Investment basics for OFWs (from someone who isn’t trying to sell you anything)

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I know, I know, this is a long time coming. After several emails and requests, I’m going to attempt to write a little treatise on investment basics for OFWs.   Even as an intro, investment is a complicated subject, so I’ll start off with this little introduction. I will attempt to simplify terms as much as I can.

This is a lot different from all the posts out there, as this will be coming from an unbiased, almost academic view – a lawyer / economist who ISN’T trying to sell you anything, insurance or otherwise.

The gist of the requests I get is this – OFWs (or even finance professionals working in Makati) have money but they want to move on from the traditional deposit instruments, which earn a measly 0.01% interest per year (less 20% withholding tax on the interest!), and are ready to invest in financial securities.

Investments

Nope, financial securities aren’t words limited to the “rich.” Just because you don’t know what they are, have never heard of them or that your parents never even taught (not even your high school or college) you these doesn’t mean you need to stay ignorant. For those persons ( friends, family, acquaintances, blog readers) who have expressly shown their interest in learning about this subject, I’m happy to tell you that’s a sign that you’re headed in the right direction – the path of knowledge.

In order to understand what financial securities are in the realm of investing, we should know what investments actually are. Essentially, investment is the use of money to create more money in the future. You, as an investor, forgoes consumption today in an attempt to be able to have more spending money in the future. Simply, investing involves delayed gratification.

Resist your Filipino push and pull factors

Delayed gratification goes against the grain of basic Filipino investment philosophy. Filipinos are so religious and erroneously rely on a god to provide for their needs.

Unfortunately for OFWs, they often have to deal with demanding family members who keep asking for more and more money, while spending like the OFW can work forever. Some OFWs have the misfortune of retiring with zero savings and have to rely on dole-outs from the government or from loans from obliging relatives. This is a sad reality for OFWs who used to earn six-digit incomes!

In order to establish the financial capital required to start investing in securities, OFWs must resist the negative push and pull factors in the Philippine setting.

Please note that before you invest, you must have first secured your emergency fund, so that you won’t be forced to prematurely liquidate your investments at a loss.

Financial securities are vehicles to invest your money. They may be in the form of: (1) money market securities ; (2) capital market securities ; and (3) derivative market securities.

Money market securities

These are securities with maturities of less than one year). Generally these are the safest of the financial securities.

OFWs and majority of people are already well-acquainted with the certificate of deposit (your basic bank account). It is among the types of money market securities, which include:
Treasury bills
Commercial paper
Banker’s acceptances
Repurchase agreements

Negotiable certificate of deposit

Capital market securities

These have maturities of greater than one year. They include:
Fixed-income securities: debt instruments issued by the PHILIPPINE government (such as treasury bonds) and corporate bonds

Equity securities: common stock and preferred stock

For information on how much to invest in stocks,  click here.

Derivative market securities

As its name suggests, it is a security derived from money market or capital market instruments. Its value is thus,usually pegged to the value of the underlying security. It includes:

Options
Futures contracts

Mutual fund shares
Unit investment trust fund (UITF) units

In the Philippines, we have a limited derivative securities market. Our financial market is still in infancy, we only have one stock market and have a limited participation bond market, which only allows trading by institutional investors. Moreover, our Securities Regulation Code expressly disallows futures trading.

Our primitive securities market can be a blessing, as it sheltered us from the US recession, which was largely caused by credit derivatives (whose underlying assets were subprime mortgage loans).

In my investment lifetime, I have experimented with almost all types of financial securities. How about you?

xoxo,
20 something lawyer

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