Free Life Insurance with BPI's Get Started Account

DEAR INVESTOR JUAN

Dear Investor Juan,

I have a question about insurance. I can't decide which of the two is a better option for my husband:

Option 1.Term life insurance for 2 million coverage with premiums in the table below

Option 2: BPI's Get Started savings account with life insurance (5x your adb maxium of 2 million). My husband has 100,000 at present which function also as our emergency fund.  I'm thaninking of putting in addition 300k so that my husbands coverage will be 2 million.

Do you think its better to just do option 1 and invest 300k in uitf? or choose option 2 meaning total saving 400k with 2 million life insurance,at the same time it will funtion as our emergency fund?

Please excuse my grammar and spelling as I have just given birth two days ago and in a hurry to write this as I would like to email you asap so to help me decide which option is better.

Thanks,
Maxine


Dear Maxine,

Thanks for your email and the very useful information that you have provided us.

The first thing I did was review the details and conditions for BPI's Get Started account. Everything seems to be above-board--it does offer free life insurance with no strings attached. The only possible drawbacks that I see are that only depositors who are 15 to 70 years old are entitled to free insurance and the minimum monthly balance of 25,000 pesos for ATM accounts (75,000 for passbook) is higher than other kinds of accounts, but these are not deal breakers, in my opinion. Also, like other savings accounts Get Started pays interest, albeit at a paltry 0.25%, but I'm sure other banks offer around the same rate.

Thanks for sharing your insurance quotation, it's really helpful especially for people who don't have any idea how much life insurance costs in the Philippines. While the annual premiums are not very high, they are also not negligible. So based on your options (which you formulated correctly, by the way), to get a 2 million peso insurance coverage on the first year, you can either pay 7,900 to an insurer or maintain a 400,000 deposit in a Get Started account. I understand your hesitation in choosing Option 2--keeping 400,000 in a savings account seems to be a waste since it can possibly earn more in an equity fund? But if you can justify keeping 400,000 as an emergency fund--which to me is completely understandable, especially if it's for your entire household--parking the amount in an account that provides extra benefits makes a lot of sense.

How much more value is Get Started providing anyway? Using your insurance quotes, maintaining a 400,000 deposit in the account earns 0.25% interest and insurance that is worth 7,900 for the first year. Which means that your deposit would effectively be earning 0.25% + 7,900/400,000 = 2.225% in the first year. Given the interest rate climate nowadays, that rate is comparable to yields on T-bills and time deposit accounts--but with Get Started you don't lose liquidity, which is a necessary feature of an emergency fund. So yeah, Option 2, most definitely.

For other readers who think 400,000 is too high for an emergency fund, just figure out the amount that is appropriate to you and deposit that in a Get Started account.

Finally, I make these recommendations based on the limited information that I have. If anyone knows comparable benefits offered by other banks, please do share the information with us.

The Greatest Food in Human History? Sorry, Not in the Philippines

According to a Freakonomics reader and this follow up New York Post article, the McDouble--at 1 USD in the US (and 9 HKD in Hong Kong) and packing 390 Calories, 23 grams of protein (half a daily serving), 7% of daily fiber, 20% of daily calcium and iron, etc.,--"is the cheapest, most nutritious, and bountiful food that has ever existed in human history."

Sadly, for some reason, we don't have a McDouble in the Philippines. What we do have is the Double Cheeseburger, which for 99 PHP (or 2.28 USD) you get a whopping extra slice of cheese more. For 1 USD, the best you can have is the Cheeseburger--if you can get over the sadness that one beef patty will inevitably bring. And we're only talking about burgers made of real meat here, so Burger McDo clearly does not count.

Final Rules for ETFs Approved

IN THE NEWS from PhilStar.com

The SEC has approved the final set of rules that would guide the offering of exchange traded funds or ETFs.

ETFs are similar to other kinds of investment funds, but unlike mutual funds and UITFs whose value are computed and posted daily by the issuer, the price of an ETF is determined by how much investors are willing to pay for (and sellers willing to receive for) its shares, just like stocks and other assets that are traded in exchanges.

ETFs are a good alternative to currently available investment funds because they are more liquid (easier to convert to cash) and ideally have lower costs.

According to the article, at least three firms, First Metro Investment Corp., BDO Unibank Inc., and Bank of the Philippine Islands have expressed their plan to offer ETFs.

A copy of the rules may be found here.

Many thanks to reader haezel for the heads up.

