The Road to Financial Freedom Starts Here!

Monday, October 22, 2012

Short Answers to Unanswered Questions: Wealth Management, 10% Annual Returns, and Compound Interest

DEAR INVESTOR JUAN


Dear Investor Juan,

I want to have a customized portfolio of stocks and bonds but i want BPI or BDO to manage it. I saw it in their website and the minimum is 1M php. I want to invest in PSE blue chips usually with dividends: PLDT, Meralco, Manila Water, Metro Pacific, DMCI, EDC, JG Summit, Ayala Corporation, SM, and SMC, and then the rest in bonds. Same as what Mark Cuban did here "Over the next year I stuck to my plan. I trusted Raleigh, and he put me in bonds, dividend-paying utilities and blue chips, just as I asked.".  

My goal is to keep invested forever and have semi annual payouts. What are you thoughts?

Regards,

Ethan


Dear Ethan,

I think it is a sound plan (although I think getting an equity UITF would more or less have the same results, cost more or less the same, but with less hassle), and I do tend to agree with a lot of things that Mark Cuban has to say about investing and money management (e.g., Ten Questions for Mark Cuban). And in having this plan, you have the right idea about wealth management services: that the most it can do for you is keep you updated with the latest investment products and execute your orders hassle-free--but ultimately you make the decisions yourself.

I actually have just finished opening such an account, but with RCBC. And I was able to do it from here in Hong Kong. I think it's a good way to manage one's investments, especially for Filipinos based abroad who want to invest in the Philippines. I'm planning to write about my experience before the year ends, hopefully. I hope you can share your experience with us as well. Good luck!

***

Dear Investor Juan,

I have read and understood how compound interest works, but I'm wondering where I can invest my money that is compounded yearly at 10%.

I have also read about mutual funds, but I don't think compound interest is applicable to this kind of investment.

I hope you can shed some light on the matter.

Thank you.

Jay


Dear Jay,

There's no such thing as earning 10% per year consistently and persistently--investments don't work that way. For example, stocks (i.e., the PSEi/composite index) has only yielded around 5.3% per year since 1995 (using the BPI equity UITF as a proxy), which is barely enough to cover inflation. Maybe 10 or 20 years ago one can earn close to 10% per year from bonds, but given today's low interest rate climate, those days are long gone. The only people I know who had enough gall to offer such returns have already pocketed the money of investors and closed shop. So if someone promises you 10% per year for certain, hold on to your cash, turn around, and run away--run away fast.

In my opinion, the only way to earn 10% or more (or even way more) is by going into business. But that takes more than just having capital--a lot more.

About compounding, it actually works with most kinds of investments--even mutual funds and UITFs. Remember, compound interest is just additional interest earned on interest, so as long as you keep your earnings (through higher NAVPUs) in the fund, your returns will be compounded.