the important points covered last week.

So how do mutual funds differ from other financial instruments like government treasuries, bonds and stocks?

For mutual funds, investors will only need to provide the investment money and indicate their choice of mutual fund to the company, and the fund manager will be the one to select and manage the investment. For the rest (i.e., government treasures, bonds and stocks), investors would have to personally identify, buy and sell these as applicable.

This is the reason mutual funds perfectly fit busy professionals or individuals specializing in other fields, as everyone can enjoy the benefit of the growth in the financial market, even if they do not have the time or knowledge.

Below are the recommended mutual funds according to type of investor. Please note that the returns mentioned are as of May 17:

Conservative investor. Investment horizon is less than three years; best suited to invest in bond fund

  • First Metro Save and Learn Fixed Income Fund Inc.—five years average return of 12.27 percent
  • Phil Equity Peso Bond Fund Inc.—five years average return of 11.22 percent
  • Philam Bond Fund Inc.—five years average return of 10.49 percent

Moderate investor. Investment horizon is three to seven years; best suited to invest in balanced fund

  • First Metro Save and Learn Balanced Fund Inc.—five years average return of 27.94 percent
  • Philam Fund Inc.—five years average return of 20.22 percent
  • Pami Horizon Fund Inc.—five years average return of 19.57 percent

Aggressive investor. Investment horizon is more than seven years; best suited to invest in stock/equity fund

  • First Metro Save and Learn Equity Fund Inc.—five years average return of 26.58 percent
  • Phil Equity Fund Inc.—five years average return of 26.21 percent
  • Philam Strategic Growth Fund Inc.—five years average return of 22.76 percent
  • Phil Equity PSE Index Fund Inc.—five years average return of 21.79 percent
So how do you get started on mutual funds?
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Friday, June 21, 2013

Financial IQ: Mutual Funds Primer - part 1

Common Sense on Mutual Funds: New Imperatives ...
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (Photo credit: Wikipedia)
Financial IQ Philippines Quick Hit(s):

Introduction to Mutual Funds.  Read on... :)

On May 15 the Philippine Stock Exchange index (PSEi) reached a new all-time high, ending that day with 7,397.34 points, representing a year-to-date investment return of more than 25 percent. This is the 31st record high the Philippine stock market has reached this year.

During this and past year’s bull run, were you invested?

Investing in the stock market requires some specialized knowledge. As such, some people avoid the stock market entirely. For other people, they try to get in to enjoy the profit, but at the expense of speculating how the stock market will move.

Good news to everyone who wants to participate and enjoy the gains of the stock market without having the time to study all its intricacies. There is an investment option called mutual fund(s) that can help you get good returns without having to learn everything and continually monitor the stock market. Essentially, the investor will just select the preferred mutual fund(s), hand the money to the mutual-fund company to subscribe shares and immediately get to enjoy the ups and downs of the fund.

So what is a mutual fund? It is an investment vehicle that pools the money of various individual investors to buy corporate bonds, government treasuries, stocks and other financial instruments. It is important to note that investment returns are not guaranteed and are subject to market volatility, unlike savings or time deposits where interest rates are fixed but investment returns are significantly lesser (and mostly, cannot even outperform inflation rates).

There are four types of mutual funds:

  1. money market fund
  2. bond fund
  3. stock/equity fund
  4. balanced fund

The return of investment of the money market fund is aligned with the returns of the money market, which is at 2 percent per annum. Whether you are a conservative or aggressive investor, it is best to avoid the money market fund as you can get a comparable rate of return with other financial instruments such as a special deposit account.

Now let us go to the bond fund. This type of mutual fund has majority of its investment in fixed-income instruments, such as corporate bonds and government treasures such as Treasury bills, notes and bonds. These instruments are called fixed income because they generate regular and predictable interest rates per annum. This fund is best suited for conservative investors who have a shorter investment time frame (typically three years or less) and returns are conservatively on an average of 6 percent to 8 percent annually.

Stock fund, commonly called equity fund, is mostly invested in stocks. The holdings of the various Philippine stock/equity mutual funds are mostly publicly listed companies on the PSE and could range from big, well-known companies to smaller ones. This type of fund is best suited for aggressive investors who have an investment time frame of seven or more years, as there is more volatility but returns are higher, conservatively on an average of 10 percent to 12 percent annually.