The DRREW Framework in Action

DEAR INVESTOR JUAN

Dear Investor Juan,

I have a few questions regarding investment. I'm a 24 yrs old, single and my current financial situation:
* Free of debt
* Emergency Fund (good for 6months of expenses)
* Life insurance and Health card (provided by my employer) 

Investment goals:
* Retirement Fund - invest in stocks (longterm), since I'm still 24
* Condo/House - I'm not yet decided on what to buy and I'm still searching for a nice place, but I want to prepare  the money that I will use for buying my own place. For the meantime, I'm planning to put the money in Mutual Fund (Money Market Fund) since I'm not sure when I will be needing the money.
* Future Personal Expense - I'll be using this fund for 3-5 years from now, but I can't decide if I will put it in stocks or Mutual Fund (Equity Fund)

Here are my questions:
1. Based on my current financial situation, do you think I can now proceed to my investment goals?
2. Is it okay to have a fund dedicated to each goals? 
3. Since I have 3 funds to monitor, I'm thinking if it could be costly for maintaining the multiple funds because of the fees. I'm not sure if I'm doing it correctly or not.

If you have any inputs to improve my goal, I am gladly to hear it :)

Thank you.

Best regards,
Jay


Dear Jay,

Dear Jay,

I completely support your plan. This is exactly what I proposed in this post about the "DRREW" framework. Congratulations--YOU GET IT. :)

Here are my answers to your questions:

1. Based on my current financial situation, do you think I can now proceed to my investment goals?

Yes. I assume that you already know what portions of your savings to allocate to your retirement fund, the property that you are planning to buy, and "future personal expenses."

2. Is it okay to have a fund dedicated to each goals? 

Since the three goals that you mentioned above involve different holding periods, funds for each must be invested in the appropriate type of asset or fund.

3. Since I have 3 funds to monitor, I'm thinking if it could be costly for maintaining the multiple funds because of the fees. I'm not sure if I'm doing it correctly or not.

Nah, you won't have to pay more since fees are charged as a percentage of the value of your investment--so given the same fee percentage, investing 900,000 in one fund would result in the same fee as investing in three separate funds of 300,000 each. Also, if you do it right you don't really have to monitor anything since your decision to sell or divest should be solely determined by need and not by how much money you are making or losing. To minimize hassle, though, you may want to buy funds from just one bank.

I have nothing more to add, really, given what I know about you situation. Thanks for your email, and good luck!

How Much Does it Cost to be Your Favorite Superhero IRL? Inflation from Different Angles

PERSONAL FINANCE 101

A friend shared these interesting infographics with me:

How much does it cost to be Batman in real life?

How much does it cost to be Spider-man in real life?

How much does it cost to be the Hulk in real life?

How much does it cost to be Superman in real life?

So it seems that even our favorite superheroes are not immune from the ravages of time--and inflation. Looks pretty bad, doesn't it? But how bad, exactly? How much inflation have our justice friends suffered through in the past several decades?

Say, P is the price of a certain product now, and Px the price of the same product x years ago. The compounded average annual change in price of the product--i.e., the inflation rate with respect to the product--is:

[(Px/P)^(1/x)] - 1

Let's try applying this formula to some of the items in the infographics above (since we can only use the formula for the prices of the same item, we can't use it for Batman's expenses and Spider-man's residence expense, for example).

Superhero	Item	Px	P	From	To	(Implied) Inflation
Spider-man	Suit	193	265	1962	2013	0.62%
Spider-man	Date	780	3,299	1962	2013	2.87%
Hulk	Undergrad	11,080	183,560	1962	2013	5.66%
Hulk	PhD	25,430	190,420	1962	2013	4.03%
Hulk	Psychologist	7,852	15,600	1962	2013	1.36%
Hulk	Clothing	450	4,160	1962	2013	4.46%
Superman	Apartment	800	24,000	1938	2013	4.64%
Superman	Eyeglasses	10	95	1938	2013	3.05%
Superman	Suit	30	1,510	1938	2013	5.36%
Superman	Subway fare	36	1,344	1938	2013	4.94%

Given that the inflation rate in different parts of the world has behaved this way since 1986 (have purposely excluded the 50% jump in prices in the Philippines in 1984):

And you hear statistics like these from CHEd:

CHEd said that on the average, tuition would increase by P37.45 per unit or by 8.5 per cent, the lowest percentage increase in the last 10 years.

The national average increase in school fees is P194.62 or by 7.58 per cent, according to CHEd.


Cost-wise, being a superhero may not be so bad, after all. Large changes in price over a long period of time may seem much at first glance, but really reasonable upon closer inspection.

