What kind of investor are you?

Find:

What kind of investor are you?

Published by sam - 30/04/08 - 04:04:36 pm

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

I am greatly interested in investing but nowadays there are so many options available that it gets confusing sometimes. Where should a young professional invest? I am 23 years old and making enough to invest in a strategic fund and get a couple of insurance policies. I recently got out of credit card debt too by refinancing it with a cheaper two-year loan. I am thinking of buying a condo unit so I can diversify my investments. Any thoughts? — Nancy (not her real name)

This question is an extension of the one asked by Erick last week . While Erick is at the earliest stage of saving awareness, Nancy has already taken concrete steps towards specific investments and managing her debt. What investment opportunities would give Nancy more returns?

We need to know as much of the full market of investment opportunities out there. Investing cannot be done in a vacuum and comparisons are inevitable. At the end of the day, though, not all instruments are for all investors all the time. We should only focus on instruments that fit both our specific investment goals and the realities of our resources.

When I am asked which instruments make good investments at this time, my reply has always been the same bland line: It depends on what you have, what you need and what investment horizon is involved, instead of playing the “favorite-for-the-season” game.

This sounds like a cop out but it is not. We have to accept that except for the very rare only-for-the-movies plot, investing alone is not likely to bridge the divide between the ultra-rich and the rest of us. Your investment strategy will be driven by how much resources you can invest (i.e., what you have), how much you want to attain (i,e., what you need) and how much time you are willing to allot (i.e., your investment horizon).

No matter how the investment gurus package their own secret method, all that has been said of investing invariably goes back to these three items. Think of a trip: you want to go somewhere and you ask yourself what travel arrangements can be made.

Every trip has its own set of uncertainties and risks. There are many things that we simply cannot control. For example, it is not likely that you will take a plane between Quezon City and Tagaytay or is it possible to go to New York City from Makati City by land.

Yet, there are also many important details that reflect how we prefer to travel knowing ourselves and knowing the uncertainties of the trip. In the absence of choices, we may not want to travel at all. Forcing a trip under conditions that we are not comfortable with will lead to a lot of finger-pointing when the discomfort sets in.

This is the very essence of personal finance since it is what makes the trips a voluntary and personal experience.

And what are these preferences? From what I see, we can categorize investors into four major groups: the haves, the getting there group, the liquidity savers and the currency converters.

If financial institutions describe you as a “high net worth individual” (HNI), you are generally a client of the bank’s private banking unit. A “Relationship Manager” would be assigned to handle your account. In exchange, your outstanding business with the bank (deposits, investments) would be a few million pesos worth.

HNIs already have lots of savings and have a high income to go with that. This gives them the twin luxury of having a significant stock of investable funds and a strong recurring flow of new saving to either add on to wealth or replace any depletion of it. Without a doubt, they belong to the group I call the “Haves”.

For this group of investors, returns at par with Treasury Bill rates will be too low. They would be interested in more “sophisticated” instruments, derivatives, FXTNs, structured products among others. The complexities of these instruments coupled with the ability to invest long-term makes it worthwhile for HNIs to delegate the task of monitoring and managing investment information to a preferred financial specialist. For HNIs, the opportunity to garner better returns must come at the price of more risk and a larger minimum investment.

A notch below the “haves” is the group “getting there” which is where I believe Nancy belongs. This group has enough income to be comfortable but has not accumulated enough wealth to be at par with the “haves”. Having more income than they can spend and consciously looking out for their future, the investments profile of this group tends to cover a wide range of instruments.

This does not mean that they will splurge on every new offering in the market. The tendency is to get a feel of the instruments available with a little-of-everything approach.

Access to information separates the “haves” from the “getting there group”. Those in the latter will have some access to investment information but they often have to gather these on their own. Without a Relationship Manager to help them, this may involve a lot of self-study or finding things out within their network of peers, both professionally and socially. This makes them vulnerable to investing with the herd. When things turn badly in the market, those who have better or advance information can shield themselves; those who have delayed information are the ones who bear the largest burden of a loss.

The bulk of Filipino savers, however, are in the “liquidity savers” group. This group is daunting in its sheer size and difficult to generalize. They maintain bank deposit accounts but the outstanding balance can range from a few thousand pesos to just under the P250,000 Philippine Deposit Insurance Corp. limit. At least one parent is employed, if not both. Monthly salaries are used for regular expenses. There can be up to six siblings in the family with one or two children expected to be breadwinners in due time. The extended family structure is also more the norm than the exception so whatever is saved is used among the three generations within the family.

For “liquidity savers”, income tends to be modest and therefore cash flow and preserving capital is the dominant concern. With a lot of perseverance, good health and kind luck, savings can quietly accumulate over time specially once the children take on regular employment. Investments – if any – will be limited or conservative.

I will add a fourth group and call them “currency converters”. In the past, they would have been part of the “getting there” and “liquidity savers” groups depending on their personal circumstance. However, as currencies have become much more volatile, this group should be taken separately.

With “currency converters”, the issue remains unchanged: they earn in one currency and remit part of these earnings to dependents in the Philippines. Their concern, therefore, is not just about financial instruments but also the choice of currency if they invest and/or the timing of the currency conversion if they want to remit into the Philippines. Distance is obviously an issue and so access to reliable information and monitoring are huge constraints.

These distinctions are not absolute, but they are important. There are various factors that affect investment advice. “It depends” isn’t the cop out that it looks like but a healthy reminder that you would have to respect details before making any investment. Once you have done this honest assessment, you could now consider fine-tuning the investment options out there to the resources that you possess and the considerations that matter to you.

In the next columns, we will focus on the four groups a little more. In general though, what we would like to find out are answers to some of the basic questions:

are you generating regular saving from your work income or some other source?

how much will you be investing?

do you foresee a regular or periodic amount of saving that you can invest?

what factors do you consider yourself sensitive to?

how big a loss you can afford to accept just in case things do not work out?

do you wish to generate periodic returns?

for how long do you want to keep your investments?

how do you react to uncertainties?

how much access do you have to information?

do you expect to actively participate in monitoring and managing your investments?

I am sure that I missed a question here or there but we’ll get to these anyway. For now, it will help to look at our individual situations so that we have some early appreciation of what may matter moving forward.

Bookmark To

Add 'What kind of investor are you?' to Del.icio.us

Add 'What kind of investor are you?' to digg

Add 'What kind of investor are you?' to FURL

Add 'What kind of investor are you?' to blinklist

Add 'What kind of investor are you?' to reddit

Add 'What kind of investor are you?' to Feed Me Links

Add 'What kind of investor are you?' to Technorati

Add 'What kind of investor are you?' to Yahoo My Web

Add 'What kind of investor are you?' to Stumble Upon

Add 'What kind of investor are you?' to Netscape

Add 'What kind of investor are you?' to Smarking

Add 'What kind of investor are you?' to Delirious

Add 'What kind of investor are you?' to Live-MSN

Add 'What kind of investor are you?' to SlashDot

Artículos relacionados

April 30, 2008 | Principles of Investing |

No Comments »

RSS feed for comments. TrackBack URI

Welcome to Personal Money Management Expert,the blog where you can find advices to save money and to earn more with each dollar. If you want, it's possible to suscribe by mail and receive all news by e-mail.