There is a special stock fund called an index fund. This is composed of stocks and weighted according to the composition of the country’s stock index. For the Philippine index fund, the composition is identical to the PSEi. Compared to typical stock funds, the index fund is passively managed, as the fund manager will only transact if there are changes in the index’s composition.
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Sunday, June 2, 2013

Financial IQ: Suze Orman's tips to Filipinos

Cover of "The 9 Steps to Financial Freedo...
Cover via Amazon
Financial IQ Philippines Quick Hit(s):

Read on for Suze Orman's tips to Filipinos.

Susan Lynn “Suze” Orman is a financial advisor, speaker, and television host. She has also published a number of books such as The 9 Steps to Financial Freedom, The Courage to be Rich, and The Road to Wealth.

She is well-known for her television show, “The Suze Orman Show”.

Suze Orman has visited Philippines on 2012 and 2013. Could you guess what are her typical financial messages to Filipinos?

“It is okay to take care of others, but you also have to take care of yourself too.”
“Do the right things, not what the culture says.”
“The greatest thing you can do for yourself is to pay your debts.”

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Thursday, May 16, 2013

Financial IQ: Is it time to take profit on Philippine Stock Exchange (PSE)?

English: Phillippine stock market board
English: Phillippine stock market board (Photo credit: Wikipedia)

Financial IQ Philippines Quick Hit(s):

Do you still have a lot of investments on the Philippine Stock Exchange?  If so, it is definitely worth your time to go through this.  For the complete article, please visit the link below.

Q: The stock market has started to move sideways last week after registering an all-time high at 6,800 points recently. I wonder if this is a good time to take profits now as many stocks are already expensive, but I also worry that I might regret it later if the market resumes its uptrend and goes up further. I want to maximize my profits from stocks. Can you advise me? – Evan De Vera by e-mail

A: The reason you hesitate to sell your stocks now is you have the feeling of greed that comes with the anticipation that the market will further go up. The feeling of greed tells you to hold on to your stocks and wait for it to go higher as everyone expects the stock market to break the 7,000 target soon. There is a feeling of denial within you every time you see the market falling because you don’t want to hurt your ego by accepting the possibility that you may be wrong about your expectations.

Yes, there is no doubt that the market will go up again and possibly set another record high but every time the market goes up, the risk of losing also gets bigger. Considering the rocket speed and steep rise of the PSE index, which rose by 18 percent in less than three months, it is not hard to see that the stock market may soon be due for massive correction.

It may not necessarily be a sharp fall unless there is a reason for the market to panic but it may decline slowly on choppy fashion. Speculators will trade less as buying slows down. Traders take a back seat and assess where the market stands fundamentally. Some may fear that the market has topped already. Others think that since the Philippine stock market is already trading at scary valuations, many stocks are now ripe for the harvest.

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Thursday, May 9, 2013

Financial IQ: Possible US Mutual Funds to buy

Mutual Funds for Dummies ... U.S. Funds at War...
Mutual Funds for Dummies ... U.S. Funds at War -- Too simple? (Monday, June 4, 2012) ...item 3.. Music to Help Study and Work - 26:39 minutes ... (Photo credit: marsmet545)

Financial IQ Philippines Quick Hit(s):

If you are investing on US mutual funds, you may also want to check this out.  Gives you suggestions on possible ones that may fit your needs.

You've heard it all before: You can't time the market. Diversification is a winning strategy. Keep your costs low, and one of the best ways of doing that is to invest in index funds, which beat most actively managed funds over time.

You've probably ignored some of these truisms. Maybe you've ignored them all. You've probably made other mistakes. But what you want to do now is choose solid investments -- and get on with the rest of your life.

If that description fits you, you'll appreciate what follows: a portfolio of exchange-traded index funds that you can buy and hold virtually forever. I'll even suggest what percentages to hold in each fund and how to gear down as you approach and live in retirement.

