What To Do With Your Money?

Demystifying Investments
By N Mark Castro

Question: Where should I put my money? In a bank, property, business or stocks? — Astri Simatupang via Facebook

Answer: My pocket.

On a serious note, it is critical that you analyze carefully the investment instruments you mentioned: Advantages and disadvantages, their own merits and flaws.

You see how I turned boring terms like bank, property, business or stocks into a respectable single word like investment instruments? That’s just to kick in how good I Google. So to help you out, we’re gonna break down complex financial sentence structures into simpler words the average person can understand.

And as an expert … Googler, your options can be answered as follows:

1. Banks are the default choice of people who willingly give their money to someone for so little in return. If this is your plan, then consider my first answer.

The ATM machines of the banks, on the other hand, are everywhere and can trick you into getting more of that money you gave them and charge you for it. And when you say “bank,” I’m assuming that you are referring to traditional bank products like savings accounts and time deposits.

Savings and Time Deposits are what they call “Liquid Investments,” which you can pull out anytime — for a fee — and has a low risk. The downside, however, are the “yields”. I hope I’ve expanded your vocabulary by now and you can throw those words in parties and make you sound cool.

Of course, those liquid investments are the safest options but they give you the lowest returns. Having low returns, especially if below inflation rates, will erode the value of your money in the long run. In simpler terms, you’ll be cheated out of making your money work for you if you place it in these instruments. For one, an average bank’s interest rates are much lower than the inflation rate of your country. So in time you won’t have enough money to catch up with the rising price of goods.

But, thankfully, banks today offer other products other than the usual deposit products. You can invest in the instruments they offer like Unit Investment Trust Funds or Unit Links, Mutual Funds, Bonds and Insurance. Find out what they offer and ask if it comes with an iPhone.

2. Property is a solid investment that you can actually hold, if not live in, however, saying that land is the best investment may be too ambivalent. True, land usually appreciates in value giving you Capital Growth (increase your money), or it can generate a steady flow of income through rentals and Capital Gains (some tax thingy is involved here, Google didn’t explain as much), when you decide to sell it.

There are times, however, when real estate investments do not appreciate or, in some cases, their appreciation does not meet your expectations. In simpler terms, sometimes you bought a lemon. In other times, the property sector just goes kaput. And so does your money.

And also, there are recurring costs in property investments such as real estate tax, administrative or association dues and common area charges.

Consider this statement: When you sell a property, you will be slapped a hefty capital gains tax on top of the broker’s fees. When you sum up all the money you need to spend during the time you are holding your real estate investment, you will realize that your gains are not as substantial as you thought it would be.

As I rephrase it to: When you sell your crib you gonna pay lots of money to the government and when you do the math you wake up counting that your investment didn’t really bring you mo’ money and instead mo’ headache.

And what about this: Another downside in real estate investment is its cost—you need to spend a huge sum to buy land. If you decide to borrow money to finance your real estate investment, the interest that you have to pay may just eat up the gains you will make. Buying real estate because you need to live in it is another story as it is not an investment.

As I rephrase it to: You spend so much to buy land and if you don’t have that cash, you end up getting a loan. You know how loans go, right? You end up paying a high interest rate that would eat whatever income you’re going to get from that property. Bummer. 

3. Business — One of the latest buzzwords these days is “Entrepreneur”, and why not?

Businesses can potentially give you the highest returns. A business that succeeds can make one a millionaire, even a billionaire. There are many success stories of people who started with little but are now very wealthy because of their businesses. However, business endeavors are the riskiest among all these investment options, as they are speculative in nature. There are more businesses that fail rather than succeed, which is not encouraging for a “newbie” in the business world. Further, putting up a business requires more than just capital—competence, passion, timing, market and a lot of studying are needed when you are considering to do business.

Simply put: Don’t even think about starting a business unless you know what you’re gonna get into. It will give you tons of moolah if you know what to do and if you’ve great staff and support; if not, just accept the paycheck from your boss right now. Besides, you do know that putting up a business isn’t just about the money. You need to study the market, widen your network, and lots of luck.

4. Stocks — sounds good. Warren Buffet made his money through stocks at the age of 11 and said he regrets starting late.

There is so much attention to the stock market today as more and more people are being enticed into investing in equities because of its stellar performance in the last two to three years. Many investors are very optimistic with our local stock market and you will find many experts predicting that our stock market will further go up this year. Investing in equities today is also more convenient. Even with only a small amount, you can buy stocks through brokers (and also online) or through pooled funds such as mutual funds or UITFs.

Oh sure stocks are great options, especially in Southeast Asian markets where it wasn’t affected by the global downturn of the economy. So study the good-performing companies and invest in them. Some companies even sell shares even with a small amount.

Let me reiterate the risk-return relationship here—high returns, high risks, and vice-versa. While it is true that the stock market has been giving extremely good returns lately, there were also times when investors lost a lot of money. The stock market is not as predictable as people think it is and all the gains over the last three years can also be wiped out in a short period of time. More so, investing in the stock market, especially when you plan to trade, requires a lot of competency and time. If you don’t have the competency and the time to trade in the bourse, you should keep your day job.

High returns, high risks. It’s not gambling, of course, because it comes with credible data and historical performance of the companies you’re investing in, but be sure to study it carefully and not place all your money in them. Start small, learn more, then invest. Be sure not to let it get in the way of your main job or core business. It can be addictive if you play in the market so do it cautiously.

So there you have it, Finance 101 for you.

Now, you can transfer your money to at account number 1234 9876 5.

About Asmartrock

N. Mark Castro is the chief political communications strategist for PT AsiaLeads, a political and communications policy-making body based in Jakarta, Indonesia. He is also the Executive Director at the Southeast Asia Consulting Group, an investment advisory company assisting clients roll out their presence for the ASEAN Economic Integration in partnership with government. The views posted here are his own and do not in any way reflect the views of the companies he represents.

Posted on January 30, 2013, in General, Thoughts and tagged , , , , , , , , , , . Bookmark the permalink. 1 Comment.

  1. very smart advice, , ,

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