Who Decides Where Your Money Goes?

This is the second article that I wrote for Money Smarts and is my latest published piece.  The original can be found here.

GUEST POST: Who decides where to put your money?

01/27/09

Posted under Guest Posts, Investing, Pre-Need

By Aya Laraya, RFP*

With the global financial crisis hitting everyone and so many people losing their shirts, a lot of people are beginning to lose heart and quitting the whole financial planning mindset.  And as lousy as it can be to talk investing when you have just lost your life’s savings, you will only be able to recover from things like this if you develop a sound and coherent plan. How?  By being the one who actually decides where your money goes.  What do I mean by this? Consider the following:

First, ask yourself, how did you arrive at the decision to purchase your last investment?  (Let’s say a pre-need educational plan.)  Did you decide on your own or was it recommended to you? Did you consider other options before deciding on the pre-need plan? (Like stocks, mutual funds, etc.)  What factors made you decide to take that option over the others?  (Risk? Accessibility? Rate of Return? Cost?)

Second, who decided on which provider to buy from?  Did you research who the industry leaders were?  Or was it based on word-of-mouth?  Or on the fact that your friend or relative worked for said provider?

Third, who decided on the amount you would invest?  The worst thing that you can do here is to allow an agent to decide how much of a certain product you “need”.  Keep in mind that a great number of them work on commission and that the more you invest, the greater they earn.  Consequently, their objectivity in this matter would be somewhat suspect.

Ok, so much for the questions.  How about some suggestions? The ideal decision process would be as follows:

First, decide what you want to accomplish.  At this point, it can still be something vague like “Provide for my child’s education” or “I want to retire at 55″.

Second, quantify that target.  You have to get an idea as to how much you will need to hit your target.  Talk to your desired school to get an idea of how much their tuition fees increase annually and use a calculator or Excel to project that figure to the time when you expect your child to need it.

Third, (this is actually interchangeable with the second step), examine your current finances to determine how much you can truly afford to invest. Ideally, you should make a projection for the period during which you expect to make the payments to truly see if you can pay them all.  Very many people fail in this step and end up defaulting on payments.

Fourth, using the figures from steps two and three, determine what investments can achieve the desired rate of return.  This is the most technical step in the process and you may want to get outside help. However, the key point here is that you have to be the one to decide which investment vehicle to ride in.

Fifth, examine the different companies that sell these investment instruments. Find out who the industry leaders and laggards are. Make it a point to visit their head offices to see how they do business. Is their office all flash but filled with unresponsive people? Do they try to hard-sell you the minute you walk in? How easy is the office to get to? What is the process for you to get your money back?  (In my experience, making that initial investment is the easiest thing in the world. It’s when you want to get your money back that you suddenly have to fill-up so many forms and jump through so many hoops.)

Sixth, get proposals from at least three firms.  Make sure that the terms come from you so that it will be easier to compare options. Think of this step as like going to the pharmacy with a prescription. For example: I have P50,000 right now, what blue-chip stocks would be good to buy?  I don’t want oil, mining or other speculatives. Or: I can pay P4,000 a month for the next five years. What plans can your company offer me? In both cases, the control lies with you. You already know what you want and it simply becomes a matter of whether they can provide it or not.  If it’s the latter, then just walk away.

Lastly, always monitor the company you invested with. If the past year has taught us anything, it’s that even century-old institutions can be wiped out and that it’s the individual investor who pays the price. Ask for financial statements on at least an annual basis. If you invest in a managed fund that dabbles in stocks, make sure you check their portfolio regularly. Simply put, NEVER assume that investing is a fire-and-forget process.  The hard truth is that you can never relax because, at the of the day, everyone is looking after their own interests so you better make sure you protect yourself.

*Registered Financial Planner

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