The 5-minute investment checklist

Jul	05
2009

By Carlos Gonzales, MoneySense Magazine | 11/08/2008 12:19 PM

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After you consider your investment objective and time frame, you can start evaluating your options. Here’s a useful checklist:

Rate of return. What rate should you look for? The general rule: Beat inflation. If your money grows less than the rate of inflation, then you’re actually worse off, since it eats up the value of your money, letting you purchase lesser goods in the future. So, if inflation averages 5% a year, the return on your investment should grow more than that.

Guarantee of return. When evaluating an investment instrument, check if the rate of return is guaranteed, in which case, expect a relatively conservative rate. If it’s not, then you want to earn a higher rate because you deserve a higher return for the extra risk you take. If you’re promised returns of 4% a month, then start wondering. That’s equivalent to 48% a year. Here’s another rule of thumb: If it’s too good to be true, it probably is.

Safety. Are you willing to risk everything, including the original amount of your investment? Or do you want to make sure you keep your principal intact? If you’re a bit conservative, placing your money in T-bills, RTBs, or time deposits will give you some peace of mind.

Liquidity. Once you place your money, how soon can you take it out? Bank deposits and investment funds are relatively liquid. Real estate investments are not liquid because they take a longer time to sell them. If you’ll need the money quickly, you want to place it in liquid instruments.

Affordability. This is another factor to consider when investing: the initial minimum investment required. There are a good number of investments that regular folks can afford. For instance, you only need P5,000 to buy RTBs and P10,000 to invest in bond funds.

Diversification. You know this rule of thumb: Don’t put all your eggs in one basket. That means spreading your money across different investment instruments and different institutions. Ideally, you should have money in stocks, bonds, government securities, money market instruments, etc. How much you allocate across different investments depends on your age and your objectives.

Fees. They come in the form of commissions, management fees, sales loads, etc. Fees eat up your returns. So with all things being equal, go for the company that charges less.

Taxes. The government taxes bank deposits, stock transactions, even government securities. Mutual funds are tax-free and so are investments that are long-term (at least 5 years). So, when comparing investments, compare the returns net of tax.

This article is from is MoneySense, the country's first and only personal finance magazine. You can read more financial tips and stories at www.moneysense.com.ph.