Because all of my picks are index funds, you'll never own a fund that tops the performance charts. You'll give up the chance of beating the indexes. You'll have little to talk about at the office water cooler. But you're practically guaranteed to beat roughly two-thirds of actively managed fund portfolios. Not bad.

All the ETFs in this article are Vanguard ETFs because Vanguard is the industry's low-cost provider and because ETFs tend to be even more tax-efficient than ordinary index funds. But you can accomplish the same goals with ishares ETFs or with Vanguard's regular mutual funds.

One big caveat: This portfolio isn't designed with today's market in mind. It's a long-term portfolio, not one that will require adjustments every year or two. For example, I'm including an index fund that tracks small-company stocks, even though small caps, by most measures, look overvalued today. Why? Because over the long term, small caps will do just fine.

Following are the exchange-traded funds to use and the percentage of your stock holdings to put in each (I'll add bond funds later):

Vanguard Total Stock Market (VTI), 40%. This ETF, which for years has tracked the MSCI US Broad Market Index, is switching over to the CRSP U.S. Total Market Index. But the change will be invisible to investors. Vanguard is changing the index provider on 22 funds because -- you guessed it -- it will lower costs. Total Stock Market invests in virtually every U.S. stock with a market value of at least $10 million. All told, it owns more than 3,200 stocks, but they're weighted by market value. The largest holding, at last report, was Apple, at 3.2% of assets. The fund charges a mere 0.06% of assets annually.

Vanguard Total International Stock (VXUS), 20%. Most of this fund is in stocks of large companies in developed nations. But it has 20% in small and midsize companies in developed markets and 20% in emerging-markets stocks. With about 6,200 holdings, the fund is even more diversified than Vanguard Total Stock Market. It's transitioning from tracking the MSCI All Country World ex US Investable Market Index to following the FTSE Global All Cap ex US Index. The fund charges 0.16% annually.

Vanguard FTSE Emerging Markets (VWO), 10%. I don't think the long-term trend toward globalization will run out of steam in the coming years, and over time, many emerging nations should mature into developed economies. But new entrants will take their places. This fund is changing over to the FTSE Emerging Markets Index, which, unlike the MSCI index it is replacing, classifies South Korea as a developed country and thus excludes it from the fund. Emerging-markets stocks will remain volatile but should deliver superior results over the long term. This fund charges 0.18% a year.

Vanguard Dividend Appreciation (VIG), 10%. This fund seeks to mirror the obscure Nasdaq US Dividend Achievers Select Index. A strategy of investing in blue-chip companies that consistently increase their dividends has paid off over the long haul. This index consists only of companies that have raised their dividends in each of the past ten years and that pass other tests of financial strength. This is not a high-dividend fund; it yields 2.2%, about the same as the overall U.S. stock market. But its holdings are of the highest quality. The fund's expense ratio is 0.13%.

Vanguard Extended Market (VXF), 10%. This fund diversifies your U.S. holdings. It has all but 6% of assets in small and midsize companies. Small-caps and midcaps are riskier than stocks of large companies, but over time they have produced higher returns. The ETF tracks something called the S&P Completion Index, which includes virtually all U.S. stocks outside Standard & Poor's 500-stock index. The expense ratio is 0.14%.

Vanguard Small-Cap Value (VBR), 10%. Last but not least is this small-company value fund, which is switching from tracking the MSCI US Small Cap Value Index to mimicking the CRSP US Small Cap Value Index. The average market value of its holdings is about $1.4 billion. This fund is far more volatile than Vanguard Extended Market, but, over time, stocks of small, beaten-down companies have, on average, beaten stocks of larger, pricier companies. The expense ratio is 0.21%.

All you need now is a bond fund. In the area of low-cost index funds, the default choice is Vanguard Total Bond Market (BND) ETF. But because we've already had a 30-year-plus bull market in bonds and the risks of owning bonds are high, I instead recommend Vanguard Short-Term Corporate Bond (VCSH) ETF. It yields only 1.2% (compared with 1.7% for Total Bond Market), but Short-Term will lose a lot less than Total Bond when interest rates rise, as they inevitably will. Expenses are just 0.12%. (If you're investing in a taxable account, you'll probably be better off investing in a tax-free municipal-bond fund. But there are no good index funds in this area, so I suggest one of two actively managed funds, Vanguard Intermediate Term Tax-Exempt (VWITX) or Fidelity Intermediate Municipal Income (FLTMX).

