Ask Your Advisor: Diversifying your first investment

(Part 2 of 2) In my previous article Ask Your Advisor: First job, first investment, I told my relative Lucy (not her real name) that she can already start setting aside a few thousand pesos for investment while she builds her emergency fund.

The most conservative investment that she can start with is a money market unit investment trust fund (UITF). While the fund can provide relatively safe and steady returns, its performance is limited to its underlying assets, which are usually time deposits and short-term Philippine government securities.

As Lucy’s salary grows over time, she may diversify her investment portfolio to generate potentially greater returns, albeit by taking on a bit more risk.

Investors with a more moderate risk appetite may consider bonds as the next step up from money market securities. A bond is a long-term financial instrument, similar to a loan, wherein a borrower pays a fixed stream of “coupon” interest income along with the promise to repay the investor on a specific maturity date in the future.

For newcomers to investing, choosing individual bonds can be daunting. Fortunately, many financial institutions offer bond-focused UITFs that simplify the process. These funds typically invest in a mix of government and corporate bonds, providing diversification and professional management. Some funds focus on bonds with an average duration of about five years, striking a balance between potential returns and risk.

It’s important to note that bond funds, while generally more stable than equity investments, can still experience price fluctuations depending on market conditions. Investors should be prepared to hold these investments for at least three to five years to potentially realize optimal returns.

For those seeking regular income, some bond UITFs are designed to distribute payouts periodically, often quarterly. While these can provide a steady stream of passive income, it is worth remembering that unlike individual bonds, the payouts from these funds can vary based on the underlying portfolio’s performance.

As investors become more comfortable with financial markets and potentially develop a higher risk tolerance, they might consider adding equities to their portfolio. Stocks represent partial ownership in a company and offer the potential for capital appreciation and dividend income. However, they also come with higher volatility compared to bonds or money market instruments.

Equity UITFs can be an excellent way for newer investors to gain exposure to the stock market. These funds pool money from multiple investors to create a diversified portfolio of stocks, often aiming to track or outperform broader market indices. Some equity funds focus on companies with a history of consistent dividend payments, which can be attractive for investors seeking both growth potential and regular income.

As young professionals progress in their careers and their investable funds grow, it is crucial to consider proper diversification and asset allocation. A common strategy for younger investors with a higher risk tolerance is to allocate a larger portion of their portfolio to equities, gradually shifting towards more fixed-income securities as they approach retirement. This approach aims to capitalize on the growth potential of stocks in the early years while prioritizing capital preservation later in life.

Many UITFs offer accessible entry points, with initial investments often starting around PHP 10,000 and allowing additional contributions in smaller increments of at least PHP 1,000. This flexibility enables young professionals like Lucy to start building a diversified portfolio early in their careers and increase their investments as their income grows.

Remember, the key to successful investing is aligning strategy with one’s personal risk tolerance, investment horizon, and financial goals. By understanding these various investment options and strategies, those starting on their investment journey can take confident steps towards building a robust and diversified portfolio.

For those who wish to know about Metrobank’s products related to the funds I mentioned above, please check out the following:

• Metro Money Market Fund
• Metro Max-5 Bond Fund
• Metro Unit Paying Fund
• Metro Equity Fund
• Metro High Dividend Yield Unit Paying Fund

For detailed information on these products and to determine which might be suitable for you, please consult with a Metrobank investment specialist.

EARL ANDREW “EA” AGUIRRE   is the Head of the Investment Counselor Department under the Financial Markets Sector of Metrobank. He has over 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.