Foreign exchange, stocks, and investment funds

Foreign exchange, stocks, and mutual funds are not for the faint of heart. Neither are they for orphans and widows who may not be able to risk their capital in any way. These are for investors who have cash to spare (read: they don’t need the money in the near term) and are willing to take risks in exchange for the possibility of higher yields.

Your chances to maximize returns significantly improve when you link up with financial experts who can help you plan and strategize on how you can meet your financial objectives.

Foreign Exchange

Foreign exchange investment is particularly useful when you have an ongoing need – for example, if you have children studying or living permanently overseas – for more than one currency. By spreading your investments across different currencies, you are able to reduce the risk of capital erosion.

For example, if you had P2,700 in 1996, this would have been equivalent to $100. If you held on to that money in pesos, this would just be worth $50 now. In contrast, if you converted that P2,700 in dollars in 1996, then you would still be holding on to $100 instead of $50 today.

The forex market is highly volatile but does not necessarily entail very high risk. Premium accounts like Citigold are an excellent way to participate in the forex market in a controlled way that is appropriate for your circumstances and personal attitude towards risk.

• There are two principal methods of attempting to forecast exchange rates:

• Technical analysis – this is used to attempt to predict very short-term movements by examining the patterns in charts of price movements, trading volume, rates of exchange, and other data.

• Fundamental analysis – this attempts to predict longer-term exchange rate trends by analyzing supply and demand, political and economic factors.

You can, of course, ask professionals to help you forecast market movements. While experienced investors generally have a good understanding of the issues affecting their home currency – in this case, the Philippine peso – it would be best if they relied on experts for global currency movements.

Stocks

Stocks are also called equities or shares. These refer to your holdings in a company listed with the Philippine Stock Exchange and/or with other exchanges abroad. When you buy shares in a company, you become a part owner of that company. You can buy shares through accredited brokers of the stock exchange, who process your orders in exchange for a small transaction fee.

Although stocks are volatile, they have consistently outperformed cash and bonds in the long term, particularly in developed markets.

Ironically, stock prices are not a very objective or accurate indicator of a company’s value. Most investment professionals regard profits as the ultimate test of value but have difficulty in obtaining accurate measurements of it.

For one, there is a natural tension among the managers of a company; its owners or stockholders; and lenders (such as banks and bondholders) that tends to result in accounting distortion. In general, managers tend to want to take an optimistic view of sales and profits while playing down costs and liabilities. Owners are eager for this kind of good news, as long as it is true, while lenders want very conservative – almost pessimistic – accounts to ensure that their money will be repaid.

For another, there are forces beyond a company’s control (such as war or changes in consumer behavior or the emergence of new technology) that can affect profitability.

As a private investor, you cannot realistically hope to be outstandingly successful in picking individual stocks but you can choose to weight your equity portfolio towards markets such as China in Asia and industries such as biotechnology that are expected to grow well over the long-term. If you do not have the time and skill or access to information on which to make well-informed judgments, find a full-time professional analyst to do the job for us.

Investment Funds

An investment fund such as a unit investment trust fund of a bank or a mutual fund of an insurance company is a pooled investment product that gathers money from many investors into a single investment portfolio and is managed by a professional investment team. When you invest in an investment fund, you are buying a unit or share of the investment portfolio; you are not investing in the fund manager itself.

An investment fund allows for better diversification – a fund may own 100 or more individual securities – which retail investors may not be able to afford or manage on their own. First-time investors would benefit most from this type of investment since the minimum investment per person could be as low as P5,000.

In choosing an investment fund, find out what its stated objectives are. Its objectives and your personal investment goals must match.

Advice

Whether you are thinking of investing in foreign exchange, stocks, or investment funds, bear in mind that these instruments are volatile. Do not be carried away by sentiment.

Ask the experts for advice before making any move. The financial world is so large and complex that no single individual can hope to know everything.

Remember your goal and make every effort to maximize these instruments for you to meet your financial objectives.

(For more information on how you can build your personal wealth or to schedule a free financial check-up, you may call Citibank at 894-7162.)