Although it's also perfectly understandable to interpret this as "reasonable annual changes in price translate to insane price differences over a long period of time." It's just a matter of perspective, really. And compounding completely playing tricks with our minds.

Making Linux Work on Your PC, Part 2: Productivity and Gaming

If you have decided to give Linux a try as I talked about in Part 1, there are a couple more things that you can do to get more out of your Linux machine and lessen your dependence on Windows.

While Linux comes preinstalled with perfectly usable (and in certain aspects, better) open source alternatives to commercial software (e.g., Libre Office for MS Office and GIMP for Adobe Photoshop), I recommend that you install several more applications to enhance your Linux experience.

Chromium

Even if Firefox is preinstalled in Linux Mint, I strongly suggest installing and using Chromium, the open source version of Google's infinitely-better Chrome web browser. Installing Chromium is easy: just go to Menu > Software Manager, search "chromium" in the search bar, and then install.

One minor issue that you may have with Chromium on Mint is the custom Google search behind the omnibox. To revert to the default version of Google, just click the Menu > Terminal and type and enter:

sudo rm -fr /etc/skel/.config/chromium ~/.config/chromium

Dropbox

Dropbox is a handy tool that lets you automatically sync selected files and folders across different machines and different platforms--perfect if you use a different machine at work and at home, or if you want ready access to your files via your mobile phone.

First, create a free account on the Dropbox website (or pay a fee if you want more cloud storage space). Then install Dropbox by downloading the Ubuntu installer (choose 32- or 64-bit depending on what kind of system you have). Next, go to Menu > System Tools > GDebi Package Installer and open the *.deb file that you just downloaded to install. Find the Dropbox button under Menu > Internet (or use the search bar in Menu), click it, and log in to connect your Linux PC to your Dropbox account.

Everpad

Everpad is the Linux port of Evernote, the cloud-based note-taking software. To install, run the following lines (one at a time) in the terminal:

sudo add-apt-repository ppa:nvbn-rm/ppa
sudo apt-get update
sudo apt-get install everpad

Picasa

Picasa is a free and user-friendly tool for storing, managing, and editing photos. Install by searching "picasa" in Software Manager.

Steam

Steam may be the one application that will eventually take Linux to the mainstream. Steam is a platform for buying and playing games for Windows, Mac, and now, Linux machines--kinda like iTunes, but for games. While not every Steam game is currently available to play on Linux, the list--which includes Amnesia, Portal, Half Life 2, Team Fortress 2, and almost all Humble Bundle games--will just get longer over time.

To install, go to the Steam website and download the *.deb package. Same as with Dropbox above, use GDebi Package Installer to open the file and install the application.

Other software

There are some other open source software applications in Software Manager that you may be interested in. I have started learning LibreCAD (an AutoCAD alternative) for 2D designs and I plan to learn how to make 3D models using Blender in the near future.

Linux is slowly turning out to be a viable alternative to Windows and even Mac. While it's still not perfect, it's more than enough for most of our needs, and it just gets better with each passing year. With these series of guides, I hope that I was able to convince at least some of you to give Linux a try.

The Solution to Being a Shopaholic

This is irresponsible, misleading, and in my opinion, unethical advertising.

But I must admit, it is entertaining. "Christine's" story is chock-full of lols.

Why Even a 0.5% Difference in Fees Matters

DEAR INVESTOR JUAN

Dear Investor Juan,

Your blog is really a good find and very helpful for educating newbies. Thank you very much! Now I am seeking some opinion from you. While checking the UITFs of BDO, BPI and Metrobank, I came to know that BDO have the lowest fee - 1% while Metrobank charges the most at 2% plus others. Am I correct in this or I am missing something?

Regards,
Jovy

Dear Jovy,

Perfect timing, I've been planning to discuss the effect of differences in fees in investment returns. Maybe this illustration can help convince you that even a "small" difference in management fee matters.

Say there are two equity funds (UITF or mutual fund), A and B. The returns of the two funds, before management fees, in years t = 1, 2, 3... are as follows:

Fund A:

rA1, rA2, rA3, ...

Fund B:

rB1, rB2, rB3, ...

So that after 1 year, an investment in A will have grown by 1 + rA1 times, in 2 years by (1 + rA1)(1 + rA2) times, in five years by (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5), and so on.

