How to Do Investment Planning?

By Mr Alijeffty C. Gonzales, CIS, RFP

What is a good investment?

In front of you are two investment options, one promising a return of 4.0% while the other promises 8.0%, which one do you choose?

The more popular choice would be the 8.0% option, but is it the right choice?

Looking at the underlying security of the two options, the 4.0% turns out to be a one-year government security while the 8.0% a 20-year Fixed Rate Treasury Note., which one now would you select?

Investment planning in the context of a personal financial plan is not limited to investment selection, its ultimate objective is to grow your funds by investing it in an appropriate manner so that you would be able to realise most of your financial goals.

Appropriate in this sense means that “an investment should be selected to match a goal and not the other way around.”  The rule of thumb is to match the tenor of an investment vehicle with the timeline of a specific financial goal (funds intended for a 10-year goal to be invested in a 10-year instrument).

A practical approach that can help in coming out with a sensible personal investment plan involves answering 3 questions: Where are you now? Where do you want to be? How will you get there?

Where are you now?

Assess your current financial status. Measures like personal net worth (your assets less your liabilities) and income/expense figures are computed to give us a sense on how much savings we can realise every month as it is the cornerstone of any investment plan; the hard reality is that we cannot invest the money we don’t have.

Where do you want to be?

Do you want to be rich? Can you tell me how much money you should have to be able to say you are rich already?

In determining personal financial goals it helps if we can articulate and quantify our financial goals by setting financial milestones and timelines so we would know if we are on track. If I am planning for my retirement 20 years from now, I need to articulate today the type of retirement lifestyle I envisioned for myself and my family; specific issues like “where would I spend my retirement, what are the things I would do, places I would visit, etc.” should be carefully thought of, after which an estimate of how much money is needed to bring this to fruition is computed.

How will you get there?

Only after we answer the first two questions should we start our investment selection.

Assuming I need P20 million to ensure a comfortable retirement, how much savings should I realise every month to be invested for my retirement goal?

There are three factors to consider: (a) timeline, (b) amount of investment and (c) rate of return.

As the time line is already set (20 years), the amount of monthly investment would vary depending on the expected rate of return. This is where we narrow down our investment selection to the three main asset class (cash, bonds and equities); over a 20-year horizon, an equity investment has shown the best risk/return profile, then the appropriate vehicle should be an equity investment.

At the expected return of 4% per annum, I need to set aside and invest P54,529/month in an equity portfolio, P33,954 at 8.0% and P20,217 at 12.0%.

A useful Microsoft Excel program to help you estimate the required monthly investment is the PMT function.

=pmt(4%/12,240,0,-20000000)

240 – number of months in 20 years
0 – no contribution in the beginning
-20M – your financial goal (append with a negative sign)

Mr. Alijeffty C. Gonzales, CIS, RF P is one of the pioneers of RFP in the Philippines. He is the facilitator of the Investment Planning Module ever since the very first RFP class several years ago (the 26th RFP Class would be offered in January 2012).

A graduate of the Management Development Program of the Asian Institute of Management where he finished with a Superior Rating and a recipient of the Father James Donelan Prize for the Most Outstanding Strategy Presentation. He has served as senior executive to several financial services companies and is currently the Vice President and Head of Business Development for Insular Life, the largest FilipinoLife Insurance Company where he is actively involved in the design, marketing and distribution of Structured Variable Universal Life products; these provides policyholders with access to a diversified, strategic and fully managed global investment portfolio, life insurance and 100% principal guarantee if held to maturity. Mr. Gonzales maintains a personal blog (www.acgadvisors.net) where he shares his insights and materials from the public seminars he regularly conducts.