During the 1980s, an investment-linked insurance product, known as Variable Universal Life, was launched in the US. This product line combines insurance protection with mutual fund type investing.
When VUL insurance was first introduced in the Philippines at the start of the new millennium, it drove life insurance agents to be trained as financial advisors, it enabled insurers to offer investment management services to policyholders, and it led to “bancassurance” business alliances between insurance and banking institutions.
Sales of VUL products indicate a growing class of young professionals, OFWs, business owners and employees who are keenly interested in investment opportunities. However, there is a cautionary note to this as a lot of them may not yet be financially savvy and could be preyed upon by unscrupulous operators seeking to perpetuate illicit investment scams. It is therefore vital to know how to invest safely and effectively.
Among the most sensible investment advice I have received from trusted and knowledgeable professionals are the ones I would like to share today.
Start early and observe the risk-return principle. Once you have enough liquidity and have insured your family’s lifestyle against major risks of loss, you can seek higher returns for your excess funds. To illustrate the value of starting early, a person aged 35 invested P25,000 each year for 30 years with an annual return of 8 percent. By the time he turned 65, he accumulated a total of P3,330,338. Another person aged 25 invested exactly the same amount each year for only eight years but also earned 8 percent annually. By the time he reached age 65, he had P3,640,421. By starting 10 years earlier, he invested less yet ended up with a larger retirement fund because of the power of compounding. This is known as the time value of money. Because of low interest rates today, however, fixed-income investments need more time to earn substantially, but it is not a reason to immediately favor higher-yielding instruments. Investment returns are directly commensurate to the risk taken. This is known as the risk-return principle. Therefore, start with low-risk options first before proceeding to higher-risk ones in order to better protect both principal and returns.
Stay the course.Some investors seek the most opportune time to come in, but no one can predict market trends and movements with 100 percent certainty. It is futile to wait for a perfect confluence of favorable conditions. Seasoned fund managers will tell you that spending “time in the market” is always better than “timing the market”. For these professionals, what matters more is endurance. Someone looking to become an instant millionaire should try the lottery and other games of chance instead because investing is a marathon, not a sprint. Genuine investing requires discipline and patience to build a balanced investment portfolio of differentiated instruments and asset classes. Moreover, make sure to have short, medium and long-term tenors plus the fortitude to see them through. The best way to stay the course is to define your investment objectives from the outset. For example, if your purpose is to accumulate a retirement fund, you are more likely to ride out market volatility and remain invested until that time comes.
Manage the risk, not the returns. In 1949, Benjamin Graham, a British-born American economist and considered the father of “value investing”, wrote a book entitled, “The Intelligent Investor”. In it he said, “The essence of investment management is the management of risk, not the management of returns”. Moreover, according to Graham, real investors aspire for adequate, not extraordinary performance while speculators are obsessed with beating the market and earning the highest returns. This is an important commentary that rings true to this day. Don’t let the lure of returns blind you into throwing all caution to the wind. Tragically, many of our countrymen failed to heed this warning and ended up as victims of pyramid scams and other “too-good-to-be-true” schemes. Prudence is a virtue, not a hindrance, to sound investing.
The final point to be made it this: risks and rewards come together. As long as we keep this in the front of our minds, we should be able to find our way in the investment arena.*