How to split your money between stock and bond funds? If you have an average tolerance for the markets' inevitable belly flops, are investing for retirement and are at least ten years from your goal, put about 70% in stock funds. Subtract five or ten percentage points if you're a worrier, and add five points if selloffs don't give you the sweats. Cut your stock funds by five points when you're less than ten years from retirement.

Once you retire, you should cut your stock holdings to 60% of assets. If you have enough money and are a skittish investor, consider investing as little as 50% in stocks. And once you've launched your program, just add new money that comes your way in the same proportions as your initial investments. In other words, don't change a thing.

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Tuesday, May 7, 2013

Financial IQ: Some US stocks to consider

Huaneng Power International
Huaneng Power International (Photo credit: Wikipedia)

Financial IQ Philippines Quick Hit(s):

If you are investing in the US stock market, you may want to check out the suggested stocks below.  Please take note that US stock market is also on the high side, similar to Philippine stock market.

All 50 stocks in StockScouter's benchmark portfolio for May
Alliant Energy (LNT) -- Scouter score: 9
Spectra Energy (SE) -- Scouter score: 9
AES (AES) -- Scouter score: 9
Pepco (POM) -- Scouter score: 9
Ameren (AEE) -- Scouter score: 9
PPL (PPL) -- Scouter score: 8
Duke Energy (DUK) -- Scouter score: 8
Exelon (EXC) -- Scouter score: 8
EQT Midstream Partners (EQM) -- Scouter score: 10
Huaneng Power International (HNP) -- Scouter score: 10
CMS Energy (CMS) -- Scouter score: 9
Consolidated Edison (ED) -- Scouter score: 9
Northwestern (NWE) -- Scouter score: 9
American Electric Power (AEP) -- Scouter score: 9
Nippon Telegraph & Telephone (NTT) -- Scouter score: 10
Companhia de Saneamento Básico do Estado de São Paulo (SBS) -- Scouter score: 9
UIL (UIL) -- Scouter score: 9
Edison International (EIX) -- Scouter score: 9
Verizon Communications (VZ) -- Scouter score: 9
American States Water (AWR) -- Scouter score: 9
AT&T (T) -- Scouter score: 9
WGL (WGL) -- Scouter score: 9
Scana (SCG) -- Scouter score: 9
Vectren (VVC) -- Scouter score: 9
Otter Tail (OTTR) -- Scouter score: 9
Hawaiian Electric Industries (HE) -- Scouter score: 9
South Jersey Industries (SJI) -- Scouter score: 9
NV Energy (NVE) -- Scouter score: 9
ITC (ITC) -- Scouter score: 9
Piedmont Natural Gas (PNY) -- Scouter score: 9
Questar (STR) -- Scouter score: 9
OGE Energy (OGE) -- Scouter score: 9
Cleco (CNL) -- Scouter score: 9
Xcel Energy (XEL) -- Scouter score: 8
Laclede Group (LG) -- Scouter score: 8
NiSource (NI) -- Scouter score: 8
UNS Energy (UNS) -- Scouter score: 8
California Water Service Group (CWT) -- Scouter score: 8
Westar Energy (WE) -- Scouter score: 8
Southwest Gas (SWX) -- Scouter score: 8
Pinnacle West Capital (PNW) -- Scouter score: 8
Empire District Electric (EDE) -- Scouter score: 8
AGL Resources (GAS) -- Scouter score: 8
Northeast Utilities (NU) -- Scouter score: 8
Great Plains Energy (GXP) -- Scouter score: 8
Magellan Midstream Partners (MMP) -- Scouter score: 8
Kinder Morgan Energy Partners (KMP) -- Scouter score: 8
Progressive Waste Solutions (BIN) -- Scouter score: 8
DirecTV (DTV) -- Scouter score: 10
Old Dominion Freight Line (ODFL) -- Scouter score: 10

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Monday, May 6, 2013

Financial IQ: Do you take advantage of tax savings?

