As mentioned on my previous post, there are many ways to invest your money. For you to decide which investment vehicles are right for you, first, you need to know their differences. What is your goal? Are you investing to prepare yourself for your retirement? Are you planning to buy your own house? And lastly, you have to know your risk profile as well, you have to ask yourself, will you be investing your money only for short term or long term? What percentage of this investment do you plan to spend in the next 7 years? Or you don’t plan to spend any of it? How much of a temporary decline in the value of your investment can you tolerate? These are just some questions you may need to ask yourself. You can take the test now by clicking this link.
Bonds are investments that are being lend out to a company or government wherein you earn interest. The good thing about bonds is that your investment is somehow guaranteed and risk-free especially if you’re buying it from a stable government. Not so good about it is its low return. These investments are low-risk that has low returns as well. Bonds are generally lower than other securities.
Also knows as equities. If you invest in stocks, you are technically buying shares of the business. PLDT, BPI, BDO, AC (Ayala Corp), ALI (Ayala Land Inc.), and SMPH (SM Prime Holdings), these are just examples of stocks. Imagine yourself being part owner of these businesses. This entitles you to receive profits that the company allocates to each shareholders or owners. These profits are referred to as dividends. The downside of stocks is its volatility. Not like in bonds, these investments are high risk but has high returns. It has the highest potential returns compared to other securities. Stocks fluctuate in value on a daily basis and you are not guaranteed for any returns. Some stocks don’t even pay dividends.
Mutual Funds are pooled funds with the combination of stocks and bonds. When you invest in mutual funds you are actually pooling your money with a huge number of investors. When buying mutual funds you pay a professional referred to as fund managers who allocate your funds to different securities. These can range from small stocks to large stocks, from government bonds to stocks and even stocks in different countries. This will depend on the current movement of the market. The advantage of a mutual fund is that you don’t need that much time and experience for you to invest your money since you are giving your money to a professional.
VUL stands for Variable Universal Life. This is actually a 2 in 1 investment. It is a combination of a life insurance and an investment like mutual funds. It serves as an income continuation if something happens to you and can serve as your retirement plan if you live too long.
In financial planning, there’s a financial planning pyramid (see image below). In order for you to build a pyramid, of course, you have to start first with a strong foundation. The foundation consists of the following, health insurance, life insurance, disability insurance, and long term care insurance. So if you are just starting your investment, it is recommended that you invest on yourself first. It is then followed by accumulation or your investments. Investing in VUL is a good option for those people who are just starting to invest since it will fill in the first two levels of their financial planning pyramid.
Alternative Investments: Options, Futures, FOREX, Gold, Real Estate, Etc.
These alternative investments fall into one of the categories discussed above. These are more complicated types of securities and requires an advanced investing strategies. I’m not going to discuss these types of investments since I want you to focus first on building your financial foundation. You have to be familiar first with these basic types of investments before you consider investing your money in these securities.
Always remember that financial ignorance is expensive. Do some research and read books about investments. If you don’t know what you’re doing, you could lose some, and worse, all your investments. Better yet, talk to your financial adviser now.