It is good to keep some cash in a bank account to secure your financial needs in case unexpected expenses come up in the future, but having too much cash may also mean a huge loss of opportunities.
With interest rates falling to historically low levels nowadays as a result of the pandemic crisis, tucking away too much money for emergency purposes may not be productive.
If you have already established your emergency fund, which is about six monthsâ€™ worth of your income, you should consider investing any excess cash for higher returns.
Ideally, the best time to invest is when you have saved at least P100,000 in excess cash. When you invest, there are three things you need to remember:
First, you need to identify your financial goal. How much money do you want to make when you invest your savings? What is the target return per year that you want to achieve from your investments?
Second, you need to know your timetable. How long do you want to accomplish your objective? A longer period means lower return on your investments, while higher returns mean shorter period.
Third, you need to know your risk tolerance. What is risky to you may not necessarily be risky to the next person. Aiming for higher return means taking higher risk, while lower risk means accepting lower returns.
So, if you wish to double your P100,000 savings, for example, you must identify how soon you want to achieve this and at what risk and return you are willing to take.
Following the rule of 72, if you want your investment to double in five years, you can simply divide the number 72 by five years in order to derive your target annual returns of 14.4 percent.
On the other hand, if you want it shorter within three years, you divide it by three to get higher annual returns of 24 percent.
Whether you are investing in a single asset or a portfolio of assets, your target period to double your investment will determine the level of risk that you will assume, as well as the overall returns of your investments.
Here are the five ways you can invest your P100,000 savings:
1. Invest in blue chip stocks
If you are the conservative type of investor, you can simply invest in blue chip stocks that normally compose the Philippine Stock Exchange (PSE) index.
Blue chip stocks are companies with large market capitalization and have history of reliable earnings. Historical statistics have shown that the stock market has increased by an average of 9 percent every year in the last 10 years since 2010.
During this period, a number of blue chip stocks have correspondingly increased in value. Among the notable stocks are Universal Robina, 26 percent; SM Prime, 17 percent; Jollibee, 14 percent and Ayala Land, 14 percent.
Imagine if you had invested P100,000 worth of Universal Robina shares in 2010, this investment would have grown now to P1 million, yielding more than 1,000-percent return despite the impact of coronavirus crisis.
If you are willing to invest your money for the long-term, buying blue chip stocks is the way to go.
2. Invest in income stocks and bonds
If you are looking for investments that pay regular cash flows every year, you can invest in dividend paying stocks or fixed income instruments such as bonds.
This type of investment pays you a regular income in the form of dividend or interest, which you can accumulate and reinvest at the same rate of return to get higher capital appreciation.
For example, if you invested in Aboitiz Power bonds that pay quarterly interest of 3.94 percent per year, you will effectively receive an interest income after tax of 3.15 percent for the next five years until it matures in 2025.
The return is conservatively low because it is relatively less risky compared to stocks, but if you want to get a higher yield, you can invest in preferred stocks.For example, you can invest in Megawide Series 2B Preferred Share (PSE: MWP2B) that pays 5.75 percent per year. If you buy the stock at below P100 per share in the market today, you can get an even higher yield.
3. Invest in high growth stocks
If you are willing to assume higher risks, you can invest in high growth stocks. Growth stocks are typically companies whose earnings are expected to grow faster than the market.
Growth companies do not pay so much dividends because they need the earnings to reinvest for expansion. Because growth stocks do not have reliable earnings history, they can be risky, but if you have invested correctly, the returns that you will derive can easily double your investment at minimum.
One example of a growth stock is MerryMart (PSE: MM). If you had bought the stock at its initial public offering price of P1.00 last June this year, your P100,000 investment would have grown to P604,000, a return of over 600 percent in less than six months.
Because of the high risks associated with growth stocks, investing in the wrong company can result in massive losses, too. It is important that proper research be conducted before investing.
4. Invest in real estate
Investing in real estate is one way to make long-term capital appreciation. You can either invest in idle lot whose value you expect to increase in the coming years or in rental-paying properties
such as condominiums.
But if your budget is only P100,000, there is no way you can invest in these properties. Your alternative is to invest in Real Estate Investment Trust (REIT) that pays annual dividends.
For example, if you bought Ayala Land REIT (PSE: AREIT) this year, you would have earned not only expected dividend yield of 4.9 percent, but also capital gain of 8.1 percent today.
5. Invest in startup businesses
Perhaps the fastest way to double your money, but the riskiest investment you can make at the same time, is to start your own business.
By historical statistics, about 90 percent of startups always fail while only 10 percent survive.
If you succeed in putting up your own business, you can more than double your money in the shortest possible time. In order to increase your chances of succeeding, it is important that you equip
yourself with the right skills and mindset through education and training.
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