If A charges an annual management or trust fee of 1%, then the after-fee value of an investment in A after 1, 2, and 5 years are:

After 1 year: (1 + rA1)*(1 - 1%) = (1 + rA1)*0.99
After 2 years: (1 + rA1)*0.99*(1 + rA2)*0.99 = (1 + rA1)(1 + rA2)*0.99^2
After 5 years: (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5)*0.99^5 = (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5)*0.95

Which means that if you invest in the fund for 5 years, 5% of the value of your investment would go to management fees. And if you invest in A for 30 years, your investment will have the following value at the end of the period:

(1 + rA1)(1 + rA2)...(1 + rA30)*0.99^30 = (1 + rA1)(1 + rA2)...(1 + rA30)*0.74

Let's say B charges a 1.5% management fee. A 30-year investment in the fund would result in:

(1 + rB1)(1 + rB2)...(1 + rB30)*0.985^30 = (1 + rB1)(1 + rB2)...(1 + rB30)*0.64

Assuming that the performance of an equity fund does not depend on the skill of the fund manager so that the long-term return (e.g., 30 years) of two equity funds on any given year is the same,

(1 + rA1)(1 + rA2)...(1 + rA30) = (1 + rB1)(1 + rB2)...(1 + rB30)

This means that compared to a fund that charges 1% per year, investing in one that charges 1.5% results in a 14% loss in value (0.64/0.74 - 1) over a 30-year holding period.

The table below compares the effects on value of different combinations of fees and holding periods.

Holding period	1.00%	1.50%	2.00%	3.00%	4.00%	5.00%
5	.9510	.9272	.9039	.8587	.8154	.7738
10	.9044	.8597	.8171	.7374	.6648	.5987
20	.8179	.7391	.6676	.5438	.4420	.3585
30	.7397	.6355	.5455	.4010	.2939	.2146

So to answer your question, for a 30-year investment, a 2% fee will reduce the value of the fund to 55%, compared to 74% for a 1%-fee fund. It means if you invest in the 2% fund, you'd be losing 26% more (55/74 - 1) of the value of your fund.

I hope this answers your question.

Short Answers to Unanswered Questions: Preferred Shares and Other Things

DEAR INVESTOR JUAN

Dear Investor Juan,

Am a regular reader of your blog and while you have some articles there regarding preferred shares, I would like to ask the following regarding the dividend rates that goes with the issuance of these shares:

• How does one company determine the dividend rates for these preferred shares? 
• What do they use as basis for the dividend rates?
• Do public companies have different basis for the dividend rates being offered ("as sweetener") vs.private, non-listed companies (if they wish to issue preferred shares to existing stockholders)?

Would appreciate if you can share your insights on the above matter.

Thank you and more power,

Vic


Dear Vic,

Here are my answers to your questions.

Firms issue preferred stock to raise money to finance projects or other uses. It's like a more expensive alternative to borrowing. The dividend rate on preferred stock is primarily determined by the market: the dividend yield on outstanding preferred shares issued by companies of the same risk serves as a benchmark. The dividend rate also reflects how much return investors are demanding for lending out their funds.

I'm not so sure about my answer to your last question because I'm not very familiar with preferred stock issues by private companies (as I think they are quite rare), but these should have a higher dividend rate than preferred stock issued by a listed company in the same industry and of the same size because of the following reasons:

• An unlisted firm would be subject to less stringent reporting requirements, and would be less transparent, and thus riskier, in the eyes of investors.
• Preferred shares of an unlisted firm would not be tradable in exchanges, and this lack of liquidity would prompt investors to demand a higher return.

***

Dear Investor Juan,

I would like some advise on investing in BDO UITFs. I am currently a college student and really interested in investing at an early age. I am willing to invest about more than 10K in a BDO UITF product. Could you please explain to me the ff.:

1) The fees/charges I have to pay in investing in BDO's UITF.
2) Do you recommend this EIP Program by BDO?
3) Is 10K enough to start investing?

Thank you. 

Louie

Dear Louie,

I would only suggest investing in an equity fund if you don't have any debt, you already have an emergency fund, and you can afford to invest long-term. So if all these conditions are met, then here are my answers to your questions:

1) You don't have to pay anything. All fees and taxes are automatically deducted and paid from the fund's assets and are already reflected by the fund's NAVPU.
2) I'm okay with enrolling in an automatic investment scheme. Deciding which bank you would buy a UITF from is all up to you.
3) Yes.

Good luck!


***

Dear Investor Juan,

Got any good recommendations for a first credit card? I really need to get one soon.

Marvin


Dear Marvin,

Local bank credit cards have lower interest than foreign bank credit cards, so I suggest that you just get one from a local bank that you already have an account with.