Marriage Day
Marriage Day (Photo credit: Fikra)

Financial IQ Philippines Quick Hit(s):

Did you know that in China... happy couples still apply for divorce?  Why?  So that they can enjoy some of the tax breaks... and afterwards, they can get married again.  Can't fault them... as they are just taking advantage of opportunities to save, which is quite significant as it involves property acquisitions. :)

Long queues of happy couples waiting to get married might be a common sight in Las Vegas. But lines of happily married couples waiting to get divorced? Only in China.

In major cities across the country last month, thousands of couples rushed to their local divorce registry office to dissolve their marriages in order to benefit from fast-expiring tax breaks on property investments for unmarried individuals. Local media reported long waits at registries in Beijing, Shanghai, Guangzhou and elsewhere as savvy investors sought to buy or sell a second home before the government introduced strict new regulations that would force married homeowners to pay hefty taxes on the sale of second properties.

The new regulations are designed to cool speculation in China’s feverish property market and are part of a package of measures that would require couples to pay up to 20% capital gains tax on the sale of second homes. But for determined investors, nothing gets in the way of a good bargain, and some quickly noticed that the 20% impost didn’t apply if the second home was bought before the couple were married — or after they got divorced.

China’s marriage law allows for divorce if couples simply sign an agreement to divorce, present themselves at the registry office and pay a fee of just $1.50. Weighed against the prospect of tens or even hundreds of thousands of dollars of profit from property investments, many couples are deciding the $1.50 charge is worth it.

According to media reports, in March the number of couples getting divorced in Tianjin, a large city on the eastern seaboard, soared to 300 per day — more than triple the normal amount. In Beijing, too, realtors reported a boom in divorcing couples seeking out new houses. “Half of the deals I made last month were cases where the couples were getting divorced,” a Mr. Jin, who works as an agent at one of the biggest realtors in Beijing, tells TIME. “These were all young couples between 25 and 35 years old, and all of them were looking to buy another house as an investment.”

As an emerging middle class accumulates wealth, more and more young families are finding that they have limited options to make good use of their money. With overseas investment options closed off by complex regulatory barriers, banks offering measly interest-rate returns on deposits and the stock markets on a never ending losing streak, there aren’t many attractive investment choices.

Some choose to invest in gold and other precious metals. Indeed, when gold prices fell sharply last week, shops in mainland China and Hong Kong quickly reported stock shortages and empty shelves. But China’s savvy purchasers have long had an affinity for putting their money into bricks and mortar, not least because property prices in most cities have soared over the past decade and continue to rise sharply.

With a seemingly endless supply of money flowing into the country’s property sector, and prices on a constant upward trajectory, regulators have long been worried about the frothy market giving rise to major property bubbles, especially in the most populous cities like Beijing and Shanghai. But it seems that canny investors are quick to spot ways around the cooling measures, hence the new vogue for divorce.

It’s not only profiteers who are choosing the divorce route. Many couples who simply want to trade up from their current home have realized that they can save tens of thousands of dollars by splitting up before making their next purchase. According to media reports, one couple in the southern city of Guangzhou, who already owned two apartments, saved $32,000 by getting divorced and selling one of their houses before buying another.

The divorce solution is extreme but it’s the kind of solution to which China’s put-upon middle classes have become accustomed. Civil-servant couples, for example, are subject to a particularly strict version of the one-child policy that would require them to give up their jobs if they had a second child. Some have decided to circumvent those rules by getting divorced and having a second child out of wedlock, registered under either parent’s name as a “first” child.

Of course, the country’s regulators have also taken notice of the long queues outside divorce registries and have acted to put a stop to the practice. In recent weeks, the government revised its regulations to increase the taxes payable by unmarried individuals selling a secondhand property, effectively cutting the most speculative investors out of the market.

Others, though, are still happy to break the knot, if only because they need not stay divorced for long. Realtor Jin advises his clients who are considering the process that they can be back in happy matrimonial bliss within as little as three weeks. “If you pay the full price in cash up front, the whole transaction can be completed in as little as 10 days — and even if you’re taking out a mortgage, it only takes about six weeks,” Jin says. “Once that’s done, you can go and get remarried right away.”

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